April 25, 2022

Daily Market Commentary

Canadian Headlines

• To understand why inflation is running so hot, look to Canada’s West Coast. Vancouver, the home of one of North America’s busiest ports, is bursting at the seams. The vacancy rate for space in the city’s warehouses has fallen below 1%, according to data from real estate advisory Altus Group Ltd. Industrial rents are soaring and so are land values — if you can find any land to buy, that is. The average home is C$1.4 million ($1.1 million) and developers are eager for new places to build. It’s so hard for firms to find space that goods destined for Vancouver are sometimes brought in through the port and sent about 660 miles (1,160 kilometers) east, to Calgary, where they’re stored before being shipped back again.

World Headlines

• European stocks tumbled to the lowest in more than a month as global risk-off sentiment swelled on concerns over a more aggressive Federal Reserve and the spread of Covid in China, outweighing optimism over French President Emmanuel Macron’s election victory. The Stoxx 600 Europe Index fell 2.1% as of 11:09 a.m. in London, the lowest since March 16. Miners and energy led the declines as iron ore and oil slumped on a deteriorating demand outlook.  European equities have been under pressure this year on monetary tightening concerns and as the war in Ukraine led to a surge in commodities, fueling inflation fears. China locked down some areas of Beijing and ordered mandatory Covid testing in a district, further weighing on the sentiment. Separately, European investors are bracing for this year’s busiest week of the earnings season.
• U.S. equity futures fell, pointing to extended losses for the S&P 500 after the gauge shed 2.8% Friday to reach the lowest level since mid-March. The Stoxx 600 Europe Index fell about 2%, with miners and energy firms at the forefront of losses. West Texas Intermediate futures slid almost 5% to trade below $98 a barrel amid a rout in other raw materials.  A flight to havens lifted global government bonds, with the yield on the U.S. benchmark note down about seven basis points. The dollar extended an advance, while the euro fell even after Emmanuel Macron’s win in the French election removed a key risk for markets.
• Asian stocks slumped the most since March 11 as China’s worsening Covid-19 outbreak and a looming rate hike by the Federal Reserve hurt risk sentiment.  The MSCI Asia Pacific Index fell as much as 2.2% Monday, setting off a grim start to the region’s busiest week for earnings. The biggest drags were technology stocks sensitive to higher interest rates, including Taiwan Semiconductor Manufacturing, Alibaba and Tencent.  Equities in mainland China and Hong Kong were among the region’s worst performers. Chinese stocks slid to a two year low amid fears that rising infections in Beijing may spur an unprecedented city-wide lockdown of the capital. The Chinese regulator also ordered platform companies to better handle online violence, dragging tech stocks lower.
• Oil fell at the start of the week on concerns that a spreading Covid-19 outbreak in top consumer China will weigh on global demand. West Texas Intermediate futures slid almost 5% to trade below $98 a barrel amid a rout in stocks and other raw materials. Rising cases in Beijing sparked jitters about an unprecedented lockdown of the capital, while Shanghai reported record daily deaths over the weekend. The world’s biggest crude importer is heading for the worst oil demand shock since the early days of the pandemic. China’s travails with Covid-19 add another source of volatility to an oil market that’s been whipsawed by the Russian invasion of Ukraine. The war has fanned inflation, and the European Union is discussing measures to restrict oil imports from Russia.
• Gold fell to the lowest since March as China’s worsening Covid-19 outbreak caused sentiment to sour across markets, boosting the dollar. The outlook for gold demand in China, a top consumer, was also clouded as the nation’s Covid Zero policy weighs on sentiment, with purchases likely hit by lockdowns. Other commodities — including oil and industrial metals — also sank on expectations for lower Chinese demand, which may help ease the cost pressures fueling decades-high inflation in the West.
• Iron ore slumped along with base metals as the demand outlook deteriorated amid fears that the Covid-19 lockdown that’s paralyzed Shanghai over the last month could spread to Beijing. The price of iron ore, a steel-making ingredient and barometer for China’s economic outlook, tumbled as much as 12% in Singapore. Base metals also dropped on the mounting nervousness over demand in Asia’s top economy, with aluminum and zinc dropping more than 5% and copper sliding.
• Investors withdrew money from exchange-traded funds that buy emerging market stocks and bonds last week. This was the second straight week of outflows. Outflows from U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $225.1 million in the week ended April 22, compared with losses of $402.6 million in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $19.2 billion.
• Emmanuel Macron won another crack at convincing the French public that his pro-business, pro-European vision can work for them, after beating nationalist rival Marine Le Pen in Sunday’s election. While voters rallied around to give the 44-year-old centrist a second term, many backed him to keep Le Pen out rather than because of their enthusiasm for his project. His margin of victory — 58.5% to 41.5% — was barely more than half of what it had been in 2017. The president came to power promising a revolution in Europe’s second-largest economy. But after a flurry of action in his first year in office, his reform drive was slowed by protests and brought to a halt by the Covid pandemic. There was more discontent in the country at the end of his term than there had been at the beginning.
• Coca-Cola Co.’s first-quarter sales exceeded Wall Street expectations as consumers returned to much of their pre-pandemic behavior, and the soft drink giant emerged from a long period of shuttered venues. Revenue was $10.5 billion, beating the $9.84 billion average of estimates compiled by Bloomberg. Rebounding demand in North America contributed to a 18% jump in organic revenue in the quarter, which excludes the impact of items like currency and acquisitions, Coca-Cola said in a statement Monday. Analysts were expecting a 9.5% increase on average.
• Twitter Inc. is in the final stretch of negotiations about a $43 billion sale to Elon Musk that could rank as one of the biggest-ever internet acquisitions, a person with knowledge of the matter said.  The social media company is working to hammer out terms of a transaction and could reach an agreement as soon as Monday if negotiations go smoothly, according to the person, who asked not to be identified because the information is private. Musk has been negotiating a deal at $54.20 per share. Shares of Twitter jumped as much as 6.2% in pre-market U.S. trading Monday, hitting as high as $51.98.
• The U.S. announced additional military aid for Ukraine as Defense Secretary Lloyd Austin said that Washington wants to see Russian forces ground down so they can’t attempt a repeat of the war.  Speaking to reporters in Kyiv on Monday during the highest-level U.S. visit to Ukraine since Russia invaded two months ago, Austin and Secretary of State Antony Blinken committed a total of $713 million in foreign military financing for Ukraine and 15 allied and partner countries. Some $322 million of that sum is earmarked for Ukraine. With the war now entering a third month despite several rounds of international sanctions and waves of weapons supplied, Austin was asked about U.S. goals in the conflict. Washington wants Ukraine to remain a sovereign, democratic country, able to protect itself, and “we want to see Russia weakened to the degree that it can’t do the kinds of things that it has done in invading Ukraine,” he said.
• The S&P 500 is about to drop sharply, Morgan Stanley’s Michael J. Wilson warned, as investors struggle to find havens amid fears of a recession and aggressive tightening by the Federal Reserve.  “With defensive stocks now expensive and offering little absolute upside, the S&P 500 appears ready to join the ongoing bear market,” said Morgan Stanley strategists in a note on Monday. “The market has been so picked over at this point, it’s not clear where the next rotation lies. In our experience, when that happens, it usually means the overall index is about to fall sharply with almost all stocks falling in unison.” The S&P 500 Index has slumped for three weeks in a row, sinking to the lowest level since mid-March on Friday as investors fled risk assets amid fears of rapid monetary tightening and its impact on economic growth. Fed Chair Jerome Powell’s endorsement of aggressive actions to curb inflation sent traders racing to price in half-percentage-point interest-rate increases at the bank’s next four meetings.
• Billionaire Mukesh Ambani abandoned a plan to buy a teetering Indian retailer amid protracted legal challenges from Amazon.com Inc., potentially ending one episode of the broader clash between the two titans to control the country’s billion-people-plus market.   In a filing Saturday, Reliance Industries Ltd. said its proposal to acquire certain assets of Mumbai-based Future Group — which ran the nation’s biggest retail grocery chain before the pandemic struck — “cannot be implemented” after its flagship firm Future Retail Ltd. failed to win the approval of its secured creditors for the deal. Reliance didn’t elaborate. Future Retail’s shares slipped as much as 5.1% in Mumbai on Monday, extending this year’s plunge to 45%. Reliance fell as much as 3.5%, compared to a 1.5% drop in the benchmark S&P BSE Sensex Index.
• Britain’s cost-of-living squeeze is starting to bite into the spending power of most parts of the country, with 43% of those who pay energy bills saying they will struggle with the costs. The same proportion said they will be unable to save over the next year as a result of a jump in household bills, the Office for National Statistics saidMonday. The findings from the Opinions and Lifestyle Survey showed 87% of adults felt prices rising. The findings underscore the scale of the hit to consumers from a jump in electricity and natural gas prices that has pushed up inflation across the economy to a 30-year high. The government is under pressure to provide more support to the poorest households.
• Sprng Energy Pvt is nearing a deal for Shell Plc to acquire the Indian renewable power producer for about $1.8 billion including debt, people with knowledge of the matter said. An agreement between Sprng’s private equity owner Actis and the energy giant could be signed in two to three weeks after Shell beat out rival bidders, the people said, asking not to be identified as the information is private. No final decision has been made and talks could still fall apart, the people said. A representative for Shell declined to comment while representatives for Actis didn’t immediately respond to requests for comment.
• China’s worst equity selloff since early 2020 reflects a growing concern about President Xi Jinping: He can’t afford the political costs of shifting from a Covid Zero strategy that is pummeling the economy. In Shanghai, a weekslong Covid-19 lockdown got even worse, with workers in hazmat suits fanning out over the weekend to install steel fences around buildings with positive cases. In Beijing, the process is just getting started, as authorities on Monday began shutting down a bustling district in the capital to quash fresh outbreaks.  The threat of paralyzing China’s two largest and wealthiest cities with a strategy abandoned by most countries helped push the CSI 300 down 4.9%, the gauge’s steepest one-day drop since the first such lockdown in Wuhan two years ago. The spreading lockdowns have investors worried that Xi is sacrificing the Communist Party’s reputation for pragmatic economic management to defend a political narrative that portrays him as the world’s most successful virus-fighter.
• Credit Suisse Group AG is weighing its second broad management overhaul in as many years as Chief Executive Officer Thomas Gottstein struggles to turn around the lender after a series of scandals and profit warnings.   The Zurich-based bank is considering replacing long-standing executives on the management board, including top lawyer Romeo Cerutti, chief financial officer David Mathers and Helman Sitohang, who heads the Asia Pacific region, according to people familiar with the matter, who asked not to be named because decisions haven’t been finalized. Credit Suisse last week shocked investors with its fifth profit warning in six quarters, as the hit from Russia’s war in Ukraine combined with a growing burden of legal costs for the struggling lender hurt profitability. While the lender has warned that 2022 will be a transition year after the Archegos Capital Management and Greensill disasters, the succession of blows is starting to worry top shareholders that the bank is far from having its house in order.
• Optimism abounds about the future of wind power, with a clean-energy boom powering robust growth in an industry that businesses and governments agree is key to slowing climate change. But a nagging problem could keep the sector from fulfilling that promise: Turbine makers are still struggling to translate soaring demand into profit. Wind power heavyweights Vestas Wind Systems A/S, General Electric Co. and Siemens Gamesa Renewable Energy SA are reeling from high raw material and logistics costs, changes in key clean-power subsidies, years of pressure on turbine prices and an expensive arms race to build ever-bigger machines.  A retreat from wind power could have devastating consequences, as it is set to play a pivotal role in global efforts to transition to green energy. To limit warming to as little as 1.5 degrees Celsius, the world would need to start adding about 390 gigawatts of wind farms a year by 2030, according to the International Energy Agency. In 2021, only about a quarter of that amount of wind capacity was added.
• Bitcoin extended this month’s losses in Monday trade as investors shied away from risk assets amid a more hawkish outlook for Federal Reserve policy tightening. The largest cryptocurrency slid as much as 3.3% to $38,223, the lowest since March 15, and down more than 20% from last month’s high. The second-biggest coin, Ether, slumped as much as 4.8% to $2,799, a level not seen since March 18. Price charts are signaling further declines are likely, technical analysts say. Bitcoin has dropped below its Ichimoku cloud support on a weekly chart, with secondary support only coming in around $27,200, said Katie Stockton, founder and managing partner at Fairlead Strategies. She isn’t alone in seeing more downside.
• Buyout firms including CVC Capital Partners and KKR & Co. are considering bids for Toshiba Corp., people familiar with the matter said, after the Japanese conglomerate said it would open the door to potential buyers. Suitors have been holding high-level discussions with Toshiba and its advisers, the people said, asking not to be identified discussing private information. Bain Capital has also been studying a potential deal.  Their interest shows that major private equity funds see an opportunity at the troubled Japanese firm, where management and shareholders have been at odds for years over the company’s future. A buyout of Toshiba, which has a market capitalization of almost $18 billion, would possibly be private equity’s biggest ever deal in the country.
• Silicon Motion Technology Corp. is exploring a potential sale amid takeover interest in the semiconductor firm, according to people familiar with the matter. The Taiwan-based company is working with advisers as it holds talks with potential suitors, said the people, who asked not to be identified because the deliberations are private. No final decision has been made and the company could still opt against a sale, the people said. Silicon Motion’s American depositary receipts have fallen about 19% this year, giving it a market value of $2.7 billion. The shares gained in recent days amid takeover speculation in the market.

*All sources from Bloomberg unless otherwise specified