January 20, 2022
Daily Market Commentary
- Canada’s plans to introduce a tax credit for carbon capture in the country’s oil patch would amount to a fossil fuel subsidy for an ineffective technology, a group of academics said in a letter to the deputy prime minister. Carbon capture, where the carbon dioxide from oil and gas production facilities is sequestered and injected back into the ground, is economically unsound and has a “terrible track record” of delivering emissions reductions, the Canadian academics and scientists said in their letter to Chrystia Freeland. The money would amount to a subsidy for the fossil fuel industry that would be better spent on renewable energy, electrification and energy efficiency.
- European stocks fluctuated between gains and losses today as the global selloff in bonds and rise in yields paused, with investors shifting their attention to company earnings to gauge the strength of economic recovery. The Stoxx Europe 600 Index gained 0.2% by 11:55 a.m. in London, having earlier lost as much as 0.4%. Travel and leisure as well as utilities stocks led gains. Meanwhile, banking stocks, which have been among this year’s best performers thanks to higher yields, declined. Energy shares also retreated with oil. European equities have been caught in volatility since the start of the year as increasing expectations of a Federal Reserve rate hike fueled a surge in bond yields, which weighed on frothier parts of the market, such as technology. Traders are now monitoring earnings to assess the impact rising inflation and supply chain constraints have had on companies.
- U.S. futures rose as the global sovereign-bond selloff paused and investors turned their focus to corporate earnings. Automakers and energy companies held declines as crude oil slipped from a seven-year high. Treasury yields fell, but remain higher for the week on concerns about elevated inflation and the prospect of Federal Reserve interest-rate hikes. A dollar gauge was steady and gold dipped. The dominant theme for markets remains prospective Fed rate hikes and the possible reduction of its holdings in Treasuries starting later in 2022. The withdrawal of outsized stimulus threatens to inject more volatility across a range of assets.
- Chinese stocks rallied across the board as investors bet policy makers will ramp up easing in support of sectors hammered during months of regulatory crackdown and deleveraging. Technology, developers and financial shares were among the top gainers as the Hang Seng China Enterprises Index rallied 3.8%, snapping a five-day decline. Hong Kong’s benchmark Hang Seng Index also added more than 3% in its best day since July 2020, leading advances in the region. Investor optimism toward Chinese equities is rising as the central bank has pledged to take further steps to spur the economy, even as the Federal Reserve gears up for tightening. Beijing’s determination to support growth is boosting expectations that a bottom has been reached for beaten-down Chinese stocks, with an increasing number of analysts seeing more rate cuts and calling for double-digit gains in equities.
- Oil slipped from the highest close since 2014 after President Joe Biden pledged to continue trying to lower prices and an industry report pointed to a modest increase in U.S. crude stockpiles. Futures in London dipped near $88 a barrel after advancing over the past three sessions. While Biden does have some options to address the increase in oil prices, many of them would be limited and likely short-lived. Crude’s rally poses a challenge for consuming nations and central banks as they try and stave off inflation while supporting economic growth. The American Petroleum Institute reported U.S. crude inventories rose by 1.4 million barrels last week, according to people familiar. That would be the first gain in eight weeks if confirmed by official data later Thursday. It also reported another gain in gasoline stockpiles, which have risen sharply so far this year.
- Gold held near the highest level in almost two months after rallying on easing U.S. bond yields and a weaker dollar. Treasury yields extended a decline on Thursday after reaching the highest in two years. Gold steadied, having broke through a key resistance near $1835 an ounce on Wednesday. The decline in yields and a softer greenback both provided support to the metal. Volatility in U.S. equities is also stoking demand for havens, with the S&P 500 suffering its worst two day decline since December this week.
- Wheat futures reached the $8 mark for the first time since December as heightened tensions between Russia and Ukraine keep the market on edge for trade disruptions. U.S. President Joe Biden on Wednesday said he thinks Vladimir Putin doesn’t want a full-blown war, but will “move in” on Ukraine after amassing troops at the border. The Russian leader has said he does not plan to invade. The countries are both major grain shippers, leaving the risk a conflict could disrupt flows. Wheat in Chicago has climbed about 7% so far this week, headed for the biggest gain in two months. Prices on Thursday reached $8.0275 a bushel, before paring the advance to trade 0.8% lower. Corn and soybean futures also fluctuated.
- Base metals rallied, with nickel reaching $24,000 a ton for the first time in more than a decade and tin notching up a fresh record on supply snarls and China’s monetary easing. Metals supplies are dwindling as the world recovers from the pandemic. All the main London Metal Exchange contracts are in backwardation — a condition in which prices for cash delivery are higher than futures — signaling supply constraints. The nickel market reached its tightest since 2007 after a plunge in exchange stockpiles, which prompted closer monitoring from the bourse. Supplies of nickel held by the LME were unchanged on Thursday after falling for 56 straight days.
- China is ramping up its coronavirus testing regime after linking at least two omicron cases at opposite ends of the country to international parcels. Tokyo raised its virus alert to the highest level while Germany reported a second straight record in new Covid-19 cases. Hong Kong is suspending in-person secondary-school classes. Covid tests for hamsters in Macau came back negative after Hong Kong ordered thousands of the animals to be culled. Researchers in South Africa found that booster shots with messenger RNA vaccines failed to block infection with omicron while a separate study showed that the new strain may be more dangerous for children than earlier variants.
- U.S. President Joe Biden’s comment that Russia may opt for a smaller-scale incursion into Ukraine, combined with the European Union’s reluctance to discuss specific penalties for Moscow, risks deepening concern about how firmly the West would respond to a lesser provocation. Biden raised the prospect in a news conference on Wednesday that President Vladimir Putin might go for a “minor incursion” or cyber attack on Ukraine as opposed to a full-blown war, noting that could complicate how the U.S. and its allies react, “and we end up having to fight about what to do and not do.” The White House said after Biden’s remarks that the U.S. remained committed to a strong response to any move by Russia against Ukraine. But Europe and the U.S. have also made clear they would not send in troops themselves. And the EU is still shying away from a group discussion within the 27-member bloc of the details of a potential sanctions package.
- HSBC Bank Plc’s Max Kettner has been recommending buying U.S. stocks ever since Joe Biden won the U.S. presidential race. But a flurry of risks from slowing economic growth to rising bond yields has pushed the strategist to close his position and recommend European equities instead. The U.K. bank’s chief multi-asset strategist forecasts an especially “toxic” environment for risk assets in the first half of 2022 on weaker economic recovery, U.S. fiscal drag, overly optimistic growth expectations, inflation, supply crunch and hawkish central banks. The HSBC strategist sees “the more expensive U.S equity market likely remaining under pressure from rising real rates in the coming weeks,” he wrote in a note to clients on Thursday, cutting U.S. stocks from overweight to neutral. In a reversal of fortunes, Kettner raised euro-area equities from underweight straight to overweight.
- With the worst start of a year in more than a decade and a $2.2 trillion wipeout in market value, the Nasdaq Composite Index couldn’t have had a messier kickoff to 2022. The tech-heavy benchmark has fallen 8.3% so far this year as of Wednesday’s close, and is on track for its worst January performance since 2008 when the global financial crisis roiled equity markets worldwide. The latest selloff is coming on the back of a surge in U.S. Treasury yields, making pricier stocks less attractive. High-growth technology shares make up more than half of the Nasdaq’s 3,600-plus stocks and they are getting crushed as higher interest rates are set to eat away at valuations that are based on profits expected to be delivered far into the future.
- Soaring energy prices and rising inflation are causing policy headaches around the world. In the U.K., though, the government is raising taxes at the same time, kicking off an economic experiment in one of the countries worst-hit by the pandemic. Britain’s acute cost-of-living crunch will hit in April, instantly stretching household and company budgets and penalizing the poorest households, many of which have already been most impacted by Covid-19. The squeeze is coming from all sides. U.K. consumer price growth hit a 30-year high of 5.4% in December, and is wiping out wage gains. The Bank of England isjacking up interest rates faster than the Federal Reserve. A cap on domestic energy costs is expected to rise by 50% in April, just as payroll taxes go up in a bid to repair the U.K. public finances. Brexit hasn’t come cheap, either.
- Citigroup Inc. has asked its London staff to come into the office at least three days a week, as finance firms start to push workers to return after the U.K. dropped its work-from-home guidance. “We are now free to gather in our offices, without restriction, where we are better able to generate the energy and collaborative spirit on which Citi thrives,” EMEA Chief Executive Officer David Livingstone and U.K. head James Bardrick said in an email to staff sent late Wednesday and seen by Bloomberg. “Everyone is expected to be in the office at least three days per week.” The moves come after the government announced Wednesday that most Covid-19 restrictions are being lifted in England over the coming days, which included asking people to work from home. PricewaterhouseCoopers UK’s Chairman Kevin Ellis is another executive welcoming the change, saying he expects the return to the office to be speedier than last time, when it took his firm two months to get back to 80% capacity at the office.
- Turkey plans to inject 51.5 billion liras ($3.8 billion) into state banks to ensure they keep lending to businesses after the lira’s record drop eroded their buffers. Turkey’s sovereign wealth fund will boost core capital of TC Ziraat Bankasi AS, Turkiye Halk Bankasi AS and Turkiye Vakiflar Bankasi TAO as well as their Islamic banking affiliates, a senior official with direct knowledge of the matter said, asking not to be identified as the decision has yet to be announced. Under the current plan, Ziraat will receive 22.5 billion liras while Halkbank and Vakifbank get 13.5 billion liras each, the official said. Islamic banking units will get a total of 2 billion liras, he said.
- Sequoia Capital India has made its first investment in the Persian Gulf region by leading a funding round for Lean Technologies, a Saudi fintech firm whose founders include one-time roommates at Stanford University. Lean, which enables companies to access bank data and make payments, raised $33 million, according to a statement on Thursday. Besides Sequoia Capital India, existing investors and newcomers including General Electric Co.’s former chief Jeff Immelt participated in the Series A round. Created in 2019, Lean says it’s amassed dozens of major clients and has offices in Riyadh, Abu Dhabi, Dubai, Cairo and London. It intends to use the proceeds to grow its team and expand further across the region.
- Private equity firm KKR & Co. is among suitors competing to acquire Bank of New York Mellon Corp.’s credit investment arm Alcentra, a deal that would add $43 billion of assets under management, according to people familiar with the matter. BNY Mellon has held talks with a range of potential buyers including PGIM, the asset management unit of Prudential Financial Inc., the people said. Other private equity firms also expressed initial interest in the business, according to the people, who asked not to be identified because the information is private. Alcentra specializes in alternative credit investments across leveraged finance, private credit and special situations. The London-based firm, led by Chief Executive Officer Jon DeSimone, has over 180 professionals working for the business globally. It’s particularly well known for its direct lending and collateralized loan obligation businesses.
- Netflix Inc.’s stock has been the gift that keeps on giving since 2002. Now, with a pandemic-era surge in user sign-ups fading away and investors turning impatient due to rising bond yields, the stakes have never been higher as fourth-quarter earnings loom. The bad news is, the closely watched subscriber additions are pointing to a miss. The movie and show-streaming service probably added 8.1 million customers in the December quarter, according to the average of analyst estimates compiled by Bloomberg. That would fall short of Netflix’s forecast for growth of 8.5 million.
- Arizona State University is aiming to enroll an additional 100 million students by 2030 through a free global education initiative to be launched in April. The program, to be announced Thursday, will translate into 40 languages and put online the materials for five business courses, with the aim of reaching students in every corner of the globe. The program will use machine learning and artificial intelligence to teach and grade. The courses will confer academic credit as well as lead to a global management and entrepreneurship certificate. The initiative is a new attempt by universities and private ventures to scale technology to reach more students and make degrees more affordable. Among the first attempts were Massive Open Online Courses, which emerged about a decade ago. Web-based MOOCs have had some success, with some courses reaching tens of thousands of students. But early on a small percentage completed the courses.
- At his Jan. 11 hearing for confirmation to another four years at the helm of the Federal Reserve, Jerome Powell told the Senate Banking Committee that tighter monetary policy “really should not have negative effects on the employment market.” That assertion, echoed by Powell’s prospective No. 2, Lael Brainard, in her own appearance before Congress the same week, puts the Fed’s policymakers at the center of a debate among economists that stretches back decades about the link between interest rates, employment, and inflation—in other words, how the central bank’s toolkit actually works and, for that matter, what determines the course of inflation itself. Fed officials are walking a tightrope as they lay the groundwork for a series of interest-rate increases that could begin as soon as March. They’re heeding calls to quell the fastest consumer price inflation in 40 years while at the same time trying to avoid the appearance of penalizing workers at a moment when they’re enjoying historic bargaining power, widely seen as long overdue.
- Back in 2020, JPMorgan Chase & Co. started closing its local private banking businesses in Brazil and Mexico, ending a decades-long effort to compete locally. The move paid off — the unit went on to have its best year ever. The bank increased assets it manages for wealthy clients by 13% to $180 billion in 2021, a feat it achieved even while serving clients exclusively from outside the region. Revenue also expanded at pace as record private investments in technology companies drove valuations and fueled founders’ personal wealth. JPMorgan, which held sway as Latin America’s biggest private banker, is hoping for a repeat in 2022. It’s expecting 8% growth in revenues and anticipating assets to swell by as much as 15%.
- New York City and Chicago are home to some of the most vulnerable housing markets in the U.S., where the pandemic continues to threaten homeowners and the broader economy. Of the 50 most at-risk counties across the country, those two metropolitan areas each had eight, while there were seven throughout California in the final three months of 2021, according to real estate data firm Attom Data Solutions. The Philadelphia area and Delaware also had a cluster of vulnerable counties, Attom said. The markets represent areas where housing is unaffordable for average workers, higher levels of foreclosures and larger portions of homeowners who are underwater on their mortgages, which means one’s mortgage balance exceeds the estimated property value. Home valuations have surged during the pandemic, and more recently, mortgage rates are on the rise as well.
- Banks are preparing to launch a $10 billion jumbo financingbacking the buyout of cybersecurity software maker McAfee as debt sales for M&A flood the market. Meanwhile, the main benchmark for U.S. leveraged loans hit the highest level since 2007 on Wednesday. And in the junk-bond market several new deals have emerged amid an otherwise sleepy week for sales. Jet and transport services provider VistaJet Group is selling $800 million of eight-year high-yield notes to fund the redemption of debt maturing in 2024. The company is projected to wrap up the deal on Friday after concluding a roadshow
- The hedge fund arm of UBS Group AG has set up a $2.5 billion fund to invest in private loans to companies hit hard by the pandemic, according to a statement seen by Bloomberg. UBS O’Connor raised $1.7 billion in equity commitments for its Clover Private Credit Opportunities II Strategy from investors in Europe, Asia, and North America. It plans to invest borrowed money as well, bringing the total expected size of the fund to $2.5 billion.
- Tech platforms such as Alphabet Inc.’s Google and Meta Platforms Inc.’s Facebook face tighter restrictions on how they target ads to users, after European lawmakers voted to toughen upcoming legislation. The European Parliament moved to favor rules that restrict platforms from using sensitive data — race or religion, for instance — for targeting purposes, and require them to make it easy for users to opt out of tracking while continuing to use their products. The result of the vote, announced Thursday, makes measures set last month by a committee of European lawmakers even stricter. That agreement included a ban on targeting ads to minors, and using so-called dark patterns, where platforms push people to consent to being tracked online. It also allows people to seek compensation if platforms continue to promote content that they know harms people.
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*All sources from Bloomberg unless otherwise specified