June 30, 2022

Daily Market Commentary

Canadian Headlines

• Canadian Prime Minister Justin Trudeau’s government released a long-anticipated plan to slash motor fuel emissions, setting up a potential clash with the country’s hydrocarbon producing provinces. The Clean Fuel Regulations aim to reduce emissions from motor fuels by 26.6 million metric tons by 2030, according to a statement from the Minister of Environment and Climate Change. The measures are similar to a program spearheaded by California decades ago, known as the Low Carbon Fuel Standard, that has also been adopted by Oregon and the province of British Columbia.  The program is the latest initiative by Trudeau’s government to fight climate change while maintaining Canada’s position as one of the world’s biggest producers of oil and natural gas. The government plans to make Canada a net zero emitter by 2050 even as it pushes forward with plans to build a new oil pipeline from the Alberta’s oil sands to the Pacific as well as new liquefied natural gas export terminals.
• Air Canada says it will make “meaningful” cuts to its flight schedule in July and August to reduce passenger volumes to a level the transport system can handle. Post-pandemic “surge in travel has created unprecedented and unforeseen strains on all aspects of the global aviation system,” Chief Executive Officer Michael Rousseau says in email to customers sent Wednesday. Airline apologizes for flight cancellations and customer service shortfalls that occurred. “Regrettably, things are not business as usual in our industry globally, and this is affecting our operations and our ability to serve you with our normal standards of care,” CEO says

World Headlines

• European stocks were poised for their biggest drop in any half-year period since 2008, as investors focused on the prospects for economic slowdown and stubbornly high inflation in the region. The Stoxx Europe 600 Index fell 2.1% as of 11:40 a.m. in London, extending its year-to-date drop to over 18% for the first half. All sectors were in the red, with autos and consumer products showing the biggest declines. Uniper SE plunged to a five-year low after the German utility withdrew its outlook and said it was discussing a possible bailout from the German government following Russia’s move to curb natural gas deliveries.
• US futures signaled extended stock-market losses Thursday after central bankers issued warnings on inflation and fueled concern that aggressive policy will end in recession. Nasdaq 100 contracts dropped 1.8% while S&P 500 futures declined 1.4%. The tech-heavy gauge managed to end Wednesday’s trading slightly higher, while the S&P 500 fell for a third straight day. Traders ramped up bets that the global economy will buckle under central bank tightening campaigns — and that policy makers will eventually backpedal. The bond market shifted to price in a half-point rate cut in the Federal Reserve’s benchmark rate at some point in 2023.
• Asian stocks fell for a second day as tech-heavy indexes in Taiwan and South Korea continued to get pummeled amid concerns over the potential for aggressive monetary tightening in the US to rein in inflation. The MSCI Asia Pacific Index declined as much as 1.2%, dragged down by technology shares including TSMC, Alibaba and Tencent. Taiwan slid more than 2%, while gauges in Japan, South Korea, Australia dropped more than 1%.  Stocks in mainland China rose more than 1% after the economy showed further signs of improvement in June with a strong pickup in services and construction as Covid outbreaks and restrictions were gradually eased. Traders are also watching Chinese President Xi Jinping’s trip to Hong Kong, his first time outside of the mainland since 2020.
• Oil is heading for the first monthly decline since November as OPEC+ ministers prepare to gather to discuss the group’s supply policy. West Texas Intermediate futures traded near $110 a barrel after closing almost 2% lower on Wednesday. OPEC+ is expected to rubber-stamp an increase in supply for August, but focus is rapidly turning to how much the group’s members with spare production capacity will pump once the current agreement ends.  The oil market was roiled by two conflicting drivers in June. On the one hand escalating fears over an economic slowdown as central banks aggressively raise interest rates has weighed on headline prices. Still, physical barrels are fetching enormous premiums as tight crude markets wrestle with outages from Libya to Ecuador.
• Gold headed for a third straight monthly decline as investors weighed rising interest rates against recession fears, with central bankers warning of a longer-lasting inflation shock. Federal Reserve Chair Jerome Powell and his European counterparts may be forced to tear up their playbook of the last 20 years as they debate how to tackle persistent price pressures and slower growth. Speaking at the European Central Bank’s annual forum Wednesday, President Christine Lagarde said it’s unlikely that the world will soon go back to a low-inflation environment as a result of the pandemic and geopolitics.
• Bitcoin is on track for its worst quarter in more than a decade, as more hawkish central banks and a string of high-profile crypto blowups hammer sentiment.  The 58% drawdown in the biggest cryptocurrency is the largest since the third quarter of 2011, when Bitcoin was still in its infancy, data compiled by Bloomberg show.  The decade in between those hallmarks saw several booms and busts, with cryptocurrencies’ market value swelling to peak at $3 trillion as they gained more widespread adoption and ultra-low interest rates spurred risk taking. But the current bear market stands out for the amount of crypto leverage that’s been unwound — and for the regulatory scrutiny being heaped on an asset class many central banks now consider a threat to financial stability.
• Central bankers have signaled they will do whatever it takes to combat inflation by raising interest rates — something which looks to have already convinced markets to unwind almost all their concern over spiraling prices. Global policy makers ratcheted up their rhetoric Wednesday, with Federal Reserve Chair Jerome Powell saying he will risk a recession to rein in price pressures. The bond market responded by pushing down a gauge of five-year inflation expectations to the lowest since October, erasing all of this year’s spike to a record. The sting in the tail is that traders are also losing confidence central banks can achieve a so-called soft landing, with markets starting to price in rate cuts next year for the US, UK, Brazil and Australia. Bond-market volatility is climbing as yields tumble from multi-year highs reached just two weeks ago.
• IBS Software Services Pvt., backed by Blackstone Inc., is considering a US initial public offering that could value the company at more than $2 billion, according to people familiar with the development, defying concerns about heightened market volatility. The company is working with Goldman Sachs Group Inc. and JPMorgan Chase & Co. for the planned first-time share sale, the people said. IBS Software has filed confidentially for the US IPO, which could happen as soon as this year, they added. The company is considering seeking at least $500 million in the offering, the people said, who asked not to be identified as the information is private. Considerations are at an early stage and details of the IPO including size and timeline could still change, said the people. Representatives for Blackstone, Goldman Sachs and JPMorgan declined to comment. A spokesperson for IBS Software said the company is focused on taking advantage of the recovery in travel, and that it is a strong IPO candidate in the right market environment.
• The housing slowdown is helping to solve one of the US real estate market’s most intractable problems: tight inventory. With fewer buyers competing, the number of active US listings jumped 18.7% in June from a year earlier, the largest annual increase in data going back to 2017, Realtor.com said in a report Thursday. And new sellers entered the market at an even faster rate than before the pandemic housing rally began. The Federal Reserve is cooling off the red-hot housing market as it fights to curb inflation by driving up interest rates. The resulting spike in mortgage costs is making homes less affordable and pushing would-be buyers to the sidelines. That means properties aren’t selling as quickly and must compete with the growing number of new offerings.
• Pfizer Inc. asked US regulators for full approval of Paxlovid, its Covid-19 drug that’s now used on an emergency basis, for people at high risk of developing severe disease. Submission of a new drug application to the US Food and Drug Administration brings the New York drugmaker a step closer to securing a formal clearance that would allow it to sell and market the product outside the pandemic emergency. Pfizer is seeking approval for use in both vaccinated and nonvaccinated people. An oral antiviral treatment for people with mild to moderate Covid, Paxlovid is intended to prevent death and hospitalization in people most at risk, such as the elderly and those with underlying health conditions. Pfizer suggested that the market for its product is large, citing Centers for Disease Control and Prevention data showing that 60% of the US population is estimated to have at least one risk factor for progressing to severe Covid illness.
• Apple Inc. didn’t use the most potent weapon in the management-side playbook—requiring workers to attend anti-union meetings—in recent organizing efforts in Maryland and Georgia, signaling a shift in strategy as the Biden administration seeks to crack down on the practice. The results at the two stores couldn’t have been more different. In Atlanta, Apple exerted enough pressure that workers withdrew their election petition. In Towson, Md., the union prevailed by a wide margin in an election June 18. The efforts unfolded as one of the government’s top labor lawyers, National Labor Relations Board General Counsel Jennifer Abruzzo, seeks to ban anti-union “captive audience” meetings where workers aren’t allowed to leave. Unions have long said these meetings give an unfair advantage to management and are lobbying Congress for legislation to outlaw them.
• Samsung Electronics Co. kicked off mass production of 3-nanometer chips that are more powerful and efficient than predecessors, beating rival Taiwan Semiconductor Manufacturing Co.to a key milestone in the race to build the most advanced chips in the world. South Korea’s largest company will begin with 3nm semiconductors for high-performance and specialized low-power computing applications before expanding to mobile processors, it said in a statement on Thursday. By applying so-called Gate-All-Around transistor architecture, Samsung’s 3nm products reduce power consumption by up to 45% and improve performance by 23% compared to 5nm chips, it said. Samsung’s push to be first to market with the latest technology is essential in its uphill climb to match TSMC, which remains dominant in the contract chipmaking, or foundry, market. The Taiwanese firm accounts for more than half of the global foundry business by revenue and is the exclusive supplier of Apple Inc.’s Silicon processors for iPhones, iPads, MacBooks and desktop Mac PCs.
• Japan Airlines Co. is considering replacing its older Boeing Co. 737 short-haul fleet with more modern and fuel efficient models, according to people familiar with the matter. The airline, which operates 45 of the 737 jets with an average age of about 12.5 years, is currently deciding between the 737 Max range and Airbus SE’s rival A320neo family, the people said, asking not to be identified because the discussions are private. An order could be for anywhere between 30 and 50 of the narrow-body jets, the people said. Deliberations are preliminary and no final decisions have been made, the people said.
• Germany is in talks to bail out energy giant Uniper SEto stem broader fallout from Russia’s moves to slash natural gas deliveries. Uniper, the largest buyer of Russian gas in Germany, said it’s discussing a possible increase in state-backed loans or even equity investments to secure liquidity. The crisis could also affect Finland, which controls Uniper’s parent Fortum Oyj. The utility said Uniper’s rescue requires a national effort “in Germany.”  Talks are ongoing to provide “stabilization measures” for the utility, German Economy Ministry said in a statement on Thursday. “The reason for this is the sharp rise in gas prices and the reduced supply volumes from Russia,” it said.
• The European Central Bank plans to ask the region’s lenders to factor in the economic hit of a potential cut off of Russian gas when considering payouts to shareholders. “We will propose to ask banks to recalculate their capital trajectories under a more adverse scenario including also potentially a gas embargo or a recession,” said Andrea Enria, who leads the ECB’s supervisory board. The watchdog would “use this also for the purpose of vetting their distribution plans going ahead.” European banks have seen their prospects clouded as Russia’s invasion of Ukraine raises the possibility of a wave of soured loans given a spike in inflation and companies’ difficulty in sourcing commodities. That’s a stark difference to the beginning of the year when European banks were luring back investors with pledges to return billions of euros in capital via dividends and share buybacks.
• London Heathrow and Paris-Charles de Gaulle airports are canceling more flights as Europe’s travel chaos continues into the summer. Heathrow asked airlines to cut 30 flights from their schedules Thursday morning amid concern that peak passenger numbers will exceed the level it can safely handle. France’s civil aviation authority has ordered a 17% reduction in flights out of Paris-Charles de Gaulle on Thursday due to a strike by firefighters. The walkout will lead to a shutdown of two out of the the hub’s four runways between 7 a.m. and 2 p.m. local time. The labor strife is set to continue into the weekend and spill over to Paris’s other hub at Orly, as more categories of workers plan walkouts.
• German unemployment unexpectedly rose, snapping 15 straight months of decline as refugees from the war in Ukraine were included in those searching for work. Joblessness jumped by 133,000 in June, lifting the jobless rate to 5.3% — the highest since November. Economists had estimated a drop of 5,000. The European Central Bank predicted this month that refugees fleeing Russia’s invasion could end up boosting the euro area’s active labor force by as many as 1.3 million people. Researchers explained, however, that the region’s rapidly aging population and staff shortages — as well as cultural proximity and swift efforts to help those escaping the war — could simplify integration into the workforce.
• UK house prices slowed more than expected this month after a series of interest-rate increases raised the cost of mortgages. Nationwide Building Society said prices grew 0.3% in June to £271,613 ($330,000), the slowest since September and less than the 0.5% gain that economists had expected.  The annual pace of growth eased to 10.7% from 11.2% in May. The Bank of England has lifted interest rates steadily since December to quell inflation, which has reached a 40-year high. With policy makers signaling more increases in the months ahead, economists expect a slowdown in the property market, which remained buoyant throughout most of the pandemic recession.
• Italy is set to pass a new energy aid package worth as much as 8 billion euros ($8.4 billion), as Prime Minister Mario Draghi’s government steps up support to families and consumers hit by soaring utility bills, people familiar with the matter said. Draghi rushed back to Rome on Wednesday, cutting short a visit to Madrid for a summit of Nato leaders, in order to chair a cabinet meeting Thursday on budget adjustments, the people said, adding that no final decision on the measures has been taken. Italy has so far weathered the economic impact from inflation and the war in Ukraine better than European peers, but the outlook is at risk from looming recession and higher bond yields, which will limit the government’s room for maneuver in coming months.
• OPEC+ is expected to rubber stamp an oil-output increase of 648,000 b/d for August when it meets virtually today. The cartel is unlikely to be able to hit even that modest target, given its production problems. But for now, traders are more concerned about aggressive interest-rate hikes and possible recessions in the US and Europe, meaning oil prices are being weighed down even with the supply situation still so tight. This combination of weak supply and demand outlooks is causing a clash of sorts between physical traders and pure commodity funds — who think going long energy is an obvious play — and, on the other hand, macro funds anticipating demand destruction from high prices.
• Skeptics have long made a sport of predicting that the decade-long rally in technology stocks was destined to reverse. At the halfway point of 2022, it seems like this is the year when they will be proven right. The Nasdaq 100 Index has tumbled by almost a third this year, erasing some $5.4 trillion in value in a selloff that has left few stocks unscathed. The benchmark, which gets half its value from tech, is on track for its biggest calendar-year decline ever. And it’s hard to make a convincing case for a market recovery in the second half: Investors are pricing in further interest rate increases from the Federal Reserve as the central bank tries to combat inflation, sparking concern that the global economy will tip into recession. Analysts are beginning to cut earnings estimates for technology companies as a result.
• Walgreens Boots Alliance Inc. beat Wall Street’s estimates for fiscal third-quarter profit as Covid-19 testing and vaccination continued to pull customers into its drugstores. Walgreens reported adjusted earnings of 96 cents a share, compared with 94 cents a share, the average estimate of analysts surveyed by Bloomberg.
• A gauge measuring risk on European junk bonds crossed the threshold of 600 basis points for the first time since April 2020, as central bankers reiterated concerns over inflation. The iTraxx Crossover, which tracks the cost of insuring European high yield bonds, jumped to as much as 605 basis points on Wednesday, reaching its highest level since April 2020, according to CBBT pricing compiled by Bloomberg. The move came after central bankers meeting in Portugal contemplated the new policy play-book which might be required in a new world of surging prices.  Junk credit has struggled in this first half of the year, as mounting recession fears dampened the risk appetite of investors and pushed them to seek shelter in safer asset classes. A Bloomberg index tracking returns for high yield bonds saw a 13.6% decline year-to-date.
• President Xi Jinping said Hong Kong had been “reborn” since he last visited five years ago, as he returned to the former British colony to mark its 25th anniversary of Chinese rule. “After the storm, Hong Kong has been reborn from the ashes, showing vigor and vitality,” the Chinese leader said in a short speech Thursday afternoon at West Kowloon railway station. His comments were an apparent reference to the sweeping security law Beijing imposed in 2020 that crushed dissent after mass anti-government unrest.  The president added that his “heart is always with Hong Kong,” saying the city’s “one country, two systems” formula would ensure its prosperity and stability. Xi and his wife, Peng Liyuan, were greeted by crowds of flag-waving schoolchildren and a traditional lion dance, after taking the city’s high-speed rail link from the mainland. Outgoing Chief Executive Carrie Lam was at the reception along with her successor, John Lee, and Zheng Yanxiong, head of the secretive agency China created to implement its security law.
• Mark Tritton was supposed to be the savior for Bed Bath & Beyond Inc. — a hotshot executive from Target Corp. who knew how to charm customers with in-house brands and train stores on handling online and in-person orders. But the chief executive officer never saw the fruits of his labor, and the home-goods retailer watched its sales melt away during the pandemic even as customers snapped up the same wares at nimbler competitors. One last dismal quarterly report was all it took, and Tritton was unceremoniously dumped on Wednesday. Behind the scenes, activist shareholder Ryan Cohen, whose Reddit-reading fans had followed him into the stock, had grown fed up with Tritton’s performance and pushed the board to fire him, according to a person familiar with Cohen’s thinking. Cohen continues to believe the better-performing Buybuy Baby unit is a great asset and sees Tritton’s departure as a chance to undo a series of missteps over the last three years. The challenge, with the stock down 80% in the past 12 months and bond yields rising, is persuading other investors that Bed Bath & Beyond still has time to recover.

Russia confirmed it withdrew troops from Ukraine’s Snake Island in the Black Sea after the Ukrainian military said it had driven them out under massive attack. The Defense Ministry in Moscow called the decision a gesture aimed at easing grain shipments from Ukraine, but a top official in Kyiv dismissed that claim. There was no sign of a long-sought deal on deliveries aimed at easing a global food crisis

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

*All sources from Bloomberg unless otherwise specified