The Daily – October 31, 2022

October 31, 2022

Happy Halloween!

Daily Market Commentary

Canadian Headlines

• West Texas Intermediate futures dipped below $87 a barrel on Monday after Chinese government figures showed factory and services activity contracted in October. Wheat futures jumped as much as 7.7% early on Monday, with traders pointing to uncertainty about the outlook even as ships loaded with crops are departing Ukraine and defying Russia’s exit from a deal to allow grain exports from Black Sea ports. The Bloomberg Nanos Canadian Confidence Index will be released at 8 a.m. Toronto time.

World Headlines

• European stocks were steady in early trading at the start of another busy week of earnings and central bank decisions. The Stoxx Europe 600 Index was little changed as of 10:32 a.m. in London, with travel and leisure and financials leading gains, while consumer staples and construction declined. Credit Suisse Group AG climbed as it announced expected terms for its capital increase. European stocks have in recent weeks trimmed losses that saw the Stoxx 600 slump into a bear market in September. Investors are looking at earnings for signs of whether a surge in living costs and interest rates is weighing on demand as well as profit margins.
• Stocks were mixed at the start of another busy week of earnings and key central bank decisions. US futures declined after posting their best two-week rally since November 2020, while Europe’s benchmark fluctuated. US-listed shares of Brazilian oil firm Petrobras tumbled in premarket trading after Luiz Inacio Lula da Silva won the presidential election, while chipmakers and US-listed Chinese stocks were also lower. The yield on the 10-year Treasuries rose above 4% after surging by nine basis points on Friday. Yields on UK gilts were steady ahead of what could be the Bank of England’s biggest interest-rate hike in more than 30 years.
• Asian stocks advanced as optimism on local corporate earnings and a lift from Apple offset disappointment with Chinese economic data. The MSCI Asia Pacific Index climbed as much as 1.1% before halving the advance in afternoon trading. Tech-heavy markets of South Korea and Taiwan saw indexes rise more than 1%, while key gauges in China and Hong Kong extended last week’s rout.  Samsung, TSMC and other Apple suppliers in Asia staged a rally after the iPhone maker jumped nearly 8% Friday, fueling gains on Wall Street. Apple’s results were seen as positive in contrast with disappointing recent announcements from other tech giants.
• Oil fell as weak economic data from China fanned concerns about energy demand, but it was still set for the first monthly advance since May on OPEC+’s planned supply cuts. West Texas Intermediate futures dipped below $87 a barrel on Monday after Chinese government figures showed factory and services activity contracted in October. The nation’s Covid Zero policy and an ongoing slump in the property market have weighed heavily on the nation’s economy this year. Crude is still up by more than 9% this month after a decision by the OPEC+ alliance to make sizable cuts to output. The curbs take effect from November and are the start of an uncertain period for oil supply heading into winter, with the European Union set to implement sanctions on Russian flows in December.
• Ships loaded with crops are sailing from Ukraine, as the United Nations and Turkey work to salvage the agreement to keep seaborne exports flowing even after Russia’s weekend announcement that it was suspending its involvement in the deal. Wheat prices soared on Monday, with traders pointing to uncertainty about the outlook even as the vessels departed, while tensions surged in Ukraine as Russia launched a massive wave of missile attacks across the country. Ukraine is one of the world’s biggest suppliers of wheat, corn and vegetable oil and the July agreement to open three Black Sea ports has been vital to help alleviate a global food crisis.
• European natural gas fell after two days of gains as unseasonably warm weather curbs demand and eases concerns about shortages for the winter. Futures for December delivery dropped as much as 10%. The above-normal temperatures have delayed heating, and allowed gas to continue to be injected into storage sites that are already fuller than normal. Strong inflows of liquefied natural gas and lower consumption by industries are also creating a sudden glut in Europe. Many parts of Europe, from Germany and France to the UK basked in temperatures in the low to mid 20s Celsius this weekend, and the mild weather may persist in most of Europe through mid-November, according to forecaster Maxar. Meanwhile, prices are “likely to drift lower until temperatures drop,” said Ole Hansen, head of commodity strategy at Saxo Bank A/S.
• Credit Suisse Group AG hired about 20 banks to help with a $4 billion capital increase that will help fund the extensive restructuring unveiled last week and make the Saudi National Bank a new top shareholder. Investors including the Saudi lender have already committed to contribute about 1.76 billion francs ($1.76 billion), by buying shares at a 6% discount to the average price on Thursday and Friday, Credit Suisse said in a statement Monday. Shareholders still need to approve the issuance of new stock next month. To help it raise the rest of the 4 billion francs needed, the Swiss bank announced an enlarged syndicate of banks that includes Wall Street names such as Goldman Sachs Group Inc., European lenders such as BNP Paribas SA and Barclays Plc as well as firms in Asia. The announcement confirmed a Bloomberg report over the weekend.
• The US Treasury is likely to call a halt to its scale-down of quarterly sales of longer-term securities this week, in an announcement where dealers’ main focus will be on any hints of program to buy back older Treasuries. With the US fiscal-deficit cycle now turning, the Treasury Department probably cannot keep shaving back its debt issuance. At Wednesday’s so-called quarterly refunding announcement, officials are expected by most dealers to hold the total size of next week’s auctions at $96 billion, the same as in August. Slowing economic growth is set to eat into the Treasury’s revenues. Meantime, the Federal Reserve is continuing to shrink its holdings of government bonds, in a move that requires the Treasury to issue more debt to the public.
• The end of the Federal Reserve’s campaign to raise interest rates is approaching, according to Morgan Stanley strategist Michael Wilson, who until recently was a prominent stock market bear who correctly predicted this year’s slump in equities. Indicators including the inversion of the yield curve between 10-year and three-month Treasuries — a recession indicator with a perfect record — “all support a Fed pivot sooner rather than later,” Wilson wrote in a note on Monday. “Therefore, this week’s Fed meeting is critical for the rally to continue, pause or even end completely.” All eyes will be on the US central bank, which is widely expected to raise rates by 75 basis points on Wednesday for a fourth time, while investors will be dissecting Chair Jerome Powell’s commentary for guidance on future moves. US stocks have rallied over the past two weeks as traders parsed economic indicators for signs of the impact of Fed tightening, even as Big Tech earnings disappointed.
• Cathie Wood is back at buying the battered shares of online broker Robinhood Markets Inc. that rebounded from record lows hit just four months ago. Funds backed by Wood’s firm Ark Investment Management LLC slightly bought over 185,000 shares of the broker platform in transactions on Monday and Friday, according to data compiled by Bloomberg. That marks the firm’s first buying of the US company since May 5. While shares of Robinhood have risen about 65% from their record low in June this year, they are still down more than 80% from all-time high hit in 2021. The purchases have been carried out by Ark Next Generation Internet ETF and Ark Fintech Innovation ETF. The buying comes at a time when Robinhood is carrying out a sweeping overhaul to rein in expenses as it adjusts to a sharp downturn in trading activity.
• Ukraine said Russia launched a massive wave of missile attacks across the country, after the Kremlin accused Kyiv of strikes against its Black Sea fleet and pulled out of a grain-export deal. Missiles targeted the capital, Kyiv, including essential civilian infrastructure, on Monday, leaving parts of the city without water and electricity, Mayor Vitali Klitschko said. Explosions were also reported in Kharkiv, Zaporizhzhia, Kremenchuk and Vinnytsia regions among others. The attacks come after Russia pulled out of a deal at the weekend that was crucial in allowing millions of tons of Ukrainian grain and agricultural products to be exported from three Black Sea ports under an agreement brokered by the United Nations and Turkey.
• Blackstone Inc. agreed to buy control of Emerson Electric Co.’s climate technologies arm in a deal valuing the business at about $14 billion. The private equity firm will acquire a majority stake of the unit, which sells the Copeland line of compressors, according to a statement Monday. St. Louis, Missouri-based Emerson will receive upfront, pre-tax cash proceeds of around $9.5 billion and keep a minority stake. The business sells products like compressors that are used in heating and cooling equipment for offices and homes. Bloomberg News reported in early October that Blackstone was in talks to buy assets from Emerson’s commercial and residential solutions division.
• Thermo Fisher Scientific Inc. agreed to acquire British specialty diagnostics firm Binding Site in a deal valued at £2.25 billion ($2.6 billion). The US instrument maker will buy Birmingham, England-based Binding Site in an all-cash deal from owners led by buyout firm Nordic Capital, according to a statement Monday confirming an earlier Bloomberg News report. The transaction could point to a revival of dealmaking in Europe, where mergers and acquisition volumes have declined sharply this quarter. Health-care transactions remain an active sector for merger activity, especially as US-based buyers benefit from a strong dollar when paying for pound-denominated assets.
• Credit Suisse Group AG’s chairman Axel Lehmann bought about 1 million Swiss francs ($1 million) worth of shares in the group following the bank’s restructuring announcement last week. A Swiss regulatory filing showed an unidentified member of the bank’s board of directors making the purchase. The chairman bought the stock in a sign of confidence that the bank will deliver on its strategy, according to a person familiar with the matter.
• UK homeowners will need to get used to paying more for their mortgages, with the higher costs potentially triggering a property price fall of as much as 5% in 2023. That drop in house prices would erase the past 8 months of price gains from the average UK home, according to a report from property portal Zoopla. London properties would face the biggest loss of value with 13 months of capital gains wiped out in this scenario, which would see mortgage rates hover around 4%. “The year ahead hinges on the trajectory for mortgage rates, which impacts the buying power of households who are already facing higher living costs,” said Richard Donnell, executive director at Zoopla. “Homeowners wanting to sell in 2023 will need to be realistic on price and may have to forgo some of the pandemic price gains to achieve a sale.”
• Poland reached a deal with South Korea to develop the European nation’s second nuclear power plant, accelerating its efforts to become energy independent following Russia’s invasion of Ukraine. Korea Hydro & Nuclear Power Co., a state-run nuclear plant operator, signed a letter of intent with Polish utilities PGE SA and ZE PAK SA on Monday, South Korea’s energy ministry said in a statement. The consortium will build several APR-1400 reactors near ZE PAK’s coal plants in Patnow.  “The initiative of ZE PAK and PGE is extremely interesting because it fulfills the strategic goals of Poland and Poles — cheap energy and energy independence,” Poland’s Deputy Prime Minister Jacek Sasin was quoted as saying in the statement.
• Japan spent a record 6.3 trillion yen ($42.4 billion) in October to counter the yen’s sharp slide against the dollar, as it tried to limit speculative moves adding to pressure on the currency. The finance ministry disclosed on Monday data for the period between Sept. 29 to Oct. 27. Central bank figures and market estimates of money flows with the government had suggested that a suspected intervention on Oct. 21 cost around 5.5 trillion yen ($37.2 billion).  Other moments of high volatility including a sharp move on Oct. 24 have kept traders guessing over how often authorities have been operating in the markets and how long they can continue to support the currency.
• Euro-area inflation surged to a fresh all-time high, while the bloc’s economy lost momentum — reinforcing fears that a recession is now all-but unavoidable. Consumer prices jumped by 10.7% from a year ago in October, far exceeding the 10.3% median estimate in a Bloomberg survey. Third-quarter output, meanwhile, slowed to 0.2% from the previous three months — more than analysts estimated but much less than the 0.8% advance recorded between April and June. With the energy crisis continuing to ravage businesses and households, the expansion is widely expected to shift into reverse during the winter.
• Brazil’s Petrobras is set to tumble after Luiz Inacio Lula da Silva won the presidential election due to concerns about how the left-wing leader’s policies will impact Latin America’s largest oil company. The American depositary receipts of Petroleo Brasileiro SA slumped more than 10% in premarket trading from Friday’s closing price. A drop of that size in the company’s shares listed in Brazil would see it nearly wiping out its gains year-to-date. The stock had already suffered its worst week since February 2021 as support for incumbent Jair Bolsonaro showed signs of stalling.

*All sources from Bloomberg unless otherwise specified