October 27, 2022

Daily Market Commentary

Canadian Headlines

  • Shopify Inc. gained as it reported revenue that beat analysts’ expectations after adding more avenues for merchants to sell and promote their products. Revenue was $1.4 billion in the third quarter, the Ottawa-based company said in a statement Thursday. That exceeded expectations for $1.3 billion, according to the median of analyst estimates compiled by Bloomberg. Shopify reported a loss of 2 cents per share on an adjusted basis, compared with estimates of a seven cent loss. The US-traded shares rose 7% in premarket trading in New York. The better-than-expected results suggest Chief Executive Officer Tobi Lutke’s changes to cope with a tough retail environment, including job cuts and measures to improve services for small-business customers, may be starting to bear fruit. The company nevertheless has a long path to a full recovery, with the shares down more than 75% in the year through Wednesday amid strains from the return of in-person shopping and pressure on consumer spending from high inflation.
  • The Bank of Canada’s interest-rate surprise potentially opens up Governor Tiff Macklem to the accusation that he and his governing council are reacting to political sniping against them, economists said.  The central bank raised its overnight rate by 50 basis points on Wednesday to 3.75%. Traders and a majority of economists polled by Bloomberg were anticipating a larger increase of 75 basis points.  Those expectations were based, in part, on Macklem’s Oct. 14 remarks that the bigger policy risk was under-tightening. Five days later, Statistics Canada reported headline inflation of 6.9% for September, which appeared to the seal the case for a larger hike. Macklem has also come under criticism from the other side of the political spectrum. Conservative Party Leader Pierre Poilievre has targeted Macklem since the early days of the pandemic for allegedly enabling Trudeau’s deficits through purchases of government bonds. Poilievre even promised to fire Macklem, though he has avoided repeating that pledge since his election as leader in September.
  • Suncor Energy said it agreed to purchase an additional 21.3% working interest in the Fort Hills Project and associated sales and logistics agreements from Teck Resources for of C$1 billion. Upon closing, Suncor’s aggregate share in the project will increase to 75.4%, it said in a statement. The acquisition will be funded by cash from asset sale processes currently underway.

World Headlines

  • European equities retreated on a busy day for corporate earnings as traders braced for another interest rate hike from the European Central Bank. The Stoxx Europe 600 fell 0.6% at 11:44 a.m. in London with the ECB today expected to lift its main interest rate to the highest in more than a decade to tackle record euro-zone inflation. Miners were under pressure from the drop in iron ore, and miners along with chemicals also paced the declines. The ECB is hiking rates at a precarious time in Europe as the region grapples with geopolitical headwinds, an energy crisis and a looming recession. None of that has deterred central banks this year as they remain focused on bringing down soaring inflation, weighing on equities in the process. Investors have been assessing earnings to see how firms have navigated these headwinds, with margins being pressured by higher costs and supply constraints.
  • Contracts on the S&P 500 fluctuated before a report that may show the US economy rebounded in the third quarter, while futures on the Nasdaq 100 retreated. Meta Platforms Inc. shares plunged as much as 21% in premarket trading after the Facebook parent gave a disappointing revenue forecast and asked investors for patience as costs soared. The yield on the 10-year Treasury bond rebounded after inching below 4% earlier, with investors positioning for less aggressive rate hikes as earnings and economic data indicate a slowdown. The benchmark US yield has dropped more than 20 basis points over the past two days. A gauge of the dollar gained after two days of steep declines. While consensus still calls for a 2.4% expansion in US gross domestic product in the third quarter, a few forecasters cut their projections after Wednesday’s trade data were released, with one dropping by nearly a full percentage point. The GDP figures are due out later Thursday, along with data on durable-goods orders and weekly first-time unemployment claims.
  • Asian stocks advanced for a third straight day, as Hong Kong shares jumped and a weaker dollar supported regional equities. The MSCI Asia Pacific Index rose as much as 1.2%, lifted by technology shares, before paring its gain. Gauges in Hong Kong also trimmed their advance to less than 1%, while investors focused on a slew of earnings and awaited further policy guidance following China’s party congress. Benchmarks in Taiwan and South Korea were also higher as some chip stocks rose, with the measures buoyed by encouraging earnings beats this week including by Samsung SDI and LG Energy.
  • Oil fluctuated after the US reported record exports of crude and fuel, while recent weakness in the dollar made commodities more attractive. West Texas Intermediate traded in a narrow range near $88 a barrel after gaining almost 4% over the prior two sessions. Total US petroleum exports hit 11.4 million barrels a day last week, government data showed. The surge came with domestic fuel inventories at historic seasonal lows, highlighting a tightening supply outlook. The weaker dollar has also helped buoy crude. A Bloomberg gauge of the greenback — which hit a record last month — was little changed Thursday, trading near a three-week low, making raw materials priced in the US currency cheaper for overseas buyers.
  • Gold remained steady as the market awaits next week’s Federal Reserve meeting to get a gist of the central bank’s future rate-hike path. The US central bank’s aggressive monetary tightening this year has pushed up the dollar and pressured gold. The traditional haven is now down about 9% since the start of the year, and has lost almost 20% of its value since its March peak. Questions remain about when the Fed’s rate-hike campaign could begin to slow. Other central banks have started providing optimistic signs that less aggressive tightening could be near, with the Bank of Canada raising rates by a smaller amount than expected on Wednesday.
  • Iron ore extended its rout to the lowest level in more than two years on mounting concerns over global steel demand. The steel-making ingredient hit $82.45 a ton in Singapore on Thursday, its lowest since May 2020. Prices have fallen more than 50% from a peak in March. Iron ore has been under pressure as consumption weakens in China because of the nation’s housing market woes and Covid restrictions. Demand worldwide is also fading as tighter monetary policy and Europe’s energy crisis roils major economies.
  • India may have to allocate more funds towards fertilizer subsidy, boosting the total bill to $31 billion as soaring costs of a key raw material may deplete the allocation in one to two months, according to the local unit of S&P Global Ratings. The government’s fertilizer subsidy bill could rise by 400 billion ($4.85 billion) to 2.55 trillion rupees for the fiscal year ending March, Crisil Ltd., an S&P unit, said in a statement Thursday. Surging prices of pooled natural gas, a key component to produce urea, alongside the weakness in the rupee are fanning import costs and bloating the subsidy bill. “Any delay in increased allocation and disbursement would lead to higher working capital requirement and moderate the credit metrics of fertilizer makers,” Crisil said.
  • Chinese President Xi Jinping said his nation is willing to work with the US to find ways to cooperate, comments that come before a potential meeting with President Joe Biden at a Group of 20 summit next month. Better communication between the two nations would bolster global peace and development, Xi said in a letter to the National Committee on US-China Relations’ annual dinner Wednesday, the official Xinhua News Agency reported. “China stands ready to work with the United States to find the right way to get along with each other in the new era on the basis of mutual respect, peaceful coexistence and win-win cooperation, which will benefit not only the two countries but also the whole world,” Xi said, according to the report on Thursday.
  • Shell Plc will raise its dividend after reporting its second-highest profit on record, even as some parts of its business showed signs of slowing. The run of historically high earnings is boosting rewards for shareholders, while also keeping the oil industry in the cross-hairs of governments grappling with the high cost of energy. Still, profit came in slightly below estimates and a measure of the company’s debt levels rose unexpectedly. Shell said it will buy back another $4 billion of shares over the next three months, bringing the total repurchases for the year to $18.5 billion. It plans to increase its dividend by 15% for the fourth quarter, subject to board approval.
  • UK traders are scaling down expectations for interest rates as the government charts a course for austerity to fix public finances. Money markets are wagering on less than 75 basis points of hikes next week, according to interest-rate swaps tied to BOE policy dates, marking a sharp turnaround from a month ago when traders bet on as much as two percentage points of increases. The bank rate is expected to peak below 5% next year compared to over 6.25% last month. The change of sentiment follows last month’s UK market upheaval, stoked by an unfunded, and ultimately reversed, tax-cut plan which led to the downfall of Liz Truss’s cabinet. Investors have been reassured by new Prime Minister Rishi Sunak and Jeremy Hunt, the Chancellor of the Exchequer, who pledged to keep a tighter lid on spending.
  • Winter electricity prices in France climbed the most in almost a month as concerns over the country’s nuclear reactor fleet persist. France gets more than two-thirds of its electricity from nuclear energy, but only half of its capacity is available as the government tries to ramp up repairs of its corroded plants and build new ones. French power prices have stayed stubbornly high as traders expect hundreds of hours of power shortages this winter, overpricing the risks forecast by grid operator RTE earlier this month. “The market remains highly volatile on concerns over nuclear availability,” said Sabrina Kernbichler, a power analyst at S&P Global Commodity Insights. It’s also due to the possibility that mild weather, which has helped keep demand low, could give way to colder weather later in the winter, she said.
  • Southwest Airlines Co. reported a third-quarter profit greater than Wall Street expected as business sales strengthened, even as the carrier warned that cost pressures will extend into next year. Adjusted earnings were 50 cents a share in the period, the company said Thursday in a statement, compared with the 44-cent average from analyst estimates compiled by Bloomberg. Revenue of $6.22 billion was essentially in line with analysts’ projections. Pilot staffing limits will keep the carrier from fully utilizing its fleet for “the majority” of next year, and it faces higher spending on wages and benefits and for airport costs. Southwest also expects delays in aircraft deliveries from Boeing Co. to extend into 2024.
  • Caterpillar Inc. posted quarterly profit that exceeded analysts’ expectations in a sign that the maker of iconic yellow bulldozers is weathering supply chain snarls, surging raw material costs and a global economic slowdown. The bellwether company said third-quarter adjusted earnings were $3.95 per share, beating the $3.18 average estimate of 24 analysts polled by Bloomberg, according to a Thursday statement. Caterpillar’s earnings are viewed as an indicator of economic growth given how integral its equipment is to a range of industries. The Deerfield, Illinois-based company is the world’s biggest maker of heavy machinery and demand for its equipment can reflect the health of industries including mining and construction. Its earnings report comes as the US, the world’s biggest economy, is set to release its latest figures for economic growth. Some economists cut their estimates for third-quarter growth for US goods and services given that a stronger dollar has squeezed the country’s exports to the rest of the world.
  • House Republicans are launching an investigation into what they say could be the “potential misuse” by the Biden administration of the nation’s emergency oil reserves to lower gasoline prices, as well as White House deliberations over a fuel-export ban. The move by the Republicans on the House Committee on Oversight and Reform previews a more robust probe if the GOP takes control of the chamber after the November midterm elections, a development that would grant them the power to subpoena key administration officials of President Joe Biden. Committee Republicans, in a letter Wednesday, said they were examining the use of the Strategic Petroleum Reserve by the administration amid a historic 180 million barrel release that began in the Spring. The Repubicans also said in the letter to Energy Secretary Jennifer Granholm that it was seeking information about a possible export ban of refined petroleum products.
  • Credit Suisse Group AG opted to tap investors for a painful multibillion-dollar capital raise to shore up confidence and fund a years-long reshaping that will carve out its investment bank and slash its headcount by 9,000. The stock dropped as much as 16% on the firm’s plans to raise 4 billion francs ($4.1 billion) through a rights issue and selling shares to investors including the Saudi National Bank. It’s effectively breaking up the investment bank, separating the advisory and capital markets unit and selling the majority of a trading business to a group led by Apollo Global Management Inc. The moves mark an urgent attempt to restore credibility at Credit Suisse after a succession of big losses and management chaos shattered its status as one of Europe’s most prestigious lenders. Chief Executive Officer Ulrich Koerner and Chairman Axel Lehmann are already facing questions over whether the biggest overhaul in the bank’s recent history is radical enough and offers sufficient payoff for suffering shareholders.
  • Shell Plc gained the most since July as it raised its dividend after posting its second-highest profit on record, even as some parts of its business showed signs of slowing. The run of historically high earnings is boosting rewards for shareholders, while also keeping the oil industry in the cross-hairs of governments grappling with the high cost of energy. Still, profit came in slightly below estimates and a measure of the company’s debt levels rose unexpectedly. Shell said it will buy back another $4 billion of shares over the next three months, bringing the total repurchases for the year to $18.5 billion. It plans to increase its dividend by 15% for the fourth quarter, subject to board approval.
  • Treasury Secretary Janet Yellen, traveling to the election battleground state of Ohio, will say that the Biden administration’s policies to spur electric vehicle manufacturing have begun to create a “battery belt” across the US Midwest. “Since January of last year, companies have announced over $100 billion in EV, battery, and charging investments here in America,” Yellen is set to say, according to the text of a speech she’s scheduled to deliver on Thursday in Cleveland. “The wave of new battery investments in the Midwest has been so significant that some commentators are dubbing the region as the new “battery belt.” The private-sector commitments follow passage of the two pieces of legislation in August that channel about $52 billion into semiconductor manufacturing and tens of billions more into green energy technology, including electric vehicles.
  • Pfizer Inc. is the target of an Italian probe alleging the company hid at least €1.2 billion ($1.2 billion) in profit by transferring money to units in other countries, according to people familiar with the investigation. Italy’s finance police have alleged that Pfizer’s unit based just outside Rome, Pfizer Italia Srl, transferred excess capital to affiliates in the US and the Netherlands to avoid taxes on profit that could be as high as 26%, according to the people, who asked not to be named as the information isn’t public. The company’s Italian branch allegedly sent the capital to foreign affiliates linked to Delaware-based Pfizer Production LLC and Pfizer Manufacturing LLC, the people said. The investigation of the New York-based drug giant began in February and covers 2017, 2018 and 2019, they said.
  • McDonald’s Corp. reported sales that handily beat expectations in the third quarter as diners proved willing to pay more for their fries and burgers — a sign the fast-food chain’s offerings are resonating with consumers amid rising inflation.  Same-store sales, a key indicator for restaurants and retailers, rose 9.5% in the quarter, surpassing the 5.8% gain that was the average of estimates compiled by Bloomberg. Earnings of $2.68 per share also exceeded analysts’ projections.
  • Meta Platforms Inc. shareholders are paying dearly for its spending on the metaverse: The Facebook parent’s market value has collapsed by a whopping $520 billion in the past year, and now it’s on the brink of getting booted from the ranks of the 20 largest US companies. The punishment shows no signs of easing anytime soon. Meta’s stock is down 19% in premarket trading after it spooked investors with ballooning costs to fund its version of virtual reality and a decline in revenue. Meta was the sixth biggest US company by market capitalization at the start of the year, flirting with a $1 trillion market value. Fast forward 10 months and the stock will be worth about $283 billion, ranking it 20th, if it opens regular trading in line with its decline in the premarket. It will now be smaller than companies including Chevron Corp., Eli Lilly & Co. and Procter & Gamble Co.

*All sources from Bloomberg unless otherwise specified