January 28, 2022

Daily Market Commentary

Canadian Headlines

• Canadian equities fell to their lowest point in more than a month, dragged lower by technology and materials sectors, as investors weighed prospects for monetary policy tightening. The S&P/TSX Composite dropped 0.3 percent at 20,544.11 in Toronto. Shopify Inc. contributed the most to the index decline, decreasing 5.6 percent. Hut 8 Mining Corp. had the largest drop, falling 11 percent.

World Headlines

• European stocks dropped amid renewed concern over the impact of tighter monetary policy on the economic recovery, while a flurry of corporate earnings also drew attention. The Stoxx Europe 600 Index was down 1.5% at midday in London. Retail stocks outperformed as Hennes & Mauritz AB climbed on a profit beat, while technology stocks continued to underperform as the sector that is most vulnerable to higher interest rates. Equities in the region have had a volatile week as investors exited risk assets and frothy stocks on fears of a toxic mix of a hawkish Federal Reserve and slowing economic growth. Corporate earnings have so far failed to assuage investor concerns about the stalling recovery.
• U.S. futures fell with European stocks as concern about tighter policy lingered at the end of a volatile week, overshadowing strong earnings from Apple Inc.  Contracts on all three major U.S. gauges were lower after an earlier advance, with those on the Nasdaq 100 giving up gains of as much as 1.4%. Apple rose in premarket trading, while Chevron Corp. fell on disappointing profits. Global markets have been whiplashed this week by volatility as the Federal Reserve signaled aggressive tightening, while geopolitical tensions and an uneven earnings season added to investor concerns. Also sapping sentiment on Friday, Germany’s economy shrank more than expected and a measure of euro-area confidence fell to a nine-month low.
• Asian stocks rose after slumping to their lowest since November 2020, with Japan and Australia leading the rebound as turbulence over the highly anticipated U.S. monetary tightening eased. The MSCI Asia Pacific Index climbed as much as 1% on Friday following a 2.7% slide the day before. Industrials and consumer-discretionary names provided the biggest boosts to the measure. Japan’s Nikkei 225 Stock Average was among the best performers in the region after enduring its worst daily drop in seven months. The Asian benchmark is down almost 5% this week, and set to cap its biggest such drop since February last year. Federal Reserve Chair Jerome Powell said the central bank was ready to raise interest rates in March and didn’t rule out moving at every meeting to tackle inflation, triggering a broad selloff in global equities Thursday.
• Oil is headed for a sixth straight weekly gain, with prices trading near a seven-year high as crude makes a roaring start to 2022. West Texas Intermediate rose near $87 a barrel, taking its advance this week to more than 2%, while the global Brent benchmark approached $90 as robust demand tightened global markets. Heightened geopolitical risks driven by fears that Russia may invade Ukraine have also contributed to crude’s climb. Oil’s stellar run comes despite a soft patch in global equity markets after the Federal Reserve signaled it’s ready to tackle inflation. For now, crude prices have defied the pull of weaker risk sentiment elsewhere, with consumption on the brink of returning to pre-pandemic levels.
• Gold extended its worst weekly loss since August as the dollar strengthened following a more aggressive approach by the U.S. Federal Reserve to rein in inflation. Fed Chair Jerome Powell this week has made it clear the U.S. central bank will act to cool the hottest inflation in almost 40 years, including a possible interest-rate liftoff in March and more frequent, larger hikes than anticipated. Traders are now boosting bets for higher borrowing costs, with money markets expecting almost five interest-rate increases this year. Meanwhile, the case for a March rate hike was bolstered by data released on Thursday that showed U.S. GDP growth topped estimates last quarter, while weekly jobless claims fell for the first time in four weeks.
• Nickel stabilized toward the end of a week of heavy losses, with traders weighing whether fresh supply from Indonesia will help to reverse a sharp drawdown in inventories in global exchanges. The metal used in stainless steel and electric-vehicle batteries steadied on Friday, with a continued slump in stockpiles on the London Metal Exchange and the Shanghai Futures Exchange underscoring the market’s tight supply dynamics. Still, prices are heading for the biggest weekly drop in almost four months, with new supply from Indonesia driving a retreat from a decade-high at the start of the week.
• The euro-area economy kicked off 2022 on a weak footing, with pandemic restrictions taking a toll on confidence and growing fears that Germany may be on the brink of a recession for the second time since the crisis began. A sentiment gauge by the European Commission fell to 112.7 in January, the lowest in nine months, driven by declines in most sectors and among consumers. Employment expectations dropped for a second month. The report follows grim news from Germany showing output in the fourth quarter shrank 0.7% — more than twice as much as economists predicted. On the bright side, France and Spain reported faster-than-expected growth.
• Hong Kong is considering expanding its vaccine mandate to include premises including shopping malls and public transport, HKET reported. Singapore will increase enforcement of its social distancing rules over the Lunar New Year holiday next week in an effort to mitigate the spread of omicron. China reported two new coronavirus cases among Olympic teams. Germany’s seven-day rate of infections rose to a record. San Francisco removed an indoor mask mandate for offices and gyms, provided people prove they are up to date on vaccinations and boosters, starting Feb. 1. Cases are soaring among dockworkers at West Coast ports, stretching capacityat the U.S.’s busiest gateway for shipping containers.
• Russian Foreign Minister Sergei Lavrov said on Friday that the American proposal to defuse tensions with Ukraine contained “rational elements,” even though some key points were ignored. The seemingly calmer tone came after U.S. President Joe Biden warned of a possible Russian attack next month during a phone call Thursday with his Ukrainian counterpart, Volodymyr Zelenskiy. They also discussed ways the U.S. could offer financial support to bolster Kyiv’s economy. Russia has denied it intends to invade, despite massing thousands of troops, tanks and equipment near Ukraine’s eastern border.
• Apple Inc. rallied in late trading after quarterly revenue sailed past Wall Street estimates, marking a victory against a supply-chain crunch fueled by the pandemic and chip shortages. Sales climbed 11% to a record $123.9 billion in the fiscal first quarter, the company said Thursday. Analysts had predicted $119.1 billion on average. Profit also beat projections, and the company predicted that sales would grow by a double-digit percentage in the March quarter. The surprisingly strong results suggest that fears of supply upheaval were overblown. Apple Chief Executive Officer Tim Cook had warned late last year that shortages could cost the company more than $6 billion in sales during the all-important holiday period. But the tech giant navigated the crisis and benefited from a flood of new products, including the iPhone 13, Apple Watch Series 7 and updated Macs.
• LVMH SE shares surged after the luxury giant bounced back from the depths of the pandemic as customers snapped up items ranging from Christian Dior couture to Hennessy cognac. Revenue last year totaled 64.2 billion euros ($71.6 billion), the Paris-based company said late Thursday, topping the previous record set in 2019, before Covid-19 lockdowns closed stores and kept shoppers stuck at home. Analysts had expected revenue of 62.2 billion euros. The shares rose as much as 5.8% early Friday in Paris, lifting LVMH’s market value by more than 18 billion euros ($20 billion), to about 368 billion euros.
• The brutal selloff this week isn’t scaring investors from putting their money in the stock market. In the week that pushed the S&P 500 Index to the verge of a correction, stock funds absorbed billions of cash. There’s “zero capitulation in equity positioning,” Bank of America Corp. strategists led by Michael Hartnett wrote in a note on Friday. The strategists, who track EPFR Global data, said equity mutual funds and exchange-traded products took in $17.1 billion in the week to Jan. 26. While it may sound counterintuitive that stocks can go down when fund flows are going up, it’s only a small part of what’s happening in the market, compared with flows in derivatives. Investors mainly track the data as a gauge of market sentiment.
• Chevron Corp. posted disappointing profits after slumping values for some long-held fields hurt the oil giant’s ability to take full advantage of surging energy prices. The U.S. supermajor’s overseas upstream business and domestic refining network fell short of analysts’ fourth-quarter expectations by a combined $1.3 billion. Chevron is especially vulnerable to gyrations in foreign markets because they account for more than 60% of the driller’s oil and natural gas output. Chevron linked the earnings miss to the shrinking value of legacy assets including a stake in an Australian gas development known as the Northwest Shelf, which the company has been trying to sell since 2020. Higher royalty and tax payments tied to rising commodity prices also played a role, as well as the timing of some gas trades, Chevron said in a presentation on its website.
• Caterpillar Inc. reported fourth-quarter earnings that topped analysts’ estimates as surging demand and higher prices for the company’s diggers, bulldozers and trucks muted the impact of rising raw-materials costs. The producer of construction and mining equipment reported adjusted quarterly earnings of $2.69 a share, compared with the $2.27 per share average of analysts’ estimates compiled by Bloomberg. Sales rose 23% to $13.8 billion. The report from Caterpillar, considered an economic bellwether, comes as worries over inflation mount, with the prospect of interest-rate hikes from the Federal Reserve and some other central banks. The company said Friday it anticipates higher prices to offset manufacturing cost increases in 2022.
• Airlines are altering schedules to limit their exposure to Ukrainian airspace, though flights into and out of the country are continuing as its standoff with Russian troops massed at the border intensifies. Ryanair Holdings Plc, Europe’s largest discount airline, has reduced the number of flights to and from Ukraine, according to a spokeswoman. Deutsche Lufthansa AG and its Swiss and Austrian units have switched some flights to Kyiv from evenings to mornings due to safety concerns, allowing crew to avoid staying overnight in the Ukrainian capital, a spokesman said. Dutch carrier KLM is doing the same, Interfax-Ukraine reported this week.
• The sale of offshore oil and gas leases on more than 80 million acres in the Gulf of Mexico was canceled by a U.S. judge who ordered regulators to take a harder look at the impact on climate change. U.S. District Judge Rudolph Contreras in Washington vacated the lease sale in a 67-page decision, issued Thursday. The judge found that the Interior Department underestimated the climate impacts of the leases and doing a further analysis wouldn’t overly harm the companies seeking the leases. “The leases have not become effective and no activity on them is taking place,” the judge wrote. If the leases were to take effect, it would be much harder to cancel them, Contreras said.
• German Finance Minister Christian Lindner clashed with his French counterpart Bruno Le Maire and European Central Bank President Christine Lagarde when the latter suggested a common euro-area budget during Eurogroup discussions last week, according to Germany’s Spiegel magazine. The ECB chief is reported to have proposed a joint fiscal capacity to help stabilize the region’s economy during shocks, Spiegel reported, citing a transcript of the finance ministers’ meeting. Le Maire agreed and received support from Portugal, Italy and Spain, Spiegel said. Lindner — who joined Eurogroup discussions for the first time since taking office — disputed the suggestion, the magazine reported, arguing he wasn’t convinced of the need for such a tool. His views were supported by officials from Finland and Luxembourg.
• Hennes & Mauritz AB avoided the elephant in the room as the Swedish clothing retailer reported a 41% slump in sales in China. Chief Executive Officer Helena Helmersson sidestepped an analyst’s question Friday about whether that market will rebound. The analyst asked Helmersson what role Chinese revenue will play in her goal to double total sales by 2030.  The Swedish retailer is an extreme example of how China is becoming harder for consumer-goods companies to navigate as China starts to lose its reputation as a motor for global consumption. Thursday a report showed that the U.S. surpassed mainland China as the largest destination for Swiss watch exports last year. Less-stellar growth has converted Asia into a slower market even for luxury-goods behemoth LVMH SE.
• Volvo Group said strong demand for trucks coupled with a strained supply chain and higher costs for raw materials and freight will continue to drive inflation. The Swedish manufacturer has been restricting truck order intake because of “already large” order books and long delivery times, Volvo said Friday, reporting fourth-quarter earnings broadly in line with expectations. The company is also battling additional costs to manage the disruptions in the supply chain. The battle to secure enough semiconductors continues to snarl production lines of manufacturers like Volvo, with deliveries of cars and trucks falling short of demand. The crisis has so far confounded early hopes of improvements this year, with higher raw-material prices and shipping constraints adding to the supply chain woes.
• Google will invest as much as $1 billion in India’s second-largest mobile phone operator, as firms race to offer inexpensive data and digital offerings in the only billion-people-plus market still open to foreign companies. Alphabet Inc., which owns the Google search engine, will pay $700 million for a 1.28% stake in Bharti Airtel Ltd., the New Delhi-based company said in an exchange filing Friday. Another $300 million is part of a corpus that will be invested over five years in the areas of devices, network and cloud technologies, Gopal Vittal, Bharti’s chief executive officer for India and South Asia, said in a media call later in the day. Asia’s third-largest economy is a key growth driver for Silicon Valley, especially after China’s crackdown on its technology sector. The move to invest in the wireless carrier could be complementary to Google’s other investment in India — it bought a $4.5 billion stake in billionaire Mukesh Ambani’s Jio Platforms Ltd. in 2020 and has co-developed an affordable smartphone — riding on Prime Minister Narendra Modi’s flagship ‘Digital India’ program.
• Australia’s dollar dropped to the lowest level in 18 months amid concern that aggressive policy tightening by the Federal Reserve will slow a global recovery. The Aussie fell as much as 0.8% to 69.75 U.S. cents as of 9:39 p.m. in Sydney, the lowest since July 2020. The currency has declined 3.9% so far this year, making it the third worst-performing Group-of-10 currency as the Reserve Bank of Australia lags behind many of its peers in signaling monetary tightening. Markets price in almost five rate hikes by the Fed this year while the MSCI World Index of global shares has slid about 9% as the hawkish Fed outlook hurts risk appetite.
• One of Britain’s most prominent tech tycoons, Mike Lynch, was hit with a damning court judgment that said he dressed his software company to dishonestly induce Hewlett Packard Enterprise Co. to buy it, damaging his chance of staving off extradition to the U.S. to face criminal charges. HP was “induced to buy” Autonomy Corp, Judge Robert Hildyard said reading a summary of his judgment on Friday. The U.K. company’s sale of hardware “enabled Autonomy to cover shortfalls in its software” revenue and had to be concealed from the market to secure its approval. “The purpose was dishonest — the defendants were well aware of this.” While HP was seeking $5 billion in damages from Lynch, the judge said the amount is likely to be “substantially” less. The tech entrepreneur can appeal Friday’s decision.
• Seven straight jumps in the so-called “fear gauge” for the S&P 500 is a signal that it may be time to wager against volatility, if history is any guide. Only 10 times in the past two decades has the Cboe Volatility Index — better known as the VIX — risen for that many trading sessions in a row. Investors who shorted the gauge after the previous nine streaks of that length would have earned a return of nearly 19% after 20 days, according to data compiled by Bloomberg. The most-recent round of stair-stepped volatility increases ran from Jan. 18 to Jan. 26, when the Federal Reserve had its latest policy meeting. The VIX fell the following day, signaling more clarity and, seemingly, less fear about interest rates and yields.
• Chinese stocks extended their nearly $1.2 trillion rout this month even as mutual funds, state media and companies all intensified efforts to support the market. At least 15 mutual funds have committed to buying their own equity-focused products in the past couple of days, a move that may have been coordinated. A series of recent articles in state media have touted the attractiveness of Chinese stocks on valuation and policy support, with the Securities Times calling the act of the funds “setting a good example.” China’s CSI 300 Index fluctuated between losses and gains on Friday, but ended 1.2% lower as traders weighed the impact of the concerted efforts, while also seeking to close positions ahead of a week-long Lunar New Year break. Trading volumes were about 10% below the 30-day average, according to Bloomberg-compiled data. The gauge slipped into a bear market on Thursday.
• Merck & Co.’s Covid-19 drug showed activity against omicron in six laboratory studies that raise confidence in the ability of the new therapy to battle the contagious, dominant variant. The independent studies from the U.S. and five European countries studied the impact of Merck’s molnupiravir and other antivirals against variants of concern including omicron, Merck and partner Ridgeback Biotherapeutics LP said Friday in a statement.  Merck’s drug was cleared by regulators in the U.S. and U.K. to treat Covid patients at high risk of severe illness after it showed 30% effectiveness in preventing death or hospitalization. Because it works by inducing genetic errors, U.S. guidelines recommend it be used only when other outpatient treatments, including Pfizer Inc.’s Paxlovid, can’t be.
• Hong Kong’s securities regulator slapped a fine of HK$348.3 million ($44.6 million) on Citigroup Inc. for “serious regulatory failures” when executing stock trades for clients between 2008 and 2018. The Securities and Futures Commission reprimanded Citigroup Global Markets Asia for allowing trading desks under its cash equities business to make misrepresentations to institutional clients, according to a statement Friday. The regulator will commence disciplinary proceedings against certain former members of its senior management in due course. The U.S. bank’s failures “exposed a culture that encouraged chasing revenue at the expense of basic standards of honesty,” Ashley Alder, chief executive officer of the SFC, said in the statement.

*All sources from Bloomberg unless otherwise specified