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Msg  72065 of 72289  at  8/16/2022 9:40:52 AM  by

carswell

The following message was updated on 8/16/2022 9:40:52 AM.

The Launch Pad


Richardson Wealth - Connected Wealth
Daily market commentary
The Launch Pad
August 16, 2022
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Today

Futures are little changed this morning after investors weighed the earnings reports from two key retailers, Walmart and Home Depot. U.S. stocks rose for a second day in a row yesterday reversing losses from the opening while the TSX closed flat for the day. Equities are coming off a fourth straight weekly gain, the longest run this year, with sentiment buoyed by signs of slowing price pressures. The positive economic news has stirred hopes of a shift by the Fed to be less aggressive with rate hikes going forward, but that has yet to be confirmed, leaving the market vulnerable to a pullback.

Canadian CPI decelerated in July, rising 7.6% YoY but down from the prior print of 8.1%. The decline from last month came as gasoline prices fell by the most since the start of the pandemic. Core inflation numbers, however, climbed to 5.3%, a record in data dated back to 1990. While yearly inflation has possibly peaked, the persistently broad upward pressures could still prompt the BoC to deliver another 75 bps increase at its Sept. 7 decision. In other economic news, manufacturing sales in Canada fell 0.8% to $71.8 billion in June with the petroleum and coal product sector leading the decline. The move lower came as sales fell in eight of the 21 industries tracked by Stats Canada and followed a 1.1% drop in May.

Canadian investors seem a little more optimistic these days as better-than-expected earnings and data pointing to easing inflation in the U.S. have helped boost the performance of three cyclical sectors (which typically falter during an economic downturn). Tech stocks have climbed the most, rising over 16% since mid-July, followed by industrials and consumer discretionary, both up over 12%. Whether Canada’s market will end the year higher than the U.S. remains unknown, however in doing so, it would be the first time since 2016. The TSX is down roughly 5% this year, vs. the S&P 500 Index’s decline of 10%.

The real estate market in Canada continues to cool, with prices falling for a fourth straight month. Benchmark home prices declined 1.7% in July, to $789,600, bringing the cumulative drop from February’s peak to nearly 6%. The number of sales also continued to slide, falling 5.3% from June and 29.3% from a year earlier. The resulting home-price declines so far have been sharpest in markets with the biggest run-ups, mainly Toronto and the communities around it, but that weakness is now spreading across the country. The declines are expected to continue as the BoC signals further rate hikes.

Big Pharma is feeling the (heart)burn now as legal proceedings stemming from the drug Zantac are set to begin this month. Shares of pharmaceutical companies such as GlaxoSmithKline, Sanofi, and Haleon sold off sharply last week, shedding tens of billions in market value, over fear of potential U.S. litigation charges. In 2019, regulators launched a safety review due to concerns the drug can be linked to cancer, prompting manufacturers to pull it from shelves. By 2020, the F.D.A. and the European Medicines Agency asked all versions be withdrawn from the market. Since then, more than 2,000 cases have been filed in the U.S. with the first case beginning this month.

Is it time to buy? Saudi Arabia’s sovereign wealth fund thinks so. The $620 billion Public Investment Fund (PIF) is investing more than $7 billion to build new positions in U.S. stocks including Amazon.com Inc., Alphabet Inc., BlackRock Inc. and JPMorgan Chase & Co. as markets were battered by recession fears. The PIF is engaging deeper into public markets to reach its goal of more than doubling its assets by 2025. The fund is diversifying into equities as Saudi Arabia’s income from oil almost doubled in the second quarter.


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Company news

Walmart beat earnings expectations as shoppers looked for bargains at the retail giant amid soaring inflation. Walmart is trying to weather a shift in consumer spending habits as inflation forces shoppers to spend more on essential goods and less for more lucrative items for Walmart than groceries. Walmart also announced a deal to offer Paramount Global’s streaming service as a perk of its Walmart+ membership program. Walmart+ (not available in Canada) was launched two years ago to drive sales and deeper customer engagement and was the company’s answer to Amazon Prime, but with a different set of perks. It includes free shipping of online purchases, free grocery deliveries for orders of at least $35 and discounts on prescriptions and gas.

Home Depot’s revenue growth topped estimates despite a slowdown in U.S. home sales and the broader economy with comparable sales increasing by 5.8% in the fiscal second quarter. Home Depot maintained its guidance for the rest of its fiscal year, including annual comparable sales growth of about 3% and earnings per share up by a mid-single-digit percentage. The second quarter is seasonally the strongest for wholesale building retailers as home projects pick up in the summer months.

Lundin Mining is weighing the sale of a copper and zinc mine in Portugal that could be valued at about $1 billion as a global shift from fossil fuels to clean energy is creating demand for materials that can help deliver emissions-free power and electric transport. The world’s top miner, BHP Group Ltd., is among those on the hunt for copper and nickel assets that are vital to this transition.

Tencent Holdings’ biggest investees plummeted after announcing their intention to sell all or much of its $24 billion stake in food delivery giant Meituan to appease Beijing. Beijing since late 2020 has worked to curb the influence of tech industry leaders from Tencent to Alibaba Group Holding Ltd. The two companies exert enormous influence over the Chinese internet economy through part-ownership of hundreds of startups and publicly traded firms. Others like Kuaishou Technology, Bilibili Inc. and e-commerce player Pinduoduo Inc. are all down on the news.


Commodities

Aluminum is higher by almost 2% in London on concerns that China’s producers could face deepening curbs as soaring temperatures stretch power supplies and dry up water for hydro-electricity. Making aluminum is very energy intensive, and is often a target when authorities want to conserve energy. Sichuan, a major aluminum hub in the southwest of China, has vowed to ensure power supply for residential use, and at least one aluminum smelter there has already cut production. Water flows into hydropower reservoirs have dropped by 50% since the start of the month from average historical levels, just as the hot weather boosted power demand. The fear is that cuts could deepen, and spread to other regions. Zinc, whose production is power intensive, also gained more than 2%.

Gold is lower after the biggest drop in a month yesterday as investors flocked to the U.S. dollar amid growing signs of an economic slowdown. Bullion has been under pressure after rising for four weeks with the greenback renewing its ascent. The latest U.S. data is showing rapidly cooling manufacturing and slumping homebuilder sentiment, which added to concerns over the risks to global growth following weak figures from China.


Fixed income and economics

Canadian bond yields are rising sharply throughout the curve on a just-released inflation update from StatsCan that will continue to put hawkish pressure on the Bank of Canada. Headline CPI posted a +0.1% increase for the month of July that was on the screws and slower than the +0.7% previous pace. Annualized prices clocked in at +7.6% year-on-year, also meeting expectations and slowing from prior. But, all of the aforementioned is moot as core inflation continued its white-hot ascent from previous months. The average of the common, median and trim readings posted a +5.3% increase during the period --- faster than the +5.2% pace in June and the highest for the gauge since 1990. Much of this was blamed on service inflation as StatsCan noted a +5.7% increase that is certainly attributable to wage price gains that drive much of that component. And markets are now taking this all to imply an expectation that Canadians will see a 75 bps increase to the overnight target rate on September 7. OIS spreads had priced in a less than 50% likelihood we’d see this large of a move prior to the release --- that has no flipped to a majority consensus. Two year Canada yields have risen by seven bps to 3.29% immediately following the release while five year rates jump from 2.83% to 2.90%. The tightening cycle is certainly far from over as evidenced by this morning’s release.

Chart of the day

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Quote of the day

Jump, and you will find out how to unfold your wings as you fall.
Ray Bradbury

Contributors: A. Innis, A. Nguyen, D.Mak, P. Kwon


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