The Daily – September 27, 2023

September 27, 2023

Daily Market Commentary

NEWS

Canadian Headlines

• Canada-India ties have deteriorated since Prime Minister Justin Trudeau accused New Delhi of orchestrating the assassination of a Sikh separatist leader in British Columbia. Now, the diplomatic standoff threatens to spill over into their economies. A proposed early-stage trade deal is in jeopardy, potentially hurting India’s efforts to woo the West and serve as a supply-chain alternative to China. India’s access to Canadian potash, a key nutrient for crops, may get affected. Indian students may start avoiding Canada for higher education after New Delhi issued a safety advisory on the country for “anti-India” activities. This could affect a sector that brings in about C$22 billion ($16.3 billion) annually in revenues for Canada. Both nations have already expelled senior diplomats from the other side in a tit-for-tat escalation. Canada plans to reduce embassy staff as security threats rise in the South Asian country while New Delhi stopped issuing visas to Canadian citizens.
• A Canadian family that operates some of the largest malls in North America sold a bond to refinance debt linked to a shopping center in Canada after a weekslong marketing effort, according to people familiar with the matter. Triple Five Group of Cos., which is owned by the Ghermezian family, priced C$1.2 billion ($890 million) of four-year mortgage bonds to yield 7.791% via a subsidiary, according to data compiled by Bloomberg. The proceeds of the bonds will be used to fund general corporate purposes, including repayment of 4% maturities that are set to come due after 10 years in 2024.

World Headlines

• The global selloff in bonds eased. The dollar steadied while stocks struggled for direction. US Treasury yields slipped three basis points, backtracking from a 16-year high sparked by speculation the Federal Reserve will keep policy restrictive into next year, or longer. A gauge of the dollar was steady near its highest this year, while a measure of how much bond investors are compensated for holding long-term debt turned positive for the first time since June 2021. US stocks are heading for their biggest monthly decline since December as investors worry the Fed would keep interest rates higher for longer at a time when economic growth is slowing.
• Asian equities were set to snap a two-day drop boosted by a rebound in Chinese stocks following strong economic data. Gains in US stock futures on recovery in Treasuries also supported sentiment. The MSCI Asia Pacific Index rose as much as 0.2%, erasing an earlier drop of 0.6%, with technology and health care stocks leading the recovery. Stocks in Hong Kong and mainland China closed higher after data showed industrial profits rose in August for the first time in more than a year. Meanwhile, a Bloomberg gauge of Chinese developers closed at its lowest level in 12 years after Evergrande’s chairman was put under police control. “There is quite a lot of negative sentiment and people are waiting to see good news before they are willing to jump in China,” Alexander Treves, investment specialist at JPMorgan Asset Management, told Bloomberg Television.
• Oil rose, aided by signs of a tightening market and improved sentiment in equity markets. Brent futures, the global benchmark, climbed toward $95 a barrel. The premium for near-term barrels of US benchmark West Texas Intermediate is at the highest level in more than a year, indicating a deficit. Official data due later Wednesday may confirm another draw in crude inventories at an important US storage site. On Tuesday, the industry-funded American Petroleum Institute reported that inventories at the storage hub in Cushing, Oklahoma, declined again last week, although nationwide stockpiles climbed, according to a person familiar with the data. A separate estimate from AlphaBBL Corp. also pointed to a drop at Cushing, where holdings have already sunk to the lowest since mid-2022.
• Gold fell beneath $1,900 an ounce as investors eyed a relentless surge in the greenback that’s weighing on the precious metal. The dollar inched higher, gaining for a sixth straight session on Wednesday and hitting the highest since December 2022. The US currency’s gains, driven by expectations that the Federal Reserve will keep monetary policy tight for longer than its peers, tend to pressure gold. Spot gold fell 0.3% to $1,894.98 an ounce by 11:07 a.m. London time. The Bloomberg Dollar Spot Index rose 0.1%. Silver and platinum declined, while palladium edged higher.
• The governing boards of Hollywood’s writers union approved a new contract with the studios and ended their strike, authorizing workers to return to their jobs. The board of the Writers Guild of America West and the council that oversees the Writers Guild of America East said their strike ended at 12:01 a.m. Los Angeles time on Wednesday. Union members will now vote on the new contract, with balloting scheduled to end Oct. 9, the groups said in a statement. With the two bodies authorizing a vote, union leadership provided members with a copy of the tentative agreement, including pay, the so-called residuals that members will get from reruns and staffing levels.
• Russia’s war-related industries are booming with military production expanding at a double-digit pace as the Kremlin continues to press its invasion of Ukraine. Industries providing goods for the military are expected to increase their output by almost a third in 2023, according to government forecasts seen by Bloomberg News that cover the next three years. The output for products such as computers, electronics and optics — a category that includes among other things parts for aircraft and rocket engines, as well as optical sights — are projected to grow by 34% compared to the previous year. The surge in production is buoying Russia’s economy even after the US and its allies have sought to constrain it through unprecedented sanctions imposed as punishment for the war in Ukraine. It comes in large part due to state support, a shift toward more domestic purchasing and government military orders, the document says.
• The latest surge in long-term interest rates to the highest levels in 16 years adds to a lengthening list of headwinds threatening to blow the US economy off a soft-landing course. The increase in borrowing costs puts a nascent recovery in the housing market at risk and raises the hurdle for companies seeking to fund investment. It’s also sent shudders through US equities, trimming some of the wealth gains investors have enjoyed so far this year. The rise in rates — 10-year Treasury yields are up over a percentage point since mid-May — is one of a series of shocks buffeting what’s been a surprisingly resilient US economy. Autoworkers are on strike, the government is on the verge of a shutdown and student loan payments are resuming after a pandemic pause. Oil prices are rising, growth in Europe is stagnating and China is struggling with a property market breakdown.
• US President Joe Biden and the European Union’s Ursula von der Leyen are set to meet on Oct. 20 likely in Washington, where they aim to announce measures on steel which would turn the page on a Trump-era trade dispute, according to people familiar with the issue. Charles Michel, who chairs EU summits, will also take part representing the bloc’s members, said the people who asked not to be identified on confidential preparations. The EU and US have made progress on negotiating how the so-called Global Arrangement on Sustainable Steel and Aluminum could tackle excess steel production from countries such as China, Bloomberg previously reported. Discussions on how to levy excess carbon remain difficult and would likely require a political agreement between the two leaders.
• The US Department of Justice has stepped up its probe into Credit Suisse Group and UBS Group AG over suspected compliance failures that allowed Russian clients to evade sanctions, according to people familiar with the situation. What began as a series of subpoenas sent to a range of banks early this year has developed into a full-scale investigation focusing on Credit Suisse, said the people, who requested anonymity to speak about an ongoing inquiry. The DOJ has briefed US-based lawyers for UBS about Credit Suisse’s alleged exposure to sanctions violations since UBS acquired its smaller rival in June, the people said. The DOJ is also looking into possible compliance failures at UBS, one of them said. The probe is still at an early stage and may not result in charges or a settlement, the people said. Still, it comes at a delicate time for the Zurich-based bank, which is absorbing thousands of employees from Credit Suisse. Along with Credit Suisse’s business, which boosted its wealth management business by almost a third to over $4 trillion, UBS also inherited Credit Suisse’s legal woes, the main cause of its collapse in March.
• Borrowing by companies in the euro zone grew at the slowest pace in almost eight years in August as evidence mounts that the European Central Bank’s historic bout of interest-rate hikes is restraining economic activity. Credit to the corporate sector rose by only 0.6% from a year ago — down from 2.2% in July — the ECB said Wednesday in a statement. Lending to households slowed to 1% from 1.3%. Officials are closely watching such data to gauge the impact of the 450 basis points of rate increases enacted since July 2022. The ECB expects output in the 20-nation euro area to stagnate this quarter, though business surveys point to a private-sector contraction. New inflation readings for the region’s top economies are due this week.
• Telecom Italia SpA is planning to grant KKR & Co. a two-week extension to present its offer of as much as €23 billion ($24.3 billion) for the phone carrier’s network, according to people familiar with the matter. Telecom Italia’s board of directors in a meeting Wednesday is expected to vote to extend the period for exclusive talks with KKR to Oct. 15 from Sept. 30, the people said, asking not to be named discussing confidential deliberations. That would allow the private equity firm to wrap up its preparation for the bid and submit a binding offer, they said.
• Tohoku Electric Power Co. is accelerating plans to test the co-firing of hydrogen at a natural gas power plant, a technology that’s being pushed in Japan and some other nations as a key tool for decarbonization. The utility will begin replacing about 1% of fuel volume at the Niigata Thermal Power Station — which uses liquefied natural gas — from next month, bringing forward trials that had been originally scheduled to begin in the fiscal year starting next April, the company said Tuesday in a statement. Power generators across both Japan and South Korea are developing plans to use ammonia or hydrogen to replace as much as 20% to 30% of coal or gas burned in fossil fuel-power plants, aiming to both curb emissions and to extend the lives of the operations.
• BlackRock Inc. said insurance executives overseeing $29 trillion plan to pour more money into private debt and credit strategies while cutting back on private equity and real estate. Of 378 senior insurance executives surveyed by BlackRock, 89% said they plan to invest more in private markets during the next two years, according to a report set for publication Wednesday. Within private assets, they expressed the most enthusiasm for direct lending, with 60% of those surveyed planning to boost allocations. Meanwhile, 34% said they’ll pull back on private equity. A similar percentage of executives said they’ll trim bets on real estate equity and debt.
• A US government shutdown or prolonged strike by automotive workers could slow the economy, meaning the Federal Reserve wouldn’t have to use its tools to ease price growth, Minneapolis Fed President Neel Kashkari said. “If these downside scenarios hit the US economy, we might then have to do less with our monetary policy to bring inflation back down to 2% because the government shutdown or the auto strike may slow the economy for us,” he said in an interview Wednesday on CNN. “I’m not hoping for that, but there’s an interaction there.” In a letter published online Tuesday, Kashkari — who votes on monetary policy this year — outlined two scenarios for the Fed’s inflation response. In one, to which he assigned a 60% chance, the US central bank can bring inflation down to its 2% target without causing severe damage to the economy. In the other, price growth would be more entrenched and require further rate increases to bring price growth under control.
• On picket lines around the country, auto workers aren’t just demanding higher wages. They want to get back their once-sacred retirement pensions. While United Auto Workers members who were hired prior to the 2008 financial crisis have pensions, those brought on since have received 401(k) plans instead. The union is demanding the auto companies provide pensions for new employees and those who currently lack them. Ford Motor Co., General Motors Co. and Stellantis NV  are determined to consign pensions to the past even as striking UAW members are just as keen to revive them.  The fight has resonance well beyond the auto industry:  With inflation persisting as the US enters another fraught presidential election cycle, the plight of the middle class — and the financial condition of millions of retirees  — is front and center.
• US mortgage rates jumped last week to the highest level since 2000, taking a toll on already depressed home-purchase applications. The contract rate on a 30-year fixed mortgage rose 10 basis points to 7.41% in the week ended Sept. 22, according to Mortgage Bankers Association data out Wednesday. As a result, the index of home-purchase applications fell to 144.8, one of the lowest readings in decades. The latest pickup in borrowing costs is making the housing market — already one of the least affordable on record — even worse. Despite elevated financing costs, home prices continue to rise amid the limited supply of homes for sale.