The Daily – July 20, 2022

July 20, 2022

Daily Market Commentary

Canadian Headlines

• Statistics Canada will report inflation numbers for June at 8:30 a.m. Ottawa time, with economists expecting a print of 8.4%, potentially setting up more aggressive Bank of Canada rate hikes this fall. The rapid increase in rates this year is already evident in housing markets in cities like Toronto, where home prices are falling and contractors are seeing a drop in inquiries for renovations. Bausch + Lomb said Joseph Papa is stepping down as CEO and chair. Thomas W. Ross will take over as chair and the company will start a CEO search.

World Headlines

• European stocks erased gains amid lingering uncertainty about whether Russia will restart gas supplies and as investor focus turned to the second-quarter earnings season. The Stoxx Europe 600 Index fell 0.1% by 12:09 p.m. in London, snapping a three-day gaining streak. Auto and insurance stocks led the declines, while technology, energy and real estate gained. European investor sentiment has been roiled recently by the prospect that Russian gas supplies could halt entirely, a scenario that strategists said would tip the regional economy into a recession. Russian President Vladimir Putin has signaled that Europe will start getting gas again through the Nord Stream 1 pipeline, but warned that unless a spat over sanctioned parts is resolved, flows will be tightly curbed.
• US equity futures fell with stocks Wednesday amid rising concern that Europe will lose access to Russian gas, sending the region into a recession that could have global repercussions. Contracts on the Nasdaq 100 and the S&P 500 flipped to losses from gains along with the Stoxx 600 Index. In the premarket, Netflix added about 6% after it reported better-than-feared earnings late on Tuesday and said it expects to return to subscriber growth before the end of the year.  The fragile sentiment sparked a reversal in haven assets, as Treasuries rose with the dollar. The yield on the 10-year benchmark fell back below 3%.
• Asian stocks advanced as a weaker dollar and report of a possible end to China’s investigation into Didi Global boosted sentiment. The MSCI Asia Pacific Index gained as much as 1.7%, the biggest intraday gain in more than three weeks. Alibaba and Tencent were among the biggest boosts to the benchmark after the Wall Street Journal reported that China is expected to fine ride-hailing firm Didi more than $1 billion before wrapping up its year-long probe. Almost all main Asian markets were higher, with the Japan benchmark climbing more than 2% ahead of its central bank’s policy decision Thursday. Key equity measures in Hong Kong rose more than 1%.
• Oil fell after a three-day climb as investors weighed data that pointed to an increase in US inventories. Brent futures, the global benchmark, lost 0.9%. Prices have struggled for meaningful direction in recent days as trading volumes have thinned out with summer getting underway in the Northern Hemisphere. US inventories of crude expanded by almost 2 million barrels last week, estimates from the American Petroleum Institute showed, according to people familiar with the figures. Gasoline holdings also rose, despite being a time of year when they would normally be expected to drop, due to high consumption for travel.
• Gold is holding near an 11-month low as investors weigh the US dollar’s retreat against rising Treasury yields amid improving sentiment in markets. Bullion has been stuck in a narrow trading range, closing little changed since Friday, as a gauge of the greenback extended losses in a sign of waning haven demand. Treasuries held a decline that’s taken the 10-year yield back above 3%. Holdings in gold-backed exchange-traded funds have dropped for 15 days, the longest stretch since March 2021, according to initial data compiled by Bloomberg. Traders are awaiting more clarity on central bank action to tackle searing inflation. The European Central Bank may consider raising interest rates on Thursday by double the quarter-point it outlined just last month, according to people familiar with the situation. The Federal Reserve’s meeting on July 26-27 will also be closely watched.
• Copper gained by 2% as risk appetite returned to volatile global markets, with the dollar weakening and Europe’s economy set to avoid the bleakest scenarios for Russian gas supplies. The brighter mood in risk markets from equities to metals has been underpinned by an easing of the dollar in recent days. Bloomberg’s gauge of the greenback’s strength is on course for a fourth daily decline after surging to a record last week. Goldman Sachs Group Inc. has said the strong dollar was a major contributor to copper’s weakness in recent months. Metals have had a volatile week so far as China’s government tackles new threats in the property markets, and investors monitor Europe’s gas crisis. Russian President Vladimir Putin signaled that gas flows will resume through a key pipeline on Thursday, but the shipments could be tightly curbed. Gas prices rose on Thursday amid expectations that flows will resume at a lower rate.
• Prime Minister Mario Draghi told the Italian Senate on Wednesday that his fractious coalition can be rebuilt, tamping down concerns he’ll quit the government and throw the country into chaos. Markets rallied after his comments.  Stocks and bonds were hammered last week after Draghi said he wanted to resign because he didn’t have the backing of the parties in his coalition, particularly that of Giuseppe Conte’s Five Star Movement. Two center-right groups, Matteo Salvini’s League and Silvio Berlusconi’s Forza Italia, both said over the weekend they were ready to quit the government, complicating a solution.
• President Joe Biden on Wednesday will announce executive action to confront climate change, including plans to steer federal dollars to heat-ravaged communities, though he’s holding off for now on an emergency decree that would allow him to marshal sweeping powers against global warming. The president will outline the steps he’s taking at a shuttered coal-fired power plant in Massachusetts, vowing that he won’t allow a congressional impasse on climate legislation to put off urgent action to slow rising global temperatures, according to a White House official who asked to speak anonymously before the speech is delivered. White House officials are still weighing a separate declaration that climate change is a national emergency — a step that would unlock broad executive authority to propel clean-energy construction, restrict oil drilling and curb the transport of fossil fuels.
• After losing more than a million customers in the first half of 2022, Netflix Inc. has a message for investors: It could have been worse. The leader in paid streaming TV lost 970,000 subscribers in the second quarter, according to a statement Tuesday. That was less than half what Wall Street feared, thanks in large part to a new season of “Stranger Things,” the service’s most popular English-language series. “We’re talking about losing 1 million instead of 2 million — our excitement is tempered by the less-bad results,” Chairman Reed Hastings said on an earnings call. “But looking forward, streaming is working everywhere. Everyone is pouring in.”
• Federal Reserve Chair Jerome Powell is dusting off the supply and demand curves every student learns about in economics to explain what the US central bank is doing to bring inflation under control.  The trouble is, his story only presents a best-case scenario. At the heart of it is the idea of a vertical supply curve — which Powell has cited during congressional testimony as a possible reason why inflation may fall as quickly as it has soared, without much disruption to economic activity. In the current economy, however, it could be that in the labor market, unemployment is so low and workers have become so scarce that higher wages aren’t drawing more of them into the pool of available labor for hire. And in product markets, businesses have become so constrained by a lack of available inputs that higher prices no longer induce additional production.
• Apple Inc.’s iPhone shipments likely surged in June in China, leading a rebound in the smartphone market after Covid lockdowns lifted. China’s mobile phone shipments jumped 9.2% last month, led by overseas vendors such as Apple and Samsung Electronics Co. while domestic brands like Xiaomi Corp., Oppo and Vivo were down 0.5%, official data showed. Samsung no longer commands a significant share of the country’s smartphone market whereas Apple is the fourth-largest player, suggesting the bulk of the rebound in demand was for iPhones. The US company will provide details on its Chinese business when it reports earnings later this month. Chinese smartphone makers have struggled to stir excitement for their handsets this year, hurt by rising costs and souring consumer sentiment. Sony Group Corp. warned at the start of the year that its sales of premium phone camera sensors to Chinese customers came in lower than expected and device shipments have matched that downward trend. Research firm Canalys said this week that all the Chinese smartphone powerhouses saw declines in their global second-quarter shipments.
• Russian President Vladimir Putin signaled that Europe will start getting gas again through a key pipeline, but warned that unless a spat over sanctioned parts is resolved, flows will be tightly curbed. Europe is on tenterhooks, waiting to see whether gas flows resume on Thursday when maintenance on the Nord Stream pipeline is set to end. Putin gave the clearest signal yet that Moscow plans to restart at least some flows.  But if a pipeline part that was caught up in sanctions isn’t returned to Russia, then the link will only work at 20% of capacity as soon as next week — as that’s when another part that’s now in Russia needs to go for maintenance, Putin said. After frantic diplomatic efforts by Germany, the turbine is on its way home from Canada.
• Volkswagen AG’s main volume nameplates will share more parts and factories to boost efficiencies as the carmaker battles to lift profitability in the more affordable range of its portfolio. To differentiate between its namesake VW, Seat and Skoda brands, Europe’s largest automaker will emphasize individual design, the new head of VW’s main car brand Thomas Schaefer said in an interview. The company has long struggled to rein in complexity of multiple engine and trim variants across its sprawling offering that includes the upscale VW Touareg SUV and the Skoda Fabia. Volume models make up about 80% of VW’s global deliveries, making them the “the core of the company,” according to Schaefer. VW is aiming for an efficiency gain of 20%, he said.
• Korea Gas Corp. agreed to deals worth an estimated $1.7 billion for liquefied natural gas as the nation prepares for a looming squeeze on energy supply. The state-owned utility has purchased at least 14 spot cargoes for delivery from October to March, and is considering a plan to buy further supply for the winter, according to traders with knowledge of the matter, who asked not to be identified to discuss private deals. Importers in Asia are stepping up efforts to prepare for rising energy demand in the months ahead, ratcheting up global competition for gas at a time when European buyers are struggling to replace supplies from Russia. Nippon Steel Corp. recently purchased Japan’s most expensive LNG cargo ever, people familiar with the details said Tuesday.
• Stock markets are yet to see full capitulation from investors, raising the risk of more declines in the short term, according to Sanford C. Bernstein strategists. “We have not yet seen capitulation in outflows from equity funds,” strategists Mark Diver and Sarah McCarthy wrote in a note on Wednesday. “In fact outflows, excluding Europe, have only just begun.”  Bernstein’s comments stand in contrast with the findings of the Bank of America Corp.’s July global fund manager survey, which signaled that full capitulation has been reached after investor allocation to stocks plunged to the lowest since October 2008 while exposure to risk assets dropped to levels not seen even during the global financial crisis.
• Uniper SE is nearing a bailout deal that may see the German government inject billions of euros and take a direct stake in the energy giant, according to people familiar with the matter. The government may end up with a stake of as much as 30%, which would give it effective veto power over major decisions at Uniper, the people said, asking not to be identified because the information is private. Chancellor Olaf Scholz’s administration is discussing the purchase of equity-like hybrid securities in addition to buying common stock at a nominal value in a capital increase, they said. Germany is considering injecting more than 5 billion euros ($5.1 billion) into the business, with the total commitment likely to be less than 10 billion euros, the people said. The exact amount is still under negotiation and an agreement could be finalized in the next few days, the people said.
• UK inflation hit a new 40-year high in June, intensifying the cost of living crisis and heaping pressure on the Bank of England to deliver an aggressive interest-rate increase next month. Consumer prices rose 9.4% from a year earlier, the biggest increase since February 1982, the Office for National Statistics said Wednesday. The acceleration from 9.1% in May was driven by a 9.3% surge in the price of motor fuel over the month.  Prices are now rising far more quickly than wages. The pain for households is set to get worse, with inflation forecast to top 11% in October when another energy price-hike kicks in. On Tuesday, unions representing public-sector workers threatened further strikes after the government offered pay increases that amounted to a significant cut in real terms.
• Citigroup Inc. economists have labeled a global recession a “clear and present danger,” while repeating they estimate a 50% probability of such a slump. In a report to clients, economists led by Nathan Sheets said they now expect the world economy to grow 2.9% this year and 2.6% in 2023, slightly lower than previously.  That means global growth will be below trend with the US and euro area expected to slip into mild recessions over the next 12 to 18 months.  “On balance, our forecast sees the global economy skating through and avoiding a synchronized downturn,” the economists said. “The risks to our forecast look skewed heavily to the downside. As such, we also reaffirm our 50% recession call articulated.”
• Biogen Inc. reported revenue that declined less than expected and raised its guidance for the year, as it tries to move on from the US government’s April decision to sharply restrict coverage of its Alzheimer’s drug. Cambridge, Massachusetts-based Biogen now expects 2022 revenue of $9.9 billion to $10.1 billion, higher than its previous forecast of $9.7 billion to $10 billion. Adjusted earnings per share are now expected to be $15.25 to $16.75, up from $14.25 to $16.
• As Tesla Inc. prepares to pull back the veil on its results for the second quarter, the company finds itself under a harsh spotlight. From Covid-related lockdowns in China and heavy costs to ramp up its new factories to supply-chain snags and high-profile layoffs, the electric-vehicle maker has been in the news plenty lately — largely for the wrong reasons. And that doesn’t even account for Chief Executive Officer Elon Musk’s ill-fated pursuit of social-media company Twitter Inc. Wall Street expects Tesla on Wednesday to report adjusted earnings of $1.83 a share for the second quarter, which would mark the first sequential profit decline since the end of 2020. Revenue will be $16.88 billion, according to the average of analyst estimates compiled by Bloomberg.

“Do what is right, not what is easy nor what is popular.” —Roy T. Bennett

*All sources from Bloomberg unless otherwise specified