August 3, 2022

Daily Market Commentary

Canadian Headlines

• Semiconductor maker Semtech Corp. is acquiring Sierra Wireless Inc. in all-cash transaction valuing the Canadian company at $1.2 billion including debt. Semtech said in a statement Tuesday that it’s paying $31 a share for Sierra Wireless, a premium of about 25% to Friday’s closing price before Bloomberg News reported the merger talks. The deal is expected to roughly double Semtech’s annual revenue, according to the statement. Sierra Wireless fell 5.2% to $28.15 in New York trading Tuesday, giving the company a market value of about $1.1 billion. The shares rose to about $30.25 after the close of regular trading. Based outside Vancouver in Richmond, British Columbia, Sierra Wireless makes so-called Internet of Things technology, a set of components designed to equip electronic systems with internet connections. Semtech has been making inroads into this area and a takeover of Sierra would complement its Internet of Things business.

World Headlines

• European stocks were little changed on Wednesday as investors weighed signs of resilience in the second-quarter earnings season and monitored US-China relations in light of Nancy Pelosi’s visit to Taiwan. The Stoxx Europe 600 Index was 0.2% higher at 12:13 p.m. in London after posting small declines in the past two days. Autos and telecoms stocks underperformed, while insurance and technology shares advanced. BMW AG fell about 6% after cutting its delivery outlook due to ongoing supply-chain snarls. European stocks are facing a crucial test in August — historically one of their worst months of the year — to see if they can extend July’s sharp rebound as investors were encouraged by signs of that company earnings were coping with scorching inflation and slowing growth. Weaker macroeconomic data have also raised bets of a dovish pivot in Federal Reserve policy in time to avoid a recession, but strategists have warned it’s premature to dismiss fears of an economic contraction.
• US stock futures climbed on Wednesday as some of the investor anxiety over tense US-China ties eased, while Treasuries extended a slide sparked by hawkish Federal Reserve comments. S&P 500 and Nasdaq 100 contracts both rose by about 0.5%. In New York premarket trading, Airbnb Inc. fell after the home-rental company missed estimates on bookings. Match Group Inc. fell after the parent to dating apps including Tinder gave a weak revenue forecast. PayPal Holdings Inc. jumped after the payments giant said activist investor Elliott Investment Management is now among its biggest shareholders. The two-year Treasury yield added to its advance beyond 3% following a selloff in bonds on Tuesday sparked by Fed officials indicating the central bank has some way to go to curb inflation. That lead traders to trim wagers on policy easing in 2023.
• Asian stocks pared losses as investors monitored China’s response to US House Speaker Nancy Pelosi’s Taiwan trip along with the latest corporate results. The MSCI Asia Pacific Index was down 0.1% after falling as much as 0.8% earlier. Japanese megabank MUFG was among the biggest drags as it reported a profit decline the previous day. Alibaba was among the biggest gainers and also lifted Hong Kong shares ahead of its earnings report on Thursday. Key equity gauges in Hong Kong and Taiwan fluctuated before closing slightly higher while equities in mainland China declined. Pelosi reaffirmed US support for the democratically elected government in Taipei. Beijing halted some trade with Taiwan and planned military drills around the island.
• Oil slipped before an OPEC+ meeting as traders wait to see whether the group will heed or snub a US call to boost crude supplies. West Texas Intermediate fell toward $93 a barrel after swinging between gains and losses. The Organization of Petroleum Exporting Countries and its allies including Russia convene virtually later Wednesday, and a Bloomberg survey of traders and analysts suggested the alliance led by Saudi Arabia was more likely to keep output steady in September than agree on an increase. Kazakhstan said on Wednesday that the group may have to raise output. Oil sank to the lowest close in more than five months earlier this week, giving up the bulk of the gains seen since Moscow’s invasion of Ukraine. That drop came as investors fret about a global economic slowdown. When OPEC+ meets later today Brent crude prices will likely be below $100, while timespreads that gauge market strength have weakened markedly, indicating that some of the strength in physical markets is easing.
• Gold climbed as the dollar and bond yields retreated, with investors assessing US-China tensions and an apparent hawkish turn from the Federal Reserve. Bullion has been drawing some haven support amid the ongoing geopolitical risks. While anxiety has eased slightly in markets, traders are still monitoring the latest developments as China halted some trade with Taiwan in retaliation to US House Speaker Nancy Pelosi’s high-profile visit to the island. Bullion had dropped 0.7% on Tuesday as Fed officials pushed back against a narrative in financial markets over the past week that the central bank is likely to pivot away from tightening to prevent a sharp slowdown.
• The three-month London interbank offered rate for dollars climbed to the highest level since the financial crisis as traders price in larger interest-rate hikes by the Federal Reserve. Libor rose for the fourth straight session, rising roughly 2.5 basis points to 2.83229%, the highest since November 2008. The spread of Libor over overnight index swaps was unchanged at 17.9 basis points. The move follows Tuesday’s surge in Treasury yields after several Fed policy makers’ comments that they’re not close to done fighting inflation prompted traders to reduce bets on rate cuts next year.
• If euro-area rates markets were too gung-ho just a couple of weeks ago about how fast the European Central Bank would tighten policy, now they are swinging the other way. Overnight indexed swaps were factoring in almost 75 basis points of increase in September in the immediate aftermath of the ECB’s July review. Now, they are factoring in less than 50 basis points of tightening, which seems like skepticism overdone. The euro-area services PMI for July saw a decent revision upward, while producer prices for June still underscore how inflation is likely to be belligerent. If anything, there is still no straightforward solution in sight to the region’s energy crisis, and with autumn drawing nearer, energy consumption may push inflation yet higher. Unless the euro-area economy goes completely pear-shaped between now and Sept. 8, it’s hard to imagine that the ECB’s policy committee, which has been hawkish through this year, will persuade itself to be content with a 25-basis point increase. As things stand, there is little headroom for policy makers to react to any downturn, and they would legitimately want to create that space when the economy can still withstand higher rates. Clearly, meeting-dated payer swaps may come into vogue in the coming weeks.
• China halted some trade with Taiwan in retaliation to the high-profile visit of US House Speaker Nancy Pelosi to the island, with more disruptions likely as political tensions intensify. China suspended some fish and fruit imports from Taiwan, citing excessive pesticide residue detected on products since last year and some frozen fish packages that tested positive for coronavirus in June. Exports of natural sand, used in construction, were also banned. With Taiwan’s agricultural exports accounting for only 0.6% of total exports last year, according to DBS Group Holdings Ltd., and China’s sand exports to the island amounting to just over $1 million last year, the trade bans imposed so far are likely to have only a marginal impact on Taiwan’s economy. However, the bigger risk is if Beijing widens the restrictions or shipments are disrupted as China conducts military exercises around the island.
• Starbucks Corp. shares rose as a strong US performance and higher prices helped to offset lower traffic and sluggishness in China, where Covid-19 measures have sharply suppressed demand. The results reinforce the message found in recent reports from McDonald’s Corp. and Chipotle Mexican Grill Inc.: Americans are still opening up their wallets to eat out — even if inflation is starting to erode purchasing power. Sales of $8.15 billion came in slightly above expectations in the fiscal third quarter ended July 3, Starbucks said Tuesday in a statement. The average ticket — or cost per order — rose 6%, but comparable transactions fell 3%. This shows that higher prices are making up for a lower volume of sales.
• Under Armour Inc. cut its profit forecast for the year, with logistical issues persisting as the company searches for a new chief executive officer. The company now sees earnings per share, excluding some items, in the range of 47 cents to 53 cents a share for the year ending in March. That’s down from a prior range of 63 cents to 68 cents. Analysts surveyed by Bloomberg were looking for 61 cents, on average, and several had expected profit guidance to be lowered. Global revenue was flat at $1.3 billion for the fiscal first quarter ended June 30 compared with a year ago, Under Armour said Wednesday in a statement. The company maintained its full-year revenue outlook.
• The US announced Tuesday it had approved the potential sale of additional Patriot missiles and related equipment to Saudi Arabia in a deal valued at as much as $3.05 billion, just weeks after an awkward meeting between President Joe Biden and Saudi Crown Prince Mohammed bin Salman. The encounter came to be symbolized by Biden’s fist-bump with a leader whose kingdom he once labeled a global “pariah” and hoped to marginalize after the killing of columnist Jamal Khashoggi. It underscored the president’s calculus to bring home relief from high gasoline prices and to reaffirm the US role in the Middle East. But Biden departed Saudi Arabia last month without a firm commitment for an increase in oil production that could ease pain at the gasoline pump, saying only that based on his conversations he expects “further steps in the coming weeks.”
• Societe Generale SA outlined new revenue targets and pledged higher profitability as rising interest rates and a global trading rally provide a tailwind to outgoing Chief Executive Officer Frederic Oudea. The Paris-based lender on Wednesday set a goal for average annual top line growth of at least 3% over the next three years, after second-quarter revenue and operating profit beat analyst estimates. A jump in fixed-income trading by half stood out in a quarter where all main operating units reported strong gains. The performance helped cushion the impact of a previously announced 3.3 billion-euro pretax hit from the sale of its Russian unit Rosbank PJSC, which handed Oudea his third quarterly loss since market volatility picked up in early 2020. One of the longest-serving CEOs in European banking, he restructured the firm after a rollercoaster performance and in May announced he will not seek another term.
• BMW AG says new vehicle orders are retreating from high levels as inflation and higher interest rates hit consumers, making the company the first among major carmakers to turn more cautious. The Munich-based manufacturer sees vehicle orders normalizing toward the end of the year, particularly in Europe, it said Wednesday. Current order books are at an all-time high because of pent-up demand due to the ongoing semiconductor shortage. BMW stuck to a forecast of automaking returns at between 7% to 9% for the year on the back of strong vehicle prices and model lineup as well as demand for used cars. The manufacturer also said it won’t be able to fully pass on rising materials costs with internal savings helping to soften the impact.
• China will resume quarantine-free travel with Macau as the city recovers from its worst ever Covid-19 outbreak, in a move that could herald a tourism revival for casinos that have been bleeding cash for months. Macau’s border with the neighboring Chinese city of Zhuhai will reopen from 6 p.m. Wednesday, with some conditions attached, according to statements from the governments in both cities. People entering Zhuhai from Macau will need to show a negative nucleic test result no older than 24 hours and inform community representatives in the location where they will stay of their travel history. They’ll then need to take another test within 48 hours of traveling to the city and are banned from taking public transport or attending gatherings within the first three days of their arrival.
• Hackers targeted the Solana ecosystem early Wednesday with thousands of wallets affected in the latest hit to the cryptocurrency market after bridge protocol Nomad was attacked at the start of the week. Estimates of the damage vary. Just over $5.2 million in cryptoassets have been stolen so far from more than 7,900 Solana wallets, according to blockchain forensics firm Elliptic. Security company PeckShield said four Solana wallet addresses drained approximately $8 million from victims. Crypto projects are proving a rich vein for hackers and the industry has suffered numerous attacks this year. Solana’s woes come days after Nomad — a bridge protocol for transferring crypto tokens across different blockchains — lost close to $200 million in a security exploit on Monday. More than $1 billion has already been stolen from bridges in 2022, according to a June report by Elliptic.
• European commercial real estate is in the midst of a correction that could wipe off as much as 20% of the value of some properties, one of the continent’s largest asset managers says. Frankfurt-based DWS Group says the value of older and less environmentally friendly buildings could fall by a fifth, global head of real estate research Simon Wallace said in an interview. Even prime buildings could see a 10% to 15% drop as real estate yields start to rise, according to research published by the company. European real estate markets are in a state of flux after a decade of rock bottom interest rates helped push prices to record highs. That’s now started to reverse as the cost of borrowing rises, with lenders anticipating a series of interest rate hikes, the first of which came last month as the European Central Bank increased the benchmark rate for the first time since 2011.
• The rally in stocks since June’s low has been built on shaky foundations and, according to many market watchers, a key ingredient for a solid base is still missing — more cuts to earnings estimates. An analysis of the past four recessions by Bank of America Corp. showed that the S&P 500 Index bottomed only after earnings per share forecasts had fallen either to or below the level they were at when the market last peaked. Fast forward to now — while projections have fallen, they are still about 6% higher than at the time of January’s all-time record. Their words will send a shiver through those that have chased equities higher over the past six weeks even as company executives sounded more cautious about economic growth. US stocks finished July with their biggest monthly gain since 2020 as weaker economic data spurred expectations that the Federal Reserve could slow the pace of rate hikes. A better-than-feared corporate earnings season has also stoked wagers that profit margins are proving resilient to scorching inflation and gloomier consumer sentiment.
• House Speaker Nancy Pelosi pledged that the US wouldn’t abandon Taiwan, reaffirming American support for the democratically elected government in Taipei despite threats of fresh trade curbs and military actions by Beijing.  Pelosi made her comments on Wednesday during a Presidential Office ceremony with Taiwanese leader Tsai Ing-wen. The California Democrat’s arrival in Taiwan late Tuesday made her the highest-ranking US official to visit in a quarter century, and the most high-profile success in Tsai’s six-year drive to attract greater foreign support and reduce reliance on China. Tsai said Pelosi’s visit showed Taiwan’s staunch international support in the face of a years-long international pressure campaign led by Beijing, which claims the island as its territory. “Facing deliberately heightened military threats, Taiwan will not back down,” Tsai said, after conferring an award on the visiting US lawmaker.

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

*All sources from Bloomberg unless otherwise specified