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Msg  73001 of 73293  at  2/6/2023 12:18:21 PM  by


The Launch Pad

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Daily market commentary
The Launch Pad
February 6, 2023
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Futures fell this morning as concern grow over U.S.-China geopolitical tensions after an alleged surveillance balloon from China was shot down off the coast of South Carolina this weekend, spurring tensions between the two countries. Sentiment has also fallen after Friday’s blowout NFP report signaled that the Fed may still have some more work to do to rein in inflation. Investors will have a lot to digest this week including more earnings reports, although it has been a lackluster earnings season so far. About halfway through earnings season, profits for S&P 500 companies are on pace to be 2.7% lower for the fourth quarter. Investors are also on edge ahead of a speech by Jerome Powell tomorrow and the BoC’s first summary of deliberations, which will give investors an idea of the reasoning behind the central bank’s decision to raise interest rates last month.

Corporations are continuing to binge on their own shares, with announced buybacks reaching $132 billion last month, more than triple the amount in January 2021 and the highest total ever to start a year. Corporate demand is picking up steam as companies emerge out of an earnings-related blackout. While likely a sign that business leaders see no better use of cash when the economic outlook remains murky, the fact that they are sticking to buybacks is being seen by many as a vote of confidence in their own businesses. In past downturns, firms tended to slash buybacks to preserve cash.

With household budgets becoming stretched as interest rates rise, more Canadians are having to choose which debt payments they make and which ones they fall behind on. This trend can be seen in the delinquency rates for auto loans, which now surpass pre-pandemic levels. Auto loan delinquency rates reached 2% in Q3 2022, above the average of 1.8% in 2018 and 2019. A combination of soaring car prices, higher borrowing costs, and the surging cost of living is making it harder for some Canadians to keep up with their car payments. Prices for cars remain elevated and with interest rates expected to remain high for some time, analysts are noting that delinquency rates could continue to creep higher.

Sales in the Toronto housing market reached their slowest pace since April 2020, with just 3,100 homes sold in January. With so little action in Toronto’s market in January, the benchmark price for a home edged down 0.2% from December to roughly $1.08 million, down 14% from a year earlier. Despite the recent pullback, buyers are still facing a much more expensive market than a few years ago, with prices 28% higher than before the pandemic. One thing that has pushed prices so high in recent years has been the number of investors buying real estate with Stats Canada reporting that investors made up almost one third of homeowners in some provinces in 2020.

The U.S. military this weekend shot down a suspected Chinese surveillance balloon that had been floating across the country for several days. Officials said the balloon was being used by the People’s Republic of China in an attempt to surveil strategic sites in the U.S. The balloon, which was estimated to be the size of three school busses, was shot down over open water, with officials now attempting to recover the debris. The balloon prompted U.S. Secretary of State Antony Blinken to indefinitely postpone a trip to China on Friday, intended to reinforce communication and cooperation between the two countries.

Queen Bey. Beyonce broke the record for most career wins at the Grammy awards last night but lost again in the prestigious album of the year category, this time going to Harry Styles. Beyonce added four Grammys to her collection, bringing her lifetime total to 32 and surpassing the tally of late classical conductor Georg Solti.

Diversion: Clumsy fella.

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Company news

Are you a fan of Delissio pizzas? If you are, you may be out of luck. Nestle Canada says it is winding down its frozen meals and pizza business in Canada over the next six months. On top of Delissio, Nestle will also no longer stock Stouffer's, Lean Cuisine and Life Cuisine at Canadian grocery stores. The company says it is focusing on categories that support long-term business growth, including confectionary, coffee, ice cream, premium water and pet food.

Newmont Corp. is looking to buy Australia’s Newcrest Mining Ltd. for $17 billion and create a global precious metal behemoth in the largest takeover deal globally this year. The takeover, if completed, would also be one of the biggest in Australian history. The proposed deal comes as gold prices have experienced a sustained period of strength since 2020, and have rallied about 15% since early November. It would also increase Newmont’s footprint in copper, which is becoming more sought after due to its use in renewable energy and electric vehicles as economies de-carbonize.

Tyson Foods Inc. shares are looking to open lower as falling prices for beef and chicken squeezed profits. The biggest U.S. meat company reported fiscal first-quarter earnings plunged 70% from a year ago and missed expectations. The earnings miss comes as some consumers have been purchasing less meat to combat soaring food costs. Softer consumer demand is coming as costs for animal feed remain elevated, pressuring meat companies and farmers. Tighter supplies of cattle and hogs are also forcing meat companies to pay more for livestock. Operating margin in pork fell to a negative 1.4% for the first quarter, down from 10% in the first quarter of 2022.


Oil prices are higher after Turkey halted oil flows to the Ceyhan export terminal on the Mediterranean coast after a major earthquake. This disruption comes amid ongoing optimism around stronger Chinese consumption. The International Energy Agency Executive Director Fatih Birol said that the world’s largest crude importer could see a stronger-than-anticipated rebound that’ll boost demand for crude. That view was echoed by the chief executive officer of Kuwait Petroleum. A European ban on seaborne imports of Russian oil products in response to the war in Ukraine came into effect yesterday, adding to the strength in oil. The measure is coupled with a price cap similar to one in effect for crude and designed to curb Moscow’s revenues while enabling products to flow to third countries.

Gold is little changed today after tumbling 2.5% on Friday following a stronger-than-expected U.S. jobs report that threw cold water on optimism the Federal Reserve would turn less hawkish this year. The labour market reading reduces the chances the Fed will switch to rate cuts later in 2023 and prompted a jump in the U.S. dollar and U.S. bond yields, a negative for non-interest bearing bullion. This put an end to a six-week rally to slump 3.3% last week.

Fixed income and economics

Bond markets are taking it on the chin for a second day as a string of policy makers messaged they should expect further rate hikes, pushing back on speculation central banks were nearing an end of their tightening cycles. In Europe, German and Italian notes erased all their gains that followed last week’s ECB and Federal Reserve decisions and commentary which appeared to have a dovish tilt. Since then, officials have been busy digressing from that messaging and now interest rate markets are showing ECB’s peak rate rising to 3.50%, implying another cumulative 50 bps hike beyond the one that is fully priced. Treasuries are also under pressure as traders ramped up their bets on future tightening, fully pricing the upper bound of the Fed Funds target rate reaching 5.25% for the first time since November. It looks as though monetary tightening has not been strong enough to tame the labour market, after nonfarm payroll data reported much higher than expected on Friday and the unemployment rate ticked lower.

Investors are hoping for fresh insights about the state of the economy, with balance of trade figures due on Tuesday and the preliminary Michigan consumer sentiment report expected Friday. In Canada, the only key piece of economic data are the employment figures out before the weekend. A series of Fed speakers are also due to make remarks, including Chairman Jerome Powell on Tuesday. Investors will be looking to central bank officials for further clues about monetary policy plans and their expectations for the economy.

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Contributors: A. Innis, A. Nguyen, P. Kwon, M. Letchumanan

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