Launch Pad

Daily market commentary

August 9, 2022
  
Click here to sign up for the Launch Pad
     
Today
 

Futures slipped this morning as investors evaluate whether a strong earnings performance can continue despite recent disappointments. Treasuries dipped, with the 10-year benchmark yield rising as investors await tomorrow’s inflation report to gauge the path of Fed tightening. Focus is turning to the question of whether CPI in the U.S. may have peaked in June as economists project the biggest drop in more than two years for July. A blowout reading for nonfarm payrolls has eased worries about a recession, while corporate performance remains impressive with 81% of S&P 500 companies beating or meeting expectations. 

U.S. stocks retreated yesterday after a three-week rally. The Nasdaq underperformed after a gloomy forecast from Nvidia Corp. weighed on tech shares. Rising risks in the market have sparked earnings downgrades, and after recent figures showed U.S. GDP shrank for a second straight quarter, some are warning that earnings cuts could ramp up, despite strong earnings this quarter. The TSX closed in the green after getting a lift from materials, with Barrick Gold Corp., First Quantum Materials Ltd., and Agnico Eagle Mines adding the most to the index. 

Welcome news for the fed – inflation expectations are coming down. The latest survey by the Federal Reserve Bank of New York found that expectations for U.S. inflation three years ahead fell to 3.2% in July, from 3.6% in June, the second straight monthly drop. The outlook for inflation in the coming year fell to 6.2% from 6.8%. The drop in gas prices over recent weeks played a big part in easing concerns and relief at the pumps will likely contribute to a lower headline rate of inflation for July when the Labor Department releases the data on Wednesday.  

After months of gut-wrenching turbulence for the asset class, crypto investors are focusing on the broader equity markets for clues on when the bleeding will end. The 90-day correlation coefficient of Bitcoin and the S&P 500, after weakening slightly in June, now stands around 0.65 which is among the highest readings. Experts are saying that crypto is poised for outperformance if equities have bottomed out, but whether equities and crypto have reached their lows is a question no one can call with any real certainty. With equities mostly up over the last few weeks, Bitcoin has added 15% over the past month, but still is down over 50% YTD.  

China is mad. After Nancy Pelosi's visit last week to Taiwan, China responded with test launches of ballistic missiles over the island's capital and miliary exercises. The exercises began on Thursday and centered on six locations around Taiwan. Over the weekend, Chinese and Taiwanese warships played high seas "cat and mouse" with 10 warships each from China and Taiwan sailing at close quarters in the Taiwan Strait. China says its relations with Taiwan are an internal matter and it reserves the right to bring the island under its control, by force if necessary. Taiwan rejects China's claims saying only Taiwan's people can decide their future. China said it is extending the exercises surrounding Taiwan which has raised concerns about the potential for conflict in a region crucial to global trade. 

A rise in M&A deals among biotech companies is fueling a rebound in the sector which has been hit hard in this year’s selloff in growth stocks. Recent delas include Pfizer’s $5.4 billion acquisition of Global Blood Therapeutics Inc. which comes after Amgen Inc. said last week it would spend $3.7 billion to buy ChemoCentryx. Gilead Sciences said it would pay $405 million for privately held MiroBio and there are reports around Merck’s interest in buying Seagen.  Deals like these are crucial to the industry, with many small, cash-intensive firms looking to attract larger biopharmaceutical companies to help finance drug development. The value of deals this so far this quarter is already larger than the entire first three months of the year. Investors are taking notice and sentiment for the beaten-down sector has changed recently with the help of key clinical wins and strong earnings from companies such as Moderna. 

A new survey found that the majority of Canadians set stricter priorities and reduced spending due to inflation. Canadians are cutting back on groceries and entertainment as inflation continues to put pressure on household budgets. The top categories facing cutbacks include dining out at restaurants and ordering in, followed by groceries, and entertainment such as movies, sports events and personal sports activities. Those living in Atlantic Canada are most likely to be cutting back on spending, with 71% reporting that they are setting stricter priorities amid higher prices, followed by those living in Alberta, Manitoba/Saskatchewan, Ontario, British Columbia and Quebec. 


Diversion: Sorry to interrupt your meeting. 
The
Tactical model 
 
(% equity weight)

Our tactical fund is designed to complement your existing holdings to minimize portfolio volatility. To learn more, please click here.
 
 
The latest
Market Ethos 


Second half off to a good start - NEW
The future is bright for Japan 
Emerging markets 
Currency in the spotlight 

Sign up for the Market Ethos mailing list.
 
Company news

Alexa! Start my Roomba. Amazon is acquiring iRobot Corp, maker of the Roomba robotic vacuum cleaner, in an all-cash deal worth $1.7 billion. Amazon will pay $61 per share, giving iRobot a 22% premium on last week’s closing price of $49.99. Amazon is pushing to expand its lineup of home robotic products, with Senior Vice President Dave Limp citing, “In five to 10 years, we believe every home will have at least one robot that will become a core part of your everyday life.”  

Nvidia reported its quarterly revenue missed projections by more than $1 billion, surprising investors and piling on more evidence that demand for electronic components is drying up quickly after a two-year boom. Nvidia’s graphics chips are a staple of high-end PCs used to get the most realistic gaming experience. Most of the major gaming companies have reported falling sales or weaker outlooks this year, from PlayStation maker Sony Group Corp. to Microsoft Corp., which sells the Xbox console.   

Novavax is looking to open one third lower after reporting a quarterly revenue miss and cutting guidance, but the vaccine maker remained positive on its longer-term outlook. Sales for the year will be as much as $2.3 billion, which is less than half the previous expected peak of $5 billion. CEO Stanley Erck stated the “significant shortfall” in revenue was mostly due to changes in expectations from two major markets: the U.S. and the Covax program, which obtains vaccines for low- and middle-income countries.  

The largest U.S. maker of memory semiconductors, Micron, said fourth-quarter sales may come in at the low end of or below its previous guidance after customers scaled back their own inventories. Micron previously said sales would be about $7.2 billion in its fiscal fourth quarter, far below the analyst estimate of $9.14 billion at the time.   

Fairfax Financial Holdings is looking for a private deal to take out Recipe Unlimited Corp, valuing the Canadian restaurant chain at about C$1.2 billion. Recipe Unlimited owns fast-casual and fast-food brands such as East Side Mario’s, Kelseys and Swiss Chalet. Fairfax already owns about 23% of the subordinate voting shares of Recipe. 

BP reached an agreement to sell its 50% interest in the BP-Husky Toledo Refinery in Ohio to Cenovus Energy, its joint venture partner in the facility. Cenovus will pay $300 million for BP’s stake in the refinery, plus the value of inventory, and take over operations when the transaction closes, which is expected to occur later in 2022. 
Commodities

Corn is higher hitting a one-week high as U.S. crop conditions deteriorated with searing heat and drought affecting Northern Hemisphere production. Data from the Department of Agriculture data showed the proportion of U.S. corn in good to excellent condition fell to 58% in the past week, which was below expectations and compares to 61% a week earlier. The U.S. is the world’s biggest producer of corn. Another bout of extreme heat is also sweeping Europe, worsening prospects for their local harvest. Analysts expect the U.S. government to cut its estimate for world corn stockpiles in a report later this week. 

Oil prices are higher despite the latest progress to revive the 2015 Iran nuclear accord, which would clear the way to boost its crude exports in a tight market. Yesterday, the EU put forward a “final” text to revive the 2015 Iran nuclear deal, awaiting approvals from Washington and Tehran and a senior EU official said a final decision on the proposal was expected within “very, very few weeks”. The 2015 nuclear pact granted the Persian Gulf nation relief from punishing economic sanctions, including on oil sales, in exchange for limits to its nuclear program. It slowly unraveled after the Trump administration exited four years ago.   
Fixed income and economics

A relatively quiet start in bond land this morning sees Treasuries cheapening across the spectrum to give back some of yesterday’s gains. There’s little motive for the selling other than further expectations for additional hawkishness from the Fed and the likelihood of a higher than forecast CPI print tomorrow. The long bond is back above 3% but not yet able to supersede the increase on the front end of the curve as the 2/30 yield spread continues to invert, with the gap in benchmarks hitting -23.6 bps and the most negative since 2000. Treasury markets will have the benefit of this afternoon’s three-year auction to further inform sentiment on the front-end though --- there’s been a generally solid trend of primary activity in this tenor this year with six of the last eight sales stopping through. This has been primarily a function of good demand from domestic investment funds that took their second largest share of the notes on record last month. There is an unquestionable event risk posed by tomorrow’s CPI read and the proximity to the data could leave some buyers on the sidelines. This combined with the overall level of monetary policy uncertainty, should result in a larger concession today but expect the result to still be close to the screws. 
Chart of the day
 
Markets
Quote of the day
 

Still round the corner there may wait, A new road or a secret gate.
J.R.R. Tolkien
Contributors: A. Innis, A. Nguyen, D.Mak, P. Kwon

Charts are sourced to Bloomberg unless otherwise noted.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson Wealth Limited or its affiliates. Assumptions, opinions and estimates constitute the author's judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. Richardson Wealth Limited, Member Canadian Investor Protection Fund. Richardson Wealth is a trademark of James Richardson & Sons, Limited used under license.