April 18, 2022
Daily Market Commentary
- Canada’s housing minister has a daunting target in front of him as his government tries to rein in skyrocketing housing prices: doubling the pace of housing construction in the country within 10 years. But Ahmed Hussen, who was appointed to the job after last year’s election, says Canada doesn’t have a choice if it wants to keep expanding its economy and attracting skilled immigrants. “The issue of housing supply is critical to our future success as a country,” Hussen said in an interview with Bloomberg. Canadian housing prices were already high before the pandemic before rising by more than 50% in the past two years. The price surge has become one of the top political issues in the country.
- U.S. equity futures and Treasuries fell on Monday as investors weighed the prospect of faster policy tightening by the Federal Reserve. U.S. index futures followed a decline in Asia-Pacific stocks, which were sapped by Japan and China. Markets in Australia, Hong Kong and much of Europe remain shut for Easter. Treasury yields rose as investors look forward to speeches by Fed policy makers this week for new clues on whether it will raise interest rates by a half point in May to curb price pressures. A jump in energy costs highlighted inflation concerns, as U.S. natural gas prices surged to the highest intraday level in more than 13 years. Oil fluctuated. Investors will also focus on earnings and guidance as companies from Bank of America Corp. to The Bank of New York Mellon Corp. report on Monday. Bank of America gained in premarket trading as it continued a string of beats by big lenders such as Morgan Stanley and Citigroup Inc.
- Asian stocks dropped for a second day in holiday-thinned trading amid continued concern over the impact of inflation and efforts to contain it on global economic growth. The MSCI Asia Pacific Index fell as much as 1.1%, with India, Vietnam and Japan leading losses among national benchmarks. Mumbai-listed IT giants were among the biggest drags on the regional gauge after disappointing results from Infosys due to surging wages. Hong Kong and Australia remained closed for Easter holidays. Meanwhile, China reported faster economic growth for the first quarter, while retail sales in March showed the first monthly decline since July 2020, as markets brace for the impact of the latest Covid outbreaks and lockdowns. The nation’s central bank refrained from lowering interest rates Friday, disappointing investors who had been looking for a cut.
- Oil was little changed amid signs that continued coronavirus lockdowns in China are weighing on the economy, countering bullish news that protests are shutting in supplies from Libya. West Texas Intermediate traded just below $107 a barrel after rallying last week by the most since early March. China reported its biggest decline in consumer spending and worst unemployment rate since the early months of the pandemic, while Shanghai reported its first deaths from an ongoing outbreak of the virus. Supplies are taking a hit as Libya faces further interruptions to deliveries after demonstrations against the government of Prime Minister Abdul Hamid Dbeibahon Monday shut down Sharara, the country’s biggest oil field. Protesters earlier forced two Libyan ports to stop loading, with output halted at the El Feel field.
- Gold rose to a five-week high as the war in Europe, elevated inflation, and the risk of a U.S. recession boosted demand for the haven asset. The precious metal climbed as much as 0.8% after capping a second weekly gain. The strategically vital city of Mariupol hasn’t fallen, but its defenders are encircled by Russian forces, Ukrainian officials said, hours after Kyiv warned of a possible naval landing operation and more air strikes. The possibility of a de facto European Union embargo on Russian gas and the threat of some curbs on crude in Europe’s next sanctions package bolstered both commodities. That’s adding to already elevated raw material prices, fueling demand for gold as a hedge against accelerating inflation.
- Billionaire entrepreneur Elon Musk kept investors in the dark this weekend, floating a cryptic tweet with the word “tender,” a likely wink-and-nod reference to a potential tender offer to Twitter Inc. shareholders for control of the company. The world’s richest person caused a stir last week after he filed a $43 billion proposal offering $54.20 a share for the social network, which led Twitter to adopt a so-called poison-pill provision on Friday to make it harder for Musk or a group of investors to acquire more shares. If Twitter directors ultimately reject him, the world could learn whether Musk was truly threatening a direct appeal to shareholders or had just added the 1956 Elvis Presley hit “Love Me Tender” to his playlist.
- Bitcoin dropped to its lowest level in more than a month as cryptocurrency continued to be hurt by investors’ risk aversion amid signs of muted new interest in the coins. The largest cryptocurrency fell as much as 4.2% to $38,580 on Monday. Second-largest Ether dropped 4.7%, declining to as low as $2,902. The global crypto market’s value dropped about 4% in the past 24 hours to $1.9 trillion, according to pricing from CoinGecko. Technical charts suggest that despite Bitcoin’s recent drop it’s “not close to an oversold reading,” and near-term support at $35,000 likely won’t hold, said John Roque, technical analyst at 22V Research, in a note Sunday. “We continue to believe that it will get to the $30,000 level,” he said.
- Investors withdrew money from exchange-traded funds that buy emerging market stocks and bonds last week, ending four weeks of inflow that reached $9.84 billion. Outflows from U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $402.2 million in the week ended April 14, compared with gains of $2.3 billion in the previous week, according to data compiled by Bloomberg. This was the biggest weekly outflow since Dec. 24. So far this year, inflows have totalled $19.4 billion.
- Mannai Corp. shares soared after the Qatari trading firm agreed to sell its stake in Inetum SA for an enterprise value of 1.85 billion euros ($2 billion) to a group of investors led by Bain Capital Private Equity. The shares jumped 10% in Doha to the highest level since 2016, taking their gains this year to 114%. The benchmark Qatar Exchange Index fell 0.5% on Monday. Mannai said the sale of the French information technology services provider to the investor group, which also includes NB Renaissance and Inetum’s management team, could result in an equity value for Mannai in the range of 1.03 billion euros to 1.06 billion euros.
- Long-maturity Treasuries are contending with their biggest drawdown on record, at least according to their most popular exchange-traded fund. BlackRock’s $19 billion iShares 20+ Year Treasury Bond ETF (ticker TLT) has fallen almost a third from an all-time high in August 2020. That’s more than the previous record drawdown seen between 2008 and 2010, based on closing prices. Such Treasuries, favored by the likes of pension funds, have longer duration, or sensitivity to interest-rate changes. That’s put them at the forefront of a global fixed-income selloff as the Federal Reserve signals it will raise rates swiftly to tame inflation.
- History suggests that the Federal Reserve will face a difficult task in tightening monetary policy enough to cool inflation without causing a U.S. recession, with the odds of a contraction at about 35% over the next two years, according to Goldman Sachs Group Inc. The Fed’s main challenge is to reduce the gap between jobs and workers, and to slow wage growth to a pace consistent with its 2% inflation goal by tightening financial conditions enough to reduce job openings without sharply raising unemployment, Chief Economist Jan Hatzius wrote in a research report on Sunday. Achieving a so-called soft landing may be tough, because historically large declines in the gap in the U.S. have only occurred during recessions.
- Russia’s central bank conceded it’s found no clear alternatives to the world’s major reserve currencies after sanctions over the war with Ukraine left it in possession of only yuan and gold. Before the invasion, the Bank of Russia spent years reducing exposure to the dollar, bringing its share to just under 11% at the end of last year. But more than a third of the total was in euros — on top of additional investments into currencies such as the British pound and yen — making it possible for international governments to seize about half of the stockpile in retaliation for President Vladimir Putin’s attack. More than a month into the war, the central bank has yet to identify other options, according to Governor Elvira Nabiullina. Speaking Monday in front of a parliamentary committee in Moscow, she said it was too early to draw lessons for what Russia should do differently.
- Investors have a clear message to China’s policy makers: more stimulus is needed, and quickly, to reignite a stalled recovery in markets. The People’s Bank of China decision to give lenders a modest cash boost Friday was met with declines in equities on Monday. And with data showing consumer spending took a dive in March, weighing on sentiment, traders are left waiting to see what policy makers will do with loan prime rates — key benchmark lending levels — on Wednesday. “The market needs key actionable plans for easing measures for the property sector, the regulatory overhang on tech to be removed and China’s Covid-zero policy to go away,” said Kerry Goh, chief investment officer at Kamet Capital Partners Pte. “There’s no one-size-fits-all stimulus that can revive the markets and the economy.”
- The positive effects from inflation on earnings growth for U.S. firms have peaked as rising costs trim their margins and price pressures caused by the Ukraine war hit consumers, according to Morgan Stanley strategists. “Margin expectations look overly optimistic for the balance of ‘22 given the myriad of cost pressures companies face,” the strategists led by Michael Wilsonwrote in a note published today. Meanwhile, the Ukraine conflict “has led to a spike in energy and food costs which serve as nothing more than a tax on a consumer that is already struggling with high inflation.” U.S. consumer prices rose in March by the most since late 1981, ramping up the pressure on the Federal Reserve to raise rates. At the same time, investors are growing concerned that the response to inflation from an increasingly hawkish Fed could hurt growth, or even lead to a recession.
- Bank of America Corp. joined Wall Street rivals in capitalizing on market volatility while also benefiting from an increase in lending. The company’s trading operation posted $4.72 billion in revenue, down just 7.1% from a year earlier after analysts expected a 16% decline. The best results were in the equities business, which posted a 9.5% gain, the Charlotte, North Carolina-based company said in a statement Monday. Traders across the U.S. finance industry had a better-than-expected first quarter as Russia’s invasion of Ukraine compounded volatility already simmering on inflation concerns and a lingering pandemic. Goldman Sachs Group Inc., Morgan Stanley posted surprise increases in trading revenue last week, while Citigroup Inc. and JPMorgan Chase & Co. also surpassed analysts’ expectations for quarterly results.
- U.S. Treasury officials blamed the Internal Revenue Service’s outsized number of audits on low-income households on severe underfunding of the agency by Congress. Audits on filers with higher net worth require more time and expertise, and the agency’s underfunding has led to a significant loss of personnel capable of performing those, senior Treasury officials told reporters in a telephone conference Friday. They were responding to a study from Syracuse University showing households making less than $25,000 were almost three times as likely to get audited in tax year 2021 than those making $200,000 to $1 million.
- Pakistan is cutting electricity to households and industry as the cash-strapped country can no longer afford to buy coal or natural gas from overseas to fuel its power plants. The South Asian nation is struggling to procure fuel from the spot market after prices of liquefied natural gas and coal surged to records last month as the war in Ukraine exacerbated supply shortfalls. Pakistan’s energy costs more than doubled to $15 billion in nine months ended February from a year earlier, and it isn’t able to spend more on additional shipments. About 3,500 megawatts worth of power capacity had been shut due to the fuel shortages as of April 13, according to a Twitter post by Miftah Ismail, who has been selected as finance minister by new Prime Minister Shehbaz Sharif. A similar amount is offline due to technical faults, he said. The more than 7,000 megawatts represents almost a fifth of total generation capacity, according to Tahir Abbas, the head of research at Arif Habib Ltd. in Karachi.
- Larsen & Toubro Ltd. is weighing a merger between two of its publicly traded software firms, according to people familiar with the matter, as the Indian conglomerate seeks scale to compete with global digital giants. The boards of Mindtree Ltd. and Larsen & Toubro Infotech Ltd., two software units controlled by the Mumbai-based engineering firm, could consider share swap ratios for the merger as early as next week, one of the people said, asking not to be identified as the information is not public. Larsen acquired control of Mindtree in 2019. The conglomerate holds about a 61% stake in the company, which has a market value of $8.3 billion, and has around 74% of L&T Infotech, which has a market capitalization of $13.6 billion, data compiled by Bloomberg show.
China’s carbon market, hindered by low prices and thin trading, has struggled to become a useful tool in the country’s efforts to rein in its world-leading emissions. Now, accusations of data fabrication and questions over verification methods have added a new roadblock. A recent provincial inspection unearthed widespread problems with emissions data submitted by power plants, who have to pay for every ton of carbon dioxide they generate that exceeds an allocated amount. Four consulting firms that help utilities prepare their submissions were criticized last month in connection with negligence or falsifying data. Early teething issues seem to have been anticipated by Beijing. It launched the carbon market last year after several delays with just one industry — power generation — and ample allocations of free emissions allowances to keep prices low so compliance wouldn’t be too much of a burden. The idea was to hammer out the technical details, then slowly enroll seven other industries over the ensuing couple of years. By the end of the decade, when China plans to reach peak pollution, the government would be able to use it as a tool to effectively control emissions.
“Dreaming, after all, is a form of planning.” – Gloria Steinem
*All sources from Bloomberg unless otherwise specified