September 13, 2022

Daily Market Commentary

Canadian Headlines

  • The S&P/TSX Composite rose 1.1%, with 11 of 11 sectors higher, led by energy stocks. As of market close, 213 of 237 stocks rose, while 21 fell. New Gold Inc. led the advances, rising 8.1%, while Corus Entertainment Inc. decreased 8.2%.
  • Ontario Teachers’ Pension Plan Board, one of Canada’s largest public-sector pension managers, is nearing a deal to buy a stake in specialty packaging company GPA Global from buyout firm EQT AB, according to people familiar with the matter. OTPP is poised to beat out rival bidders for the stake in GPA, the people said, asking not to be identified because the matter is private. The parties are hammering out the final details of a transaction that could be announced in the next few weeks, the people said. The Canadian fund and Asian private equity firm FountainVest Partners were among shortlisted bidders vying for the stake, Bloomberg News reported last month. The deal could value the packaging business at about $700 million to $800 million, people familiar with the matter have said.
  • Atlas Arteria Ltd. agreed to buy a $2 billion stake in the Chicago Skyway toll road despite strong opposition from the Australian company’s biggest shareholder. Canada Pension Plan Investment Board and OMERS Infrastructure sold their respective one-third stakes in the 12.5 kilometer (7.8 mile) road linking downtown Chicago to its south-eastern suburbs. The deal forms a venture with Ontario Teachers’ Pension Plan, which will retain a one-third interest, according to a statement Tuesday. The acquisition was announced despite a strongly-worded statement Monday from Atlas Arteria’s biggest shareholder IFM Investors, following confirmation of the talks. It said the deal could be potentially “dilutive to distributions” and that those concerns were shared by other major shareholders.

World Headlines

  • European stocks gained for the fourth day, the longest stretch of gains in a month, as investors bet that US data will show inflation cooling. The Stoxx 600 Index added 0.3% by 9:23 a.m. in London. Consumer products and travel sectors led the advance, while retail underperformed. Ocado Group Plc slumped 12% as the company said shoppers are placing smaller orders. Marks & Spencer Group Plc shares slid 2.7%. European stocks are staging a rebound, fueled by expectations that softer inflation could lead to a slowdown in the pace of monetary tightening by central banks. Ukraine’s progress in recapturing territory from Russian forces has also lifted market sentiment.
  • US equity-index futures advanced ahead of key inflation data due later on Tuesday. Treasury yields dipped and the dollar extended a decline. Contracts on the S&P 500 and Nasdaq 100 climbed about 0.6% each after the S&P completed its best four-day surge since June on Monday following robust pre-order data for Apple Inc.’s iPhone 14 Pro Max. The Bloomberg Dollar Spot index declined a third day, the longest losing streak in more than a month, as investors weigh positive signs in the economy against hawkish rhetoric from Federal Reserve policy makers. The US inflation report is expected to show headline CPI cooled for a second month in August. That’s ignited a debate among market participants about the outlook for monetary policy, with some wagering the Fed could end its tightening cycle sooner. Others warn that the central bank will want more evidence of sustained moderation in price increases, with tighter policy weighing on economic growth and riskier assets.
  • Asian stocks extended their recent rally as several markets returned from holidays, and as traders awaited a key US inflation data release due later Tuesday. The MSCI Asia Pacific Index rose as much as 0.7%, poised for a fourth-straight day of gains, driven by technology shares. South Korean stocks led advances among regional benchmarks in a catch-up rally following a four-day weekend. Chinese equities edged higher as traders returned from a holiday. President Xi Jinping plans to travel to Central Asia this week in what would be his first trip abroad since the Covid pandemic began. Shares in Hong Kong fell.
  • Oil pushed higher for a fourth day as a weaker dollar offset global demand concerns, and progress toward an Iranian nuclear deal stalled. West Texas Intermediate futures rose toward $89 barrel, climbing for a fourth day. Should the US benchmark end higher on Tuesday that would be the longest run of gains since mid-May. The dollar fell for a third session before US inflation figures due later. Economists expect a decline in the headline figure year-on-year, in part on cheaper gasoline. Nevertheless, traders still expect another large rate hike from the Fed next week, taking their cue from officials supporting that view.
  • Gold held near its highest level this month, as the dollar continued its retreat on more hawkish rhetoric from the European Central Bank and expectations that inflation may have peaked in the US. Bullion closed up 0.5% on Monday after earlier hitting $1,735.14 an ounce, the highest since Aug. 30, on the greenback’s slide. The ECB has joined the Federal Reserve in aggressively hiking rates, helping spur a decline in the US currency from a record last week. The US will release inflation data for August on Tuesday, with markets expecting annual price increases to fall to 8.1%, which would be the second monthly decline from a peak of 9.1% in June. Consumers are also expecting CPI to fall, according to a survey published Monday by the Federal Reserve Bank of New York.
  • Hon Hai Precision Industry Co., the assembler of most of the world’s iPhones, plans to build a chipmaking facility in India with a local partner to tap rising demand for semiconductors and the government’s support for such projects. A joint venture of Taiwan’s Hon Hai, known also as Foxconn, and metals company Vedanta Ltd. will set up a factory in Gujarat, the home state of Prime Minister Narendra Modi. The total investment in the project, which includes semiconductor fabrication, assembly and testing as well as display production, is set to reach 1.54 trillion rupees ($19.4 billion), Vedanta said in a statement Tuesday. While the partners have little experience running large chip operations, they are betting on rising demand as everything from smartphones and cars to home appliances contain an increasing number of semiconductors. Modi’s government late last year unveiled a $10 billion incentive plan, offering to cover as much as half of a project’s cost, to lure display and semiconductor fabricators to set up base in India. The country is also the world’s No. 2 smartphone maker.
  • In the almost 1,000 days since Xi Jinping last ventured abroad, China has found itself increasingly isolated within the US-led world order. He’s finally reemerging this week alongside Russia’s Vladimir Putin to showcase his vision for a viable alternative. Xi and Putin this week are expected to hold their first in-person chat since Russia invaded Ukraine, showing that Beijing sees the relationship as crucial to countering the US. It will occur on the sidelines of a Chinese-founded security forum slated for Thursday and Friday in Uzbekistan that gathers countries ranging from India to Iran — a grouping that aims to accelerate the formation of a multipolar world. Prior to that, Xi on Wednesday will stop in Kazakhstan, where he unveiled what would be become his signature Belt-and-Road trade-and-infrastructure plan nine years ago. That foreign-policy initiative has since become a focal point of the US and its allies in the Group of Seven, which in June announced plans to raise $600 billion in financing so lower-income countries have an alternative to Chinese cash.
  • Twitter Inc. whistle-blower Peiter Zatko’s first public appearance since his explosive allegations against the social media giant couldn’t be more awkwardly timed for the company that billionaire Elon Musk no longer wants to buy. Zatko, the ex-hacker who was Twitter’s head of security, is expected to tell the Senate Judiciary Committee on Tuesday that the company misled its board, investors and users about the security of its platform and the prevalence of bots. The testimony comes as lawmakers and regulators seek to rein in or break up tech companies, and as Musk tries to get out of his offer to buy the company. A judge last week ruled that Musk’s legal team can use Zatko’s whistle-blower claims in his defense against Twitter’s lawsuit seeking to force him to complete the $44 billion deal.
  • President Joe Biden is trying to capitalize on a sudden spate of positive economic news to turn Democrats’ biggest political liability into an unlikely election-year selling point. Falling gas prices, two major legislative victories and early signals that red-hot inflation may be easing have boosted Democrats’ once improbable bid to retain their House and Senate majorities in the November midterms. Biden plans to argue Tuesday that he and his fellow Democrats have helped steer the economy back to firmer footing during a White House ceremony touting a sweeping new climate, energy and health care law dubbed the “Inflation Reduction Act.” The saliency of that message could be helped — or undercut — by the latest government inflation data, due for release just ahead of the event.
  • A soft landing is becoming the more likely scenario for the global economy, which will continue to provide tailwinds for risky assets, according to strategists at JPMorgan Chase & Co. who have been stalwart equity bulls for much of the year. Recent data pointing to moderating inflation and wage pressures, rebounding growth and stabilizing consumer confidence suggest the world will avoid a recession, a team including Marko Kolanovic and Nikolaos Panigirtzoglou wrote on Monday. Markets can benefit from fiscal stimulus in China, energy support plans in Europe and very low investor sentiment, they said. Positive sentiment has returned to markets in recent days amid hopes that inflation may have peaked, at least in the US. On Monday, the MSCI AC World Index completed its best four-day surge since May, as traders ready for key US consumer price data Tuesday.
  • The Czech government proposed capping retail prices of power and natural gas to combat the worsening cost-of-living crisis, even though that might delay its main election pledge to slash the budget deficit. Prime Minister Petr Fiala’s cabinet agreed late Monday that households, small businesses and the public sector would pay no more than 6 koruna per kWh for electricity and 3 koruna/kWh for gas starting in November. Windfall taxes and dividends from state-controlled companies will help pay for the measure, estimated to cost as much as 130 billion koruna ($5.4 billion). The center-right ruling coalition is deploying the biggest assistance package to date as the country grapples with one of the highest inflation rates in the European Union. While the caps will ease the pressure on consumer prices, it is unclear how much of the expenditure can be covered with fresh budget income, according to Martin Gurtler, senior economist at Komercni Banka AS.
  • Nintendo Co.’s family-friendly online shooter game Splatoon 3 became the biggest Switch debut to date with 3.45 million units sold in Japan over its opening weekend. Shares in the console maker rose 5.5% in Tokyo on Tuesday, their biggest jump since December 2020. The long-awaited release topped initial domestic sales of any Switch title, surpassing Animal Crossing: New Horizons’ 1.88 million units. Animal Crossing provided a major boost to Nintendo’s software sales during the pandemic and helped sustain hardware demand for the now five-year-old platform.
  • UBS Group AG plans to raise the dividend for this year by 10% and will probably exceed a target for share buybacks, as it returns excess capital to investors following the cancellation of its Wealthfront acquisition. The Zurich-based lender will propose a dividend of 55 cents a share for approval at its annual meeting next year, up from 50 cents a year earlier, it said in a statement Tuesday. It also expects share repurchases to exceed a target of $5 billion for 2022. UBS has already bought back $4.1 billion worth of shares as of Sept. 9. The move comes after the Swiss firm this month called off the $1.4 billion acquisition of US robo-adviser Wealthfront following a collapse in valuations of tech stocks. In returning more cash, UBS is underscoring how fears of a global recession aren’t stopping European lenders from rewarding investors who have stuck with them through years of negative interest rates and sub-par profitability.
  • Bayer AG has quietly started the search for a successor to Chief Executive Officer Werner Baumann, raising the prospect of an early departure, according to people familiar with the matter. Chairman Norbert Winkeljohann is fielding internal and external contenders with the goal of presenting a new candidate by the next annual shareholder meeting in April, the people said, asking not to be identified discussing confidential information. While initiating the search now could indicate plans to replace Baumann before his contract expires in April 2024, it remains unclear whether he’ll be asked to hand over the reins early, the people said. A representative for Bayer declined to comment.
  • Germany is set to use a fund created to help companies cope with the economic hit from the pandemic to provide loan guarantees for struggling energy firms, according to a person familiar with the plan. State development bank KfW would oversee the mechanism and the volume of loan guarantees available would be around 67 billion euros ($67.9 billion), said the person, who asked not to be identified discussing confidential information. Chancellor Olaf Scholz’s government is set to approve the plan — which is designed to help energy companies forced to pay higher prices due to Russian supply cuts — at a regular cabinet meeting Wednesday, the person added.
  • US trading titans and brokerage firms are building a crypto exchange that brings investing in digital assets further into the domain of traditional finance, by mimicking the structure of how other asset classes trade. EDX Markets will start trading a limited number of spot, crypto tokens starting with a November trial period, with the official launch in January, Chief Executive Officer Jamil Nazarali said in an interview. It is backed by Charles Schwab, Fidelity Digital Assets, Paradigm, Sequoia Capital, Citadel Securities and Virtu Financial. Similar to trading equities and options, EDX will allow investors to buy and sell digital assets from through their existing broker dealer, rather than an outside venue or directly through a crypto-native exchange.
  • Goldman Sachs Group Inc. is set to close its latest mezzanine debt fund with roughly $15 billion of firepower, according to people with knowledge of the matter. The fund, GS Mezzanine Partners VIII, topped its initial target of $12.5 billion. Mezzanine financing ranks in between senior debt and equity funding in the pecking order of repayment if a business fails. The lender assumes more risk compared to buying other forms of debt, but receives a higher yield in return. Opportunistic investors are looking to take advantage of weakness in global credit markets fueled by quickening inflation, higher energy costs and concerns about an economic slowdown. Lower-rated transactions have encountered tepid demand in recent months, forcing banks seeking to offload risky financings to offer steep discounts or higher yields to lure buyers.
  • The European Union is considering capping the power-generation revenues of renewable and nuclear companies at 180 euros to 200 euros per megawatt hour as part of an emergency package, according to people familiar with the talks. The plans still need to be finalized and ultimately signed off by member states. Deep divisions on how to design the package to stem the energy crisis were on display at a meeting of ministers last week and some governments are likely to push for changes. The Commission is also planning to propose a temporary levy on companies in oil, gas, coal and refinery industries of at least 33% of their extra profits, said the people, asking not to be identified commenting on private talks. The basis will be pre-tax profits of fiscal year 2022 that are more than 20% higher than the average of the three years starting in 2019.

*All sources from Bloomberg unless otherwise specified