Newsletter - April 28, 2022
Oil / Commodities
- Oil tumbled toward $100 a barrel as China’s spreading virus outbreak continued to weigh on the outlook for global demand. WTI futures declined 1.5% after closing marginally higher Wednesday following a choppy session. Hangzhou is the latest Chinese city to be added to a growing list of regions required for mass virus testing, while the nation’s top state-run oil processor said during an earnings call that the resurgence was slowing fuel demand. There are some signs that the outbreak is easing but lockdowns have led to stockpiles swelling up in China. The oil market continues to be torn between a bullish supply outlook and a bearish demand picture. Supply risks around Russian oil are longer term in nature compared to the COVID-related demand hit in China. As a result, it is likely oil prices will remain well supported. Russia’s finance minister said the nation’s oil output may drop by as much as 17% this year as buyers shun its crude. The U.S. and U.K. are banning imports from the OPEC+ producer, while the EU is devising a plan to take similar steps. Brent remains narrowly backwardated after nearing a bearish contango structure Tuesday. The global benchmark’s prompt timespread was 37 cents a barrel in backwardation, compared to as high as $5.88 in early March just after the Russian invasion of Ukraine. The fuel market has also tightened as Europe relies more on U.S. imports to avoid Russian supply. American supplies of distillates, including diesel, dropped for a third week and are at the lowest since 2008. Gasoline stockpiles also fell for a fourth consecutive week. The U.S. East Coast is bearing the brunt of the tightness in part because shrinking refining capacity has led to increased reliance on U.S. Gulf Coast shipments. However, Gulf Coast processors are instead exporting more fuel as a premium as buyers in Latin America and Europe race to replace Russian supply.
o https://www.bloomberg.com/news/articles/2022-04-27/oil-steadies-as-investors-weigh-china-s-lockdowns-russian-war
Tech
- Michael Burry defended short sellers in a tweet that appeared to address Elon Musk’s delicate position of funding his buyout of Twitter using some of his Tesla stake. Musk is buying Twitter for $44 billion, partly funding the purchase with a $12.5 billion margin loan secured by Tesla shares. If the EV maker’s stock falls below $740, which it last did for a brief moment on February 24th, Musk may not have enough to cover the full loan. Musk may also need to sell Tesla shares to cover a $21 billion equity commitment he has made for the Twitter purchase. Shares of Tesla slumped 12% Tuesday and now trades under $900 apiece. About 2.9% of its float is sold short. Musk had previously criticized investors with a short position in Tesla, including Burry and Bill Gates.
- Amazon-owned Twitch is weighing changes to how it pays top talent, an effort that would boost its profits but also risk alienating some of its biggest starts. The updates under consideration would offer incentives for streamers to run more ads. The proposal would also reduce the proportion of subscription fees doled out to the site’s biggest performers. Some changes to Twitch’s monetization structure could be implemented as soon as this summer. Twitch staff is considering paring back the revenue cut of channel subscriptions granted to the top echelon of streamers in this partnership program from 70% to 50%. Another option is to create multiple tiers and set criteria for how to quality for each one. In exchange, Twitch may offer to release partners from exclusivity restrictions, allowing them to stream on YouTube or Facebook. Viewership for live videos of people playing video games has exploded in recent years and has elevated a new class of internet celebrities. Twitch leads the market, but Amazon increasingly wants the site to make money over the long-term. Twitch currently has more than 51,500 members in its partnership program. Viewers can subscribe to an individual streamer for $5 to $25 a month and receive digital badges, custom emoticons and other perks. Typically, streaming partners get half of the subscription revenue from their channels, but Twitch routinely awards the top performers a higher cut. In addition to subscriptions, partners also earn fees for running ads on their channel. The rate, $3.50 to $5 for 1,000 ad impressions depending on the streamer’s location, has remained essentially unchanged for years. Now, Twitch is experimenting with other approaches to ads, including a payout of $100 to streamers that stream at least 40 hours a month for running two minutes of ads per hour. The payout increases with more ad minutes. Another option is revenue sharing to enable a more lucrative and attractive model for streamers.
- U.S. households stopped adding to their roster of streaming services, in another sign that the on-demand video market has reached saturation point. The number of on-demand services accessed per household levelled off at 4.7, after almost two years of constant increases alongside new service launches. The industry is expecting to see a greater rate of churn and switching as consumers are more selective about what they watch. It will also be more challenging for newer entrants in the market, as consumers grapple with justifying the value of a new add with burgeoning options.
- PayPal’s vow to rein in costs and push to boost profits cheered investors even after executives lowered targets for the firm’s performance this year. the company said it would focus on simplifying operations as it warned that it now expects revenue for the year to climb only as much as 13%, compared with an earlier target of up to 17%. The move came after revenue from the first three months of the year climbed 8% to $6.5 billion, beating the $6.4 billion average estimate. PayPal shares rose 4.2% in extended trading following its announcement of first quarter results. The stock has lost $180 billion of tis market value after slumping 65% in the last six months, as it deals with a myriad of headwinds – former parent EBay’s exit from the payment platform and consumers’ return to in-store shopping, as well as supply chain dislocations and record high inflation that have affected e-commerce transaction volumes. In February, the company was pivoting away from a previous strategy of trying to add millions of new users, and instead encouraging existing customers to use its app more frequently. Transactions per active user jumped 11% in the first quarter to 47. But the company could be at risk for higher turnover of customers this year as it focuses on more-engaged users. The company expects total payments volume for the year to climb by 15% to 17%, compared with an earlier range of 21% to 23%. The deteriorating macro environment and normalized consumer e-commerce spending coming out of the pandemic is making the outlook for PayPal an increasingly complex endeavour to get a grip on.
- FB shares soared in extended trading after Facebook added more users than projected in the first quarter, potentially staving off concerns that the company is losing momentum as a new generation flocks to younger sites like TikTok. Shares surged more than 19% in late trading after Facebook showed 1.96 billion daily users, a return to growth after the first-ever decline in the December quarter. Analysts had estimated 1.94 billion. Revenue for the period also jumped and would have been higher if not for the war in Ukraine. The stock has lost 50% of its value this year as investors became increasingly worried about FB’s main business and profit engine – advertising – was losing steam. But with Facebook adding 31 million new DAUs in the recent quarter, those concerns have been put to bed for now. But still, many challenges remain for FB. TikTok continues to provide serious competition for young users’ attention, while FB’s answer, Reels, is still years away from making significant money like Stories. At the same time, Apple’s new privacy policies have hindered FB’s growth in monetizing on targeted ads. The company expects the privacy changes to reduce 2022 sales by $10 billion. Advertisers have also been spending less due to issues with supply chains, inflation and the ongoing war in Ukraine, which further complexes the picture. A prolonged slowdown spells further challenges for the company, especially as it tries to justify its VR-fuelled vision of the metaverse – a business that will not bring in profit for years, if ever. Mark Zuckerberg confirmed during the call on Wednesday that it will be years before Meta’s Reality Labs unit will contribute meaningfully to the consolidated business. The company is planning to launch its new VR headset, code-named Project Cambria, later this year. the headset is meant to be used for work purposes as a replacement for a laptop.
- Qualcomm, the biggest maker of smartphone chips, surged in late trading after giving a strong sales forecast for the current quarter, bolstered by its expansion into new markets. Revenue will be $10.5 billion to $11.3 billion in the fiscal third quarter which compares to average estimates of $9.97 billion. profit will be $2.75 to $2.95 a share, well above the $2.60 consensus estimate as well. The outlook helped dispel fears that chip demand is slowing after a pandemic-fuelled surge the past two years. Analysts have pointed to slowing demand for Android phones in China, the largest market, as a threat to growth. But sales of Qualcomm’s phone-related chips were higher than expected last quarter, coming in at $6.33 billion compared to estimates of $5.99 billion. The company predicted its handset division will growth more than 50% in the current fiscal year, bolstered by Samsung’s flagship Galaxy phone and gains at some Chinese smartphone makers. Revenue from IoT of $1.7 billion also beat average projections of $1.6 billion. Increasing use of chips in industrial machinery is driving growth as well. The company’s automotive unit, which posted sales of $339 million, was up 41% from a year earlier.
- Amazon has permanently lifted a ban on mobile phones for warehouse workers. The ban was temporarily lifted during the pandemic for safety reasons. But when Amazon considered resuming the ban late last year, workers were angered. A December tornado that killed six Amazon workers at an Illinois warehouse further reinforced employees’ desire to have their devices so they could access real-time information during emergencies.
- Former President Donald Trump’s social network is back on top of Apple’s App Store, fuelling a rebound in DWAC. Shares of DWAC leaped 24% Wednesday s thousands more suers gained access to Truth Social’s full functionality and downloads jumped almost tenfold. DWAC had slumped 60% in the previous two months. Truth Social downloads leaped to more than 55,000 Tuesday from less than 6,000 the week before. Truth Socials’ DAUs also jumped to 365,000 on Tuesday, a 20% increase from the week prior. Still, DWAC timed gains to 10% after Elon Musk tweeted that Truth Social exists because Twitter censored free speech. While shares remain down more than 50% from a March closing high, DWAC is up 380% from a September debut and remains one of the best performing SPACs.
- A key incentive used by Texas to lure multibillion dollar investments from tech firms like Tesla and Samsung is set to go away, sparking a rush by companies to lock down the tax breaks. More than 75 applications were tallied in the first quarter, more than were seen in some entire years recently. The program, known as Chapter 313, which provides property tax breaks for as long as 10 years in exchange for investments that can range from small solar farms to semiconductor factories, shuts down to new entrants at the end of this year. the frenzy shows how much companies value incentives, which totalled almost $11 billion in the two decades through June 2020. Texas has posted one of the country’s fastest growth rates in recent years, boosted in part by corporate relocations and expansions that tapped into the Chapter 313 program. But going forward, the state might become less competitive for a lot of the major high-profile, capital-intensive projects without the tax break incentive. More than a dozen bills have been proposed to replace Chapter 313 last year, but legislators rejected them all. Some are arguing that the targeted tax breaks are unfair and increase the burden on everyone else. Meanwhile, others see these types of programs as corporate welfare. Research has found that 52 mostly low-income districts in Texas lost more than $1,000 in revenue per student in one year because of Chapter 313 agreements. Findings also show that the vast majority of projects receiving Chapter 313 abatements are energy projects, which means that geography and infrastructure, not tax breaks, are the primary reason they are built in Texas, and the projects would have been built in Texas even without the tax incentives. For now, parties are still working to find a replacement for Chapter 313.
- Singapore’s Millennium Hotels and Resorts is inviting online avatars to what it claims as the first ever hotel in the metaverse. The building is located at the heart of Decentraland. The hotel, called M Social Decentraland, features a giant M on four sides of its virtual building, along with glass exteriors and neon pink accents. It will open its doors on May 5th.
o https://www.bloomberg.com/news/articles/2022-04-27/this-hotel-company-invites-your-avatar-to-the-metaverse?srnd=technology-vp
Electric Vehicles
- Baidu’s ride-hailing service will deploy driverless cars on Chinese roads for the first time, a symbolic victory in a yearslong quest to carve out businesses beyond internet ads. Baidu is one of two companies to secure the country’s first permits to operate a fleet of self-driving robotaxies without someone in the driver’s seat. The approval covers just part of Beijing for now, but underscores potential for continued relaxation of Chinese transportation rules. Baidu and AI driving start-up Pony-ai can now dispatch autonomous cars with safety personnel only in the passenger seat, whereas previous regulations mandated a human ready to grab the wheel in an emergency. However, the latest development still does not allow the two companies to charge for related rides yet. Baidu has been transitioning to AI and self-driving in recent years after its core advertising revenue shrank in the mobile era. Its smart driving business provides software to carmakers like Geely and runs a ride-hailing platform powered by a fleet of Robotaxis in nine cities including Guangzhou and Beijing. Its EV spinoff raised $400 million from external investors and plans to start mass production in 2023. The new driverless robotaxi permit for Baidu’s Apollo Go operations was granted by regulators in the Beijing High-level Automated Driving Demonstration area, which is on the outskirts of the capital. In November, Baidu and Pony.ai won licenses to run commercial self-driving operations in the same region. Baidu has plans to expand Apollo Go into 65 cities across China by 2025 and 100 cities by 2030. The ride-hailing platform currently has about 300 cars nationwide, and one such vehicle could generate roughly 18 orders per day in big cities like Shanghai. The robotaxi service is expected to become more profitable in some regions in three years.
- The highest bid for lithium at an online sale surged by 140% in just six months, an indication the stampede for supplies of the main ingredient used in EV batteries could get more intense. Pilbara Mineral’s auction of spodumene concentrate – a partly processed form of lithium – attracted a top bid of $5,650 a ton on Wednesday for a cargo of 5,000 tons. That compares with $2,350 at the previous sale in late October on the Australian miner’s Battery Metal Exchange. The pricing received on the BMX sales trading platform is indicative of the critical shortage that exists in respect of lithium raw material supply. Miners worldwide are already cranking up production to meet the skyrocketing demand and also enjoying bumper profits. Chinese producer Ganfeng Lithium reported a more than 600% jump in first quarter net income from a year earlier, while Pilbara’s share price rose as much as 6.5% on Wednesday.
- Strong demand for BYD EVs in China has triggered at 8,312% jump in net cash flow from operations, underpinning the Warren Buffett-backed company’s strongest first quarter in six years. the automaker said the 11.9 billion yuan of net cash flow from operating activities reported during the March quarter is its highest ever recorded for the first quarter and was mostly spurred by cash received from sales of goods and provision of services. The company’s high operating cash flow print sets a strong tone for the year. BYD delivered 286,329 new energy vehicles in the first quarter, up more than 400% from the same period of 2021. The company’s target of selling 1.5 million to 2 million EVs in 2022 could reflect an even more impressive growth trajectory against the backdrop of soaring material prices for battery cells.
- Ford slightly exceeded earnings expectations in the first quarter as higher prices offset supply chain snarls that have limited production. One day after rolling out an electric version of the F-150 pickup truck, Ford on Wednesday posted adjusted EPS of 38 cents, topping the 36 cents analysts predicted on average. Adjusted EBITDA of $2.3 billion also surpassed consensus estimates of $1.8 billion. The automaker continues to warn of issues with chip supplies, which constrained the company in North America in particular, and hit the production of large vehicles like the F-Series, Expedition, and Navigator more disproportionately. Ford’s income in the latest quarter was about half of the level a year ago. The results compared poorly with rival GM’s first quarter profit of $2.09 a share, excluding some items. GM kept its full year outlook unchanged as well and said it expected to improve access to chip supplies in the second half. The intractable chip shortage has slashed F-Series truck sales by 31% in the U.S. in the first quarter. Ford’s revenues in the first quarter of $34.5 billion exceeded analyst estimates of $32.2 billion. But wholesale shipments of nearly 970,000 vehicles were down 9% from a year earlier – the latest evidence that the chip shortage is hurting performance. Ford’s first quarter revenues were down just 5% on the year, a reflection of higher prices.
o https://www.bloomberg.com/news/articles/2022-04-27/ford-posts-slight-earnings-beat-as-high-prices-boost-resutls?srnd=premium-asia
Consumer / Retail
- Port bottlenecks that have increased supply chain congestion because of the war in Ukraine and COVID lockdowns in China may be showing signs of easing. Currently, the number of ships waiting outside of the ports in LA and Long Beach have been reduced to less than 40, from more than 100 earlier this year. Wait times for ships at Shanghai ports is two or three days, compared with 10 to 14 days at the U.S. ports. Shippers are foreseeing further easing in the second half, making all difficulties easier going forward. While shipping operations are improving in Shanghai and factories are gradually restarting, containers are still piling up in ports because of a shortage of trucks. Once bunched up cargo vessels start sailing again, logistics experts warn of a flood of containers clogging U.S. and European ports. Congestion in Shanghai ports has increased about 30% to 40% as of April 25th since the beginning of March, though it is still lower than the peak during the third quarter last year. Global trade growth is projected to have slowed to 5% this year from an estimated 10.1% in 2021.
- AMC said the domestic box office will not rise to pre-pandemic levels this year and may still fall short in the subsequent two years. Studios are just starting to release major films at a pre-pandemic pace again and the industry is still assessing the new habits of moviegoers. By 2024, theatres will probably start making close to what they did in 2019 but they will have to continue to be flexible to survive. The film business was battered by the pandemic. About 2% of domestic movie screens, roughly 800, permanently went dark after some theatres ran out of cash during lockdowns. Some movie makers have also released films directly to consumers online. Further, theatres are still unable to persuade some streaming companies like Netflix to debut their new movies in cinemas.
o https://www.bloomberg.com/news/articles/2022-04-27/amc-ceo-says-movie-ticket-sales-may-not-rebound-until-2025?srnd=premium-asia
China Market
- The northern port of Qinhuangdao is the latest Chinese commodities hub to get hit by virus-related lockdowns. The city in Hebei province has locked down its Haigang district, which includes the port. Qinhuangdao handled nearly 50 million tons of goods, mostly coal from the interior and metal ore imports, during the first quarter. Hebei is China’s biggest steel province and its mills rely on seaborne supplies of iron ore. The city is chiefly known as a transition point for sending coal from the mining regions of the north to the coastal industrial centers in the south. The price set at the port is an important benchmark for China’s coal market, which is the largest in the world. While port administrators are working remotely, workers are on site and coal is being transported normally. Still, coal flows have drawn particular scrutiny in recent weeks as markets in the south stress over dwindling imports and a resurgent virus that has clogged up transportation of the nation’s mainstay fuel.
- China continues to roll out swift measures from mass testing drives to lockdowns for just a mere handful of COVID cases, aiming to keep flare-ups at bay and avoid the economic and social hardship endured by Shanghai. Hangzhou, an e-commerce hub, has started a mass testing drive, joining the capital Beijing in trying to stamp out outbreaks before they spiral out of control. Port cities of Qingdao and Qinhuangdao, along with Yiwu, have gone into full or partial lockdowns as well. The hard-line responses reflect the growing stakes local governments face in wrestling with the highly infections omicron strain before it takes hold, plunging cities into protracted lockdowns that incur heavy costs on residents and businesses.
- China’s State Council has pledged to promote the growth of internet platform firms and give cash handouts to poor people who have lost their jobs, stepping up efforts to bolster an economy buckling under the threat of COVID outbreaks. Temporary subsidies will be provided to jobless migrant workers who have paid unemployment insurance premiums for less than a year and are therefore not eligible for the benefits. People in difficulties who lost their jobs due to COVID and are not covered by relevant insurance policies will also get access to similar aid. Chinese authorities have long credited healthy job creation as a critical pillar for maintaining economic growth and social stability. But the country’s worst COVID outbreak in two years have disrupted economic activity, pushing the jobless rate up to 5.8% in March, the highest since May 2020. The government will also allow more companies to delay pension and other social insurance contributions, expanding it to cover all SMBs. College graduates will be encouraged to apply for internships first, with companies that employ them receiving government subsidies. More farming, water conservation and rural road projects will be launched to increase job opportunities for migrant workers.
o https://www.bloomberg.com/news/articles/2022-04-27/china-cabinet-vows-stronger-policy-to-boost-jobs-as-covid-rages
Russia-Ukraine Development
- President Biden is preparing to send to Congress a proposal for weapons and humanitarian assistance for Kyiv that would last through September. The House of Representatives lawmakers have also passed a bill urging the U.S. to seize assets valued at more than $2 million that belong to Russian individuals and entities who benefit from ties to President Putin’s regime; related funds will be used to help rebuild Ukraine. EU members pushed the bloc to deliver clearer guidance over Russia’s demand for natural gas payments to be made in rubles after flows to Poland and Bulgaria were cut off. Germany signalled it is open to a phased-in ban on Russian oil imports. UN Secretary-General Antonio Guterres is scheduled to meet Ukrainian President Zelenskiy on Thursday after holding talks earlier this week with Russian President Putin in Moscow. The UN said its humanitarian office is mobilizing a team from around the world to coordinate evacuation of civilians from a steel plant in the port of Mariupol.
o https://www.bloomberg.com/news/articles/2022-04-27/ukraine-latest-russia-says-it-cut-gas-flows-to-poland-bulgaria
- European Commission President Ursula von der Leyen warned companies not to bend to Russia’s demands to pay for gas in rubes, as the continent scrambles for a united response to Moscow’s weaponization of its energy sources. Gazprom has turned off the taps to Poland and Bulgaria on Wednesday in a dramatic escalation, making good on a threat to cut supplies if payments are not received in rubles. Attention now turns to how big consumers Germany and Italy response, with German Economy Minister Robert Habeck warning that the risk of more cutoffs must be taken seriously. Italian energy giant Eni SpA is preparing steps that would potentially allow it to comply while Germany’s Uniper SE believes it can keep buying gas without breaching sanctions. A source close to Gazprom said four European gas buyers have already paid for supplies in rubles. Benchmark prices surged Wednesday by more than 20% then eased as traders reassessed the chances of a wider cutoff. Germany also reiterated that companies should keep paying in euros in compliance with EU guidelines, and Habeck said the continent had to be ready for a wider cutoff.
- Germany slashed the price for taking public transport to 9 euros a month as part of a package of measures to counter surging energy prices and cut fuel use as Russia seeks to weaponize energy. The monthly passes will be available for three months from June. In Berlin, the regular rate for the entire network runs as high as 107 euros. Germany’s transport passes are geared toward reducing fuel use during the summer travel season. They will be valid for local and regional transport systems, including buses and trains. The cabinet has also approved a one-off payment of 100 euros per child to offset higher energy bills.
o https://www.bloomberg.com/news/articles/2022-04-27/germany-slashes-public-transport-rates-to-counter-energy-threat
- Several EU nations are pushing for clearer guidance from the bloc on Russia’s demand to pay for gas in rubles. The European Commission told ambassadors at a closed-door meeting Wednesday that it will fine-tune the wording of its guidelines. A number of countries who raised the issue want the commission to clarify that buyers do not have any workarounds to acquiesce to the Kremlin’s demands. In a Q&A document published last week, the EU said that the Kremlin’s payment procedure would be a clear breach of contract as well as EU sanctions. But the bloc also said payments may be allowed in euros and dollars as long as any legal obligations end once the initial euro or dollar payment is made to Gazprombank. It remains unclear whether Moscow would accept that transactions are complete after the initial payment is made in euros or dollars, even if the funds are then converted to rubes. Member states are expected to discuss the issue at an upcoming meeting of EU energy ministers on May 2nd.
- The U.S. has lifted some restrictions on sharing intelligence with Ukraine as it confronts a renewed Russian military assault in the east and south. The expanded sharing is intended to help Ukraine defend and potentially retake territory in those regions. Russian military officials said at the end of March that they would shift their focus to taking full control of the Donbas region after a month of fighting that yielded limited territorial gains in the western parts of the country, including an attempted siege of the capital Kyiv. The shift was seen as an admission that the rapid, large-scale invasion President Putin had envisioned to quickly take the country and oust President Zelenskiy’s government had failed and that Russia was focusing on more limited territorial gains.
o https://www.bloomberg.com/news/articles/2022-04-27/u-s-sharing-more-intelligence-with-ukraine-for-fight-in-donbas
Market Update
- U.S. equity futures rose Thursday in Asia trading amid steadier sentiment following a surge in FB shares and as investors digested official pledges of economic support in China; FB jumped 18% in extended trading after it reported more user net adds than expected, brightening the mood toward megacap U.S. tech firms and bolstering the biggest ETF that tracks the Nasdaq 100
- Treasuries were little changed as investors calibrated risks from the prospect of aggressive Federal Reserve monetary tightening to tackle high inflation; volatility remains the watchword in markets, stoked by China’s struggle to suppress COVID, Russia’s war in Ukraine, and worries that the Fed tightening may tip the U.S. economy into a recession, but there are still lingering hopes that robust U.S. corporate earnings could improve the move
- S&P 500 futures rose 0.7%, while the S&P 500 rose 0.2% to 4,183.96
- Nasdaq 100 futures rose 1.3%, while the Nasdaq 100 was little changed at 13,003.36
- 10-year Treasury yield fell 1 basis point to 2.82%
- WTI crude fell 1.5% to $100.47 a barrel
- Gold was at $1,881 an ounce, down 0.3%
- Financial conditions – a cross-asset measure of market health from equities to fixed income – have finally started to tighten over the past week in sympathy with the recent plunge in equities, led by richly priced technology companies. That is likely welcome news for Fed officials gathering next week to lift interest rates by an anticipated 50 bps for the first time since 2000. In March, Fed Chair Jerome Powell stressed that financial conditions are the mechanism through which monetary policy reaches the real economy, and should be expected to contract as the central bank raises borrowing costs. The 12% drop in the S&P 500 this year combined with the plunge in speculative high growth equities can be seen as a validation of hawkish monetary efforts to moderate the excesses of this inflation lashed business cycle. For the Fed, the equity market rout is probably pretty close to the best-case scenario, as tightening of financial conditions continue to proceed orderly. Meanwhile, the correction in stocks has also been in the frothier parts of the market and has not had much spill over effect into credit markets despite the crazy rate volatility. U.S. financial conditions have compressed to -0.73, near the tightest levels since 2018, excluding 2020’s COVID shock. The measure eased in the aftermath of the Fed meeting in March when policy makers kicked off the tightening campaign with a 25-bps hike, undercutting efforts to tamp down demand and inflation. Now, markets are ever-less buoyant, with rate sensitive megacap names bearing the brunt of this week’s selloff as investors brace for super-sized Fed hikes. The risk-off sentiment has permeated into credit markets where spreads are widening back to March highs but remain not far off historic lows. Tighter financial conditions are the mechanism that reduces demand and ultimately slows inflation. If financial conditions do not tighten and inflation remains high, the Fed will likely need to hike more.
- FAANG stocks are looking increasingly toothless amidst a tightening policy environment and high inflation. On April 19th, Netflix shocked Wall Street when it announced for the first time in a decade it had lost customers and predicted further churn in coming months. Its shares fell more than a third that day. That followed Facebook’s February meltdown after it revealed user growth had stalled, causing the stock to suffer the biggest one-day loss in value in U.S. market history. But the hard times at FB and Netflix do not mean that they will not bounce back or that the same fate awaits Apple, Amazon and Alphabet. Despite Netflix’s woes, it is still one of the best-performing stocks of the past two decades, up more than 18,000% since its 2002 debut as it delivers average annual returns of about 30%. Over the same span, Apple has returned more than 42,000% including dividends (35% annual average), and Amazon has risen 15,000% (29% on average). However, the Fed’s rein-in of easy-money policies and investors’ fears of an economic slowdown have caused all of Alphabet, Amazon and Microsoft to lag the S&P 500 index. Soaring U.S. Treasury yields are also diminishing the projected value of future corporate profits, which is a big deal for tech companies that often enjoy lofty valuations on promises of fatter future earnings. The FAANGs have been largely a market drag this year. The pact, including Microsoft, accounts for less than a quarter of the value of the S&P 500 but more than half of its decline this year. Apple remains the single member of the group that is still outperforming the S&P 500 in 2022, albeit by a whisker. Investors continue to prize Apple’s devoted customer base and massive cash flows, but it is difficult to argue that the world’s biggest company by market value is still a growth stock. Related sales are projected to expand just 8% in the current fiscal year and continue to slow through at least 2024 based on average analyst estimates. Meanwhile, Amazon and Alphabet are the only FAANGs that might still be considered growth companies. Amazon’s revenue is predicted to increase 15% in the current fiscal year, fuelled by its highly profitable AWS business. And Google is projected to deliver 18% sales growth in fiscal 2022.
- Nasdaq 100 futures rose as FB surged in aftermarket trading and China stepped up efforts to bolster its economy. Shares of FB jumped more than 19% in late trading after Facebook posted more user adds than projected. FB has a 3% weighting in the Nasdaq 100 and a 1.1% weighting in the S&P 500. Index futures also got a lift from a rally in Asian shares after China’s State Council pledged to promote the growth of internet platform firms and give cash handouts to poor people who have lost their jobs.
o https://www.bloomberg.com/news/articles/2022-04-28/nasdaq-100-futures-rise-on-facebook-users-china-economic-pledge
Summary
- Micro – U.S. equities are headed for a stronger start for Thursday’s regular session, buoyed by a return of positive investors sentiment on strong corporate earnings from tech titans like FB and Qualcomm. Chinese stocks are also regaining momentum in Asia trading Thursday after the State Council pledged more support to restore internet platform firms’ growth and hand out subsidies to those who have lost their jobs during the pandemic, underscoring the desire to bring the domestic economy back to recovery from extended COVID disruptions. Apple and Amazon will be reporting their earnings after the bell on Thursday, which could spell further updates on the impact of an inflationary environment and other macro headwinds (e.g. war disruptions, supply chain snarls, Fed policy tightening, etc.) on the megacap tech giants.
- Macro – Oil continues to hover at $100 a barrel as investors grapple with changing supply and demand sentiment due to a potential EU exit from Russian energy altogether and a slowdown in demand from China, the largest crude importer, as it continues to manage COVID outbreaks. But with the loss of Russian supplies to the EU being a more structural, longer-term impact, it is likely that oil prices will remain higher over the longer-term. Meanwhile, Treasuries steadied as traders await the Fed’s rate decision at its policy meeting next week. Most are expecting a 50bps increase, while there are a handful that have buckled-in for a 75bps hike to ensure inflationary pressures do not spiral out of control.