November 11, 2021

Daily Market Commentary

Canadian Headlines

• Canadian equities finished lower Wednesday as shares in the tech sector led losses and a dip in oil dragged on energy companies. The S&P/TSX Composite fell 0.6% at 21,461.93 in Toronto. The decline was the biggest since falling 0.8% on Oct. 29 and follows the previous session’s increase of 0.2%. Shopify Inc. contributed the most to the index decline, decreasing 4.8%. SunOpta Inc. had the largest drop, falling 12.7%. Today, 158 of 233 shares fell, while 74 rose; six of 11 sectors were lower, led by information technology stocks.

World Headlines

• European stocks were little changed near a record high, with market participants assessing rising inflation risks and expectations for interest rate hikes.  The Stoxx Europe 600 Index gained 0.2% as of 10:10 a.m. in London, with miners leading the advance, while construction and banking shares climbed. The U.K.’s FTSE 100 outperformed slightly as the pound fell to its lowest level since December. The European Central Bank could stop buying bonds as early as next September if inflation looks to have sustainably returned to the official target, Governing Council member Robert Holzmann said.
• Stocks were steady, while U.S. futures signaled a rebound Thursday as investors assessed the prospects of higher inflation spurring tighter monetary policy. Contracts on U.S. gauges rose, led by those on the Nasdaq 100 after the gauge’s worst slump in more than a month. Tesla Inc. rose in premarket trading filings showing Chief Executive Officer Elon Musk unloaded $5 billion of stock. The U.S. cash Treasury market is shut Thursday for a holiday, while the dollar ticked up. Trading conditions in Treasuries are the roughest since March 2020, based on Bloomberg’s liquidity gauge for the debt. Investors are bracing for tighter monetary policy sooner rather than later, after Wednesday’s stronger-than-forecast data on U.S. consumer prices dealt a blow to the argument that inflation is transitory.
• Asia’s regional benchmark declined, on track for a third day of losses, after monthly U.S. consumer prices rose at the fastest annual pace since 1990, raising concerns over costs and monetary policy moves. The MSCI Asia Pacific Index slid as much as 0.6%, before paring most of the losses, with several tech hardware stocks weighing on the benchmark and Tencent the biggest drag after its 3Q revenue missed analyst estimates. Still, the Hang Seng Tech Index ended the day higher after Reuters reported that Didi Global is getting ready to relaunch apps in China by the end of the year. Investors have been cautiously eyeing inflation data as the next market catalyst amid the ongoing pandemic. China helped lead Asian stocks lower Wednesday after reporting a spike in producer prices. U.S. shares tumbled following the CPI data overnight.
• Oil fluctuated as investors weighed the odds that the White House will intervene to cool prices, with President Joe Biden saying that reversing inflation is now his top priority, particularly in energy. West Texas Intermediate bounced between gains and losses, but was still down about $4 from its high for the week. The president is facing growing pressure to address rising prices as gains in consumer costs hit the fastest pace in decades. His options include tapping the Strategic Petroleum Reserve or even banning oil exports. Eleven Democratic senators urged Biden to act on the issue in a letter this week. As much as 60 million barrels could be released from the SPR, in part by bringing forward mandated sales from 2022, according to Citigroup Inc. That would be enough to wipe out the supply deficit that the Energy Information Administration has forecast for the rest of this year.
• For much of this year, rising inflation has been bad news for gold. Now it’s giving the metal a shot in the arm. While bullion is often bought as a way to protect wealth when consumer prices are climbing, this year’s inflation had weighed on the metal as investors bet that it would spur the Federal Reserve to scale back huge stimulus measures. But with the Fed determined to keep rates low while unemployment remains elevated, worries about out-of-control inflation are boosting gold’s allure. That was clear on Wednesday, when gold jumped to break out of a 15-month downtrend after data showed U.S. consumer prices rose the fastest since 1990. On Thursday, spot prices rose as much as 0.8%.
• Israel has started a drill in the format of a “war game” to test the nation’s readiness in case a more lethal Covid-19 variant were to flare up in the country. German Chancellor-in-waiting Olaf Scholz called for a renewed vaccination effort as the number of new cases jumped by more than 50,000 in a single day for the first time. The southern state of Bavaria declared the latest wave a “disaster situation.” On the continent’s least-vaccinated southeast, Bulgaria asked the European Union to activate an aid mechanism in case the pandemic worsens. Neighboring Romania, overwhelmed by one of the world’s worst outbreaks, reported the fourth deadly hospital fire since the epidemic started.
• Tesla Inc. Chief Executive Officer Elon Musk unloaded $5 billion of stock in the electric-car maker, shortly after restoking a social media debate over the tax treatment of billionaires’ shareholdings. The world’s richest person so far has disposed of more than 4.5 million shares this week, according to regulatory filings. Those were his first sales in more than five years. Musk, who frequently stokes controversy on Twitter, created a firestorm over the weekend with a survey asking whether he should sell part of his Tesla stake. While he portrayed his proposal as having to do with debate over billionaires avoiding taxes, the filings released Wednesday show some of the transactions were pre-arranged in mid-September — weeks before the poll. He also didn’t mention in the tweets that he has millions of stock options that must be exercised before next August, when they expire.
• China and the U.S. vowed to work together to slow global warming, issuing a surprise joint statement Wednesday that injects new momentum into the last days of global climate negotiations. The deal also marks a rare moment of cooperation between superpowers locked in geopolitical rivalry and who seemed at odds for most of the two-week talks in Glasgow, Scotland. The two sides agreed to boost their efforts to cut emissions, including by tackling methane and illegal deforestation, China’s special climate envoy Xie Zhenhua told reporters.  They will establish a working group to increase action in the 2020s — a key decade — which will meet in the first half of next year. His U.S. counterpart John Kerry said that the group will focus on “concrete” measures.
• Hong Kong jailed a former food delivery worker for five years and nine months for chanting a banned protest slogan, as authorities use a Beijing-drafted national security law to set stark new limits on speech. Ma Chun-man, 31, known locally as Captain America 2.0 for the Marvel character he’d sometimes dressed as while protesting, faced as many as seven years in prison for incitement to secession. The District Court ruled last month that his use of slogans, including “liberate Hong Kong, revolution of our times,” violated the vaguely worded security law. He had pleaded not guilty. Judge Stanley Chan had been scheduled to hand down the sentence earlier Thursday, but pushed back the hearing until the afternoon, saying its high profile nature meant the court needed more time.
• The European Union warned that talks with the U.K. aimed at resolving a diplomatic spat over Northern Ireland are at risk of stalemate unless Boris Johnson’s government agrees to shift its stance. Negotiations over the Northern Ireland Protocol, a key part of the wider Brexit settlement, face stumbling blocs in three significant areas, a European Commission official told reporters in Brussels on Thursday. While there have been constructive talks on customs and other checks, and there’s scope for further discussions on state aid, the official said the U.K.’s position on the European Court of Justice is impossible for the bloc to accept.
• Burberry Group Plc shares slumped as the U.K. trenchcoat maker’s plan to go upmarket lost momentum ahead of the arrival of a new chief executive officer. The stock fell as much as 10%. The company’s full-priced sales growth decelerated to 10% in the three months through September after more than doubling in the first quarter, which had an easier comparable. The slowdown dashed hopes the company was already turning its business around ahead of the arrival of Jonathan Akeroyd as CEO in April. Burberry has been shifting more stores to a fancier design and said it was trying to reduce discounting. Burberry should finish exiting markdowns by the end of the fiscal year in March, Chief Financial Officer Julie Brown told analysts in a call Thursday.
• Belarusian President Alexander Lukashenko threatened to shut down a key pipeline carrying Russia gas to the European Union if Poland closes the border as thousands of migrants seek to cross into EU territory.  “We’re heating Europe and they are threatening us that they will close the border,” Lukashenko said at the meeting with government on Thursday, citing the Yamal-Europe pipeline across Belarus, according to state-owned news agency Belta. “What if we cut off natural gas flows there? Therefore, I would recommend the leadership of Poland, Lithuanians and other empty-headed people to think before speaking.” Lukashenko’s threat comes as Europe is dealing with the worst energy crisis in decades amid capped Russian gas deliveries and competition with Asia for liquefied-gas cargoes. Russia, the key supplier of the fuel to the continent, started to boost gas deliveries earlier this week, yet so far the flows remain below the seasonal norm.
• Europe’s energy crunch fueled profits for RWE AG as the German utility giant benefited from burning coal and trading commodities. As gas prices soared to records day after day, RWE fired-up its coal and lignite power plants, sending earnings for that division up 89% in the first nine months of the year and making it the company’s most profitable business. Results from commodities trading also jumped more than 50%, the utility said on Thursday. The increase in profits from burning coal comes at an awkward time, with world leaders meeting in Scotland to try to hash out a plan to curb global emissions. It’s also likely to put more pressure at RWE after a small activist investor pressured the company to accelerate the transition to clean electricity and France’s biggest insurer, AXA SA, dropped the energy giant as a client because of its dependency on coal.
• Euro-area inflation will slow sharply in 2023 as energy costs stabilize and the supply-chain disruptions that are currently stoking prices fade, according to the European Commission. While boosting the outlook for prices in 2021 and 2022, the European Union’s executive sees inflation averaging just 1.4% the following year — below the European Central Bank’s 2% target. Energy costs should peak in the coming months and wage growth is set to remain subdued because of excess capacity in the labor market, it said. The projections reinforce arguments by ECB officials including President Christine Lagarde that surging prices will ease next year and don’t warrant higher interest rates. Even so, inflation in the 19-nation euro region is the fastest since 2008, complicating the exit from extraordinary stimulus measures unleashed after Covid-19 struck.
• Sika AG has agreed to buy German rival MBCC Groupfor 5.5 billion francs ($6 billion), allowing the Swiss building materials company to broaden its product range. Shares in Sika surged nearly 12%, the most in more than a year. They were up 8.5% at 10:40 a.m. in Zurich.  Private equity company Lone Star Funds is selling the business formerly known as BASF Construction Chemicals. The acquisition will boost Sika’s earnings per share from the first year after completion, according to a statement on Thursday.
• GoTo Group, formed this year by the merger of Indonesia’s two most valuable internet startups, raised more than $1.3 billion in the first closing of a fundraising round ahead of its initial public offering. Investors in the pre-IPO round included the Abu Dhabi Investment Authority, Avanda Investment Management, Fidelity International and Google, the company said in a statement on Thursday. The Jakarta-based company expects more investors to join the fundraising ahead of the final completion in the coming weeks. Other backers in the round included Permodalan Nasional Berhad, Primavera Capital Group, SeaTown Master Fund, Temasek Holdings Pte, Tencent Holdings Ltd. and Ward Ferry.
• President Xi Jinping delivered the first doctrine on Communist Party history by a Chinese leader in 40 years, giving him a mandate to potentially rule for life as a major meeting wraps up in Beijing. The approval of the landmark document was announced in a communique Thursday, the official Xinhua News Agency said, as the four-day plenum at a military hotel in Beijing closed. Only Mao Zedong and Deng Xiaoping have authored a so-called historical resolution, and both went on to dominate party politics until they died. The full text of the resolution hasn’t been released yet.  The Central Committee called on the country to “unite around the party with Xi at the core,” implement his doctrine to strive for party goals set through 2049 and realize “the great rejuvenation of the Chinese nation,” the communique said, according to Xinhua.
• Netflix Inc. is close to overtaking Walt Disney Co. in market value for the first time since last year, after the amusement park owner’s earnings stoked concerns about slowing subscriber growth in its streaming business. A 25% advance since the end of July has boosted Netflix’s market value to $287 billion. Disney is poised to see its market value shrink to about $300 billion when markets open on Thursday, falling 4.9% in premarket trading. While Netflix’s subscriber growth has been boosted by hit shows such as Squid Game, additions to the Disney+ streaming app missed Wall Street estimates on Wednesday evening. The Disney World theme-park owner has made the family streaming product its major focus for growth in coming years.
• The record-setting rally in European stocks has further to run, according to Goldman Sachs strategists. A combination of low interest rates, resilient earnings recovery and cheap valuations will drive a total return of 13% for the Stoxx Europe 600 Index next year, according to Goldman. Even after reaching numerous record highs and rising 21% this year, European equities trade at a steep discount to the U.S. market, with a forward price-to-earnings ratio of 16 compared to the S&P 500’s 21 times. The region’s stocks have benefited from the economic reopening thanks to their hefty exposure to cyclical sectors, such as banks and automakers.
• Carefully laid career paths that suddenly become dead ends, college degrees that no longer open doors, coveted overseas jobs gone in an instant. Whenever the acute phase of the pandemic eventually fades, the crisis will be far from over for young workers in emerging economies. Worldwide, youth employment fell by 8.7% in 2020, vs. a 3.7% drop for adults, according a report the International Labour Organization published in June. Although labor markets continue to rebound in line with the global recovery, ILO’s researchers noted that unemployment data compiled by governments offer only a partial picture of the problems. Their report highlights a different metric, the share of young people not in employment, education, or training—the so-called NEET rate—which has yet to return to pre-crisis levels in most countries.
• Revenue at Tapestry Inc. beat Wall Street’s expectations in the most recent quarter thanks to robust sales at Coach, as the brand’s recovery from the depths of the pandemic helped to offset a more sluggish rebound at Kate Spade and Stuart Weitzman. Sales increased 25% on a constant-currency basis to $1.48 billion during the fiscal first quarter ended Oct. 2, according to a statement Thursday. Analysts surveyed by Bloomberg expected revenue of $1.44 billion.
• One side effect of the supply-chain turmoil across the globe is a boom in air freight, as demand for both consumer and industrial goods picks up and congestion shows the downside of full dependence on ocean shipping. The freight market will be squarely in focus when the world’s air carriers, aerospace manufacturers, and leasing companies gather for the Dubai Airshow starting Sunday. Airbus will be chasing customers for a cargo version of its A350 widebody passenger plane. Boeing will be schmoozing the airlines and leasing companies that are potential customers for an all-cargo version of its 777 widebody, which could also be officially launched during the confab if a big order can be cemented in time.

Lest we forget, Remembrance Day 2021

*All sources from Bloomberg unless otherwise specified