Newsletter - April 6, 2022
Oil / Commodities
- Oil erased early losses after the EU tip-toed around sanctions on Russian oil, and investors weighed the outlook for the dollar. WTI crude traded near $102 a barrel after slipping as much as 1.6% to trade below $100 a barrel earlier this week. While the EU will press on with additional penalties against Moscow for the war in Ukraine, including a ban on coal, crude will not yet be targeted. The dollar held gains after jumping on Tuesday as investors digested the prospect of a swift reduction in the Federal Reserve’s debt holdings, part of stepped up monetary tightening to combat soaring inflation. A stronger currency typically makes commodities priced in the currency less attractive. Oil surged by a third in the first quarter as the Russian invasion and backlash from the EU and the U.S. roiled markets. While the U.K. and Washington have moved to bar Russian crude, it is harder for the EU to follow suit given the region’s far higher level of dependence. Washington and its allies in the IEA have also tapped strategic petroleum reserves to try to calm prices. Oil markets remain in backwardation, although differential shave narrowed in recent days amid the sanctions moves and announcements for major reserve releases. Brent’s prompt spread was $1.48 a barrel, down from more than $4 a month ago. Investors are also tracking a COVID outbreak in top oil importer China that is hurting energy demand as cities including Shanghai have been placed under lockdown. The country reported more than 20,000 new daily cases Tuesday. Figures from the American Petroleum Institute on Tuesday also showed a 1.1 million barrel increase nationwide, as well as a rise at the key hub in Cushing, Oklahoma. Meanwhile, average retail gasoline prices remain on a record high in March according to data from the American Automobile Association.
- Elon Musk has refiled the disclosure of his stake in Twitter to classify himself as an active investor, making the change after taking a seat on the social media company’s board. Musk filed a form 13D with the U.S. SEC on Tuesday, disclosing a stake of 9.1%. The new filing indicates that Musk plans to take an active role in shaping Twitter’s agenda. The form he used on Monday, a 13G, is reserved for investors who plan to be passive. The board appointment ends the possibility of Musk mounting a takeover of Twitter, capping his ownership at 14.9% during his time on the panel. His ownership stake makes him Twitter’s biggest stockholder. As a new board member, Musk is in a position to influence Twitter’s potential beyond news and live events, and could help draw younger users. Though the edit button and removal of bots are some features that Musk has openly advocated for recently, the board and management changes are likely in the next six months if the company continues to underperform peers. Twitter responded on Tuesday that it has been working on an edit feature since last year. The company will test the feature within its Twitter Blue subscription service to learn what works, what does not, and what is possible. Musk joining Twitter’s board will lead to a host of strategic initiatives which could include a range of near-term and long-term possibilities out of the gates for the company still struggling in the social media arms race. Musk’s term on Twitter’s board is set to expire at the company’s 2024 annual meeting.
- U.S. and German officials have seized what they described as the world’s largest and most prominent darknet market, which traffics in illicit goods and services. The Hydra Market’s servers were shut down and cryptocurrency wallets containing $25 million worth of Bitcoin were confiscated by German police on Tuesday. The U.S. Department of Justice announced criminal charges against Dmitry Pavlov, a 30-year-old Russian resident, for conspiracy to distribute narcotics and conspiracy to commit money laundering in connection with his operation and administration of Hydra’s servers. The U.S. Treasury Department, meanwhile, announced sanctions against Hydra Market, and a ransomware-enabling virtual currency called Garantex, which mostly operates out of Russia. Started in 2015, Hydra allegedly offered a wide variety of illegal goods and services to mainly Russian-speaking countries. Its wares included hacking software, fake IDs, and illegal drugs such as heroin, cocaine and LSD, which were openly advertised on the site. Hydra also offered a robust array of money laundering and cash-out services to wash illicit proceeds. In 2021, Hydra accounted for about 80% of all darknet market-related cryptocurrency transactions, and since 2015, it has received approximately $5.2 billion in cryptocurrency.
- CEO of AT&T’s WarnerMedia unit, Jason Kilar, has stepped down days before the upcoming merge with Discovery to form a new media company. Kilar’s exit paves the way for David Zaslav, the CEO of Discovery, to begin building his own management team at the soon-to-be combined companies. The merger could close as early as April 8th. Kilar made waves in the film industry during the pandemic by releasing all of the Warner Bros. movies simultaneously in theatres and on the streaming service. That broke the old rules of distribution, which called for cinemas to have new movies exclusively for 90 days or more.
- Apple will be holding its annual Worldwide Developers Conference virtually for the third year in a row, a sign that major tech events are still aways off from returning to pre-pandemic norms. The show, better known as WWDC, will take place online from June 6 to June 10. The company will allow a limited number of developers and students to watch the opening day keynote videos from its Apple Park headquarters in Cupertino, California. The conference is where Apple previews its major software updates for the iPhone, iPad, Apple TV, Mac and Apple Watch – typically a few months before they are released. The company will hold a consumer-focused keynote event to unveil the new software on June 6th, along with other presentation geared toward software developers.
- The shift to working from home during the pandemic has fuelled a resurgence in demand for PCs. Microsoft is hoping a partial return to the office will spur sales of its latest Windows operating system. With some employees still at home, some returning to offices, and others splitting time between he two, Microsoft is styling Windows 11 as the operating system for hybrid businesses. On Tuesday, the company unveiled a series of new features for the software, which first came out in October, aiming to improve network security for a mobile workforce and make it easier to move work between physical computers and the cloud. The idea is to help companies be more agile and flexible for their employees and themselves. They also need to be more resilient in dealing with security threats. Part of the pitch of Windows 11 is moving customers to a cloud PC model, where the software is delivered to individual computes but continues to be stored, updated and managed in the cloud. Users can access the same programs from the office or at home, blurring the line between loud computing and traditional PCs. The change will require Microsoft and its hardware partners to create devices for a work-form-anywhere lifestyle. Part of Tuesday’s updates include a new system called Defender SmartScreen, which finds and alerts users when they are inputting their Microsoft login information into a hacked website or malicious program. Smart App Control, meanwhile, prevents anything but trusted apps from running. And a personal data encryption feature will protect information stored on a device when the user is not logged in. That makes it harder for sensitive information to eb seized from a device that is lost or stolen. Features aimed at blending the cloud and physical world include Windows 365 boot, which lets clients log directly into a cloud PC. There is also as switch feature that allows users to easily move from a physical desktop to what they have stored int eh cloud. An offline option enables customers to work on their cloud PC when they are disconnected.
- Russian car sales plunged in March as sanctions imposed over the invasion of Ukraine battered the ruble and many global auto companies joined a boycott of the country, leaving buyers confronting sparse showrooms. New vehicle sales fell 60% in March from the previous month at Rolf, Russia’s largest dealership. The company forecasts demand to fall by half this year to a level on par with Spain, which ahs one-third the population of Russia. The collapse in car sales comes with consumers shifting their spending to essentials as they brace for a recession brought on by the war. Vehicle prices rose 40% in March, while automakers from Toyota to VW halted production in Russia as part of an unprecedented international boycott. With buyers facing higher prices and fewer options, the government is seeking to stimulate domestic production. Imported cars from Europe and Japan may be replaced with Chinese and Indian models. Even before the crisis, Russia was already battling a deficit of new cars due to supply chain disruptions and distribution delays that the automotive industry has contended with globally. Russian new car sales in 2021 were down nearly 50% from their peak in 2012 as the economy stagnated since the 2014 annexation of Crimea from Ukraine.
- In recent months, a string of carmakers and EV battery producers have announced their intentions to build facilities in the U.S. Manufacturers from across the world are throwing around billions of dollars of investments into EV battery technology too. Meanwhile, President Biden has invoked the Defense Production Act, a Cold War-era provision to help increase the domestic availability of raw materials like lithium and graphite to boost battery manufacturing and reduce dependence on foreign supply chains. As promising as all the efforts sound, it is unlikely to move the needle. It seems the U.S. has waited too long to ramp up and prioritize the core of any EV strategy – batteries and how to charge them. For starters, the new factories will not be up and running for a while, so they will not be churning out power packs anytime soon. Capital is not being directed in a focused way, either. China will likely stay well ahead in the battery race in the meantime. While the hype around EVs has been present for a while with amped up demand and consumer awareness over the past year or two, it was only last June when the U.S. released a blueprint for battery supply chain build-up to help guide investments. Upstarts have been tyring to crack the right technologies for a while now, and manufacturers have been talking up big changes to automaking for clean vehicles. Ionically, the U.S.’ tactics are often associated with China’s technology dominance goals, and is also indicative of the lackluster progress on development of viable and scalable powerpack options domestically. China, on the other hand, continues to hurtle toward making batteries for most EVs in the world. It has cornered 60% of battery production. Despite a faltering COVID policy and supply chain delays, it has been filling the growing gap between demand and supply. Tesla was able to churn out cars, export them across the world and open its Europe Gigafactory because of a Chinese battery partnership and wide-scale manufacturing. Other carmakers have also turned to Chinese suppliers for supplies used in energy storage. VW also recently signed agreements with Zhejiang Huayou Cobalt and Tsingshan Holding Group to ensure supply of nickel and cobalt for 160 gWh of batteries. Meanwhile, CATL is scouting out sites across North America for a $5 billion plant. CATL, the world’s largest battery maker, has remained committed to innovation too – it has been working on a third-generation battery with cell-to-pack technology that is almost 13% more efficient than Tesla’s much-awaited 4680 battery in terms of space utilization; CATL is also developing key thermal control technology, an important safety feature to ensue fires do not spread in the latest types of powerpacks which are prone to combustion. If the U.S. cannot lead on a key area of innovation now, it is hard to say how the future for EVs will play out there. The woes of the EV ecosystem have also been compounded by a market imbalance and raw material prices. That means it will only be harder to gather supplies and make affordable batteries.
- Rivian produced 2,553 vehicles in the first quarter as the maker of plug-in pickup trucks contended with a snarled supply chain and pandemic challenges. The company also reaffirmed its guidance to build 25,000 EVs this year, including 10,000 vans due to Amazon by year-end. The figures include a combination of its R1T pickups and R1S SUVs, along with battery electric delivery vans for Amazon, a major shareholder. The company delivered 1,227 vehicles in the first three months of the year. The latest results bring the total output from Rivian’s Illinois plant to about 3,600 EVs since productions started in September 2021.
- U.S. regulators have opened an investigation into electric- and hybrid-vehicle batteries made by LG Energy Solution after five automakers issued recalls over fire risks. The probe covers an estimated 138,324 vehicles that the NHTSA said could catch fire when parked or in use. NHTSA opened the probe, known as an equipment query, on April 1st. The regulator said it launched its probe after receiving complaints about cars made by Stellantis, VW, GM, Hyundai and Mercedes Benz. The investigation underscores the technical challenges of automotive electrification as the industry spends billions to churn out new models to comply with global emissions regulations and keep up with Tesla. GM recovered $1.9 billion from LG Electronics last year to cover the costs of recalling batteries in Chevrolet Bolt EVs.
- GM and Honda will jointly develop affordable EVs in major global markets, dramatically expanding a partnership that already spans gas-powered models, batteries and self-driving technology. The automakers plan to create a new architecture based on GM’s Ultium EV battery that will be used primarily for small crossover SUVs, with the first models available in North American in 2027. The project is intended to produce EVs that will be priced below GM’s planned $30,000 Chevrolet Equinox and similar future offerings from Honda. The collaboration marks a major move toward democratizing EVs, most of which are expensive and out of reach of many consumers. By joining forces, GM and Honda believe they can reduce battery costs faster and develop EVs at prices that even market leader Tesla appears to have stopped pursuing. GM and Honda have been working together on hydrogen fuel cells since 2013 and more recently announced collaborations on EV batteries, gas-powered vehicles and self-driving technology.
Consumer / Retail
- JetBlue has offered to buy budget carrier Spirit Airlines for $3.6 billion, potentially spoiling a competing bid by rival Frontier Group Holdings and reshaping the landscape for ultra-low-cost air travel. Spirit said Tuesday it received an unsolicited proposal from JetBlue to buy outstanding shares for $33 apiece in cash. Spirit will work with financial and legal advisers to evaluate the offer. The surprise development comes about two months after Frontier reached an agreement to buy Spirit for $2.9 billion. Frontier criticized JetBlue’s competing offer, saying such a combination would raise fares and reduce flight options. It also questioned JetBlue’s effort in light of an unrelated federal lawsuit to block an alliance with American Airlines. Spirit’s allure stems in part from an industry-wide turn toward domestic markets and leisure travellers – the bread-and-butter of ultra-low-cost airlines – to recover from a pandemic slump. A Spirit acquisition would give JetBlue the growth that it has long sought, moving it closer to competing with larger carriers and assuring its spot as the fifth largest airline in the U.S. JetBlue said its offer is not subject to approval by its shareholders or to a financing contingency. The proposed deal would generate as much as $700 million in annual synergies.
- China reported more than 20,000 new daily COVID cases Tuesday, driven by surging infections in Shanghai where local officials are building the world’s largest makeshift isolation facility to help contain the city’s outbreak. The current outbreak in China has already surpassed the number of infections found in the early days of the pandemic, before testing was easily available, and encompasses a much broader swath of the nation. While President Xi is committed to getting the problem under control, his request to limit economic consequences is getting harder to do as the wildly transmissible omicron variant continues to spread despite intense efforts to stop it. The Asian nation is struggling with the economic and personal ramifications of the lockdowns, with food shortages, a lack of medical care and shuttered manufacturing plants bringing misery to residents. Shanghai will conduct another mandatory round of city-wide testing starting today. People living in housing compounds where infections have been reported since April 1st will undergo laboratory testing, while those complexes without any cases will do at-home antigen tests.
- Hong Kong’s no. 2 official, John Lee, will be the only candidate to seek the city’s top post as Chief Executive after Carrie Lam announced earlier this week that she will not be running for a second term. China’s Liaison Office told local elites in a series of meetings Wednesday that Lee had the central government’s blessing to become Chief Executive of Hong Kong. Lee was expected to resign Wednesday, a necessary step for any official seeking higher office. Lee’s solitary run in the May 8th vote, when 1,500 mostly Beijing loyalists pick the next leader of the Asian financial hub, would mark the first time in two decades that a candidate has run unopposed. The former career police officer emerged as a potential candidate in June when he was named Chief Secretary, a post that has launched two of the city’s four leaders into the top job. Prior to that, Lee served as outgoing Chief Executive Carrie Lam’s security minister, overseeing a clampdown on the pro-democracy opposition and implementing a Beijing-drafted national security law. Hong Kong’s next leader will take office July 1st, the halfway mark in Beijing’s 50-year pledge to preserve the city’s liberal financial and political systems. No Chief Executive has so far managed to complete two full terms, as they struggle to balance Beijing’s demands for control and citizens’ expectations for greater freedoms. Lee’s security background will bolster concerns that Beijing will further tighten its grip. The former police officer was a staunch supporter of the extradition to China bill that sparked the 2019 protests, and was sanctioned by the U.S. in 2020 for his role in curtailing political freedoms under the security law.
- Kaisa Group Holdings dollar bonds rallied in Asia trading Wednesday after the defaulted developer unveiled a strategic tie-up with a state-controlled builder and one of China’s major bad-debt managers, as the government works to contain the sector’s cash crunch. Some notes were on pace for their biggest gains in months as Kaisa announced the pact with China Merchants Shekou Industrial Zone Holdings and China Great Wall Asset Management to develop real estate, tourism and other businesses in the Greater Bay area. China’s state-controlled distressed-asset firms have been moving to support cash-strapped developers at the urging of policy makers in Beijing. Kaisa’s announcement and more funding access through onshore bond issuances could mean overall sentiment toward the sector is turning. Elsewhere, China Evergrande Group has agreed to pay the adviser fees of a bondholder group working with the debt-laden developer to restructure debt.
- China’s services sector took a massive knock in March from the nation’s worst COVID outbreak since the start of the pandemic, with the latest holiday spending figures showing there is more damage to come this month. The Caixin China Services Purchasing Managers Index fell to 42 in March from 50.2 in February, the lowest level since the depths of the 2020 lockdown after the initial outbreak in Wuhan. The reading was below the 50-mark that separates expansion from contraction and well below the 49.7 median estimate in a survey of economists. Spending over the just-ended Qingming festival break, a traditional Chinese holiday where people usually visit the tombs of their ancestors, point to weak data for April as well. Domestic tourism revenue dropped 31% over the three-day holiday period from a year ago, while delivery of packages and cinema box office sales also declined. Businesses are growing less optimistic, with the sub-index for planned future activity hitting a 19-month low in March as well. The gauge for new business dropped to the weakest level since March 2020 while the one for new export business fell to the lowest since October 2020. Lockdowns and other restrictions to curb the spread of COVID showed spending is still well below pre-pandemic levels. Tourism revenue over the three-day national holiday that ended Tuesday was only about 39% of the level reached during the same period in 2019. Separate data from the Ministry of Transport showed around 53.8 million trips were made by rail, road, waterways and air during the holiday, down 62.7% from a year ago and 9.8% from the same period in 2020. The number of packages delivered by the postal industry likely fell 12.8% year-on-year to 690 million during the holiday according to the State Post Bureau. Box office sales totalled 122 million yuan, about 1/7th of the 822 million yuan recorded in the same period in 2021.
- The EU’s foreign policy chief described a summit with Chinese President Xi as a “deaf dialog”, casting doubt on how much cooperation the Asian nation will offer to end the war in Ukraine. EU foreign policy chief Josep Borrell described that China did not want to talk about Ukraine and did not want to talk about human rights and other issues, and instead wanted to focus on the positive things. Borrell cited that the European side has made clear that this compartmentalization is not feasible and not acceptable, considering the war in Ukraine is a defining moment for whether the world today is governed by rules or by force. The comments stand in contrast to China’s take on the April 1st video summit between President Xi and European Commission President Ursula von der Leyen and European Council President Charles Michel. A Chinese summary said that the EU expressed its desire for candid exchanges with China to sustain the good momentum of EU-China relations. During the summit with EU leaders, President Xi said the current situation risks erasing the benefits of global economic cooperation and that Beijing and Brussels should commit to preventing spillover from the crisis. The EU has urged China to use its influence with Russia to reach an immediate cease-fire and to support humanitarian corridors. The pact has also added that any attempt to help Moscow evade sanctions could have serious consequences.
- China’s envoy to the UN expressed dismay at the killing of unarmed civilians in Bucha, while calling on all sides to refrain judgment until a probe establishes who is responsible. China’s representative Zhang Jun had stopped short of condemning Russian President Putin for the violence, saying that circumstances and specific causes of the incident should be verified and established and all sides should exercise restraint and avoid unfounded accusations. President Biden said President Putin could face a war crimes trial related to the civilian deaths in Bucha, on the outskirts of Kyiv, and other Ukrainian towns vacated by Russian soldiers. Russia has denied its forces killed civilians, saying the pictures of bodies strewn on the streets were a fabrication by Ukraine. The Chinese government has been under fire by the West on its ignorance and unwillingness to take a stance on the ongoing Russia-Ukraine conflict, as Chinese diplomats continue to play down civilian casualties and cast President Putin as a victim of the U.S.-backed expansion of NATO. Chinese state-backed media has referred to the recent mass killings of Ukrainian civilians as the “Bucha incident”, while also calling the U.S. the initiator of the Ukraine crisis and blaming it for exacerbating tensions by sanctioning Russia.
- The U.S., EU, and Group of Seven are coordinating on a fresh round of sanctions on Russia, including a U.S. ban on investment in the country and an EU ban on coal imports, following the discovery of civilian murders and other atrocities in Ukrainian towns abandoned by retreating Russian forces. The governments plan to increase penalties on Russian financial institutions and state-owned enterprises and will sanction unspecified Russian officials and their family members. The rube further weakened against the dollar on news of the new penalties. Earlier Tuesday, European Commission President Ursula von der Leyen said the EU is proposing a ban on most Russian ships and trucks from entering the bloc, as well as Russian coal imports. The EU will also push ahead with a debate on targeting Russian oil – a sensitive issue to Europe where many member countries are dependent on Russian energy imports. The EU is also considering sanctioning Russian President Putin’s daughters. The EU sanctions proposed Tuesday also include expanding export controls on technologies used in the Russian defense sector and other key industries, as well as restrictions on sales of equipment that can be used to liquefy natural gas. They also proposed sanctioning more entities, including banks such as VTB Bank, that have been already cut off from the SWIFT global payments messaging system but are not yet fully sanctioned. U.S. officials say Russia’s economy is forecast to contract by 15% or more in 2022 as a result on ensuing sanctions and that inflation in the country ahs already soared above 15%.
- The U.K., U.S. and Australia said they are working on developing hypersonic weapons – military technology already deployed by Russia in Ukraine – as part of their new trilateral security pact called AUKUS. Their plan is to accelerate development of advanced hypersonic and counter-hypersonic capabilities. The alliance wants to counter the threat of such weapons, which can evade traditional missile defense systems and travel five times faster than the speed of sound and develop its own as a deterrent. The alliance is also aiming at deepening defense cooperation on issues such as electronic warfare, where adversaries seek to use the electromagnetic spectrum to gain an advantage on the battlefield. The AUKUS alliance will also focus on working collectively in areas like cyber warfare and artificial intelligence. The AUKUS pact announced in September 2021 was designed to help Australia develop at least eight nuclear-powered submarines, a project that could take more than a decade, and also coordinate military capabilities to promote security in the Indo-Pacific region.
- The exiled former head of Yukos Oil, who was once Russia’s richest person, said the U.S. and its Western allies fail to understand that from President Putin’s perspective, they are already at war with Russia. With the U.S. and major powers ramping up sanctions on Moscow, supply weapons to Kyiv and training Ukraine’s military, President Putin views his nation as essentially being at war with America and Europe on Ukrainian soil. The ex-oligarch cited that President Putin has said from the very beginning that this war includes the U.S. and its Western allies. President Putin thinks NATO is weak and that they will not defend the Baltics if Russia attacked those nations, which are all former members of the Soviet Union. If that plays out, the ex-oligarch said President Putin believes NATO will collapse and that means that American global influence will plummet. U.S. and NATO officials have repeatedly said they would honour the alliance’s central charger calling an attack on one an attack on all. But since Ukraine is not a member of the alliance, other nations have declined to send their own forces to the country’s defense or take actions – such as enforcing a no-fly zone – that would be seen as an offensive action against Russia, effectively expanding the conflict. Russia, meanwhile, as argued that NATO’s eastward expansion has become an existential security threat, even though Ukraine was not being seriously considered for membership.
- Ukraine is launching a web page for selling the estimated 300 nonfungible tokens it has received in donations to help in the nation’s war efforts. The NFTs included a donated CryptoPunk that is expected to fetch about $200,000. Only between 5% and 10% of the donated NFTs are valuable. The web page, which could be started within the week, will also offer 10 NFT collections created by independent companies that have pledged all the proceeds to Ukraine. The sales will happen via OpenSea, the largest NFT marketplace. The nation sold about $770,000 of what it refers to as museum NFTs, which debuted last week and show scenes from the war. The museum NFT sale could conclude as early as this week when the digital art sale shit $1 million. Ukraine had 32 Bitcoins valued at around $1.5 million donated yesterday. It has raised more than $60 million digital coin donations to date. So far, the Ukrainian government has spent about $41 million on items such as bulletproof vests, helmets, and medical supplies. Within a few weeks, about 66,000 Ukrainians will get a digital wallet with $300 of crypto, thanks to a $20 million donation gathered by the Stellar Development Foundation. People with children and low-income residents will get priority, ad the wallets can be used in MoneyGram locations.
- Two senators, California Democrat Dianne Feinstein and Pennsylvania Republican Pat Toomey, wrote to President Biden in a letter dated Tuesday saying it would be in line with his efforts to punish Russia and help Ukraine counter the invasion by removing 25% tariffs on Ukrainian steel imposed by former President Donald Trump. Metal production is a cornerstone of Ukraine’s economy, citing the senators. The nation is the world’s 13th largest steel producer, and the metal and related sectors account for 12% of Ukraine’s GDP, with 80% of production typically exported.
- After shutting its stores in Russia in response to its invasion of Ukraine, Chanel is stopping customers outside the country from buying bags they intend to sue there. The luxury brand’s move is aimed at implementing EU sanctions that ban the export of luxury goods costing more than 300 euros to Russia. The bloc has also forbidden the sale of such goods to individuals planning to use them in Russia.
- This year’s unprecedented global bond rout accelerated Tuesday after Federal Reserve Governor Lael Brainard said the central bank will likely step up monetary policy tightening by swiftly reducing its massive U.S. debt holdings. The prospect of aggressive Fed actions drove the yield on benchmark 10-year Treasures up 6 bps to 2.6%, taking it back into the ranges traded in 2018 and 2019. The yield spiked 16 bps on Tuesday in its biggest jump since the COVID crash in March 2020. Bonds are dropping worldwide this week after completing a record eight-month losing streak. Investors are dumping fixed income securities as policy makers move to raise interest rates in the face of surging global inflation and tightening labour markets. Brainard said Tuesday that the central bank will continue tightening monetary policy methodically and will start to reduce the balance sheet at a rapid pace as soon as the committee’s May meeting. The comments on the Fed’s quantitative tightening added fuel to a rout that had already driven Treasuries this year to the worst losses in decades as traders brace for an aggressive series of rate hikes in the face of surging inflation. The whole Fed tightening narrative is being moved up in time and magnitude. Swaps markets anticipate that the Fed will start increasing rates by more than one quarter percentage point at a time, as it did at tis March meeting, with an approximately 86% chance of a half-point hike priced in for the May meeting. Overall, around 2.22 percentage points of additional hikes are priced in for in the next six meetings through December, up from 2.13 on Monday. Brainard also mentioned that shrinking the Fed’s balance sheet would occur at a much faster pace than in the previous recovery in 2017 to 2019. Selling pressure in the U.S. bond market was also spurred by a report on the service sector economy for March, which sowed a rebound in employment. The shift higher in Treasury yields helped boost the U.S. dollar with the reserve currency climbing to its strongest against the Japanese yen so far this month.
- The shudder seen in U.S. stocks and bonds Tuesday looks set to spread as investors wake up to the likely impact on markets of a quicker-than-expected rundown of the Federal Reserve’s $9 trillion in debt holdings. Fed Governor Lael Brainard sent shockwaves through markets when she said the central bank would start balance sheet reduction at a rapid pace as soon as next month. Interviews with investors before Brainard spoke showed many suspected risk assets had yet to account for such a sharp pullback from historically easy money, with equity and credit markets singled out for being unusually calm as quantitative tightening loomed. Tightening financial conditions by the Fed mean lower equity prices, wider credit spreads and higher interest rates. A faster-than-expected rundown of the Fed’s balance sheet is a second policy move to rising interest rates that has potential to destabilize global markets. Not only does it mean a key buyer of Treasuries has disappeared but shrinking the Fed’s balance sheet pulls liquidity from the financial system which can result in higher borrowing costs and spikes in volatility across asset classes. Given that the recovery has been considerably stronger and faster than in previous cycles, the balance sheet will likely shrink considerably more rapidly than in the previous recovery according to Brainard, adding that the ”caps” set to govern the pace of asset roll-off could be significantly larger and phased in much faster than last time around in 2017 to 2019. When the Fed last shrank its balance sheet in 2017, it began with monthly caps of $6 billion Treasuries and $4 billion mortgage-backed securities, rising over the course of a year to $30 billion and $20 billion, respectively. But despite the caps, the roll-off still helped fuel a disruptive spike in repo rates, a keystone of short-term funding markets. Some asset managers are now seeing trouble particularly for tech stocks with valuations heavily dependent on cash flow projections far into the future and suggested the recent weakness in bank stocks – which are supposed to benefit from rising rates – reflected fears of credit losses in a growth downturn. Minutes from the Fed’s March meeting due Wednesday will be closely scrutinized as they are expected to provide more insight into their balance sheet plans.
- Chinese tech stocks fell in Asia trading Wednesday, tracking overnight losses in U.S. peers as hawkish comments from the Federal Reserve dampened sentiment toward richly-valued growth shares. Alibaba and JD.com led declines. Tech shares led losses after Fed Governor Lael Brainard said the central bank will raise interest rates steadily while starting balance sheet reductions as soon as next month. Wednesday’s losses come as sentiment toward Chinese tech stocks seemed to be improving after regulators over the weekend sought to defuse U.S. delisting risks with a radical rule change proposal. Risks remain for the broader Chinese economy as COVID lockdowns prompt analysts to cut GDP and earnings forecasts, with the results season unable to ease worries. Economists have been rushing to cut China’s growth forecasts as lockdowns and various curbs cover vast swathes of the nation.
- The Federal Reserve is scheduled to unveil details of its likely plans to shrink its massive balance sheet with the release of minutes of the U.S. central bank’s March meeting on Wednesday at 2pm Washington time, as policy makers confront the highest inflation in four decades. Fed Chair Jerome Powell promised a more detailed discussion of the $8.9 trillion balance sheet laying out pretty much the parameters of what the central bank is looking for in his comments during a press conference following the March FOMC meeting. Officials at that meeting raised interest rates for the first time since 2018. The minutes will probably show a much faster pace of reduction that the last time it conducted this exercise between 2017 and 2019. This could include details on monthly caps that increase over time to govern the roll-off of the Fed’s holdings of maturing Treasuries and mortgage-backed securities, which officials bought aggressively to shield the economy as COVID spread. Governor Lael Brainard said Tuesday that the process could start as soon as May and go considerably faster than in 2017, when they rose over the course of a year to a maximum monthly roll-off of $50 billion combined. Officials only halted bond purchases last month as surging inflation accelerated plans to reduce the balance sheet, viewed as a passive way to tighten monetary policy that supplements increase sin interest rates. Economists say the caps on run-off could total roughly $100 billion monthly, allowing around $1 trillion in reductions per year. Downsizing assets will be the Fed’s latest manoeuvre to try to cool inflation pressures. Policy makers in March raised their key rate by 25 bps to a target range of 0.25% to 0.5% after two years of holding borrowing costs near zero to insulate the economy from the pandemic. In the Fed’s so-called dot plot of the quarterly interest rate forecasts, officials’ median projection was for the benchmark rate to end 2022 around 1.9% and then rise to 2.8% in 2023.
- The U.S. VC industry raised $73.8 billion last quarter. The data show that venture capitalists still have plenty of cash to keep bankrolling start-ups. The vote of confidence comes despite a shrinking market for IPOs, rising inflation and a war. Those challenges could be the reason why venture capitalists also seem to be parting with the cash more slowly than in 2021. In the first quarter of 2022, they spent $70.7 billion, funding 3,723 start-up deals. That is a higher tally than in almost any other quarter over the past two decades, but not compared with last year, which as an unusually rich one. VCs spent $77 billion on 4,282 deals in the first quarter of 2021. And in the last three months of last year, they spent $95.4 billion on 4,098 deals. Meanwhile, exit activity, meaning IPOs or a start-up’s sale to another business, fell this year alongside market conditions. The first quarter saw $33.6 billion across 310 exit deals, down from $124.6 billion across 393 deals a year earlier. With the economy wobbling as 2021 drew to a close, some venture firms may have pulled forward fundraisings they had originally planned for later in 2022.
- Stocks and bonds declined in Asia trading Wednesday on the prospect of a swift reduction in the Federal Reserve’s debt holdings as part of a stepped up campaign of monetary tightening to tackle high inflation; U.S. futures wavered, following a drop in Wall Street shares led by the technology sector
- Treasuries extended a slump, pushing the 10-year yield to 2.60%, the highest level since 2019 after Fed Governor Lael Brainard said Tuesday that curbing inflation is “paramount”, adding the central bank may start trimming its balance sheet rapidly as soon as May; this has caused investors fear that a more restrictive U.S. central bank could end up tipping the world’s largest economy into a downturn or even a recession
- The key risk for Wall Street-correlated world stock markets remains the Federal Reserve tightening cycle; markets signal a half point Fed rate increase coming May, while price pressures show little sign of abating as war stokes already elevated raw material costs, spelling high volatility levels as the market heads into earnings season
- Oil was steady at about $102 a barrel; worries remain that Russia’s growing isolation over the war in Ukraine may further disrupt commodity flows, especially after the U.S. and EU’s announcement of a fresh round of sanctions on Russia, including a U.S. ban on investment in the country and an EU proscription on coal imports
- S&P 500 futures were little changed, while the S&P 500 fell 1.3% to 4,525.12
- Nasdaq 100 futures decreased 0.1%, while the Nasdaq 100 fell 2.2% to 14,820.64
- 10-year Treasury yield advanced 6 bps to 2.61%
- WTI crude rose 0.3% to $102.28 a barrel
- Gold was at $1,919.48 an ounce, down 0.2%
- Micro – Equities retreated Tuesday following Fed Governor Lael Brainard’s comments supporting more aggressive monetary policy tightening efforts on Tuesday. Brainard reaffirmed that quelling inflation remains the Fed’s paramount priority at the moment. In addition to a series of aggressive rate hikes, the Federal Reserve will likely start to reduce the balance sheet at a rapid pace beginning May following the committee’s upcoming meeting. Shrinking the Fed’s massive balance sheet will also occur at a much faster pace than the last time around between 2017 and 2019. Tightening financial conditions represented by a combination of a faster-than-expected rundown of the Fed’s $9 trillion balance sheet and an aggressive series of rate hikes could be a recipe for lower equity prices and wider credit spreads ahead. Some asset managers are now seeing trouble particularly for tech stocks with valuations heavily dependent on cash flow projections far into the future and suggested the recent weakness in bank stocks – which are supposed to benefit from rising rates – reflected fears of credit losses in a growth downturn. Minutes from the Fed’s March meeting due Wednesday will be closely scrutinized as they are expected to provide more insight into their balance sheet plans.
- Macro – The global bond selloff deepened Tuesday after Federal Reserve Governor Lael Brainard said the central bank will likely amp up monetary policy tightening measures by swiftly reducing its massive U.S. debt holdings as mentioned above. The increasingly hawkish prospects drove the yield on benchmark 10-year Treasuries up 6 bps to 2.60%, taking it back into the ranges traded in 2018 and 2019. Investors are dumping fixed income securities as policy makers move to raise interest rates in the face of surging global inflation and tightening labour markets. The combination of a faster-than-expected rundown of the Fed’s balance sheet and aggressively rising interest rates has potential to destabilize global markets. Not only does it mean a key buyer of Treasuries has disappeared, but shrinking the Fed’s balance sheet pulls liquidity from the financial system which can result in higher borrowing costs and spikes in volatility across asset classes. Economists say the rundown caps could total roughly $100 billion monthly, allowing around $1 trillion in reductions per year. This compares to monthly caps ranging from $6 billion for Treasuries and $4 billion on mortgage-backed securities to $30 billion and $20 billion, respectively, during the last course of balance sheet rundowns in 2017. Downsizing assets will be the Fed’s latest manoeuvre to try to cool inflation pressures. Policy makers in March raised their key rate by 25 bps to a target range of 0.25% to 0.5% after two years of holding borrowing costs near zero to insulate the economy from the pandemic. In the Fed’s so-called dot plot of the quarterly interest rate forecasts, officials’ median projection was for the benchmark rate to end 2022 around 1.9% and then rise to 2.8% in 2023. Elsewhere, oil rebounded above $102 a barrel after renewed sanctions by the U.S. and the EU on allegations of Russia’s latest atrocities in Ukraine, which include the execution of unarmed civilians in Bucha and other Ukrainian towns. Oil surged by a third in the first quarter as the Russian invasion and backlash from the EU and the U.S. roiled markets. While the U.K. and Washington have moved to bar Russian crude, it is harder for the EU to follow suit given the region’s far higher level of dependence. Washington and its allies in the IEA have also tapped strategic petroleum reserves to try to calm prices. Oil markets remain in backwardation, although differential shave narrowed in recent days amid the sanctions moves and announcements for major reserve releases. Brent’s prompt spread was $1.48 a barrel, down from more than $4 a month ago. Investors are also tracking a COVID outbreak in top oil importer China that is hurting energy demand as cities including Shanghai have been placed under lockdown. The country reported more than 20,000 new daily cases Tuesday. Figures from the American Petroleum Institute on Tuesday also showed a 1.1 million barrel increase nationwide, as well as a rise at the key hub in Cushing, Oklahoma.