Newsletter - April 26, 2022
Oil / Commodities
- Industrial metals from copper to iron ore recouped some of Monday’s losses after China pledged more support to help revive an economy that has been imperilled by an escalating COVID outbreak. The PBOC has vowed to increase monetary support to the real economy, especially for industrial and small businesses hit hard by the pandemic. That is followed by the central bank’s decision to cut the amount of money banks need to have in reserve for their foreign currency holdings on Monday, an attempt to help limit the drop in the yuan. Strict lockdowns are wreaking havoc on consumer spending and snarling supply chains, putting China’s GDP growth target of 5.5% for the current year at risk.
- Oil climbed after a two-day decline that drove prices below $100 a barrel as investors assessed the impact of China’s rapidly spreading pandemic outbreak on the outlook for global demand. The supply picture remains tight at the moment and bargain hunters appear to be swooping in. Oil has now given up most of the gains since Russia’s invasion of Ukraine in late February following a tumultuous period of trading. The war has led to the U.S. and U.K. banning Russian crude imports, while the EU is considering similar as the conflict continues. Brent remains narrowly in backwardation with the prompt timespread at 21 cents a barrel compared to a high of $4.64 in early March.
o https://www.bloomberg.com/news/articles/2022-04-25/oil-holds-drop-below-100-as-traders-weigh-china-s-lockdowns
Tech
- Elon Musk has agreed to acquire Twitter for $44 billion, ending weeks of speculation after he took a stake in the social media platform this month. The deal would be completed in an all-cash offer at $54.20 a share. Musk has raised $25.5 billion fully committed debt with margin loan financing from a dozen banks to back the bid. When the deal is completed, Twitter will become a privately held company. The remaining $21 billion of the consideration will be provided as an equity commitment by Musk personally, but there were no further details about where the money would come from. It is likely some PEs will come on board and write him a cheque. For a commitment this size, upwards of four or five different firms could be involved in what is commonly known as a syndicated, or club, deal. Some existing shareholders could also decide to roll their Twitter stakes into the private company. Others are worried Musk may have to sell his shares in Tesla to fund the acquisition of Twitter. CEO Parag Agrawal and Chairman Bret Taylor is likely to keep running the company for now. The entire transaction will be subject to a shareholder vote before finalization. A date has yet to be revealed. Twitter founder Jack Dorsey calls Musk’s take-private deal for Twitter a correct first step.
o https://www.bloomberg.com/news/articles/2022-04-26/musk-seals-44-billion-deal-even-he-wasn-t-sure-would-succeed?srnd=technology-vp
- Jeff Bezos has posted a series of tweets questioning whether Elon Musk’s $44 billion takeover of Twitter could make things difficult for Tesla in China. China is currently the world’s largest EV market and about half of Tesla’s cars sold globally last year were produced in Shanghai, a figure that Musk said may double. Musk had always championed free speech on Twitter. But the social media platform is banned in China by officials wary of the impact on public discourse.
- Elon Musk’s acquisition of Twitter poses a serious threat to Donald Trump’s Truth Social. While Trump told Fox News on Monday he does not plan a Twitter comeback if his permanent ban ends, speculation about his return was enough to torpedo the shares of DWAC, a SPAC aiming to merge with Truth Social owner Trump Media & Technology Group. The DWAC stock has been in a bit of a struggle in recent weeks. Recently, hedge fund Kerrisdale Capital Management bet against the SPAC, speculating that regulators will crack down after it gave misleading statements in its registration documents. Earlier this month, Truth Social’s chiefs of technology and product development resigned, which sent the shares on a further spiral. Many are calling Musk’s version of Twitter a real competition to DWAC if changes are made to purify Twitter’s previously poor policies.
- SoftBank-backed Light is struggling to raise funds after the world’s largest tech investor balked at putting more money into the start-up. SoftBank owns 30% of Light through Vision Fund, which led an injection of $121 million into the advanced camera developer in 2018. SoftBank’s continued support is critical for the start-up which had been spending millions of dollars to expand into self-driving tech at SoftBank’s urging. Hurt by plunging valuations, SoftBank has been walking away from some of its loss-making portfolio firms to comply with stricter investment criteria. The adoption of prudence at SoftBank’s Vision Fund is an about-face from its past freewheeling largess. For years, SoftBank has encouraged start-up founders to think bigger and promised continued support to help them expand. But the company’s next earnings report coming up in May might spell the biggest ever quarterly loss on the plunging value of its most valuable holdings, including South Korea’s Coupang, and China’s Didi Global. During the February earnings call, the firm said Vision Fund would continue to invest but at a slower rate, given privately held firms’ lofty valuations amid a rout on publicly traded companies’ share prices.
- The Twitter account of EV designer Henrik Fisker vanished shortly after the social media company announced it was accepting a $44 billion buyout from Tesla’s Elon Musk. Fisker said in a tweet Monday that his followers should look for him on Instagram for future updates, without providing additional details. Shortly after that, the account was deactivated.
o https://www.bloomberg.com/news/articles/2022-04-25/fisker-ceo-s-twitter-account-disappears-after-musk-acquisition?srnd=premium-asia
Electric Vehicles
- Full scale testing of Elon Musk’s Hyperloop under Boring Co will begin this year. Last week, after securing additional funding, Boring Co started advertising new jobs that indicate an expanded scope for the company. Two engineering roles will specialize in Hyperloops, another job for an electrical engineer and one other job for a mechanical vacuum engineer. Vacuum technology makes up a key part of the Hyperloop as originally envisioned because vehicles move faster in a low friction or vacuum environment. But significant hurdles remain before deploying a working intercity hyperloop. In the U.S., it would typically require a yearslong environmental study at the state and federal levels. Boring Co’s loop in Las Vegas, although not as “hyper speed” as intended, has enjoyed overall good reviews for connecting parts of the city’s convention center. It has also built a connection to the Resorts World hotel and is working on building further stops around the city.
o https://www.bloomberg.com/news/articles/2022-04-25/hyperloop-plan-for-elon-musk-is-revived
Consumer / Retail
China Market
- Beijing has started mass testing millions of its residents as part of an unprecedented scheme designed to identify and squash omicron’s spread. Nearly 20 million people will undergo three rounds of COVID testing through the weekend as Beijing’s municipal government expands efforts from the eastern Chaoyang district, where most cases in the recent flareup have emerged. The testing urgency underscores the importance of figuring out how long and how broadly omicron has been quietly spreading in the sprawling city and devising a way to cut off those chains of transmissions.
- Chinese techs tocks rallied as Beijing’s renewed vows to step up support for the economy lured back some dip buyers after shares fell near oversold territory. Policies makers also promised further support for consumption and said they will end the rectification work at major tech companies as soon as possible.
- The PBOC pledged to increase support for the economy, seeking to reassure investors as financial markets take a hammering from a worsening growth outlook and threats of widespread COVID lockdowns. The central bank has decided to cut the amount of money that banks need to keep in reserve for their foreign currency holdings on Monday, an attempt to help limit the drop in the yuan. The PBOC said Tuesday the recent volatility in the markets has been mostly driven by changes in investors’ expectations and sentiment, adding that China’s economic fundamentals remain good. The PBOC will also add 100 billion yuan of quota to its relending program to support the production and storage of coal. The program provides loans to commercial banks for lending to targeted sectors. The central bank will also set up relending funds for the aviation industry, on top of expanding the program to cover more small businesses, technological innovation and elderly care.
- China’s stringent rules to curb COVID are about to unleash another wave of summer chaos on supply chains between Asia, the U.S. and Europe. Shipping congestion at Chinese ports, combined with Russia’s war in Ukraine risks a one-two punch that threatens to derail the recovery, already buffeted by inflation pressures and headwinds to growth. Even if the virus is reined in, the disruptions will ripple globally and extend through the year, as bunched up cargo vessels start sailing again. China accounts for about 12% of global trade and COVID restrictions have idled factories and warehouses, slowed truck deliveries and exacerbated container logjams. U.S. and European ports are already swamped, leaving them vulnerable to additional shocks. And once product export activities resume and a large volume of vessels make their way to the U.S. West Coast ports, waiting times could increase significantly. In the meantime, some are considering a relocation of supply chains, which could cost more, but if made in smaller quantities then sellers can sell at closer to full price and offset the impact. A recent research report found 78% of CEOs are either considering reshoring or have done it already.
o https://www.bloomberg.com/news/features/2022-04-25/china-s-covid-crisis-threatens-global-supply-chain-chaos-for-summer-2022?srnd=premium-asia
Russia-Ukraine Development
- The U.S. has announced additional military aid for Ukraine as Defense Secretary Lloyd Austin said Washington wants to see Russian forces ground down so they cannot attempt a repeat of the war. The U.S. has committed $713 million in military financing for Ukraine and 15 allied and partner countries. Some $322 million of that is earmarked for Ukraine only.
o https://www.bloomberg.com/news/newsletters/2022-04-25/russia-invades-ukraine-what-you-need-to-know-04-25-2022
- The Biden administration is weighing swift action to ramp up global food assistance amid rising concern that Russia’s invasion of Ukraine is stoking a hunger crisis in many poorer nations. The White House is considering attaching a global food aid request to the military aid package for Ukraine. The war has so far disrupted exports of wheat, corn, sunflower oil and other foods from Russia and Ukraine, and growing alarm about how to deal with rapidly rising food costs and insecurity is driving bipartisan support in Congress for providing as much as $5 billion in related aids.
o https://www.bloomberg.com/news/articles/2022-04-25/biden-weighing-attaching-global-food-aid-to-ukraine-funding?srnd=premium-asia
Market Update
- Stocks and U.S. equity futures rose in Asia trading Tuesday after China’s pledge to boost monetary policy support assuaged concerns about the outlook for the global economic recovery
- Treasuries slipped along with the dollar and oil advanced in a sign of steadier investor sentiment; but the risk of an economic downturn from China’s lockdowns as well as aggressive Federal Reserve policy tightening to quell inflation continues to hang over markets
- The prospect of slower economic expansion alongside persistent inflation is leading to a febrile mood in markets; the panoply of risks spans the pandemic, supply chain disruptions, Fed tightening and Russia’s grinding war in Ukraine
- Wall Street shares closed a chopping session higher Monday after Elon Musk agreed to buy Twitter and as dip buyers emerged ahead of big tech earnings reports; U.S. corporate earnings have been providing some solace for equity bulls, with close to 80% of firms having beat profit expectations
- S&P 500 futures rose 0.2%, while the S&P 500 rose 0.6% to 4,296.12
- Nasdaq 100 futures rose 0.3%, while the Nasdaq 100 rose 1.3% to 13,533.22
- 10-year Treasury yield rose 3 bps to 2.85%
- WTI crude was at $99.49 a barrel, up 1%
Summary
- Micro – Equities regained footing shortly before close during Monday’s regular session after Elon Musk agreed to buy Twitter and dip buyers re-emerged ahead of big tech earnings scheduled for this week. About 80% of U.S. corporate earnings reported to date have beat expectations, underscoring the strength of fundamentals still amid a highly volatile economic environment, buoyed by the panoply of risks spans the pandemic, supply chain disruptions, Fed tightening and Russia’s grinding war in Ukraine.
- Macro – Treasuries slipped along with the dollar while oil advanced again after two consecutive days of declines as investor sentiment regained stability. China’s actions to support economic stability on Monday, which include lowering reserve ratio requirements for banks on foreign currency holdings, as well as a vow that the rectification of tech sector regulations will wrap up as soon as possible, has added a positive touch to markets. Despite widespread COVID restrictions that risk spreading to Beijing now, investors continue to assess the impact of such measures on the outlook for global demand. Oil supply remains tight, but bargain hunters appear to be swooping in, underscoring how oil would continue with the upper hand as the likely hood of a global sanction against Russian energy rises.