October 28, 2022

Daily Market Commentary

Canadian Headlines

  • Rogers Communications Inc. failed to settle a dispute with Canada’s antitrust watchdog about its takeover of Shaw Communications Inc. during mediated talks, almost certainly sending the parties to court. The companies said they’re committed to the deal and are confident of their chances in litigation. That step is scheduled to begin next month, with Rogers, Shaw and the Competition Bureau making their arguments in front of the federal Competition Tribunal. At stake is one of the largest mergers in Canada’s history — a C$20 billion ($14.7 billion) deal to unite Rogers, the country’s largest wireless and cable firm, with Shaw, a major provider of cable and internet services in the western provinces. Rogers and Shaw tried to appease antitrust regulators by striking a deal to sell Shaw’s Freedom Mobile division to Montreal-based communications company Quebecor Inc. That wasn’t enough for the Competition Bureau, which has argued in court documents that Freedom will be a weaker competitor under new ownership and consumers are likely to pay higher prices.
  • Brookfield Asset Management Inc. has become the only bidder for a landmark property in Tokyo owned by China Investment Corp., according to people familiar with the matter. The investment firm has been in talks with CIC on a potential purchase of Meguro Gajoen, an office and banquet hall complex in Meguro, said the people, who asked not to be identified as the information is private. A deal could value the property at about 180 billion yen ($1.2 billion), the people said. Discussions are ongoing and Brookfield and CIC could decide against proceeding with a deal, the people said. CIC could also keep the assets for longer, they added. Representatives for Brookfield and CIC declined to comment.

World Headlines

  • European equities retreated as investors digested a flurry of corporate earnings after disappointing results from US tech giants. The Stoxx Europe 600 fell 0.8% by 9:35 a.m. in London, with miners under pressure from falling metals prices and technology shares dropping with the Nasdaq futures. The European benchmark was still set for its best week since end-July. European stocks have benefited from a positive seasonality in October, as investors entered the month with extreme bearish positioning, prompting some aggressive technical buying. Dovish takeaway from the European Central Bank meeting on Thursday and the Bank of Canada hiking less-than-feared on Wednesday have reignited a debate that peak global interest rates are on the horizon, with all eyes on next week’s Federal Reserve’s decision.
  • Stocks slid along with US equity futures as disappointing results from tech giants soured sentiment and marred a tentative recovery in equities. Treasuries retreated, with benchmark yields topping 4%. Contracts on the tech-heavy Nasdaq 100 slumped more than 1% on Amazon.com Inc.’s plunge after hours as its sales forecast trailed estimates. S&P 500 futures and the Stoxx Europe 600 were as much as 0.7% lower after trimming a loss of about 1% each. The 10-year benchmark Treasury yield surpassed 4% as a rally in government bonds began to fizzle. Government bonds this week were buoyed by hopes that policymakers are preparing a downshift in aggressive rate hikes amid softer economic data.
  • Asian equities were poised for a third weekly drop as Chinese shares slumped, offsetting an earlier reprieve from declines in US Treasury yields and the dollar. The MSCI Asia Pacific Index fell as much as 1.8% on Friday, on track to end the week with losses. Chinese stocks traded in Hong Kong plunged again to 2008 lows, snapping a three-day rally, after the party congress dashed hopes for more market-friendly policies. President Xi Jinping’s tighter grip on China has “caused some investors to finally throw in the towel, with the most dramatic impact on the technology stocks,” said Jonathan Pines, head of Asia ex-Japan at Federated Hermes in a note.
  • Oil pared its weekly gain as investors shied away from risky assets on a dimming outlook for China and the wider global economy. West Texas Intermediate slid below $88 a barrel on Friday as a risk-off tone spread across wider markets. China’s economic growth outlook is darkening as investors bet Beijing will be slow to exit Covid Zero, while in Europe the French and Spanish economies slowed. Crude is still up around 3% for the week and there are signs of extreme tightness in US refined products markets. The nearest timespread for gasoline — a gauge of market strength — closed at its strongest level in a decade on Thursday amid dwindling fuel inventories.
  • Gold headed for a weekly decline after paring gains as traders seek clues on the Federal Reserve’s future interest-rate hike path amid mixed economic data. Bullion has been relatively stable this week, hovering near $1,650 to $1,660 an ounce. The precious metal has faced headwinds from the Fed’s aggressive monetary policy tightening, with prices tumbling nearly 20% since March, when they surged to near a record after Russia’s invasion of Ukraine. Earlier in the week, US data showing a contraction in the services and manufacturing sectors as well as a drop in sales of new homes signaled that the Fed’s tightening was starting to take a toll on the economy.
  • Hopes that the euro zone can stave off a recession got a boost as Germany defied expectations by reporting another quarter of economic growth, though momentum slowed dramatically in France and Spain. Surging energy prices, record inflation and rising interest rates are weighing on output across the continent in the third quarter as a post-lockdown splurge on leisure and tourism fades. But data Friday showed Germany managed to grow by 0.3% between July and September. Consumer-price growth from the region was mixed. In Italy, it smashed estimates to reach a euro-era high, while coming in well below estimates in Spain.
  • A heap of distressed debt is expanding in the US corporate bond market and investors worry that a burst of defaults will follow. The amount of dollar-denominated bonds and loans trading at levels indicating distress is the largest since September 2020, reaching $271.3 billion last week after five straight weeks of growth, according to data compiled by Bloomberg. Companies that binged on low-cost borrowing in recent years are facing the prospect of refinancing at exorbitant yields — if they can find any investors — as the Federal Reserve raises rates to battle persistent inflation, threatening to push the economy into recession. Some market participants see distress leading to default, and for some companies, bankruptcy.
  • Elon Musk’s buyout marks the end of nine years of public trading in Twitter Inc., which debuted with a bang but failed to match the rocket ride achieved by some other tech heavyweights. While the stock made a splash when it made its trading debut in November 2013, surging 73% on its first day, the company has since failed to impress investors as it struggled to consistently grow its user base and ramp engagement. Twitter’s shares doubled during its tenure as a listed company, equal to an 8.4% growth a year. That’s lower than the S&P 500 Index’s 11% annual return and Nasdaq 100 Index’s 15% climb.
  • The Nasdaq 100 was poised to extend a $675 billion wipeout of the past two days as disappointing earnings updates from big tech companies stoked investor concerns over a weakening profit outlook. Nasdaq 100 futures slumped 1.2% by 5:21 a.m. in New York, set to trade lower for a third day as reports from Amazon.com Inc. and Apple Inc. hurt sentiment. Contracts on the S&P 500 were down 0.7%. Despite recent weakness, the S&P 500 is set for a second week of gains for the first time since August. Amazon shares plunged 14% in premarket after the tech giant projected sluggish sales for the holiday quarter. Apple edged higher after posting weaker-than-expected iPhone and services sales for its latest quarter, marring an otherwise upbeat report.
  • Funds managed by Cathie Wood are exiting the beleaguered Southeast Asian e-commerce giant Sea Ltd. one by one. Ark Next Generation Internet ETF on Thursday sold its last few shares in Sea, almost a quarter after flagship Ark Innovation ETF exited from the company in June, according to Ark trading data compiled by Bloomberg. Exchange traded funds backed by Wood’s firm Ark Investment Management LLC’s have been selling shares in Sea since mid-May. Ark Fintech Innovation ETF is now the only one holding shares in the Singapore-based company, according to Bloomberg data.
  • Federal Reserve officials will maintain their resolutely hawkish stance next week, laying the groundwork for interest rates reaching 5% by March 2023, moves that seem likely to lead to a US and global recession, economists surveyed by Bloomberg said. The Federal Open Market Committee will raise rates by 75 basis points for a fourth consecutive meeting when policymakers announce their decision at 2 p.m. in Washington Wednesday, the survey found. Rates are projected in the survey to rise another half point in December, then by quarter points the following two meetings. Fed forecasts released at the September meeting showed rates reaching 4.4% this year and 4.6% next year, before cuts in 2024.
  • Apple Inc. delivered just enough good news in its quarterly report Thursday to avoid the fate of most tech giants this earning season, when its peers have seen valuations plunge by hundreds of billions of dollars. Though sales of iPhones and services were softer than expected last quarter, Apple’s revenue and profit both topped analysts’ estimates. The company said that growth wouldn’t be as strong during the current period. Investors found enough optimism to send shares up about half a percentage point during pre-market trading in New York on Friday. Apple dropped 3.1% to close at $144.80 in New York on Thursday.
  • Chevron Corp. blew past analysts’ estimates with the second-highest earnings in its history, accelerating a prolific profit haul for the world’s biggest oil explorers. Third-quarter earnings of $5.56 per share surpassed the median $4.94 forecast among analysts in the Bloomberg Consensus. Net income was $11.2 billion, down slightly from the all-time high of more than $12 billion in the prior three months, according to a company statement on Friday. Soaring international natural gas prices stemming from Russia’s invasion of Ukraine was a key driver of Chevron’s performance and the company also benefited from strong oil-production growth in the Permian Basin and higher jet-fuel demand.
  • Exxon Mobil Corp. and Chevron Corp. amassed more than $30 billion in combined net income as politicians blast Big Oil for raking in massive profits at a time when consumers are struggling with soaring inflation and energy shortages worldwide. Exxon posted the highest profit in its 152-year history, while Chevron announced its second-best quarterly result as natural gas demand and prices surged. Those earnings follow strong results posted by European peers Shell Plc and TotalEnergies SE earlier this week. Even as the supermajors bask in profits unimagined just two years ago during the darkest days of the pandemic, oil executives are under pressure by government leaders to ease prices at the pump for consumers and cut global-warming emissions. Meanwhile, shareholders have been demanding higher returns and an end to costly exploration programs, adding to commodity-price pressures.
  • Europe has been able to plug the gap left by smaller Russian gas flows with US supplies, but those shipments won’t be able to keep up as the shortfall expands. While US fuel now makes up 40% of Europe’s liquefied natural gas imports, it will only offset a fraction of the deficit from Russia next summer, BloombergNEF says. That means it’ll be harder to rebuild inventories next year when faced with a longer period without Russian gas. Securing shipments not needed by top buyer Asia has been crucial for Europe as it swaps piped supplies for the super-chilled fuel. To meet demand going forward, it needs to remain an attractive market for sellers and pull about 70% of global spot supplies, primarily from the US, as LNG output growth remains limited in the next few years.
  • Porsche AG’s surging income failed to impress investors as concerns over headwinds in the final months of the year weighed on the luxury-car maker’s shares. Operating profit jumped 41% to €5.05 billion ($5 billion) in the first nine months from the same period last year, partly due to exchange-rate effects, the luxury-car maker said Friday. But the company didn’t raise its full-year guidance, suggesting the current quarter may be more challenging. “In this volatile and difficult market environment we are demonstrating our ability to operate profitably, in particular through cost discipline and an attractive product mix,” Chief Financial Officer Lutz Meschke said in a statement.
  • German carmakers long ago went all in on China, building dozens of factories with local partners they were forced to share technology with. The risks seemingly were outweighed by an unprecedented expansion of what’s become the world’s largest car market. For years, these bets paid off. Surging demand from a burgeoning middle class and the nouveau riche bolstered Volkswagen, Mercedes-Benz and BMW’s revenues and profits. All three now sell more vehicles in China than any other market. The idea Beijing would ever pull the rug out from under international companies was brushed aside as fear-mongering. One might think Russia’s abrupt cut-off of the gas Germany relied on before Moscow’s invasion of Ukraine would lead to some soul-searching about China dependence in Wolfsburg, Stuttgart and Munich. If there has, it’s not coming across from CEOs Oliver Blume, Ola Kallenius and Oliver Zipse.
  • Pinterest Inc. surged after reporting third-quarter revenue that beat analysts’ estimates, standing out from its social media peers in a difficult market. Third-quarter sales grew 8% to $684.55 million, the company said, topping the average analyst estimate for $666.85 million. Monthly active users also grew slightly to 445 million, from 444 million in the year-ago period, after three straight quarters of declines. The stock gained about 8% in premarket trading on Friday before exchanges opened in New York. Pinterest’s shares had fallen 40% this year through Thursday’s close.
  • The Bank of Japan stood by its ultra-low interest rates amid fresh government support, pushing back against lingering market speculation it will adjust policy as it continues to predict inflation will cool below 2% next year. Governor Haruhiko Kuroda and his board left their negative rate, 10-year yield cap and asset purchases unchanged at the end of a two-day policy meeting Friday. The result was in line with the view of 49 economists surveyed by Bloomberg. While the yen was broadly unchanged after the initial announcement it started to weaken after Kuroda told reporters not to expect a rate hike anytime soon, speaking at the post-meeting press conference. An announcement of more frequent central bank buying of longer-term debt also coincided with a further bout of weakness late in the afternoon in Tokyo.
  • It was only a year ago that President Joe Biden stood in Brussels to announce the dawn of a new era for the world’s largest trade relationship. Back then, there was real optimism for a grand detente after four years of strained relations between the US and the European Union under former President Donald Trump. Biden shelved Trump’s tariffs on bilateral trade worth $21.5 billion, paused an aircraft-manufacturing dispute dating to 2004, and launched talks to reduce overproduction of steel and aluminum. Twelve months on, US allies in the EU are citing unfairness in the Biden administration’s most recent industrial policies, including about $370 billion of clean-energy subsides in the Inflation Reduction Act.
  • Automaker BYD Co. reported record income for the third quarter as revenue surged, buoyed by strong demand in China, the world’s biggest market for electric vehicles. Net income for the three months ended Sept. 30 rose 350% to 5.72 billion yuan ($788 million) versus the same period of 2021. Revenue came in at 117.1 billion yuan, up 116% on the previous corresponding period, bringing sales for the nine months year-to-date to 268 billion yuan. BYD flagged earlier this month that its third-quarter profit may surge up to 365% to between 5.5 billion yuan to 5.9 billion yuan.
  • Russia’s central bank held interest rates for the first time since the immediate aftermath of the attack on Ukraine, as risks of higher inflation intensify following the Kremlin’s call-up of reservists to fight in the war. Policy makers led by Governor Elvira Nabiullina left the benchmark at 7.5% after six cuts in a row, in line with the expectations of most economists surveyed by Bloomberg. Nabiullina will hold a news conference at 3 p.m. on Friday in Moscow. The Bank of Russia didn’t give a clear guidance for what it plans to do next but said in a statement that “proinflationary risks still dominate and have grown slightly since mid-September.” It improved its forecast for the economy this year and now sees a shallower contraction of 3%-3.5%.

*All sources from Bloomberg unless otherwise specified