The Daily – August 15, 2022

August 15, 2022

Daily Market Commentary

Canadian Headlines

• Home Capital Group Inc., the Canadian mortgage lender that Berkshire Hathaway Inc. helped rescue five years ago, says it turned down an approach from an unnamed buyer because the price was too low. Toronto-based Home Capital didn’t disclose the exact amount of the offer but said it was more than C$28.60 a share — the maximum price on a stock buyback it recently announced. That means the takeover approach valued the company at at least C$1.2 billion ($930 million). The shares closed Friday at C$28.47 in Toronto. Home Capital shares have dropped 27% this year and are trading below book value as Canada’s housing market encounters severe headwinds because of rising interest rates. Prices have been sliding for months, especially in urban markets in Ontario, the province to which Home Capital has the most exposure.
• Rio Tinto Group’s $2.7 billion offer to buy out Turquoise Hill Resources has been rejected, blocking its efforts to gain greater control of a giant copper mine it’s developing in Mongolia. Rio’s offer doesn’t “fairly reflect the fundamental and long-term strategic value of the company’s majority ownership of the Oyu Tolgoi project,” Turquoise Hill said Monday, after appointing a special committee to review the bid. The rejection is a setback for Rio Chief Executive Officer Jakob Stausholm, who has prioritized getting stalled projects moving, while rebuilding the company’s reputation after a series of missteps. Rio owns 51% of Turquoise Hill, which in turn holds a two-thirds share in Oyu Tolgoi.

World Headlines

• European equities climbed for a fourth day as investors considered the prospects of a possible pivot by major central banks after China cut rates in response to a deepening economic slowdown. The Stoxx Europe 600 rose 0.3% by 9:58 a.m. in London, set for the longest winning streak since late May. Healthcare as well as construction and materials stocks advanced, while miners underperformed. Among individual movers, HelloFresh SE soared after the meal-kit maker confirmed results published in a preliminary report on July 20 and reiterated its full-year outlook. Expectations that central banks will pause interest rate hikes as inflation cools have sent stocks rallying in recent weeks. Investors are also pinning hopes on a mild recession that company earnings will be able to withstand.
• U.S. equity-index futures slipped, the dollar gained and commodities from oil to iron ore tumbled as disappointing data from China further clouded the outlook for the global economy. Contracts on both the S&P 500 and Nasdaq 100 were lower, suggesting a four-week stocks rally may stall. Europe’s equity benchmark advanced about 0.3%, as corporate news buoyed healthcare stocks while miners and carmakers declined. An Asian share index added less than 0.1% and emerging-market stocks dropped. Treasury yields were little changed and the bond curve remained deeply inverted, pointing to worries that the Federal Reserve’s campaign of monetary tightening against high inflation will spark a US recession. Bonds in Europe gained.
• Asian equities eked out gains with Japanese stocks giving a boost, while investors weighed China’s unexpected policy rate cut against disappointing economic data. The MSCI Asia Pacific Index was up less than 0.1% as of 5:34 p.m. in Singapore, erasing a bulk of its 0.6% rise driven by health care and tech shares. Japan’s Nikkei 225 led gains in the region, with the benchmark turning positive for the year helped by a weaker yen and continued stimulus by Bank of Japan. China stocks turned lower after retail sales, industrial output and investment all missed estimates, erasing a gain caused by the country’s central bank lowering the rate on its one-year policy loans. The undershoot in data highlighted the growing toll of the nation’s Covid restrictions, casting a pall over the market’s outlook. Hong Kong shares were the worst performers in Asia.
• Oil extended losses at the start of the week as traders weighed concerns about Chinese demand and the prospect for more Iranian supply. West Texas Intermediate dropped near $88 a barrel, falling as much as 4.3%, with markets selling off as China’s surprise cut in key interest rates boosts support for an economy hit by virus lockdowns and property woes. The nation’s apparent oil demand last month was about 10% lower year-on-year. After over a year of stalled and cancelled talks, a nuclear deal with Iran looks more likely on Monday. A spokesperson for the Iranian foreign ministry said there could be a basis for a signed agreement “in the very near future,” while Foreign Minister Hossein Amirabdollahian said in a separate briefing that the country would inform the European Union tonight of it’s position while striking a more conciliatory tone than in recent months.
• Gold dropped after four straight weeks of gains as investors assessed signs that China’s economy is struggling to recover ahead of minutes from the Federal Reserve later in the week. Bullion fell as much as 1.6% on Monday, after the longest run of weekly gains in almost a year, as it came under pressure from the stronger dollar. The precious metal has gained amid cooling inflation in the US, which backs the case for the Fed to be less aggressive in raising borrowing costs.
• Natural gas prices in Europe rose as a hot and dry summer dries up rivers in the region and boosts demand in a market that is already reeling from a supply crunch. Benchmark futures rose as much as 0.7% on Monday. Very low water levels at key on Europe’s rivers are making it difficult for diesel, coal and other commodities to be transported through the continent. As an alternative, utilities could use more gas.  While that could constrict governments’ efforts to reduce consumption, the rate of building stockpiles has stayed near average levels with high imports of liquefied natural gas, and kept price rises in check. German storage hit a target two weeks ahead of schedule.
• Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week, ending three weeks of outflows that reached $994.3 million. Inflows to U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $344.3 million in the week ended Aug. 12, compared with losses of $486.1 million in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $23.2 billion.
• Top Wall Street strategists are divided on whether the US stock market is poised to extend its longest winning streak of the year — or slip back after another false dawn. Morgan Stanley strategists said in a note Monday that the sharp rally since June is just a pause in the bear market, predicting that share prices will slide in the second half of the year as profits weaken, interest rates keep rising and the economy slows. But rivals at JPMorgan Chase & Co. said the rally — which has pushed up the tech-heavy Nasdaq 100 index by over 20% — could run through the end of the year. The schism reflects the highly uncertain outlook for the US stock market in the face of strong cross-currents. On the one hand, inflation is showing signs of pulling back from its peak and businesses have been expanding payrolls at a strong pace, both of which auger well for equities. Yet at the same time, Fed officials have signaled that they will continue to raise interest rates aggressively until consumer price increases are reined in, which risks driving the economy into a recession.
• Bill Gates-backed TerraPower LLC raised at least $750 million to advance efforts to develop small-scale nuclear reactors, including a major investment from South Korean conglomerate SK Group. SK will invest $250 million to add a stake in the technology developer, which aims to commercialize smaller and cheaper designs than conventional nuclear plants, the companies said Monday in separate statements. “Nuclear will become a vital part of our energy transition,” Kim Moohwan, executive vice president of a green investment center at SK Inc., the holding company of SK Group, said in an interview. “In terms of safety, economic viability and applicability of the technology, TerraPower’s smaller reactors stand out the most to us.”
• Iran said it will inform the European Union of its official position on a draft text to revive the 2015 nuclear accord by Monday night, signaling it may be nearer an agreement with the US over a deal that could restore its oil exports to global markets. “If the US shows a realistic approach and flexibility, we can reach the point of an agreement in the next few days,” Iranian Foreign Minister Hossein Amirabdollahian said. The EU, which is acting as the main coordinator and mediator in negotiations between the US and Iran over how to save the beleaguered atomic agreement, has proposed a “finalized” draft text which it said represents the last remaining hope of rescuing the deal.
• Russia defied expectations of a collapse in oil production following its invasion of Ukraine. But Moscow will have to redouble its efforts to find new buyers if it’s to keep output from shrinking in the coming months. After plunging in the immediate aftermath of its offensive in February, Russian production has rebounded over the past three months as domestic refining boomed and Asian customers stepped in to take shipments shunned by Western buyers. Yet a looming European Union ban on most Russian crude, as well as a gathering economic slowdown, will strike a blow to the country’s producers. “Russian oil companies have been enjoying the beauties of the summer season — soaring domestic demand and the absence of EU sanctions have allowed them to ramp up production,” said Viktor Katona, head of sour-crude analysis at data firm Kpler. “As we look into the immediate future, that is bound to change.”
• China’s military said it held fresh patrols around Taiwan to “fight back” against another US congressional visit less than two weeks after House Speaker Nancy Pelosi traveled to Taipei.  The patrols and exercises conducted in the “sea and air space around Taiwan” on Monday provided a “resolute response and stern deterrence to US-Taiwan collusion,” Chinese Defense Ministry spokesman Senior Colonel Wu Qian said in a statement. Taiwan’s Ministry of National Defense said Monday that it detected 30 Chinese military planes and five warships around Taiwan’s surrounding region. Unlike earlier this month when China conducted live-fire exercises and likely fired ballistic missiles over Taiwan’s main island, Beijing didn’t immediately specify exclusion areas for commercial planes or ships to avoid. Chinese naval vessels and warplanes have regularly breached the US-drawn median line that divides the Taiwan Strait since Pelosi’s arrival on Aug. 2.
• The Saudi government’s oil income almost doubled in the second quarter even as state-controlled producer Aramco held dividends unchanged. The oil giant made payments to the government — its 94% shareholder — of more than $65 billion in the period, up from $35 a year earlier, according to financial statements released Monday. That’s a combination of dividends, income taxes and royalties on oil production. Despite efforts to diversify the economy, Saudi Arabia’s crude is still the major source of government revenue. Soaring prices are set to give the country its first budget surplus in almost a decade, even without Aramco boosting shareholder payouts, most of which go to the government.
• As crypto’s most traded tokens, stablecoins have ballooned in circulation under a relatively light-touch regulatory regime. That’s about to change. Lawmakers in the US, the EU, the UK, Japan and others are considering rules that would overhaul the $150 billion sector. Several of these proposed restrictions are intended to bring issuers of the tokens — which are cryptoassets designed to keep a one-to-one peg with a less volatile currency like the US dollar — under the same financial regimes as payment providers. More specifically, regulators want a say over the types of assets that stablecoin providers can use to fill their coffers, and are expected to require more detailed disclosures and fully-backed reserves. The changes could hurt some stablecoins, but already, providers are starting to adapt.

“Do what is right, not what is easy nor what is popular.” —Roy T. Bennett

*All sources from Bloomberg unless otherwise specified