July 27, 2022

Daily Market Commentary

Canadian Headlines

  • Shopify Inc. slumped in premarket trading after the company kicked off earnings season for e-commerce firms with a second-quarter result that missed analysts’ estimates. The Ottawa-based company fell more than 6% to $29.47 in premarket trading in New York as of 7:13 a.m. Shopify posted a loss of 3 cents per share on an adjusted basis, falling short of estimates for a profit of 3 cents, according to data compiled by Bloomberg. Revenue rose 16% to $1.3 billion from a year earlier, broadly in line with expectations of $1.33 billion. The worse-than-expected earnings come one day after Shopify said it was cutting its workforce by 10% amid a softening in online sales — a move will mean about 1,000 lost jobs. The shares dropped 14% Tuesday as Chief Executive Officer Tobi Lutke acknowledged that the company’s rapid expansion during the pandemic was unsustainable.
  • Rogers Communications Inc. reiterated its forecast for at least 6% growth in service revenue this year and extended the deadline for its proposed acquisition of Shaw Communications Inc. to the end of December. Toronto-based Rogers beat sales and profit estimates for the second quarter. Canada’s largest wireless and cable operator earned C$463 million ($318 million) or 86 Canadian cents per share, beating the average analyst estimate of 85 cents. The company has come under intense political pressure after its suffered a massive network failure on July 8, knocking 12 million customers offline and disrupting emergency services and businesses.  Rogers expects capital expenditures of about C$3 billion this year, and more of that will be dedicated to network improvements than in the past, Staffieri said this week. The company will also give customers a five-day billing credit that’s expected to cost about C$175 million in the third quarter.
  • Don Lindsay is stepping down as chief executive officer of Canadian miner Teck Resources Ltd., ending a 17-year run that saw him make a number of large deals but also receive criticism from investors over his pay and performance. Lindsay, 63, will be replaced by two executives in “the culmination of a multiyear succession process,” Teck said a statement. Chief Financial Officer Jonathan Price, a former BHP Group executive, will take over as CEO, while Chief Operating Officer Harry “Red” Conger will add the title of president. Lindsay — among the longest-serving leaders of any big mining company — faced calls for his ouster in 2020. Impala Asset Management LLC claimed he had hurt the share price and said he was overpaid. Tribeca Investment Partners also wanted Lindsay replaced and proposed that the company spin off its energy and coal businesses.
  • Canadian National Railway Co. reported earnings that easily beat analysts’ estimates, as strong volumes allowed the railroad to increase prices and fuel surcharges to offset rising costs. Revenue in the second quarter was C$4.34 billion ($3.4 billion), topping the expected C$4.08 billion and about 21% higher than last year. The company said it was helped by a combination of higher freight rates and fuel charges as well as strong volumes of coal and US grain. A weaker Canadian dollar also gave sales a boost. Montreal-based Canadian National earned C$1.93 a share on an adjusted basis, beating forecasts for C$1.76 per share. The company also reiterated an earlier outlook that calls for 15% to 20% earnings growth for the full year compared with 2021.
  • Flying for many has become full of delays, cancellations and other travel woes, but there are some airports that are worse than others when ranked by air-travel hiccups. Most of the 100 busiest airports worldwide have had at least 20% of their flights delayed, according to flight-data specialist FlightAware, which measured flights between June 1 and July 24. At two Canadian airports, Toronto Pearson International Airport and Montréal-Trudeau International Airport, more than half of departing flights were late. FlightAware’s data set covers the world’s top airports measured by number of flights. The delay percentage is the share of an airport’s completed departures that arrived more than 15 minutes late at their destination, according to the data provider. Chicago Midway International Airport had the worst mark for U.S. airports, as 38.3% of its flights were delayed, FlightAware said. Also high on the list for U.S. airports was Florida’s Orlando International Airport, New York’s John F. Kennedy International Airport and the Baltimore/Washington International Thurgood Marshall Airport, or BWI.

World Headlines

  • European stocks gained as investors digested a flurry of corporate earnings and braced for the Federal Reserve’s key policy meeting later in the day, which will provide clues on its monetary policy’s trajectory. The Stoxx Europe 600 Index added 0.4% by 8:54 a.m. in London, with technology and travel and leisure sectors outperforming while telecom shares fell. Market participants are focused on the earnings season during one of the busiest weeks of the year and watching for signs of how corporates are responding to high inflation and weakening consumer sentiment.
  • Stocks and US equity futures rallied Wednesday as a batch of resilient company earnings helped alleviate some of the wider caution in markets ahead of a pivotal Federal Reserve monetary-policy meeting. Contracts on the tech-heavy Nasdaq 100 led gains as major technology and internet stocks advanced in premarket trading after reassuring reports from Alphabet Inc., Microsoft Corp. and Texas Instruments Inc. The mood remains edgy ahead of a much-anticipated Fed interest-rate increase — part of a global wave of monetary tightening to quell inflation that’s stoking concerns about a worldwide economic slowdown. Investors are bracing for the busiest reporting day of the season and a slew of macro-economic data on Thursday.
  • Most Asian stocks were higher while gauges in China and Hong Kong fell, with trading volume thin as traders awaited the Federal Reserve’s monetary policy decision. The MSCI Asia Pacific Index fell 0.1%, dragged down by Chinese tech giants. Trading volume in Asia was among the lowest this year as investors took to the sidelines ahead of the Fed’s anticipated 75 basis point rate hike due later Wednesday. Hong Kong’s equity benchmark fell more than 1%, with Alibaba’s retreat contributing the most to the loss as the focus shifted to next week’s earnings results. India’s gauges jumped, while those in South Korea, Japan and Australia advanced modestly.
  • Oil rose as industry data signaled a big drop in US crude inventories ahead of an expected interest-rate hike by the Federal Reserve. West Texas Intermediate futures edged up near $96 a barrel after closing 1.8% lower in the previous session. The American Petroleum Institute reported crude stockpiles fell by 4.04 million barrels last week, according to people familiar with the figures. If confirmed by the Energy Information Administration later Wednesday, it would be the largest draw since the end of May.
  • Gold edged higher on the weaker dollar as investors awaited the outcome of a key Federal Reserve meeting amid mounting concerns over an economic slowdown. Bullion has steadied this week as traders anticipate a 75 basis-point interest rate increase Wednesday by Fed Chair Jerome Powell and his colleagues, and await clues for how much further borrowing costs will need to rise to restore price stability. Gold is heading for a fourth straight monthly loss — after dropping to the lowest since March 2021 last week — as the dollar’s strength dimmed the precious metal’s haven appeal.
  • European energy prices extended a scorching rally as Russia tightened its grip on the region’s energy supply, further threatening the economy and key markets. Benchmark natural gas surged as much as 14%, and is more than 10 times higher than the usual levels for this time of the year, as supplies through a key pipeline slump. The price surge is crippling Europe’s industrial output, driving up household bills and pushing inflation to the highest in decades. It’s also fed through to the power market with German futures rising further to unprecedented levels on Wednesday. Europe’s energy crisis reached a new level this summer as Russia started to progressively cut flows through the Nord Stream pipeline to Germany, citing sanctions-related issues with a turbine. European leaders have accused Moscow of weaponizing supply, even as severe restrictions were placed on Russia for its invasion of Ukraine that began in late February.
  • President Joe Biden will speak with Chinese leader Xi Jinpingon Thursday amid fresh tensions over Taiwan, according to people familiar with the matter. The first conversation between the two presidents since March will take place at a particularly difficult juncture for US-China ties: House Speaker Nancy Pelosi’s staff and security officials aren’t ruling out plans for her to visit Taiwan in early August. Chinese Foreign Ministry spokesman Zhao Lijian said Monday that Beijing was getting “seriously prepared” for the possibility that Pelosi could visit the self-governing island, which China considers part of its territory. US Ambassador to China Nicholas Burns said in June that relations with China have deteriorated to probably “the lowest moment” since diplomatic relations resumed in 1972. Biden, who is recovering from the coronavirus at the White House, also is considering whether to lift some tariffs on Chinese imports in a bid to stem rampant inflation.
  • For analysts, the last Thursday of July is always one of the busiest dates in the calendar. This year, it’s likely to be even more of a stretch. Firms in the US and Europe worth more than $9.4 trillion will report their latest figures tomorrow at a time when concern over the impact of rampant inflation on corporate profitability is at fever pitch. And coming right on the back of a crucial Federal Reserve meeting and on the same day as a slew of major macro-economic data, there will be a huge amount for market watchers to digest. In a year that the S&P 500 and other major indexes have slumped into bear market territory, the day will have a lot riding on it. Particularly after a recent rally in equities, which appear to have already priced in a disappointing earnings season to date, sending the Stoxx Europe 600 Index up 4.7% in July.
  • Alibaba Group Holding Ltd. may attract at least $16 billion of Chinese money by shifting to a primary listing in Hong Kong, strategists say, getting a much-needed boost as its stock struggles to bottom out. The move paves the way for the e-commerce giant to be included in the city’s trading links with mainland bourses, allowing an influx of new capital. Chinese investors hold around 7% stake of firms included in the links, suggesting an inflow of $16 billion into Alibaba over the next few years, according to Goldman Sachs Group Inc. Sanford C. Bernstein estimates $21 billion.  Such hopes are timely for Alibaba, whose stock is still down more than 60% from an October 2020 peak as brief bouts of recovery this year have failed to last amid regulatory fears. Elevating its listing status from secondary will also help the firm reduce reliance on investors in the US and prepare for an eventual delisting there as an auditing standoff between Washington and Beijing continues.
  • Funds controlled by Cathie Wood dumped Coinbase Global Inc.’s stock for the first time this year amid reports the largest US crypto exchange is facing a probe. Three Ark Investment Management LLC funds sold slightly over 1.41 million shares, which were worth about $75 million as of Tuesday’s close, according to Ark’s daily trading data compiled by Bloomberg. The firm’s flagship Ark Innovation ETF sold 1.13 million shares. Shares of Coinbase Global lost about a fifth of their value Tuesday. The company is facing a US probe into whether it improperly let Americans trade digital assets that should have been registered as securities, according to people familiar with the matter.
  • T-Mobile US Inc. raised its subscriber growth forecast for the second straight quarter, blowing past inflation-related setbacks that ensnared rivals AT&T Inc. and Verizon Communications Inc. T-Mobile now expects to add 6 million to 6.3 million new subscribers this year, up from a prior view of 5.3 million to 5.8 million. Analysts surveyed by Bloomberg projected 5.6 million, including 2.81 million new phone customers.
  • Alphabet Inc., Microsoft Corp. and Texas Instruments Inc.posted double-digit quarterly revenue growth on Tuesday and expressed optimism about the coming months, reassuring investors who had been fretting that the technology industry was poised for a dour second half. All three companies jumped in early trading on Wednesday. Alphabet shares rose 4%, Microsoft was up 3.8% and Texas Instruments gained about 4.5% in trading before markets opened in New York.  The earnings reports from the trio of industry giants set the tone for a week that will include results from heavy hitters like Meta Platforms Inc., Qualcomm Inc., Apple Inc., Amazon.com Inc. and Intel Corp. Microsoft gave an encouraging sales forecast for the current fiscal year, soothing fears that the strong US dollar and a weakening economy would ravage sales. Chip manufacturer Texas Instruments also offered a bullish forecast, indicating that sales and profit this quarter would likely exceed Wall Street estimates. And Alphabet, the parent company of search giant Google, managed to post advertising revenue that surpassed analysts’ expectations.
  • Hilton Worldwide Holdings Inc. reported results that beat analyst estimates as surging travel demand allowed the company to raise prices. The company reported adjusted earnings per share of $1.29, compared to an average estimate of $1.05 by analysts. Hilton also raised its full-year projections for adjusted earnings per share to between $4.21 and $4.46, up from previous guidance for a range of $3.77 to $4.02, according to a statement Wednesday.
  • Spotify Technology SA has decided to cut hiring growth, and took a 31 million-euro ($31.4 million) hit from its decision to stop making an in-car hardware device. Despite the decision to book a loss, the music-streaming company beat a range of analyst estimates, with monthly active users hitting 433 million over the second quarter, above estimates of 428 million. Shares rose over 6% in pre-market trading. Paid subscriber forecast for the current quarter exceeded analysts’ estimates, after a bumpy quarter in which its stock reached its lowest prices ever and investors questioned its investments in podcasting. At the same time, the company increased its ad revenue in the face of a slowing ad market that’s already cratered other tech stocks, like Snap Inc.
  • With Ulrich Koerner taking over as chief executive officer, Credit Suisse Group AG’s top ranks are looking more like UBS Group AG, suggesting the firm may draw from its crosstown rival’s play book. The 59-year-old will replace Thomas Gottstein, who is resigning after a two-year tenure marked by scandal, turmoil and huge losses. Both Koerner and Credit Suisse Chairman Axel Lehmann joined the bank last year after stints at UBS, which has pursued a more conservative strategy that leaned away from the trading business. Credit Suisse on Wednesday said it aims to slash the size of its investment bank in the face of mounting losses, something UBS did a while ago. The firm, which posted a larger-than-expected 1.59 billion franc ($1.65 billion) second quarter loss, said it will seek to cut at least another 1 billion francs of costs and evaluate its securitized products trading unit.
  • The European Central Bank will deliver only 50 basis points of additional interest rate increases this year as the euro zone succumbs to a recession in the fourth quarter, according to JPMorgan Chase & Co. Economists led by Greg Fuzesi see rate hikes of 25 basis points in September and October. They no longer expect a similar move in December.  “A front-loaded 50 basis-point move in September is also possible, but we suspect that growth uncertainty will already lead to some caution by the September meeting and will lead to a pause after October,” they said.
  • House Speaker Nancy Pelosi is getting bipartisan support for a possible trip to Taiwan, with some lawmakers from both parties arguing that it’s important that the top leader in the US Congress show no sign of giving in to pressure from China’s government. “If we can allow the Chinese to dictate who can visit Taiwan and who cannot, then we have already ceded Taiwan to the Chinese,” said Senate Foreign Relations Chair Bob Menendez, a New Jersey Democrat who made his own trip to Taiwan in April. “If they can veto everyone in the world who wants to come to Taiwan, then Taiwan will be isolated. So I think she has an absolute right to visit and I think the support of Taiwan is important.” The government in Beijing has escalated threats of repercussions since reports last week that Pelosi was planning a stop in Taiwan during a trip to Asia next month, which would come after of an expected call between President Joe Biden and Chinese leader Xi Jinping. Taiwan, which China considers part of its territory, is a particularly sensitive issue.
  • Glencore Plc, the mining and commodity trading giant, agreed to supply coal to a Japanese customer at one of the highest prices ever paid by the nation, threatening to further accelerate inflation. Nippon Steel Corp. agreed on an annual supply deal through March with Glencore for power plant coal at $375 per ton, according to people with knowledge of the deal, who asked not to be identified because the information is private. The agreement is three times more expensive than similar dealsdone last year, and is likely one of the costliest coal contracts ever signed by a Japanese company, one of the people said. Global competition for coal and natural gas is escalating as power generators move to secure additional fuel shipments amid an energy crunch. Utilities are curbing imports from Russia due to the war in Ukraine, tightening the amount of available supply and sending prices surging.
  • Boeing Co. generated $81 million in cash from its operations during the second quarter, sharply reversing its heavy cash use earlier this year as the planemaker stepped up deliveries of its highly profitable 737 Max jetliners. The performance outpaced Wall Street’s expectations, with analysts predicting the manufacturing titan would burn through $343 million, according to datacompiled by Bloomberg. It puts Boeing on track to generate free cash flow on an annual basis for the first time since 2018, Boeing’s Chief Executive Officer Dave Calhoun told employees in a memo Wednesday. Boeing still has much work to do before its financial and operational turnaround is complete. Cost overruns on contracts for its Starliner space capsule and MQ-25 aerial refueling drone led to $240 million in accounting charges, the Arlington, Virginia-based company said in a statement.
  • Deutsche Bank AG scrapped a cost target and warned its main profitability goal was getting harder to reach, as the economy weakens and the war in Ukraine, surging inflation and litigation drive up expenses. The muted outlook, published Wednesday along with second-quarter results, overshadowed a strong performance at the corporate bank, which benefited from higher interest rates, as well as in fixed-income trading, which beat Wall Street in a volatile market. Chief Executive Officer Christian Sewing has so far stuck with the key pledge of his four-year turnaround plan, an 8% return on tangible equity this year. He’s benefited from a years-long trading rally and, more recently, rate increases by the European Central Bank and the Federal Reserve. But with the economy slowing, inflation showing no signs of easing and multiple other challenges piling up, prospects for the rest of the year have clouded over.
  • Sherwin-Williams Co. slumped in pre-market trading as stagnant demand in Europe and China hurt sales for the second quarter, prompting a slash in full-year adjusted earnings guidance also in part due to inflation pressure.  The paintmaker cuts its forecast given “the shortfall in our second quarter results, demand pressures in Europe, China and North American DIY, and a continuation of the highest cost inflation seen in decades,” says CEO John G. Morikis in statement. Sherwin-Williams’ comments highlighted the challenge faced by the sector as rising costs eat into profits and temper customer demand. Earlier in the day, peer RPM International reported adjusted earnings per share that missed analysts’ estimate and warned of continued cost increases.
  • Inflation and the Great Resignation have forced Amazon, Apple, and other major employers to raise wages in the past year. But for Detroit’s automakers, the bill likely won’t come due until 2023. That’s when General Motors, Ford Motor, and Stellantis (née Chrysler) will sit down with theUnited Auto Workers to hammer out a new four-year labor contract for 150,000 employees. When they last came to the table, in 2019, GM workers went on a 40-day strike that cost the company about $2.9 billion in lost earnings. The hot-button issues then were the use of temporary employees and a two-tier wage scale. Now rising prices are eroding wages at a time when automakers have enjoyed lush profits from record-high car prices fueled by vehicle shortages. That’s giving the UAW added leverage for next year’s contract negotiations, and union leaders will be under pressure to prove their mettle to a restive membership.
  • The Justice Department is using a grand jury in Washington to investigate efforts by former President Donald Trump and his inner circle to create false electors and pressure former Vice President Mike Pence to overturn the 2020 election, according to a person familiar with the matter. Marc Short, Pence’s former chief of staff, and Greg Jacob, the former vice president’s chief counsel, appeared before the grand jury in recent days where they were asked by federal prosecutors about conversations they had with Trump and his allies about efforts to create and submit false elector certificates from some states Joe Biden won, according to the person, who asked not to be identified due to the sensitive nature of the investigation. The nature of the questions posed to grand jury witnesses by prosecutors, earlier reported by the Washington Post, is one of the clearest signs to date the Justice Department’s investigation has expanded beyond those who attacked the US Capitol on Jan. 6, 2021, to focus on actions taken by Trump and his allies in the days and weeks after the 2020 election.

Beijing is welcoming back direct inbound passenger flights from overseas for the first time in more than two years as China eases parts of what is still the toughest pandemic border regime in the world. Air China Ltd.’s website shows it restarted a direct flight from Paris once a week, while ANA will resume weekly flights from Narita in August. Meanwhile, Etihad Airways PJSC resumed direct flights to the capital in late June after China halved the length of time incoming travelers must spend in a quarantine facility to seven days, state broadcaster China National Radio reported earlier this month. China’s Civil Aviation Administration banned direct flights into Beijing from overseas in early 2020, making travel difficult. Anyone heading to the capital was required to first land at one of a list of pre-approved cities, where they would need to quarantine, before traveling onward.

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

*All sources from Bloomberg unless otherwise specified