June 24, 2022
Daily Market Commentary
• Recession Fears Sink Canadian Banks Into 20% Drop From High. Canadian banks fell about 20% from their record high set in early February as recession fears send investors fleeing. The S&P/TSX Commercial Banks Index, which tracks the country’s eight largest lenders, dropped Thursday, adding to another day of losses after inflation in Canada surged to a four-decade high and US data pointed to rising unemployment and slumping manufacturing and services activity. Toronto-Dominion Bank, Canada’s second-largest lender, led losses as it dropped 3.3% to its lowest point in nearly nine months. Canadian Imperial Bank of Commerce and Bank of Nova Scotia each fell about 3%. The commercial banks index hit its high on Feb. 8 and was one of the S&P TSX Composite Index’s strongest performers before spiraling as Russia launched its war in Ukraine on Feb. 24 and central banks warned of a potential economic downturn. Analysts are warning that profits may not be as strong going forward. Canadian bank earnings estimates for 2023 could fall by 16% on average in the case of an economic downturn, according the RBC Capital Markets. Scotiabank and CIBC are among the Big Six bank stocks leading losses this year. Both banks, Canada’s third- and fifth-largest banks, could have further to fall as they rebuild loan loss provisions previously released as pandemic restrictions unwound earlier this year.
• Bausch Health Names Hedge Fund Billionaire Paulson Chairman. Bausch Health Cos. has named hedge fund billionaire John Paulson as its new chairman, replacing Joseph Papa, who resigned on Thursday. The pharmaceutical and device company, which focuses on eye care, gastroenterology and dermatology products, said Papa’s resignation wasn’t the result of “any dispute or disagreement.” Paulson, who is also the company’s second-largest shareholder, starts immediately.
• Global equity funds saw their biggest outflows in nine weeks as investors piled into cash amid fears that the US economy could be headed for a recession. About $16.8 billion exited global stock funds in the week through June 22, with US equities seeing their first outflow in seven weeks at $17.4 billion, Bank of America Corp. said, citing EPFR Global data. Bonds saw redemptions of $23.5 billion, while investors moved $10.8 billion to cash and $0.6 billion to gold, the data show. Bank of America’s custom bull and bear indicator remains at “maximum bearish,” strategists led by Michael Hartnett wrote in a note, which is a buy signal for stocks. For the year, investors have bought $195 billion of stocks and sold $193 billion of bonds, meaning capitulation has not been reached for equities, they said. The US stock market has struggled to meaningfully recover after it sank into a bear market last week, and the S&P 500 Index is still on track for its worst first half since 1970 amid fears of economic slowdown. Federal Reserve Chair Jerome Powell acknowledged this week that a soft economic landing was “very challenging.”
• US Tech Stocks Poised to Gain as Yield Pullback Provides Relief. The Nasdaq 100 is set for further gains after the sharp drop in bond yields helped brighten the outlook for technology stocks, which have led the selloff this year as central banks embarked on a path of interest rate hikes. Contracts on the tech-heavy gauge rose 0.9% by 5:06 a.m. in New York after the underlying benchmark rallied 1.5% on Thursday, when the yield on the 10-year Treasury slipped to 3.09%. S&P 500 futures climbed 0.7%, with the US stock benchmark on track for its first weekly gain in a month. Traders dumped technology stocks this year as the Federal Reserve raised interest rates to tame soaring inflation, stoking fears of a recession. Higher rates mean a bigger discount for the present value of future profits, hurting growth stocks with the highest valuations, especially tech.
• SPACs were one of Wall Street’s hottest trades during the pandemic bull market that finally came to a crashing close in June. Special purpose acquisition companies, also known as blank-check firms, go public without having a business yet. Instead, they’re formed to raise money so that they can buy another, still-private company to be chosen later. SPACs captured the imagination of a lot of ordinary investors who saw them as a way to get in early on promising startups before they went public. The fad also attracted a range of Wall Street titans, athletes, and celebrities looking to get a piece of the pie by starting their own SPACs. But tumbling stock prices—especially those of more speculative, early-stage companies—have wiped out billions of dollars in value for shareholders who held SPACs after their acquisition deals. Some companies that went public via a merger with a SPAC have fallen so far that they’ve been bought by private companies or competitors at far lower prices. At the same time, a lot of blank-check companies that have yet to do a deal are coming up on big deadlines. If they don’t find a deal soon, they’ll have to return the money they raised to their shareholders.
• US Poised to Escalate Claim Mexico Violated Free-Trade Pact. The US is preparing to escalate its complaints that Mexico’s state-favoring energy policies violate the nations’ free-trade agreement, people familiar with the matter said, a move that would risk exacerbating tensions between the countries’ governments. US Trade Representative Katherine Tai’s office in recent weeks has been working on a request for formal consultations under the US-Mexico-Canada Agreement and discussing it with other agencies, according to the people, who asked not to be identified without permission to speak publicly. The timing for the request is still being determined, the people said.
• Europe Is Now in Its Worst Corporate-Bond Selloff in Decades. By almost any metric, this is Europe’s worst corporate-bond selloff in decades, surpassing even the 2008 financial crisis. Whether you look at returns, the speed at which yields have risen, or the length of the selloff, investors face a historic pummeling. An index of investment-grade European debt has fallen seven months in a row, its longest losing streak since its inception in 1998. The 12.9% loss over the past 12 months is also the worst in its history. The plunge, a dramatic turnabout from three decades of largely favorable markets, is the result of central banks around the world tightening monetary policy in an attempt to tame spiraling inflation. “We’ve been down most months this year,” said Kyle Kloc, a senior portfolio manager at Fisch Asset Management. “You very rarely get these types of repeated negative returns.” The selloff is more intense than two comparable periods, he said: the onset of the Covid-19 pandemic, which lasted only weeks before central banks calmed markets, and the great financial crisis, which was a series of “sharp, quick drops.”
• Hackers Steal $100 Million by Exploiting Crypto’s Weak Link. Hackers looted about $100 million from a so-called cryptocurrency bridge, again exposing a key vulnerability in the digital-asset ecosystem. Blockchain Harmony said in a tweet that the hack of its Horizon bridge, which lets people swap coins between different blockchains, took place Thursday morning. It has “begun working with national authorities and forensic specialists to identify the culprit and retrieve the stolen funds.” Most of the crypto world is divided into silos: The Bitcoin and Ethereum networks, for example, can only operate using Bitcoin and Ethereum tokens. As more cryptocurrencies gain adoption and traders demand the ability to interact seamlessly with one another, projects like Harmony are developing platforms known as bridges that can accept a variety of tokens and move them fluidly between blockchains.
• Spotify’s Billion-Dollar Bet on Podcasting Has Yet to Pay Off. Last year, Ostroff’s research and data team asked a question that many at Spotify already knew the answer to: Had any of this spending yielded a major new hit? The team produced a report that basically said no, according to five current and former employees who didn’t want to be named discussing internal business. Spotify evaluated how well shows did based on listenership, their traction on social media, and if they attracted new fans to the service, among other criteria. The team, the employees say, identified two groundbreaking hits—neither of which Spotify produced: Serial, the true crime drama that introduced many to the format (and is now owned by the New York Times), and The Joe Rogan Experience, a talk show from the former host of Fear Factor. (Rogan’s show is currently exclusive to Spotify.) A couple of dozen shows were classified as lesser hits.
• Gary Gensler said the SEC is seeking one rule book to prevent cryptocurrency operators from slipping through the fragmented regulatory structure, the FT reported. Coinbase will roll out its first crypto derivative product on Monday.
• Twitter gave Elon Musk more user data this week, including real-time API information, after Musk’s lawyers sent the board a letter last Friday, claiming the historical data already supplied wasn’t enough, according to Insider. The latest data allow Musk’s team to conduct its own analysis on bots.
• The Senate approved bipartisan gun legislation that’s being hailed as the biggest breakthrough on the issue in three decades. It offers states grants and incentives to help curb firearms violence and is expected to pass the House. At the state level, NY, NJ, and California are exploring legislation and regulations to combat a Supreme Court decision that overturned a NY law limiting who can carry a handgun in public.
• Biden and G-7 leaders will weigh a plan to curb Russian oil revenue when they meet in Bavaria on Sunday in the shadow of war, global recession fears and a faltering presidency. Several leaders worry a midterm defeat will limit what he can achieve on Ukraine, a French official said. Before the gathering, the US announced a further $450 million in weapons and aid for Ukraine.
• More bad news for Boris Johnson. He faces fresh questions about his leadership and voter appeal after the Conservatives lost two key parliamentary seats in one night and the party chairman quit. The economic picture also looks bleak. Retail sales fell 0.5% in May as the cost of living forced consumers to cut back spending, especially on food. And consumer confidence dropped to a record low.
• Germany Fears Russia Could Permanently Close Main Gas Pipeline. Germany’s economy minister said he can’t be sure that Russia will resume shipments through a key gas pipeline following planned maintenance next month, raising the prospect of a fresh surge in prices and rationing this winter. “I would have to lie if I said I didn’t fear that,” Economy Minister Robert Habeck said late Thursday in an interview with public broadcaster ZDF. His concerns were echoed Friday by Klaus Mueller, the head of the federal network agency, who said that flows through the Nord Stream 1 link might not restart even after the end of the 10-day maintenance period beginning on July 11. Mueller also warned that prices for consumers could triple, and urged households and businesses to put money aside and save energy wherever possible. “If we have a very, very cold winter, if we’re careless and far too generous with gas then it won’t be pretty,” Mueller said in an interview with public broadcaster ARD.
• Lufthansa Scraps 3,100 Flights as Europe’s Travel Chaos Mounts. Deutsche Lufthansa AG is canceling a total of 3,100 flights after a wave of coronavirus infections worsened staffing shortages, adding to Europe’s travel chaos as the crucial summer vacation period gets under way. Germany’s flagship airline on Friday announced it will scrap 2,200 domestic and European routes in July and August. That comes on top of 900 cancellations announced earlier this month. Lufthansa fell as much as 3.3% in Frankfurt. Travel demand has rebounded dramatically in Europe with the lifting of virus curbs, leaving some airlines struggling to cope and subjecting passengers to hours-long queues and cancellations. A new Covid-19 outbreak — while less deadly than previous waves — is causing growing absences from workplaces, worsening acute labor shortages.
• Oil’s Dive Won’t Bring Any Immediate Relief on Inflation. Anyone hoping that the recent slump in oil prices will bring a quick fix for rampant global inflation needs to think again. While Brent crude has shed 10% in the past few weeks, retail prices all over the world for products like gasoline and diesel haven’t fallen anywhere near as fast — and are often still rising. In the US, pump gasoline prices are just a few cents below a record of more than $5 a gallon set earlier this month. The UK continues to set daily retail fuel price records, while in Singapore prices are hovering close to the highest ever. They are all signs that the oil industry’s main supply problem — principally a shortage of capacity to make refined fuels — has no easy fix except demand destruction. But for now, with many governments buoying consumption through subsidies or tax cuts, refineries are struggling to make as much gasoline and diesel as the world wants. “The restraint is on refining capacity,” said Amrita Sen, co-founder and director of research at London consultancy Energy Aspects Ltd. “We’ve seen crude prices come down but products really haven’t.”
• Crops Plunge to Pre-War Price, Bringing Relief to Expensive Food. Crop prices have crashed back to where they were at the start of the war in Ukraine, potentially bringing some relief to food inflation that’s contributing to a squeeze on household budgets. Wheat, soybean oil and sugar are among farm commodities that have retreated in recent weeks, with the Bloomberg Agriculture Spot Subindex on track for its worst week since 2011. On Friday, grains steadied or picked up as traders took stock of the rout that has taken the agriculture index into oversold territory. Prices have been caught up in broader worries over a global recession, while the start of grain harvests in some key growers should help replenish world supplies strained by the war. That could herald some relief for consumers who have been hit by surging costs of essentials from food to energy to fuel. Yet, changes in crop prices often take time to feed through to grocery stores and Ukraine’s crop exports remain hobbled by Russia’s invasion.
• Commodity Losses Strip Emerging Markets of Their Main Attraction. The most popular trade in emerging markets this year — betting on commodity-exporting nations — is losing its appeal. The currencies and bonds of Brazil to Mexico and South Africa were the best performers among developing-nation peers in the first five months of 2022 as commodity prices skyrocketed following Russia’s invasion of Ukraine. They have turned laggards this month after growing fears of a global recession and China’s Covid lockdowns sent a Bloomberg gauge of raw-material prices tumbling 10% from an eight-year high. The fizzling of the commodity-led rally comes at a crucial point for emerging-market investors as the Federal Reserve’s tightening saps liquidity and worsens the outlook for riskier assets. They have nowhere to hide as the other half of the developing world — commodity importers mainly in Asia — are also witnessing a selloff amid stubborn inflation and delayed rate-hike plans.
• Global Commodity Shock Enters Next Phase With Recession Test. Commodities will get intense scrutiny for the rest of 2022 after a first half dominated by the supply turmoil and inflationary shocks unleashed by Russia’s attack on Ukraine. Here, we look at what the rest of the year holds for raw materials from crude oil and natural gas to grains, gold, and iron ore. The second half will be about how consumers, businesses and governments cope with the shockwaves to commodity flows. Either the global economy can withstand the sky-high prices needed to maintain tight supplies — especially for energy — or soaring prices will be cured by recessions. In natural gas, Russia’s supply cuts open a troubled new era for Europe. In oil, OPEC’s next move is crucial, and in food, there are some signs of prices cooling. The fate of China’s beleagured property sector will be crucial for metals, while central bank moves to crush inflation pose a broad headwind.
“Do what is right, not what is easy nor what is popular.” —Roy T. Bennett
*All sources from Bloomberg unless otherwise specified