June 27, 2022

Daily Market Commentary

Canadian Headlines

• The war in Ukraine has highlighted the risks associated with the supply chain for metals needed for the energy transition. Canada has the potential to become a metals powerhouse for batteries and electric vehicles, harnessing its significant raw material resources, hydropower capacity and proximity to the large US market. This ascension is not assured, however, and will likely hinge on the country increasing its metals recycling capacity to bolster supply, and investing in technologies such as carbon capture to decarbonize production. Canada’s proximity to the US also makes it an attractive place to build an EV metals supply chain. With the joint venture between GM and POSCO Chemical investing $633 million in a cathode materials plant and the Stellantis-LG Energy Solution tie-up deploying $4.1 billion to build a battery plant, there is a significant push by the government to create an entire EV supply chain within Canada. Some 14 million EVs are expected sold in the US and Canada by 2040.

World Headlines

• European equities rose as enticing valuations won out for now over the risk that the economy may be headed for a recession. The Stoxx Europe 600 Index climbed 0.6% at 11:50 a.m. in London, rising to the highest level in nearly two weeks. Basic resources lead gains as metals recovered and after the sector underperformed last week. Meanwhile, the OMX Stockholm 30 Index outperformed European peers after being shut for a holiday on Friday, while Italy’s FTSE MIB Index lagged. European stocks have slumped this year as central banks turned more hawkish to tame soaring inflation, stoking fears of a recession. The benchmark now trades at about 12 times estimated earnings, hovering near its lowest valuation since March 2020, the start of the pandemic.
• Global stocks extended gains on Monday after posting their best performance in a month last week. U.S. futures rose, with the Nasdaq 100 advancing 0.6% and technology heavyweights including Amazon.com Inc., Apple Inc. and Microsoft Corp. climbing in premarket trading. Quarterly portfolio rebalancing by institutional buyers could be helping equities, as investors assess whether inflation is cresting and recession can be averted. JPMorgan Chase & Co.’s Marko Kolanovic is calling for stocks to rise 7% this week as pension and sovereign wealth funds shift their exposures. Treasuries slipped, pushing the rate on the US 10-year note to 3.16%. Yields have retreated from June highs on growth worries, but whether that marks the end of the Treasury bear market is a live debate. The dollar fluctuated.
• Asian stocks advanced after battered technology shares rebounded as easing recession fears underpinned investor sentiment. The MSCI Asia Pacific Index rose as much as 2.1%, its biggest intraday gain this month, as chip and internet companies including TSMC and Alibaba climbed. Tech-heavy markets such as Taiwan and South Korea extended gains made Friday, while an index of Asian tech stocks rallied for a second straight session after dropping to the lowest since September 2020.  Asian equities are bouncing back from a two-year low, as US Treasury yields retreat. Almost all markets in the region rose, with Hong Kong’s Hang Seng Index leading gains and China’s benchmark coming closer to a bull market as Shanghai’s leader declared victory in defending the financial hub against Covid. A Chinese tech measure in Hong Kong advanced 4.7%.
• Oil fluctuated near $107 a barrel in New York as investors monitored developments from the gathering of Group of Seven leaders, while fears of a demand-sapping recession continued to hang over the market. West Texas Intermediate swung between gains and losses on Monday, after posting its first back-to-back weekly loss since April. The G-7 will commit to providing indefinite support to Ukraine for its defense against Russia, a draft statement showed. The group is also weighing a price cap on Russian crude. Oil is heading for its first monthly decline since November amid mounting economic concerns as central banks hike interest rates to combat surging inflation. Retail prices for products such as gasoline haven’t fallen anywhere near as fast as crude due to a shortage of capacity to make fuels.
• The plan by some Group of Seven nations to ban new gold imports from Russia is “largely symbolic” as flows have already been restricted by sanctions, according to analysts.  The US, UK, Japan and Canada plan to announce the ban during the G-7 summit that started Sunday in Germany. While the UK government said over the weekend that “this measure will have global reach, shutting the commodity out of formal international markets,” analysts played down the potential impacts as the London Bullion Market Association, which sets standards for that market, removed Russian gold refiners from its accredited list in March. Bullion climbed as much as 0.8% on Monday as the dollar weakened. Prices may have received a little initial support from the news, but most analysts said the sanctions are unlikely to have a longer-term impact.
• Iron ore rebounded — with futures briefly topping $120 a ton in Singapore — on optimism over China’s recovery from virus lockdowns.  Asia’s largest economy has shown some improvement this month as Covid-19 restrictions were gradually eased, according to a Bloomberg aggregate index of eight early indicators for June. The overall gauge returned to the neutral level after deteriorating in the previous two months. The steel-making ingredient is still down around 25% this quarter amid a property slump and economic downturn in China, as well as growing fears of a global recession. A continued relaxation of virus curbs is generating some optimism on the demand outlook, however, with Jefferies Financial Group forecasting a rebound on more relaxedChinese monetary policy.
• Britain under Prime Minister Boris Johnson is running into the biggest headwinds it’s faced since the 1970s, heaping pain on an economy still reeling from Brexit and the pandemic. After suffering from unprecedented shocks in recent years, the nation is succumbing to more intractable problems marked by plodding growth, surging inflation and a series of damaging strikes. The result is a plunge in consumer confidence that analysts warn may lead to a recession. Railway workers last week walked off the job in anger that their living standards are slipping, and criminal barristers are striking Monday. Teachers and doctors may be next.
• Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week. Inflows to U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $534.1 million in the week ended June 24, compared with losses of $528.8 million in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $22.9 billion.
• Dubai business park operator Tecom Group drew orders worth $9.63 billion for its initial public offering, the latest Middle East listing to attract strong investor demand amid a boom in regional share sales. Dubai’s government sold 625 million shares at 2.67 dirhams each, raising $454 million, according to a statement on Monday. The price implies a dividend yield of about 6%, following a regional trend of luring investors with juicy returns, and a market capitalization of 13.4 billion dirhams ($3.65 billion). The price range had been set at 2.46 dirhams to 2.67 dirhams per share and investors put in enough orders to cover the books within hours on the first day. Despite being covered 21 times, Tecom’s IPO proved less popular than some recent Middle Eastern listings.
• The Saudi Central Bank placed about 50 billion riyals ($13 billion) as time deposits with commercial lenders, according to people familiar with the matter, seeking to ease the worst liquidity crunch in over a decade. The intervention started just before the US Federal Reserve’s interest-rate hike this month, and consisted of money provided to banks at a discount to the three-month Saudi Interbank Offered Rate, or Saibor, used as a benchmark to price loans, the people said, asking not to be identified as the information is private. Liquidity conditions as measured by Saibor are the tightest since late 2008, when the price of crude collapsed below $40 a barrel. The extent of the funding stress among Saudi banks has little precedent outside periods when oil prices were crashing or global crises like the credit crunch of 2008-2009.
• Prosus NV is planning to sell more of its $134 billion stake in Chinese internet giant Tencent Holdings Ltd. to finance a buyback program, reversing a pledge to hold onto the full shareholding. Tencent declined in Hong Kong on Monday as investors pondered the extent to which Prosus, the Chinese company’s biggest shareholder, will unload its stock. The shares fell as much as 2.5% and traded 1.6% lower at the close. “We will keep selling Tencent shares to buy back our own, it’s open-ended and an unlimited program,”, Chief Executive Officer Bob Van Dijk said in an interview. Disposals will be in relatively small chunks working out at about 3% to 5% of daily trading volumes, he said.
• Group of Seven nations are set to announce an effort to pursue a price cap on Russian oil, US officials said Monday, though there is not yet a hard agreement on curbing what is a key source of revenue for Vladimir Putin for his war in Ukraine. Russia’s war and limiting its profits from rising energy prices have been the main topics of discussion so far for leaders gathered for three days in the Bavarian Alps. Bloomberg News reported Sundaythat the G-7 is discussing a price cap and that a potential mechanism would work by imposing restrictions on insurance and shipping. Negotiators — especially those from the US and Italy — are seeking a system that limits the flow of money to Russia while allowing oil’s availability to large buyers, like China and India, in order to avoid further price shocks.
• Group of Seven leaders are discussing the viability of a price cap on Russian oil as talks in the Bavarian Alps again focus on Ukraine. President Volodymyr Zelenskiy joined the summit by video link from Kyiv and said he wants the war to be over by the end of the year, according to officials familiar with his remarks. On the second day of their meeting at Schloss Elmau, leaders adopted a declaration pledging to support Zelenskiy and his government “for as long as it takes.” US President Joe Biden is set to announce the purchase of an advanced surface-to-air missile defense system to help protect Ukrainian cities. Later in the day, leaders of the club of rich nations will address topics including food security, with the world facing a threat of widespread famine due to stocks stranded in Ukraine, one of the world’s biggest grain exporters. Counterparts from India, Indonesia, Argentina, South Africa and Senegal are joining the discussions.
• The leaders of Finland and Sweden are set to meet with Turkish President Recep Tayyip Erdogan on Tuesday in a bid to convince him to drop the objections to their membership in NATO. Finland’s President Sauli Niinisto and Swedish Prime Minister Magdalena Andersson are slated to meet Erdogan in Madrid, alongside Jens Stoltenberg, the secretary general of the North Atlantic Treaty Organization, Niinisto’s office said on Twitter on Monday. Their meeting is preceded by a round of talks hosted by NATO in Brussels, including a bilateral encounter by Stoltenberg and Andersson. Finland and Sweden applied to join NATO in May following Russia’s attack on Ukraine, only to have their accession immediately stalled by Erdogan, who is demanding they do more to clamp down on Kurdish groups it views as terrorists. Allowing sales of weapons is another key demand by Erdogan.
• European Union governments are confronting the risk of a splintering energy market as Russian cuts in natural-gas supplies test the bloc’s unity in response to the war in Ukraine. An increase in gas supply disruptions following EU sanctions on Russia is prompting member countries to step up winter preparations as they seek to refill depleted storage. EU energy ministers will discuss risk preparedness at a meeting on Monday in Luxembourg, according to diplomats. German Economy Minister Robert Habeck warned of a possible gas shortage in the country and appealed to European solidarity. Sufficient reserves are key to getting through peak heating and lighting demand in the winter. They also act as a buffer that allows gas to move across borders within the EU to ensure all member nations have enough supply. Countries can help each other out if the crisis escalates.
• Denmark has agreed on a new energy deal which will remove gas as a heating source for households and expand offshore wind capacity. A majority of parties across the political aisle agreed over the weekend to a new set of targets, including to phase out gas for about 400,000 households from 2035 and an ambition that all gas should come from green sources by 2030, the government said.  Denmark currently has 2.3 gigawatts of offshore wind and with the extra 4 gigawatts to be added with the new deal, the Nordic country expects to reach 12.9 gigawatts in 2030, when including other projects in the pipeline.
• President Joe Biden rebooted his effort to counter China’s flagship trade-and-infrastructure initiative after an earlier campaign faltered, enlisting the support of Group of Seven leaders at their summit in Germany. The Build Back Better World initiative, named after Biden’s domestic spending and climate agenda, struggled to get off the ground because not enough G-7 partners contributed financially when it was unveiled a year ago, according to people familiar with its lack of progress. European officials cited the Biden administration’s inability to get its own ambitious economic legislation through Congress. The measure has been re-branded the “Partnership for Global Infrastructure and Investment” and the US is calling on leaders to agree to fund the launch of projects in middle- and low income countries to the tune of $600 billion over the next five years. It will consist mostly of private sector investments, with some funding from the US Development Finance Corporation and Export-Import Bank and other commitments from foreign governments.
• Days before Hong Kong’s landmark July 1 celebrations, President Xi Jinping is still keeping the city guessing over his in-person attendance, as the former British colony clocks some 2,000 daily Covid cases. The official Xinhua News Agency reported Saturday that Xi will “attend” both a meeting celebrating the city’s 25th anniversary of Chinese rule and the swearing-in ceremony of incoming Chief Executive John Lee and his government, without providing details. When Xi last visited the city five years ago, the official statement announcing his trip was more explicit, with Xinhua specifying the Chinese leader would “go to Hong Kong to attend the celebration of the 20th anniversary” of the city’s handover from Britain.
• One of Wall Street’s most prominent bears sees the current rally in US stocks extending — prior to the selloff recommencing. Morgan Stanley strategists led by Michael Wilson say the S&P 500 Index may climb another 5% to 7%, before resuming losses. “We think US equity markets can rally further,” they wrote in a note, with a decline in both bond yields and oil prices having eased some worries around runaway inflation and helping the benchmark snap a three-week losing streak. US stocks have been roiled this year by concerns that a combination of a hawkish Federal Reserve and surging inflation could tip the economy into a recession. The S&P 500 is in a bear market after falling 20% from its January peak and is on course for its worst first half since 1970. S&P 500 futures were up 0.3% while Nasdaq 100 contracts gained 0.4% as of 6:23 a.m. in New York on Monday.
• For years, investors valued Facebook’s parent company as if its growth would never falter. Now that it has, fund managers who buy cheap, out-of-favor stocks are finally getting a chance to own shares of Meta Platforms Inc.  Stock pickers at value firms Dodge & Cox, First Eagle Investment Management and Artisan Partners bought millions of Meta shares this year. Index-tracking investors now will be buying too: After FTSE Russell’s annual overhaul of its equity benchmarks, Meta on Monday joined other former growth darlings Netflix Inc. and PayPal Holdings Inc. in the firm’s value indexes, which serve as the basis for billions of dollars of passive portfolios. Meta began to attract bargain hunters after the company announced in February that Facebook’s user growth had stalled, sending the shares plunging. The stock last week reached its cheapest level ever, relative to earnings. For investors who believe the problems at Facebook are temporary, that’s a buying opportunity.
• McDonald’s Corp. named Ian Borden as its new chief financial officer starting Sept. 1, part of a trio of promotions as the company deals with challenges to its global supply chain. Borden — currently the company’s president for international operations — will replace Kevin Ozan, who is becoming senior executive vice president for strategic initiatives. Ozan is replacing Francesca DeBiase, who is retiring as of Aug. 31, the hamburger chain said in a statement Monday. Marion Gross, the supply-chain chief for North America, will assume that role on a global basis starting Sept. 1. The changes come as McDonald’s is navigating what Chief Executive Officer Chris Kempczinski has called “an increasingly complex and uncertain operating environment.” While diners are still spending to eat out, consumers are grappling with soaring inflation at the gas pump and in the grocery aisle. McDonald’s also recently pulled out of Russia and is dealing with supply-chain disruptions and a tight labor market.
• Spirit Airlines falls 5.4% in premarket trading on Monday after Frontier Airlines raised its offer for the carrier, earning a recommendation from proxy firm Institutional Shareholder Services. This latest move by ULCC in its pursuit of SAVE is an effort to fend off a competing bid by JetBlue Airways

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

*All sources from Bloomberg unless otherwise specified