February 28, 2022

Daily Market Commentary

Canadian Headlines

• Toronto-Dominion Bank agreed to buy First Horizon Corp. for $13.4 billion to expand in the U.S. Southeast. The Canadian bank agreed to pay $25 a share in cash for Memphis-based First Horizon, the Toronto-based company said Monday in a statement. The purchase price was about 37% higher than First Horizon’s closing price on Friday. “It provides TD with immediate presence and scale in highly attractive adjacent markets in the U.S. with significant opportunity for future growth across the Southeast,” TD Chief Executive Officer Bharat Masrani said in the statement. The deal would expanding TD’s U.S. franchise into one of the nation’s top-six banks with about $614 billion in assets, the bank said. First Horizon operates 412 branches and has more than 1.1 million consumer, business and commercial customers across 12 states. It has a large presence in Tennessee and Louisiana and “important footholds” in Atlanta, Dallas and Houston, according to the statement.
• Bank of Nova Scotia reached an agreement to acquire Grupo Said’s remaining 16.8% stake in Scotiabank Chile, increasing its ownership to 99.8%. Deal is valued at approximately C$1.3 billion. On closing the bank will pay C$650 million in cash and issue 7 million shares to Grupo Said impacting Scotiabank’s Common Equity Tier 1 capital ratio by approximately 10 basis points.
• Fortress Investment Group LLC struck a deal to sell British plane-leasing firm Falko Regional Aircraft Ltd. to a Canadian regional aviation company for $445 million. The sale to Chorus Aviation Inc. includes Fortress’s equity interests in 126 owned and managed regional aircraft, Toronto-based Chorus said in a statement late Sunday. The talks were first reported by Bloomberg on Feb. 1. Aircraft leasing emerged as a crucial source of financing for the airline industry during the Covid-19 pandemic and ensuing travel restrictions, which hammered demand for flights. Airlines sold and leased back their fleets to raise vital cash, while lessors allowed planemakers to continue deliveries. Fortress, owned by SoftBank Group Corp., set up Falko in 2011 following a management buyout of BAE Systems Plc’s asset-management unit. The private-equity firm has been active in the U.K., agreeing to buy Punch Pubs & Co. late last year, two months after losing to rival Clayton Dubilier & Rice LLC in a takeover battle for WM Morrison Supermarkets Plc.

World Headlines

• European stocks tumbled as investors fled risky assets, bracing for another volatile week after the West imposed harsher sanctions on Russia over its invasion of Ukraine. The Stoxx Europe 600 Index fell 1.6% as of 9:19 a.m. in London, with banks and automakers leading the losses. U.S. futures also traded lower. Equity traders are facing another tumultuous week after investment playbooks were put to test last week after Russia invaded Ukraine. As Russia continued to strike targets in Ukraine over the weekend, Western nations moved to sanction the central bank in Moscow and cut off various Russian banks from the critical SWIFT financial messaging system.
• Equities fell Monday, sovereign bonds rallied and commodities surged amid heightened uncertainty after a new wave of sanctions against Russia for the invasion of Ukraine. U.S. index futures dropped, alongside European markets. Banks with exposure to Russia led declines, while utilities and defense stocks gained. Oil, natural gas, wheat and palladium jumped, as Brent crude soared to about $103 a barrel on fears of commodity-supply disruptions. A key question is how all this may affect the Federal Reserve’s plan for a series of interest-rate hikes starting in March. Markets now see smaller chances of an aggressive Fed liftoff, and anticipate just under six hikes in 2022. Meanwhile, Goldman Sachs Group Inc. lifted its U.S. inflation forecast and now sees the Fed lifting rates more than expected in 2023.
• Asian stocks edged higher on Monday as an escalating Ukraine conflict spurred doubts over the Federal Reserve’s ability to quickly tighten monetary policy. The MSCI Asia Pacific Index rose as much as 0.2%, led by materials stocks. The gain is stark contrast to the plunges seen in futures on the U.S. and European equity indexes, as some market watchers dialed back on bets that the Fed will hike rates by a half point next month. The better performance from the regional gauge comes after it tumbled almost 4% last week, trailing U.S. and European peers. Renewed regulatory fears for Chinese tech firms and slower earnings growth have also weighed on sentiment in recent days.
• Oil surged as energy and commodity markets were thrown into disarray after Western nations unleashed more sanctions to isolate Russia following its invasion of Ukraine. Brent futures jumped as much as 7.3% on concern that oil supply — already stretched amid rebounding demand — may tighten further should Russian flows be disrupted. Some customers have paused purchases of the country’s flagship Urals grade, while Asian buyers are trying to secure more Middle Eastern crude. Western nations agreed over the weekend to exclude some Russian lenders from the SWIFT bank messaging system, and targeted the central bank’s foreign reserves. BP Plc also moved to dump its holding in oil giant Rosneft PJSC, taking a financial hit of as much as $25 billion.
• Gold has replaced Treasuries as the haven of choice as the conflict in Ukraine worsens, with surging oil prices diminishing the appeal of bonds. The precious metal is gaining in popularity after Russia’s invasion of Ukraine drove Brent crude prices above the $100 mark last week for the first time since 2014. Bullion jumped more than 6% this month, while an index of U.S. sovereign bonds slid 1.5%. The worst geopolitical crisis in Europe since World War II has redefined the limits of safety for investors as costlier commodities add to fears of accelerating inflation. Even the yen and the Swiss franc, which tend to strengthen during times of risk aversion, have fared poorly due to their respective central banks’ loose monetary policies.
• Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the ninth straight week of inflows. Inflows to U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $626.2 million in the week ended Feb. 25, compared with gains of $1.36 billion in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $8.75 billion.
• Hong Kong reported more than 34,000 confirmed Covid-19 cases Monday, as the city’s government is forced to move away from key pillars of its strict Covid Zero strategy. The Covid-19 response team leader of China’s National Health Commission is arriving in Hong Kong. Meanwhile, airline bookings out of the city are surging as residents seek to leave after authorities unveiled measures to combat a surge in Covid cases. New Zealand is removing the requirement for vaccinated travelers to self-isolate on arrival, while the Philippines Metro Manila region plans to shift to the lowest alert level as infections stay low.
• U.S. natural gas futures advanced on the prospect of higher overseas demand after Western nations imposed tighter sanctions to isolate Russia, one of the world’s top energy suppliers. The U.S. and European allies agreed to exclude some Russian banks from the SWIFT messaging system over the weekend, while Societe Generale SA and Credit Suisse Group AG stopped financing commodities trading from Russia. Any potential disruption to Russian supplies will boost European demand for U.S. liquefied natural gas. Russian gas shipments through pipelines crossing Ukraine have jumped as energy companies rush to secure supplies and sanctions have so far avoided directly targeting energy.
• Europe froze Sberbank of Russia PJSC’s main businesses in the bloc after regulators determined they were likely to fail in the wake of sanctions imposed over Russia’s invasion of Ukraine. The Single Resolution Board, which handles European lenders that run into trouble, suspended payments, enforcement and termination rights to three Sberbank divisions until the end of March 1. That came after the European Central Bank determined that Austria-based Sberbank Europe AG and its subsidiaries in Croatia and Slovenia probably won’t be able to pay their debts or other liabilities as they fall due.  Sberbank Europe and its subsidiaries “experienced significant deposit outflows as a result of the reputational impact of geopolitical tensions,” the ECB said in a statement. “This led to a deterioration of its liquidity position. And there are no available measures with a realistic chance of restoring this position at group level and in each of its subsidiaries within the banking union.”
• New York’s Covid-19 restrictions, in the city and around the state, will be scaled back in the coming days, ending indoor school mask mandates and requirements to show proof of vaccination in city restaurants, gyms and other venues. The announcements Sunday added up to possibly the most significant erosion of restrictions since New York became the first U.S. epicenter for the Covid-19 outbreak in early 2020.  Governor Kathy Hochul announced that New York state would lift its indoor school mask mandate on March 2, citing a reduction in infections, hospitalizations and deaths caused by the omicron variant. Daily cases plunged from a record of more than 90,000 statewide in January to 1,671 on Sunday.
• Chevron Corp. agreed to buy green diesel producer Renewable Energy Group Inc. for $3.1 billion in the biggest low-carbon deal of Chief Executive Officer Mike Wirth’s four-year tenure. The San Ramon, California-based oil giant will pay $61.50 a share for Renewable, it said Monday in a statement. Bloomberg News reportedthe companies were close to a deal late Friday. The purchase would give a significant boost to Chevron’s push into renewable fuels, with demand expected to grow in the coming years as businesses and governments move away from oil and gas to cut carbon emissions. Chevron, like the rest of the fossil fuel industry, is under pressure from investors to help scale up technologies to advance a low-carbon economy as well as reduce its own carbon footprint.
• Airbnb Inc. is offering free short-term housing for up to 100,000 Ukrainian refugees who are fleeing the Russian invasion of their country and will work with neighboring European states to provide long-term stays. Leaders from the San Francisco-based company, including Chief Executive Officer Brian Chesky, wrote to the governments of Poland, Romania, Germany and Hungary offering support for housing refugees, according to a statement from Airbnb. The housing will be funded by the company, donors and hosts on the platform. While the crisis is still ongoing, more than 300,000 Ukrainians have left following Russia’s invasion and the European Commission forecasts that the number could grow to millions. Airbnb last year helped to resettle refugees following the Taliban’s takeover of Afghanistan, providing housing to more than 21,000 people. The company operates in more than 220 countries and regions.
• Goldman Sachs Group Inc. has lifted its U.S. inflation forecast and now sees the Federal Reserve lifting rates more than expected in 2023. The U.S. bank now forecasts the Fed’s preferred inflation measure to reach 3.7% by the end of 2022 compared with its previous forecast of 3.1%, economists led by Jan Hatzius wrote in a report to clients. They then see price growth slowing to 2.4% by the end of 2023 compared with an earlier view of 2.2%.  “A very high inflation path in 2022 should make an easy case for steady rate hikes at all seven remaining FOMC meetings,” the economists wrote. “In light of our higher inflation forecast for 2023, we now expect four additional quarterly hikes next year (versus. three previously), resulting in a slightly higher terminal funds rate of 2.75-3%.”
• BP Plc’s shares dropped the most in three months after its decision to offload its stake in Rosneft PJSC was given little chance of attracting a buyer. The London-based company already warned that it could take a financial hit of as much as $25 billion from exiting Russia in response to President Vladimir Putin’s invasion of Ukraine. Several analysts predicted a financial hit on that scale was the most likely outcome, due to harsh economic sanctions imposed by the West.  Sunday’s surprise move from the British company was the latest sign of how far Western powers are willing to go to punish Putin. BP has been in Russia for three decades and just weeks ago was staunchly defending its presence there. But it was coming under growing pressure from the U.K. government over the alliance with Rosneft.
• Chelsea Football Club owner Roman Abramovich is trying to help broker an end to the war in Ukraine, his spokesperson said Monday. “I can confirm that Roman Abramovich was contacted by the Ukrainian side for support in achieving a peaceful resolution, and that he has been trying to help ever since,” spokeswoman Rola Brentlin said in an emailed statement. The billionaire has been under pressure from U.K. politicians following the Russian invasion of Ukraine. Chris Bryant, a member of Britain’s opposition Labour Party, told the House of Commons that Abramovich shouldn’t be allowed to own an English football club.
• President Joe Biden’s administration on Monday banned U.S. people and companies from doing business with the Bank of Russia, the Russian National Wealth Fund and the Ministry of Finance. The moves by the U.S. Treasury’s Office of Foreign Assets Control will effectively immobilize any Russian central bank assets held in the U.S. or by U.S. nationals, according to a Treasury department statement. The U.S. also announced new penalties on a key Russian sovereign wealth fund, the Russian Direct Investment Fund, and its Chief Executive Officer, Kirill Aleksandrovich Dmitriev, a close ally of Russian President Vladimir Putin.
• Commodities from aluminum to wheat and gold rallied in a jittery start to the week, as traders grappled with a fraught geopolitical environment and an array of supply risks triggered by war in Ukraine. Aluminum surged to a fresh record, while nickel rose and wheat advanced near its highest level in more than 13 years. Bullion — a haven in times of international tensions — climbed more than 2% before paring gains. The U.S. and a sweep of European governments agreed to penalize Russia’s central bank and exclude others from the SWIFT messaging system that’s used for trillions of dollars worth of global transactions. The tougher restrictions add to deep uncertainties for commodities, which have been roiled by Russia’s invasion of its neighbor.
• There’s little doubt President Joe Biden had it right when he called the $1.9 trillion pandemic relief package that Democrats rammed through Congress a year ago one of the most consequential in U.S. history. The trouble is that he didn’t envisage some of the consequences. The “American Rescue Plan,” including one final round of stimulus checks among its welter of transfer payments to families and local authorities, was designed as a short-term bridge to an even bigger $4 trillion long-term economic program — one designed to revamp and rebuild the economy and society.
• Toyota Motor Corp. is suspending output at all of its Japanese factories on Tuesday after disruptions to a supplier’s systems, marking another production setback for the world’s No. 1 automaker. The halt on March 1 is due to a system disruption at a supplier, Toyota said in a statement late Monday. The Nikkei newspaper reported earlier that the parts maker is most likely Kojima Press Industry Co., an unlisted company based in Toyoda, and that its operations were taken down because of a cyberattack. The incident may hurt Toyota’s efforts to return to full production following factory halts in January and February because of chip shortages and Covid-related disruptions. Toyota, which has remained relatively resilient to supply chain snags through most of the pandemic, has been trying to ramp up production to make up for lost output and meet soaring global demand for cars.

*All sources from Bloomberg unless otherwise specified