May 9, 2022

Daily Market Commentary

Canadian Headlines

  • To close one of Canada’s biggest-ever takeovers, Rogers Communications Inc. may need help from an unlikely ally: a rival telecommunications company led by an outspoken Quebec separatist with a penchant for lawsuits.  Rogers is trying to acquire Shaw Communications Inc. for about C$20 billion ($15.5 billion), but the deal is in jeopardy because the country’s Competition Bureau is trying to block it. Rogers is trying to solve the most difficult antitrust issue by selling Shaw’s wireless division, which competes in major markets such as Toronto, Calgary and Vancouver under the name Freedom Mobile.  That’s where Quebecor Inc. and its controlling shareholder, Pierre Karl Peladeau, enter the picture.  Peladeau has suggested numerous times that he would be interested in buying Freedom, under the right conditions. But until recently, Rogers has been focused on cutting a deal with other parties, including New York-based investment fund Stonepeak Partners LP, which controls Canada’s Xplornet Communications Inc.

World Headlines

  • European stocks declined to the lowest in two months amid concerns that tightening of monetary policy in response to surging inflation will lead to an economic contraction. The Stoxx Europe 600 Index retreated 2.1% by 11:45 a.m. in London. Technology shares led the drop as the yield on five-year U.S. Treasury notes rose to the highest level since September 2008. The jump in yields and rising rates have been particularly damaging for frothy growth shares amid concerns about their future earnings. Miners were also among the top fallers, tracking the drop in metals prices. European equities have been under pressure this year because of a flurry of headwinds, including hawkish central banks, soaring prices and as the war in Ukraine fuels fears of an economic contraction. The Stoxx 600 slumped last week after the Bank of England warned of recession while the initial optimism following the Federal Reserve’s meeting quickly disappeared as traders worried about stagflation.
  • Investors rushed to the safety of the U.S. dollar, while global stocks slid ever closer to a bear market, as the Federal Reserve’s aggressive tightening path and China’s Covid lockdowns worsened the outlook for economic growth. The greenback extended a two-year high, rising on Monday against all of its major peers. Futures on the S&P 500 and Nasdaq 100 gauge each tumbled by at least 2%, as the MSCI gauge of world stocks extended its retreat from a November peak to 16%. A wave of risk aversion is sweeping through global markets after Friday’s U.S. jobs data left little room for a change of course in the Fed’s rate-increase and quantitative-tightening plans. While that sent the S&P 500 Index to the longest streak of weekly losses since 2011, sentiment took a further knock over the weekend as Chinese Premier Li Keqiang warned the nation’s employment situation had turned grave because of Covid restrictions.
  • Asia’s stock benchmark headed for a sixth day of declines as investors shunned risk assets fretting over the economic fallout from China’s lockdowns, rising global inflation and higher U.S. interest rates. The MSCI Asia Pacific Index slid as much as 1.8% in a broad rout that saw all major country benchmarks in the red, led by Indonesia. Materials and industrials were the worst-performing index groups, while tech names like TSMC and Sony were among the biggest drags in terms of individual stocks. A stronger dollar added to woes for Asian investors, who have already seen rising input costs and supply chain disruptions eating into company profits. The MSCI Asia gauge is down more than 17% this year and at its lowest levels since July 2020. Traders are keenly awaiting the U.S. consumer inflation data due Wednesday, given its implications for the Federal Reserve’s policy.
  • Oil fell as investors weighed continued European Union talks about cutting Russian supplies and a flight to safety as global stocks slid closer to a bear market. West Texas Intermediate traded near $107 a barrel as European equities lost more than 2%. The EU is set to weaken its sanctions passage on Russia after a weekend of wrangling. The bloc will drop a proposed ban on its vessels transporting Russian oil to third countries, but will retain a plan to prohibit insuring those shipments, according to documents seen by Bloomberg and people familiar with the matter. The leaders of the most-industrialized countries made a vow to ban imports from Russia in response to President Vladimir Putin’s war in Ukraine over the weekend. Russia said Monday it expects its oil production to rise in May, and that it’s seeing new buyers for its crude, including in Asia.
  • Gold extended its longest run of weekly losses this year as investors eyed rising Treasury yields — and a stronger dollar — ahead of a flurry of inflation figures due from major economies in coming days. Bullion has been sliding since mid-April as the Federal Reserve and other central banks tighten policy to fight rising consumer prices. The monetary squeeze has sent yields on U.S. government bonds past 3% and fueled five weeks of gains for the dollar, making non-interest bearing gold less attractive. There could be more bond-market swings to come as a swathe of inflation data feeds the debate on price pressures and monetary policy. U.S. consumer prices are released on Wednesday, with China, India, Mexico and Brazil also reporting during the week.
  • Russian President Vladimir Putin used the annual display of military might on Moscow’s Red Square marking victory against Nazi Germany to justify his faltering 10-week-old invasion of Ukraine, which he compared to the battle during World War II. “Today, you’re defending what our fathers, grandfathers and great grandfathers fought for,” Putin said in a speech before the military parade on Monday, flanked by veterans at the May 9 Victory Day celebration of the German defeat in 1945.  He spoke as air-raid sirens rang out in Ukraine’s capital Kyiv and Russian forces continued shelling across the front lines in the country’s east and south, while the U.S. and its allies discussed imposing more sanctions to punish Moscow for the invasion. Putin made no major announcements in his speech, despite speculation that he might formally declare war.
  • Bitcoin is falling toward levels last seen in July 2021, part of a wider retreat in cryptocurrencies amid a global flight from riskier investments. The world’s largest digital token dropped as much as 2.7% on Monday and was trading at $33,741 as of 12:40 p.m. in Singapore. The second biggest, Ether, shed as much 4.6%. Most of the major virtual coins were under pressure over the weekend and the downbeat mood carried over into Monday. Tightening monetary policy and ebbing liquidity are turning investors away from speculative assets across global markets. Adding to the caution around digital assets, the value of TerraUSD or UST, an algorithmic stablecoin that aims to maintain a one-to-one peg to the dollar, slid below $1 over the weekend before recovering.
  • Investors added money to exchange-traded funds that buy emerging market stocks and bonds last week, ending three weeks of outflows that reached $716.1 million. Inflows to U.S.-listed emerging market ETFs that invest across developing nations as well as those that target specific countries totaled $174.4 million in the week ended May 6, compared with losses of $88.3 million in the previous week, according to data compiled by Bloomberg. So far this year, inflows have totalled $19.2 billion.
  • BP Plc is set to acquire a stake in a $36 billion green hydrogen project in Western Australia and become the development’s operator, The Australian newspaper reported Monday citing two people that it didn’t identify. The investment in the Asian Renewable Energy Hub, which is pursuing government approvals and seeking to produce about 1.8 million tons of the fuel a year while eyeing exports as soon as 2027, could be announced within days, according to the report. BP declined to comment. The Asian Renewable Energy Hub didn’t immediately respond to an emailed request for comment. The project aims to install 26 gigawatts of solar and wind capacity over a 6,500 square kilometer (2,500 square miles) stretch of the Pilbara region, and to use much of that energy to produce green hydrogen. Existing partners in the project include Vestas Wind Systems A/S and InterContinental Energy.
  • U.S. Treasuries tumbled Monday, driving the yield on five-year notes to the highest level since September 2008 amid speculation persistent inflation will prompt the Federal Reserve to tighten policy more aggressively. The yield jumped as much as three basis points to 3.11%, extending an advance that has seen the rate more than double this year. The curve steepened as 10- and 30-year bonds underperformed. While Federal Reserve Chair Jerome Powell last week played down the option of a jumbo 75 basis-point rate hike, Richmond Fed President Thomas Barkin said in an interview on Friday that nothing was off the table. The milestone caps a remarkable selloff in government bonds as central banks round the world pare pandemic-era stimulus to tackle scorching inflation, and comes as investors wait for April U.S. consumer-price data due Wednesday. The Fed has raised rates by 75 basis points so far this year and signaled more tightening to tame inflation now running at the fastest pace in 40 years.
  • U.S. President Joe Biden will give a speech on his efforts to stem inflation as spiking prices threaten Democrats’ already dim chances of holding onto to Congress after midterm elections.  The president will detail his legislative push on Tuesday at the White House, an official familiar with his plans said. Biden will draw a contrast with a Republican plan to raise taxes and let popular programs like Social Security and Medicare expire. Those GOP details come from a proposal put forward by Florida Senator Rick Scott.  Biden’s intervention comes as skyrocketing prices leave Americans increasingly pessimistic about their finances despite strong job growth. Consumer prices rose in March at the fastest pace since 1981, especially driven by food, energy and shelter costs.
  • Boeing Co. may be moving to Washington, but right now it needs Washington to move. Regulatory delays are bogging down the launch of a new jet model with an estimated $16 billion in potential orders, threatening the planemaker’s comeback in the critical market for midsize jets. With Airbus SE holding a lopsided sales lead, repairing relations with regulators and lawmakers is crucial for Boeing as it shifts headquarters to the nation’s capitol after two decades in Chicago. Boeing’s 737 Max 10 is its next entrant to the hottest segment of the travel market: narrow-body jets that can haul 230 travelers across the country. But it is also among the first jets to undergo a more rigorous certification after Congress bolstered the Federal Aviation Administration’s authority in the aftermath of two fatal Max crashes in 2018 and 2019.
  • Mexico’s annual inflation accelerated less than expected in April though core prices remained at a 21-year high, putting additional pressure on the central bank to continue boosting interest rates. Consumer prices rose 7.68% from the same month a year earlier, lower than the 7.73% median estimate of economists surveyed by Bloomberg, the national statistics institute reported Monday. On a monthly basis, prices rose 0.54%, driven primarily by food and energy costs, below the 0.58% median estimate of economists. Core inflation, which excludes volatile items like fuel, rose 7.22% last month from a year earlier, more than the 7.18% median estimate of analysts and its fastest pace since 2001. Economists pay close attention to sustained core price increases, because they often signal that elevated inflation could prove more persistent than originally expected.
  • The European Union is set to weaken its sanctions package on Russian oil after a weekend of wrangling, though it aims to keep a key provision on shipping that would hinder Moscow’s ability to export its crude globally. The bloc will drop a proposed ban on EU vessels from transporting Russian oil to third countries, while retaining a plan to prohibit insuring those shipments, according to documents seen by Bloomberg and people familiar with the matter. Greece, which is among the world’s largest shipowners, was among the member states that pushed for the provision to be removed from the EU’s sixth package of sanctions over Russia’s invasion of Ukraine, citing a lack of agreement among Group of Seven nations, the people said.
  • Airbus SE delivered close to 50 aircraft last month, according to a person familiar with the matter, keeping the planemaker well positioned to meet its full-year target.  The April handovers take the year’s total so far to about 190, said the person, who asked not to be identified as the final tally won’t be published until later Monday. That’s just over a quarter of the 2022 goal of 720 deliveries, with handovers traditionally accelerating toward the end of the year. Airbus said last week that the backdrop to achieving its annual target has got more challenging, citing the ongoing Russia-Ukraine conflict and lockdowns in major customer China. Still, the company hasn’t needed to alter its plans thus far.
  • Australian phone company TPG Telecom Ltd. agreed to sell mobile-phone towers and rooftop infrastructure to Omers Infrastructure Management Inc. in a deal valued at A$950 million ($670 million) including debt. The sale will generate net cash proceeds of about A$890 million, which will be used to repay debt, TPG said Monday. The 1,237 sites being sold include 428 towers and 809 rooftops, representing about 21% of TPG’s total mobile-network footprint, it said. The rest is already owned and operated by other tower companies.
  • The dollar strengthened versus all of its major peers as China’s Covid lockdowns, accelerating global inflation and the worsening economic outlook boosted demand for the U.S. currency as a haven. A gauge of the greenback advanced for a third day after Friday’s U.S. payroll numbers pushed up Treasury yields, giving investors more reason to funnel funds into the world’s largest economy. Adding to the dollar’s attraction is the hawkish Federal Reserve, which has committed to a series of half-point rates hikes in coming months. The dollar’s rally is sending it to new highs against many of its global counterparts. The Aussie slid below 70 U.S. cents for the first time since January, the yen dropped to the lowest since 2002, while India’s rupeeslumped to a record.
  • Meat demand is still going strong despite soaring inflation, according to Tyson Foods Inc. The biggest U.S. meat company by sales said a pick up in beef and chicken volumes boosted returns, with adjusted earnings in the second quarter of $2.29 per share topping analyst estimates for $1.90. Sales of $13.12 billion compared with estimates for $12.8 billion. “Although we continue to see inflationary pressures across the supply chain, we are working to drive costs down by continuing to increase our efficiency, productivity and bringing more capacity on line,” Chief Executive Officer Donnie King said in a statement Monday. The top U.S. chicken producer and owner of Hillshire Farms and Ball Park hot dogs has been raising prices to offset a tight labor market and soaring costs for animal feed and fuel. Chicken breasts were fetching record prices at supermarkets.
  • Investment banks advising on the initial public offering of Life Insurance Corp. of India are forgoing large fees expected from the country’s biggest ever listing, and settling instead for glory in the league table rankings. The 10 advisers managing the IPO will receive around 10 million rupees ($129,000) each for their role in the offering, a fraction of what they’d typically pocket for a deal of this size. Earnings are further trimmed because India’s government, which owns LIC, won’t compensate the banks for expenses such as printing forms for the issue. What bankers stand to gain is outsized credit in rankings that compare rivals by the volume of deals they handle, which can be influential in winning them future work. The fee estimates are from people familiar with the developments, who asked not to be identified because the information is still private.
  • Rivian Automotive Inc. fell as much as 9.6% in U.S. premarket trading after a media report that Ford Motor Co. is selling 8 million of its shares in the electric-pickup maker at a discount. Ford’s sale is being handled by Goldman Sachs Group Inc., CNBC’s David Faber said in a tweet.  The U.S. manufacturer owns about 12% of the electric-vehicle hopeful, or just under 102 million shares after taking a stake prior to Rivian going public last year. An insider lockup period expired Sunday after the November share sale that saw the company’s market value briefly top $100 billion making the developer more valuable at the time than Ford and General Motors Co.
  • The outlook for U.S. stocks isn’t particularly bright, even if an outright recession is avoided, according to Goldman Sachs Group Inc. strategists.  “The best case scenario for the economy — and, eventually, for equity prices — probably involves a continued period of constrained equity market returns,” the strategists led by David Kostin wrote in a note to clients. “Risks around equity valuations are skewed to the downside even in our base-case, non-recessionary scenario.” The S&P 500 capped its fifth week of declines on Friday, the longest such streak since June 2011, and U.S. futures on Monday signaled the drop may extend. The benchmark has fallen more than 13% this year as record inflation readings, a slowing economy and aggressive tightening by the Federal Reserveto tame soaring prices have weighed on risk appetite and valuations.
  • Traders have no doubt that the Federal Reserve will keep raising interest rates over the next few months. It’s when and where the central bank stops that’s proving far more vexing. Even with inflation at a four-decade high, the swaps market is still pricing in a steep but shallow cycle of interest-rate hikes, one that will leave the overnight benchmark not too far above the 2.5% peak at the end of the Fed’s last tightening cycle in 2018. In the mid-1990s, it hit 6%. It reached 20% in 1980. That unusually low end point expected this time around is puzzling investors seeking to properly position for the Fed’s cycle, fueling unusually strong about-faces in the Treasury market. That was evident last week: Yields tumbled Wednesday after Fed Chair Jerome Powell waved off expectation the bank will increase the size of its rate hikes, only to surge back Thursday and Friday on fears the Fed may find itself facing a prolonged battle against inflation that could stall economic growth.

“Life is too short for long term grudges.” — Elon Musk

*All sources from Bloomberg unless otherwise specified