It’s been a tough week for markets, however, futures are now signaling a pause to the three-day selloff. Despite the positive signal this morning, the S&P 500 and Nasdaq are down -2.7% and -3.5% this week, respectively, on track for their worst weekly performance since March, while the TSX is down over -4% for the week. Investors this week were forced to accept the idea of higher-for-longer interest rates after global central banks this week stressed that they remain vigilant about the risks of inflation and warned investors against premature expectations of rate cuts. Hopes of a soft landing are now dissipating, prompting investors to dump stocks at the fastest pace since December.
The labour market in the U.S. remains healthy, with jobless claims dropping to 201,000, the lowest level since January. Continuing claims also fell to 1.66 million, the lowest since the beginning of the year, indicating a robust economy. And while hiring has slowed, layoffs remain minimal, sustaining consumer spending and overall economic growth. Fed Chair Jerome Powell acknowledged a tight labour market this week after the central bank agreed to keep rates at the current level (for now) but mentioned that supply and demand conditions are improving.
A report from Equifax Canada is highlighting the increase in fraud across the automotive, credit card, and mortgage sectors. Fraudsters are using bold tactics to exploit growing financial pressures on consumers, leading to calls for improvements in verification processes to counter these trends. So just how bad is it? Well, the automotive sector saw a 28% YoY increase in fraud, credit card fraud jumped by 37.9%, and mortgage sector fraud rose by 18.8%, with factors like high-interest rates and supply chain challenges contributing to this rise. Fraudsters are using synthetic identities, a combination of real and fake information, to commit fraud, particularly in credit card applications.
Watch out for that trigger rate. As interest rates continue to rise, it should come as no surprise that variable-rate mortgage holders in Canada are paying thousands of dollars more in interest compared to those with fixed-rate mortgages. According to a report, someone with a five-year insured $500,000 variable-rate mortgage taken out in 2021 would pay $23,579 more in cumulative interest by September 2023 compared to a fixed-rate mortgage. This represents a 63% increase in added interest compared to fixed rates. While variable-rate mortgages were popular when interest rates were low during the pandemic, experts suggest they remain attractive for some due to lower penalties and potential future rate decreases.
Struggling European currencies face challenges as central banks likely pause their interest rate increases, with potential rate cuts on the horizon. Sterling hit a six-month low against the dollar, despite the BOE keeping rates at a 15-year high. The Swiss franc, a strong currency this year, dropped nearly 1% after Switzerland paused its rate hike cycle. Additionally, the quarter-point rate hike in Sweden did little to help its weakened currency. Factors contributing to the bearish outlook for European currencies include a strengthening dollar, sluggish economic growth in Europe, and rising oil prices, which may lead to rate cuts in Europe.
The bank of mom and dad. Rising inflation, pandemic lockdowns, and student debt have led to nearly 45% of young Americans aged 18 to 29 living with their parents. This shift is no longer seen as a sign of individual failure, with nearly 90% of Americans believing people shouldn't be judged for moving back home, according to a Harris Poll. Financial nihilism is also influencing how younger generations to work and live, with many embracing remote work from childhood bedrooms and reconsidering the value of college. The future sounds bright.
Anybody out there? Michigan police issued a reminder after a woman had to be rescued from an outhouse toilet this week while attempting to retrieve her dropped Apple Watch. The incident occurred when the woman climbed into the toilet to retrieve her device, got stuck, and had to be freed by first responders. Police cautioned against attempting such rescues, emphasizing the potential for serious injury. I’m just curious why someone would want their watch after dropping it down there...
Microsoft Corp.’s $69 billion acquisition of Activision Blizzard Inc. looks set to clear its final regulatory hurdle after the UK competition authorities signaled they will accept the latest concessions, ending a wait of more than a year and a half to complete the biggest ever gaming deal. The Competition and Markets Authority said Friday that Microsoft’s proposal opens the door to the deal being cleared. The restructured offer to sell some gaming rights to French publisher Ubisoft Entertainment SA. is expected to keep competition in cloud gaming open for years, the regulator said. It will consult on the offer until Oct. 6.
IA Financial Corp. is discontinuing its institutional operations, including equity research, and cutting over a dozen jobs due to challenging market conditions over the past two years, including rising interest rates and difficult corporate deal flow volume. The company, based in Quebec City, will focus on its other services, such as financial advice and asset management for individual investors. IA Financial aims to continue providing Canadian investors with professional, independent, and unbiased financial advice and investment solutions.
RBC is proceeding with job cuts in its capital markets operations, part of the broader reductions announced in August, which could exceed 1,000 positions. The bank had 93,753 employees as of July 31, and it plans to reduce its staff size by 1 to 2% in the current quarter. These cuts come after RBC reported a surge in expenses that weighed on its third-quarter results. The bank is aiming to navigate a challenging economic environment by reducing costs. This move includes the departure of several employees, including asset-backed securities traders and leveraged finance salespeople.
Rupert Murdoch, one of the most influential media figures of the last seven decades, is stepping down as chairman of Fox Corp. and News Corp. His son, Lachlan Murdoch, will take over as sole chairman of News Corp. and continue as executive chair and CEO of Fox. Rupert Murdoch's media empire, which includes Fox News, has reshaped the media and entertainment landscapes. However, it has faced high-profile scandals, including phone-hacking investigations and lawsuits accusing Fox News of spreading misinformation. The Murdoch empire has also struggled to gain prominence in the streaming video era.
Commodities
Oil prices are back up in a volatile week. Crude benchmarks have been a roller coaster ride all week as the Fed signaled borrowing costs will stay higher for longer, boosting the U.S. dollar and dimming the allure of commodities including crude, while technicals had also been indicating that oil’s gains were overdone. Still, there is plenty of pressure for prices to move higher with Russia announcing a temporary ban on diesel and gasoline exports yesterday. In addition, US crude inventories posted another decline, and oil’s backwardated timespreads point to strong competition for near-term supplies.
Sugar futures are moving higher after a cut in India’s output estimates by the industry added to bets that the world’s second-biggest producer will restrict exports with output in the region possibly slumping to 28.6 million tons in the new season starting on Oct. 1. That’s below the Indian Sugar Mills Association’s forecast of 31.68 million and almost 13% lower than the current season’s production. A lack of rain in India’s key growing areas have led industry watchers, including a local sugar miller, to speculate that some export curbs are coming. That would further tighten global supplies as key exporter Thailand will probably see its output falling by almost a fifth due to a severe drought.
Fixed income and economics
4.5%. That is the yield the U.S. 10-year hit yesterday for the first time since 2007 as a hawkish Fed continues to battle persistent inflation. The resilience of the U.S. economy in the face of the steepest rate increases for a generation is spurring a flight from bonds, given the likelihood of a soft landing that would rule out rapid policy easing in 2024. The recent Fed dot plot released on Wednesday showed a median rate for 2024 at 5.125%, up from the forecast on June 14 at 4.625%. Surging oil prices and a massive fiscal deficit also have traders bracing for further selloffs after this week’s rout sent yields on every benchmark Treasury maturity to the highest levels in more than a decade.
Private-sector activity in the euro area has continued to shrink in September, suggesting the economy contracted in the current quarter. Eurozone PMI data showed a fourth consecutive month of falling output, hitting 47.1 compared to an estimate of 46.5. Despite the reading being an approvement from August, the reading is clearly below the 50 level that indicates contraction. The euro region has been struggling under the weight of higher energy prices, a surge in borrowing costs and waning demand in export markets like China. While there’s agreement that the currency bloc is going through a rough patch, the ECB’s latest forecasts still see the third quarter as a stagnation, not a contraction, and the economist consensus is for 0.1% growth.
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Mistakes are part of the dues one pays for a full life. Sophia Loren
