Latest market-sensitive news and views - Nov. 20

Milei elected president of Argentina | Bayer woes continue | Dollar at 11-week low

MARKET FOCUS

— Equities today: Asian and European markets were mixed in overnight trading. U.S. Dow opened slightly higher. Traders continue to assess the outlook for monetary policy, with FOMC minutes due tomorrow set to provide further clues on what the Fed will do next year. On the corporate front, shares of Microsoft gained about 1.7% in premarket trading after news that the company has hired Sam Altman and Greg Brockman, former OpenAI, to lead a new advanced AI research team. In Asia, Japan -0.6%. Hong Kong +1.9%. China +0.5%. India -0.2%. In Europe, at midday, London -0.2%. Paris +0.2%. Frankfurt -0.2%.

U.S. equities for the week and Friday: U.S. stock indices finished in positive territory Friday, notching gains for another week. The Dow was up 2%, The Nasdaq gained 2.5% and the S&P 500 rose 2.3%.

On Friday, the Dow was up 1.81 points, 0.01%, at 34,947.28. The Nasdaq gained 11.81 points, 0.08%, at 14,125.48. The S&P 500 was up 5.78 points, 0.13%, at 4,514.02.

— Bayer AG suffered its largest market value loss ever, amounting to approximately €7.6 billion ($8.3 billion). This decline follows significant legal setbacks and drug development challenges, putting pressure on the company's new leader to devise a turnaround strategy. Five years after Bayer's $63 billion acquisition of Monsanto Co., the negative impact of the deal continues to grow. Ongoing litigation related to Monsanto's weedkiller Roundup poses a significant financial risk to Bayer, especially after a recent unfavorable jury verdict that may require Bayer to utilize all or even more than the $16 billion it has allocated for Roundup lawsuits. Simultaneously, Bayer is facing a crisis in its pharmaceutical division due to the suspension of a crucial study for its most important experimental drug due to efficacy concerns.

Shares fell as much as 21% in Frankfurt trading. As a result, Bayer's market valuation has shrunk to approximately $37 billion, less than half of what it paid for Monsanto and allocated for legal issues stemming from the acquisition. Bill Anderson, who took over as CEO earlier this year, is now under increased pressure to consider breaking up the conglomerate, which includes pharma, agriculture, and consumer health divisions. Bayer's Monsanto unit has recently faced multiple jury verdicts linking Roundup to cancer. While Bayer intends to appeal these verdicts and maintains the product's safety, the legal risks may complicate any potential spin-off of the agriculture division.

— Following Sam Altman's ouster from OpenAI on Friday, Microsoft said he and Greg Brockman, OpenAI’s president, were joining the company to lead a new advanced AI research team.

— $14 billion: The amount investors withdrew from sustainable funds this year, leaving them with $299 billion, according to Morningstar. Conventional funds also lost money, but the pain was more acute for climate funds. At least five funds announced they would drop their ESG mandates this year, while another 32 sustainable funds will close, according to data compiled by Morningstar and WSJ.

— Quotes of note:

• The federal-funds futures market is pricing in four 25-basis-point (one-quarter percentage point) cuts by the end of 2024 in the wake of the latest CPI print, according to the CME FedWatch site. From the current target range of 5.25%-5.50%, the futures market prices discount the initial trim coming on May Day next year, with another at the end of July, followed by moves in mid-September and mid-December. This would be the seventh time since mid-2022 that the markets anticipated a “pivot” by the Fed toward lower short-term interest rates, according to a client note by Deutsche Bank macro strategist Henry Allen following the CPI report. “On the previous six occasions, those hopes have been dashed, since inflation has remained too fast for the Fed to be comfortable cutting rates,” he wrote.
• 50%: The approximate pay raise that Americans said they would need to be happy, according to a new survey of about 2,000 people by financial-services company Empower. But just how much happier a 50% raise would make any given person is hard to determine, researchers said. The reality: According to consulting firm Mercer, employers are planning on an average pay increase of 3.9% in 2024 for nonunion employees.


• “This will be the go-to metals transition company in the world.” — Glencore Chief Executive Gary Nagle. Mining giant Glencore recently agreed to a multimillion-dollar deal that will eventually rid the company of its coal mines. The Wall Street Journal reports the big strategic shift will allow Glencore to focus on bolstering its position as a major supplier of metals needed for electric-vehicle batteries and other green technologies.

— Credit crunch in the U.S. office sector is escalating, and by some measures, it's even worse than during the 2008-09 global financial crisis. Moody's Analytics reports that in the first nine months of 2023, only one out of every three securitized office mortgages that came due was paid off by the end of September. This represents the lowest repayment rate for the first nine months of any year since at least 2008. The primary cause behind this trend is that many office property owners are struggling to repay their existing loans because they are unable to secure new mortgages in the current economic environment, the Wall Street Journal reports.

Market perspectives:

— Outside markets: The U.S. dollar index fell, with the euro and British pound stronger against the greenback. The yield on the 10-year U.S. Treasury note was higher, trading around 4.48%, with a positive tone in global government bond yields. Crude oil futures were higher, with U.S. crude around $77.25 per barrel and Brent around $82.10 per barrel. Gold and silver futures were down ahead of US market action, with gold around $1,975 per troy ounce and silver around $23.48 per troy ounce.

— The Bloomberg dollar spot index has reached its lowest point since August, while Treasury yields are showing a slight increase in anticipation of a closely-watched 20-year bond auction. Investors are currently factoring in a roughly 30% probability of the Federal Reserve implementing its first rate cut as early as March. They are eagerly awaiting the release of the minutes from the Fed's November decision, which may provide additional insights into the central bank's future interest rate trajectory.

— Italian banks are experiencing a surge in their stock prices following Moody's Investors Service's decision to revise its outlook on Italy's debt to stable. This action removes the immediate risk of Italy's debt being downgraded to junk status, providing a positive development for the country's financial stability.

— Brent crude futures increased to approximately $81 per barrel on Monday, building on gains from the previous session. This rise is due to investor anticipation of an upcoming OPEC+ meeting during the weekend, where the group is expected to consider deepening supply cuts to bolster oil prices. Crude prices surged by about 4% on Friday after OPEC+ stated that it was contemplating additional supply cuts at the November 26 meeting. Analysts also anticipate that Saudi Arabia and Russia may extend their voluntary cuts into early next year. However, oil prices are still down about 20% from their September highs due to indications of ample supplies and the diminishing war-risk premium linked to the Israel-Hamas conflict. Recent data shows a notable increase in crude oil inventories in the U.S., and Russia has recently lifted its ban on gasoline exports.

— Indonesia plans to introduce nickel tracing and push local producers to reach global mining standards to help the country move closer to securing a critical minerals deal with the U.S. Bloomberg.

— United Auto Workers (UAW) union announced that 64% of workers at the Detroit Three automakers have voted to ratify new contracts. These votes come after strikes at General Motors (GM), Ford Motor, and Chrysler-parent Stellantis. The ratification of these contracts locks in the UAW's tentative agreement with the automakers through April 2028. The agreements include a 25% increase in base wages and will ultimately raise the top wage by 33%, when compounded with estimated cost-of-living adjustments, to over $42 an hour.

— The worst appears to be behind the North American railroad industry as volume declines may make way for high-single-digit growth next year, according to a 2024 outlook from Bloomberg Intelligence.

— USDA daily export sale: 104,000 MT corn to Mexico during 2023-2024 marketing year.

— Cocoa prices have reached their highest levels since 1978 when Hershey Co. introduced Reese's Pieces, according to Bloomberg. The delay in the start of the harvest season in Ivory Coast and Ghana, the world's largest cocoa producers, compared to the previous season has raised concerns of a potential supply shortage, driving prices up. This surge in cocoa prices is benefiting Ecuador, Latin America's largest cocoa producer, in its efforts to surpass Ghana and become the second-largest cocoa producer globally.

— India, the world’s top rice exporter, is expected to maintain its curbs on overseas sales well into next year, a move likely to hold the staple grain at close to its highest price levels since the food crisis of 2008. Bloomberg.

ISRAEL/HAMAS CONFLICT

— Iranian-backed Houthi rebels, located in Yemen, have captured a cargo ship in the Red Sea and are holding 25 crew members as hostages. The rebels claim they seized the vessel due to its alleged connections to Israel, warning previously that they consider all Israeli ships as potential targets. However, Israel's government asserts that the ship is British-owned and Japanese-operated. Although the ship's owner is a company registered in Britain, it is reportedly owned by an Israeli billionaire. This incident highlights ongoing tensions and conflicts in the region involving different actors and their interests.

— Ongoing conflict between Israel and Hamas in Gaza is placing President Biden's support for Israel to the test, the Wall Street Journal reports. Biden is facing difficulties in convincing Israeli Prime Minister Benjamin Netanyahu to adopt measures that U.S. officials believe could de-escalate the situation in Gaza. This strain in their relationship is significant given their historical alliance. While there have been points of agreement, such as Israeli commanders heeding American advice not to immediately enter Gaza, U.S. officials remain uneasy about Israel's long-term intentions for Gaza and are alarmed by the high number of Palestinian casualties.

— Arab foreign ministers press China to support end to Israel-Hamas fighting. Wang Yi backs ‘immediate ceasefire’ as Beijing seeks to step up influence in Middle East. Financial Times.

RUSSIA/UKRAINE

— Zelenskyy shakes up military leadership for operational improvements. Volodymyr Zelenskyy, the President of Ukraine, has removed the commander of Ukraine's medical forces and called for rapid improvements in the country's military operations. Zelenskyy emphasized the necessity for a significant enhancement in the level of medical support for Ukrainian soldiers, prompted by allegations from paramedics that their leader, Tetiana Ostashchenko, failed to ensure an adequate supply of first-aid kits. These changes in leadership and medical support come at a challenging time, as Ukraine faces difficulties in its counter-offensive efforts against Russia.

CHINA UPDATE

— China appears to be shifting away from further interest rate cuts as a means of supporting its economy and stabilizing credit growth as it approaches the new year. The country's commercial banks on Monday maintained their benchmark lending rates, including the five-year loan prime rate used as a reference for mortgages. This aligns with expectations following the People's Bank of China's decision to hold the medium-term lending facility rate steady. China has previously implemented rate cuts to aid economic recovery, but constraints on the yuan, capital outflows, and narrowing bank profit margins have limited their effectiveness. Rising time deposits have also increased banks' costs. Consequently, China is exploring alternative methods to boost liquidity and support lending.

The focus is shifting towards coordinating credit extension and providing credit support to specific sectors as a means of expanding domestic demand and boosting confidence. The People's Bank of China has also taken other measures to support the economy, such as injecting liquidity into the financial system. This approach is seen as more effective than further interest rate cuts.

Of note: Chinese regulators are drafting a list of 50 developers eligible for a range of financing, the nation’s latest effort to put a floor under the property crisis.

— Era of undisputed U.S. submarine supremacy over China is coming to an end, the Wall Street Journal reports. China is closing a significant gap between the U.S. and Chinese military capabilities, particularly in submarine technology and undersea detection capabilities. These recent advancements underscore not only China's progress but also a deficiency in the U.S. submarine fleet. The WSJ item discusses China's advancements and their implications for the U.S. and its Pacific allies. This shift in submarine capabilities has raised concerns about the changing dynamics and strategic balance in the region.

— Taiwan export orders fall the least in 13 months. In October 2023, orders for Taiwanese exports declined by 4.6% compared to the previous year, reaching a total of $52.87 billion. This marked a significant improvement from the steep 15.6% drop observed in September and was slightly better than market expectations, which had predicted a 4.93% decline. It represents the smallest decrease in export orders since the ongoing contraction sequence began in September 2022.

— A Chinese firm has announced it will build a renewable energy project with more generating capacity than New Zealand in a vast inland desert province. Bloomberg.

— China's sow herd declines for tenth consecutive month. Data from the Chinese Ministry of Agriculture and Rural Affairs revealed that China's sow herd has decreased to 42.1 million, down from 42.4 million in September, marking a tenth consecutive month of declines. However, state broadcaster CCTV indicated that the government still considers this level to be higher than necessary, as pork consumption has been lower than anticipated, and productivity has continued to rise. This situation has put pressure on hog prices in China, which are now 42% lower than they were a year ago.

The ministry has stated its intention to "stabilize" the situation and encourage a more reasonable level of production. However, specific details about the policy shifts that may be implemented to achieve this goal have not been provided.

— ‘We were not hard enough’: how past trade tensions inspired Brussels’ fresh China crackdown. EU believes ramping up pressure on Beijing is the only way to tackle huge bilateral trade deficit. Financial Times.

— Why Xi tried to assure U.S. he has no plans for Taiwan invasion. Chinese leader plays for stability while facing economic stress at home. Nikkei Asia.

— Chinese, Saudi central banks sign currency swap worth $7 billion. China and Saudi Arabia have signed a local-currency swap agreement worth around $7 billion, deepening their ties as countries across the Middle East look to shift more of their non-oil trade away from the dollar. Bloomberg.

ENERGY & CLIMATE CHANGE

— U.S. subsidies fuel boom in global auto trade. Global auto trade is experiencing a significant boost, particularly in auto exports from Europe and Asia, driven by generous subsidies for electric vehicles in the U.S. and other countries. Dealers are working to rebuild inventories that have yet to reach pre-pandemic levels. This surge in the auto industry stands in contrast to the overall weakness in exports due to a slowdown in the global economy. It highlights how the West's adoption of industrial policies aimed at promoting domestic manufacturing and reducing reliance on fossil fuels is reshaping the dynamics of global trade patterns, the Wall Street Journal reports.

— POET concerned Biden's tax credit decision may force exit from SAF market. POET, a biofuel maker, expressed concerns that the Biden administration's decision on tax credits for sustainable aviation fuel (SAF) could lead them to withdraw from the SAF market. The company has received significant interest in developing low-carbon projects with airlines and fuel producers in the SAF market. However, the economic feasibility of these projects is heavily dependent on the value of the tax credits proposed by the White House.

Background. Biofuel advocates have been urging the administration to establish a model that favors corn-based ethanol as a feedstock for SAF credits. Without favorable tax credits, POET may find it economically unfeasible to continue operating in the SAF sector, and political support for a more sustainable SAF policy could diminish. The Biden administration is expected to provide guidance on the tax credits in December.

POLITICS & ELECTIONS

— Javier Milei, a far-right libertarian often likened to Donald Trump, has been elected as Argentina's next president in a significant rightward shift for the country. Milei, a 53-year-old economist and former TV personality with limited political experience, won with 56% of the vote, defeating center-left economy minister Sergio Massa, who conceded defeat before official results were released.

Milei's platform includes promises to reduce spending and taxes, eliminate Argentina's central bank, and replace the currency with the U.S. dollar. He has also advocated for banning abortion, loosening gun regulations, and aligning Argentina with countries opposing socialism, such as the United States and Israel.

Of note: While Milei's victory aligns with the global far-right movement, some analysts suggest that many Argentines voted for him out of desperation for change rather than endorsing his far-right ideology. The Argentine economy presents a significant challenge for Milei, who has proposed radical reforms, including dollarizing the economy and cutting government spending.

Milei's ascent has raised concerns about his potential impact on Argentina's democracy due to his pre-emptive claims of voter fraud and downplaying of the atrocities committed during Argentina's military dictatorship. He will be sworn in as president on Dec. 10, marking a significant shift in the country's political landscape.

Trade policy impact: Milei has said he wants to withdraw from Mercosur. The EU wants to finalize its push to ratify its trade deal with the South American bloc over the next few weeks. Brussels is trying to get it done by Dec. 6, when Brazil hands over the presidency of Mercosur to Paraguay. As previously noted, Milei will be sworn in on Dec. 10.

— Former President Donald Trump received the endorsement of Texas Governor Greg Abbott during an event near the U.S./Mexico border, where the focus was on Trump's plans to take a tough stance on immigration if he runs and wins the 2024 election. The event in Edinburg, Texas, included a visit with Texas National Guard soldiers, Texas Department of Public Safety troopers, and other service members stationed at the border. According to Reuters, Governor Abbott expressed concerns about President Biden's border policies, stating that they pose a threat to communities across the United States. He credited Trump with reducing border crossings to the lowest levels in decades during his presidency. Abbott emphasized the need for a president who would prioritize border security and claimed that President Biden was facilitating terrorism by reversing certain Trump-era immigration policies, such as those related to deportations and asylum seekers waiting in Mexico for their hearings.

By

Jim Wyckoff

For Kitco News

Follow @jimwyckoff

jwyckoff@kitco.com

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