March 30, 2022

Daily Market Commentary

Canadian Headlines

• Lululemon Athletica Inc. shares rise 7.6% in premarket provided a 1Q profit and net revenue forecast that topped estimates. The board approved a new stock buyback for up to $1 billion of common shares. The analysts recognize Lululemon strong momentum, brand power, and guidance above Street’s expectation, with at least one raising his PT, while some say at current levels there is not much upside to come.
• Ontario is raising a tax on home purchases by some foreigners to 20% and making it harder to avoid as it tries to cool a scorching real estate market. The so-called speculation tax will apply to homes bought anywhere in the Canadian province by foreign nationals and foreign companies, provincial Finance Minister Peter Bethlenfalvy said in a statement Tuesday. Currently, the tax is 15% and applies only to homes in Toronto and surrounding areas. The soaring cost of homes and rents has become a significant political issue in the province of about 15 million people, and Ontario Premier Doug Ford faces an election in June. In Toronto, the average sale price in February was C$1.3 million ($1 million), seasonally adjusted.

World Headlines

• European equities dropped on Wednesday amid warnings that the inversion of the U.S. treasury yield-curve signals a recession is looming, and that optimism about a de-escalation of the war in Ukraine is overblown. The Stoxx 600 Index retreated 0.9% as of 9:54 a.m. in London, snapping a three-day winning streak. Energy and mining were the only sectors in the green as oil, iron ore and aluminum prices rose, testing market narratives that the worst of the commodity-driven inflation spike is behind. The main European equities benchmark is on course for its first monthly gain this year, recouping the losses suffered after the launch of the Russian invasion of Ukraine, even as the war exacerbated inflationary pressures and prompted a wave of downgrades in economic growth forecasts. Despite the rebound, the gauge will end this quarter in the red, following a ferocious post-pandemic rebound that saw it climbing to successive record highs over seven consecutive quarters of gains.
• Stocks fell and energy prices rose as optimism about a de-escalation of Russia’s war in Ukraine faded. U.S. futures slipped amid warnings that gains of the past two weeks have the hallmarks of a bear-market rally and concerns that the Treasury curve signals a looming recession. The dollar slipped, the euro climbed and the yen bounced from a six-year low after the Bank of Japan pledged to buy more securities than planned and include longer-dated debt. The rally in equities globally remains fragile as the war in Ukraine drags on. The Treasury yield curve’s inversion is fanning debate over the risks of a growth downturn as central banks globally begin to withdraw stimulus. Money markets in the U.S. are pricing in two percentage points of additional interest-rate hikes this year.
• Asian equities advanced for a second day as traders remained cautiously optimistic over Russia’s offer to scale back military operations in Ukraine. The MSCI Asia Pacific Index climbed as much as 0.9%, with Taiwan Semiconductor Manufacturing the biggest contributor following Micron’s strongforecast. Equities in mainland China outperformed, led by gains in brokerages and developers. Japanese stocks retreated as the yen strengthened. Investors are hoping for a de-escalation in the war in Ukraine, though progress in cease fire talks has been met with some skepticism. Also on traders’ radar are Chinese firms’ earnings results and the risk of trading halts, and the impact from the yield-curve inversion in U.S. treasuries that are typically seen as a sign of future recession.
• Oil rose as investors cautiously assessed the outlook for a de-escalation of Russia’s war in Ukraine and any potential impact on crude output. Futures in New York climbed near $107 a barrel after losing more than 8% over the prior two sessions. The war is already taking its toll on Russian production, which fell below 11 million barrels a day in the second half of March, while deliveries to refineries slid about 11%. Supply is starting to show a “significant decline relative to the beginning of the month,” consultant OilX said in a note. While Russia has offered to “fundamentally cut back” its military operations in northern Ukraine, a person close to the Kremlin said that doesn’t mean a cease-fire or a complete withdrawal of troops from around Kyiv. The U.S. also cautioned about declaring progress.
• Gold steadied after dropping to the lowest level in more than a month on Tuesday as investors weighed the prospects for a de-escalation of the war in Ukraine. Bullion has lost nearly 2% this week amid optimism that Russia and Ukraine made progress toward a peace deal at talks in Turkey. Moscow’s offer to “fundamentally cut back” its military operations in northern Ukraine is being treated with caution, however, as it looks more like a tactical move. The U.S. says Kyiv remains under threat, with President Joe Biden saying he’ll wait and see whether Russia delivers on its pledge. Treasury yields eased following the talks, as traders bet a resolution to the war could ease inflationary pressures from high commodity prices.
• The pandemic spurred a historic change in consumer demand, pushing up wages and reshuffling America’s workforce in a way that’s unlikely to reverse anytime soon. Two years after the onset of Covid-19, the labor market has adapted to reflect shifts in spending that’s heavier on goods and lighter on services. Hiring has boomed in transportation and warehousing, and payrolls in retail trade, which saw some of the worst job losses in early 2020 when lockdowns shuttered storefronts, are now higher than before the health crisis.  Meantime, the enormous leisure and hospitality sector remains 1.5 million jobs short of its pre-pandemic peak.
• UBS Group AG said it will buy back as much as $6 billion of stock over the next two years as part of plans to boost shareholder returns. The Swiss lender expects to make up to $5 billion of repurchases under both the now-concluded 2021 and the new 2022 repurchase programs by the end of the year, according to a statement from the Zurich-based lender on Wednesday. The new $6 billion plan begins March 31. UBS surprised analysts and investors in February with ambitious profit and cost targets and plans to increase its share repurchase program after net income beat analyst estimates. The bank had already repurchased $2.6 billion of shares as of the end of the fourth quarter under a previous buyback plan. Ralph Hamers, embarking on his second year as chief executive officer, is giving investors more insight into his plans for the bank and boosting returns, after a move earlier this year to revamp the digital offering by buying robo-advisor Wealthfront for $1.4 billion.
• Cnooc Ltd. plans to implement share buybacks and guarantee dividends through 2024 after its profits soared to a record last year.  China’s biggest offshore driller reported 70.3 billion yuan ($11 billion) in net income in 2021, rebounding from a three-year low in 2020 on rising production and higher prices, it said in its annual report Wednesday. Oil and gas output rose 8.5% to 573 million barrels of oil equivalent. Cnooc plans to propose at its shareholder meeting annual dividends of at least 40% of profits from 2022 to 2024, with an absolute dividend of at least HK$0.70 per share, according to its annual presentation. It also plans to implement share buybacks this year. It’s 2021 dividend allocation will only be announced after a planned listing in Shanghai.
• Warren Buffett once described the tobacco industry as a no-brainer: make a cigarette for one cent and sell it for a dollar. Those days are long gone. With the rise of heated tobacco, vapes and nicotine pouches, companies such as Philip Morris International Inc. and British American Tobacco Plc are shifting from simple cigarettes to high-tech, rechargeable gadgets. The explosion of inventions to deliver nicotine without the most harmful effects of smoking has sparked scores of disputes over who owns the technology. Tobacco companies that once competed for the best marketing executives are now chasing the top patent lawyers. The situation may become even more tense now that the big players have announced plans to exit Russia after its invasion of Ukraine. Russia is not only the world’s fourth-largest cigarette market by volume, but also an important region for heated tobacco products, meaning companies will likely try to compensate with growth elsewhere.
• U.S. trade chief Katherine Tai said it was time to forget about changing China’s behavior and instead take a more defensive posture toward the world’s second-biggest economy. In remarks distributed before she testifies before a congressional committee Wednesday, Tai said talks last year with China on a so-called phase one trade agreement reached under President Donald Trump failed to produce results. “While we continue to keep the door open to conversations with China, including on its phase one commitments, we also need to acknowledge the agreement’s limitations, and turn the page on the old playbook with China, which focused on changing its behavior,” she added.
• Russia’s exports of refined fuels are sliding fast as buyers stay away following the invasion of Ukraine, denting supplies in a market that’s already fretting over stockpiles. Exports of products including diesel and naphtha are down by about 520,000 barrels a day from a month earlier, consultant OilX wrote in a note to clients. Vortexa Ltd. estimates are down by about 600,000 a day, at 2.4 million barrels a day. It’s another sign that a buyers’ strike across the oil industry is starting to affect Russian supply. Energy ministry data also showed a drop off in crude production and delivery to refineries in the second half of March. Several major European oil companies have announced a scaling back of purchases from Moscow.
• The Kremlin said there are no breakthroughs in talks with Ukraine as skeptical NATO allies evaluate whether Russia’s promise to scale back military operations in Ukraine marks a turning point in the conflict or simply a tactical shift. Attacks continued to be reported near Kyiv. President Joe Biden said he’ll wait and see whether Russia delivers on a pledge made after peace talks in Istanbul. De-escalation does not mean a cease-fire or complete withdrawal of troops from around Kyiv, said a person close to the Kremlin. Moscow’s likely war goals now are to take two eastern provinces, together with a land corridor from the Russian border to the Crimean peninsula, which Russia annexed in 2014, the person said.  Russian Foreign Minister Sergei Lavrov is in China on his first visit since the invasion. Beijing has struggled for a consistent response to the war, supporting Vladimir Putin’s rationale for invading but expressing concern about civilian casualties and pushing for talks to end the fighting.
• Citigroup Inc. agreed to sell its India retail banking business for about $1.6 billion cash to Axis Bank Ltd., as the U.S. lender seeks to consolidate its operations in identified markets. Citi will sell its consumer banking businesses including credit cards, retail banking, wealth management and consumer loans, it said in a statement on Wednesday. The transaction also includes the sale of the consumer business of Citi’s non-banking financial company, Citicorp Finance (India) Ltd., comprising the asset-backed financing business.
• India’s government is considering a proposal from Russia to use a system developed by the Russian central bank for bilateral payments, according to people with knowledge of the matter, as the Asian nation seeks to buy oil and weapons from the sanctions-hit country. The plan involves rupee-ruble-denominated payments using Russia’s messaging system SPFS, the people said, asking not to be identified discussing confidential deliberations. No final decision has been taken and the matter will probably be discussed when Russian Foreign Minister Sergei Lavrov arrives in India for a two-day visit Thursday. Russian central bank officials are likely to visit India next week to discuss the details, the people said. The Reserve Bank of India regularly meets with executives from its banking system to discuss matters including exposure to Russia and the risk of sanctions, another person said.
• Investors in company debt are bracing themselves for more trouble ahead after a turbulent quarter as economy fears remain in place while the end of the war in Ukraine could prove elusive. The worldwide pool of the safest corporate debt has already shrunk by $805 billion so far this year, while the global junk market lost $236 billion, according to data compiled by Bloomberg. That’s the biggest dollar decline since records began over 20 years ago, following a borrowing binge propelled by record-low funding costs. The slump marked the biggest total return loss since Lehman Brothers’ collapse for high-grade bonds, and the worst performance since the start of the pandemic for junk. The global credit market remains under pressure from rampant inflation, which will push central banks to boost rates, in turn risking an economic slowdown. Meanwhile, Russia’s invasion of Ukraine increases concerns about Europe’s ability to fulfill its energy needs and further disrupts already struggling supply chains.
• As the war in Ukraine enters its second month, Wall Street is considering an array of possible outcomes, from de-escalation to protracted conflict. Goldman Sachs Group Inc. is recommending cheap hedges against stagflation in one scenario. BlackRock favors short-dated bonds in another. French titan Amundi SA is warning of tighter liquidity. Investors who’d taken to the sidelines at the time of the Russian invasion are under increasing pressure to hedge their risks. Many investment specialists say they’re ditching high-conviction strategies that bet on market direction.  “We’re living in a climate of elevated geopolitical uncertainty,” said Mark Dowding, chief investment officer at BlueBay Asset Management in London, which manages $127 billion in assets. “Some of this increase in the risk premia is likely to be permanent because we’ve seen something seismic in the course of this month. Who knows what’s going to happen at a moment’s notice? We could have any headline in the next hour or two.”
• Pearson Plc shares plunged after private equity firm Apollo Global Management Inc. said it won’t make an offer for the education publisher.  Apollo was unable to reach an agreement with Pearson’s board on the terms of an offer, it said in a stock market statement Wednesday. It now can’t bid for the company for six months, according to U.K. takeover rules. Earlier this month Pearson said it rejected two offers it had received from Apollo in November and March at 800 pence per share and 854.2 pence per share respectively because they “significantly undervalued” the company.
• Hackers stole about $600 million from a blockchain network connected to the popular Axie Infinity online game in one of the biggest crypto attacks to date. Computers known as nodes operated by Axie Infinity maker Sky Mavis and the Axie DAO that support a so-called bridge — software that lets people convert tokens into ones that can be used on another network — were attacked, with the hacker draining what’s known as the Ronin Bridge of 173,600 Ether and 25.5 million USDC tokens in two transactions. The breach happened on March 23, but was only discovered Tuesday, according to Ronin, the blockchain that supports Axie Infinity. The attack is the latest to show that bridges are often rife with problems. The computer code of many isn’t audited, allowing for hackers to exploit vulnerabilities. It’s often unclear who runs them and exactly how. Identities of validators, who are supposed to order transactions on bridges, are often shrouded in mystery. And yet there are thousands of bridges out there, and they move hundreds of million of dollars worth of crypto.
• Glencore Plc, the world’s biggest commodity trader, said it won’t seek new deals in Russia but will continue its valuable business ties in the country. The company at the start of March announced it was reviewing its shareholdings in two large Russian firms — En+ Group International PJSC and Rosneft PJSC — as well as its wider trading operations in the country. “Glencore will not enter into any new trading business in respect of Russian origin commodities unless directed by the relevant government authorities,” it said in an emailed statement on Wednesday. It will continue to honor legal obligations under pre-existing contracts, subject to meeting any sanctions and where it’s “feasible and safe” to do so, it said.
• U.S. profits are likely to feel the heat from a jump in wages this year caused by a historically tight labor market, according to Morgan Stanley strategists. “The challenges companies face in attracting workers seems to be worsening in quarters,” strategists including Andrew Pauker and Michael Wilson wrote in a note. Companies have so far responded by raising prices to offset higher wage costs, but that could become increasingly difficult as demand weakens across industries such as household durables and autos, they said. After consistently lagging behind productivity growth over the past two decades, wages have rapidly caught up in the post-pandemic economic recovery. What’s more, the jump in costs is likely here to stay, rather than being a temporary squeeze as fiscal policies lead to persistently tight labor markets.
• Nearly half of manufacturing executives are turning down business opportunities due to a lack of workers, a new survey shows. Almost 45% of manufacturing leaders are constrained by talent shortages, according to a report from Deloitte and The Manufacturing Institute released Wednesday. At the same time, nearly 83% of manufacturers surveyed said that attracting and retaining a quality workforce is a top challenge. While job openings in manufacturing have fallen from a record 943,000 in July, they remain at more than double pre-pandemic levels. The elevated number of vacancies reflects both a struggle to recruit qualified talent and strong demand for manufactured products as consumers continue to spend on goods ranging from cars to furniture at unprecedented rates.
• After swooping in to help shale producer Occidental Petroleum Corp. win a bidding war for Anadarko Petroleum by buying $10 billion of Oxy’s preferred stock in 2019 and then quietly buying up a sizable stake in its regular shares in the months that followed, Warren Buffett’s Berkshire Hathaway Inc.suddenly disappeared from the common stock in 2020, giving no reason for the storied investor’s about-face. Now, Buffett is once again on the Occidental bandwagon—and with more momentum than ever. Just as billionaire investor Carl Icahnexited his own stake in Occidental, Berkshire disclosed in a regulatory filing in March a rekindled interest that quickly snowballed into a buying spree. In just a few weeks, Berkshire stacked up an investment worth about $7.7 billion on top of its preferred stock holding, making it the biggest shareholder at Occidental and landing the company among the conglomerate’s top 10 equity bets.

*All sources from Bloomberg unless otherwise specified