February 18, 2022

Daily Market Commentary

Canadian Headlines

  • Canadian banks have started to freeze a small number of accounts connected to people whom police say have been involved in illegal protests, acting on orders from Prime Minister Justin Trudeau’s government. But the banks won’t be going after donors who collectively gathered millions of dollars to help the truckers and demonstrators who’ve blockaded downtown Ottawa and other sites.  Trudeau invoked an emergency law Monday that requires financial institutions in Canada to examine customer records and take action against people involved with the protest, or those aiding them. The law also grants the government other extraordinary powers, such as the right to ban public assembly in certain locations. The Canadian Civil Liberties Association said it plans to challenge the government’s decision in court.

World Headlines

  • European equities trimmed an advance on Friday amid hopes that the U.S. and Russia will remain engaged in talks to avert military conflict in Ukraine, while traders braced for a potentially volatile session due to option expirations.  The Stoxx 600 Europe Index was up less than 0.1% as of 10:12 a.m. in London, on course for a weekly decline of about 1%. Hermes International was among the biggest decliners, falling by 4.2% after the French luxury firm reported lower revenue from its key leather-goods division. Energy stocks also underperformed as oil prices extended declines.
  • U.S. futures rose on Friday as planned talks between Russia and the U.S. over Ukraine alleviated some investor gloom about geopolitical risks. Futures signaled an upbeat end to a week in which investors shunned risky assets on geopolitical and tightening monetary policy concerns. Some $2.2 trillion of option expirations set to hit the market Friday may exacerbate volatility. Bets on a sharper Federal Reserve interest-rate liftoff in March have eased somewhat in light of Ukraine tension. But investors continue to be vexed by the question of how markets will cope as stimulus ebbs.
  • Asian stocks fell as sentiment was eroded by renewed worries over China’s regulatory crackdown on industries, amid lingering tensions surrounding Russia and the Ukraine. The MSCI Asia Pacific Index slid as much as 0.9%, dragged down by a slump in consumer-discretionary shares. Meituan led declines for the sector, plunging15% after China issued new guidelines asking food-delivery platforms to cut fees for restaurants. Hong Kong was the region’s worst performer. Asia’s benchmark is extending this year’s losses to about 2% following a 3.4% drop in 2021. The market’s mood has recently been dominated by uncertainty surrounding Ukraine and the prospective pace of U.S. monetary policy tightening.
  • Oil headed for the first weekly loss in two months as investors weighed the crisis over Ukraine and the possibility that Iran’s nuclear deal may be revived. West Texas Intermediate fell below $90 a barrel after losing as much as 3% on Friday. There have been signs that the market’s recent rally is starting to cool in recent days — albeit from exceptionally high levels. The North Sea market has seen differentials for physical barrels ease, while refining margins have come under pressure. Mounting speculation that Iran’s nuclear deal may be revived, potentially paving the way for the removal of U.S. sanctions on the nation’s crude exports, is easing off some of the bullish signals. The oil market’s structure weakened markedly on Friday, and one oil-focused exchange traded fund saw its biggest withdrawal since July 2020.
  • Gold dropped from an eight-month high after Russia agreed to meet with the U.S. for talks over the Ukraine standoff, easing some geopolitical concerns that had fueled demand for the haven asset. Russia responded to an offer for a meeting between U.S. Secretary of State Antony Blinken and Russia Foreign Minister Sergei Lavrov in Europe with proposed dates for late next week. The U.S. has accepted, “provided there is no further Russian invasion of Ukraine,” State Department spokesperson Ned Price said in a statement. Tensions have been high this week as the U.S. ramped up warnings of a possible Russian attack, with President Joe Biden saying a “false-flag” event may be under way. Russian officials said no invasion of Ukraine was underway and none was planned. But the Kremlin said in an official response to the Biden administration’s proposed security assurances that the offers were unsatisfactory and Russia might have to resort to unspecified “military-technical measures.”
  • The U.S. said Russia has massed as many as 190,000 personnel – including troops, National Guard units and Russian-backed separatists – in and around Ukraine in what it called the most significant military mobilization since World War II. Russia told the U.S. this week that it has no plans to attack, and officials in Moscow have repeatedly dismissed U.S. warnings about a possible invasion as “hysteria” and propaganda. The buildup has sparked a flurry of diplomatic activity between allies and adversaries. U.S. President Joe Biden will speak with transatlantic leaders on Friday about the Kremlin’s troop movements. Russian Defense Minister Sergei Shoigu will also talk to his U.S. counterpart Lloyd Austin by phone, and Foreign Minister Sergei Lavrov will meet U.S. Secretary of State Antony Blinken in Europe next week.
  • Hong Kong plans mandatory testing for residents as the city battles to get its Covid Zero strategy on track, despite spiraling cases, business closures and a backlash against its policy decisions. Chinese residents are racing back to the mainland to flee the financial hub’s worsening outbreak, while Hong Kong’s Monetary Authority urged banks to require staff to present proof of vaccination. Meanwhile, the city will delay the chief executive’s election by more than a month as it prioritizes steps to contain the outbreak. Germany’s Health Minister Karl Lauterbach warned the country remains in a “vulnerable phase” of the pandemic, cautioning that the recent trend of declining infections could reverse if restrictions are lifted too fast.
  • Ever since his arrival after university in 2004, Pawan Passi has worked the phones inside Morgan Stanley, rising to become a chief communicator with investors buying and selling big blocks of stock, a business the bank dominates on Wall Street. Then in November, his chair suddenly went empty at Morgan Stanley’s headquarters overlooking Times Square, and the whispers began spreading. The bank had put Passi on leave. The feds were poking around.
  • DraftKings Inc. sank after adding fewer new customers in the fourth quarter than Wall Street had expected even after spending hundreds of millions of dollars to lure new bettors — spending that will continue to generate deep losses this year. The sports-betting company said Friday that an average of 2 million monthly unique paying customers engaged with DraftKings during the fourth quarter. Analysts were looking for 2.1 million monthly payers, according to estimates compiled by Bloomberg. The company also forecast an adjusted loss excluding some items in the range of $825 million to $925 million this year. Sports betting has spread to an increasing number of U.S. states since the Supreme Court struck down a federal ban in 2018. That’s led to a free-for-all of introductory offers as DraftKings, FanDuel and others try to persuade people to use their phone to place wagers for the first time. DraftKings has entered the New York and Louisiana markets, and said Friday there are new potential opportunities in Maryland, Puerto Rico and Ohio.
  • Meituan tumbled the most in nearly seven months after China issued new guidelines asking for food delivery platforms to cut fees, showing that investor angst over the nation’s tech giants remains high.  Shares of the food delivery giant sank 15%, wiping out $26 billion in its market value, after the government asked platforms to cut charges for restaurants to reduce business costs. The move caused a broad selloff in tech shares, with the Hang Seng Tech Index closing 3.2% lower while the benchmark Hang Seng Index dropped 1.9%. Online food delivery platforms were also told to give preferential fees to restaurants in regions hit by the pandemic, according to a statement by the National Development and Reform Commission on Friday.
  • Chamath Palihapitiya stepped down as chairman of Virgin Galactic Holdings Inc. to focus on other ventures, leaving the board as the space-tourism company moves from startup phase toward paying flights. Board member and chief investment officer Evan Lovell was appointed interim chairman as the company begins a search for a successor, according to a statement Friday. Palihapitiya, known as the SPAC King for his use of the investment tool to bring companies public, will focus on other public-company commitments.  The board shakeup comes at a point of transition for Virgin Galactic, one of a handful of firms pioneering near-space travel. Founder Richard Branson flew on a test flight last year, and the shares jumped earlier this week after the company started ticket sales.
  • Electricite de France SA announced measures to bolster its battered finances as a combination of reactor shutdowns and government policies to cap power prices slash its earnings this year. The utility will sell about 2.5 billion euros ($2.8 billion) of new stock — the bulk of which will be bought by the French state — dispose of more assets and offer investors the option of receiving their dividends in shares instead of cash. EDF’s core earnings, which were boosted last year by high power prices, could slump by as much as 70% in 2022 as the company is forced to offer wider discounts on the shrinking volume of electricity it generates.
  • Macquarie Group Ltd. is weighing the purchase of a controlling stake in National Grid Plc’s gas transmission business that could value the asset at more than $10 billion, according to people familiar with the matter. The Australian financial services group’s asset management division has made an initial non-binding offer for a majority stake in the gas business, the people said, asking not to be identified discussing confidential information.  National Grid announced its intention to sell the holding last year as it transitions to a low-carbon future. The asset has also drawn interest from infrastructure specialist IFM Investors, Canada’s Public Sector Pension Investment Board and pension fund investor APG Asset Management, the people said.
  • Deere & Co., the largest maker of agricultural machinery, reported profit that topped analysts’ estimates and raised its fiscal-year outlook as booming farm incomes lift demand for tractors and other equipment. The company forecast 2022 net income of $6.7 billion to $7.1 billion, up from a prior range of $6.5 billion to $7 billion, according to a statement on Friday. In the first quarter ended Jan. 30, net income per share was higher than the average of analysts’ estimates compiled by Bloomberg. Deere shares rose 27% last year as farm earnings surged on higher crop prices and growers placed orders to replace aging tractor fleets. Analysts at Baird said the market already factored in cost headwinds for the first quarter, and that the farm-machinery industry has strong pricing to offset rising costs. Lingering impacts from a labor strike and supply disruptions provide upside to the outlook for the second and third quarters of 2022, according to Bloomberg Intelligence.
  • Celanese Corp. agreed to buy the majority of DuPont de Nemours Inc.’s mobility and materials arm for $11 billion in cash, the company’s biggest-ever acquisition. The agreement announced Friday confirms an earlier Bloomberg News report that the companies were close to a deal. The unit had also attracted interest from private equity firms including Apollo Global Management Inc. and Carlyle Group Inc. Texas-based Celanese makes chemicals and other products for use in everything from cigarette filters to paints, while the DuPont unit it’s buying produces polymers and resins for vehicles, electronics, consumer products and other applications.
  • The price tag for one of the biggest trading debacles during the pandemic-fueled market meltdown of early 2020 is beginning to emerge. Allianz SE, facing multiple lawsuits and regulatory probes tied to the collapse that year of its Florida-based hedge funds, said late Thursday that it will take a charge of 3.7 billion euros ($4.2 billion) and warned investors of more pain to come. The German insurance and financial-services firm, which also owns bond giant Pacific Investment Management Co., said it expects to reach settlements soon with major investors in its Structured Alpha Funds. Allianz said it can’t provide a total cost because it’s still in discussions with other plaintiffs as well as the U.S. Securities and Exchange Commission and Department of Justice.
  • The price tag for one of the biggest trading debacles during the pandemic-fueled market meltdown of early 2020 is beginning to emerge. Allianz SE, facing multiple lawsuits and regulatory probes tied to the collapse that year of its Florida-based hedge funds, took an unprecedented, 3.7 billion-euro ($4.2 billion) charge to cover a settlement reached Friday morning with the vast majority of investors in the funds. In a sign of more pain to come, the German insurance and financial-services firm, which also owns bond giant Pacific Investment Management Co., warned that ongoing probes by U.S. Securities and Exchange Commission and Department of Justice are at a “sensitive” stage and that it couldn’t yet estimate the final price tag.
  • More than 120,000 homes in Britain were without power and hundreds of flights were canceled as Storm Eunice blew across London, southeast England and parts of continental Europe. The Met Office issued a red warning for London and southeast England from 10 a.m. until 3 p.m., with winds as high as 80 miles (129 kilometers) set to batter the country. An earlier red warning for parts of south west England and south Wales will remain in place until noon on Friday, while the storm is also impacting the Netherlands, France, Germany and Ireland.
  • The Felicity Ace, a massive Panama-flagged cargo ship carrying thousands of Volkswagen Group vehicles, caught fire near the Azores islands in the Atlantic Ocean Wednesday afternoon. The ship’s 22 crewmembers were successfully evacuated and taken to a local hotel by the Portuguese Navy and Air Force, who were deployed to help with the rescue effort, according to a statement from the Navy. The ship itself was left unmanned and adrift. An internal email from Volkswagen’s U.S. operations revealed there were 3,965 Volkswagen AG vehicles aboard the ship. Headquartered in Wolfsburg, Germany, the group manufactures vehicles under brands including Volkswagen, Porsche, Audi and Lamborghini — all of which were in tow when the vessel set ablaze.
  • Italy is set to approve up to 8 billion euros ($9 billion) in new aid to shield consumers and companies from the soaring energy prices which are dampening the outlook for the country’s economy, people familiar with the matter said. Some 6 billion euros will be allocated to the energy sector itself, while other funds will support industries including the automotive sector, the people said, asking not to be named as the measures are not yet public. The administration led by Prime Minister Mario Draghi had already alloted more than 10 billion euros to offset the price spike. The new package will not require changing the country’s deficit target, and it will be financed by anticipating spending planned later in the year, the people said.
  • The European Union won’t use its new budget power to deny funds to countries accused of violating democratic standards until after Hungary holds elections, in a win for Prime Minister Viktor Orban, who has accused the bloc of conducting a “rule-of-law jihad.”  The European Commission, the bloc’s executive arm, will be ready to use the so-called conditionality mechanism in more than five-to-nine months, according to an EU official familiar with the planning. Orban faces a general election on April 3.  The EU Court of Justice this week backed the legality of the new budget rule, paving the way for the commission to withhold billions of euros of funding to countries accused of violating the bloc’s democratic standards. Hungary could miss out on more than 40 billion euros ($45 billion) from the EU’s seven-year budget, Poland more than 130 billion euros.
  • Indian Oil Corp. Ltd., the country’s biggest oil refiner and a large user of hydrogen, expects prices of the cleanest form of the fuel to halve after the government scrapped fees on wheeling renewable power across the country. The offer to waive transmission charges on green energy from one state to the other can reduce costs by as much as 50% from $5-$6 a kilogram at present, Director for Research & Development S.S.V. Ramakumar said in an interview. The country now needs to cross the second-biggest cost barrier by promoting domestic manufacturing of electrolyzers, key hardware needed for producing the fuel. Green hydrogen, produced from water and green electricity, is seen as a potential path to decarbonize heavy industries, such as steel, cement and oil refineries. India, the world’s third-biggest emitter of greenhouse gases, plans to take the lead and has won support from state-run heavyweights like Indian Oil and NTPC Ltd. as well as billionaires Mukesh Ambani and Gautam Adani.
  • Hong Kong’s Chief Executive Carrie Lam said the city is planning to make it mandatory for all residents to get tested for Covid-19, deploying a tactic widely used to curtail the virus on China’s mainland as the financial hub struggles to contain an escalating outbreak. The city will also delay the chief executive’s election by more than a month, Lam said at a press conference Friday, where she described plans for universal testing that might need to be linked to residents’ government identity cards. “Mandatory testing and a complete city lockdown may not need to go hand in hand, it depends on the actual situation,” she said. “In our case, having examined the unique situation in Hong Kong, we probably will just go for universal testing of everyone”
  • UBS Group AG traders will see their bonuses for last year decline by about 10% on average after the bank’s markets unit took an $861 million hit from the collapse of prime brokerage client Archegos Capital Management, according to people familiar with the matter. The overall bonus pool for employees at UBS is being increased by around 10% from the previous year, said the people, who asked not to be named as the matter is private. Chief Executive Officer Ralph Hamers, on a mission to cut costs through digitalization, said last month that the pool for 2021 would not match the prior year’s 24% increase.  At UBS, investment bankers should see their individual variable compensation increase by more than 15% for 2021 from the year before, on the back of a very good period for advising on deals and mergers and acquisitions, people familiar said.
  • Companies are expected to refrain from selling U.S. investment-grade bonds on Friday after a mid-week burst propelled issuance to over $31 billion, beating estimates. One issuer that stood down on Thursday is likely to skip the last day of the week and instead take another look beginning Tuesday, following a bond market holiday in the U.S. The backdrop for would-be issuers is inviting with equity futures higher, the 10-year Treasury yield flat and the high-grade CDX tighter by about half of a basis point. U.S. investment-grade bond sales surged in the middle of the week as borrowers used windows of relative calm in financial markets to work through a backlog of deals held up due to volatility. Investors pushed back by the second day of the sales spree, however, forcing borrowers to sweeten terms to get deals done. On Feb. 16, companies paid 19 basis points in new issue concessions on average, about four times higher than the 2022 average and almost 10 times higher than they did in 2021, according to data compiled by Bloomberg..

“Never let the fear of striking out keep you from playing the game.”– Babe Ruth

*All sources from Bloomberg unless otherwise specified