Newsletter - April 19, 2022
Oil / Commodities
- Russia’s invasion of Ukraine is upending the global transition away from fossil fuels in the fight against climate change. The war is slowing the shift and instead breathing new life into old energy. However, it also bolsters the argument that adding more EVs to roads and installing additional wind turbines and solar panels can boost energy independence. But for now, without Russian energy, countries around the world are forced to make hard choices on how to fuel their economies, putting the energy transition at a crossroad. The rush to punish Russia by deserting its energy offerings has led to a short-term surge in demand for coal, despite its grim long-term prospects. The demand has sent thermal coal prices to $44- a metric ton, more than five times the price a year earlier. Soaring gasoline prices have also compelled President Biden to order an unprecedented release of emergency stockpiles from the strategic petroleum reserve. In the EU, efforts to end energy dependence on Russia has several member states considering development of new import terminals for LNG – these include Germany, Latvia, Estonia, Greece and Italy. The push away from Russian natural gas is also leading the EU into billions of dollars in new commitments for a low-carbon hydrogen market.
- Tangshan, a steelmaking hub about 100 miles from Beijing, has re-enforced COVID lockdowns in some districts just over a week after lifting city-wide curbs. The city locked down five districts Tuesday morning and will conduct mass testing. Tangshan hosts about 13% of China’s steel output and some production was halted during a 20-day lockdown that ended April 11th. The lockdowns will raise fresh concerns about steel output and underscores China’s difficulties in stamping out omicron’s spread.
- Record coal and natural gas extraction and consumption-sapping COVID lockdowns are slashing China’s import demand and helping loosen global fuel markets. Domestic output is soaring after Beijing pressured state-owned producers to boost activity to ensure energy security after shortages last year and to insulate it from the surge in global commodity prices. Coal imports are down 24% and LNG by 11% over the first three months of the year. With most exporters producing at full capacity, China could be a game changer if it cuts back on overseas purchases in the wake of the Russian invasion of Ukraine. China’s desire to walk away from seaborne coal imports by boosting domestic coal output should pose major downside risks to global fossil fuel prices over the next few years. China is capable of mining half the world’s coal and is no. 4 and no. 6 in the rankings of global drillers of gas and oil. Growing coal output has been an obsession of Beijing’s since a shortage of the fuel caused widespread power outages in the fall. Earlier this year, government officials set a target of increasing production capacity by 300 million tons, the same amount China typically imports annually. Output surged 15% y/y in March at the same time that less coal was needed for electricity generation with thermal power output actually falling as pandemic lockdowns slowed economic activity. But domestic demand for coal could come roaring back in the second half of the year if lockdowns end and China leans heavily on construction-led stimulus to spur economic growth. And it is currently unclear whether the production surges are sustainable.
- Oil is headed for the best run of gains this year as China vowed to repair the economic damage caused by a spate of COVID lockdowns and crude supplies from Libya were disrupted. Global benchmark Brent rose for a fifth day, shedding early losses to trade near $114 a barrel. The impact of the pandemic on China’s economy is short term and normal conditions will be rapidly restored after the outbreak is contained. Libya’s oil production has fallen by more than half a million barrels a day and there is a risk of further losses as a wave of political demonstrations engulfs the OPEC member. The Sharara field in the west of the country which can pump 300,000 barrels a day has been closed as protests spread. Oil has advanced more than 45% since the onset of the Russia-Ukraine war, upending an already-tight market. But the prospect of the EU phasing out Russian oil imports is the key sentiment driver. Oil markets remain backwardated and Brent’s prompt spread was $1.32 a barrel, up from 42 cents a week ago.
o https://www.bloomberg.com/news/articles/2022-04-18/oil-edges-lower-as-traders-weigh-china-lockdowns-libyan-strife
Tech
- Twitter shares rebounded and posted its biggest gain in two weeks on Monday after the company launched a poison pill defense to thwart an unsolicited bid by Elon Musk to take the company private at $54.20 a share. A securities filling on Monday confirmed the defense strategy which would allow the company to issue new stock that all shareholders except Musk could buy at a discounted price. It imposes a significant penalty on any person or entity that would acquire more than 15% of the company without board approval. Musk currently owns just over 9% of Twitter shares. The board adopted the rights agreement to protect stockholders from coercive or otherwise unfair takeover tactics. The shares are gaining amid speculation that Twitter will strike a deal that is more palatable to shareholders. The company has been fielding takeover interest form other parties, including tech-focused PE firm Thoma Bravo. PE firm Silver Lake, which already owns a significant stake in Twitter, also would make sense as a partner since it has an existing relationship with Musk as well, but it is unclear if they are interested. Meanwhile, Musk may partner with Oracle and a PE consortium that includes Thoma Bravo to thwart Twitter’s poison pill, while raising the bid by 10% to 15% to about $50 billion.
- Amazon will be changing the name of its free streaming app IMDb TV to Freevee. So much attention is paid to premium services such as Amazon’s Prime Video, Netflix and HBO Max that it is often overlooked how huge ad-supported streaming apps like Freevee have become. As cited by ex-Warner CEO Jason Kilar, nearly half of HBO Max subscribers are opting for the $10/month option with ads over the $15/month option without. Hulu’s proportion is even higher. And Kilar predicts Netflix, which has religiously avoided ads, will eventually give in. Amazon’s gobs of data gathered over the years will also complement its ad-focused Freevee streaming platform. The data enables more targeted ads, particularly with its original programming. Amazon boasts it can offer ad integration to the point where auto or beverage brands can pay to have main characters drive their cars or drink their sodas – network TV-style product placement that would likely feel jarring in higher quality Prime originals such as The Expanse or The Man in the High Castle. The strategy alone can help Amazon capture greater share in the growing ad opportunity within streaming.
o https://www.bloomberg.com/news/newsletters/2022-04-18/freevee-tv-app-is-amazon-s-bet-on-video-ads?srnd=technology-vp
Electric Vehicles
- Cathie Wood’s Ark Investment Management now expects Tesla shares to more than quadruple to $4,600 by 2026. Ark last year said it saw shares of the EV maker hitting $3,000 by 2025, but has since updated its price target amid new expectations around Tesla’s prospective robotaxi business and capital efficiency. Ark’s bull case suggests the price could rise to around $5,800 by 2026 and the bear case suggests $2,900. The investment management firm believes Tesla will trade like a mature company rather than a high growth one beginning 2026. A key driver of Ark’s new model is expectations of greater demand for autonomous ride hailing, an estimated $11 to $12 trillion market. Ark has also increased its conviction in Tesla’s ability to achieve full self-driving, with the carmaker’s prospective robotaxi business contributing to a 60% chunk of its expected value in 2026. Capital efficiency is another determinant, noting that Tesla’s capital expenditure per incremental unit of capacity has decreased from $87,000 in 2017 to $7,700.
o https://github.com/ARKInvest/ARK-Invest-Tesla-Valuation-Model
- U.S. regulators are applying greater scrutiny to Tesla’s Autopilot than ever before. The NHTSA has opened two formal defect investigations that could ultimately lead Tesla to retrofit cars and restrict use of Autopilot in situations it still cannot handle safely. A clampdown on Autopilot could tarnish Tesla’s reputation with consumers and spook investors whose belief in the company’s self-driving bona fides have helped boost market valuations. It could damage confidence in technology other auto and software companies are spending billions to develop in hope of reversing a troubling trend of soaring U.S. traffic fatalities. It could also bring long-simmering tensions between Washington and Tesla to a boil. Tesla, which reports earnings later this week, has lately had an aura of invincibility. As larger rivals were hobbled by the global chip shortage and other pandemic disruptions, the EV maker managed to substantially increase production.
- Tesla has restarted production at its Shanghai factory and laid out stringent measures for staff operating in the closed-loop system. The EV maker will provide each worker with a sleeping bag and mattress. Given there is no purpose-built dorm, staff will be required to sleep on the floor in a designated area and there will be other spaces allocated for showering, entertainment and catering. All employees will have to take a nucleic acid test daily for the first three days and have their temperature checked twice a day while maintaining a stringent hand-washing mandate. Workers will be provided three meals a day and will be given an allowance of about 400 yuan a day, although the actual amount will depend on a person’s position and level. Only staff residing in the lowest risk residential compounds and those who have competed a two-shot vaccination regime will be allowed to re-enter, joining the some 400 staff already on site due to pandemic prevention and emergency measures. Prior to the pandemic-inducted halt on March 28th, Tesla workers in Shanghai were working three shifts covering 24 hours, seven days a week. Factory staff would work four days on and then have two days off. Now, they are asked to work 12 hours a day, six days straight with one day off. The company’s Shanghai plant was producing about 2,100 cars a day, churning out 182,174 vehicles in the first quarter. ramping up productions after such a long lockdown will not be an instant process. Tesla is estimated to only have inventory for two weeks based on its new closed-loop schedule, and logistics remain a major problem for many other parts.
- The industry-wide lack of chips is thwarting Rivian’s ramp up still. For now, its Normal, Illinois facility’s parking lot is crammed with hundreds of battery electric pickups called R1T. Parked alongside in trademark “Prime Blue” were dozens of plug-in commercia delivery vans for Amazon. All vehicles are awaiting shipment to their new owners, a dormant cavalcade ready to deploy in the coming EV wars. But still, the factory is still limping compared to rival facilities. Rivian forecasts it will run at just 50% capacity this year due to shortage of key parts constraining output. The assembly line was static in places and some workers were diligently organizing parts bins and re-checking machinery. Sometimes, staff shifts end early because they do not have enough to do. For now, Rivian has managed to speed the flow of certain products, in part by sending employees to supplier plants to step up the pressure. Computer chips, however, remain a challenge. There is a fixed supply and typically chipmakers allocate them based on historic production, which is a huge disadvantage to newcomers like Rivian. The EV maker has reiterated a pledge that it will roll out 25,000 vehicles this year, including 10,000 vans for Amazon, which is half of what the facility is capable of if it had a steady stream of parts. Eventually, Rivian plans for the Illinois facility to stamp out 200,000 machines a year by 2023. But so far, the factory’s limitations do not have any effect on demand. Orders are still coming in at an increasing rate. But with a wait list of more than 85,000, Rivian is selling hardware that customers will not receive for nearly two years. New customers will be able to choose a truck and put down a deposit to claim a spot in line, but they will not be able to choose options or configure their vehicle or even lock in a specific price until closer to an appointed deliver date. Rivian attributes the decision to evolving pricing and content changes. The change in reservation strategy will help Rivian account for inflation and fast fluctuating prices for commodities and parts. The Company in early March walked back an announced price increase for people with standing orders when a swell of those customers cancelled their reservations.
- CATL has partnered with PT Aneka Tambang and PT Industri Baterai Indonesia to build a $5.97 billion mining-to-batteries complex. The project spans everything from nickel mining to battery materials, recycling and an EV batteries factory. CATL already has exposure in Indonesia, while Chinese firms including Tsingshan Holding play a major role in the country’s nickel sector. The Indonesia project will be an important milestone for CATL as it expands its global footprint within the booming industry.
o https://www.bloomberg.com/news/articles/2022-04-15/china-battery-giant-catl-joins-6-billion-venture-in-indonesia?srnd=hyperdrive
Consumer / Retail
China Market
- UBS, Barclays and Standard Chartered have cut their forecasts for China’s full year economic growth as the country sticks to tough anti-COVID curbs and lockdowns to control a worsening virus outbreak. UBS downgraded its GDP forecast to 4.2% from 5% in light of the intensified downward pressure on the economy. Barclays economists also cut their assessment by 20 bps to 4.3% in expectation that COVID disruptions will be prolonged. Standard Chartered lowered their GDP projection to 5% from 5.3% in a report Monday citing the growing toll from lockdowns. The UBS economists said they expect more policy support, mainly in the form of more infrastructure investment, stronger credit growth and easier property policy. But they do not see the government doing whatever it takes to achieve a growth target of 5.5% this year, nor shift the COVID policy soon, creating a base for a forecast trim by 50 bps to 4.8%.
- President Xi’s friendship with President Putin has made investors more distrustful of China, while a strongman narrative is gaining momentum as the Communist Party doggedly pursues a COVID-Zero strategy and unpredictable campaigns to regulate entire industries. Some international investors are finding an aggressive allocation to China increasingly unpalatable. Outflows from the country’s stocks, bonds and mutual funds accelerated after Russia’s invasion of Ukraine, while Norway’s $1.3 trillion sovereign wealth fund has snubbed a Chinese sportswear giant due to concerns about human rights abuses. On Monday, China’s better-than-expected economic data released prompted questions from analysts who pointed to inconsistencies with alternative statistics that paint a grimmer picture of the economy. Politics and governance factors should now set a cautious tone, especially for long-term commitments to China. The Ukraine invasion raises these risks very sharply and funds will likely remain very low weighted in China for some years to come.
- China’s central bank announced a spate of measures to help an economy which has been hit by lockdowns to control the current COVID outbreak but the focus on boosting credit likely means the chances for broad-based easing are shrinking. The PBOC told banks to meet the reasonable funding needs of local government financing vehicles. It also urged more lending to people with flexible employment such as taxi drivers, online shop owners and truck drivers, and provide long-term and cheaper loans to small businesses. In the 23 new supporting measures mentioned, the central bank vowed to step up the use of targeted tools including the relending program, which provides funds for banks to lend to sectors that include those hit by the pandemic. The various relending programs are expected to lead to 1 trillion yuan in additional bank loans.
- Beijing’s crackdown on the private sector has laid waste to Alibaba’s strategy of becoming an e-commerce giant like Amazon. Alibaba’s core e-commerce operation is under siege from regulators and its finance arm has been forced to pull back from some of its most lucrative initiatives. But nothing may illustrate its changing fortunes more than the recent troubles of its cloud computing operation, AliCloud. Cloud computing is a vital part of Amazon’s formula, with its AWS throwing off so much cash it can subsidize the e-commerce business and fund new initiatives that may not pay off for years. In Q4’21, AWS accounted for more than 100% of the company’s operating profit. Alibaba envisioned the same function for its cloud unit, identifying it as one of the company’s strategic pillars, especially as China’s cloud market looks to grow into a trillion RMB opportunity by mid-decade. But in recent years, the Communist Party has increasingly focused on the use and security of data, and declared data a critical factor of production, making its defense a priority for the government and thwarting Alibaba’s ambitious plans of becoming a tech giant like Amazon on the global stage. AliCloud has been under particular pressure because of its parent’s strained relationship with the Chinese government after co-founder Jack Ma openly criticized the Chinese government during a public speech in 2020. Alibaba even considered spinning off the cloud business last year with a potential valuation of $100 billion, but the plans were eventually shelved because of business and political obstacles. AliCloud’s performance subsequently began to tank, missing analyst forecasts during the December-quarter with continuous deceleration. Up-and-coming cloud providers such as Huawei and China Telecom which have more cordial relationships with the government have increasingly lured awy users. AliCloud’s market share decreased to 37% last year compared to 46% in 2019, although it continues to lead the market. Meanwhile, Huawei doubled its market sahre over the same period. The government is also favouring state-backed cloud providers, calling for all public government agencies to migrate their data from private cloud operators such as AliCloud to a state-backed cloud system. While this trend could be bad for all commercial cloud service providers, many worry that AliCloud’s political standing means it will be hit harder than competitors like Huawei. In December, China’s Ministry of Industry and Information Technology upbraided AliCloud for not reporting a software flaw in a timely fashion. As a result, the Chinese tech overseer suspended cooperation with the cloud service provider on a cybersecurity information-sharing platform for six months, and required rectification measures before deciding whether to resume their partnership.
- China’s quarterly production of semiconductors shrunk for the first time since early 2019 as consumer electronics demand softened and COVID-triggered lockdowns in regions including Shanghai disrupted output. Output of integrated circuits dropped 4.2% in Q1’22 as chipmakers reported a steeper decline in March. It was the worst quarterly performance since Q1’19 when the country’s chip output slumped 8.7%. China has put Shanghai – a key chipmaker hub – into a month-long lockdown in an effort to stem the virus. SMIC and Hua Hong Semiconductor have both struggled to source some components due to traffic controls imposed by local authorities. Chip production dropped 5.1% in the month of March. Tech factories across China could be forced int production halt after May if suppliers in Shanghai remain closed. For years, Beijing treated home-grown chip industry as a strategic one and a key component of its tech arms race. Its chip output enjoyed double digit growth for years amid the trade war with the U.S. although China still imported more than $432 billion worth of chipsets in 2021. Sluggish demand from consumer electronics sector also bodes poorly for some Chinese chip firms.
o https://www.bloomberg.com/news/articles/2022-04-18/china-s-chip-output-shrinks-as-lockdowns-hurt-production?srnd=technology-vp
Russia-Ukraine Development
- President Zelenskiy said Russian forces had begun a new campaign to conquer the Donbas region in the east of Ukraine, as remaining defenders of Mariupol are encircled by the Kremlin’s forces but have not surrendered the key port city. The Russian military has also said they have destroyed a facility in Lviv that held weapons shipped to Ukraine from the U.S. and other countries, but the Pentagon nor Ukrainian officials have yet to provide confirmation. The U.S. is now looking to re-establish a diplomatic presence in Ukraine as soon as possible in a show of support. Washington is also preparing to train Ukrainians outside the country on howitzer artillery pieces in coming days to help them fight back home. President Zelenskiy asserted the economic sanctions levied on Russia by the West had failed, citing the recovery in the ruble to pre-war levels. The EU is now planning to establish a solidarity trust fund to finance Ukraine’s re-build as member states were told they should expect to pay the bulk of the cost.
- President Putin has given a special elite designation to an army unit that Ukraine had accused of committing war crimes in the town of Bucha. Citing mass heroism and valour but making no mention of Russia’s war in Ukraine, the decree President Putin signed Monday awarded the 64th Motorized Infantry Brigade the honorary title of Guards. The unit was identified by Ukraine’s Defense Minister earlier this month as the responsible unit for the killing of unarmed civilians in Bucha and other Ukrainian towns, in which Russia has repeatedly denied.
- Russia’s central bank conceded it has found no clear alternatives to the world’s major reserve currencies after sanctions over the war with Ukraine has left it in possession of only yuan and gold. Before the invasion, the Bank of Russia spent years reducing exposure to the dollar, bringing its share to just under 11% at the end of last year. But more than a third of the total was in euros, on top of additional investments into currencies such as the British pound and yen, making it possible for international governments to seize about half of the stockpile in retaliation for President Putin’s attack. But a month after the war broke out, the central bank has yet to identify other options. The curbs imposed on the Bank of Russia meant it could not intervene in the market to defend the ruble, forcing it to impose capital controls and deliver an emergency interest rate increase to calm markets. The yuan accounted for 17.1% of the total at the end of 2021, up from 12.8% a year earlier, while gold’s share was downs lightly at 21.5%.
o https://www.bloomberg.com/news/articles/2022-04-18/russia-has-found-no-place-yet-to-invest-reserves-after-sanctions
Market Update
- World Bank Chief Economist Carmen Reinhart said the global economy is passing through a period of exceptional uncertainty and added that she would not rule out further downgrades to the growth outlook. The World Bank has lowered its estimate for global growth in 2022 to 3.2% from a January prediction of 4.1%, spurred by a cut in the outlook for Europe and central Asia that includes Russia and Ukraine. The new forecast compares with a 5.7% expansion in 2021. The array of disruptions from China’s lockdowns to the impact on food prices of Russia’s war on Ukraine all point to downside risks ahead.
- Stocks in Asia trading Tuesday were mixed as investors weigh Chinese measures to support the economy and the prospect for faster Federal Reserve policy tightening to fight inflation; Hong Kong technology names have also declined on ongoing concerns over regulation
- Treasury yields dipped after the long end declined Monday, but are still around the highest in more than three years as investors debate whether inflation is peaking; St. Louis Fed President James Bullard said that rate increases of 75 bps should not be ruled out as the central bank now needs to move quickly to combat inflation
- Price pressures remain elevated with U.S. energy costs spiking to the highest intraday level in more than 13 years; disruptions to supply chains from China’s lockdowns and to commodity flows from the war are keeping upward pressures on prices at a time when global growth is tipped to slow
- In China, markets are awaiting the release of loan prime rates on Wednesday after the PBOC reduced the reserve requirement ratio for most banks Friday but refrained from cutting interest rates; the willingness to loosen monetary policy further before COVID is under control means market sentiment will remain bleak in coming weeks, but equities could rally harder if lockdowns lift and policymakers start to make up for lost growth with additional easing measures
- S&P 500 futures rose 0.3%, while the S&P 500 was little changed at 4,391.69
- Nasdaq 100 futures gained 0.4%, while the Nasdaq 100 rose 0.1%
- 10-year Treasury yield fell 1 basis point to 2.84% to 13,910.76
- WTI crude rose 0.5% to $108.70 a barrel
- Gold was at $1,977.28 an ounce
Summary
- Micro – Equities were little changed in Monday trading as investors continue to mull on the outcomes from the upcoming earnings season as well as the looming Fed decision on the next round of rate increases coming May.
- Macro – Treasury slid again after St. Louis Fed President James Bullard advocated for a 75 bps rate hike coming May to counter the hottest inflation in four decades. Price pressures remain elevated as Russia steps up its aggression against Ukraine, stoking higher urgency for the EU to lean on a phasing out ban on Russian energy imports. China’s extended COVID lockdowns are also spelling a bleak economic outlook as it worsens global supply chain snarls. The World Bank has cut its global economic growth forecast accordingly from 4.1% in January to now 3.2% considering the looming drivers of economic uncertainty ranging from an ongoing war to extended COVID disruptions worldwide.