November 3, 2021

Daily Market Commentary

Canadian Headlines

• Toronto’s housing market posted its second-best October on record, with prices continuing to soar as a flood of buyers chased a dwindling number of homes for sale. A total of 9,783 homes changed hands, shy of last year’s 10,503 deals, which was an all-time high for October, according to data released Wednesday by the Toronto Regional Real Estate Board. The number of units newly listed for sale plunged by more than a third, creating a supply squeeze that sent the average price up 19.3% to C$1.16 million (about $930,000). Houses spent an average of just 13 days on the market in October, down from 17 days a year earlier.  The imbalance adds urgency to the federal government’s efforts to address an affordability crisis that was sent into overdrive by the low interest rates and frenzy for bigger living spaces brought on by the Covid-19 pandemic.
• Cenovus Energy Inc. continued its strong and reliable operating performance in the third quarter of 2021. Total upstream production of almost 805,000 barrels of oil equivalent per day drove solid financial results. The company generated third-quarter cash from operating activities of $2.1 billion and adjusted funds flow of $2.3 billion. Free funds flow of $1.7 billion and strategic refinancing transactions resulted in a reduction in net debt to about $11 billion at the end of the third quarter.

World Headlines

• European stocks were little changed on Wednesday as investors prepared for a key Federal Reserve policy meeting and as oil’s decline weighed on energy shares. The Stoxx Europe 600 Index was up less than 0.1% at 10:13 a.m. in London, with energy stocks declining most and miners leading the gains. Wind giant Vestas Wind Systems A/S slumped 10% after cutting its outlook for the year again. Anglo American Plc gained 2.3% after naming long-time front-runner and head of strategy Duncan Wanblad as its next chief executive officer. European equities are hovering near record highs as investors weigh strong earnings and growth optimism against inflation, tapering and valuation risks. Investors will be closely watching today’s Fed’s policy meeting, where it’s expected to announce the reduction of its massive bond purchases.
• Global equity markets swung between gains and losses and Treasury yield curves flattened as traders braced for the Federal Reserve’s widely expected move toward policy tightening. Futures on the S&P 500 Index and the Dow Jones Industrial Average slipped 0.1% each after the underlying gauges rose to records on Tuesday. The two-year Treasury yield was steady, while the 30-year rate shed two basis points. A widely communicated yet game-changing moment awaits traders, as the Fed may start tapering stimulus in a first step toward an eventual increase in interest rates. Policy makers have come under pressure to reassess their assessment of inflation being transitory, with bond and currency markets pricing in faster-than-expected rate hikes.
• Asia’s equity benchmark was little changed as traders await the outcome of the U.S. Federal Reserve’s policy meeting, with an announcement expected on tapering amid concerns about elevated inflation. The MSCI Asia Pacific Index traded in a narrow range, with Alibaba Group, AIA Group and Samsung Electronics the biggest drags and Tencent among the winners. South Korea’s Kospi tumbled 1.3% on mounting selling by foreign funds. Hong Kong’s benchmark Hang Seng Index declined for a seventh day, extending its longest losing streak since July. The earnings season has failed to boost Asian shares, with the regional benchmark down more than 10% from a February peak as supply-chain and inflation worries persist. Traders will focus on the Fed’s policy move on Wednesday for cues at a time volatility in the bond market has heightened.
• Oil fell on expectations the Federal Reserve will tighten policy at its meeting Wednesday, a move that poses headwinds for growth and the appetite for risky assets. West Texas Intermediate futures sank 2.3% as the Fed is expected to announce it will begin winding down the bond-buying program put in place last year to combat fallout from the pandemic as an initial step toward eventually increasing interest rates. The dollar ticked higher Tuesday, making commodities priced in the currency more expensive for overseas consumers. The U.S. is intensifying pressure on the Organization of Petroleum Exporting Countries and its allies to revive halted supplies more quickly, with Secretary of State Antony Blinken pressing the United Arab Emirates on Tuesday after President Joe Biden blamed the group for fueling inflation.
• Gold edged lower for a second day before a key Federal Reserve decision, as equity markets remain buoyant amid strong corporate earnings. Fed policy makers are expected to announce Wednesday that they’ll start scaling back their massive asset-purchase program amid greater concern over inflation, economists surveyed by Bloomberg said. A majority of the 49 economists in the survey predicted the U.S. central bank will begin the taper in November and wrap it up by mid-2022. Bullion is trading below the key $1,800 an ounce level, as risk sentiment remains strong even as central banks globally prepare to rein in pandemic-era stimulus. The Fed is almost certain to retain its rhetoric that it won’t raise interest rates until full employment goals are met. October’s non-farm payrolls report Friday will be closely watched for clues on the labor-market recovery.
• European Central Bank President Christine Lagarde renewed her pushback against market bets for an interest-rate increase in 2022 after an attempt last week left investors unimpressed. “In our forward guidance on interest rates, we have clearly articulated the three conditions that need to be satisfied before rates will start to rise,” Lagarde said Wednesday in a speech in Lisbon. “Despite the current inflation surge, the outlook for inflation over the medium term remains subdued, and thus these three conditions are very unlikely to be satisfied next year.” After last week’s Governing Council meeting, Lagarde called market expectations for a rate hike as inconsistent with the ECB’s own analysis and forward guidance. She stopped short of saying markets are wrong, however, reflecting an agreement within the Governing Council that such a move could backfire.
• Hong Kong’s government has approved giving out booster shots for high-risk groups starting this month, including people over 60 and those with weakened immune systems. The city is in advanced discussions with China about potentially reopening their shared border, just as the mainland is experiencing the broadest spread of the virus since Covid-19’s emergence almost two years ago in Wuhan. New Zealand’s central bank said the transition to living with the coronavirus could lead to changes in consumer behavior that dampen economic growth. Indonesia cut short its Christmas public holiday by one day to curb travel that could prompt a resurgence of the virus.
• Cathie Wood’s flagship exchange-traded fund pounced on a huge slump in Zillow Group Inc. to add more shares of the embattled real estate company. The ARK Innovation ETF bought 288,813 shares of the property firm on Tuesday, according to the daily trading update from Wood’s Ark Investment Management. Zillow plunged over 10% on the day after pulling the plug on its tech-powered home-flipping operation. Zillow was down again in early trading on Wednesday. The Seattle-based company plans to take writedowns of as much as $569 million and reduce its workforce by 25% as it ditches the algorithm-driven business in the coming months, it said.
• Mercury Retail Holding Plc, which controls Russia’s biggest chains of alcohol retailers, seeks to raise as much as $1.3 billion in what would be the largest initial public offering in Moscow since 2013. The holding, which operates more than 14,000 convenience stores that sell alcohol, cigarettes and food under the Krasnoe & Beloe and Bristol brands, said on Wednesday that the price range has been set at between $6 and $6.50 per global depositary receipt. That would value the company at as much as $13 billion. Even at the low end of the price range, a successful placement would be the largest initial public offering held exclusively on the Moscow Exchange since Alrosa’s $1.3 billion share sale in 2013 and would make Mercury Retail the largest Russian food retailer by market capitalization, ahead of Magnit PJSCand X5 Retail Group NV.
• Deutsche Lufthansa AG posted a surprise profit driven by booming cargo demand, and said a reopening of the U.S. border to Europeans will keep earnings positive through year-end. The shares jumped as much as 5.3% after the German group reported adjusted earnings before interest and tax of 17 million euros ($20 million) for the third quarter, its first profit since the start of the Covid-19 pandemic. The buoyant outlook, following strong results from Air France-KLM, signals that the travel recovery is extending to large network airlines. Both European carriers got a boost from cargo operations over summer, with prices remaining high even as capacity returns. While Lufthansa’s passenger operations posted a loss, the U.S. will reopen to foreign visitors next week, releasing pent-up demand for corporate travel and family trips over the holidays.
• Republican Glenn Youngkin shook off his Virginia opponent’s attempts to yoke him to former President Donald Trumpand in winning, returned some suburban and independent voters to the GOP, an omen for President Joe Biden and Democrats hoping to keep control of Congress next year. Youngkin’s defeat of Democrat Terry McAuliffe — a former governor and Democratic National Committee chair — makes him the first Republican candidate since 2009 to win a governor’s race in the state, where Biden beat Trump by 10 points only a year ago. His victory offers Republicans a road map for how to prevail in the crucial 2022 midterm elections, including with a focus on issues like education that are core to suburban voters. And in New Jersey, Democratic Governor Phil Murphy was fighting a much tougher-than-expected battle against Republican Jack Ciattarelli for another term, even though Murphy had been heavily favored to win by a comfortable margin in a state Biden won even more decisively, by 16 points.
• Banks and asset managers representing 40% of the world’s financial assets have now pledged to meet the goals set out in the Paris climate agreement, as an alliance championed by former central banker Mark Carney swells under the gaze of a world increasingly alarmed by planetary warming. More than 450 firms representing $130 trillion of assets now belong to the Glasgow Financial Alliance for Net Zero, almost double the roughly $70 trillion when GFANZ was launched in April, according to a progress report published by the coalition on Wednesday. Signatories must commit to use science-based guidelines to reach net zero carbon emissions by mid-century, and to provide 2030 interim goals.  For Carney, who chairs GFANZ, the announcement marks a milestone moment after he managed to get some of the world’s biggest financial firms to sign up at the eleventh hour. U.K. Chancellor Rishi Sunak called the commitments “historic” in a separate statement. He also used the opportunity to announce plans to make Britain, which is hosting the COP26 climate summit, “the world’s first net zero aligned financial center.”
• The price of two out of three emerging-market bonds sold this year fell after issuance, erasing about $9 billion from portfolios holding them. Of the 563 dollar-denominated corporate and government bonds sold this year, 371 fell in price with an average loss of 2.8%, according to data compiled by Bloomberg. Developing-nation debt faced a series of headwinds in 2021, from the slow pace of vaccinations early in the year to more recent concern about a spike in inflation. The losses may make bond funds think twice about taking on newly-issued debt. Emerging-market borrowers have a record $584 billion debt in dollars and euros maturing next year, according to data compiled by Bloomberg, while the cost of borrowing is the most expensive since July 2020. The expected withdrawal of liquidity by the Federal Reserve and the European Central Bank could force issuers to offer concessions to lure buyers, or else postpone borrowing.
• The hedge fund traders watched as a nightmare scenario played out in the world’s bond markets. From Australia to the U.K. to the U.S., government bond yields abruptly moved against them last week amid growing speculation that central banks will accelerate plans for raising interest rates in the face of persistent inflation. The losses piled up — and for a few became so big that the firms halted some trading to contain the damage. Balyasny Asset Management, BlueCrest Capital Management and ExodusPoint Capital Management each curtailed the betting of two to four traders after they hit maximum loss levels, according to people with knowledge of the matter, who asked not to be identified because the information is private. That step stopped traders from changing their positions, an extraordinary risk-management move used so firms can reassess trades or unwind them.
• Russia’s Nord Stream 2 may need a few more months to clear remaining red tape before the controversial pipeline begins pumping natural gas to Germany to help ease Europe’s energy crunch. The Baltic Sea project — which has raised concerns over the Kremlin’s control of energy supplies to the continent, including among Germany’s Greens — is complete and awaiting certification from national and European Union authorities. Russian President Vladimir Putin has pledged to step up gas supply, and has said Nord Stream 2 can be activated “the day after” regulatory sign-off. However, the pipeline might not be approved until May if regulators use all the time they’re allowed. Whether the bureaucrats would be willing to accelerate the process if Europe’s energy woes intensify remains to be seen.
• The Taliban government has banned the use of foreign currency in Afghanistan in a surprise move that could further weigh on an economy struggling with a cash crunch amid widespread hunger. The militant group’s spokesman Zabihullah Mujahed said the Afghans should use the local currency in view of the economic situation. Much of Afghanistan’s local trade is done in U.S. dollars. The move comes as the Taliban are pushing for the release of billions of dollars of reserves overseas, which were frozen by the U.S. and its Western allies since the group swept into the power in August. Without the reserves, Afghanistan has been effectively shut out of the international financial system.
• Henderson Land Development Co. won a prime land plot along Hong Kong’s famed Victoria Harbour for a record-breaking HK$50.8 billion ($6.5 billion), as the developer seeks to expand its portfolio in the city’s most important business district. The sky-high price makes the Central site the most expensive land plot ever sold in a government tender, surpassing the previous record set by Sun Hung Kai Properties Ltd. at HK$42 billion. The estimated price for the site ranged from HK$37 billion to HK$55 billion, according to property analysts surveyed by Bloomberg. Given its prime harbor-front location in Central, the government took into account the design submitted by the bidders before awarding the site. It was the first time the government looked beyond the bidding price when considering winners. Bidders’ proposed design and premium amount carried equal weight in the government’s evaluation.
• Senior Democrats are weighing expanding a new minimum tax on upper-income households in exchange for repealing a limit on state and local tax deductions created by the 2017 Republican tax law, according to three people familiar with the negotiations. Democrats in high-tax states such as New Jersey, California and New York have demanded the repeal of a $10,000 cap on what state and local taxpayers can deduct off their federal taxes, a provision enacted by the GOP in their tax law to offset the cost of its large corporate tax cut. Lawmakers such as Rep. Josh Gottheimer (D-N.J.) have gone as far as saying they will vote against President Biden’s Build Back Better economic package if repeal of the “SALT cap” is not included (SALT is an acronym for the state and local tax deduction). These demands have faced criticism from tax experts on the left, right and center, who say allowing Americans to deduct potentially hundreds of thousands of dollars in state and local taxes from their federal income would amount to a substantial benefit for the wealthiest taxpayers in the most high-tax parts of the country.
• The real-estate unit of private-equity giant EQT AB has sold a portfolio of U.S. industrial real estate to a group led by an Asian sovereign-wealth fund in a deal that values the portfolio at $6.8 billion including debt, according to people familiar with the matter. The deal for 328 industrial facilities carries one of the highest prices ever paid for U.S. industrial property, the latest sign of strength in the market for the warehouses and distribution centers that serve as the backbone of the e-commerce boom. It is scheduled to be announced Wednesday morning, according to people familiar with the matter. The properties serve major population centers, including the New York, Chicago and Los Angeles regions, and air-cargo hubs in places such as Memphis and Louisville. The sovereign-wealth fund wasn’t identified.
• Members of the United Auto Workers union rejected a deal with Deere & Co., extending a nearly three-week-long strike and illustrating the growing willingness of U.S. workers to hold out for better terms. The second rejected deal offered substantial improvements over one that workers turned down before going on strike, and included larger wage increases, no new tiers to retirement benefits and a signing bonus of $8,500. “By a vote of 45% yes to 55% no, UAW John Deere members voted down the agreement this evening,” the union said in a statement. “The strike against John Deere and company will continue as we discuss next steps with the company.”
• Citigroup Inc. is about to apply to set up an investment banking business in China, joining its major Wall Street rivals in a chase after billions of dollars in potential profits as the nation opens its $54 trillion financial market.  The U.S. bank plans to submit an application for a license to underwrite yuan-denominated shares and conduct trading for clients on the Chinese mainland over the next couple of days, a person familiar with the plan said, who asked not to be named discussing a private matter. It will also apply for a futures license in the next few weeks, the person said. A Hong Kong-based spokesman at Citigroup declined to comment. After spending more than a year exiting a local joint venture, Citigroup is now a late entrant in setting up its own securities operation after the country last year opened for foreign firms to take full control. JPMorgan Chase & Co. became the first Wall Street bank to gain full ownership in August, followed by Goldman Sachs Group Inc. last month.
• CVS Health Corp. raised its annual forecast as third-quarter earnings and sales beat Wall Street’s expectations. Full-year adjusted earnings will rise to a range of $7.90 to $8 a share, CVS said, a 20-cent increase from its earlier forecast. Quarterly adjusted earnings were $1.97 a share, the drugstore chain said, beating the average projection of $1.78. Revenue of $73.8 billion surpassed the $70.5 billion consensus.

• Supply chain has been the buzz word of third-quarter earnings season amid concern that bottlenecks are roiling sales and profits this year. Companies’ references to supply chains during earnings calls have accelerated to an all-time high this reporting season and are up 412% over the year-ago period, Bank of America’s equity and quant strategist Savita Subramanian wrote in a note this week. Amazon.com Inc., the world’s largest e-commerce company, last week said its entire fourth-quarter profit could be wiped out because of a surge in the cost of labor and fulfillment. Apple Inc., meanwhile, said it lost $6 billion in sales because it can’t meet demand for its products, and could lose more next quarter.
• Shoemaker Allbirds Inc. expanded an initial public offering and priced the shares above a marketed range to raise $303 million. The San Francisco-based company and its existing shareholders sold more than 20 million shares Tuesday for $15 each after marketing 19 million of them for $12 to $14, according to a statement confirming an earlier report by Bloomberg News. Allbirds has a market value of about $2.16 billion based on the outstanding shares listed in its filings with the U.S. Securities and Exchange Commission. Accounting for employee stock options and similar holdings, the company would have a fully diluted value of more than $2.4 billion

“The more you feed your mind with positive thoughts, the more you can attract great things into your life.” ― Roy T. Bennett, The Light in the Heart

*All sources from Bloomberg unless otherwise specified