July 26, 2022

Daily Market Commentary

Canadian Headlines

  • Central banks are responsible for soaring inflation rates around the world and should admit that they over-stimulated economies during the pandemic. That’s the view of former New Zealand central bank governor Graeme Wheelerand Bryce Wilkinson, a senior research fellow with the New Zealand Initiative think tank, who have co-authored a paper released Tuesday in Wellington titled: “How Central Bank Mistakes After 2019 Led to Inflation.”  Central banks “overdid interest-rate cuts and the scale of their quantitative easing,” and many continued asset purchases “when it was clear from the tightness of the labor market and rise in bond yields from late 2020 that their economies were stronger than forecast and that inflation pressures were starting to build,” Wheeler and Wilkinson say. Former Bank of Canada deputy governor William White has written a foreword to the paper in which he says the authors “make a convincing case that stimulative monetary policy during the global covid pandemic contributed materially to the inflation surge that followed and which persists today.”

World Headlines

  • European stocks were subdued as investors mulled the strength of corporate earnings ahead of the Federal Reserve’s policy meeting and the risks of an energy crisis as Russia reduces the flow of gas to the region. The Stoxx 600 Index was down less than 0.1% by 11:29 a.m. in London. Energy and health care stocks outperformed, while retail shares slumped after Walmart Inc. cut its profit outlook, raising questions about the resilience of consumer spending amid surging inflation. The risks of an energy crisis in Europe have increased as Gazprom PJSC said it will further curb flows through the key Nord Stream pipeline to around 20% of normal capacity from Wednesday. European Union countries reached a political agreement to reduce their gas use by 15% through next winter as the prospect of a full cut-off from Russian supplies grows increasingly likely.
  • Stocks and US futures were mixed on Tuesday amid caution in global markets ahead of the Federal Reserve interest-rate hike and as European Union countries reached a political agreement to cut their gas use. Traders are braced for a widely expected 75 basis point Fed rate rise on Wednesday, part of campaign to tackle inflation, as well as corporate reports from the likes of Apple Inc. and Alphabet Inc.
  • Asian stocks edged higher, rebounding from Monday’s decline, helped by a rally in Alibaba Group and other Chinese tech shares. The MSCI Asia Pacific Index advanced as much as 0.4%. Alibaba was the biggest contributor to the gauge’s gains after saying it will seek a primary listing in Hong Kong, a move that paves the way for investors in China to directly buy shares of the country’s most prominent e-commerce company for the first time. Sector-wise, consumer discretionary and financials were the top performers. Stocks in China gained despite a resurgence of Covid-19 infections that could threaten the operations of industry giants including BYD and Huawei Technologies, while Hong Kong’s equity benchmark was the best performer in the region.
  • Oil advanced for a second session as signs of a tight physical crude market offset concerns about an economic slowdown. West Texas Intermediate futures climbed above $98 a barrel amid a broader rally in commodities after gaining 2.1% on Monday. Crude futures have been choppy this month, fluctuating in a range of about $15 since July 5. Time spreads are indicating scarce supply, and Morgan Stanley said the market remains tight. Still, the investment bank trimmed its crude oil price forecasts this year and into 2023, citing reduced demand projections.
  • Gold steadied as investors count down to the conclusion of a key Federal Reserve meeting where a big interest-rate hike is expected. Bullion was little changed after slipping 0.5% on Monday. Traders are pricing in a 75 basis-point increase at the Fed’s July 26-27 gathering, although the outlook after that is harder to predict. Market participants have underpriced the amount of tightening needed to tame inflation, the Fed’s current priority, according to Bloomberg Economics, which expects a steeper and higher path for the fed funds rate. Gold is set for a fourth straight monthly loss — after dropping to the lowest since March 2021 last week — as central banks tighten monetary policy to contain price pressures. While this has spurred concerns of an economic slowdown, gold’s appeal as a haven has been dimmed by the dollar’s strength, though a gauge of the greenback has retreated from a record in mid-July.
  • United Parcel Service Inc. posted profit that topped analysts’ estimates as the courier raised prices, focused on its most lucrative customers and squeezed out efficiencies even while package volume cools from red-hot levels last year. Adjusted earnings were $3.29 a share in the second quarter, up from $3.06 a year earlier, Atlanta-based UPS said in a statement Tuesday. Analysts had predicted $3.15 a share. Sales were $24.8 billion, just a bit ahead of the average estimate of $24.6 billion.  Chief Executive Officer Carol Tome’s strategy has been to break from UPS its tendency to chase volume at any cost. Since she took over in June 2020, the courier has been focused on more profitable customers, such as health care and small businesses. The courier’s margins have been helped by higher prices and limits on discounts traditionally given to large-volume customers.
  • 3M Co. plans to spin off its health-care operations while the remaining business focuses on global material science. The move will allow both standalone companies to be more agile with tailored investment strategies and distinct boards and management, 3M said Tuesday in a statement. The tax-free transaction is expected to be completed by the end of 2023, subject to final approval from the board and regulators. New 3M expects to retain a stake of 19.9% in the health-care business, which will be monetized over time. The maker of Post-it notes, touchscreen displays and medical supplies announced the spinoff along with second-quarter earnings results. The company cut its full-year sales and profit forecasts as the surging value of the US dollar added to pressures from snarled supply chains, inflation and softening demand in some of its key markets.
  • UBS Group AG reported weaker-than-expected profit in the second quarter, as the global market sell-off kept wealthy clients on the sidelines and institutional investors pulled funds. The Zurich-based bank reported net income of $2.1 billion, compared with analyst estimates of $2.4 billion. The quarter was impacted by lower revenues at the key wealth management business, outflows in asset management and investment banking results that also trailed expectations. Global banks are confronting the reality of surging prices and slowing economic growth, while lockdowns in China have hurt demand for trading and investment products. While Zurich peer Julius Baer Group Ltd. this week signaled optimism that the “worst is through” for the equities sell-off, UBS said it expects client nervousness to persist.
  • Alibaba Group Holding Ltd. will seek a primary listing in Hong Kong, entrenching the financial hub’s status as an alternative to US markets ahead of a potential exodus of Chinese companies from New York. The switch could provide a template for the roughly 200 US-traded Chinese companies from JD.com Inc. to Baidu Inc. that face delisting should Washington and Beijing fail to agree on allowing US regulators to review their financial audits. It also paves the way for investors in China to directly buy shares of the country’s most prominent e-commerce company for the first time. A primary listing would allow Alibaba to seek inclusion in the Stock Connect link with the Shanghai and Shenzhen exchanges. That could expand the $285 billion giant’s investor base after a year-long selloff triggered by China’s economic slowdown and Beijing’s crackdown on its most powerful internet firms.
  • Walmart Inc. cut its profit outlook again in a surprise warning weeks ahead of its earnings report, sending retailer shares tumbling and raising new questions about US consumers’ ability to sustain their voracious spending habits with inflation at a four-decade high. Adjusted earnings per share will fall as much as 13% in the current fiscal year as US shoppers spurn big-ticket items and focus on buying less profitable groceries with consumer prices soaring, Walmart said in a statement Monday. Two months ago, the world’s largest retailer said earnings per share would only dip about 1%. In February, the company had predicted a modest increase. Walmart’s warning kicks off a week of bellwether earnings reports from consumer-goods giants including Coca-Cola Co., McDonald’s Corp. and Procter & Gamble Co. Another big US retailer, Target Corp., cut its profit forecast last month, citing the cost of whittling merchandise stockpiles that its customers were increasingly reluctant to buy. Walmart said it was feeling similar pain as it slashes prices on some goods such as apparel.
  • General Motors Co. reported weaker second quarter profit than analysts’ estimates as semiconductor shortages kept production volumes in check. But the Detroit-based carmaker kept intact its full-year earnings guidance, reflecting robust demand for its highest-priced vehicles, signaling optimism it can procure sufficient quantities of chips. “This confidence comes from our expectation that GM global production and wholesale deliveries will be up sharply in the second half,” Chief Executive Officer Mary Barra said Tuesday in a statement. In the second quarter, GM’s profit totaled $1.14 a share, less than the $1.31 consensus estimate of analysts compiled by Bloomberg and also below the $1.97 a share it earned a year ago.
  • Eutelsat Communications SA and OneWeb Ltd. are set to combine in an all-share deal valuing the UK satellite operator at $3.4 billion, a step toward creating a European champion to rival the likes of Elon Musk’s SpaceX. OneWeb shareholders will hold 50% of Eutelsat, which will continue to be listed in Paris and will ask to be listed on the London Stock Exchange, the companies announced in a statement Tuesday. The announcement confirms talks made official on Monday and first reported by Bloomberg last week. The deal is the latest merger in what has become a race by corporations and governments to offer rapid connectivity via low-orbit satellites. Both the UK and French governments have stakes in OneWeb and Eutelsat respectively, and the UK will continue to own a special share, giving it certain veto rights over strategic decisions such as the location of the firm’s headquarters.
  • Saudi Arabia will set aside 300 billion riyals ($80 billion) for an investment fund tied to the crown prince’s flagship megaproject, Neom, and plans an initial public offering of the project on the kingdom’s stock market as soon as 2024. The Neom Investment Fund could potentially expand to 400 billion riyals, Crown Prince Mohammed bin Salman told reporters in Jeddah. It will invest in companies that agree to operate at Neom, a new region planned in Saudi Arabia’s northwestern corner. The prince’s announcement on Monday was attended by global investors including Bridgewater Associates founder Ray Dalio, Tim Collins of Ripplewood, Saudi Prince Alwaleed bin Talal and Kuwaiti retail billionaire Mohammed Alshaya.
  • Coinbase Global Inc. is facing a US probe into whether it improperly let Americans trade digital assets that should have been registered as securities, according to three people familiar with the matter. The US Securities and Exchange Commission’s scrutiny of Coinbase has increased since the platform expanded the number of tokens in which it offers trading, said two of the people, who asked not to be named because the inquiry hasn’t been disclosed publicly. The probe by the SEC’s enforcement unit predates the agency’s investigation into an alleged insider trading scheme that led the regulator last week to sue a former Coinbase manager and two other people. The drumbeat in Washington for US regulators to do more to oversee crypto has grown louder as digital currencies have tumbled from all-time highs, erasing hundreds of billions of dollars in market value. SEC Chair Gary Gensler has homed in on trading platforms and argued that they should do more to protect retail investors.
  • The Federal Reserve’s interest-rate hikes are wearing out their welcome in bond markets, with a measure of the yield curve that Chair Jerome Powell has highlighted as a recession indicator sending out a warning message. The difference between rates on where three-month bills are now and where they will be in 18 months has tumbled about 95 basis points in July, the biggest monthly decline in data starting in 1996. A vast swathe of the US yield curve inverted in recent weeks as recession fears spurred investors to pile into longer maturities. The conundrum for the Fed is that readings on inflation drivers — such as wages — are elevated enough to sustain pressure on policy makers to stay hawkish, even as measures of the broader economy such as last week’s business-activity data signal the US is heading for a severe economic slowdown.
  • General Electric Co. beat Wall Street’s expectations for second-quarter profit and reported surprise positive cash flow as sales at the key jet-engine division soared, buoying the conglomerate despite supply woes that continue to pressure the balance sheet. GE Aerospace’s sales jumped 27% while orders climbed 26% in the period, the company said Tuesday in a statement, as rebounding travel boosted demand. That helped push the parent company’s profit to 78 cents a share, easily outpacing the 37-cent average of analysts’ estimates compiled by Bloomberg. The results gave GE a lift even as it cut its cash flow expectations for this year and said it expects a negative impact from insurance accounting changes. While GE is still trending toward the low end of its prior financial forecasts on most metrics, the company said about $1 billion of free cash flow is likely to push out to the future due to supply-chain challenges and sagging renewable energy orders.
  • European Union countries reached a political agreement to cut their gas use by 15% through next winter as the prospect of a full cut-off from Russian supplies grows increasingly likely. Energy ministers meeting in Brussels gave the green light to a proposal to voluntarily cut their gas usage over the next months, the Czech presidency of the EU said in a post on Twitter. The plan makes the 15% target mandatory under an emergency situation — such as a severe disruption to flows from Russia — albeit with certain opt-outs for particularly vulnerable nations or those integral to the bloc’s network as a whole. The fast pace of the agreement, with the European Commission first proposing the regulation last week, reflects the rapidly deteriorating gas flows from Russia. Supplies through the key Nord Stream 1 pipeline are set to drop to around 20% of capacity from Wednesday, with Gazprom PJSC saying that one more turbine is due for maintenance and will be taken out of service.
  • Deutsche Lufthansa AG will cancel almost all flights from its main German hubs in Frankfurt and Munich Wednesday because of a strike by ground crew, exacerbating the chaos that has snarled Europe’s crucial summer travel season. Europe’s biggest airline will cancel more than 1,000 flights in the two cities, warning that the disruption may linger into the weekend, when travel is due to pick up. There’s only very limited scope to rebook passengers whose trips have been canceled, Lufthansa said in a statement. The aviation industry is bouncing back from the depths of the coronavirus pandemic that forced Lufthansa into a government bailout and caused huge losses across airlines. But as passengers rush to board planes again for business trips and their summer vacation, they’re confronted with chaotic scenes at airports that often lack sufficient staffing to manage the surge
  • Ukraine’s plan to freeze foreign-bond payments to give it some financial breathing space could trigger payouts for investors on $2.4 billion of default insurance contracts, according to analysts. The war-torn country, reeling from its invasion by Russia, has asked for consent to restructure its debts after meeting all payment commitments so far. The proposal could breach the terms of Ukraine’s credit-default swaps, which act as insurance for bondholders. There is $2.4 billion worth of Ukraine debt protected by CDS contracts on a gross basis, according to data from the Depository Trust & Clearing Corporation, but the maximum net payout would be around $220.7 million.
  • Bankers backing the buyout of Citrix Systems Inc. are discussing new ways to sell chunks of the $15 billion financing to soften potential losses, including splitting a huge $7 billion loan between themselves, private-credit funds and other investors.  Wall Street lenders, led by Bank of America Corp., Credit Suisse Group AG and Goldman Sachs Group Inc., have pushed back the timing of leveraged loan and high-yield bond offerings to September on the basis that a post-Labor Day market would be more receptive, according to people with knowledge of the matter. But big changes to the original financing plan may still be necessary in order to reach a broader group of investors as credit conditions remain challenging, said the people, who asked not to be identified because they’re not authorized to speak publicly.
  • Bitcoin sank to a one-week low, buffeted by investor skittishness ahead of a looming Federal Reserve interest-rate hike and amid harsher regulatory scrutiny of the cryptocurrency sector. The largest token dropped as much as 5.9% on Tuesday and was trading at around $21,100 as of 10:26 a.m. in London. The MVIS CryptoCompare Digital Assets 100 gauge shed more than 4%. Equity markets were mixed, with Chinese stocks gaining while most European benchmarks slipped.  The retreat has put a dent in expectations for a sustained Bitcoin rebound and returned the token to a trading range between roughly $19,000 and $22,000. Risk appetite is generally on the back foot before an expected 75 basis-point Fed rate increase Wednesday, part of a tightening cycle that’s sapping liquidity.

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

*All sources from Bloomberg unless otherwise specified