The Daily – September 26, 2023

September 26, 2023

Daily Market Commentary

NEWS

Canadian Headlines

• Considering remote working from overseas? Join the growing segment of untethered persons: In the US alone, 17.3 million Americans, 11% of the workforce, now identify as digital nomads—traditional jobholders and independent workers—an increase of 2% from 2022, according to the August 2023 report from US workforce management company MBO Partners. Another 70 million are either planning to become digital nomads over the next two to three years or are considering it. Consequently the list of attractive destinations cutting red tape and offering remote work visa schemes is getting longer. It includes more locations in the Global North, as industrialized nations are often described. That’s because the competition is for long-term talent, not temporary tourists. Canada, which has long welcomed digital nomads for stays of up to six months while on a visitor visa, announced it’s working on a new “tech talent strategy” to attract foreign workers by the end of this year. The government is consulting with provinces and territories to find ways to promote Canada to digital nomads, and it’s working on allowing startups to apply for work permits of up to three years.

World Headlines

• European stocks extended their declines to a fourth day on Tuesday, dragged lower by renewed worries over China’s property sector and sharply higher bond yields across the developed world. The Stoxx 600 Index fell 0.6% as of 8:07 a.m. in London, with the technology and real estate sectors among the biggest laggards. Luxury stocks including Richemont and LVMH dropped further as China worries weighed on sentiment. A lid was kept on European equities this month as worries mounted about central banks staying hawkish for longer to fight inflation. As a result, value stocks have made a comeback, with the MSCI Europe Value Index is now heading for its biggest monthly outperformance over its growth counterpart since January 2022.
• US stocks were poised to reverse Monday’s modest gains as traders continued to price in a more hawkish interest-rate path and Moody’s Investors Service warned a government shutdown would reflect poorly on America’s credit rating. Futures contracts for both the S&P 500 and the tech-heavy Nasdaq 100 indexes fell about 0.5% on Tuesday as of 4:57 a.m. in New York. The Wall Street benchmarks gained 0.4% and 0.5%, respectively, in the first session of the week. Investors are ditching riskier assets worldwide as the prospect of higher-for-longer Federal Reserve rates dents hopes for an economic soft landing and fueles further dollar appreciation. Data on US consumer confidence and manufacturing activity expected later Tuesday could provide more clues on the outlook for the economy and monetary policy.
• Asian equities extended their losses as a selloff in Chinese stocks worsened, while surging Treasury yields also sapped risk appetite. The MSCI Asia Pacific Index declined as much as 1%, with technology firms among the biggest drags on the gauge amid worries over higher-for-longer interest rates. Hong Kong’s stock benchmark and a separate Bloomberg gauge of China’s real estate stocks ended at their lowest level since November amid signs of capitulation in the country’s property market. The MSCI Asia Pacific Index is on the verge of forming a death cross, a key technical milestone that traditionally portends further losses, as a rising dollar and US bond yields together with China’s worsening economic outlook dent confidence in regions’ risk assets.
• Brent oil fell toward $92 as the impact of a rapidly tightening market was offset by low risk appetite across markets with investors pricing in a prolonged period of higher interest rates. The global benchmark was down as much as 1.6% in London on Tuesday. The move mirrored a pullback in equities, with one of the broadest measures of global stock markets on track to match its longest losing streak in the past decade. That has stopped a crude rally driven by signs of scarce supply in its tracks. Closely-watched timespreads continue to trade in a large backwardation, indicating a market deficit.
• Gold held losses after the dollar rallied to its highest level this year and US bonds extended a selloff. The metal edged slightly lower on Tuesday as traders looked ahead to a key US inflation report due this week that’s expected to show a deceleration in consumer-price growth. Gold has largely range-traded since July despite hawkish signaling from the Federal Reserve and continued outflows from exchange-traded funds. Spot gold declined 0.2% to $1,912.46 an ounce at 10:21 a.m. in London, after falling 0.5% on Monday. The Bloomberg Dollar Spot Index strengthened slightly, following a 0.4% gain in the previous session. Silver, platinum and palladium slipped.
• Demand for the UK’s green bonds held up in a sale on Tuesday, after speculation that Prime Minister Rishi Sunak’s changes to climate policies might hurt investor interest. The nation sold £3 billion ($3.7 billion) of bonds due 2033 as targeted, with investors offering to buy 2.56 times the amount of securities available. That’s a greater bid-to-cover ratio than two of the three last sales of the gilt. The watered-down climate goals announced by Sunak last week push back the deadline to bar sales of new petrol cars as well as the rollout of cleaner heat for homes. It’s the latest in a string of similar policy adjustments that include expanding North Sea oil and gas production.
• The world may not be prepared for a worst-case scenario of Federal Reserve benchmark interest rates hitting 7% along with stagflation, JPMorgan Chase & Co. CEO Jamie Dimon said in an interview with the Times of India. “If they are going to have lower volumes and higher rates, there will be stress in the system,” Dimon said while visiting Mumbai for a JPMorgan investor summit. “Warren Buffett says you find out who is swimming naked when the tide goes out. That will be the tide going out.” Dimon, who has said rates may need to rise further to fight inflation, added that the difference between 5% and 7% would be more painful for the economy than going from 3% to 5% was.
• Among the sticking points highlighted by United Auto Workers on strike are the billions of dollars Detroit’s legacy carmakers have plunged into stock repurchases. Now, as the strike extends into its second week, some investors say they’re willing to forgo those coveted share buybacks as the companies face soaring labor costs over the next several years. The UAW is asking General Motors Co., Stellantis NV and Ford Motor Co. for significant pay raises and other concessions in their next four-year contract. “The companies have room to go higher than their current offer,” said Patrick Kaser, a portfolio manager for Brandywine Global, which has a stake in GM as part of its $54 billion in assets under management as of June 30. “If they pause the buyback because they need to invest in an attractive longer-term plan, that is fine.”
• Victoria’s Secret & Co. has been seeking penance with shoppers after a backlash to its sexy imagery, with an oft-changing cast of executives pledging to reimagine the retailer’s merchandise and marketing. So far, it has little to show for its efforts. The business has lost about $1.8 billion in sales since 2018 and revenue for its last full fiscal year fell 6.5%, with net income down nearly half. Shares reached an all-time low in September, down 78% from 2021. Amy Hauk, the leader who was named head of the Victoria’s Secret brand in 2022 and touted ambitious plans to rebuild its product offerings, announced her departure after six months. Her exit added to a sense of instability at a company that former executives say has relied on half-measures, instead of a total overhaul, to try to regain relevance.
• Adobe Inc.’s $20 billion (18.9 billion euros) takeover of Figma Inc. risks delays after European Union watchdogs stopped the clock running on their in-depth probe to seek missing details about the deal. The European Commission said it took the step — increasingly common in complex deal reviews — on Sept. 19 after the firms failed to provide “in a timely fashion, an important piece of information” that it had requested from them. The clock will start again once the data has been handed over, the regulator added. Adobe declined to comment. The planned deal will give San Jose-based Adobe control of world-leading web design platform Figma, in a move described by Chief Executive Officer Shantanu Narayen as “transformational.”
• The European Union’s new, tougher approach to China is being shaped by French concerns that Beijing’s trade practices have started to pose a critical threat to core industries. The government in Paris has taken a key role in driving the policy shift, according to people familiar with its thinking, calculating that inaction now would put the bloc’s economy on a path to long-term damage. Officials speaking on condition of anonymity recalled the solar industry debacle a decade ago, when cheap imports from China gutted European production. One of the officials said Europe’s auto industry could potentially be vulnerable in the same way and so the EU faces a binary choice: Either it affirms its power or submits to China.
• Wall Street economists are growing more upbeat about US economic growth while acknowledging that it may require interest rates to stay higher for longer, in line with recent projections by the Federal Reserve. Gross domestic product is expected to advance at an annualized 3% rate in the third quarter, reflecting stronger consumer spending and private investment, according to the latest Bloomberg monthly survey of economists. That compares to the 1.8% pace projected in August and is six times the growth rate forecast at the start of the quarter. At the same time, a surge in oil prices in the past month will make the path to tame inflation even choppier. Respondents see the personal consumption expenditures price index — the Fed’s preferred inflation gauge — running at a faster pace in each quarter through the end of next year, compared to last month’s survey.
• Apple Inc.’s services chief, set to testify in Washington Tuesday, plans to defend the lucrative deal that made Google’s search engine the default option on the iPhone, saying it was the best choice for consumers. Eddy Cue, Apple’s senior vice president of services and the architect of the agreement, is taking the stand at a Department of Justice trial against Google, which the government says used its dominance in search to hinder competition. Cue plans to say he has always believed that Google makes the best search engine — and that’s why Apple uses it as the go-to option across its major devices — according to a person familiar with his expected testimony. Google pays Apple billions of dollars for this prominent position on products like the iPhone, making the agreement of particular interest to the government. The question is whether the search giant pushed its way onto Apple devices at the expense of competitors.
• Private equity firms have been increasingly adding another layer of debt to their complex borrowing arrangements, raising concern among some investors about potential risks to the wider industry and the financial system. Hit by a drought of deals and dwindling cash, some buyout firms are starting to resort to backroom financing to help meet fund commitments or enable succession planning. The loans — backed by assets including the promise of future income — carry interest of as much as 19%, a rate that’s more akin to the charges faced by consumers rather than corporate borrowing. Even a junk-rated company in the US paid 10% on a bond recently. Those high costs aren’t deterring private equity firms and experts say demand is at an all-time high. While some of the biggest lenders — such as Carlyle Group Inc. — say these debts are relatively safe, others are already starting to take precautions by adding covenants that enable seizure of other underlying fund assets, highlighting worries about possible losses. Some are warning of perils when a firm faces claims from more than one type of loan simultaneously.
• Investors are souring on the technology-heavy Nasdaq 100 Index, building short positions in the futures market, according to Citigroup Inc. strategists. Positioning in the Nasdaq 100 is now one-sided net short at $8.1 billion, with all long positions unwound, a team led by Chris Montagu wrote in a note. Meanwhile, there’s a modest net short position in S&P 500 futures but $15 billion of long positions are still outstanding. The bets against the tech sector reflect growing investor concern that interest rates will stay higher for longer. The Nasdaq 100, at its 2023 peak in July, was up 45% for the year. It’s since slipped 6.8% as investors realized the Fed wouldn’t be cutting rates any time soon. Bond yields have marched higher, weighing on the appeal of the sector with lofty valuations.