Equities slipped this morning, reversing yesterday’s gains as investors begin to price in an extended period of high interest rates. The threat of tight policy is impacting some of the market’s biggest winners from the year (tech stocks) the most, as investors consider what higher rates mean for these companies. This morning’s moves are adding to the market’s losses for the month, with the Nasdaq down -5.4% so far this month, while the S&P 500 and TSX have lost -3.7% and -2.2%, respectively. Looking closer, recent declines in U.S. small-cap and industrial stocks have raised concerns, often seen as indicators of an impending recession. The S&P 500 Industrials index has dropped about 8% since August 1, while the small-cap Russell 2000 Index has lost over 11% since July 31, outpacing the S&P 500's decline during the same period. Investors this week are also facing the possibility of a government shutdown in the U.S. as Congress negotiates their spending bill.
According to Goldman Sachs, credit card companies are facing their highest losses since the 2008 financial crisis. The losses have risen rapidly since the first quarter of 2022, currently standing at 3.63%, up 1.5% from their lowest point in September 2021. Analysts predict they may rise further to 4.93%, at a time when Americans owe over $1 trillion on their credit cards, a record high. Analysts suggest the situation may resemble past cycles in the late 1990s and from 2015 to 2019, where losses increased after a period of strong loan growth. Studies show that losses typically peak six to eight quarters after loan growth peaks, implying that the credit normalization cycle is only halfway through.
The return-to-office mandates by many employers are raising concerns about setbacks in workplace participation gains made by caregivers and working mothers. Work-from-home flexibility made it easier for caregivers to maintain their jobs, and in 2022, a record percentage of working women worked full-time. Economists are speculating that this could come to an end as the high cost of childcare makes returning to in-office jobs less economically justifiable. Childcare staffing shortages and the end of pandemic funding are also making childcare less accessible and affordable, which could force mothers out of the workforce. Some studies indicate that companies allowing remote work are more likely to retain female employees, and workers with caregiving responsibilities are more likely to leave their jobs when required to return to the office.
The Vancouver Fraser Port Authority reports a 14% decline in container shipment volume at the Port of Vancouver during the first half of the year, compared to the same period in 2022. The decline is attributed to a weakening economy, which contracted slightly in the second quarter. While some sectors like grain exports saw a significant boost, other areas such as construction materials and auto parts experienced a decline. Additionally, a two-week strike by B.C. port workers in July had a negative impact on operations.
Hedge fund managers are increasingly shorting ESG stocks to uncover misleading green claims and overvalued stocks due to record stimulus measures. They believe that overpriced ESG investments can be found across various segments of the market, especially as capital flows into ESG assets have far outpaced the number of compelling investment opportunities. The rise of short positions in ESG stocks reflects some investor skepticism about ESG claims while increasing efforts by regulators to prevent greenwashing has been a slow and drawn-out process. This trend is expected to continue as investors seek to identify companies with weak ESG foundations and inflated valuations.
AI may not be able to solve all the market’s problems. The promise of AI has overshadowed a significant threat in the current era of Fed hawkishness in recent months, but that may be changing. While the equity market has thrived on optimism that AI and emerging technologies will boost growth, higher real yields mean a higher cost of capital, potentially pressuring tech companies. The prospect of higher rates has affected various assets, leading to concerns about defaults and delinquent payments. Real-world borrowing costs have continued to increase, spooking investors in recent days and leading to a selloff in equities. With real yields currently at decade highs, investors are once again becoming more cautious.
Talk about a head rush. Passengers on Canada's Wonderland's Lumberjack ride had an unsettling experience over the weekend when the ride became inverted, leaving them hanging upside down for nearly 30 minutes. The park's maintenance team successfully brought the ride down, ensuring the safety of the guests. Two individuals reported chest pain and were attended to by the park's health center but didn't require further medical attention. Let’s hope the riders were rewarded with free funnel cake after that experience.
Apple is reportedly planning to increase its production in India significantly over the next five years. According to government officials cited by PTI, the company is aiming to scale up production from the $7 billion achieved in the last financial year to a substantial $40 billion. Apple already manufactures iPhones in India and is looking to start producing AirPods next year. In a notable move, Apple launched its India-made iPhone 15 on its global release day, signaling its commitment to India's manufacturing capabilities. The move aligns with India's goal of expanding its electronics industry to $300 billion by 2026. This expansion comes amid a global push to reduce reliance on supply chains based in China.
Alibaba Group Holding Ltd. said it will spin off Cainiao Smart Logistics Network Ltd., the logistics arm of its ecommerce empire, through an IPOin Hong Kong. Alibaba will continue to hold more than 50% of the unit’s shares, and Cainiao will remain a subsidiary of the company, the filing shows. The Cainiao IPO would be among the first of Alibaba’s units to go public after a dramatic breakup of the tech giant unveiled earlier this year.
China Evergrande Group's crisis deepened as its mainland unit, Hengda Real Estate Group Co., defaulted on a 4 billion yuan ($547 million) bond payment. The company had previously missed an interest payment on the same bond in March and promised to negotiate with bondholders. Evergrande is running out of time to restructure at least $30 billion of offshore debt, with its restructuring plan in jeopardy. The company cited an investigation into Hengda by the China Securities Regulatory Commission as a reason for not being able to meet regulator qualifications to issue new bonds. Evergrande's shares plunged as much as 25% in response to these developments.
Oil prices are lower with WTI back below US$90 as the impact of a rapidly tightening market was offset by risk off appetite across markets with investors pricing in a prolonged period of higher interest rates. Though, closely-watched timespreads continue to trade in a large backwardation, indicating a market deficit. While supply remains tight as Russia and Saudi Arabia have extended production cuts to the end of the year, Moscow yesterday eased its temporary ban on gasoline and diesel exports, issued separately to stabilize the domestic market.
Copper prices in London have experienced the widest contango (the current price of a commodity is lower than its future price) since at least 1994. This reflects concerns about rising inventories and a slowdown in global manufacturing. The cash contract for copper was trading at a $70.10 per ton discount to three-month futures on the London Metal Exchange, indicating ample immediate supplies. Copper prices peaked in January but have been under pressure due to China's slowing economic recovery and global monetary tightening. Increased copper inventories held at LME warehouses are contributing to this contango. With a Ph.D. in economics is Dr. Copper trying to tell us something?
Fixed income and economics
U.S. Treasuries sell off is taking a breather after pushing the 10- and 30-year yields to multi-year highs due to expectations that the Fed will keep interest rates high and the growing supply of new bonds as the U.S. government faces increasing deficits. The 10-year yield reached 4.56%, the highest since October 2007, while the 30-year yield reached 4.68%, a level last seen in April 2011. The Fed's signaling of potential rate hikes and reduced rate cut expectations for 2024 has contributed to this trend. Shorter-term bonds have seen smaller yield increases, narrowing the yield curve. The rising yields on inflation-protected securities also suggest concerns about increasing Treasury debt sales as the Fed shrinks its debt holdings.
Wavering. Moody’s Investors Service is the only remaining major credit grader to assign the U.S a top rating of AAA. But....is now signalling that its confidence is wavering. Moody’s wrote yesterday, “while government debt service payments would not be impacted and a short-lived shutdown would be unlikely to disrupt the economy, it would underscore the weakness of U.S. institutional and governance strength relative to other Aaa-rated sovereigns that we have highlighted in recent years.” Markets have been on edging and watching for another downgrade after Fitch Ratings lowered the US rating earlier this year, citing concerns about political wrangling over the debt ceiling that took the nation to the brink of a default. Moody’s latest report, which leaves its rating of the US unchanged, is showing that U.S. debt sustainability and the politics around it will continue to be a theme through the remainder of the year. The report comes as Congress struggles to pass a short-term spending bill required to stop a government shutdown when the new US fiscal year begins in October.
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Quote of the day
Anxiety does not empty tomorrow of its sorrows, but only empties today of its strength. Charles Spurgeon