June 22, 2022

Daily Market Commentary

Canadian Headlines

• Brookfield Asset Management said it raised $15 billion for the Brookfield Global Transition Fund, including investments from institutional investors in and alongside the Fund, as well as amounts reserved for the private wealth channel. BGTF focuses on investments to accelerate the global transition to a net zero economy; co-headed by Mark Carney and Connor Teskey
• A world economy already contending with raging inflation, stock-market turmoil and a grueling war is facing yet another threat: the unraveling of a massive housing boom. As central banks around the globe rapidly increase interest rates, soaring borrowing costs mean people who were already stretching to buy property are finally reaching their limits. The effects are being seen in countries such as Canada, the US and New Zealand, where once-hot residential real estate markets have suddenly turned cold.  It’s a sharp reversal from years of surging prices fueled by rock-bottom mortgage rates and government stimulus, along with a pandemic that popularized remote work and sent homebuyers on the hunt for bigger spaces. An analysis by Bloomberg Economics shows that 19 OECD countries have combined price-to-rent and home price-to-income ratios that are higher today than they were ahead of the 2008 financial crisis — an indication that prices have moved out of line with fundamentals.

World Headlines

• European stocks fell on Wednesday, snapping a three-day rebound as investors worry about a potential recession amid surging inflation and monetary tightening. The Stoxx Europe 600 Index was down 1.6% at 8:54 a.m. in London after rallying for three days in a row as cheaper valuations lured traders. Miners and energy led the declines among sectors as commodities slumped, with the Stoxx 600 Basic Resources gauge erasing year-to-date gains, which leaves the Stoxx 600 Energy index as the only sector in the green out of 20. The FTSE 100 outperformed as the pound weakened after UK inflation rose to a fresh four-decade high in May after broad increases in the cost of everything from fuel and electricity to food and beverages, adding to investor concerns about surging prices hurting consumers and weighing on earnings growth.
• US equity futures declined, signaling a partial reversal of Tuesday’s strong rally in the underlying indexes as traders fretted over recession risks and braced for Federal Reserve Chair Jerome Powell’s Senate testimony. Nasdaq 100 futures were down 1.9% by 3:25 a.m. in New York, indicating more declines for heavyweight technology stocks, which have already been hammered by rising rates. Powell is expected to reinforce the commitment to fighting price pressures when he speaks in front of US lawmakers Wednesday. S&P 500 futures declined 1.7%. US equities have been roiled in the past few months amid worries that aggressive monetary tightening by the Fed would spark an economic recession. The S&P 500 is in a bear market after a rout that erased almost $2 trillion from the benchmark last week, and is tracking declines of nearly 9% in June alone.
• Asian stocks resumed their slide Wednesday as renewed fears of a crackdown hit Chinese technology shares. The MSCI Asia Pacific Index slipped as much as 1.7%, cutting short a rebound in the previous session. TSMC, Alibaba and Tencent were the biggest drags, with a gauge of Chinese tech firms in Hong Kong falling more than 4%. Shares of online drug sellers slumped on a report that Beijing may ban third-party platforms from offering medicines over the internet. The Asian stock benchmark is hovering near a two-year low as the prospect of a slowdown in the US driven by aggressive interest-rate hikes unsettle investors. Tesla Inc. Chief Executive Officer Elon Musk said Tuesday that a recession in the US looks likely in the near future, adding to the growing drumbeat of warnings.
• Oil plunged for the second time in a few days on concerns that a global economic slowdown will ultimately hobble demand. West Texas Intermediate tumbled toward $104 a barrel. Investors are concerned about the impact of sharply higher US interest rates and Federal Reserve Chair Jerome Powell is due to testify before Congress Wednesday on his bid to curb inflation raging at the fastest pace in decades. Inflation is also raging outside the US, with UK price rises hitting a fresh 40-year high. Since a spike after Russia invaded Ukraine, oil markets have been grappling with a liquidity crisis with futures holdings falling to the lowest since 2016, leaving headline prices prone to outsized swings. The U.S. crude benchmark also fell below its 100-day moving average early on Wednesday for the first time since January, adding technical pressure to an already fragile market.
• Gold declined as the dollar strengthened, while traders awaited comments from Federal Reserve Chair Jerome Powell for clues on monetary policy amid the growing drumbeat of warnings about the risk of an economic slowdown. Bullion is edging lower this week, with markets still focusing on central bank tightening to contain price pressures and the impact of those actions on global growth. The Fed should raise interest rates as fast as it can without causing undue harm to financial markets or the economy, Fed Bank of Richmond President Thomas Barkin said Tuesday.  Powell will deliver his semi-annual testimony on monetary policy to Congress this week — he’s addressing the Senate Banking Committee on Wednesday and the House Financial Services Committee on Thursday. The dominant topic will be inflation and the Fed’s efforts to control it as well as recession risks.
• Wheat futures recovered from their recent rout after a Ukraine port was attacked and uncertainty looms over the next round of Black Sea grain export talks.  Russian forces fired at least seven missiles on the southern Ukraine port of Mykolayiv on Wednesday, regional governor Vitaliy Kim said on Telegram. The port is normally a major hub for Ukrainian agriculture shipments. Wheat prices in Chicago rose as much as 3.2%, before paring gains. Turkey plans to host more discussions soon regarding a potential corridor for grain shipments from the Black Sea, local publication Haberturk reported. The last negotiations, held earlier in June, yielded little progress and Ukraine’s exports remain significantly constrained by Russia’s invasion.
• Base metals resumed declines — with copper falling to a 15-month low and tin tumbling — on mounting concerns about a global downturn. Demand fears are increasing as rapid rate hikes portend a sharp slowdown in the US, while China still struggles to put the coronavirus behind it. The probability of the world economy succumbing to a recession is nearing 50%, according to Citigroup Inc., while China’s finance minister said more pro-growth policies were being considered.  An LMEX index of metals is down 23% since a March 7 high, and is heading for the worst quarter in more than a decade. Tin and copper led losses Wednesday despite looming supply disruptions. Workers at Chile’s Codelco, the world’s top copper producer, will proceed with a strike to protest a decision by the state-owned company to close a smelter because of environmental concerns.
• President Joe Biden will ask Congress to enact a three-month gasoline tax holiday, after his administration’s previous efforts failed to curb soaring pump prices that weigh heavily on his party’s political fortunes. Biden will call for a pause in tax collections through September in a speech scheduled for 2 p.m. Wednesday in Washington, senior administration officials said. The national average gasoline price hit a record this month above $5 a gallon, even after Biden issued a historic release from US reserves earlier this year. As part of any suspension, Biden wants to reallocate other federal funding to make up the estimated $10 billion hit to the Highway Trust Fund, which is supported primarily by gas taxes, according to the officials. They asked not to be identified as a condition of participation in a briefing for reporters.
• Bitcoin resumed a fall on Wednesday, moving in tandem with weakening stocks amid mounting concerns about a global recession. The largest cryptocurrency declined as much as 4.3% to $19,947, and was holding right around the key $20,000 level as of 9:08 a.m. in London. Ether fell by a maximum 5% to $1,066.02. Shiba Inu, the 14th-biggest cryptocurrency by market cap, rallied 14% in the past 24 hours though its momentum was tailing off, according to pricing from CoinGecko. Cryptocurrencies have been moving for months in the same direction as stocks, and Wednesday’s moves were no exception as investor appetite for risk assets ebbed on growing fears about an economic downturn. Bitcoin appears to be consolidating around the $20,000 level, similar to its action around $30,000 for much of May and into June.
• New Yorkers in more than 1 million stabilized apartments face the largest rent increase in nearly a decade after a panel approved a 3.25% hike for one-year leases and a 5% rise for two-year leases. The Tuesday night decision by the nine-member Rent Guidelines Board of mayoral appointees reflects the political promises of Mayor Eric Adams, a landlord himself who has signaled strong support for small businesses and property owners, many of whom are facing mounting operating costs under soaring inflation. Under former Mayor Bill de Blasio, the board kept rates at historic lows, voting for rent freezes in four of the past eight years. While most current board members are Adams appointees, some have carried over from his predecessor.
• Alok Sharma, the president of the COP26 climate talks, said other nations and philanthropic organizations want to join the $8.5 billion climate finance deal offered to South Africa by the UK, US, Germany, France and the European Union. That could increase the amount of money South Africa will get to help the nation transition away from coal, he said at a press conference in Johannesburg on Tuesday. The fuel accounts for more than 80% of the country’s power generation. The Just Energy Transition Partnership was announced at the COP26 talks in Glasgow in November and the terms are being negotiated by South Africa and partner nations. The deal has been touted as a blueprint for future agreements with other coal-dependent developing nations.
• Jack Ma’s Ant Group Co. is poised to apply for a key financial license as soon as this month, according to people familiar with the matter, a sign that its lengthy overhaul following a squashed 2020 listing is getting closer to satisfying China’s financial regulators. The People’s Bank of China intends to accept Ant’s application to become a financial holding company once it’s submitted and will then start a review process, which could take months, said the people, asking not to be identified discussing a private matter. Officials will examine Ant’s capital strength and business plans, as well as the compliance of its shareholders and senior management before a final signoff. The moves would mark a crucial development in Ant’s revamp, affirming that the company can maintain its financial operations under the supervision of the central bank. While that clears a path for it to eventually revive a public offering, Ma’s fintech juggernaut will be a much diminished enterprise, with policy makers dramatically curbing its growth in consumer finance and its ability to leverage its ubiquitous payments app.
• Deutsche Bank AG’s chief executive officer and a top official from the International Monetary Fund warned of the risks of inflation spiraling through markets and society. Speaking at the Future of Finance 2022 summit in Frankfurt on Wednesday, Deutsche Bank CEO Christian Sewing warned that global economy is buckling under multiple strains, from supply-chain issues in China to rising food prices particularly in the poorest countries.  Tobias Adrian, director of the IMF’s monetary and capital-markets department, said investors might be underestimating the European Central Bank’s needs to do more to ward off high inflation.
• Ukrainian President Volodymyr Zelenskiy continued his lobbying of European Union leaders ahead of the bloc’s summit in Brussels starting Thursday, where Kyiv’s bid to secure EU candidacy status will be on the agenda. European officials are pushing back against a US initiative aimed at setting a price cap on Russian oil sales, while Germany is preparing to trigger the second stage of an emergency gas plan after Gazprom PJSC cut deliveries through a key pipeline by about 60%. Russia blamed a blaze at an oil refinery in its southern Rostov region on a Ukrainian drone attack.
• Luis Gallego, CEO at British Airways parent IAG, said there’s no certainty that the company will be immune from strikes sweeping the European airline sector, as a staffing shortage and spiraling inflation stoke wage demands. Earlier, Boeing’s Dave Calhoun delivered a similarly bleak view of the supply-chain crunch afflicting the industry, predicting issues at component makers will persist at least until the end of next year. Mid-tier parts manufacturers are worst affected by a staffing shortage, he said on the final day of the Qatar Economic Forum. Those comment came after Harrods boss Michael Ward said logistical snags had forced the London luxury emporium to delay its famed sale. “It’s almost impossible to find the right staff,” he said “We’ve lost significant amounts of people as a result of Brexit.”
• Ford Motor Co. picked its factory in Valencia, Spain, for the production of electric vehicles and will wind down a plant in Germany by the middle of the decade. The US carmaker said talks will start with unions on a “significant” number of job cuts at both sites in Europe because EVs require fewer workers to produce. The German installation in Saarlouis, which has a staff of 4,600, will continue to make the Focus model until 2025, but Ford has no plans to produce any other cars there after that, he said.  The company is sticking with a $2 billion planned investment at its key European production site in Cologne, Germany, to make electric vehicles. The push is part of the automaker’s global plan to reach more than 2 million in EV sales.
• Gulf carrier Emirates is weighing more Airbus SE A350 jetliner orders to help fill gaps in its fleet in coming years as Boeing Co. struggles to bring its wide-body models to market. Following strong freight demand during the pandemic, Emirates converted 10 Boeing 777s into cargo planes, depleting its passenger capacity, and a still-robust market might prompt it to switch another 10, President Tim Clark said.  That could open a potential hole in the Dubai-based company’s operations sometime between 2024 and 2027, with the gap hard to fill through existing order commitments, Clark said. Service entry for Boeing’s new 777X model has slipped to 2025, while Emirates wouldn’t get 787 Dreamliners until the same year at least should it hold the US manufacturer to a contract, he said.
• Moderna Inc.’s omicron-targeting vaccine triggered the production of antibodies against the strains’ newest variants, though the immune response was less robust than seen with the original version that emerged late last year.  Everyone given Moderna’s lead omicron immunization generated neutralizing antibodies against BA.4 and BA.5 in the latest trial involving about 800 people, the Cambridge, Massachusetts-based company said in a statement. The level of antibodies induced against the newer strains were less than the shot produced against the original omicron. As the coronavirus continues to mutate, medical experts are trying to decide when and how to modify vaccines to fight emerging and future variants. Moderna’s lead candidate to replace its existing Covid inoculation combines parts of its original shot with elements that specifically target omicron. The results are encouraging, officials said.
• UK inflation rose to a fresh four-decade high in May after broad increases in the cost of everything from fuel and electricity to food and beverages. The rate accelerated to 9.1%, from 9% a month earlier, the Office for National Statistics said Wednesday.  Retail prices climbed more than expected to 11.7%, and there were also more signs of inflationary pressures building at the wholesale level, with raw material costs increasing the most on record. While the jump was smaller than seen in recent months, the figures still underline the scale of the inflation crisis facing the UK. Matters will get worse later this year when another energy price hike kicks in, with the Bank of England forecasting price gains will surge above 11% in October.
• Australia’s Macquarie Group Ltd. is in talks about a potential acquisition of Kuwaiti plane leasing firm Alafco Aviation Lease & Finance Co., according to people with knowledge of the matter.  Macquarie’s aircraft financing arm is aiming to reach an agreement within as soon as the next few weeks, the people said, asking not to be identified because the information is private. Alafco, which is backed by the Kuwaiti government, has also drawn interest from other suitors, the people said. Shares of Alafco have fallen 17% in Kuwait trading this year, giving the company a market value of about $565 million.
• Thyssenkrupp AG lost a European Union court bid to overturn an antitrust veto of its plans for a European steel joint venture with Tata Steel Ltd. The EU’s General Court in a ruling in Luxembourg on Wednesday rejected all the arguments made by Thyssenkrupp, upholding the EU’s merger prohibition. The European Commission in June 2019 formally blocked the deal after a series of proposed commitments by the companies failed to ease EU regulators’ concerns that the combination of their European steel operations would have too much control over market supply and prices.
• The labor group that helped orchestrate the first successful unionization campaign at an Apple Inc. store said it’s eager to begin negotiating with the company and looks to build on the breakthrough elsewhere.  “The biggest thing for us to do now is to get Apple to the table and talk to them about who we are and what we want for our union members,” said David Sullivan, a general vice president at the International Association of Machinists and Aerospace Workers, which prevailed in a union vote last weekend at a store in Towson, Maryland.  Sullivan declined to discuss specific plans for additional stores, but said the union has a “complete strategic plan” in place. “We’ve received phone calls from all over the country,” he said.

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

*All sources from Bloomberg unless otherwise specified