May 3, 2022

Daily Market Commentary

Canadian Headlines

• Thomson Reuters Corp. on Tuesday beat expectations on revenues and adjusted earnings beat expectations in the first quarter, benefiting from growth among its Big 3 business segments. Revenue came in at $1.67 billion, up from $1.58 billion a year ago. According to analysts polled on FactSet, revenue was expected to rise to $1.66 billion. All three of the core segments posted growth in the period. Adjusted earnings per share rose to 66 cents from 58 cents, beating analyst expectations of 61 cents in the period.
• Brookfield Asset Management Inc. is exploring a takeover of data-center operator Switch Inc., according to people familiar with the matter.  The alternative asset manager is among potential buyers circling Las Vegas-based Switch as it weighs a sale, said the people, who asked to not be identified because the matter is private. No final decision has been made and Brookfield could opt against pursuing a deal, the people added.  Switch rose 3.8% to close at $31 in New York trading Monday, giving the company a market value of about $7.6 billion.

World Headlines

• European equities gave up earlier gains as investors shifted their attention to the monetary policy outlook ahead of the Federal Reserve meeting.  The Stoxx 600 Europe Index was little changed by 12:13 p.m. in London, after rising as much as 0.8%. Energy, autos and banks were in the lead, while basic resources underperformed. BP Plc shares climbed after the oil major boosted its share buyback by $2.5 billion as cash flow surged. BNP Paribas SA jumped after reporting gains in both equities and fixed-income trading.  The European benchmark is struggling to recover, in the aftermath of Monday’s flash crash, while U.S. equity futures are also pointing to a lower open on Wall Street, with worries over tightening policy outweighing a good earnings season so far.  European equities have been under pressure this year on concerns about aggressive rate increases, surging inflation and the risks to growth from the war in Ukraine.
• Bonds pared losses as investors braced for the biggest U.S. rate hike since 2000 and a wave of policy tightening by other central banks. U.S. index futures and European stocks reversed earlier gains. The U.S. 10-year yield held near 3% after hitting the milestone on Monday. Germany’s benchmark rate rose above 1% for the first time since 2015, while the corresponding yield on U.K. bonds climbed above 2% earlier on Tuesday. Australian bonds slid, and the currency jumped, after the nation’s central bank increased borrowing costs by more than many had expected. U.S. index futures fell, with Pfizer Inc’s shares down in premarket trading before the pharmaceutical giant reports earnings. Markets are getting whipsawed between concerns around persistent inflationary spirals and risks to global growth from rising yields, China’s Covid lockdowns and Russia’s war in Ukraine. The Federal Reserve’s plans to raise rates and reduce its balance sheet have ended an era of cheap money and forced money managers to reassess valuations.
• Asian stocks were mixed amid holiday-thinned trading, as investors braced for a potential increase in U.S. interest rates later this week. The MSCI Asia Pacific Index dipped as much as 0.5%, with markets including China, Japan, Singapore and India closed for holidays. Australian shares retreated after the Reserve Bank increased interest rates by more than economists anticipated and signaled further hikes. Hong Kong’s benchmark eked out a small gain as the city accelerated its reopening plans after Covid cases dropped. Shares of Alibaba Group Holding pared losses after a brief bout of concern over the status of its co-founder Jack Ma triggered wild price swings, underscoring continued investor anxiety toward China’s tech sector.
• Oil fell below $104 a barrel in New York as investors weighed lockdowns across China against looming European Union measures to limit purchases of Russian fuel. West Texas Intermediate futures slid 1.2%, reversing an earlier gain. Crude has swung within a $15 band in recent weeks as the market assesses the hit to demand from China’s Covid wave while supply concern persists amid the war in Ukraine. Investors are also bracing for the biggest U.S. rate hike since 2000. Since spiking after Vladimir Putin’s invasion, oil has struggled to make further headway. A combination of lower demand in China and reduced supply from Russia has led to a period of volatility that’s boosted the cost of trading and forced some in the market to the sidelines. The wild swings could be set to continue, BP Plc said Tuesday.
• Gold extended a drop to the lowest since February ahead of a Federal Reserve meeting expected to result in larger-than-usual rate hike. That followed bullion’s biggest decline in more than a month on Monday. Investor sentiment toward the precious metal is turning increasingly bearish on expectations the Fed will seek to tame inflation with aggressive rate hikes. Holdings in gold-backed exchange-traded fund fell last week, snapping 14 straight weeks of gains. Spot gold fell 0.4% to $1,856.11 an ounce at 10:21 a.m. in London. The Bloomberg Dollar Spot index weakened 0.1%. Silver was steady, while platinum and palladium gained. Major Asian markets, including China, Japan, Singapore and India, remained closed on Tuesday.
• A brief bout of concern about the fate of Alibaba Group Holding Ltd. co-founder Jack Ma triggered wild swings in shares of the e-commerce company on Tuesday, underscoring continued investor anxiety toward China’s tech sector after a year-long crackdown. Alibaba plunged as much as 9.4% in Hong Kong, erasing about $26 billion of market value, after state broadcaster CCTV reported that authorities in the company’s home base of Hangzhou had imposed curbs on an individual surnamed Ma. The stock rebounded after a statement from Hangzhou police indicated the accused person’s name covered three Chinese characters. CCTV also updated its report to show a third character. Jack Ma’s Chinese name is the two-character Ma Yun.
• Citigroup Inc.’s London trading desk was a behind a flash crash that sent shares across Europe tumbling on Monday, dealing a fresh setback to the bank’s yearslong efforts to improve controls. A trader at the U.S. firm made a mistake “inputting a transaction,” Citigroup said late last night, after a knee-jerk selloff in Swedish stocks in five minutes wreaked havoc in bourses from Paris to Warsaw. The bank said it identified the error “within minutes” and corrected it. The violent reaction saw the main European index lose as much as 3%, wiping out 300 billion euros ($315 billion) at one point. It revived questions how large financial firms can prevent such errors, and whether markets have sufficient safeguards in place.
• The U.S. Securities and Exchange Commission is adding 20 more officials to a team dedicated to policing crypto markets, the latest move by Wall Street’s main regulator to crack down on digital tokens that may run afoul of its rules. The additions will bring the SEC’s Crypto Assets and Cyber Unit to 50 people, the agency said Tuesday in a statement. The focus of the expanded enforcement group will include virtual-currency offerings, decentralized finance and trading platforms, as well as stablecoins, according to the regulator.  Over the past year, the SEC has moved aggressively to expand oversight of digital-assets with Chair Gary Gensler frequently saying he considers many of them to be securities and subject to his agency’s rules. The regulator has launched probes into marketplaces offering certain types of nonfungible tokens, or NFTs, and companies behind crypto-lending products.
• Germany’s natural-gas storage levels rose over the past week to 84.5 terawatt-hours, or 35% full, on May 1 compared with the 5-year average of 44% for this time of year, according to Gas Infrastructure Europe. A week earlier the country’s inventories were at 33% of capacity. Germany and Italy had the biggest one-week changes, measured in terawatt-hours, among European nations, all of which are already several weeks beyond the point in the season where storage levels stop falling and begin to rise. Austrian inventories were the least full on a percentage basis, at 20%, and also the least full when compared against the 5-year average for this time of year. The nation appears to be following a similar trajectory to 2017 and 2018, though, of course, inflows from Russia are potentially less secure now, given the war in Ukraine.
• BP Plc has rid its European refineries of Russian crude and expects to end the bulk of its long-term supply contracts with the country by the end of the year. The U.K. energy major is among a number of European companies shunning new purchases of Russian oil and gas in the wake of Vladimir Putin’s invasion of Ukraine. Yet some are still tied into long-term deals that slow their efforts to extricate themselves from Moscow. London-based competitor Shell Plc has come under fire for buying a spot cargo of Russian Urals at a record-low discount in March, and for including terms in oil-product bids that allowed for purchases of fuel that could be part-Russian. Shell has since halted such spot deals and amended its refined-products policy.
• Prime Minister Boris Johnson appeared to rule out a windfall tax on energy companies after BP Plc promised to channel billions of pounds of its profits into U.K. investments.  If the country was to levy such a tax on energy firms’ earnings, which are surging due to high oil and gas prices, that would “discourage them from making investments we want to see, that in the end will keep prices lower for everybody,” Johnson said in an interview with ITV on Tuesday. His comments came just hours after BP said its first-quarter net income, excluding accounting charges related to its exit from Russia, more than doubled to $6.25 billion. The company’s huge profit — the highest in a more than a decade — prompted calls from opposition politicians and activists for the government to take some of that money and use it to help consumers.
• Hong Kong’s economy contracted last quarter for the first time in more than a year as local restrictions to curb Covid hit activity and China’s own omicron outbreak disrupted trade. Gross domestic product fell 4% in the January-to-March period from a year earlier, according to advance estimates released by the government on Tuesday. The number — Hong Kong’s first since the end of 2020 — was far worse than a median estimate of a 1.3% contraction in a Bloomberg survey. It was also the biggest contraction since the third quarter of 2020. Ahead of the data, there were signs of deep economic damage in the first three months of the year, with retail sales collapsing more than 14% in February and exports plunging 8.9% in March. The city imposed strict social restrictions during the quarter — including a ban on dining-in after 6 p.m. and closing gyms and beauty salons — to battle a coronavirus wave that killed thousands and infected more than 1 million people.
• German prosecutors are carrying out a raid on the Frankfurt offices of Morgan Stanley as part of their wider probe into the controversial Cum-Ex scandal that robbed tax payers of billions of euros. Authorities are searching a bank and the homes of two suspects in a probe over Cum-Ex and related strategies, according to a spokesman for Cologne prosecutors. More than 75 officers are taking part in the action, he said. Prosecutors in Cologne are probing about 1,500 people from the financial industry and are ramping up the pressure on international banks. They raided Barclays Plc’s Frankfurt offices in March days after Bank of America Corp.’s Merrill Lynch premises were hit.
• Russia’s closely watched dollar payments on two bonds are trickling through to investors after the country dipped into its local holdings of the U.S. currency and sidestepped its first foreign default in a century. Three investors who asked not to be identified said their custodian banks had received payments. At least one major international clearinghouse has received and processed payments for the eurobonds due in 2022 and 2042, according to people familiar with the transaction who weren’t authorized to speak publicly on the matter.  The complications with the $650 million in coupon and principal payments are the result of wide-ranging financial and economic penalties imposed on Russia after it invaded Ukraine. They include sanctions on some of the nation’s biggest lenders, asset seizures, and a freeze on the country’s foreign reserves.
• Pfizer Inc. kept its existing outlook for sales of its Covid-19 vaccine and treatment for the year unchanged, disappointing investors who looked for the products to drive growth.  Through mid-April, Pfizer said it has clinched $32 billion in 2022 contracts for the vaccine, Comirnaty, and $22 billion for its Covid pill, Paxlovid, the same figures it released three months ago. Wall Street analysts had estimated about $34 billion in annual sales from Comirnaty, which the company makes in partnership with BioNTech SE, and $27 billion in Paxlovid sales.
• Biogen Inc. said Tuesday its chief executive officer will leave after the company’s Alzheimer’s drug failed to win broad coverage from Medicare, a disappointment that hampered the potential of one of its key new drugs.  Cambridge, Massachusetts-based Biogen posted adjusted first-quarter earnings of $3.62 a share, lower than the $4.35 a share analysts surveyed by Bloomberg were anticipating. The earnings were hit by a $0.76 a share charge due to write offs for Aduhelm, its Alzheimer’s treatment.
• China’s capital is deploying an increasingly hardcore playbook to contain its nascent Covid-19 outbreak, from repeat testing of most residents to barring access to public places without a negative result as it seeks to avoid the chaos seen in Shanghai. Beijing halted dining-in at restaurants for the duration of the May Day holiday, which runs through Wednesday, made entry into places like parks and monuments dependent on a negative Covid test and has shuttered gyms. Officials on Tuesday urged residents not to leave the city unnecessarily, with only people with green health codes and who have received a negative Covid test within 48 hours able to leave. Residents in areas deemed to be medium or high risk, those who live in controlled areas, and people in towns or villages that have one or more infections are not able to depart the city, officials said at a briefing. Schools will suspend in-person classes between May 5 and 11, with districts set to make plans for online learning.
• Federal Reserve officials are counting on higher mortgage rates to throw cold water on the frenzied housing market as they work to tame the highest inflation in decades. But the market may not cool fast enough. While rising rates and higher home prices are starting to lock some buyers out and weaken sales, pent up demand for housing, combined with a stark shortage of homes on the market, is still putting upward pressure on prices. A dearth of housing inventory also means that rising rates may not slow homebuilding activity as much as they have in the past. The Fed, which is raising interest rates to curb inflation, is relying on higher borrowing costs on homes, cars and other big-ticket items to put a damper on demand. Rising home prices boost construction and can lift consumer spending, by making homeowners feel wealthier.
• Hilton Worldwide Holdings Inc. reported first-quarter earnings that beat estimates as U.S. leisure travelers continued to power the lodging recovery.  Hilton reported adjusted earnings per share of 71 cents, according to a statement Tuesday. That compared with an average estimate of 67 cents in a Bloomberg-compiled survey of analysts.
• U.S. shale giants stung by billions of dollars in hedging losses are spending big bucks to ditch their positions in a risky bet that prices stay high. Companies including Pioneer Natural Resources Co. and EOG Resources Inc. are poised to post historic profits when they report earnings this week. But those windfall earnings would be even higher if it weren’t for massive accounting losses from hedges that protect against falling prices while limiting upside potential. Producers in the aggregate are looking at about $42 billion in oil and gas hedging losses through 2023, according to BloombergNEF calculations of data from last year. While such a hit won’t necessarily affect their balance sheets — instead representing money left on the table — the sheer scale of the miss has companies spending hundreds of millions of dollars to exit their positions. Hess Corp. in March paid $325 million to exit some of its hedges – more than twice what it cost to enter the contracts six months earlier. Pioneer, which reported $2 billion in hedging losses in 2021, spent $328 million to drop its hedges. And EOG, with $2.8 billion in hedging losses in the first-quarter alone, has paid $85 million.

*All sources from Bloomberg unless otherwise specified