September 23, 2022

Daily Market Commentary

Canadian Headlines

  • The S&P/TSX Composite fell for the third day, dropping 0.9%, or 181.86 to 19,002.68 in Toronto. The index dropped to the lowest closing level since July 26. Shopify Inc. contributed the most to the index decline, decreasing 6.3%. Canopy Growth Corp. had the largest drop, falling 7.1%.
  • Australia’s Link Administration Holdings Ltd. has pulled the plug on a potential takeover by Canadian technology company Dye & Durham Ltd., ending a two-year process that was at one point worth C$3.2 billion ($2.4 billion). The time for the satisfaction of outstanding conditions has expired, and there is no expectation they would be resolved, the Sydney-based data services firm said in an exchange filing Friday. Australia’s biggest service provider to its pensions industry is still considering whether to pay shareholders a special dividend of A$0.08 per share, the statement showed. The decision not to proceed followed Link’s rejection of Dye & Durham’s revised offer on Monday, as the Toronto-based suitor sought to recut the deal in light of liabilities stemming from a collapsed fund Link administered that was run by UK star manager Neil Woodford. Dye & Durham said while making its latest proposal that it could not commit to funding redress payments for the collapsed fund.

World Headlines

  • European stocks dropped on Friday after sinking to the lowest level since January 2021 yesterday as investors fled risk assets on fears that hawkish central banks will drive economies into recession. The Stoxx Europe 600 Index was down 0.7% by 9:39 a.m. in London, with energy and miners leading declines among sectors, while more defensive industries like healthcare and food outperformed. Equities in the region are on track for their second weekly drop, as fears over a worsening economy, energy crisis and more hawkish central banks are hitting sentiment toward riskier assets. The Stoxx 600 has slumped nearly 20% since its January record high, on track for a third consecutive quarter of declines, the longest since 2009.
  • US equity futures fell as Europe’s Stoxx 600 Index dropped to the lowest since December 2020 and was poised to enter a bear market. Energy shares led the decline as oil slipped, while Credit Suisse Group AG tumbled to a record after denying a report that it’s considering exiting the US. Goldman Sachs Group Inc. slashed its year-end target for the S&P 500 Index to 3,600 from 4,300, citing a higher interest-rate path from the Federal Reserve, while strategists gave up on a year-end rally for European stocks as private-sector activity in the region continued to contract.
  • Asian stocks fell, with investors continuing to flee riskier assets as Treasury yields surged following the Fed’s rate hike that increased recession fears. The MSCI Asia Pacific Excluding Japan Index slipped as much as 1.6% while the broader MSCI Asia Pacific Index was on course for its sixth weekly retreat, the longest losing streak since May. TSMC and Tencent were the biggest drags on both gauges as the tech sector led declines. All markets in the region dropped, with several hitting grim milestones. Hong Kong’s Hang Seng Index fell to the lowest in more than a decade, while South Korea’s Kospi finished at its lowest since Oct. 2020. Australia’s benchmark fell nearly 2% as the country resumed trading after a holiday. Japan was closed.
  • Oil headed for a fourth weekly decline after a raft of interest-rate hikes around the world darkened the outlook for energy demand. West Texas Intermediate futures edged below $82 a barrel, with prices down more than 3% for the week. The Federal Reserve gave its clearest signal yet that it’s willing to tolerate a US recession as the trade-off for regaining control of inflation, while the UK, Norway and South Africa also raised rates. Crude remains on track for its first quarterly loss in more than two years as concerns about a global economic slowdown weigh on the demand outlook. A stronger dollar added to bearish headwinds this week, making commodities priced in the currency more expensive for investors.
  • Gold headed for a second weekly decline after a slew of central banks followed the Federal Reserve in raising interest rates to cool inflation. Bullion slipped lower on Friday as the dollar climbed to a record. The precious metal had swung between gains and losses Thursday, dropping as much as 1.1% after Japan intervened in the foreign exchange market to strengthen its currency, causing bond yields to climb and the dollar to slide before later recovering. Weakness in bullion is “very likely to persist” due to “monetary tightening that makes gold costlier to hold,” said Gnanasekar Thiagarajan, director at Commtrendz Risk Management Services. “However, recession fears and any escalation in the Russia and Ukraine conflict could support prices.”
  • Ford Motor Co. has begun construction of a $5.6 billion electric-vehicle manufacturing complex in western Tennessee, the largest factory project in the automaker’s 119-year history. The site, known as BlueOval City, stretches across six square miles and is three times the size of the historic Rouge complex that Henry Ford built in Michigan a century ago to make Model Ts. By 2025, BlueOval City is expected to teem with 6,000 workers building electric pickup trucks and the batteries that power them in a joint venture with South Korean battery partner SK Innovation. The companies also are building two battery factories in Kentucky that will employ another 5,000 workers, advancing Ford Chief Executive Officer Jim Farley’s goal of building 2 million EVs annually by the end of 2026. The carmaker is spending $50 billion on EVs through 2026, and Farley expects more than half the company’s sales to be battery-powered vehicles by 2030. Last year, Ford sold 27,140 EVs in the US.
  • Goldman Sachs Group Inc. slashed its year-end target for the S&P 500 Index to 3,600 from 4,300, arguing that a dramatic shift in the outlook for interest rates moving higher will weigh on valuations for US equities. The higher interest-rate scenario in Goldman’s valuation model supports a price-earnings multiple of 15 times, compared with 18 times previously, strategists including David J. Kostin wrote in a note on Thursday. “Our economists now forecast the FOMC will raise the policy rate by 75 basis points in November, 50 basis point in December, and 25 basis points in February for a peak funds rate of 4.5%-4.75%.” Goldman said the risks to its latest forecast are still skewed to the downside because of the rising odds of recession — a scenario that would reduce corporate earnings, widen the yield gap and push the US equity benchmark to a trough of 3,150. Federal Reserve Chair Jerome Powell has signaled that he would risk a recession to fight inflation, spurring fears that central banks may derail global growth.
  • Apple Music will become the title sponsor of the Super Bowl halftime show, taking over from PepsiCo Inc., which has had its name on the star-studded intermission program since 2013. Apple Inc.’s sponsorship begins this season with Super Bowl LVII, which will be played in Arizona in February. The $2.5 trillion tech company may have paid as much as $50 million a year for the five-year deal, Sportico reported, without saying where it got the information. The pricey sponsorship’s announcement also coincides with Apple’s bid for the rights to stream the NFL’s Sunday Night games. The company is considered the front-runner for the popular package of games, for which the league is seeking $2.5 billion, an increase of $1 billion over its current deal with DirecTV.
  • Volkswagen AG is exploring ways to counter a shortage in natural gas, including shifting production around its network of global facilities, signaling how the energy crisis unleashed by Russia’s invasion of Ukraine threatens to upend Europe’s industrial landscape. Volkswagen, Europe’s biggest carmaker, said Thursday that reallocating some of its production was one of the options available in the medium term if gas shortages last much beyond this winter. The company has major factories in Germany, the Czech Republic and Slovakia, which are among European countries most reliant on Russian gas, as well as facilities in southern Europe that source energy from elsewhere. “As mid-term alternatives, we are focusing on greater localization, relocation of manufacturing capacity, or technical alternatives, similar to what is already common practice in the context of challenges related to semiconductor shortages and other recent supply chain disruptions,” Geng Wu, Volkswagen’s head of purchasing, said in a statement.
  • The Czech government — which holds the European Union’s rotating presidency — proposed a compromise on tapping the bloc’s carbon market to help finance a shift away from Russian fossil fuels, in a bid to secure a deal next month. The European Commission, the EU’s executive arm, in May floated the idea of selling 20 billion euros ($19.5 billion) worth of permits withdrawn from the market and kept in the Market Stability Reserve. Now the Czech Republic has instead proposed that 16 billion euros of allowances come from the bloc’s innovation fund, according to a document seen by Bloomberg News. Carbon futures fell as much as 5.2% to 66.75 euros per metric ton on the ICE Endex exchange
  • Mercedes-Benz AG is stockpiling parts it makes using natural gas in a move to keep production going for several weeks even if Germany introduces drastic fuel rationing. The German luxury automaker has produced extra parts made at its foundries in Untertuerkheim, which go into gearboxes, axles and transmission components to build up stockpiles at plants in the U.S. and China. This will allow carmaking operations in Alabama and Beijing to keep going even if a shortage of natural gas in Germany forces operations in the country offline, according to Mercedes-Benz production chief Joerg Burzer.
  • Liz Truss’s government has set out the most radical package of tax cuts for Britain since 1972, reducing levies on both households and companies in an effort to boost the long-term potential of the economy. The pound and UK government bonds fell after Chancellor of the Exchequer Kwasi Kwarteng scrapped the 45% the top rate of income tax, paid by only the richest earners, and cut the basic rate from 20% to 19%. The Conservative administration hopes its program including regulatory reforms will turbo-charge the economy, staving off a recession that the Bank of England says has already begun and shaking the UK out of a decade of weak growth. Investors and economists expressed concern the package will drive the Treasury’s debt to unaffordable levels and fan inflation.
  • Investors are flocking to cash and shunning almost every other asset class as they turn the most pessimistic since the global financial crisis, according to Bank of America Corp. strategists. Cash had inflows of $30.3 billion, while global equity funds saw outflows of $7.8 billion in the week through Sept. 21, the bank said in a note, citing EPFR Global data. Bond funds lost $6.9 billion, while $400 million left gold, the data showed. Investor sentiment is “unquestionably” the worst it’s been since the crisis of 2008, with losses in government bonds being the highest since 1920, strategists led by Michael Hartnett wrote in the note. They see cash, commodities and volatility continuing to outperform bonds and stocks, with Bank of America’s custom bull and bear indicator returning to the maximum level of bearishness.
  • Credit Suisse Group AG shares slumped to a record low after the bank was forced to deny a Reuters report that it is considering exiting the US market, signaling that doubts still remain over the troubled lender’s upcoming strategy revamp. “Credit Suisse is not exiting the US market. Any reporting that suggests otherwise is categorically false and completely unfounded,” a representative for the bank said in a statement late Thursday. Shares fell as much as 8% on Friday, trading at 4.34 Swiss francs as of 10:39 a.m. in Zurich. The share price has declined by about two thirds since the twin scandals surrounding Greensill Capital and Archegos Capital Management early last year.
  • Pershing Square Capital CEO Bill Ackman said that increasing immigration may be a more effective tool to tamp down inflation than the Federal Reserve raising interest rates and “destroying demand.” Ackman — with a net worth of about $2.5 billion, according to the Bloomberg Billionaires Index — made the comments on Twitter after Fed Chairman Jerome Powell earlier this week raised rates by 75 basis points for a third straight time and said there wasn’t a painless way to get inflation “behind us.”
  • China has enough ammunition to salvage its beleaguered property sector, as total bailout funds could reach 3.57 trillion yuan ($501 billion) with central government support, according to CLSA Ltd. That’s far more than the 700 billion yuan to 800 billion yuan funding gap for stalled projects, based on S&P Global estimates. At worst, this number could reach as much as 2 trillion yuan, the company added. Authorities have sought to defuse the deepening property crisis with a raft of measures, including cutting interest rates, asking banks to meet the reasonable financing needs of developers, and offering special loans of 200 billion yuan through policy banks to ensure property projects are delivered.

*All sources from Bloomberg unless otherwise specified