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U.S. stocks keep rally going as big-tech earnings loom

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U.S. stocks rallied for a second straight session as investors geared up for some of the world’s biggest companies to report earnings this week. Traders also mulled whether the Federal Reserve will slow its pace of interest-rate hikes after assessing weak economic data that released Monday.

More than 80 per cent of stocks in the S&P 500 index closed in green on Monday, buoyed by gains in technology and health-care companies. The Nasdaq 100 also rose more than 1 per cent. U.S.-listed Chinese shares plunged after that nation’s equity index tumbled as President Xi Jinping solidified his power. Among the megacap companies slated to report earnings this week are Alphabet Inc., Microsoft Corp. and Meta Platforms Inc.

U.S. Treasury 10-year yields ended the session around 4.25 per cent. U.K. bonds posted some of their biggest gains on record as investors expect incoming Prime Minister Rishi Sunak to repair the damage caused by predecessor Liz Truss after her massive package of unfunded tax cuts roiled financial markets.

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Earnings remain in focus in the U.S., with investors still on edge over whether companies that are among the key profit-growth engines for the S&P 500 can deliver profits with inflation crimping margins. Of the almost 20 per cent of companies that have reported so far, roughly 58 per cent posted positive surprises in both revenue and earnings per share, according to data compiled by Bloomberg. As the Fed attempts to stomp out inflation, latest earnings displaying resilience and showing few signs of recession may be making some investors uneasy on equities.

“Over the short-term, we think we can get some relief. The fact that earnings season has also been relatively strong is also helpful,” Andrew Sheets, Morgan Stanley’s chief cross-asset strategist, said on Bloomberg Television. “But the big picture — and I don’t think this changes — is that we still view this as a bear market rally rather than the start of a larger new bull market.”

Fed policy is also still a key focus for investors. Data on Monday indicated that Fed tightening is starting to hit the economy, with Purchasing Managers’ Index indicators showing contraction in the services and manufacturing sectors. Reports that the Fed may soon start reducing the size of its rate hikes had pushed stocks higher by more than 2 per cent on Friday. San Francisco Fed President Mary Daly’s comments on Friday also added to the tentative optimism. But some investors are still cautious in their expectations that the central bank is moderating its rhetoric.

“We are still agnostic as to whether the Fed really is going to pivot or be at the peak of its hawkish cycle,” said Lisa Erickson, senior vice president and head of public markets group at US Bank Wealth Management. “If you look at the underlying data, inflation remains sticky, particularly in services ex-housing, which can often be more persistent. So given the Fed’s dependence on the data, we’re not clear exactly again, when the Fed may truly begin to slow down.”

The central bank needs to maintain a balance between addressing inflation and reacting appropriately to any signs of slowdown in inflation, Erickson said.

Key events this week:

  • Earnings due this week include: Apple, Microsoft, Exxon Mobil, Ford Motor, Credit Suisse, Airbus, Alphabet, Amazon, Bank of China, Boeing, Caterpillar, Cnooc, Coca-Cola, HSBC, Intel, McDonald’s, Mercedes-Benz, Merck, Samsung Electronics, Shell, UBS, UPS, Vale, Visa, Volkswagen
  • U.S. Conference Board consumer confidence, Tuesday
  • Bank of Canada rate decision, Wednesday
  • ECB rate decision, Thursday
  • U.S. GDP, durable goods orders, initial jobless claims, Thursday
  • Bank of Japan policy decision, Friday
  • U.S. personal income, personal spending, pending home sales, University of Michigan consumer sentiment, Friday

Some of the main moves in markets:

Stocks

  • The S&P 500 rose 1.2 per cent as of 4 p.m. New York time
  • The Nasdaq 100 rose 1.1 per cent
  • The Dow Jones Industrial Average rose 1.3 per cent
  • The MSCI World index rose 1.2 per cent

Currencies

  • The Bloomberg Dollar Spot Index rose 0.4 per cent
  • The euro rose 0.1 per cent to US$0.9873
  • The British pound fell 0.2 per cent to US$1.1279
  • The Japanese yen fell 0.9 per cent to 148.98 per dollar

Cryptocurrencies

  • Bitcoin fell 0.8 per cent to US$19,341.76
  • Ether rose 1.1 per cent to US$1,344.95

Bonds

  • The yield on 10-year Treasuries advanced three basis points to 4.25 per cent
  • Germany’s 10-year yield declined nine basis points to 2.33 per cent
  • Britain’s 10-year yield declined 31 basis points to 3.75 per cent

Commodities

  • West Texas Intermediate crude fell 0.5 per cent to US$84.66 a barrel
  • Gold futures fell 0.1 per cent to US$1,654.20 an ounce

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‘More than disappointing’: Air Canada to stop direct flights to Calgary from Regina, Saskatoon

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Saskatchewan residents looking to fly direct to Alberta’s largest city will soon have one less airline with which to do so.

CBC News has confirmed that Air Canada will be cancelling direct flights from the Saskatoon and Regina airports to Calgary in mid-January.

“It is a bit disappointing for the airport and the community,” said C.J. Dushinski, the Saskatoon Airport Authority’s vice president of business development and service quality.

“It certainly limits the amount of options available for travellers that are looking to get to Calgary or looking to travel beyond the connect.”

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Dushinski and Justin Reves, the Regina airport’s manager of customer experience and marketing, told CBC News that Air Canada informed their respective airports that direct service to Calgary will end Jan. 16.

The Saskatoon airport authority hopes the airline will add additional seats to other hubs, such as Toronto and Vancouver, and that WestJet will add seats or service to Calgary, Dushinski said.

The Regina airport has contacted other airlines, including WestJet, about potential service, Reves said.

“Calgary is a huge market for the city of Regina,” he said.

“A lot of people, friends, family, business connections [are] there, and it’s primarily going to be disappointing for Air Canada customers who are used to being able to fly that route.”

Air Canada only offered one direct flight per day from Regina to Calgary, he added, in comparison with West Jet, which currently runs several flights daily.

Focus on rebuilding main hubs of Toronto, Vancouver and Montreal, Air Canada says

People flying out of Saskatoon and Regina will continue to see flights to and from Toronto and Vancouver, an Air Canada spokesperson told CBC News.

Saskatchewan residents will still be able to fly to Calgary, but only via other destinations, such as Vancouver.

Public health guidelines aimed to stymie the potential spread of COVID-19 affected all travel. Airports and airlines hemorrhaged money as a result of lower passenger traffic.

Air Canada has made changes to various routes to and from Calgary as it rebuilds from the impact of the pandemic, which means examining the network and where it would be most productive to deploy resources, the spokesperson said.

The airline has decided to focus on rebuilding its main hubs: Toronto, Vancouver and Montreal, they said.

The announcement is a savvy business move, said Karl Moore, an associate professor with McGill University’s faculty of management in Montreal. He has previously consulted for Air Canada, among other companies.

Air Canada is looking at load levels — how many people fill certain flights and how much they pay — to see which flights are unprofitable, or which routes or hubs could be more profitable, Moore explained.

“They spend a lot of time thinking about that and that’s what good business people do,” Moore said, noting that WestJet made a similar move by cutting service on the east coast.

In an open letter to Air Canada, Economic Development Regina also expressed their concern and disappointment about the airline’s move to cancel direct flights from Saskatchewan to Calgary.

The suspension of these routes triples the travel time between Saskatchewan’s capital and Calgary, said Chris Lane, president and CEO of Economic Development Regina.

His organization is asking Air Canada to reconsider their decision and to commit to an expansion of their service to Regina, while looking at the city’s role when it comes to supplying “sustainable food and fertilizer” to the world, said Lane.

“As one of Canada’s fastest growing economies and population areas, the need for connectivity and the opportunity it presents for airlines is as necessary as it is mutually beneficial,” he said in the letter.

“[Regina’s] population will grow by almost 10 per cent in the next five years. Calgary’s numbers are similar and so are Saskatoon’s. That the flag carrier airline of Canada would choose to suspend direct connectivity between these regions at this time is more than disappointing; it is ill-considered.”

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Theranos exec Sunny Balwani sentenced to 13 years in prison for defrauding patients and investors

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The former COO of disgraced blood testing startup Theranos, Ramesh “Sunny” Balwani was sentenced to 155 months, or about 13 years, in prison, and three years of probation. After a three-month trial, Balwani was found guilty on all 12 criminal charges, ranging from defrauding patients and investors to conspiring to commit fraud. Theranos CEO Elizabeth Holmes was convicted on four of these charges and was sentenced to 11.25 years in prison last month.

Despite the disparate outcomes from the two separate juries in two individual trials, Judge Ed Davila calculated Holmes’ and Balwani’s sentencing ranges to be exactly the same: 135 to 168 months, or 11.25 to 14 years. In both cases, prosecutor Jeff Schenk countered by asking for 15 years.

Balwani’s lawyers attempted to argue that he should get a more lenient sentence than Holmes, as he was not CEO.

“He’s not Ms. Holmes. He did not pursue fame and fortune,” said Balwani’s attorney Jeffrey Coopersmith.

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Judge Davila even noted that the court saw another side of Balwani when they were told about his charitable giving, some of which occurred after Theranos. Yet Balwani still received a severe sentence of 13 years.

Holmes and Balwani were supposed to be tried for fraud together, but the former CEO filed for a separate trial, stating that Balwani, who is 20 years her senior, had emotionally and sexually abused her during their long romantic relationship. Though the court was not ruling on those allegations, the judge granted the request.

Throughout the trial, Balwani’s lawyers attempted to make the case that even though he was an investor and executive at Theranos, he was not involved in key decision-making. The defense failed to argue for his innocence, though. In one piece of evidence, the jury was presented a text from Balwani to Holmes that read, “I am responsible for everything at Theranos.”

Balwani’s trial featured the same evidence that indicted Holmes. The prosecution focused on a key piece of evidence relating to Theranos’ relationship with Walgreens. The biotech startup’s faulty technology made its way into 41 Walgreens stores, but unbeknownst to the pharmacy giant, most of the tests were conducted on third-party equipment. Theranos’ own machines couldn’t produce accurate test results, so a lot of patients had blood drawn not with a finger prick but intravenously. So, Walgreens basically spent $140 million in its partnership with Theranos, only for the startup to use the same old tech that was already in use.

Despite claims to the contrary, a Walgreens executive testified that he worked closely with Balwani on the deal. The prosecution also displayed evidence of a text from Balwani to Holmes stating that he deliberately didn’t tell Walgreens that they were using different machines.

For patients that were unlucky enough to have their blood tested with Theranos’ technology, some got wildly inaccurate results that caused significant disruption to their lives. In one case, a mother with a history of miscarriages was wrongly informed that she would have another unsuccessful pregnancy. Another patient, Erin Tompkins, used Theranos for its low costs, got flagged as HIV-positive, and then lived in limbo for three months until she could afford a second blood test. As it turned out, she didn’t actually have HIV. Meanwhile, a patient named Mehrl Ellsworth was given a false cancer diagnosis.

Unlike the jury at Holmes’ trial, the jury at Balwani’s trial held him accountable for defrauding patients, not just investors.

Before the former COO’s sentencing hearing, Balwani’s lawyers filed 40 objections to the probation office’s pre-sentence investigation report, according to tweets from Law 360 reporter Dorothy Atkins, who was present at the hearing. Judge Davila, who also presided over Holmes’ trial, said that only four of those objections were substantive.

“Usually sentencing hearings are morbid regardless of the crime — like watching a car crash where you watch families and lives being destroyed in real time,” Atkins tweeted from the court room. “This one feels more like an accounting class.”

It would certainly not be unprecedented if Balwani decides to appeal this ruling. After Holmes’ own sentencing, the former Theranos CEO told a California federal judge that she would appeal her conviction. She then asked to stay out of custody while her appeal is under consideration, also citing that she is currently pregnant with her second child. As it stands, Holmes’ surrender date is April 27, while Balwani will report to prison on March 15.

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Bank of Canada increases policy interest rate by 50 basis points, continues quantitative tightening

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The Bank of Canada today increased its target for the overnight rate to 4¼%, with the Bank Rate at 4½% and the deposit rate at 4¼%. The Bank is also continuing its policy of quantitative tightening.

Inflation around the world remains high and broadly based. Global economic growth is slowing, although it is proving more resilient than was expected at the time of the October Monetary Policy Report (MPR). In the United States, the economy is weakening but consumption continues to be solid and the labour market remains overheated. The gradual easing of global supply bottlenecks continues, although further progress could be disrupted by geopolitical events.

In Canada, GDP growth in the third quarter was stronger than expected, and the economy continued to operate in excess demand. Canada’s labour market remains tight, with unemployment near historic lows. While commodity exports have been strong, there is growing evidence that tighter monetary policy is restraining domestic demand: consumption moderated in the third quarter, and housing market activity continues to decline. Overall, the data since the October MPR support the Bank’s outlook that growth will essentially stall through the end of this year and the first half of next year.

CPI inflation remained at 6.9% in October, with many of the goods and services Canadians regularly buy showing large price increases. Measures of core inflation remain around 5%. Three-month rates of change in core inflation have come down, an early indicator that price pressures may be losing momentum. However, inflation is still too high and short-term inflation expectations remain elevated. The longer that consumers and businesses expect inflation to be above the target, the greater the risk that elevated inflation becomes entrenched.

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Looking ahead, Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target. Governing Council continues to assess how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding. Quantitative tightening is complementing increases in the policy rate. We are resolute in our commitment to achieving the 2% inflation target and restoring price stability for Canadians.

Information note

The next scheduled date for announcing the overnight rate target is January 25, 2023. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR at the same time.

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