The Daily – July 28, 2022

July 28, 2022

Daily Market Commentary

Canadian Headlines

• In a mining reporting season marked by stickier-than-expected inflation, at least one producer saw the rising costs coming. Agnico Eagle Mines Ltd. took out protection against pricier fuel amid an energy squeeze exacerbated by Russia’s invasion of Ukraine, while hedging its foreign-exchange exposure as central banks in the western world started to tighten monetary policy to combat stubbornly high inflation. The world’s third-biggest gold producer said Wednesday that it had hedged 43% on its remaining diesel exposure in 2022 and had realized approximately $17 million in hedging gains related to fuel so far this year. “These hedges have partially mitigated the effect of inflationary pressures to date and are expected to provide a degree of protection against inflation going forward,” it said in a statement. These measures helped the gold miner deliver better-than-expected results for the second quarter, with adjusted earnings per share at 76 cents compared to analysts’ estimate of 59 cents, according to the statement. For 2023, it is hedged about 26% on its diesel exposure.
• Cenovus Energy Inc. continued to deliver safe and reliable operations and strong financial performance in the second quarter of 2022. Upstream production of 762,000 barrels of oil equivalent per day (BOE/d) and downstream throughput of more than 457,000 barrels per day (bbls/d) included the impact of significant planned turnaround and maintenance activities during the quarter. Aligned with the company’s shareholder returns framework, Cenovus delivered more than $1 billion to shareholders in common share purchases under its Normal Course Issuer Bid (NCIB) for the second quarter, in addition to the company’s base dividend.

World Headlines

• European stocks rose slightly on bets the Federal Reserve will slow the pace of interest rates hikes and as investors digested results of the busiest earnings day of the season, while concerns over an economic slowdown weighed on the sentiment. The Stoxx Europe 600 Index was 0.2% higher by 10:19 a.m. in London, with miners and constructions sectors outperforming, while utilities and telecoms declined. Confidence in the euro-area economy fell to the weakest in almost 1 1/2 years amid worries about an energy crisis, surging inflation and interest rate hikes. Shell Plc gained as it accelerated share buybacks after reporting record profit. Stellantis NV advanced as it expects to overcome supply-chain snarls to extend strong earnings into the second half of the year. Airbus SE fell after cutting its delivery goal and slowing a ramp-up in production of its best-selling narrow-body model.
• Stocks struggled to hang onto gains on Thursday as investors considered the prospect of a slower pace of Federal Reserve monetary tightening and turned their attention to the busiest day of the earnings season as well as key economic data. A dip in futures suggested the US rally could stall when Wall Street opens, with technology stocks set to pull back after their biggest jump since November 2020. Big Tech will be a particular focus with results from Amazon.com Inc., Apple Inc. and Intel Corp. Shares of social-media companies fell in premarket trading after Meta Platforms Inc. posted its first-ever sales decline.
• Weak local earnings, a limited interplay from US-centric quarterly results and China’s distressed property market are keeping a lid on Asian equities’ excitement over Fed signaling slower interest-rate hikes in time. The MSCI Asia Pacific Index has risen just 1% today versus overnight gains of 2.6% in the S&P 500 Index. Weaker-than-expected earnings at bellwethers such as Samsung Electronics and Rio Tinto are adding to the already feeble backdrop of shaky preliminary results at region’s anchor China amid lockdowns and property market turmoil. Morgan Stanley said in a note last week that Chinese firms reported the worst quarterly provisional earnings since the first three months of 2020. Overnight cues from US earnings were also mixed for the region. Microsoft and Alphabet’s positive results have limited reach for Asia while Meta fell in post-market trading after reporting its first ever quarterly sales decline. And finally, China property stocks, whose correlation with the MXAP index has risen this year to about 0.6 this year, have fallen. The argument that China’s policy easing will prop up demand in the battered sector looks weak when a potential global recession is looming in the backdrop.
• Oil extended gains after a big draw in US crude inventories, while the prospect of a slower pace of interest-rate hikes from the Federal Reserve filtered through markets, buoying commodities. West Texas Intermediate futures climbed above $99 a barrel after closing 2.4% higher in the previous session. US crude stockpiles dropped by the most since the end of May, while exports rose to a record, according to government data. Shell Plc’s chief said that oil prices are more likely to rise than fall as the tightness in supply outweighs any risks to demand. While the Fed raised interest rates by 75 basis points for a second month to combat surging inflation, Chair Jerome Powell said the pace of hikes would slow at some point. Oil has been whipsawed recently as investors weighed concerns over an economic slowdown against signs of tightening markets.
• Gold rose for a second day after the Federal Reserve signaled that it may slow the pace of interest rate increases, a move that hurt the dollar and pushed Treasury yields lower. Bullion climbed to a two-week high after the Fed raised rates by 75 basis points Wednesday. Chair Jerome Powell said while a similar move was possible again, the pace of hikes will slow at some point. Ahead of gross domestic product data on Thursday, he rejected speculation the US is in recession. Despite the post-FOMC meeting rally, the traditional haven is still heading for a fourth straight monthly loss as recent dollar strength and rising interest rates have combined to dim the precious metal’s appeal. Holdings in bullion-backed exchange-traded funds are headed for the biggest monthly drawdown since March 2021.
• The prospect of a less pugnacious Federal Reserve is encouraging bets that the crypto winter is closer to thawing. Bitcoin rose as much as 2.9% on Thursday in Asia after a near-9% jump a day earlier, when the Fed raised rates by 75 basis points for a second month but signaled the pace of tightening will, in time, slow down. The largest token was trading at $23,090 as of 1:25 p.m. in Singapore. So-called altcoins made bigger gains: Ether rose as much as 4.7% and Polkadot 9.3%. Swaps tied to Fed meeting dates indicate markets anticipate a peak in borrowing costs around year-end and rate cuts in 2023 — which would be a friendlier backdrop for digital assets given they rely on the elixir of liquidity.
• JetBlue Airways Corp. said it’s agreed to acquire deep-discounter Spirit Airlines Inc. for at least $3.8 billion in cash in a deal announced less than a day after Spirit called off a planned merger with Frontier Group Holdings Inc. JetBlue will pay $33.50 per share, or as much as $34.15 a share depending on timing, the airline said in a statement early Thursday. That includes a $2.50-a-share prepayment once Spirit stockholders approve the deal agreed to by the airlines’ boards, it said.  The agreement caps a more than three-month battle by JetBlue to derail the Spirit-Frontier deal in a bid to expand its own network, fleet and access to pilots.
• Posco Chemical Co. signed a $10.8 billion contract to supply battery materials to General Motors Co., as the US automaker seeks to secure supplies needed for its next-generation electric vehicles. Under the deal, Posco will provide high-nickel NCM cathode materials to GM, the South Korean company said in a filing Thursday. The contract period is from January 2023 to December 2025, and the materials will be used in GM’s EVs, the filing showed. Shares of Posco Chemical jumped as much as 17%, the most since January 2021, while the broader Kospi gained about 1%. Following the news, the trading volume spiked to more than 19 times the 20-day average for this time of day.
• Chair Jerome Powell said the Federal Reserve will press on with the steepest tightening of monetary policy in a generation to curb surging inflation, while handing officials more flexibility on coming moves amid signs of a broadening economic slowdown. Policy makers again raised the benchmark US interest rate 75 basis points on Wednesday to a range of 2.25% to 2.5% and said they anticipate “ongoing increases” will be appropriate. Just how much depends on how the economy performs, the central bank chief said. He stepped away from the specific guidance on the size of upcoming hikes he previously gave, though he didn’t take another jumbo move off the table.
• Meta Platforms Inc., the social media giant that includes Facebook and Instagram, reported its first-ever quarterly sales decline, citing advertisers’ shrinking budgets. Meta revenue slipped to $28.8 billion in the second quarter, missing the $28.9 billion average analyst estimate. The company’s forecast for the current period also fell short. Shares dropped more than 4% in late trading. The company’s advertising sales efforts are hitting a number of snags. Marketers are spending less due to various economic pressures, leaving Meta and its peers to compete for the smaller budgets. Apple Inc.’s privacy rules have made ads on Facebook and Instagram less effective.
• President Joe Biden’s call with Chinese leader, Xi Jinping, will begin at 8:30 a.m. Thursday New York time, the White House said. The call will be the fifth between two leaders since Biden took office.  The two leaders will speak for the first time since March with already tense US-China relations further strained in recent days over Taiwan, which Beijing considers part of its territory. A potential trip to the self-governing island by US House Speaker Nancy Pelosi during a planned tour to Asia has led Chinese officials to warn of consequences if the visit takes place.
• Secretary of State Antony Blinken said the US has made a “substantial” offer to Russia to free imprisoned Americans Brittney Griner and Paul Whelan, but the Kremlin said no deal has been reached yet. The US proposal would swap the two for Russian arms dealer Viktor Bout, whose release Moscow has long sought, according to a person familiar with the plan. Blinken said he will discuss the issue in a phone call with Russian Foreign Minister Sergei Lavrov.  The call, announced in comments to reporters Wednesday, would come amid continuing sharp exchanges over the war in Ukraine. Blinken last spoke with Lavrov on Feb. 15 and then canceled a planned meeting with him two days before Russia launched its invasion on Feb. 24.
• Southwest Airlines Co. reported second-quarter profit that exceeded analysts’ expectations as more people filled its planes and average fares rose, but the carrier said it’s grappling with high costs and delays in aircraft deliveries from Boeing Co. The carrier expects to receive 66 jets this year, down sharply from its prior plan for 114 deliveries, Southwest said Thursday in a statement. That puts further pressure on the airline to capitalize on strong travel demand and rebound from a slump early in the pandemic. “Despite those delays, we are confident about our ability to fly our flight schedules as planned,” Chief Executive Officer Bob Jordan said in the statement. “Travel demand surged in the second quarter, and thus far, strong demand trends continue.”
• Barclays Plc’s paperwork blunder is proving expensive. Total net losses from the error so far have climbed to £751 million ($914 million) after a market plunge was only partially offset by hedges and the firm took a £165 million provision for an expected US Securities and Exchange Commission fine, according to a second-quarter results presentation. The error saw the British lender accidentally issue billions of dollars more structured and exchange-traded notes than it had registered with the SEC. Barclays has said it will kick off an offer next week to buy back the securities. That has grown more expensive as the S&P 500 index fell about 16% in the second quarter, since the firm is required to buy them back at the original price.
• Russia “can afford to cut off gas” to Europe, its main export market, if the current supply crisis drags out, though it would cost about $60 billion in lost revenues, according to Capital Economics. If the flows were cut for 12 months, gas output would fall about 20%, shaving 0.3% off gross domestic product, economist Liam Peach wrote in a report. A cutoff would trim Russia’s huge current account surplus and reduce tax revenues by less than 1% of GDP, he said. Russia has cut shipments over Nord Stream, its main pipeline to Europe, by as much as 80% in recent week, blaming European Union sanctions for preventing necessary turbine maintenance. The EU has called the cuts a pressure tactic and is making plans for sharply cutting gas use this winter.
• Shares in renewable energy companies soared following a deal by US senators to advance a bill that will spend hundreds of billions of dollars on energy security and climate change. Shares in wind turbine makers Vestas Wind Systems A/S and Nordex SE gained as much as 12%, the most since February. The moves follow a jump in solar stocks in extended US trading Wednesday.  Wind power development has been stunted in the US this year, one of the world’s biggest markets, as companies awaited any major new energy legislation. The deal is significantly smaller than President Joe Biden’s original $3.5 trillion Build Back Better plan. Still, the deal will include tax credits for renewable power generation that will boost construction of new projects.
• Volkswagen AG said an improving supply-chain situation and strong demand for vehicles bode well for the second half of the year, as the carmaker reported second-quarter results that beat expectations.  Deliveries have recovered “‘noticeably” in recent weeks, pointing to improvements across the group in the battle to secure enough semiconductors and other components, the company said Thursday. While reporting robust earnings, Europe’s biggest carmaker is still reeling from the July 22 ouster of its Chief Executive Officer Herbert Diess, who will be replaced by Oliver Blume, the head of the company’s Porsche brand. “Despite all the caution in the face of the volatile market environment and geopolitical risks, we are confident that we can further accelerate the transformation,” Chief Financial Officer Arno Antlitz, who is becoming VW’s chief operating officer as part of the reshuffle, said in a statement.
• Euphoria surrounding Alibaba Group Holding Ltd.’s primary listing plan has evaporated in just two sessions, as focus shifts to the firm’s earnings announcement due next week. Shares of the e-commerce giant slid 1.8% on Thursday, putting it back at levels seen before announcing it would seek the listing status. Goldman Sachs Group Inc. said the move may draw $16 billion of inflows into the company’s shares. The reversal is another reminder that sentiment toward Chinese tech shares remains fragile as investors search for clues on the earnings outlook while trying to gauge whether a yearlong crackdown on the sector is drawing to a close. A recent rebound in internet stocks has fizzled out after new punitive measures damped sentiment.
• India’s ReNew Power Pvt Ltd. signed a preliminary agreement with the Egyptian government to invest as much as $8 billion to produce green hydrogen in the African country, according to the chairman of the renewable energy firm. ReNew, backed by investors including Goldman Sachs Group Inc. and Abu Dhabi Investment Authority, will be looking to produce 220,000 tons of the clean fuel annually in Egypt in the coming years, Chairman Sumant Sinha said in a text message. The Indian company plans to build the project in the Suez Canal Economic Zone, the Egyptian embassy in New Delhi said in a Facebook post. ReNew joins several Indian companies tapping the prospects in green hydrogen, which is considered crucial to decarbonize hard-to-abate heavy industries. Conglomerates run by India’s two richest men — Gautam Adani and Mukesh Ambani — along with state energy giants have committed large investments in the green hydrogen value chain, responding to Prime Minister Narendra Modi’s ambition to make the country a global powerhouse in this area.
• Billionaire Jack Ma plans to relinquish control of Ant Group Co., people familiar with the matter said, part of the fintech giant’s effort to move away from affiliate Alibaba Group Holding Ltd. after more than a year of extraordinary pressure from Chinese regulators. The authorities halted Ant’s $34 billion-plus IPO in 2020 at the eleventh hour and are forcing the technology firm to reorganize as a financial holding company regulated by China’s central bank. As the overhaul progresses, Ant is taking the opportunity to reduce the company’s reliance on Mr. Ma, who founded Alibaba. Mr. Ma, a 57-year-old former English teacher and one of China’s most prominent entrepreneurs, has been the target of government action that appears designed to reduce his influence and the power of his companies. He has controlled Ant since he carved its precursor assets out of Alibaba more than a decade ago. Over time he built it into a company that owns the Alipay payments network with more than one billion users, an investing platform that houses what was once the world’s largest money-market fund, and a large microlending business. Ant was expected to be valued at more than $300 billion had it gone public.
• Even as Apple Inc. contends with rising inflation, cooling consumer demand, the strengthening dollar and lockdowns in China, its share price has surged in recent weeks and is heading for its biggest monthly gain in almost two years, up 15% in July. The shares have beaten those of Microsoft Corp., Alphabet Inc. and Amazon.com Inc. this month, and also are dwarfing gains in the S&P 500 and Nasdaq 100 indexes. With the US flirting with a recession, investors are gravitating toward a household name they’re comfortable with.  “Apple is outperforming because it’s a place of safety for investors,” said Gene Munster, who covered Apple and Google during his 21-year career as an analyst at Piper Jaffray Cos. before co-founding venture-capital firm Loup Ventures. “Every company will be impacted by the upcoming slowdown. Apple should fare better.”
• Pfizer Inc. raised the lower end of its earnings forecast for the year and reiterated its sales expectations, despite unfavorable currency trends, as its continues to expect its new Covid-19 products to bring in over $50 billion of revenue this year. Pfizer raised the lower end of its 2022 full year adjusted earnings per-share to $6.30 to $6.45, up from $6.25 to $6.45, and reiterated sales guidance of up to $102 billion. Second-quarter adjusted earnings were $2.04 a share, the New York-based drugmaker said, beating Wall Street’s average expectation of $1.81. Sales of $27.7 surpassed the average estimate of $26.31 billion.
• Harley-Davidson Inc.’s second-quarter profit and revenue beat estimates as Chief Executive Officer Jochen Zeitz overcame supply-chain headaches and a production shutdown while implementing his turnaround plan for the 119-year-old motorcycle manufacturer. The Milwaukee-based company posted earnings of $1.46 a share, well over the $1.02 average of analysts’ estimates compiled by Bloomberg. Revenue from motorcycles and related products rose to $1.27 billion, compared with the $1.25 billion forecast by analysts. Harley shares rose 5% at 7:46 a.m. in New York. Zeitz, a former Puma SE executive who took the helm of the troubled manufacturer in February 2020, has slashed costs, exited unprofitable markets and tightened inventory to raise motorcycle prices as part of his “Hardwire” turnaround plan. While he’s successfully introduced new models and mopped up excess bike inventory, shipping bottlenecks and parts shortages have constrained sales growth coming out of the pandemic.
• Comcast Corp.’s internet business added no new customers last quarter for the first time in decades due to a slowdown in housing, a slump after the pandemic surge and heavy competition, causing a surprising turn that sent the shares tumbling in early trading. The largest US cable TV provider had added broadband customers in every quarter since at least 2005, according to data compiled by Bloomberg. Analysts were looking for around 83,000 new subscribers in the second quarter, and none of them predicted the gain would be in fact, zero. Subscribers to the Peacock streaming service also “stayed relatively flat” in the second quarter, Comcast said Thursday in a statement. The money-losing service had seen a surge earlier this year due to the Olympics.
• Ford Motor Co. is unveiling its first version of an all-electric pickup truck police cruiser. The F-150 Lighting Pro Special Service Vehicle, the new model shows the car manufacturing giant continuing to capitalize on the growth of the electric vehicle market. Earlier this month, the company announced that it secured enough battery supply to manufacture more than half a million electric vehicles a year by the end of 2023. Since becoming CEO, Jim Farley has bumped spending on EVs up to $50 billion in an effort to push battery-powered vehicles to be half of Ford’s global sales by 2030. Police departments have always been a reliable and lucrative customer base for the Dearborn, Michigan, based car group – cop utility vehicles provide stable profits and free visibility.

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

*All sources from Bloomberg unless otherwise specified