December 15, 2021

Daily Market Commentary

Canadian Headlines

• Prime Minister Justin Trudeau’s government released new budget estimates Tuesday that showed federal finances in better shape than expected, though the numbers don’t include the bulk of the election campaign promises his Liberal Party made earlier this year. The document from Finance Minister Chrystia Freeland is a straightforward update of the fiscal and economic picture, with little in terms of new agenda-like spending though there are some new measures around Indigenous funding and Covid support. It is essentially a placeholder document ahead of a full budget early next year. The government forecasts smaller deficits in every year along the forecast horizon, with the gap dropping to C$13.1 billion ($10.2 billion) in the fiscal year that begins in April 2026. Nominal gross domestic product is projected to average about C$90 billion more annually through 2026. Revenue is projected to be higher by an average C$18 billion per year.
• Cineworld Group Plc plunged as much as 40% after a court ordered the world’s second-largest cinema chain to pay $1 billion in damages — more than its entire market value — over an aborted takeover bid. A Canadian court ordered the British company to pay the money on Tuesday after it scrapped a plan to buy Toronto-based Cineplex Inc. as the pandemic forced entertainment venues to close. The $1.6 billion deal would have made Cineworld North America’s largest movie-theater operator. The company will appeal the decision and does not expect to have to pay damages during this process, which a spokesman said could take up to a year. Investors will be focused on whether the appeal is successful, and if in the meantime the company can balance uncertain box office income with the need to finance its $5 billion debt load.

 

World Headlines

• U.S. equity futures fluctuated as traders braced for a faster withdrawal of Federal Reserve’s stimulus when the central bank meets later today. European stocks rose after five days of losses. China’s economy slowed further last month, dragged down by a worsening property market slump and disruptions from repeated Covid outbreaks.
• The MSCI Asia Pacific Index was set to fall for a fourth day, dropping as much as 0.3%. Mainland Chinese equities edged lower after data showed the nation’s economy slowed further in November amid a housing market slump and weaker domestic consumption. Sentiment soured further in afternoon trade as fears of more investment and export sanctions by Washington sent shares of China’s biggest chipmaker and several large pharmaceutical firms tumbling, dragging down Hong Kong’s benchmark.
• Treasury yields were little changed and a gauge of the dollar’s strength inched lower as investors waited for the Federal Reserve to step up the pace in removing monetary stimulus. European stock markets snapped a five-day drop and U.S. futures were mixed.
• Oil declined for a third day as further restrictions were imposed to counter the spread of the omicron Covid-19 variant while the outlook for demand in China dimmed as Beijing cracks down on the virus, pollution and rule-breakers. Futures in New York tumbled to below $70 a barrel, extending this week’s decline to more than 2%. China, the world’s biggest importer of crude, is set to start 2022 with a subdued appetite that will partially offset the traditional increase in demand from refineries to replenish inventories during the winter months.  That comes as the Paris-based International Energy Agency says that the global market has already returned to surplus and that jet fuel demand is faltering due to omicron. On Tuesday, Brent’s prompt time spread briefly flipped into contango, a bearish signal suggesting supplies are plentiful.
• China’s oil refining rose to a five-month high after state-run units ramped up operations to avert a diesel supply crisis. Daily processing surged to 14.6 million barrels last month, up 5.5% from October. Apparent crude demand rose 4.7% to 14.2 million b/d. China’s oil demand may be subdued at the start of 2022 as Beijing keeps a hard line on controlling the spread of the virus. Crude imports in January may be marginally higher than a year earlier but will soften toward the end of the quarter, FGE said. Imports this year are already on track to post the first annual decline since 2004.
• China’s crude steel production fell 22% last month from a year earlier as the economy continued to slow and a property-market slump deepened. Gold’s lackluster year may pave the way for renewed interest in exchange-traded funds in 2022 from investors seeking a hedge against growing global uncertainties.
• Gold held onto its worst daily loss since the end of November as investors weighed the latest U.S. inflation data and counted down to the conclusion of the final Federal Reserve meeting. Nickel traded near the lowest level in almost a month as production cuts pledged by China’s stainless steelmakers and a slowdown in the nation’s economy further weakened the outlook for demand.
• Federal Reserve policy makers are poised to accelerate their removal of monetary stimulus as a step toward the first interest-rate increases since 2018 as they pivot to restraining the hottest inflation in almost 40 years. The Federal Open Market Committee is all but certain to hold its benchmark rate near zero after a two-day policy meeting Wednesday and is likely to double its pace of tapering of asset purchases only a month after the drawdown started, a removal of pandemic stimulus that sets the stage for higher rates later in 2022. The panel will release a statement and forecasts, including the “dot plot” that includes central bankers’ projections on interest rates, at 2 p.m. in Washington. Chair Jerome Powell will brief reporters 30 minutes later.
• Eco data to mull before the Fed: U.S. retail sales probably rose 0.8% month on month in November, slowing from October’s 1.7% — the fastest pace in seven months. Import prices are seen climbing 0.6%, half the October rate. Empire manufacturing and NAHB surveys are also due.
• The U.S. House voted early Wednesday to raise the nation’s debt ceiling by $2.5 trillion, an amount intended to extend the government’s borrowing authority past next year’s congressional elections and into early 2023. The 221 to 209 vote sends the bill to President Joe Biden for his signature. The Senate earlier in the day approved the bill in a 50-49 vote with only Democrats in support. The current federal debt is $28.9 trillion, and Treasury Secretary Janet Yellen had warned that the government could have difficulty meeting its obligations after Dec. 15, though outside analysts have said default could possibly be staved off into January.
• The Biden administration is considering imposing tougher sanctions on China’s largest chipmaker, according to people familiar with the situation, building on an effort to limit the country’s access to advanced technology. The National Security Council is set to hold a meeting on Thursday to discuss the potential changes, said the people, who asked not to be identified because the deliberations are private. Agencies represented through their deputies will include the Commerce, Defense, State and Energy departments. The proposal that’s being examined would tighten the rules on exports to Shanghai-based Semiconductor Manufacturing International Corp. If one proposal is adopted, companies such as Applied Materials Inc., KLA Corp. and Lam Research Corp. may find their ability to supply gear to SMIC severely limited.
• U.K. inflation surged more than expected to 5.1% in November, its highest in more than a decade, boosted by the cost of clothing, fuel and cars. Core inflation rose to 4%, the highest since 1992.
• French inflation was confirmed at 3.4% in November. Spain’s final CPI was revised down to 5.5% from 5.6%. Italy’s print was also lowered, to 3.9% from 4%. Russia’s GDP probably rose 4.4% year on year in the third quarter, up from 4.3% in the previous three months.
• China’s economy slowed further in November, amid a worsening property market slump and Covid disruptions. Retail sales growth missed at 3.9%. Fixed-asset investment growth and property investment eased in the first eleven months of the year, also missing. A bright spot was industrial output, which topped consensus at 3.8% year on year.
• Japan’s tertiary industry index rose 1.5% in October from the previous month, beating estimates, and higher than September’s 0.5% increase. South Korean unemployment surprisingly fell to 3.1% in November from October’s 3.2%, after it was seen ticking up.
• There are signs the European gas rally is starting start to slow. Russian supplies into Germany surged to the highest this month, Gascade data showed. The outlook for LNG arrivals has also turned more positive, with higher prices in Europe possibly diverting supplies from Asia. Skyrocketing gas prices may prompt Asian economies to rethink projects aimed at boosting imports. More than 60% of the proposed 139 million tons-a-year of LNG capacity in South and Southeast Asia may not be completed, the Institute for Energy Economics and Financial Analysis said.
• Top Oil Trader Vitol Expects High Prices, Volatility in 2022. “It’s going to be up there at the top of the range,” said Chris Bake, managing director at Vitol Group. Speaking  in an interview hosted by Dubai consultancy Gulf Intelligence, and emphasizing these were his personal views, Bake added there is “upside potential depending on incremental demand.” Oil inventories swelled last year as the pandemic caused both mobility and consumption to slump. The global market faces an even bigger oversupply early next year as the omicron variant of Covid-19 impedes international travel once again, the International Energy Agency said. However, Bake said global oil inventories have fallen in recent months due to the impact of coordinated output cuts from OPEC and its allies. Over the longer term, the world “will feel the impact” of insufficient spending on new upstream projects over the last few years and “in sustaining oil production,” he said. Saudi Arabia’s energy minister Abdulaziz bin Salman said Monday that the world is heading “toward a phase that could be dangerous” if spending on new oil and gas production doesn’t ramp up. This warning is “not by any stretch overstated,” Bake said.
• IAG is close to terminating an agreement to buy Air Europa for 500 million euros. The deal faced an extended EU antitrust probe due to be completed early next year, while air travel demand plummeted due to coronavirus restrictions – causing IAG to halve its initial 1 billion-euro offer.
• Inditex and H&M reported lower-than-expected results as fears grow that omicron could further dent demand in coming weeks. The Spanish clothing giant’s third-quarter earnings missed consensus, while the Swedish retailer signaled that store closures are inching up again. Shares of both fell.
• Codelco Buyers Agree to Premium Hike in Sign of Copper Strength. Codelco’s main U.S. customers agreed to an increase of the premium they pay for delivery of copper next year, people familiar with the matter said, in a positive sign for the bellwether commodity. American buyers of Codelco cathode will pay the world’s biggest supplier of the red metal between 1 cent and 1.5 cent a pound above this year’s premium, said the people, asking not to be identified because talks are private. The cost increase for fabricators that turn refined copper into wire and pipe is a endorsement of demand for everything from electronics to electric vehicles and may help ease concerns surrounding a slowdown in the Chinese economy and the impact of tighter U.S. monetary policy.

“Don’t judge each day by the harvest you reap but by the seeds that you plant.” -Robert Louis Stevenson

*All sources from Bloomberg unless otherwise specified