The Daily – July 25, 2022

July 25, 2022

Daily Market Commentary

Canadian Headlines

• Rogers Communications Inc. said it plans to invest C$10 billion ($7.8 billion) over the next three years in networks to improve reliability after a massive outage earlier this month. The House of Commons industry committee will hold hearings Monday on that incident.
• Crypto platform Voyager Digital LLC said a joint offer proposed by FTX and Alameda is a “low-ball bid” that disrupts the bankruptcy process, according to a court filing.  On Friday, crypto billionaire Sam Bankman-Fried proposed a restructuring dealto Voyager publicly. Under the plan, Alameda, Bankman-Fried’s trading firm, would buy all of Voyager’s digital assets and digital asset loans, other than loans to Three Arrows Capital, in cash at market value. Meanwhile, FTX, his crypto exchange, would offer customers of Voyager an option to receive their share of claims by opening a new account at FTX.  “The AlamedaFTX proposal is nothing more than a liquidation of cryptocurrency on a basis that advantages AlamedaFTX,” lawyers for Voyager said in response to the bid in a court filing submitted Sunday. “It’s a low-ball bid dressed up as a white knight rescue.”

World Headlines

• European stocks slipped after their best week since May as investors weigh a clouded outlook for the economy and brace for a busy earnings week while preparing for the Federal Reserve’s rate decision on Wednesday. The Stoxx Europe 600 index was down 0.4% at 8:02 a.m. in London, with energy stocks leading the declines as oil fell. Europe’s main equities benchmark is trimming gains after rising for five of the past six sessions, as most negative news around weaker earnings and hawkish central banks seems to already be priced in. Investors also continue to monitor weaker economic data as the Federal Reserve will probably have to inflict much more pain on the economy to get inflation under control.
• Stocks and US equity futures reversed earlier declines on Monday as earnings expectations outweighed concerns about a possible recession. S&P 500 and Nasdaq 100 futures rose, while European stocks extended gains after their best week since May. China’s property shares pushed higher amid a report that officials plan a fund to support struggling developers. Investors are turning their focus to earnings of US big-tech companies as they await another Federal Reserve interest-rate hike of at least 75 basis points this week. The Fed will probably inflict more pain on the economy to get inflation under control, while the European Central Bank may also continue big interest-rate increases. The Federal Reserve policy decision this week, along with earnings from the likes of Google’s Alphabet Inc. and technology titan Apple Inc., will help to clarify the outlook for a one-month-old rebound in stocks. Tech shares including Alphabet and Apple rose in pre-market trading.
• Equities across Asia Pacific fell Monday, as investors took a risk-off approach ahead of the Federal Reserve’s monetary-policy decision later this week. The MSCI Asia Pacific Index slipped as much as 0.8%, poised to snap a five-day winning streak, as energy and consumer-discretionary shares declined the most. Chinese tech stocks slid even as the State Council reiterated a call for measures to support healthy development of the Internet platform economy. Benchmarks in the Philippines, Japan and China led declines, while measures for Thailand and South Korea bucked the downtrend. China’s economic slowdown and a stronger dollar remain key overhangs for Asian corporates. The MSCI Asia gauge is still nearly 30% lower from a 2021 peak, even as some money managers consider the recent selloff in Chinese stocks as a blip.
• Oil fluctuated as concerns about weakness in the global economy jostled with signs of tight physical crude supply. West Texas Intermediate reversed declines as the dollar wiped out an earlier gain, making commodities priced in the currency more attractive. Still, crude’s futures market is facing bearish economy and policy signals with the US Federal Reserve expected to approve another big interest-rate hike this week as it combats surging inflation. That would pile pressure on demand. German business confidence tanked, indicating it is on the brink of a recession. The fears are forcing some traders to look past signs of deep tightness in the availability of actual oil barrels. Global benchmark Brent’s nearest contract is more than $5 higher than the next month, the most this month, indicating concerns over short-term supply. Some buyers in Asia have been paying premiums of more than $20 a barrel to secure certain crude grades.
• Gold steadied after posting the biggest weekly gain since May as investors weighed prospects for tighter US monetary policy and concerns over an economic slowdown. Bullion hit the lowest level since March 2021 last week, only to rebound as Treasury yields eased following poor US economic data. After raising rates in June by the most since 1994, Federal Reserve policy makers are expected to approve another 75 basis-point hike when they meet July 26-27. Gold is heading for a fourth monthly loss as Fed tightening and a stronger dollar dim its allure as a haven, overshadowing concerns about inflation and a slowdown. Over the weekend, while former Treasury Secretary Lawrence Summers cast doubt on the likelihood of a soft landing for the US, incumbent Janet Yellen said that she doesn’t see any sign the economy is in a broad recession.
• Wheat jumped after Russia’s weekend attack on the seaport of Odesa raised concerns about its deal to release millions of tons of Ukrainian grain needed to boost global food supplies. Ukrainian officials indicated they’re still moving ahead with plans to restart sea exports despite the attack, which drew swift condemnation from the United Nations, US and European Union. But the assault will serve as a stark reminder of the risks for shippers and insurers as Russia’s war rages on.  The landmark agreement signed Friday aims to facilitate shipments from three of Ukraine’s Black Sea ports, including Odesa, and was hailed as a vital step toward alleviating a global food crisis. However, many analysts and Western officials were skeptical even as the agreement was signed last week.
• Apple Inc. announced a rare retail promotion in China on Monday, offering four days of discounts on its top-tier iPhones and related accessories in advance of the launch of its next-generation devices. The company, usually reluctant to alter pricing, will take up to 600 yuan ($89) off the price of its top-line iPhone 13 Pro series between July 29 and Aug. 1, according to a notice on its website. To be eligible, buyers have to use one of a select number of payment platforms, such as Ant Group Co.’s Alipay. Certain AirPods and Apple Watch models are also part of the promotion. The discounts come as China’s economy tries to bounce back from major Covid-19 lockdowns in business hubs Shanghai and Beijing, which have hurt sales of leading domestic smartphone brands from Xiaomi Corp. to Vivo and Oppo. Apple bucked the trend by registering healthy growth in China shipments in June, according to national statistics, though the discounts suggest even it has surplus inventory heading into the latter half of the year.
• Investors withdrew money from exchange-traded funds that buy emerging market stocks and bonds last week, ending four weeks of inflow that reached $1.41 billion. Outflows from U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $460.5 million in the week ended July 22, compared with gains of $202.5 million in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $23.3 billion.
• Tesla Inc. has increased its capital expenditure plan by billions of dollars after Chief Executive Officer Elon Musk referred to the carmaker’s new factories as “gigantic money furnaces.” The company now expects $6 billion to $8 billion of capital expenditures this year and each of the next two years, according to its latest quarterly report. Tesla had previously estimated it would spend between $5 billion and $7 billion on ramping manufacturing facilities and other items. Musk told a Tesla owners club at the end of May that the company was struggling to boost production of Model Y sport utility vehicles at factories that opened last quarter near Berlin and in Austin, Texas. The carmaker still managed to beat estimates for second-quarter earnings, and the CEO’s optimism about emerging from supply chain challenges sent shares soaring to the highest since early May.
• Mike Pence is getting a one-day head start on rallying the Republican base in Washington before his former boss, Donald Trump, returns to the US capital for the first time since the violent end to his presidency. The timing of the speeches — Pence on Monday, Trump on Tuesday — is shaping up as a contest between the two men. Both have increasingly hinted at 2024 White House runs, potentially setting them on a collision course on the primary trail and in debates. They’re taking the stage at separate venues just days after the latest US House committee hearing on the storming of the US Capitol on Jan. 6, 2021, which portrayed Trump as watching the insurrection on television as a mob of his supporters searched for Pence, chanting death threats.
• Top Wall Street strategists disagree over the impact of weaker economic data on the Federal Reserve’s policy outlook and what it’ll mean for stocks. While Morgan Stanley strategists say it’s too early to expect the Fed to stop tightening its policy even as fears of a recession grow — suggesting stocks have more room to fall before finding a bottom, JPMorgan Chase & Co. strategists say bets that inflation has peaked will lead to a Fed pivot and improve the picture for equities in the second half. Sticky inflation is what will keep the Fed hawkish for longer this time around, according to Morgan Stanley’s Michael J. Wilson. While during the past four cycles the US central bank had stopped tightening its policy before the start of an economic contraction, triggering a bullish signal for stocks, current historic levels of inflation mean the Fed will likely still be tightening when a recession arrives, Wilson wrote in a note.
• Barclays Plc will start an offer to buy back as much as $17.6 billion of securities after it accidentally sold more structured notes and exchange traded notes than it had registered for sale. The bank said it will start the offer on Aug. 1 and it will last for 30 US business days, expiring on Sept. 12, according to a statement Monday. Barclays took a charge of £523 million ($632 million) in the first quarter largely relating to the mistake. In March, the bank said it had issued billions more structured notes and exchange traded notes than it had registered for sale. The error requires the firm to repurchase affected securities at their original price under a so-called rescission offer.
• Germany’s natural gas storage levels are rising again after Uniper SE stopped tapping the fuel from reserves, according to its Federal Network Agency. The country’s inventories hit 65.9% on Saturday from 65.5% on Friday, according to latest data from Gas Infrastructure Europe. Storage levels are back on a “proper path,” and could reach 75% by Sept. 1, Klaus Mueller, head of the agency known as BNetzA, said in a Twitter post on Monday. Keeping stocks high is crucial for Germany to get through the winter and tackle a possible further cut in Russian flows. Moscow has curbed shipments to Europe as regional tensions run high amid Russia’s war in Ukraine. Last week the Nord Stream gas pipeline to Germany returned to service from maintenance at limited capacity, and uncertainty about future supply remains.
• Deutsche Lufthansa AG’s ground-crew union called a strike for Wednesday, escalating a crisis at Europe’s biggest airline after staffing shortages caused thousands of flights to be cancelled earlier in the summer. The Verdi labor group called for members to take part in industrial action at Lufthansa’s German airport bases, a move that could see check-in personnel and other staff walk out over pay and conditions. “Verdi is calling the one-day strike to raise pressure on the employer to make a much-improved and acceptable pay offer in the next round of talks,” the union said in a statement on Monday. The move is likely to worsen the plight facing Lufthansa as it battles to cope with the twin demands of a sharp rebound in travel bookings and the impact of soaring inflation on pay packets. Passengers at airlines and airports across Europe have endured weeks of disruption as chronic worker shortages lead to flight delays and cancellations.
• Intel Corp. has secured one of the biggest customers to date for its year-old contract chipmaking arm, a big win for the company and Washington’s goal of boosting semiconductor production at home. Intel will make chips for MediaTek Inc. that go into a range of devices, according to a company statement. The Taiwanese designer, whose semiconductors are used in Amazon.com Inc. Echo speakers and Peloton Interactive Inc. bikes, will lean on its partner’s global manufacturing footprint to get closer to markets in the US and Europe. The partnership is a significant achievement for Intel’s efforts to compete with Taiwan Semiconductor Manufacturing Co. and South Korea’s Samsung Electronics Co. in the foundry business, or making chips for external clients. Intel Chief Executive Officer Pat Gelsinger has included contract chipmaking as part of a comeback plan that involves modernizing its factories and building new ones to restore its leadership.
• The clock is ticking for the world’s most indebted developer, whose liquidity woes sparked a broader debt crisis in China’s property industry that’s gone on to engulf more home builders, threaten banks and pose growing challenges for President Xi Jinping. China Evergrande Group, once the country’s largest real estate firm, previously said it was on track to deliver a preliminary restructuring plan by the end of July. That leaves mere days for the builder with about $300 billion of liabilities, just as a shakeup stirs fresh uncertainties. The group said Friday that Chief Executive Officer Xia Haijun was forced to resign amid a company probe into how 13.4 billion yuan ($2 billion) of deposits were used as security for third parties to obtain bank loans, which some borrowers then failed to pay back. Chief Financial Officer Pan Darong was also made to step down.
• Investors are skeptical that the Federal Reserve can tame the worst inflation in four decades without driving the economy into a recession. That’s bad news for Americans, who face the prospect of a downturn as their bills for food, rent and fuel swell. But to bond investors hit by deep losses this year, it may mean any further pain will be short-lived, as a recession will spark the US central bank to cut rates next year. That’s according to the results of the latest MLIV Pulse survey. Over 60% of 1,343 respondents in the survey said there’s a low or zero probability that the US central bank can rein in consumer-price pressures without causing an economic contraction. The survey was conducted July 18-22 and included retail and professional investors.
• The Covid-19 outbreak forced governments around the world to revamp their pandemic response programs, invest in drugs and vaccines and establish viral surveillance systems. Now monkeypox is putting those upgrades to the test — and they’re falling short. Getting out in front of the global flare-up of the monkeypox virus, which has spread to about 16,000 people in more than 70 countries in just a few months, is an achievable goal, according to infectious disease experts. Yet the lack of urgency and coordination in testing and treatment in many parts of the world has prompted the World Health Organization to sound the alarm. On Saturday, WHO Director-General Tedros Adhanom Ghebreyesus declared the outbreak a public health emergency of international concern, or PHEIC. Tedros acted even though a majority of expert advisers suggested such a move wasn’t necessary.
• Volkswagen drops as much as 4.6% in Frankfurt after Porsche AG boss Oliver Blume was named CEO of the German carmaker in place of Herbert Diess, the architect of the auto industry’s biggest electrification effort. Bernstein and Jefferies are divided on what Blume’s appointment means for the company. Jefferies says the leadership change is “untimely but positive” while Bernstein says “Volkswagen is making a bad governance situation even worse.”

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

*All sources from Bloomberg unless otherwise specified