October 26, 2021

Daily Market Commentary

Canadian Headlines

• The Canadian stock market posted its longest streak of gains ever as a rally in commodities pushed the benchmark higher for a 14th straight session. The S&P/TSX Composite Index rose 0.3% to an all-time high Monday. It has added about C$237 billion ($191 billion) in market value during its recent winning streak, according to data compiled by Bloomberg. U.S. oil prices hit $85 a barrel for the first time since 2014 and metals prices also climbed, fueling Monday’s rally. Energy and materials make up about 25% of the Canadian benchmark. “The TSX is one of the best inflation hedges you can find,” Stefane Marion, chief economist and strategist at National Bank of Canada, said via phone. In a recent analysis, Marion found that the S&P/TSX posted an annualized return of 2.3% during inflationary periods due to its commodity exposure, versus a decline of 5.9% for the S&P 500.
• Shares of Rogers Communications Inc. suffered their worst decline since the pandemic market crash of 2020 after a weekend of open hostilities within the Rogers family left it unclear who’s in control of the board. Canada’s largest wireless firm fell 5.8% to C$56.55 after Edward Rogers, the only son of late founder Ted Rogers, asserted that he’s the chairman and said he’ll try to get a Canadian court to agree that he has the right to choose the 14-person board.  It was the biggest share drop since March of last year. The company and other members of the family — including his mother, Loretta Rogers — say Edward’s new board is illegitimate and that former AT&T executive John MacDonald is still chairman.

World Headlines

• European stocks rose, approaching a record high, as a slew of corporate earnings held investor attention. The Stoxx Europe 600 Index climbed 0.6% as of 9:16 a.m. in London, almost touching an all-time closing high reached in August. Reckitt Benckiser Group Plc boosted personal care shares after increasing its forecast for full-year sales growth. Novartis AG and UBS Group AG gained after earnings from the Swiss heavyweights beat estimates. Orange SA fell after posting worse-than-expected revenue. European equities have advanced more than 4% in October, on track for their best month since March, recovering from volatility spurred by an energy crisis, higher bond yields and slowing China growth. Investors are watching the earnings season for clues on the strength of the corporate recovery.
• U.S. equity futures rose along with stocks in Europe on Tuesday as corporate earnings helped boost sentiment amid lingering concerns about inflation and growth. Contracts on the S&P 500 and Nasdaq 100 advanced as Tuesday’s round of earnings kicked off, with United Parcel Service Inc., General Electric Co. and 3M Co. gaining in pre-market trading after strong results. Eli Lilly & Co. advanced after raising full-year forecasts. Facebook Inc. rose after pledging on Monday to buy back as much as $50 billion more in stock, with big-tech peers Twitter Inc., Alphabet Inc. and Microsoft Inc. reporting after the market close on Tuesday. The 10-year U.S. Treasury yield and the dollar were steady. The debate over price pressures continues: former Treasury Secretary Lawrence Summers said officials are unlikely to deal with “inflation reality” successfully until it’s fully recognized.
• Asian stocks rose as investors focused on encouraging earnings reports from some of the world’s biggest technology companies. The MSCI Asia Pacific Index traded 0.3% higher in afternoon trading, paring an earlier gain of as much as 0.7%. The advance was driven by a subgauge of IT names including South Korean memory chipmaker SK Hynix, which climbed after reporting record sales and forecasting further demand growth. Japan led gains among national benchmarks, with the Topix rising more than 1%. The market was helped by a local media report that the ruling Liberal Democratic Party may be able to win a majority of seats on its own in the general elections scheduled for next week.
• Oil traded near its highest level since 2018 amid expectations that stockpiles will continue to decline globally as OPEC+ keeps a tight rein on supply.  Brent crude edged lower from its highest close in three years. Later Tuesday, the American Petroleum Institute will report estimates for U.S. oil inventories, including at the key hub in Cushing, Oklahoma. A sharp drawdown there in recent weeks has led to huge moves in timespreads for both Brent and West Texas Intermediate as traders pay premiums for more immediate supply. The Organization of Petroleum Exporting Countries and its allies are due to gather next week to assess output policy against a market backdrop in which investors are expecting even higher prices. Larry Fink, chairman and chief executive officer of BlackRock Inc., the world’s largest asset manager, said there’s a high probability that crude could hit $100 a barrel.
• Gold steadied after a five-day advance as inflation concerns persisted and a rally in stocks bolstered broader market optimism. A Bloomberg Economics analysis of the drivers behind the current bout of elevated U.S. inflation, as well as the Federal Reserve’s growth forecasts, suggest it’s a risky bet that price gains will be transitory. Former Treasury Secretary Lawrence Summers said on Twitter that officials are unlikely to deal with “inflation reality” successfully until they fully recognize it. Meanwhile, the S&P 500 closed at a record as corporate earnings and progress on President Joe Biden’s economic agenda boosted sentiment. Democrats stepped closer to an agreement as Senator Joe Manchin, who has been pushing to shrink the size of a sweeping social-spending package, said a deal on the outlines of the plan is within reach this week. Bullion has recovered this month to trade above $1,800 an ounce amid the debate over rising price pressures and how the world’s central banks are dealing with inflation while preparing to dial back on stimulus measures.
• Singapore’s ICU units are filling up with severely ill Covid-19 patients, with only 60 beds left in public hospitals. Meanwhile, the Southeast Asian nation took another step to revive its economy by opening travel lanes with Australia and Switzerland. Bulgaria, the European Union’s least-vaccinated country, reported a record 243 daily deaths from the disease. Hong Kong tightened its quarantine rules in a bid to open the China border. The government will stick to its “zero infection” strategy, rejecting pleas from global banks to ease its strict policy. Outbreaks in China are flaring more frequently than ever, raising questions about how long the nation can persist with the so-called Covid Zero strategy that’s leaving it increasingly isolated.
• Investors are rewarding stocks for beating on both profits and sales by the most since the Covid-19 pandemic began — while the penalty for failing to deliver has been particularly harsh. Robinhood Markets Inc. will be front and center putting the nascent trend to the test on Tuesday. The trading app plunged 10% on Aug. 19 after issuing cautious guidance during its inaugural earnings report. That has analysts setting a low bar this time around, with the average estimate predicting a 25% drop in revenue from the second quarter. Two weeks into earnings season, companies that surpass Wall Street estimates have risen by an average of 0.93% the next day, a post-pandemic best, but below the average going back to the start of 2000, according to Bank of America strategists including Savita Subramanian. Those that miss have dropped by an average of 2.78%, worse than the historical average of a 2.33% decline.
• PT Dayamitra Telekomunikasi, the infrastructure services unit of state-owned PT Telkom Indonesia, plans to raise as much as 24.9 trillion rupiah ($1.8 billion) in an initial public offering that could be the country’s biggest on record. The company, also known as Mitratel, will offer as many as 25.5 billion new shares at 775 rupiah to 975 rupiah each, according to its prospectus. The company, which aims to list on Nov. 22, will use the proceeds to buy telecommunications towers, other strategic products to grow its business, and for working capital. At $1.8 billion, Mitratel’s IPO would be Indonesia’s largest, surpassing the $1.5 billion raised this year by online marketplace PT Bukalapak.com, and the $1.48 billion mopped up by PT Matahari Department Store in 2013, according to data compiled by Bloomberg.
• Adler Group SA reached a deal to sell real estate assets worth more than 1 billion euros ($1.1 billion), the latest step in an effort to fend off short sellers’ attacks that pushed its shares 40% lower in the last three months.  Adler didn’t name the buyer of the assets, saying only that the purchase is being made by “a leading alternative investment firm” in a statement on Tuesday. The assets are mostly located in eastern Germany. Adler’s longer-term bonds jumped on the news with its notes due April 2029 rising 1.1 cents on the euro to 85.5 cents, the highest level since Oct. 8, according to Bloomberg prices. The shares rose as much as 5.7% on the Frankfurt Stock Exchange before erasing most of the gains.
• Natural gas in Europe rose for a second day as weak Russian flows and new Norwegian field outages continued to stoke concerns of a winter supply crunch.  Russian shipments to central Europe through Ukraine and Poland have declined more than 40% since Friday. Flows via the Mallnow link to Germany this month are averaging far less than in September, though they rose 58% on Tuesday from the previous day, according to data from network operator Gascade. Only about 35% of capacity via the Mallnow point was allocated for November in an auction last week. The almost 80% surge in gas prices over the last two months has hindered the economic recovery from the pandemic, forcing factories to close and governments to step in to ease household energy bills. While prices have eased from record highs in recent days, forecasts for colder weather next month and persistently low storage levels could push gas higher again.
• The U.S. and Chinese governments made some incremental progress in their economic and trade negotiations, with Chinese Vice Premier Liu He and U.S. Treasury Secretary Janet Yellen holding their second call in about four months. China described the conversation as “pragmatic, candid and constructive” in a statement Tuesday in Beijing, saying the two sides agreed that it’s important to strengthen communication and coordination of macroeconomic policies as the world’s recovery faces a critical moment.  Overall U.S.-China relations have improved since a phone call between Presidents Joe Biden and Xi Jinping last month, after the U.S. administration became frustrated with Beijing’s move to link progress on climate talks with other issues. Shortly afterward, the U.S. reached a deal to release Huawei Technologies Co. Chief Financial Officer Meng Wanzhou from extradition proceedings in Canada — one of Beijing’s top demands.
• Subhash Chandra is no stranger to corporate battles. In 1998, when his then partner Rupert Murdoch attempted to buy out their thriving five-year-old Indian television venture, the entrepreneur deftly fended off the billionaire to wrest back control of what became Zee Entertainment Enterprises Ltd. More than two decades later, India’s largest publicly traded entertainment network is back at the center of a complicated boardroom and courtroom feud: Chandra and his supporters versus Atlanta-based Invesco Developing Markets Fund, Zee’s biggest shareholder with an 18% stake.  A court in Mumbai on Tuesday temporarily restrained Invesco from calling a shareholder meeting — a crucial win for Zee and its founder Chandra. The ruling can be challenged in a higher court. Invesco, unhappy with the way Zee is run, wants to remove Chandra’s son Punit Goenka as its CEO, overhaul the board and get a new owner. Zee’s shares closed 4.3% higher, most in over a month, after the verdict.
• Chinese authorities told billionaire Hui Ka Yan to use his personal wealth to alleviate China Evergrande Group’s deepening debt crisis, according to people familiar with the matter. Beijing’s directive to the Evergrande founder came after his company missed an initial Sept. 23 deadline for a coupon payment on a dollar bond, said the people, asking not to be identified discussing a private matter. Local governments across China are monitoring Evergrande’s bank accounts to ensure company cash is used to complete unfinished housing projects and not diverted to pay creditors, the people said. The demand that Hui tap his own fortune to pay Evergrande’s debt adds to signs that Beijing is reluctant to orchestrate a government rescue, even as the property giant’s crisis spreads to other developers and sours sentiment in the real estate market. Chinese President Xi Jinping has been cracking down on the billionaire class as part of his “common prosperity” campaign to reduce the country’s yawning wealth gap.
• General Electric Co.’s jet-engine division continued to rebound from pandemic-induced lows, helping the conglomerate to post a profit that topped Wall Street expectations in spite of supply chain turmoil. Adjusted earnings jumped to 57 cents a share in the third quarter, the company said Tuesday. Analysts had expected 43 cents, according to a survey of estimates compiled by Bloomberg. Sales slipped 0.5% to $18.4 billion, while Wall Street anticipated $19.3 billion. But industrial free cash flow was $1.7 billion, well higher than the roughly $1 billion expected by analysts.
• The Western world’s biggest oil companies likely just generated more cash than at any time since the Great Recession, and investors are about to find out what they’ll do with it. The five supermajors — starting with Royal Dutch Shell Plc and TotalEnergies SE, who release earnings on Thursday — will report about $29 billion in free cash flow combined in the third quarter, according to analysts’ estimates compiled by Bloomberg. That would be the most since the beginning of 2008. Strong demand for crude, surging prices for natural gas and chemicals, and a rebound in the refining business are likely to be the main drivers. An upbeat set of results would help cement a remarkable turnaround after a painful 2020, in which Big Oil was forced to cut costs and employees, shelve spending plans and take on debt. Shell and BP Plc even resorted to cutting their vaunted dividends. Shareholders are now anxious to see whether the companies will return their windfalls via higher dividends or stock buybacks — or use them to produce more oil and gas.
• Facebook Inc. shares rose Tuesday as optimism about a share buyback plan and spending in immersive digital experiences outweighed a below-consensus revenue outlook. The social media giant gained 2.4% as of 7:01 a.m. in New York, as several analysts cut their price targets but maintained a positive view on the stock. Facebook touted its metaverse investments even as the effects of Apple Inc.’s stricter data collection rules prompted a weaker-than-expected guidance for revenue in the current quarter.  Slower revenue growth is just one of many challenges for Chief Executive Officer Mark Zuckerberg, as claims of an inadequate response to hate speech, misinformation and violent content swirl around the company.
• President Joe Biden will likely be unable to keep one of his key campaign promises — to roll back his predecessor’s historically unpopular 2017 tax cuts — because of unyielding resistance among even some in his own party to raise taxes. While Biden won applause on the campaign trail for pledging to repeal President Donald Trump’s tax overhaul on “day one,” as president he has run into the same political reality faced by Barack Obama, who kept the vast majority of George W. Bush’s tax reductions: raising taxes is a hard lift in Congress. In Biden’s case, Senator Kyrsten Sinema of Arizona has loomed as the biggest obstacle. While she hasn’t spelled out her views in public, Democratic lawmakers attempting to craft a package of revenue-raisers to pay for the sweeping social spending bill to enact most of Biden’s economic agenda say she’s opposed tax-rate increases.
• The bond market’s age-old measure of growth is flashing an ominous warning as the world’s central banks move closer to boosting interest rates from near record lows.  Traders are wagering on rate hikes of as much as 161 basis points over the next year in countries including the U.K., New Zealand and South Korea amid soaring costs of living and commodity prices. Yet a flattening in yield curves — historically seen as the market’s assessment of economic health — indicates rising concern that such a rapid withdrawal of support will hurt the nascent recovery. Such a view is not without its detractors; yield-curve signals have been distorted by more than a decade of central bank bond-buying. But with these gauges aligning with other growth indicators and talk of stagflation gripping Wall Street, investors are pondering whether such a rapid pace of tightening — if delivered — could prove a costly mistake.
• United Parcel Service Inc. increased package deliveries and prices amid a surge of e-commerce demand to post profit that topped analysts’ expectations. Adjusted earnings hit $2.71 a share, up from $2.28 a year earlier, the Atlanta-based courier said Tuesday in a statement. Analysts had predicted $2.54. Revenue rose 9.2% to $23.2 billion, while analysts had expected $22.6 billion. UPS raised its outlook for an operating margin of 13% for 2021 from a target of 12.7% set in July. The company also increased capital spending plans for the year to $4.2 billion from $4 billion in July.
• Hasbro Inc., whose longtime chief executive officer died this month, reported third-quarter results that beat analysts’ estimates as revenue from TV and film-related products offset delays in delivering toys. Third-quarter profit came to $1.96 a share, excluding some items. Analysts expected earnings per share of $1.63. Sales rose to $1.97 billion, meeting the average of analysts’ estimates. About $100 million of orders were delayed in the third quarter, with most of that arriving in the start of the fourth quarter.
• Bain Capital, Blackstone Inc. and KKR & Co. are among the firms bidding to acquire Japanese software maker Yayoi Co., according to people familiar with the matter. Japanese financial conglomerate Orix Corp. is seeking more than 200 billion yen ($1.8 billion) for the business management software maker, said the people, who asked not to be identified as the information is private. Orix aims to complete the process by the end of March, they said. Deliberations are ongoing and Orix could decide not to proceed with the sale. Representatives for Bain, Blackstone and KKR declined to comment.
• Buyout firms Carlyle Group Inc. and CVC Capital Partnersare among the suitors considering bids for French grocer Carrefour SA’s Taiwan operations, people with knowledge of the matter said.  Taiwanese conglomerate Far Eastern Group is also exploring making an offer for the business, whose enterprise value could be worth at least 1.6 billion euros ($1.9 billion), the people said. Blackstone Inc., KKR & Co. and MBK Partners have also shown interest, they said, asking not to be identified as the information is private. The process has advanced to the second round and binding bids are due in the next few weeks, the people said. Deliberations are ongoing and the potential bidders could decide against making an offer, the people said.
• China Three Gorges Corp. and State Power Investment Corp.are among the bidders for the 1 gigawatt wind energy portfolio owned by China’s Master Group, according to people familiar with the matter. The assets of the Ningxia-based Master Group could be valued at about $1 billion, the people said, asking not to be identified because the information is private.  The process, though quite advanced, could be delayed or fall apart or Master Group could decide against proceeding with the sale, the people said.

“The only thing necessary for the triumph of evil is for good men to do nothing.” – Edmund Burke

*All sources from Bloomberg unless otherwise specified