June 13, 2022

Daily Market Commentary

Canadian Headlines

• Canadian equities notched their worst week since mid-May as a hot US consumer-price index added to concern the Federal Reserve may be even more aggressive with rate hikes. The S&P/TSX Composite fell for the third day, dropping 1.4%, or 289.07, to 20,274.82 in Toronto. The move was the biggest since May 18. Canadian Pacific Railway Ltd. contributed the most to the index’s dropped, tumbling 4%. Goeasy Ltd. had the largest drop, falling 7.9%.
• BP Plc sold out of Canada’s oil sands, divesting its stake in the Sunrise project to Cenovus Energy Inc. while acquiring offshore exploration from the same company in the east of the country. The oil-sands disposal aligns with BP’s plans to divest polluting projects as investors demand greater efforts to tackle climate change. Companies such as Shell Plc and ConocoPhillips have also offloaded such ventures, which have a particularly high carbon footprint because of the energy required to extract bitumen from deposits underground. Cenovus agreed to buy BP’s 50% interest in Sunrise for C$600 million ($467 million) in cash and a contingent payment of as much as C$600 million which expires after two years. The Calgary-based company will also hand over its 35% interest in the Bay du Nord oil project off Newfoundland and Labrador.
• Go-Ahead Group Plc, the biggest operator of London’s iconic double-decker buses, has attracted takeover interest from two suitors as investors bet on a revival in the UK transport industry. A consortium of Australian bus operator Kinetic Holding Co., which is backed by Canadian pension manager OPTrust, and Globalvia Inversiones SAU made an unsolicited approach for Go-Ahead, according to a statement Monday. The company also received separate takeover interest from Sydney-listed transport operator Kelsian Group Ltd., it said.  London-listed Go-Ahead received a series of offers from each suitor, which it’s been reviewing with its financial adviser Rothschild & Co., it said in the statement. It’s now granted due diligence to both parties, as the latest proposals are at a level that Go-Ahead’s board would recommend to shareholders if the bids are firmed up.

World Headlines

• European equities slid to the lowest level since early March as investors worried that surging inflation will fuel more aggressive monetary tightening, increasing risks of a recession.  The Stoxx 600 dropped 2.1% by 11:55 a.m. in London as basic resources and technology stocks dragged the index down most. S&P 500 futures fell 2.1%, with the underlying index set to near a bear market. Yields on 10-year US Treasuries were at 3.24%, the highest since November 2018, and a selloff in European government bonds also gathered pace, with the yield on Germany’s two-year government debt rising above 1% for the first time in more than a decade. European stocks have sold off this year amid worries central banks could cause economies to contract as they tighten policy to tame surging prices. The Stoxx Europe 600 fell to the lowest in a month last week when the European Central Bank outlined a slightly more aggressive path than economists had foreseen and an unexpectedly hot reading in US consumer prices fueled bets the Federal Reserve will have to step up its battle against inflation. The index is now down over 16% from its record high.
• A global selloff intensified following a surprise American inflation print that heaped pressure on the Federal Reserve to step up monetary tightening. Treasury yields traded at multi-year highs and the dollar surged. S&P 500 futures sank more than 2% and Nasdaq 100 contracts slid as much as 3.1%. The S&P 500 is flirting with a bear market after Friday’s shock consumer prices report ignited a more than $1 trillion selloff. Yields on 10-year US Treasuries reached 3.25%, the highest since October 2018, and a selloff in European government bonds also gathered pace, with the yield on German’s two-year government debt rising above 1% for the first time in more than a decade.
• Asian equities fell by the most in three months, as hotter-than-expected US inflation and renewed lockdown fears in China fueled risk-off sentiment. The MSCI Asia Pacific Index slipped as much as 2.8% on Monday, with technology and consumer discretionary shares leading losses. Hong Kong, Japan and South Korean stocks were among the biggest decliners. Stocks in Southeast Asia were relatively resilient, with benchmarks in Singapore and the Philippines down about 1%. Monday’s slump comes after US inflation hit a fresh 40-year high, fueling bets that the Federal Reserve will have to continue tightening at an aggressive pace, even at the risk of slowing down the economy. Also weighing on sentiment is a resurgence of Covid cases in China, which has forced authorities to dial back reopening plans and is threatening a nascent recovery in the nation’s stocks.
• Oil extended losses for a third session as investors weighed the prospect of further monetary tightening to combat surging US inflation and the potential for more virus lockdowns in China. West Texas Intermediate futures fell about 2% to trade near $119 a barrel amid a broader market selloff. US inflation accelerated to a fresh 40-year high last month and traders are now betting the Federal Reserve will raise rates by three quarters of a percentage point at least once in its next three meetings. China is starting to re-impose virus curbs as cases rise, just weeks after major easing in key cities such as Shanghai. Oil is still up almost 60% this year as rebounding economic demand coincided with a tightening market following Russia’s invasion of Ukraine. The war has fanned inflation, driving up the cost of everything from food to fuels and some analysts are calling it the most bullish market they’ve ever seen. For now though, those drivers are taking a back seat as traders anticipate a sharp hiking of interest rates by the Federal Reserve.
• Gold fell from a five-week high with attention shifting to the prospect of aggressive monetary tightening following shock US inflation data. The consumer price index surged 8.6% from a year earlier to a 40-year high in May, the Labor Department said Friday. Inflation rose 1% from a month earlier, topping all estimates. Broader market sentiment took a hit, with US equity futures sliding Monday, while Treasury yields climbed and the dollar jumped. Bullion closed up 1.3% on Friday as the CPI print initially drove concerns over recession risks, and as US consumer sentiment plungedto the lowest on record. Gold often benefits from haven demand in uncertain economic times, but rising rates and bond yields damps it appeal as it offers no interest.
• Bitcoin plunged to the lowest in about 18 months in Asia trading Monday as the impact of Friday’s shock US inflation data continued to reverberate through global risk assets. The world’s largest digital token tumbled as much as 12% to $23,981 — its lowest since December 2020. Other cryptocurrencies also declined as a broader sell-off continued. The MVIS CryptoCompare Digital Assets 100 Index, which measures 100 of the top tokens, dropped as much as 14%. And the total crypto market cap, which topped $3 trillion in November, was $1.02 trillion as of 5 a.m. New York time on Monday, according to CoinGecko. Traders are boosting bets for a more aggressive pace of Federal Reserve tightening after data Friday showed US inflation jumped to a fresh 40-year high in May. Cryptocurrencies, which have struggled amid the Fed’s policy in recent months, have been hit particularly hard. The collapse of the Terra/Luna ecosystem last month, and lender Celsius pausing withdrawals Monday morning Asia time, have further eroded confidence in the space.
• Electric Last Mile Solutions Inc. said it plans to liquidate through a Chapter 7 bankruptcy process, a decision that comes almost one year after the electric-vehicle startup went public and just four months after both its chief executive officer and chairman resigned. The Troy, Michigan-based company said in a statement late Sunday that its board and interim CEO, Shauna McIntyre, decided to liquidate after a review of Electric Last Mile’s products and plans turned up no better option for stockholders, creditors and other interested parties. The filing will make Electric Last Mile the first of the EV startups that merged with special purpose acquisition companies to go out of business amid the recent market slump. On May 27, the company had warned it might run out of cash this month. Its shares have fallen 93% this year, closing last week at 51 cents.
• Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. This was the fourth straight week of inflows. Inflows to U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $909.5 million in the week ended June 10, compared with gains of $168.6 million in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $22.9 billion.
• A break up of HSBC Holdings Plc’s Asian unit could unlock $26.5 billion, or about a fifth of its current market value, according to research that could support a push from its largest shareholder to overhaul the bank. Two other scenarios that could benefit shareholders are for HSBC to spin off the Asian business or just its Hong Kong retail operations into partial initial public offerings, In Toto Consulting Ltd. said in a report dated June 8. A disclaimer in the report showed the analysis was commissioned by “an independent third party.” The UK’s Sunday Times said Ping An Insurance Group Co., HSBC’s biggest shareholder, was the firm that commissioned the In Toto report, without saying where it got the information. A spokesperson for Ping An declined to comment if it was behind the analysis.
• JetBlue Airways Corp. has been working for months on plans to integrate Spirit Airlines Inc.’s operations should it win a takeover battle for the deep-discount carrier. Melding operations of any two airlines is a major undertaking. JetBlue and Spirit have little in common — outside of their Airbus-dominated fleets and overlapping routes in Florida and the Caribbean. While JetBlue has offered low fares and customer-friendly options like free Wi-Fi, Spirit appeals to the most price-sensitive travelers as a so-called ultra low-cost carrier. JetBlue is urging Spirit shareholders to reject an existing purchase agreement with Frontier Group Holdings Inc. during a vote set for June 30. The ballot, initially scheduled for June 10, was delayed to allow Spirit more time to talk with its investors and both would-be suitors after JetBlue boosted its rival bid to $3.4 billion.
• A closely-watched part of the US yield curve inverted Monday as investors dumped short-term debt on concerns that aggressive rate hikes will lead to an economic slowdown. The US two-year yield exceeded the 10-year for the first time since early April. Short-term yields that are higher than long-term yields are abnormal, and are historically seen as heralding a potential recession. Concern has been mounting that surging inflation will require more rapid Federal Reserve policy tightening, which in turn will reduce consumer spending and business activity. US inflation data on Friday rose to a fresh four-decade high, surprising economists.
• Boris Johnson risks reopening divisions that tore his Conservative Party apart in 2019, with his government set to propose a law that would let UK ministers override parts of the Brexit deal he signed with the European Union. Northern Ireland Secretary Brandon Lewis confirmed Sunday the legislation will be presented to Parliament on Monday. That was meant to happen last week, but last-minute wrangling between ministers and interventions from pro-Brexit MPs — emboldened by Johnson’s weakened position after he narrowly survived a party confidence vote — led to a delay.
• Hedge funds eager to prove that short-selling is a legitimate ESG strategy just got some fresh material to back their case. A study published by the Managed Funds Association indicates that targeted short-selling campaigns could slash up to $140 billion in capital expenditure at the biggest carbon emitters in the S&P 500 Index by pressuring them to clean up their acts.  The analysis by MFA, which represents the alternative fund management industry, feeds into a heated debate on the extent to which short-selling can genuinely be used to support environmental, social and governance goals. A recent report from MSCI Inc. found limited evidence to back the claim that shorting raises capital costs, and questioned its value as an ESG strategy. But the hedge fund industry has been vocal in its defense, as firms jostle to ensure they don’t miss out on the billions of dollars flowing into ESG.
• Contemporary Amperex Technology Co. Ltd., the world’s biggest maker of batteries for electric cars, has kicked off an A-share private placement that could raise about 45 billion yuan ($6.7 billion), according to terms of the deal seen by Bloomberg News. The Ningde, Fujian-based company has set a floor price of 339.67 yuan for the placement, the terms show. It plans to price the share sale on Wednesday, according to people familiar with the matter, who asked not to be identified as the information is private. The placement includes a greenshoe option that could take the deal size to about $6.87 billion, IFR reported earlier on Monday, citing unidentified people. A representative for the company, better known as CATL, didn’t immediately reply to requests for comment.
• The US sought to bolster its support in Asia this weekend by reassuring nations they don’t need to join a coalition against China, drawing a stark contrast with Beijing’s threats to defend its interests with military force. Defense Secretary Lloyd Austin told Asia’s biggest security forum Saturday that the US was taking “wise counsel” from smaller countries, saying they should be “free to choose, free to prosper and free to chart their own course.”  It represented a break from the Trump administration pressing nations to take sides on the use of 5G equipment from Huawei, one of China’s most strategically important companies, a position that rankled many at the last gathering of defense officials in 2019. And it was a marked difference from China, whose defense minister, Wei Fenghe, vowed this time around to “fight to the very end” against any powers that wanted confrontation.
• Even after this year’s rapid selloff, equities are still not fully reflecting the vast risks facing corporate earnings and weaker consumer demand, according to strategists at Morgan Stanley and Goldman Sachs Group Inc. “The Equity Risk Premium does not reflect the risks to growth, which are increasing due to margin pressure and weaker demand as the consumer decides to hunker down,” Morgan Stanley strategists led by Michael Wilson wrote in a note on Monday. Depressed consumer sentiment is a key risk to the US stock market and economy as the Federal Reserve is set to keep fighting surging inflation with rate hikes, he wrote. Meanwhile, Goldman Sachs Group Inc. strategists led by David J. Kostin said that US earnings estimates are still too high and expect them to be revised downwards even further.
• Federal Reserve Chair Jerome Powell is facing an increasingly grim calculus after yet another hot inflation reading last week: He probably has to push the economy into recession in order to regain control of prices. After spending much of last year sounding a bit like the inflation-tolerant, former central bank chief Arthur Burns, Powell has increasingly taken on the mantle of inflation-slayer — and Fed icon — Paul Volcker. It’s a role he’s likely to embrace with relish on Wednesday, when he speaks with reporters after a widely-expected decision by the Fed to raise interest rates by another half percentage point. But so far at least, he’s shied away from endorsing the tough monetary medicine — and punishingly deep recession — that it took for Volcker to break the back of inflation four decades ago. While Powell has recently acknowledged that getting price pressures under control could require some pain — and maybe even higher unemployment — he’s steered clear of talking about a recession.
• Goldman Sachs Group Inc. has started to trade a type of derivative tied to Ether, as Wall Street investors look for ways to bet on the world’s second-largest cryptocurrency. The bank executed its first trade of Ethereum non-deliverable forwards, a derivative that pays out in cash based on the price of Ether. This gives institutional investors exposure without having to hold the tokens. Marex Financial was Goldman’s counterparty, the London-based financial-services firm said in an emailed statement.  Goldman has seen growing interest from clients in Ethereum, the world’s most-used blockchain network. Investors are watching closely its planned major technical upgrade called the Merge, expected to occur as soon as this summer. The revamp, if successful, is seen as a bullish development for the network, allowing it to reduce its carbon footprint and run more efficiently.
• Russia continued its assault on Sievierodonetsk, pushing Ukrainian troops out of the center in what is Kyiv’s last foothold in the Luhansk region. President Volodymyr Zelenskiy in his nightly address called fighting over the city “very fierce.” Russia’s use of cluster munitions and indiscriminate shelling in Kharkiv, Ukraine’s second-largest city, constitutes a war crime, Amnesty International said in a report published Monday. Ukraine’s top military commander said Russian troops have focused shelling on the north of the Luhansk region and pleaded with his US counterpart to send more artillery.

A gauge of the dollar’s strength rose to its highest level since the early months of the pandemic as traders wagered the Federal Reserve will intensify monetary-policy tightening. The Bloomberg Dollar Spot Index, which tracks the greenback’s performance against a basket of ten leading global currencies, advanced 0.8% to the highest since April 2020. The gauge is on course for its largest two-session gain since March 2020. The latest leg has been catalyzed by higher-than-expected US inflation data on Friday, which has prompted traders to wager on faster rate increases. They have now fully priced a 75-basis-point hike by September, which would be the US central bank’s largest since 1994.

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

*All sources from Bloomberg unless otherwise specified