Asian shares fall as Ukraine war stokes inflation fears, oil ticks higher

Asian shares fell on Thursday, while the sell-off in U.S. Treasuries paused and oil prices rose, as investors and traders weighed the latest developments in the Ukraine war and more hawkish comments from U.S. Federal Reserve officials.

MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 0.6 per cent. Japan’s Nikkei fell by more than 1 per cent on Thursday morning, after touching a two-month high in the previous session.

China’s markets opened lower, with Hong Kong’s Hang Seng Index down 0.9 per cent and the mainland’s bluechip index off 0.7 per cent. Shares of Tencent Holdings dropped 4.6 per cent after it posted its slowest-ever sales rise.

U.S. President Joe Biden arrived in Brussels for a series of summit meetings on the Ukraine War, with Biden set to announce a U.S. package of Russia-related sanctions on political figures and oligarchs on Thursday.

Oil prices held firm. Russia President Vladimir Putin said on Wednesday that Moscow, which calls its actions in Ukraine a “special operation”, will seek payment in rubles for gas sold to “unfriendly” countries.

Brent futures were up about 45 cents, or 0.4 per cent, at $122.05 a barrel and U.S. West Texas Intermediate futures were up about 15 cents, or 0.2 per cent, at $115.07 a barrel. [OR/]

The bond market, meanwhile, paused for breath with the yield on benchmark 10-year Treasury notes last at 2.3098 per cent in Tokyo trading, after retreating from a nearly three-year peak of 2.4170 per cent overnight.

The two-year yield, which is more sensitive to traders’ expectations for the Fed funds rate, stood at 2.1233 per cent, down from an almost three-year high of 2.2020 per cent reached Tuesday.

Federal Reserve policy-makers on Wednesday signalled they stand ready to take more aggressive action to bring down unacceptably high inflation, including a possible half-percentage-point interest rate hike at the next policy meeting in May.

Major U.S. equities indexes declined more than 1 per cent on Wednesday. The Dow Jones Industrial Average fell 448.96 points, or 1.3 per cent, to 34,358.5; the S&P 500 slid 55.41 points, or 1.2 per cent, to 4,456.2; and the Nasdaq Composite dropped 186.21 points, or 1.3 per cent, to 13,922.60.

“Equities reversed part of their recent rally as bond yields declined, in a move that might be just a simple pull-back after a ripping rally over the past 10 days,” said Kyle Rodda, market analyst at IG.

“It is still though a relatively volatile market, [which] suggests that these ripping moves in stocks ought to be treated with caution.”

Currency markets steadied on Thursday with the Japanese yen nursing heavy losses. It had hit a six-year low of 121.41 on Wednesday as rising U.S. yields and a deteriorating trade balance sucked cash out of Japan.

The euro hovered at $1.0988 and the Australian dollar took a breather after several days of large gains. The Aussie was little changed at $0.74955, sticking close to an almost five-month high of $0.75070 touched on Wednesday.

Gold was slightly lower, trading at $1942.9 per ounce. [GOL/]

BMO Public Offering To Raise At Least $2.7 Billion For U.S. Bank Acquisition

TORONTO — Bank of Montreal is expecting to generate at least $2.7 billion in gross proceeds from a public offering to help fund the US$16.3-billion acquisition of Bank of the West in the United States.

The Toronto-based bank says it will issue 18.1 million shares at a price of $149 per common share, below Tuesday’s closing price of $153.72.

The offering is being underwritten on a bought-deal basis by a syndicate of underwriters led by BMO Capital Markets.

BMO has granted the underwriters an option to purchase up to an additional 2.7 million shares for $402 million, exercisable at any time up to 30 days after closing of the offering, expected March 29.

The offering is not conditional on the closing of the acquisition and shares sold will remain outstanding whether or not the deal is completed.

The bank says it expects to fund the acquisition primarily with excess capital.

This report by The Canadian Press was first published March 22, 2022.

Companies in this story: (TSX:BMO)

Oil jumps 5% as Caspian pipeline disruption adds to supply fears

Oil prices jumped 5 per cent to over $121 a barrel on Wednesday as a weather-related disruption to Russian and Kazakh crude exports via the Caspian Pipeline Consortium (CPC) pipeline added to worries over tight global supplies.

Brent crude futures were up $5.95, or 5.1 per cent, at $121.43 a barrel as of 12:01 p.m. EDT (1501 GMT). U.S. West Texas Intermediate (WTI) crude futures rose $5.24, or 4.8 per cent, to $114.51 a barrel.

The CPC pipeline has been in the spotlight as the market is on edge over the ripple effect of heavy sanctions on Russia, the world’s second-largest crude exporter, after its invasion of Ukraine, which Moscow calls a “special military operation.”

Crude oil exports from Kazakhstan’s CPC terminal on Russia’s Black Sea coast stopped fully on Wednesday after damage caused by a major storm and continued bad weather, a port ship agent and the head of CPC said.

Russian Deputy Prime Minister Alexander Novak later said that oil supplies by the CPC may be completely stopped for up to two months.

The CPC pipeline carries around 1.2 million barrels per day of Kazakhstan’s main crude grade, which accounts for 1.2 per cent of global demand.

“Prices are primarily rising on the loss of CPC Blend crude exports out of Novorossiisk … adding further bullish fuel to the fire as the drop in Russian crude exports finally appears under way,” said Matt Smith, lead oil analyst for the Americas at Kpler.

U.S. President Joe Biden is set to announce more Russian sanctions when he meets with European leaders on Thursday in Brussels, including an emergency meeting of NATO. Russia refers to the invasion, which is now a month old, as a “special operation.”

European Union member countries remain split on whether to ban imports of Russian crude and oil products, but this might change once short-term contracts run out.

“You’ll know at the end of April what the total loss of Russian oil is,” said Trafigura’s Ben Luckock, at the FT Commodities Global Summit. He said it was possible that oil could reach $200 a barrel.

Russia to seek payment in rubles for gas sales from ‘unfriendly’ countries, Putin says

Russia will seek payment in rubles for gas sales from “unfriendly” countries, President Vladimir Putin said on Wednesday, sending European gas prices soaring on concerns the move would exacerbate the region’s energy crunch.

European countries’ dependence on Russian gas and other exports has been thrown into the spotlight since Moscow’s Feb. 24 invasion of Ukraine and the subsequent imposition of Western sanctions aimed at isolating Russia economically.

“Russia will continue, of course, to supply natural gas in accordance with volumes and prices … fixed in previously concluded contracts,” Putin said at a televised meeting with top government ministers.

“The changes will only affect the currency of payment, which will be changed to Russian rubles,” he said.

Russian gas accounts for some 40 per cent of Europe’s total consumption and EU gas imports from Russia have fluctuated between 200 million to €800-million ($880-million) a day so far this year. The possibility a change of currency could throw that trade into disarray sent some European and British wholesale gas prices up around 15-20 per cent on Wednesday.

The Russian ruble briefly leapt to a three-week high past 95 against the dollar before settling close to 100 after the shock announcement.

Putin said the government and central bank had one week to come up with a solution on how to move these operations into the Russian currency and that gas giant Gazprom would be ordered to make the corresponding changes to gas contracts.

With major banks reluctant to trade in Russian assets, some big Russian gas buyers in the European Union were not immediately able to clarify how they might pay for gas going forward.

“At the moment, we do not yet wish to comment. We will be in touch once we have formed an opinion,” said a spokesman at Germany’s Uniper.

Moscow calls its actions in Ukraine a “special military operation” to disarm and “denazify” its neighbour. Ukraine and Western allies call this a baseless pretext for a war of choice that has raised fears of wider conflict in Europe.

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According to Gazprom, 58 per cent of its sales of natural gas to Europe and other countries as of Jan. 27 were settled in euros. U.S. dollars accounted for about 39 per cent of gross sales and sterling around 3 per cent.

The European Commission has said it plans to cut EU dependency on Russian gas by two-thirds this year and end its reliance on Russian supplies of the fuel “well before 2030.”

But unlike the United States and Britain, EU states have not agreed to sanction Russia’s energy sector, given their dependency.

The Commission, the 27-country EU’s executive, did not immediately respond to request for comment.

There are questions over whether Russia’s decision constitutes a breach of contract rules.

“This would constitute a breach to payment rules included in the current contracts,” said a senior Polish government source, adding that Poland has no intention of signing new contracts with Gazprom after their current long-term agreement expires at the end of this year.

Russia drew up a list of “unfriendly” countries, which corresponds to those that imposed sanctions. Among other things, deals with companies and individuals from those countries have to be approved by a government commission.

The list of countries includes the United States, European Union member states, Britain, Japan, Canada, Norway, Singapore, South Korea, Switzerland and Ukraine.

Some of these countries, including the United States and Norway, do not purchase Russian gas.

Stocks bounce as investors raise rate hike expectations

U.S. stocks rebounded Tuesday as traders digested Federal Reserve Chair Jerome Powell’s latest rate hike comments.

The Dow Jones Industrial Average rose about 255 points, or 0.7%. The S&P 500 added 1.1%, and the Nasdaq Composite rallied nearly 2%.

Stocks were coming off a volatile session Monday, as Powell said “inflation is much too high” and vowed to take “necessary steps” to curb inflation. The comments came less than a week after the Fed raised rates for the first time since 2018.

“The anticipation turned out to be worse than the actual event and now the messaging that we heard yesterday … sets us up to be prepared for the worst, but hope for the best,” Liz Young, head of investment strategy at SoFi, told CNBC’s “Fast Money Halftime” on Tuesday.

Some market participants raised their expectations for rate hikes as Powell said the Fed could move the benchmark rate by a greater magnitude than previously forecast.

“If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so,” said Powell on Monday to the National Association for Business Economics. One basis point equals 0.01%.

Goldman Sachs on Monday upped its forecast to 50 basis point hikes at the May and June Fed meetings. UBS chief U.S. economist Jonathan Pingle in a note Monday said, “We think odds of a 50 bp rate hike are rising.”

The benchmark 10-year U.S. Treasury yield on Tuesday hit 2.392% at the highs of the session, its highest level since May 2019.

Bank stocks rose Tuesday along with interest rates. JPMorgan gained about 2%, and Bank of America rose around 3%.

Technology stocks, which struggled Monday after Powell’s comments, rebounded Tuesday. Big Tech names Alphabet, Meta and Amazon all gained more than 2%, providing support to the indexes.

Nike shares moved up more than 2% after the retailer reported a beat on the top and bottom lines for its fiscal third quarter, buoyed by strong demand in North America.

Investors on Tuesday continued to watch the situation in Eastern Europe, with President Joe Biden saying Russian President Vladimir Putin’s back is “against the wall” as the war with Ukraine nears a stalemate.

The three major averages are on pace to finish the month positive. The S&P 500 is up about 3% in March, while the Dow and Nasdaq are each more than 2% higher on the month.

Zebedee steps down as LNG Canada CEO, will join Suncor Energy as a vice-president

Peter Zebedee is stepping down as LNG Canada chief executive officer to join Suncor Energy Inc. as a vice-president.

His exit takes effect on March 29, nearly 33 months after he took over the top job at LNG Canada, which is building an $18-billion terminal to export liquefied natural gas from Kitimat, B.C.

Shell PLC is the largest partner in LNG Canada, with a 40-per-cent stake. The other partners are Malaysia’s state-owned Petronas (25 per cent), PetroChina (15 per cent), Japan’s Mitsubishi Corp. (15 per cent) and South Korea’s Kogas (5 per cent).

Prior to LNG Canada, Mr. Zebedee served as general manager of Shell’s Scotford oil refinery near Edmonton.

“The progress that the LNG Canada project has made in the past three years has been truly remarkable, especially in the context of a global pandemic,” he said in a statement on Tuesday.

Steve Corbin, executive project director at LNG Canada, has been named as interim CEO of the Kitimat project.

Mr. Zebedee’s role at Calgary-based Suncor will be executive vice-president of mining and upgrading, taking effect in April. He will be replacing the retiring Mike MacSween.

LNG Canada estimates project-related costs will total $40-billion for the first phase, counting the Kitimat terminal and various infrastructure that includes the Coastal GasLink pipeline to be operated by TC Energy Corp.

Coastal GasLink will transport natural gas from northeast British Columbia to the Kitimat terminal, where LNG is slated to be exported to Asia starting in 2025. The total budget also includes billions of dollars a year to be spent by producers drilling for natural gas in northeast B.C.

While Coastal GasLink has been approved by 20 elected First Nation councils along the 670-kilometre route, the pipeline project has been the target of protests led by a group of Wet’suwet’en Nation hereditary chiefs who say a 190-kilometre portion of the route goes through unceded territory under their jurisdiction.

The Fed is expected to reach 2.25% on the fed funds rate by the end of the year and a peak of 2.75% by September 2023, according to futures.

Traders are betting Federal Reserve Chair Jerome Powell’s tough inflation talk means the central bank will step on the gas to drive up interest rates even faster than expected just last week.

In the fed funds future markets, odds are rising that the Federal Reserve will become more aggressive and raise interest rates by 50 basis points — or a half-percent — at each of its next two meetings. According to the CME FedWatch Tool, the probability is better than 70% that the Fed reaches 2.25% by the end of the year.

Powell surprised the market when he spoke at the National Association for Business Economics on Monday. He said that “inflation is much too high,” adding that the central bank “will take the necessary steps to ensure a return to price stability.” Fed funds futures for May and June have moved higher, as they did across the rest of the year and into 2023.

Ralph Axel, a rates strategist at Bank of America, said there are now 1.184 basis points or 4.7 additional quarter-point rate hikes priced into fed funds futures by July. “There’s a 73% chance of a 50 in May, and a 63% chance of a 50 in June,” he said. The July futures are priced for a quarter-point move.

The market is pricing in more rate hikes than the Fed presented in its own forecast last week. The central bank raised rates by a quarter-point last Wednesday and released its forecast for six more 25-basis-point rate hikes by the end of the year. A basis point is equal to 0.01%.

A tougher stance on inflation

Powell said Monday that the Fed would be tough on inflation. He said that, if necessary, he supported an even faster pace of interest rate increases, with the possibility for rate hikes that are larger than 25 basis points.”

The Fed chief acknowledged that central bank officials and many economists “widely underestimated” how long inflationary pressures from Covid would last. He said those pressures were made worse by the war in Ukraine, which has driven the price of oil and other commodities sharply higher.

Goldman Sachs economists late Monday boosted their forecast to include half-point hikes in both May and June and four more quarter-point hikes for the rest of the year.

The market now expects the Fed to reach a high end rate, or terminal rate, before it stops the tightening cycle. According to the futures market, the fed funds rate is expected to reach 2.75% to 3% by September 2023.

“The terminal rate has been skyrocketing,” in the futures market, said Wells Fargo’s Michael Schumacher.

Schumacher said that after peaking, the futures begin to show expectations for the fed funds rate to drop. It reaches the level of a first quarter-point rate cut by June 2024. The futures show the rate flattening out to 2% into 2025.

“You can ask yourself will they walk this back like they did in March, or are they going to roll with it?” said Axel. He said the market has priced a tightening cycle that follows the pattern of the one in 2017 through 2018, which was then followed by three cuts in 2019.

“It’s been a fast-forward of a full cycle,” said Axel. “You look at all the hikes priced in then all the cuts.”

The Treasury market has also moved sharply to reflect higher interest rates and an inflation-fighting Fed. The two-year note, which most reflects Fed policy, was yielding 2.16% Tuesday, and the 10-year note was at 2.37%.

“The change in tone and the inflation reality have both gotten more challenging in the last few weeks. The market moves are just incredible. There’s truly been no place to hide,” said Schumacher.

CP Rail to restart

Canadian Pacific Railway Ltd and union Teamsters Canada Rail Conference have agreed to a binding arbitration over a labour dispute, allowing for operations to resume from Tuesday at the country’s second-largest railroad.

The company halted operations and locked its workers out early on Sunday, sparking calls for a quick negotiated end to the work stoppage over fears that it could aggravate a shortage of commodities caused by Russia’s invasion of Ukraine.

Canadian Pacific said on Tuesday it would immediately begin work to resume normal train operations across the country.

“While arbitration is not the preferred method, we were able to negotiate terms and conditions that were in the best interest of our members,” union spokesperson Dave Fulton said in a statement.

Normal operations will continue at CP during the arbitration period, Minister of Labour Seamus O’Regan Jr, who mediated the talks, said in a statement.

CP had notified the union last week that it would lock out employees on Sunday, barring a breakthrough in talks on a deal covering pensions, pay and benefits. It said the key bargaining issue is the union’s request for higher pension caps.

The union reiterated on Tuesday that demands on wages and pensions still remain stumbling blocks.

The CP strike is the latest blow to Canada’s battered supply chain, which last year weathered floods in British Columbia that suspended access to the country’s biggest port.

The country’s last major railway labour disruption was an eight-day Canadian National Railway Co strike in 2019. However, there have been 12 stoppages due to poor weather, blockades or labour issues, according to the Western Canadian Wheat Growers Association.