September 6, 2023

Daily Market Commentary


Canadian Headlines

  • Canadian pipeline operator Enbridge Inc. agreed to buy three utilities from Dominion Energy Inc. in a $9.4 billion deal to create North America’s largest natural gas provider. The acquisition of the East Ohio Gas Co., Questar Gas Co. and Public Service Co. of North Carolina will double the Calgary-based company’s gas utility business, Enbridge said in a statement Tuesday. The deal is a massive bet that gas will remain a transition fuel for the foreseeable future even as much of the world tries to phase out fossil fuels to fight climate change. While there’s a strong push to deploy more renewable energy, there’s also a growing recognition that the green transition will take time, ensuring gas will be in demand for years. The move comes as Enbridge, North America’s largest pipeline company, is pushing to position itself for the transition toward cleaner energy. The three companies it’s buying serve customers in Ohio, Utah, Wyoming and North Carolina, where revenue from utility bills is forecast to grow faster than the national average.
  • The Bank of Canada is likely to hold interest rates steady on Wednesday as policymakers consider whether a slowing economy means it’s time to end its historic campaign to tighten policy. Economists and investors expect Governor Tiff Macklem and his officials to keep the benchmark overnight rate unchanged at 5%. A pause would mark only the third time in 13 meetings that the central bank hasn’t raised borrowing costs. But most analysts think the bank is done hiking. Macklem’s challenge will be to credibly threaten that more rate increases are possible, even in the face of a swiftly deteriorating economy. Policymakers will probably say they’re making progress on inflation without declaring victory.
  • Toronto’s unexpected rebound in home prices came to an end last month as back-to-back interest rate hikes by Canada’s central bank helped squeeze buyers out of the market. The benchmark price of a home in Canada’s largest city slipped 0.1% in August from July to C$1.16 million ($850,000), according to a statement Wednesday by the Toronto Regional Real Estate Board. It was the first decline in six months. The surge in home prices that broke out in Toronto and other cities earlier this year was cited by the Bank of Canada as one reason it increased rates in June and July. Values had started to climb after the central bank said it would pause its rate-hiking campaign in January, almost immediately prompting buyers to pile back in. Now in Toronto, it appears the latest increases are having the intended effect of cooling demand.

World Headlines

  • European equities traded lower at midday Wednesday, headed for a sixth straight decline, as the recent rise in oil prices and weak economic data from Germany added to concern that the region is heading for stagflation. The Stoxx Europe 600 declined 0.7% at 12:10 p.m. in London, with 19 of 20 sectors falling. German factory orders plummeted in July, in another sign that the woes of Europe’s biggest economy continued into the third quarter. Real estate was the only subindex to gain. Telecom stocks outperformed after Saudi Telecom Co. said it’s taking a 10% stake in Spain’s Telefonica SA. European stocks have been stuck in the same 5% range since April, with neutral breadth hiding still-negative sentiment. The most recent weakness came amid fears the euro zone will be mired in stagflation should inflation prove stickier than anticipated, causing the European Central Bank to persist with interest rate increases, while tepid growth morphs into recession.
  • Stocks in Asia were little changed as Chinese equities declined amid caution over the impact of government stimulus, while shares in Japan advanced on a forex boost. The MSCI Asia Pacific Index fluctuated in a narrow range, with Tencent and Samsung among the biggest drags while Toyota and Sony provided support. Chinese stocks slid even as property developers gained, with Sunac China surging as much as 73% after Securities Times called for more cities to drop home-buying restrictions. Concerns over contagion from China’s woes have weighed on the region, with gains in MSCI’s key Asian benchmark trailing those in measures of peers in the US and Europe this year.
  • Brent oil retreated from $90 a barrel as traders digested a decision by OPEC+ leaders Saudi Arabia and Russia to extend supply curbs through the end of the year. The global benchmark fell 0.8% on Wednesday, having closed at the highest since November a day earlier. Risky assets were generally on the back foot after weak German economic data. The strategy from Riyadh and Moscow aims to drain inventories further, while driving the market’s underlying timespreads deeper into backwardation, a bullish pricing pattern. Still, in the near term, crude is flashing warnings that it is overbought on 14-day Relative Strength Index basis, raising the risk of a pullback.
  • Gold steadied after dropping the most in more than a month following commentary from Federal Reserve officials that indicated rates will be kept high. The metal edged lower Wednesday following a 0.9% drop in the previous session. Investors are awaiting upcoming US data — including a services gauge from the Institute For Supply Management — which may steer the US central bank’s policy over the rest of the year. Spot gold fell 0.1% to $1,924.86 an ounce as of 9:58 a.m. in London. Silver, platinum and palladium edged lower.
  • The US economy has been looking so solid lately that Federal Reserve officials will probably need to double their projection for growth in 2023 when they publish an updated outlook later this month. Following a string of stronger-than-expected reports on everything from consumer spending to residential investment, economists have been boosting their forecasts for gross domestic product. One widely-followed, unofficial estimate produced by the Atlanta Fed even has it expanding 5.6% on an annualized basis in the third quarter. That marks a sharp turnaround from three months ago — the last time policymakers updated their own numbers — when the consensus view was that the economy would stall in the current quarter. And it may be enough to prompt Fed officials to scale back their estimates for interest-rate cuts in 2024.
  • Private equity firm KKR Group plans to list Kokusai Electric Corp.’s shares in Tokyo as early as October at a valuation north of ¥400 billion ($2.7 billion), a person familiar with the matter said. KKR will float a portion of the shares it owns in the former Hitachi Ltd. operations on the Tokyo Stock Exchange, the person said, asking not to be named as the talks are not public. While it’s not yet clear how much equity will be sold to investors, the initial public offering would raise roughly $540 million if the company sold a 20% stake. Recent listings in Tokyo include Rakuten Bank Ltd.’s $623 million initial public offering in April, the country’s largest since SoftBank Group Corp.’s telecom unit SoftBank Corp. listed in 2018.
  • Saudi Telecom Co. is taking a nearly 10% stake in Spain’s Telefonica SA for roughly $2.25 billion as the struggling Madrid-based carrier prepares to lay out a new strategy for future growth. The Saudi government-controlled company purchased about 569.3 million shares and is using financial instruments that will altogether hand it a 9.9% interest in Telefonica once approved by regulators, according to a filing posted late Tuesday. The transaction was funded with a combination of the company’s own resources and bank debt. Telefonica’s American Depositary Receipts rose 2.05% on Tuesday in New York. The acquisition is bound to draw scrutiny from the Spanish government, which views Telefonica as a company of strategic importance, operating infrastructure that is critical to the nation’s defenses and security. Stake acquisitions of more than 5% may require approval from the the country’s cabinet. The carrier has long counted two Spanish banks, CaixaBank SA and Banco Bilbao Vizcaya Argentaria SA, as its anchor investors, and they altogether own less than 10% of the company.
  • President Joe Biden will celebrate a labor deal for port workers at the White House on Wednesday, a bid to showcase his support for unions even as another contract dispute involving the auto industry threatens to rattle the US economy and upend supply chains. Biden will welcome the leaders of the International Longshore and Warehouse Union and the Pacific Maritime Association to congratulate them on the successful negotiations that led to a six-year labor contract that covers cargo handling operations at 29 ports up and down the US West Coast, according to a White House official. Biden intends to use the event to underscore the administration’s efforts to empower American workers and strengthen US supply chains, citing it as an example of his economic agenda, known as Bidenomics, at work.
  • The historic labor force gains US women have made in recent months are at risk of stalling or even reversing as a pandemic-era lifeline to daycare providers expires, with more than 70,000 child-care programs estimated to be in danger of closing. The clock is set to run out at the end of September on $24 billion in government aid, hurting child-care providers already struggling with soaring costs and labor shortages. Some 3.2 million children could lose their spots, according to a recent estimate by the Century Foundation. The centers that survive could resort to decreased staffing, reduced operating hours or higher tuition to plug the financial hole. That upheaval threatens to push parents — especially women — to work fewer hours, switch to less-demanding roles or leave the labor force entirely.
  • Donald Trump and his advisers are mapping out an economic agenda with harsher trade policies and deeper tax cuts if he returns to the White House, stirring anxiety within the US business community of potential retaliatory measures. Hashed out over phone calls and intimate dinners at his Bedminster, New Jersey golf club, the ex-president intends to center his economic plans on extending and deepening the Republican tax cuts from 2017, rolling back regulations put forth by President Joe Biden and enacting additional tariffs, according to three people familiar with the discussion. The measures are tenets of Trump’s first-term trade doctrine, defined by the confrontation he stoked with China through a tit-for-tat series of tariffs. His successor, Biden, has kept up the pressure imposed on the world’s second-largest economy with additional measures targeting sensitive technology even as China grapples with economic shocks, including a real estate crisis.
  • Hungary has submitted a formal offer to buy a majority stake in Budapest Airport in a transaction that could be valued at about €4 billion ($4.3 billion), according to a person familiar with the matter, potentially ending years of wrangling over the hub’s fate. The two parties are expected to now enter into formal discussions, said the person, who asked not to be named. Hungary is offering to buy 51% via a state-controlled investment company, while the remaining 49% is set to be acquired by another airport operator, the person said, without identifying that suitor. The person said the offer was in the same ballpark as an earlier bid put forward by a consortium led by the Hungarian government in 2021. That effort collapsed due to the challenging economic environment the government was in at the time.
  • Microsoft Corp. and Apple Inc. face fresh investigations from European Union regulators as part of the bloc’s landmark digital markets clampdown, which could end up forcing significant changes in how the firms do business in the region. The likes of Alphabet Inc.’s Google Search, Apple’s App Store and Inc.’s marketplace are among a list of 22 services that fall under the EU’s Digital Markets Act, revealed on Wednesday. Now companies including Bytedance Ltd.’s TikTok and Meta Platforms Inc.’s Facebook have six months to fall in line with the new rules or challenge them in the EU court. However, the European Commission, the bloc’s executive arm, said it needed more time to investigate whether Microsoft’s Bing, Edge and Advertising services and Apple’s iMessage should be exempt from the new rules. The probe will not result in a fine.
  • The renewed advance in the US dollar is sending Asian currencies to multi-month lows and keeping the euro under pressure, while prompting authorities in Japan and China to step up defense of their beleaguered exchange rates. Japan on Wednesday issued its strongest warning in weeks against rapid declines in the yen, with its top currency official saying the nation is ready to take action amid speculative market moves. Shortly after, China’s central bank offered the most forceful guidance on record with its daily reference rate for the yuan, as the managed currency weakened to a level unseen since 2007. Both currencies have been under pressure from broad dollar strength over the past few months. The yen has slumped by nearly 8% versus the greenback since mid-July, while the yuan is down more than 6% since May.
  • A gauge of US mortgage applications for home purchases fell to a 28-year low last week, underscoring the stifling effect of high mortgage rates on buyer demand. The Mortgage Bankers Association index of home-purchase applications decreased 2.1% to 141.9, the lowest level since April 1995, according to data out Wednesday. The contract rate on a 30-year fixed mortgage dropped 10 basis points to 7.21% in the week ended Sept. 1 but remains near its highest level in decades. High mortgage rates have pushed homeownership further out of reach for many Americans and driven housing affordability to its worst point in decades. Meantime, borrowers with pandemic-era low mortgage rates are loathe to give them up, crimping inventory and keeping upward pressure on home prices, compounding the issue.