September 1, 2022

Daily Market Commentary

Canadian Headlines

  • Canadian equities drop to their lowest level since late July, led by energy as oil posted a third monthly drop — the longest losing streak in more than two years. The S&P/TSX Composite fell for the fourth day, dropping 0.9%, or 182.09 to 19,330.81 in Toronto. The index dropped to the lowest closing level since July 27. Enbridge Inc. contributed the most to the index decline, decreasing 3%. Laurentian Bank of Canada had the largest drop, falling 10.3%.
  • Rio Tinto Group has agreed to buy out Turquoise Hill Resources Ltd. in a deal valued at about $3.3 billion to add more control of a giant copper mine in Mongolia. The C$43 ($33) a share deal comes two weeks after Turquoise Hill rebuffed a lower offer from Rio and ends almost six months of takeover talks. Rio, which already owned a 51% stake, has been seeking to add direct exposure to Turquoise Hill’s Oyu Tolgoi asset, expected to be the world’s fourth-largest copper mine once an underground expansion is completed. Rio said the final deal, which is subject to shareholder approval, represented a 67% premium on Turquoise Hill’s share price before Rio’s first offer on March 11.
  • Brookfield Asset Management Inc. has more than $110 billion to invest and is eagerly eyeing deal opportunities, including buyouts of mispriced public companies. “There cannot be a better time to be a value investor,” Anuj Ranjan, managing partner and head of business development at Brookfield, said in a Bloomberg Television interview Thursday. “This environment actually limits competition and creates a ton of opportunity. It’s an opportune time to have that kind of dry powder.” Toronto-based Brookfield has been focusing on cash-generative businesses and invested some $30 billion in the past 18 months, Ranjan said. Recent acquisitions include UK household repairs provider HomeServe Plc, and a stake in Deutsche Telekom AG’s towers unit.
  • Rogers Communications Inc. succeeded in extending a deadline to buy back $9.33 billion of bonds, overcoming objections from some investors about terms of the deal. The Toronto-based cable and wireless firm got approval from investors holding a majority of eight US and Canadian dollar bond securities to extend the deadline to complete its acquisition of Shaw Communications Inc. to December 2023, the company said in a statement. Under the original terms of the bonds, Rogers would have to repay the securities at 101 cents on the dollar if the C$20 billion ($15.2 billion) deal isn’t done by the end of this year. Investors who agreed with Rogers’ proposal will be paid a consent fee, which in the case of its US dollar bonds ranges from $23.50 to $62.60 per $1,000 in face value, according to terms of the consent released Aug. 22. They can receive additional fees of $11.45 to $31 if the merger doesn’t close by Dec. 31 and Rogers isn’t forced to repay the notes at that time. Some investors felt the fees should have been higher after the bonds sold off.

World Headlines

  • European stocks declined for the fifth day as a new Covid lockdown in China and concerns around hawkish central banks hammered risk demand at the beginning of a seasonally weak month for equities. The Stoxx 600 Index dropped 1.2% by 9:09 a.m. in London, hovering at its lowest level in seven weeks. The declines also mark the longest losing streak since June as investors grow wary of a possible global recession. Miners and real estate underperformed, along with consumer products as luxury companies retreated on concerns over China locking down Chengdu to contain an outbreak. Investors have soured on stocks after a sharp summer rally as Federal Reserve officials dashed hopes of a pivot in rate hikes. With the energy crisis feeding into scorching inflation in Europe, some of Wall Street’s biggest banks now expect the European Central Bank to hike rates by 75 basis points at next week’s meeting. Fears of a hit to corporate earnings are also growing, and the Stoxx 600 has now erased more than half of the summer gains.
  • Stocks and bonds extended their selloff on Thursday as a hawkish drumbeat from central banks and a lockdown in China further frayed investor nerves. The dollar gained. A global equity index hit a six-week low as Nasdaq 100 futures fell after a sales warning from Nvidia Corp. Stocks are entering a month that is often poor for returns and an equity bounce from June lows is fizzling as the Federal Reserve pushes back against bets on tempered rate hikes. A hotly anticipated US jobs report on Friday has the potential to tip the scales toward a third jumbo-sized hike in interest rates later this month.
  • Asian stocks fell as fresh Covid lockdowns in China and hawkish rhetoric from the central bankers hurt investor sentiment. The MSCI Asia Pacific Index slid as much as 1.9%, with Taiwan and South Korea stocks among the region’s worst performers as manufacturing gauges in both markets slumped. Equity benchmarks in Hong Kong and China extended declines after the city of Chengdu became the biggest city to shut down since Shanghai’s bruising two-month lockdown earlier this year. Asian stocks are poised for a third weekly drop following hawkish commentary from central bankers. Cleveland Federal Reserve President Loretta Mester said the US central bank needs to raise its benchmark rate above 4% by early next year, unleashing risk-off sentiment across markets. Euro-area data on Wednesday showed inflation at a record, prompting Bundesbank President Joachim Nagel to call for a “strong rise in interest rates in September.”
  • Oil fell for a third day as demand concerns continue to escalate and the dollar rose, joining a selloff of assets from equities to metals. West Texas Intermediate futures dropped below $88 a barrel, after falling for a third consecutive month in August in the longest run since April 2020. Investors are focusing on tighter monetary policy around the world that could crimp economic growth and eventually hit oil demand. The lock down of the Chinese megacity of Chengdu to contain a Covid-19 outbreak added to the negative sentiment. Oil slumped by more than 20% in the three months through August, overturning all of the gains since Russia’s invasion of Ukraine at the end of February. It has prompted Saudi Arabia to signal that the Organization of Petroleum Exporting Countries and its allies could cut supply. The group is scheduled to gather on Monday to discuss output policy.
  • Gold fell to a six-week low on expectations the Federal Reserve and other central banks will keep raising interest rates to curb inflation. Silver dropped to the lowest in two years. Bullion dropped for a fifth day as the dollar and Treasury yields rose, damping the allure of the non-interest bearing precious metal. Money markets are also pricing in 125 basis points of tightening by the European Central Bank by October as policy makers step up their fight to contain inflation. The outlook for more global tightening pushed gold to a fifth monthly drop in August, the longest losing run in four years.
  • European natural gas declined for a fourth day as a recent record surge eroded demand, while a rapid filling of storage sites is helping ease some concerns over Russian supply. Benchmark futures slumped as much as 7.2%, shedding about a third of the value from last week’s high. European Union inventories are filling about two months ahead of schedule, countering the risk that Moscow could keep shipments at minimal levels even after the end of a three-day maintenance shutdown of the key Nord Stream pipeline that started on Wednesday. An European official on Thursday warned of further supply cuts from Russia. Even if gas flows stop after September, a storage buildup may reduce the “risk perception” if demand remains curtailed by 10% and strong imports of liquefied natural gas continue, according to Citigroup Inc. Consumption for the fuel in Europe slumped 12% in August compared with a year earlier, it said.
  • The hotly anticipated US jobs report has the potential to tip the scales toward a third jumbo-sized hike in interest rates later this month after a wave of data that point to a resilient consumer and high labor demand. Friday’s report is one of the last marquee releases Fed officials will have in hand before the mid-September policy meeting to help them decipher a complex economic and inflationary puzzle. Forecasts call for a healthy, yet more moderate 298,000 gain in August payrolls and for the unemployment rate to hold steady at 3.5%, matching the lowest in five decades. Solid wage growth is also expected amid a persistent mismatch between labor demand and supply.
  • Joe Biden’s White House wants voters headed into midterm elections to think more about the threat he believes Republicans pose to democracy — and less about the complicated state of the economy. In recent speeches, the president has portrayed the GOP as still under the spell of his predecessor, Donald Trump, and his false claims that the 2020 election was fraudulent. Last week Biden even described his opponents as “semi-fascist’’ and bent on curtailing Americans’ freedoms. The shift in tone will be amplified on Thursday when Biden delivers a primetime address from Independence Hall in Philadelphia, the birthplace of the Constitution. The setting represents both symbolism, as the birthplace of the Constitution, and a political calculation, as the biggest city in a key battleground state.
  • 3M Co. plans to eliminate jobs as part of a broader cost-cutting drive in response to the slowing economy, according to internal communications. The move comes just days after 3M suffered a setback over a key legal strategy designed to mitigate mounting liabilities and as it faces an array of other challenges, ranging from inflationary woes to sluggish growth. Michael Vale, head of 3M’s safety and industrial division, disclosed the planned cuts in a message to employees of the unit. “The business can’t avoid this tough necessity,” he said in the communication, which was reviewed by Bloomberg News.
  • Microsoft Corp.’s planned $69 billion purchase of Activision Blizzard Inc. will be sent for an in-depth review unless it offers remedies to address the UK watchdog’s competition concerns. The Competition and Markets Authority said Thursday it was concerned about a substantial lessening of competition in the gaming consoles, multi-game subscription services and cloud gaming services markets. It gave Microsoft a Sept. 8 deadline to offer acceptable remedies. The combination with Activision — which owns some of the most popular franchises including Call of Duty, World of Warcraft and Guitar Hero — will make Microsoft the world’s third-largest gaming company and boost the XBox maker’s roster of titles for its Game Pass subscribers.
  • California called off its power-grid emergency as night fell and temperatures dropped, averting blackouts for now amid a heat wave that could threaten electricity supplies through the long Labor Day weekend. The state’s grid operator declared a level-1 energy emergency earlier Wednesday as temperatures topped 100 degrees Fahrenheit (38 degrees Celsius) in inland areas, with residents asked to conserve power. The grid ended the emergency measures at about 8pm local time, according to a notice on its website. In a tweet, the grid said residents’ conservation efforts had made the difference. However, it may be just a temporary reprieve. The heat is forecast to intensify through Monday, keeping power demand high and supplies tight. Governor Gavin Newsom, who signed an emergency proclamation Wednesday to free up extra electricity supplies, warned the extreme temperatures could linger for a week and asked Californians to cut back on power use.
  • Former President Donald Trump accused the Justice Department of “criminalizing” his possession of personal documents by investigating the presence of hundreds of highly classified White House records at his Mar-a-Lago estate. Trump made the allegation in a Wednesday night court filing seeking to bolster his case for a neutral third party to review documents seized by the FBI during an Aug. 8 search of the former president’s Florida home. A federal judge who was appointed to the bench by the former president is scheduled to hear arguments on his request Thursday at 1 p.m. in West Palm Beach. Trump’s lawyers made the broad argument that the Presidential Records Act allows a president to take whatever document he wants.
  • Liz Truss ruled out introducing any new taxes or rationing energy this winter if she becomes the UK’s next prime minister, making two eye-catching pledges in her final pitch to win the post. Truss, who is the bookmakers’ favorite to succeed Boris Johnson, made the commitments at the last Conservative Party leadership hustings in London on Wednesday, ahead of the victor being announced Sept 5. Truss was asked if she’d make a “read my lips” promise not to raise taxes in government, a reference to a famous pledge made — and then broken — by former US President George H. W. Bush. She replied: “Yes. No new taxes.” She specifically ruled out introducing any new windfall taxes on the energy sector.
  • Deutsche Lufthansa AG said it will suspend almost its entire flight operations in Frankfurt and Munich on Friday because of a strike by pilots who are demanding higher pay, adding another day of major disruptions to what has already turned into a summer of travel chaos. In total, about 130,000 passengers will be affected as Lufthansa scraps 800 flights at its two biggest German hubs, according to a statement. Some disruptions will already occur on Thursday, according to the carrier. Pilots at Lufthansa called a one-day strike following the collapse of wage talks. Lufthansa said it has “absolutely no understanding” for the decision to strike, after making what it called “a very good and socially balanced offer.” According to the airline, giving in to pilot demands would increase payroll costs by more than 40%.
  • India has pushed into a corner of the Russian oil market once dominated by China, taking a record number of shipments of a Far Eastern grade as the fallout from Moscow’s invasion of Ukraine reshapes trade flows. Six vessels hauling Russian crude known as ESPO were headed to refiners in the South Asian nation in August, according to traders and shipbrokers. That’s the highest number of cargoes purchased by India since the stream was introduced, and accounts almost one-fifth of available monthly shipments. “ESPO crude is now becoming a steady flow for India, a country that wasn’t a big fan of the variety for years,” said Emma Li, analyst at Vortexa Ltd. “The voyage to India will take longer, but the shipments might continue as long as the price stays attractive and there aren’t real sanctions blocking the trade.”
  • Hong Kong is targeting an end to hotel quarantine in November, ahead of a summit of global bankers and an international rugby competition, even as a resurgence in Covid-19 cases prompts health officials to push back on the plan, according to people familiar with the debate. Chief Executive John Lee is leaning toward scrapping hotel quarantine before the November events to signal Hong Kong is back in business, despite the objections of some in his administration, the people said. Health Secretary Lo Chung-mau is among those who want to tighten restrictions as cases surge, one person added, on the hope that suppressing cases will lead to the reopening of the mainland border. The momentum is on the side of ending quarantine on the international border over resuming unimpeded travel with the mainland, one of the people said, as many in the government view public opinion in favor of opening to boost the economy. A final decision will ultimately hinge on the daily case count, the number of fatalities and public perception, the person said.
  • Rain Financial Inc. is laying off hundreds of employees in a fresh round of job cuts, according to people with knowledge of the matter, as the ongoing volatility in digital assets takes its toll on one of the Middle East’s largest crypto exchanges. The company communicated the decision to staff on Thursday morning, the people said, asking not to be identified because the matter is private. Before this week’s cuts, the firm had about 400 employees, the people said. Rain also laid off dozens of staff members earlier this year, Bloomberg News has reported. It wasn’t immediately clear exactly how many jobs would be affected in the latest round of cuts.
  • Closely watched gauges of manufacturing in Europe and Asia fell amid intensifying fallout from the war in Ukraine and an economic slowdown in China. The purchasing managers index for the 19-nation euro zone slipped to 49.6 in August from 49.8 in July, according to S&P Global — a reflection of dwindling demand as consumers face surging costs for energy and a broadening range of goods and services. In Asia, Taiwan’s PMI fell to 42.7 — its lowest since May 2020 — while South Korea’s declined to 47.6 — the worst since July 2020. Japan weakened too, though remained above the level of 50 that separates contraction from expansion.


*All sources from Bloomberg unless otherwise specified