Newsletter - February 15, 2022
Oil / Commodities
- European natural gas prices dropped after Russia this week signalled a de-escalation of tensions, easing some concerns over energy supplies to the continent. Europe’s energy crunch has eased in recent weeks with an influx of LNG into Europe and milder temperatures. Russian gas entering Slovakia through a key route crossing Ukraine are also gradually recovering after bottoming out over the weekend. However, flows through the Yamal-Europe line has been halted for over eight weeks. Ukrainian President Volodymyr Zelenskiy briefly spooked markets on Monday with predictions of a Russian invasion which was later explained as an iron. The market continues to respond to every change of tone in the talks between Russia and the West over Ukraine. An escalation in tensions raises fears of a potential disruption of Russian energy supplies.
- Engie has raised its dividend pay-out by 60% after a surge in energy prices drove net income higher last year. The French utility also predicted that earnings will continue to rise through 2024 as gas and electricity crunches throughout Europe show little signs of easing. The company is growing its renewable and energy-infrastructure segments as demand for these businesses rise with energy transition. Energy producers have benefited in Europe after limited supply, depleted stockpiles and demand rebounding from a pandemic boosted prices of gas and power to record highs last year. Markets also remain on edge with tensions between the West and Russia over Ukraine running high, while issues at some of Electricite de France’s nuclear plants are driving regional power higher. Engie plans to pay 85 euro cents per share of dividend for last year, up from 53 euro cents in the previous year. for 2022, Engie predicts recurring net income in the range of 3.1 billion to 3.3 billion euros. The company sees that at 3.3 billion euros to 3.5 billion euros in 2024. The predictions for the period are based on average prices of forward commodity prices of the second half of 2021.
- The EU’s top diplomat said Monday a revived nuclear deal between Iran and world powers was in sight and urged negotiators to compromise. Iran had signalled earlier Monday it would dig in on key demands that have emerged as stumbling blocks in the talks despite saying it was in a hurry to revive the 2015 accord which would likely ease sections in return for hemming in its atomic program. While geopolitical risks in Europe will continue to dominate this week, progress in the Iran talks is also being closely watched by the market. A revived deal could potentially ease oil prices that topped $95 a barrel on Monday.
o https://www.bloomberg.com/news/articles/2022-02-15/eu-urges-compromise-as-nuclear-deal-is-in-sight-iran-snapshot?srnd=premium-asia
Tech
- Sea Ltd. Lost more than $16 billion of value in its biggest daily market drop after India abruptly banned its most popular mobile gaming title. Investors are growing concerned the ban may just be the start of the company’s troubles. New Delhi’s decision to ban Free Fire – a lucrative title for Sea – highlighted the company’s challenges from geopolitical tensions as well as mounting competition from rivals like Alibaba’s Lazada. India has banned hundreds of Chinese apps over the past two years, but the expansion of that policy to Sea took management and investors by surprise. Sea’s largest shareholder remains Tencent, but was founded by Singaporean citizen Forrest Li. Investors worry that India could potentially ban Shopee too, the second pillar of Sea’s business where it had about 300 employees and 20,000 local sellers as of December. Sea’s shares have lost almost two-thirds of their value since October. JMP analysts have also slashed price targets by about 40% to $250, citing heightened nervousness around Sea’s gaming franchise. Meanwhile, ARKK bought more than 145,000 shares on Monday. The most immediate question is whether Sea can appeal India’s decision and reverse it – or, if it fails, whether that ban will extend to its other businesses in the world’s fastest-growing internet economy.
- BlockFi announced on Monday that it had seek SEC approval for accounts that pay clients high yields for lending out their crypto as part of a record $100 million settlement with federal and state securities watchdogs. The plan would give the company the first SEC sanctioned product of its kind, immediately adding pressure on competitors to follow suit. Companies offering digital asset lending have attracted tens of billions of dollars in deposits by promising yields that far exceed those available through traditional savings accounts. The SEC has frequently warned crypto platforms that they likely need to be registered with the agency or face the prospect of sanctions by regulators. BlockFi’s potential settlement with the SEC could be a huge step forward toward that goal. As part of the agreement announced by the SEC, current BlockFi customers can continue to earn interest on their existing investments but the company must not sell the products to new American clients. The company has 60 days to seek to comply with SEC regulations and it is also seeking to register a new crypto-lending product that will satisfy the agency’s rules. BlockFi intends for BlockFi Yield to be a new, SEC-registered crypto interest-bearing security which will allow clients to ear interest on their crypto assets. BlockFi agreed to pay a $50 million fine to the SEC and another $50 million to various states.
- Uber is close to paying a final price for its troubled recruitment of a star driverless car engineer away from Google’s Waymo. Uber has entered into a global settlement requiring it to pay a substantial portion of the $120 million Google clawed back from the engineer, Anthony Levandowski, in which Uber had hired in 2016. The fight over Levandowski involves the exposure of high-stakes trade secrets between Uber and Waymo, followed by a successful criminal prosecution of the engineer. In 2020, Levandowski was ordered to spend 18 months in prison after he pleaded guilty to a single count of trade secret theft from Google as he defected to Uber. Uber also agreed to pay Waymo about $245 million in closely held stock. Last year, just minutes before Levandowski was due to appear before ethe judge who had sentenced him, his lawyers filed with the court a pardon from Donald Trump, which was also supported by Peter Thiel. While Levandowski had been spared incarceration, Google has separately won a judgment reclaiming a $120 million bonus it had paid Levandowski. The global settlement with Uber now also requires Levandowski to pay Google $25 million.
- Peloton’s operating chief Mariana Garavaglia left Peloton and took a new role Monday at the 3D printing company Relativity Space following a senior management shakeup at the fitness technology company. Brad Olson, chief business officer, and Jon Adee who oversaw Peloton’s supply chain, have also stepped down. New CEO Barry McCarty has said that he is focused on turning around the business and not looking to sell it.
- Intel is close to a deal to acquire Tower Semiconductor for about $5 billion as part of its push into the outsourced chip-manufacturing business. The U.S. chipmaker plans to announce the purchase of the Israeli company as early as Tuesday morning. The move furthers CEO Pat Gelsinger’s goal of getting into the chip-foundry business – contract manufacturing of semiconductors for other companies. Tower competes in a market dominated by TSMC, but is much smaller. Its sales are about $1.3 billion annually. Tower makes power management chips, image sensors and a variety of other semiconductors. Its customers include Analog Devices and Broadcom.
- Texas is suing Meta Platforms over claims its Facebook and Instagram platforms are still monetizing people’s faces without their consent, although the social media firm has already dropped its controversial facial-recognition technology last year alongside a $650 million settlement fine on grounds of U.S. consumer privacy. Texas has also cited that Meta Platforms is holding onto a facial-geometry database compiled over a decade in its complaint. The state is seeking billions out of the complaint filed Monday. If Texas’ claims hold up, Meta Platforms could be looking at stiff fines.
- Apple has been fined an extra 5 million euros by Dutch antitrust regulators over an order to open up app payments for dating services. Apple’s new terms for payments for dating apps are unreasonable and create an additional barrier according to the Authority for Consumers & Markets. This is the fourth penalty payment Apple has received from Dutch regulators following a December order for it to open up payment options for dating app providers in the Netherlands. The latest penalty brings the running total for fines to 20 million euros out of a potential maximum of 50 million euros. Bowing to the regulator’s pressure, Apple on January 15th announced its first ever move to allow outside payments within App Store apps in the Netherlands in exchange for a 27% fee, a three-percentage point discount from the standard fee structure.
o https://www.bloomberg.com/news/articles/2022-02-04/apple-takes-27-cut-of-dutch-dating-apps-using-outside-payments
Electric Vehicles
- Tesla’s expectation for the amount of revenue it will recognize from automated driving software appears to have slipped. The carmaker said in a filing last week that it anticipates recognizing $962 million of deferred revenue related to FSD this year. The amount was down from a projection made three months ago for $1.39 billion and inconsistent with comments from Elon Musk during the January 26th earnings call. Margins are expected to jump when FSD revenue is unlocked, but Tesla may be losing faith in its forecast. While Musk is bullish on prospects for FSD in 2022, it might not be time to get too excited yet. Musk said on last month’s earnings call that Tesla thinks FSD will become its most important source of profit over time and repeated a prediction that the wide release of the capability will lead to one of the biggest asset-value increases in history. He also predicts achieving FSD this year, at a safety level significantly greater than a person. CFO Zachary Kirkhorn has said Tesla immediately recognizes roughly half the revenue collected from customers who buy FSD, with the rest going to the company’s deferred revenue balance. As more features are released, Tesla makes determinations about their associated value and has released certain amounts from deferred revenue accordingly. Despite recent signs of delays to FSD roll-out, the software continues to be worth the wait if it guarantees 90%+ margin revenues.
- Glencore has committed to a 40 million pound cornerstone investment in Britishvolt to develop Britain’s first large-scale EV battery plant. The battery plant developer has started a 200 million pound series C fund raising led by Bank of America. Metals giant Glencore participated in previous funding rounds but its total stake was not disclosed. Last month, the companies announced a JV to build a 10,000-tons-per-eyar capacity battery recycling plant. Glencore agreed to supply the company with primary cobalt last year.
- Toyota’s North America operations continue to be disrupted after protests closed off the Ambassador Bridge linking the U.S. and Canada, hurting production at several of the automaker’s plants in the region. Toyota plants in Ontario, which have been idled since last week, are likely to continue to be affected this week. Output will also remain curtailed at factories in Alabama and West Virginia due to factors including weather and supply issues. The North American disruptions come on top of chip shortages and interruptions to Toyota’s operations due to the spread of the highly contagious omicron variant in both Japan and China. Toyota, which has been tyring to ramp up production to meet soaring demand, ahs been relatively resilient to the supply chain snags that have shaken the industry the past two years. sturdy supply and inventory management systems helped it finish both 2020 and 2021 as the world’s top-selling automaker. But the carmaker has now grappled with a fresh wave of disruptions. Last week, it cut its output goal for the fiscal year ended March 31st to 8.5 million vehicles from a previous target of 9 million vehicles due to disruptions from COVID and chi shortages. The automaker announced Monday it is seeking to produce 950,000 vehicles in March, up from 843,393 unit sit assembled in the same month last year, but about 100,000 lower than a previous target. Separately, a line at a Honda Canada factory that also halted productions previously due to the bridge protests has resumed operations on Monday, while another line is being partially halted due to chip shortages.
- EV start-up Canoo has lost several key executives in recent weeks, deepening a talent drain as it faces an investigation by securities regulators. The losses complicate Canoo’s efforts to start manufacturing commercially focused electric vans later this year. The company has been under investigation by the U.S. SEC over its 2020 merger with a SPAC. The company also faced pushback following a strategic shift last year away from contract engineering services.
- China remains the world’s largest EV market, accounting for just over half of global sales in 2021. Worldwide, sales are forecast to top 10 million this year, and EV leader Tesla remains the world’s most valuable automaker. Now, China is using the Winter Olympic games to promote its hydrogen power cars, which has not really caught on the way battery-powered vehicles have been though they too offer the advantage of producing no tailpipe emissions. Just under 9,000 hydrogen vehicles were sold in China between 2015 and 2021, a tiny fraction of the 302 million vehicles on the road. But now, more than 1,000 hydrogen vehicles are traversing the streets of Beijing and Zhangjiakou, the mountainous region about 220 km northeast of the capital where ski jumping and snowboarding events are being held. The vehicles include more than 800 buses from automakers including Beiqi Foton, Geely and Yutong. Toyota’s hydrogen-powered Mirai cars and Coaster vans are also running through the Olympic venues. Compared to EVs, whose batteries can drain faster in the cold, hydrogen-powered vehicles are better suited for wintry climates. Refilling a hydrogen car takes only minutes, much faster than charging an EV. While a lack of hydrogen filling stations has been a factor hindering the acceptance of fuel-cell-powered vehicles in countries like neighbouring South Korea, more than 30 such facilities were set up in the two cities to help meet the goal of making these Winter Games achieve net-zero carbon emissions. By the end of last year, 16 provincial governments, including Tianjin, Shandong and Zhejiang, had put in place strategies to develop hydrogen vehicles. in December, city clusters in Hebei and Henan won central government approval to trail the operation of hydrogen vehicles, joining Guangdong, Shanghai and Beijing – areas that have robust auto industries. Hydrogen vehicles in China are predicted to reach 30 million units by 2050. If that turns out right, it seems the playbook for developing the EV industry will be copied in coming years, with the first steps being taken now.
Consumer / Retail
China Market
- China’s once-hot convertible bond market is cooling sharply as a double whammy of falling equities and bond prices caused the CSI Convertible Bond Index to slump as much as 5.2% this week, the most in two years. This contrasts the 18% jump in the CSI Convertible Bond Index last year even when the stock benchmark dropped, as investors looked for shelters amid a slowing economy and regulatory headwinds. The latest decline in the notes was also triggered by a jump in China’s credit data in January, which led some investors to worry the central bank may feel less of an urgency to ramp up easing. This has caused government bond prices to fall in the past few days.
- Didi plans to reduce its overall headcount by as much as 20% prior to transferring its stock market listing in the U.S. to Hong Kong. Most of the company’s core businesses will be affected by the cuts, which are aimed at reducing expenses ahead of the Hong Kong listing. Ride-hailing may see staff reductions of up to 15%, though drivers will not be affected. The company has already pared investments in once red-hot businesses like community grocery buying. Some units like Didi Finance, which is expanding outside China, and is autonomous driving business will be less impacted. The latest strategy could lift profitability before its planned IPO in Hong Kong. Margins in its domestic ride-hailing business were hit in 2021 by regulatory and competitive pressure on pricing and costs, so a narrowed cost base could right-size the business for the slower growth that is now expected. Investors now await the final penalties stemming from the cybersecurity probe, as well as more details on the transfer of its shares to Hong Kong. The market has priced in a possible penalty of 10 billion yuan. But Beijing is not letting up on efforts to curb its tech sector yet, with eight government departments including the ministries of transport and public security this week pledging to tighten regulations governing the car-hailing industry. Rules for drivers and vehicles taking to the streets for the first time will be tightened.
- The U.S. is continuing conversations with China despite Beijing’s failures to abide by a trade agreement reached during the Trump administration, but that process could soon come to an end. Biden administration officials are trying to assess Beijing’s willingness to make any further concessions but consider that unlikely. Trade data released by the Commerce Department last week underscored that China had failed to live up to its commitments under the deal and American officials pledged to hold the country accountable, though without citing a specific timeline for countermeasures. The Biden team also stressed that the trade deal does not address longstanding U.S. concerns with China’s state-led economic system – an issue U.S. Trade Representative Katherine Tai said she wants to focus on in her negotiations with Beijing.
o https://www.bloomberg.com/news/articles/2022-02-15/biden-team-sees-limited-ability-to-press-china-in-trade-talks
Market Update
- Traders continue to assess geopolitical risks and worries about Federal Reserve policy tightening with the S&P 500 and Nasdaq 100 contracts swinging between gains and losses
- Treasury yields have edged down amid a flatter curve signalling concerns that looming Fed interest rate hikes could choke economic growth; the ebb and flow of haven demand due to the Russia-Ukraine standoff has also whipsawed bonds lately, while also keeping oil markets on edge with WTI crude at around $95 a barrel
- The Fed continues to react to inflationary prints even though many of the pressures on inflation are factors that the Fed cannot really solve, which increases the risks and reduces the clarity; meanwhile, Fed Bank of St. Louis President James Bullard said the monetary authority needs to move forward its plans to raise rates to underline its inflation-fighting credibility
- S&P 500 futures were flat while the S&P 500 fell 0.4% to 4,401.67
- Nasdaq 100 futures rose 0.1% while the Nasdaq 100 rose 0.1% to 14,268.60
- 10-year Treasury yield fell 1 basis point to about 1.98%
- WTI crude fell 0.5% to $94.99 a barrel
- Gold was at $1,878.72 an ounce, up 0.4%
- Confusion reigned Monday afternoon when media accounts of Ukrainian leader Volodymyr Zelenskiy derided assumptions about Russia’s military intent, igniting a brief bout of ill-advised selling. Zelenskiy’s advisor later said that the remarks should be interpreted as irony and the country remained skeptical of concrete dates being cited for a potential invasion. Officials in Kyiv have said repeatedly they view the risk of a large-scale attack by Russia as unlikely. Investors have been struggling to price in a host of evolving catalysts, from the omicron variant to inflation and its impact on Federal Reserve policy and now European geopolitics. In the U.S., stocks staged several of the biggest intraday reversals in two decades last month.
- Stocks have yet to feel the full impact of risks from elevated inflation, Federal Reserve policy tightening and geopolitical tension. Some strategists are bracing for another leg down in equities in coming weeks and months and have indicated playing defense is a priority. Investors have increasingly sought shelter in shorter term, cash-like assets amid trepidation about looming Fed interest rate hikes.
- As Ukraine tensions and U.S. rate hike bets whipsaw global markets, investors are going back to the drawing board to search for the next big trade. Some are betting long-dated Treasuries are the clearest bet as they offer a refuge from Russian risks and possible monetary policy missteps. Citigroup has switched to an overweight position in five-year U.S. sovereign bonds, while hedge fund K2 Asset Management sees opportunities in sold-off European stocks. Portfolio managers are trying to get a handle on the recent swings that have left virtually no corner of the market untouched. Benchmark Treasury yields soared as much as 11 bps last Thursday on U.S. inflation data before plunging by about a similar magnitude the next day on Russia-Ukraine risks, while major equity indexes declined. Even though risk aversion has turbocharged interest in Treasuries, that has not stopped U.S. bonds from posting their worst start to a year in more than four decades as expectations of rising borrowing costs build. The backdrop is one of high uncertainties at the moment with the Fed starting to tighten and geopolitical risks building up.
o https://www.bloomberg.com/news/articles/2022-02-15/traders-torn-by-rate-hike-bets-and-ukraine-fears-seek-way-out?srnd=premium-asia
Summary
- Micro Observation – U.S. equities have remained volatile on Monday’s session as investors continue to grapple with rising geopolitical risks between Russia and Ukraine, and uncertainties over the timing and magnitude of the upcoming central bank rate hikes amidst rising inflation. We continue to await key earnings this week that could jumpstart the market. They include Nvidia on February 16th. Mega caps like Nvidia could potentially extend a boost like its peers had in the last two weeks. Investors continue to focus on higher quality rather than speculative investments. Companies with more stability and predictability in earnings like Nvidia are now preferred. This earnings season has continued to show a trend of high rewards for some of the most expensive companies for solid earnings, while severely punishing those who miss.
- Macro
o On the inflation and Federal monetary policy tightening front, St. Louis Fed Bank president James Bullard continues to advocate his support for a 50-bps rate hike coming March, with interest rates to reach 1% by July to front-load monetary policies and ensure credibility of the central bank’s ability in taming inflation. Meanwhile, rising geopolitical tensions have also added pressure to macroeconomic factors like oil prices, leading to increased fears on where inflation might be headed. Oil prices have retreated towards about $95 a barrel following the EU’s reports of positive negotiation on the nuclear deal with Iran which could ease supply constraints. Yet, the potential for a Russian invasion of Ukraine remains uncertain.
o March FOMC meeting minutes will be released Wednesday, in which we expect to cause further volatility in markets this week. Recall the January release of December policy meeting minutes had roiled equities after indicating an increasingly hawkish stance from the Fed. We expect no different this time, especially as inflation remains elevated. The likelihood of frontloaded rate hikes of 50 bps beginning March will potentially increase, with expectations for elevated inflation figures to remain until at least April. We expect things to moderate towards the latter half of the year when supply chain bottlenecks are expected to ease and early-stage rate hikes start to place an effect on taming inflation levels.