July 4, 2022

Daily Market Commentary

Canadian Headlines

  • A Chinese-Canadian tycoon who was seized at a Hong Kong hotel five years ago and has lost much of his business empire to the Chinese government is going on trial on Monday. The Canadian embassy in Beijing said in a statement that it was aware Xiao Jianhua’s trial would take place. “Canadian consular officials are monitoring this case closely, providing consular services to his family and continue to press for consular access,” it added. The Wall Street Journal reported earlier that Xiao would be charged by prosecutors in Shanghai with illegally collecting public deposits, which in China usually involves unlicensed institutions or individuals gathering funds from the public.
  • The Toronto Stock Exchange has approved Vermilion’s bid to purchase up to 16.1 million shares over a 12-month period starting July 6, according to a statement.

World Headlines

  • European equities advanced as bargain hunters stepped in after another week of declines, even as economic growth concerns continued to limit appetite for riskier assets. The Stoxx Europe 600 climbed 0.8% by 9:32 a.m. in London. Energy and health care were among the biggest gainers. Higher interest rates, surging inflation and rising risk of a recession have been among the key threats to equity markets this year, sending the Stoxx 600 for its worst half-year loss since 2008. Investors are now looking to the earnings season as the next major catalyst for stocks, although negative profit revisions now outweigh upgrades, according to Citigroup Inc.’s Europe ex-UK index.
  • Contracts on the S&P 500 and Nasdaq 100 dropped 0.3% each after the underlying indexes capped their 11th decline in 13 weeks. The dollar weakened at the start of the US Independence Day holiday after a report the US may ease tariffs on China. Italian bonds tumbled with investors watching domestic political tensions. World stocks and bonds are in the grip of the worst selloff in at least three decades as increasing chances of a US — or even global — recession are spooking investors. At the same time, sticky inflation has left little room for the Federal Reserve to apply brakes on monetary tightening. This toxic combination presents markets a trading challenge not seen since the late 1970s.
  • Asian equities edged higher amid optimism the region’s earnings will prove resilient as the reporting season gets underway. The MSCI Asia Pacific Index climbed as much as 0.8%, buoyed by consumer discretionary shares as most sectors advanced. Benchmarks in Australia and Japan were among the best performers in the region. Bucking the trend, Indonesia’s stock gauge slumped more than 2% as a decline in commodity prices caused traders to book profits on Asia’s top-performing market this year. While recession concerns have been weighing on global stock markets, falling commodity prices may ease inflationary pressure in Asia. China’s progress toward economic reopening may also help Asian stocks recover from their worst first half in three decades.
  • Oil fluctuated as investors weighed concerns that a global slowdown will erode demand against still-solid physical market signals. West Texas Intermediate futures dipped below $108 a barrel, having earlier topped $109, with trading volumes curtailed by the US Fourth of July holiday. Crude has been buffeted over the past month by indications of an impending recession, yet supply outages, including in Libya, have offset some of the weakness. Key time spreads also show a robust market. Oil remains more than 40% higher this year after being boosted by the war in Ukraine, which triggered a wave of sanctions on Russian flows. Many product prices are still elevated and Vitol Group, the biggest independent oil trader, warned at the weekend that surging fuel costs are starting to hurt demand.
  • A study of stock-market and bullion price patterns during 50 years of US recession history suggests gold stands a good chance of beating the S&P 500 Index. Gold has held steady in 2022 while risk assets from stocks and cryptos to emerging-market currencies and corporate debt tumbled. Federal Reserve tightening has driven real yields higher, limiting the allure of the non-interest bearing metal. But raging inflation, war in Ukraine, sliding cryptos and the risk of recession have kept gold on investors’ radar.
  • Goldman Sachs cut its price targets for iron ore, which just capped a third straight weekly slide and sank further as more Covid-19 cases in China put investors on edge. The bank downgraded its higher-grade iron ore price target by about 15% to $100 a ton for the final six months of the year. Its three-month forecast for the steel-making ingredient is now $90 a ton, it said in an emailed report, citing reasons including substantial market surpluses as the Chinese economy attempts to reopen after lockdowns. The warning come as prices sank as much than 5%, the steepest decline in almost two weeks, to back under $110 a ton. Hopes that demand in China will have a strong recovery were checked by new Covid cases reported over the weekend, including close to 400 local cases on Saturday.
  • A giant aviation deal from China on Friday underscored how trade tension between Washington and Beijing can impact individual companies, with Boeing Co. left looking on as rival Airbus SE scooped up orders worth at least $37 billion.  China’s top three airlines ordered almost 300 Airbus jets — one of the European planemaker’s biggest ever single-day deals — in the first major acquisitions since pandemic restrictions isolated the world’s second-largest economy. Such deals tend to be made during state visits or at big industry events, making the timing unusual — the Farnborough International Airshowdoesn’t start until July 18. China is a key market for Boeing’s 737 family of jets and Airbus’s A320s, mainstays of modern commercial aviation. Relations between China and the West have become increasingly strained in recent years, particularly with the US as a trade war erupted and widespread tariffs were imposed by both sides. Boeing is America’s biggest exporter.
  • Advanced Info Service Pcl, Thailand’s biggest mobile phone operator, plans to expand its network by acquiring Triple T Broadband Pcl and an infrastructure fund for a total of 32.4 billion baht ($908 million). The Bangkok-based company will buy internet provider Triple T from Jasmine International Pcl for 19.5 billion baht, Chief Financial Officer Tee Seeumpornroj said in an exchange filing. It will also acquire 1.52 billion units, or a 19% stake, in Jasmine Broadband Internet Infrastructure Fund for 12.9 billion baht. At 8.5 baht a unit, that is a 7.6% discount to the fund’s latest unit price of 9.2 baht. Shares of Advanced Info rose as much as 2.8% Monday, the biggest gain since June 24. Jasmine International, a technology company that is expanding into Bitcoin mining, dropped as much as 7.2%, while Jasmine Broadband slid 7.4% before paring the loss to 3.2%.
  • Members of the House committee investigating the US Capitol attack by supporters of Donald Trump promised further revelations, after an ex-White House staffer portrayed the former president’s outbursts of rage. “We are following additional leads,” Representative Adam Schiff, a California Democrat, said on CBS’s “Face the Nation” on Sunday. “I think those leads will lead to new testimony.” Committee members view Cipollone as a central figure in the dramatic moments before, during and after the storming of the Capitol on Jan. 6, 2021. Former White House staffer Cassidy Hutchinson cited what she said were legal concerns by Cipollone during her testimony last week.
  • Tesla Inc. delivered 254,695 cars worldwide in the three months to June, snapping a two-year streak of quarter-on-quarter gains, as a Covid-related shutdown at its factory in Shanghai crimped production.  The results, posted Saturday, missed a forecast of 261,181 vehicle deliveries based on an average of analyst estimates compiled by Bloomberg. That is less than the record 310,048 cars Tesla delivered in the previous three months, but above the 201,250 from the same quarter a year ago. The delivery data is a closely watched indicator for Tesla since it provides insights into the electric-car maker’s likely financial performance. The figure also is widely seen as a barometer for EV demand generally, since the Austin, Texas-based company has led the market for battery powered vehicles.
  • Airbus SE delivered about 55 jets in June, according to people familiar with the matter, leaving the European firm only two-fifths of the way toward its 2022 goal after the first half. Airbus has so far handed over fewer than 300 planes this year, against a 12-month target of 720, the people said, asking not to be named ahead of the publication of official data later this week. Supply-chain issues involving staffing and raw-material shortages are holding back deliveries even as Toulouse, France-based Airbus seeks to lift production of its best-selling A320 series planes. Chief Executive Officer Guillaume Faury said last month that 20 narrowbodies fully built by the end of May were yet to receive engines and couldn’t be shipped.
  • President Biden is expected to roll back some tariffs on Chinese imports soon, a decision constrained by competing policy aims: addressing inflation and maintaining economic pressure on Beijing. People familiar with the situation say what comes next has been pending with Mr. Biden in recent weeks and that he could announce his decision this week. It could include a pause on tariffs on consumer goods such as clothing and school supplies, as well as launching a broad framework to allow importers to request tariff waivers. The Office of the U.S. Trade Representative is conducting a mandatory four-year review of the Trump-era tariffs. A comment period for businesses and others who have benefited from the tariffs will close July 5, giving the administration an opportunity to calibrate its policy.
  • Germany’s banks would be forced to put extra funds aside to cover a potential spike in defaults if the country were to get cut off from Russian gas, several senior bankers said. The scenario would lead to a recession in Europe’s largest economy and require lenders to back up corporate loans with more capital, BNP Paribas Germany head Lutz Diederichs said Monday at a conference in Frankfurt. He echoed comments made by Commerzbank Chief Financial Officer Bettina Orlopppublished over the weekend in an interview with the weekly Focus Money. Lenders are particularly concerned about planned maintenance work on the main gas pipeline connecting Germany with Russia as there is a chance that supplies won’t resume as before once the work is completed, said two top bankers who asked not to be named discussing the deliberations. The pipeline is slated to be shut down between July 11 and 21 for maintenance.
  • The European Central Bank plans to rejig its corporate bond portfolio to favor issuers that pollute less, marking its most significant shift yet to weave environmental considerations into monetary policy. The ECB will reinvest “the sizeable redemptions expected over the coming years” in a way that penalizes companies with a big carbon footprint, according to a statement on Monday. The new plan will affect some 30 billion euros ($31.3 billion) worth of reinvestments each year, or around 10% of the ECB’s corporate portfolio, Executive Board member Isabel Schnabel said.  The ECB is adjusting a cornerstone of its toolbox amid a growing sense of anxiety that time is running out to address the threat posed by global warming. The United Nations Intergovernmental Panel on Climate Change has estimatedthat the planet might be on track for temperature increases that could be twice the limit set out in the Paris climate accord.
  • India’s decision to impose windfall taxes on fuel exports last week will offset May’s excise duty cut on domestic prices of petrol and diesel, and help lower the budget gap in the current fiscal year, economists said. The taxes on production of crude, and exports of petrol, diesel and aviation fuel could garner about 1 trillion rupees ($12.7 billion) for the government if the levies continue for the rest of the fiscal year ending in March, Mumbai based Kotak Mahindra Bank Ltd. economists Suvodeep Rakshit, Upasna Bhardwaj and Anurag Balajee wrote in their report. India on Friday joined a growing number of nations that are taxing energy firms to cope with surging costs. It also increased taxes on gold imports to control the widening current account gap and slow the rupee’s fall.
  • Chinese developer Shimao Group Holdings Ltd. missed payment on a $1 billion dollar note due Sunday, its first default on a public bond after months of mounting stress. Shimao’s delinquency is among the biggest dollar payment failures so far this year in China and the firm has about $5.5 billion in outstanding offshore bonds. The luxury builder’s bonds have priced in deep levels of distress since the beginning of the year, with most notes falling to record lows of below 15 cents on the dollar after the firm missed repayment on a private note. Shimao, whose landmark projects include a five-star hotel built into an abandoned quarry, was once considered largely immune to the sweeping crackdown that has engulfed larger peers like China Evergrande Group and Sunac Group Holdings Ltd. The country’s 14th-biggest developer by contracted sales has faced mounting worries about its financial health since late last year, with stress in the industry taking it toll on a widening set on players.
  • Credit Suisse Group AG is cutting more than two dozen front line roles at the investment bank in Asia as the Swiss lender grapples with losses and a weakening outlook for the global economy, people familiar with the matter said. The reductions in recent weeks fell across businesses including deal-making and trading, the people said, asking not to be identified discussing private information. They are part of a global effort to reduce costs, and more cuts may follow in the fourth quarter, one of the people said. The dismissals come as Credit Suisse is warning of a third straight quarterly loss tied to volatile markets and clients cutting back on risk. Stocks and bonds around the world combined have fallen by the most on record in the first half, according to Bloomberg data going back to 1990, in response to Russia’s invasion of Ukraine and a push by major central banks to hike interest rates.
  • Unknown hackers claimed to have stolen data on as many as a billion Chinese residents after breaching a Shanghai police database, in what industry experts are calling the largest cybersecurity breach in the country’s history. The person or group claiming the attack has offered to sell more than 23 terabytes of stolen data from the database, including names, addresses, birthplaces, national IDs, phone numbers and criminal case information, according to an anonymous post on an online cybercrime forum last week. The unidentified hacker was asking for 10 bitcoin, worth around $200,000. The scale of the alleged leak has sent shockwaves through the Chinese security community, triggering speculation about the credibility of the claim and how it could have taken place. Zhao Changpeng, founder and Chief Executive Officer of cryptocurrency exchange Binance, tweeted on Monday the company had detected the breach of a billion resident records “from one Asian country,” without specifying which, and had since increased verification procedures for potentially affected users.
  • Vauld, a crypto lender backed by Coinbase Inc., said it froze withdrawals and hired advisers to explore a potential restructuring, joining rivals from Celsius Network to Babel Finance in resorting to last-ditch measures to survive the market rout.  The Singapore-based company hired Kroll as financial adviser and Cyril Amarchand Mangaldas and Rajah & Tann Singapore LLP as legal advisers, Chief Executive Officer Darshan Bathija said in a blog post on Monday. All withdrawals, trading and deposits on the platform have been suspended. Vauld’s move came less than three weeks after the company said it was processing withdrawals “as usual and this will continue to be the case in the future.” The about-face hints at the speed with which plunging prices are rippling through the sector, bringing firms ranging from Celsius to hedge fund Three Arrows Capital to their knees.
  • Boris Johnson is under pressure to explain what he knew and when after a string of allegations surfaced over the weekend about the past sexual behavior of Chris Pincher, the Conservative MP who quit last week as one of the prime minister’s enforcers, citing his own drunken behavior. The UK prime minister late on Friday suspended Pincher from the Conservative Party, almost a day after the Sun reported allegations that Pincher groped two fellow guests at a private club. Pincher’s office didn’t respond to emailed requests for comment made on Friday and Sunday by Bloomberg News. Pincher didn’t respond on Sunday to a phone message seeking comment. Parliament’s Independent Complaints and Grievance Scheme is now probing the matter, and there are growing calls for Johnson to spell out why he named Pincher as deputy chief whip in February, despite the MP quitting a similar role in 2017 amid allegations he had made unwanted sexual advances on a former Olympic rower.

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

*All sources from Bloomberg unless otherwise specified