February 25, 2022

Daily Market Commentary

Canadian Headlines

  • Canadian stocks erased earlier losses, closing the session higher on a rally in technology stocks as investors weighed whether Russia’s invasion in Ukraine could cause central banks to ease on plans for aggressive interest rate hikes. The S&P/TSX Composite advanced 0.1% to 20,761.93 in Toronto, ending a 5-day loss, led higher by tech. The S&P/TSX Composite Information and Technology Sector Index climbed 4.7%, the most in nearly three weeks. Shopify Inc. contributed the most to the index gain, increasing 6.4%. Energy Fuels Inc/Canada had the largest increase, rising 12.1%.
  • Canadian Imperial Bank of Commerce’s plan to spend more to accelerate growth in its domestic business paid off last quarter. Revenue in the company’s Canadian personal and business banking segment rose 7.8% from a year earlier to C$2.18 billion ($1.7 billion) in the fiscal first quarter, the Toronto-based company said Friday in a statement. That compares with 6.6% growth in the fourth quarter. Overall profit topped analysts’ estimates. Chief Executive Officer Victor Dodig is investing in technology and hiring more frontline bankers and other revenue-generating employees in a bid to speed up lending growth in its Canadian retail-banking operations. That helped the company take advantage of consumers ramping up borrowing last quarter, with gains spread across mortgages, credit cards and other personal lending.
  • National Bank of Canada got another lift from market volatility that lifted financial firms’ trading revenue. Revenue from the financial markets business rose to C$662 million ($517 million) in the fiscal first quarter, up  11% from a year earlier, the Montreal-based company said in a statement Friday. That came after a decline in the previous three months. Overall profit topped analysts’ estimates.  National Bank has the highest concentration in capital markets among Canada’s lenders, giving it an extra benefit from strength in that business. Trading revenue increased from the previous three months in equities, fixed income, commodities and currencies, similar to the boost markets gave Royal Bank of Canada in the fiscal first quarter.

World Headlines

  • European stocks jumped the most in a month on Friday as investors returned to risky assets following yesterday’s sharp selloff sparked by Russia’s invasion of Ukraine. The Stoxx Europe 600 Index was up 2% as of 11:37 a.m. in London, the most since Jan. 26, although lingering uncertainty over the economic impact of the conflict put it on course for its second straight weekly decline of 2.9%. With the benchmark gauge entering a technical correction Thursday, the Stoxx Europe 600 Relative Strength Index (RSI) closed below 30 in so-called oversold territory, hitting its lowest level since October 2020. Oversold readings have triggered relief rallies over the past year.
  • U.S. equity futures dropped as the Ukraine conflict and Western sanctions on Russia muddied the outlook for markets and the global economic recovery. Oil prices steadied after briefly halting a rally. Contracts on the S&P 500 were down about 0.3% after paring earlier declines of more than 1%. Benchmark West Texas Intermediate crude flipped to a gain while Brent crude fluctuated just under $100. President Joe Biden imposed stiffer sanctions on Russia, promising to inflict a “severe cost on the Russian economy” after Moscow-led forces attacked military and civilian targets in Ukraine, triggering the worst security crisis in Europe since World War II. China urged Russia and Ukraine to negotiate to address problems, according to Chinese state TV.
  • An uneasy calm returned to Asia’s stock markets on Friday, as investors assessed the fallout of Russia’s invasion of Ukraine and the outlook for China’s tech sector. The MSCI Asia Pacific Index climbed as much as 1.2%, rallying from its worst drop in a year on Thursday. Weaker-than-expected U.S. sanctions on Russia supported market sentiment, helping lift tech and industrial shares. China’s tech stocks advanced even after Alibaba announced the slowest revenue growth since it went public. Benchmarks in Japan and India were among the top performers. India’s Sensex turned from the biggest loser in Asia to the biggest winner on Friday. Hong Kong’s Hang Seng Index dropped as the city deals with record Covid-19 cases.
  • Oil extended its retreat from a seven-year high, slipping back below $100 a barrel in London, as Russia’s invasion of Ukraine forced traders to grapple with a fluid market environment. Brent futures rallied above $105 a barrel on Thursday as Russia launched an attack on its neighbor, though prices subsequently retreated as it emerged that Western governments wouldn’t impose sanctions on energy exports. Still, buyers like China are shunning Russia’s flagship Urals grade on concern that the rupture in international relations may yet complicate dealings with Moscow. The U.S. imposed its toughest-ever sanctions on Russia as tanks and troops moved closer to the Ukrainian capital, but said restrictions on currency clearing would include carve-outs for energy payments, a crucial source of revenue for Moscow.
  • Gold held a decline amid a rebound in stock markets as investors remained on edge while assessing the impact of Russia’s invasion of Ukraine and Western sanctions. European shares surged the most in a month on Friday as risk sentiment improved following yesterday’s sharp sell-off. Bullion fell on Thursday after surging to the highest in more than 17 months as traders digested a new round of sanctions on Russia following the country’s attack on its neighbor. Meanwhile, Federal Reserve officials signaled they remain on track to raise interest rates next month. They stressed the need to confront the hottest U.S. inflation in 40 years, despite uncertainty posed to the global economy by the Russia-Ukraine conflict. Higher rates could weigh on non-interest bearing gold.
  • Wheat futures retreated from a 13-year high in Chicago, paring a rally that’s adding to inflation concerns worldwide as the Russian invasion of Ukraine stalls grains trade from a vital global hub. The two countries are key suppliers of a raft of agricultural goods to regions including Asia and the Middle East, and the attack appears likely to upend global trade flows. Ukraine’s president said his nation continues to resist on the second day of the Russian invasion as the U.S. and European Union stepped up economic penalties and fighting raged north of Kyiv.
  • Federal Reserve officials stuck to their resolve to raise interest rates next month despite uncertainty posed by Russia’s invasion of Ukraine, with at least one policy maker considering a half-point move. While acknowledging the risks created by the conflict, which has triggered one of the worst security crises in Europe since World War II and caused oil prices to jump, U.S. central bankers stressed the need to confront the hottest U.S. inflation in 40 years.
  • Mexico’s economy narrowly avoided recession in 2021, as manufacturers adjusted to supply chain snarls and shortages amid a lack of fiscal stimulus. Gross domestic product stayed unchanged in the fourth quarter from the previous three-month period, better than the median estimate for a 0.1% decline in a Bloomberg survey, according to final data released by Mexico’s statistics institute Friday. Preliminary data last month had showed GDP falling 0.1%, which followed a 0.4% third-quarter contraction.  Mexico, one of the world’s largest exporters, was plagued by global supply problems even while demand for its goods increased in the U.S., its main trading partner. The absence of significant government stimulus and the increasing hawkishness of the central bank in response to above-target inflation further dampened growth, with a 0.6% quarterly contraction of the services sector representing the biggest drag on the economy.
  • More than 10% of European Union citizens living in Hong Kong have left the city, according to the European Union Office to Hong Kong and Macao, as its strict Covid Zero measures continue to frustrate residents while the rest of the world adjusts to living with the virus.  Meanwhile in the U.S., the pace of administering shots plummeted to the lowest level since the start of the vaccination campaign, the latest sign that the nation may be nearing maximum uptake. The Centers for Disease Control and Prevention may ease mask rules and plans to move away from counting new cases as its primary measure of how severe outbreaks are around the U.S., and instead focus on how many people are hospitalized, according to people familiar with the matter.
  • Volkswagen AG said it will continue to explore an initial public offering of the German manufacturer’s Porsche sportscar brand as markets are roiled by Russia’s invasion of Ukraine. A listing could happen at the earliest in the fourth quarter, VW Chief Financial Officer Arno Antlitz said Friday. The plan comes on the heels of the fighting in Ukraine, which has sparked volatility across world markets and concerns of higher energy prices. Europe’s largest automaker and its majority shareholder Porsche Automobil Holding SE — the billionaire Porsche and Piech family’s main investment vehicle — confirmed this week they’re in advanced talks about selling shares in the company’s most profitable division. The move would lift VW’s valuation and help fund its shift toward electric cars.
  • Russian forces closed in on Ukraine’s capital and its embattled leadership as President Vladimir Putin shrugged off a barrage of sanctions imposed by the U.S and Europe and pressed deeper with his invasion. With the war raging Friday, Chinese President Xi Jinping held a call with Putin in which he urged Russia and Ukraine to enter negotiations, according to China Central Television. It cited Putin as saying that he was ready to conduct high-level talks. There was no immediate confirmation of the call readout from Moscow. At about the same time, Russian Foreign Minister Sergei Lavrov said that Moscow won’t talk to Kyiv until Ukraine’s army surrenders. “We’re ready for negotiations at any time, as soon as the Ukrainian armed forces respond to our president’s call, stop resistance and lay down their weapons,” Lavrov said in the Russian capital.
  • Morgan Stanley said U.S. regulators and prosecutors are investigating various aspects of its block-trading business, acknowledging the firm itself is under scrutiny as authorities dig into how Wall Street bankers and money managers carry out stock transactions big enough to move prices. The New York-based investment bank has been responding since August to requests for information from the U.S. Attorney’s Office for the Southern District of New York, the company said in a regulatory filing Thursday. It’s also been fielding requests from the U.S. Securities and Exchange Commission since June 2019, the firm said, noting that it’s cooperating. U.S. investigators have been gathering communications involving employees at a number of banks, as well as outside money managers known to acquire slugs of stock in confidential offerings, Bloomberg reported last week. As part of the probe, authorities are trying to determine whether any banks’ dealmakers improperly tipped off investors to transactions big enough to move share prices.
  • Former Goldman Sachs Group Inc. banker Tim Leissner, who admitted helping rip off hundreds of millions of dollars from Malaysian wealth fund 1MDB, testified he also stole tens of millions of dollars from his accomplices in the fraud. Leissner, the key government witness in the bribery trial of his former colleague Roger Ng, testified Thursday that “a large portion” of the $6.5 billion raised through three 1MDB bond deals he helped organize with Ng was siphoned off to pay kickbacks and bribes to officials in Malaysia and Abu Dhabi. But the $60 million in kickbacks he kept for himself wasn’t enough, Leissner said. When Malaysian financier Jho Low, the alleged architect of the massive fraud, asked Leissner to “hold” 145 million Euros ($162 million) in a shell company in Mauritius, Leissner saw an opportunity. Because much of his money was invested in illiquid assets, Leissner told the jury he kept $80 million for himself. He said he then borrowed another $1.25 million from Ng, his subordinate at Goldman.
  • Students at New York City’s public schools will no longer have to wear masks outdoors on school grounds starting on Monday. Masks will still be required inside schools for all students, staff and visitors for the U.S.’s largest school system, said Schools Chancellor David Banks in a statement on Friday.  “Throughout the pandemic, our schools have remained some of the safest spaces for our students and staff,” he said. “I am so pleased that we are able to make this exciting announcement and safely allow students and staff to remove their masks when outdoors at NYC public schools.”
  • Credit Suisse Group AG joined UBS Group AG and Pictet in slashing the amount it will loan private banking clients against Russian debt as the U.S. ramps up sanctions after the Ukraine invasion. The Swiss bank has assigned a zero lending value for some Russian bonds, effectively meaning that Credit Suisse no longer accepts the debt as collateral, according to people familiar with the matter. Securities of sanctioned banks Sberbank and VTB Bank are among those that have been cut to zero, the people said. Russia’s sovereign bonds plummeted Thursday, taking some to distressed levels, as President Vladimir Putin’s decision to order a military attack on Ukraine cast a pall on global markets. While some of the sovereign bonds rose on Friday, they still remain at depressed levels.
  • BlackRock Inc., Capital Group Companies and Legal & General Group Plc are the top holders of Russia’s dollar bonds, which lost almost half their value this week, according to data compiled by Bloomberg. BlackRock, the world’s biggest asset manager, has about $1.5 billion of the $33 billion of bonds outstanding, according to the data. Capital Group and Legal & General are the second and third biggest investors, with holdings of $283 million and $272 million, respectively. The firms didn’t immediately comment on the data when contacted by email earlier today. Russian dollar bonds were hammered this week on concern the invasion of Ukraine would incur sweeping sanctions that would severely limit Moscow’s ability to access financial markets, including restricting investors’ ability to trade Russian debt on the secondary market. They lost 45%, or $15 billion, of their market value, according a Bloomberg index that tracks 10 dollar bonds. The selloff on Thursday alone wiped out about $11 billion.
  • European consumers are set for the highest energy bills on record as gas and oil prices surge again amid Russia’s invasion of Ukraine. Based on current forward prices, the region’s total primary energy bill is now set to approach $1.2 trillion this year, Citigroup Inc. said in a report. That reflects Europe’s enduring reliance on imports to meet demand, with its swift expansion of renewable power so far causing little dent in that dependence. The continent is “facing a big headwind from its energy bill,” analysts including Alastair Syme wrote in the report. Citi’s forecast is up almost $200 billion since its January prediction and surpasses the previous high in 2008.
  • Companies that have borrowings loaned to them by Russian banks may need to find new financiers following recent sanctions imposed by the U.S., U.K. and European Union. Almost $22 billion of outstanding foreign currency loans were made to non-Russian borrowers since 2011, most of which were European firms including the likes of oil and gas company Socar Turkey Enerji, Luxembourg metals trader Traxys Sarl and Netherlands’ communications provider Veon Holdings, according to Bloomberg data. Several Russian financial institutions such as the country’s largest financial institutions Sberbank and VTB Bank have been sanctioned by the U.S., U.K. and EU following the invasion of Ukraine. In 2021 alone, Russian banks were involved in $5.2 billion of loans to non-Russian borrowers.
  • Banks are taking precedence for President Vladimir Putin as Russia devises a domestic response to sanctions rolled out by western governments over the invasion of Ukraine. Russian state aid will initially focus on assisting lenders hit with penalties, according to two people who attended a closed meeting with Putin to address the impact of the conflict on big business. First Deputy Prime Minister Andrey Belousov asked the gathered billionaires and corporate titans to keep working with sanctioned banks, said the people, who asked not to be identified because the meeting was private. The remarks came after the public part of the Thursday event, in which Putin warned that the west shouldn’t seek to push Russia out of the global economy.
  • Beijing’s regulatory tightening isn’t the only thing to worry about in China’s technology stocks. Alibaba Group Holdings Ltd.’s weakest-ever revenue growth reminded investors that the sector’s golden era is long gone, as companies struggle with an economic slowdown. Meanwhile, a global flight to quality amid the Russia-Ukraine crisis is triggering selloffs in riskier investments, in particular assets that face heightened political uncertainty.  Alibaba’s results, the curtain-raising event of the tech giants’ earning season, disappointed some analysts as competition and weak domestic consumption curbed core revenue and new business growth. Next month, Tencent Holdings Ltd. is expected to report its biggest-ever net income drop, while JD.Com Inc. may post a loss for a second straight quarter. Profit estimates for the sector may have farther to fall, said Morgan Stanley strategist Laura Wang.
  • Liquefied natural gas buyers in Asia have been unable to secure credit lines from some Singapore banks for the purpose of purchasing shipments from Russia amid fears of further sanctions. The banks won’t issue a so-called standby letter of credit — essentially a pledge by a lender to repay if the issuer can’t — for buying spot shipments from Russia’s Sakhalin-II export project, according to people with knowledge of the matter. Without the letter of credit, the buyers are unable to proceed with purchasing additional shipments, the people said, requesting anonymity to discuss private details. The U.S. and European Union’s growing sanctions against Russia over the invasion of Ukraine don’t specifically target LNG export projects. Yet banks have become more cautious in dealing with any related Russian entities on concerns of possible breaches that could affect their dollar-clearing capability. Most cargo financing is done in dollars.
  • President Joe Biden has decided on a nominee for a seat on the U.S. Supreme Court, a person familiar with the matter said Thursday night. The person, who was granted anonymity to discuss the selection process, did not provide further details, including the name of the nominee or when the selection would be announced. White House Press Secretary Jen Psaki said early Thursday evening that Biden had not formally offered the job to anyone. The person declined to say whether the president had made an offer in the hours since then.

“Be yourself; everyone else is already taken.” ― Oscar Wilde

*All sources from Bloomberg unless otherwise specified