September 2, 2022

Daily Market Commentary

Canadian Headlines

  • Canadian equities dropped for the fifth straight day as energy and materials stocks tumbled. The S&P/TSX Composite fell 1%, or 188.09 to 19,142.72 in Toronto. The index dropped to the lowest closing level since July 26. Bank of Nova Scotia contributed the most to the index decline, decreasing 1.7%. Energy Fuels Inc./Canada had the largest drop, falling 10.9%.
  • Toronto home prices fell for a fifth straight month, the longest skid since 2017, as the property market adjusts to sharply higher interest rates from the Bank of Canada. The benchmark price for a home in Canada’s largest city dropped 2.8% in August compared with the month before to reach C$1.12 million (about $852,000), according to data released Friday by the Toronto Regional Real Estate Board. That brings the total price decline to nearly 16% since March — the biggest five-month drop since the measure started being tracked in 2005. In March, the central bank began raising its benchmark interest rate from an emergency low of 0.25% to rein in the highest inflation since the 1980s. It’s now 2.5%, representing one of the most aggressive rate-hiking campaigns in decades.
  • The Bank of Canada is expected to pull off a coveted soft landing, bringing soaring inflation back to near its 2% target without tipping the nation’s economy into a major downturn. A wide-ranging Bloomberg survey of 21 economists on Bank of Canada policy found that the central bank took a credibility hit with a late response to inflation. But its decision to shift course and tighten policy aggressively may wrangle price pressures down quickly, they said. Inflation is forecast to fall sharply to near target by the end of 2024, from about 8% currently. Economists see that happening without borrowing costs rising too far into restrictive territory, with the policy rate peaking in October at 3.75%, according to the median estimate in the survey.

World Headlines

  • European stocks climbed, ending a five-day losing streak as enticing valuations outweighed concerns about a growth slowdown and hawkish central banks. The Stoxx 600 Index gained 0.5% by 11:28 a.m. in London after the gauge yesterday fell the most in nearly two months. Automakers as well as construction and materials shares outperformed. Among individual movers, JD Sports Fashion Plc and Puma SE edged higher after Canadian peer Lululemon Athletica Inc raised its full-year outlook. The Stoxx 600 is trading at about 11.2 times forward earnings, hovering at the lowest valuations since the start of the pandemic, while the 14-day relative strength index closed below 30 on Thursday, signaling that it may be oversold. It’s set for the biggest weekly decline since June. Investors have been offloading European shares amid concerns about a slump in economic growth, with central banks remaining firmly hawkish in the face of soaring prices. At the same time, Europe is grappling with a gas crisis.
  • Stocks are set for a third straight week of declines ahead of key US jobs data that could stir expectations for another sharp Federal Reserve interest-rate hike. The jobs update is expected to show healthy payrolls growth and follows a stronger-than-expected US manufacturing report. Traders increasingly anticipate another large 75 basis points Fed rate rise to cool inflation. Concern that rising rates will hurt growth has weighed on markets, pushing global bonds into their first bear market in a generation. The Bloomberg Global Aggregate Total Return Index of government and investment-grade corporate bonds down more than 20% from a 2021 peak.
  • Asian stocks fell Friday, on course for their worst week in more than two months, as the dollar hit a new high amid worries about the Federal Reserve’s aggressive rate-hike path and as lockdowns continued in China. The MSCI Asia Pacific Index declined as much as 0.7%, set for a weekly loss of nearly 4%. TSMC and other tech stocks contributed the most to the benchmark’s drop as Treasury yields climbed, sending the Bloomberg Dollar Spot Index to a record high. Equity gauges in Hong Kong led declines in the region, dragged by the banking and tech sectors. Meanwhile, shares in Japan fell as the yen slipped to a 24-year-low against the dollar. Fresh lockdowns in China are also weighing on sentiment, putting the Asian stock benchmark on track for its third-straight weekly decline. The sell-off reflects broad concerns of an economic slowdown amid weaker manufacturing data in the region’s major tech exporters.
  • Oil rose on Friday — paring a hefty weekly decline — before an OPEC+ meeting on supply at which Saudi Arabia could push for output cuts, and as efforts to revive an Iranian nuclear accord suffered a setback. West Texas Intermediate climbed above $89 a barrel, after slumping almost 11% over the prior three days. Crude has come under pressure this week as tighter monetary policy and renewed anti-virus lockdowns in China spurred concern that consumption will weaken. The dollar’s jump to an all-time high has also weighed on prices in the run-up to Monday’s OPEC+ gathering. Oil fell by more than a fifth in the three months through August, erasing all of the gains since Russia’s invasion of Ukraine. The retreat poses a challenge for the Organization of Petroleum Exporting Countries and its allies, with ministers due to meet on Monday to plan output policy. While OPEC-watchers expect the group to keep supply steady, Saudi Arabian Energy Minister Prince Abdulaziz bin Salman raised the possibility of a production cut in remarks last week.
  • Gold headed for a third straight weekly drop as the dollar rallied ahead of key US jobs data, which could provide further clues on the size of the Federal Reserve’s next interest-rate hike. The metal edged higher Friday as the dollar eased back from a record notched in the previous session. Bullion is still trading near a six-week low, under pressure from higher Treasury yields that damp the appeal of the non-interest bearing precious metal. The jobs report later Friday is expected to show robust payrolls growth for August and follows stronger-than-expected US manufacturing data. Wage growth is also expected to stay strong even as the Fed tries to damp inflationary pressures with tighter monetary policy.
  • President Joe Biden is seeking to stoke voters’ outrage over the extremism of Donald Trump and his supporters ahead of November’s midterm elections, even if the strategy risks exacerbating political tensions in the US. In a prime-time address to the nation Thursday from Philadelphia’s Independence Hall, Biden sharpened the criticism he’s recently used to describe his predecessor and Trump supporters. Declaring that “equality and democracy are under assault”  from “extremist” Republicans, he implied that the only way to stop them was to vote against Republicans who support the former president.
  • Under pressure from central bankers determined to quash inflation even at the cost of a recession, global bonds slumped into their first bear market in a generation. The Bloomberg Global Aggregate Total Return Index of government and investment-grade corporate bonds has fallen more than 20% from its 2021 peak on an unhedged basis, the biggest drawdown since its inception in 1990. Officials from the US to Europe have hammered home the importance of tighter monetary policy in recent days, building on the hawkish message from Federal Reserve Chair Jerome Powell at the Jackson Hole symposium. Rapid interest-rate hikes deployed by policy makers in response to soaring inflation have brought to an end a four-decade bull market in bonds. That’s creating a difficult environment for investors, with bonds and stocks sinking in tandem.
  • The European Union is preparing to release a new funding package of 5 billion euros ($5 billion) for Ukraine as the nation battles to find resources for the war against Russia and for running the country. The European Commission, the EU’s executive arm, will propose the loan package next week to help Kyiv cover urgent costs including salaries and benefits, according to EU diplomats familiar with the plan. The money is part of a bigger package of 9 billion euros pledged by the bloc last May that remains largely to be transferred due to disagreement between the commission and member states over the details of the aid program.
  • India’s institutional investors are starting to sell local shares just as foreign funds return to the country’s $3.4 trillion equity market. Domestic firms offloaded $889 million of shares in August, the first month of net sales since February 2021. Foreigners have bought $7.6 billion of stocks since the end of June, after pulling out a record $33 billion since October. The changing of the guard hasn’t derailed Indian stocks, which are up an impressive 10% since the end of June even as the rest of the world’s equity markets falter. Despite the overall selling of domestic investors, mutual funds have continued to receive a monthly inflow of more than $1 billion.
  • Shell Plc and Exxon Mobil Corp. agreed to sell their oil-production joint venture in California as the energy majors focus on newer projects. Shell said Thursday it’s selling its 52% stake in Aera Energy LLC to German asset manager IKAV for about $2 billion in cash. Exxon said separately it’s selling its share of the venture to IKAV. Aera, based in Bakersfield, is among Californian oil producers that have found it more difficult to obtain hydraulic fracturing permits as the state clamps down on new oil and gas development.
  • Warren Buffett’s Berkshire Hathaway Inc. trimmed its stake in BYD Co. even further, offloading another 1.72 million shares as of Sept. 1, according to an exchange filing Friday, just days after the legendary US investor began reducing his holding in China’s biggest maker of electric vehicles. Berkshire’s interest in BYD’s Hong Kong-listed shares has now fallen to 18.87% from 19.02%, with the latest securities sold for an average of HK$262.72 apiece, giving the stake a value of around HK$450.8 million ($57.5 million). That takes Berkshire’s total shares jettisoned to 3.05 million, or 1.4% of Buffett’s known 225-million-share holding. Theories about Buffett’s plans for the bellwether Chinese electric car company have swirled since a 20.49% stake — identical to the size of Berkshire’s last reported BYD position in Hong Kong as of the end of June — entered the Central Clearing and Settlement System in July, a sign to investors a sale may be imminent. That triggered the biggest slump in BYD stock in nearly two years.
  • Starbucks Corp. tapped Laxman Narasimhan, chief executive officer of Reckitt Benckiser Group Plc, as its next CEO, choosing a consumer-industry veteran to build on the new path charted by Howard Schultz. Narasimhan, 55, will join the coffee giant Oct. 1 while longtime leader Schultz, 69, stays at the helm. The new chief will take over fully April 1 after an introductory period in which he’ll learn about the company. At that point, Schultz will cede the top executive role but remain indefinitely as an adviser. Before his stint at Reckitt, Narasimhan was an executive at global beverage titan PepsiCo Inc., which is a Starbucks partner for ready-to-drink products, and worked at consulting firm McKinsey & Co.
  • Investors bracing for a recession jolt accelerated their retreat from stocks after the Federal Reserve warned it won’t be easily deterred in its fight against inflation, Bank of America Corp. strategists say. Global equity funds had outflows of $9.4 billion in the week to Aug. 31, the fourth-largest redemptions this year, according to EPFR Global data cited by the bank. US equities had the biggest exodus in 10 weeks, while $4.2 billion left global bond funds, the data show. Strategists led by Michael Hartnett expect a “fast inflation shock, slow recession shock” as nominal growth continues to be boosted by surging consumer prices, fiscal stimulus, large household savings and the impact of the war in Ukraine.
  • The Group of Seven most industrialized countries are poised to agree to introduce a price cap for global purchases of Russian oil — a measure the US hopes will ease energy market pressures and slash Moscow’s overall revenues. G-7 finance ministers are meeting Friday, where they are expected to formally back the plan, according to two people familiar with the matter. The G-7 plan, which is part of broader efforts to punish Russia for its military invasion of Ukraine, would allow buyers of Russian oil under a capped price to continue getting crucial services like financing and insurance for tankers. The G-7 discussions were progressing well, one of the people said, and that the planned joint statement would be relatively detailed, including a price range for the planned cap on Russian oil purchases and a possible date when the measure could kick in.
  • SoftBank Group Corp. is planning to cut at least 20% of staff at its loss-churning Vision Fund operation, following public pledges from Masayoshi Son to reduce headcount at the world’s biggest tech investor, according to people familiar with the matter. The Tokyo-based company will slash a minimum of 100 positions and may announce the job cuts as early as this month, said the people, asking not to be named as the information is not public. The cuts will mostly be in the UK, US and China operations, which have the most headcount, said the people. The Vision Fund unit had about 500 employees including Latin America funds staff. Son, the self-made billionaire founder of the group, had said in August he plans widespread cost-cutting at his conglomerate and the Vision Fund investment arm after a record $23 billion loss. Most of the losses came from a plunge in the valuations of portfolio companies, including South Korea Coupang Inc. and DoorDash Inc. SoftBank also reported a $6 billion foreign exchange loss because of the weaker yen.
  • Australia raised its ceiling on permanent migration in a move that will allow as many as 35,000 more workers to enter the country every year as part of an effort to ease worsening labor shortages. The increase could see many more nurses, engineers and agricultural workers join struggling Australian businesses, Home Affairs Minister Clare O’Neil said at the government’s Jobs and Skills Summit in Canberra on Friday. Australia previously allowed a maximum 160,000 permanent migrants each year. In addition to the changes to migration, the summit attendees agreed to A$1 billion ($679 million) in increased funding for skills training places, loosening restrictions on multi-enterprise bargaining agreements and greater flexibility to allow international students to work.
  • The US government’s new restrictions on the ability of Nvidia Corp. to sell artificial intelligence chips to Chinese customers threatens to deal a heavy blow to the country’s development of a sweeping range of cutting-edge technologies. The Santa Clara, California-based company disclosed in a regulatory filing this week it can no longer sell certain high-end chips in China without a license from Washington. These AI accelerators go into large data centers to train AI models for tasks like autonomous driving, image recognition and voice assistance. Nvidia has nearly a 95% share of that market, according to Fubon Securities Investment Services estimates, and the rest is accounted for by Advanced Micro Devices Inc., a fellow US chip firm that’s bound by the same export restrictions. Without access to their gear, tech giants that rely on big server farms to develop everything from electric and self-driving cars to social and cloud services will be at a disadvantage to international competition.

 

*All sources from Bloomberg unless otherwise specified