Newsletter - February 9, 2022
Oil / Commodities
- Auxin Solar is asking the U.S. Commerce Department to investigate possible efforts to circumvent tariffs with the imports of equipment from Malaysia, Thailand, Vietnam and Cambodia. The company alleges that solar imports use parts or components from China, and producers are assembling equipment in the SEA nations as a way of skirting duties. Tariffs on Chinese solar products were first imposed in 2012 while President Joe Biden’s administration last year banned solar equipment using raw materials originally from China-based Hoshine Silicon Industry in an effort to confront alleged human rights abuses in the Xinjiang region. U.S. renewable power advocates have warned that expanded trade barriers threaten to slow the energy transition and solar installations inside the country. Chinese firms currently dominate the manufacturing of photovoltaic panels, which is a multi-step process often done in separate factories that can be located in different provinces or even countries. Several suppliers have opened plants in other nations in recent years for the last stage of assembling the solar modules.
- Oil edged higher after a two-day decline as an industry report pointed to shrinking U.S. crude and gasoline stockpiles. Futures in NY traded near $90 a barrel after falling 3.2% over the past two sessions. The American Petroleum Institute reported another drop at the key storage hub at Cushing, while signalling that nationwide inventories shrunk by 2 million barrels. Official figures from the EIA are due late Wednesday. U.S. gasoline stockpiles fell by about 1.14 million barrels last week.
- Iron ore futures slumped from a five-month high after Chinese regulators warned information providers against false price disclosure. The warning is the latest sign of Beijing stepping up efforts to oversee prices of the steel-making ingredient. They also vowed to keep the market stable with more effective measures.
o https://www.bloomberg.com/news/articles/2022-02-09/iron-ore-sinks-after-china-warns-over-false-price-information?srnd=premium-asia
Tech
- FTX Trading and Crypto.com are due to run ads during the upcoming Super Bowl matchup between the LA Rams and the Cincinnati Bengals on Sunday. A Super Bowl ad can catapult a brand into the mainstream consciousness, which could help the exchanges boost crypto adoption coming off a painful downturn that has made even some of the biggest advocates skittish about a potential bear market. A jump in new users after the game would help keep the platforms growing. A 30 second ad slot this year costs as much as $7 million, an all-time high. Crypto ads in general have also soared to an all-time high this year. Crypto.com has deployed about $65 million on its advertising campaign with Matt Damon, while FTX has invested $21 million on multiple campaigns, including a handful with Tom Brady. SoFi technologies, the namesake of Sunday’s stadium, has also spent roughly $18 million on ads.
- Microsoft is in talks to acquire cybersecurity research and incident response company Mandiant, a deal that would bolster efforts to protect customers from hacks and breaches. Adding Mandiant would build up Microsoft’s arsenal of products for protecting clients and responding to cybersecurity threats. The software giant has already bought two smaller cybersecurity companies last year, and said last month that it had amassed $15 billion in security software sales in 2021, up almost 45% from a year earlier. In the future, the cloud with most security features would win. A deal would enable Microsoft to better compete with companies focused solely on security and might also push cloud rivals AWS and Google Cloud to pursue their own similar acquisitions.
- Amazon says its medical consultation service is expanding around the U.S., underscoring the company’s determination to become a major player in the health care industry. Amazon Care offers virtual health services nationwide and this year will expand in-person care to 20 more cities, including NY, SF, Miami and Chicago. Amazon Care provides consultations through an app available 24/7. It also offers access to a range of urgent and primary care services. Current Amazon Care customers include employment agency TrueBlue and Whole Foods.
- Apple confirmed plans to release its much-anticipated Tap to Pay feature on the iPhone later this year, giving merchants an alternative to Block’s Square technology. The option will let sellers accept payments through Apple Pay, credit cards and digital wallets without additional hardware. The system relies on near field communication, NFC, to securely connect. Tap to Pay on iPhone will provide businesses with a secure, private and easy way to accept contactless payments and unlock new checkout experiences. The company has been working on the new feature since 2020, when it paid about $100 million for a Canadian start-up called Mobeewave that developed technology for smartphones to accept payments with the tap of a credit card. Analysts currently do not expect the inclusion of Apple’s Tay to Pay will have a material impact on current competitive dynamics against industry peers like Block.
- Twitter told a U.S. senator it is cutting ties with a European technology company, Mitto, that helped it send sensitive passcodes to its users via text message. The co-founder of Mitto operated a service that helped governments secretly monitor and track mobile phones. Twitter cited such media reports as the motivating factor behind its decision to sever ties with the company.
- SoftBank said it plans an IPO for Arm after Nvidia abandoned a proposed acquisition of the chip designer in the face of fierce opposition from regulators and customers. The company said it is aiming for an IPO in the U.S. in the fiscal year ending March 2023. In addition, Arm President Rene Haas is taking over the CEO role from Simon Segars who resigned. Nvidia announced the proposed acquisition of Arm in September 2020, aiming to take control of chip technology used in everything from phones to factory equipment. But the $40 billion transaction faced opposition from the start. Arm’s own customers scorned the idea, while regulators vowed to give it close scrutiny. The purchase was dealt its most severe blow when the U.S. FTC sued to block it in December, arguing that Nvidia would gain too much control over chip designs used by the world’s biggest tech companies. The agreement also needed approval in the EU and China, as well as the U.K., where Arm is based, and none of which appeared poised to clear the transaction. Arm’s value has always been its neutrality. When Nvidia announced the deal, concerns grew that either its value would be destroyed, or opposition would scuttle its chances of getting signoff from governments around the world. The two sides have since terminated the deal because of significant challenges preventing the consummation of the transaction, despite good faith efforts by the parties. SoftBank will keep a $1.25 billion breakup fee as a result.
- Use of Arm’s technology has gone beyond smartphones to automobile and cloud computing. Arm is about to embark on its golden age where it will have its second growth spurt. While an IPO now is SoftBank’s fallback, the company had considered a similar debut before Nvidia proposed its acquisition. SoftBank now aims for the biggest semiconductor IPO in history. The Nvidia deal was valued at about $40 billion when announced in 2020, but that valuation for Arm has surged by tens of billions of dollars with the bidder’s stock price. SoftBank is likely to struggle in landing a similar valuation in an IPO for Arm. SoftBank paid $31 billion to take Arm private in 2016.
- Arm designs key parts of the chips that power almost every smartphone on the planet. But when SoftBank announced a deal to sell Arm to Nvidia, it sparked an outcry from Arm’s customers. In February, after spending more than a yar trying to win over antitrust regulators, Nvidia abandoned the $40 billion deal. Nvidia’s rivals said a sale to the world’s largest chipmaker by market value threatened a cornerstone of Arm’s success: its neutrality. Arm’s technology has been used across the $400 billion semiconductor industry on the understanding that nobody would get privileged access. Apple, Samsung and others had an incentive to use it as the basis for their innovation because of Arm’s ecosystem of compatible software and the legions of engineers who know and use it. Nvidia pledged to uphold Arm’s independence but regulators still said no. SoftBank is now planning an IPO for Arm. Arm does not own factories or produce its own chips. Instead, the company designs core semiconductor components and licenses the blueprints to other firms to produce them in exchange for a fee based on how many are made. The arrangement brings in around $700 million in revenue every quarter, making it one of the U.K.’s largest tech businesses. That is still only a fraction of revenue that Nvidia and Intel makes, and Arm has a relatively small workforce of only 6,000 employees. Yet, few companies reach so far across the tech ecosystem – Arm estimates that 70% of the world’s population uses its products on a daily basis, and more than 200 billion chips have been made using its technology. Arm products are used in everything form the tiniest sensors to the most powerful data centers. Amazon, Samsung, and Apple are important customers. Arm’s instruction set – the basic code used by software to communicate with semiconductors – is in billions of devices. Arm’s designs prioritize performance and energy efficiency to ensure devices that rely on batteries can operate on chips that can get by with relatively little power. When smartphones came along and started to demand more processing horsepower, the technology evolved into more computer-like chips. There are about 1.4 billion of these pocket computers (i.e. SoCs) sold every year, with more than 90% using Arm. Many companies like Apple and Amazon which supply their own chips also rely on Arm. The consummation of Nvidia and Arm would have increased Nvidia’s reach into a presence in data centers and AI processing, and allow the company to push faster into new areas such as automotive chips.
o https://www.bloomberg.com/news/articles/2021-12-15/why-softbank-s-40-billion-arm-sale-has-hit-a-wall-quicktake?srnd=premium-asia
Electric Vehicles
- Lithium’s vital role in EVs mean automakers, miners and investors are racing to figure out how much supply the world will need in coming years and how much it is going to get. The metal’s price has surged fivefold in the past year, reflecting mounting worries about availability. EV batteries are now at risk of becoming more expensive which could hobble the transition just as momentum picks up. In a survey of six leading lithium forecasters, estimates for how the market will look in 2025 range from a deficit equal to 13% of demand to a 17% surplus. Projections for the market’s size diverge sharply too, with demand forecasts ranging from as little as 502,000 tons to as much as 1.25 million tons. An average of six estimates suggests annual growth of more than 20% for both supply and demand between 2021 and 2025. That compares with the typical growth rates of 2% to 4% in larger and mature markets like copper, where surpluses and deficits usually equal a fraction of demand.
- Global traffic congestion was 10% lower in 2021 than in 2019 largely due to changes in work habits. Congestion during peak hours fell by an average 19% in 2021 compared with 2019. Still, many cities saw congestion swing from extreme lows to extreme highs as travel restrictions followed the ebb and flow of new COVID variants.
- Europe will have 130 million EVs on the road by 2035 from the current 5 million; the pact will reach 65 million EVs by 2030 and doubling over the following five years. EY estimates that the continent will need 65 million chargers to fuel these cars, trucks and buses, with 85% of plugs installed at homes. Europe’s rapid adoption of EVs presents two large tasks for utility providers. The first is to build a network of 9 million out-of-home chargers along roadways, workplaces, and at fleet-charging hubs. There are about 445,000 public connectors installed across Europe right now. The pact now needs to install 500,000 chargers every single year until 2030 and about 1 million every year between 2030 and 2035, which will cost $62 billion. it will cost another $72 billion to install 56 million residential chargers. The ramp-up of EVs will coincide with an increase in renewable energy generation, the electrification of heating and an increase in extreme weather. Europe’s utility industry will also need to manage the increased load on the grid. Along highway corridors, where drivers will expect fast charging on demand, EVs could increase peak loads by 90%. Managing these surges will require on-site solar and energy storage systems at charging stations. In urban residential settings, EY expects charging demand to surge in the evenings when drivers return from work, causing potential increases in peak load of 86%. To smooth these peaks, electricity providers will need to offer incentives for drivers to charge at off-peak times and to put power from car batteries back into the grid, meaning both homes and cars will need two-way charging capabilities. With such mitigations in place, utilities could reduce EV demand spikes by more than a fifth. This coincides with a recent EU report that plans to begin rolling out incentives as part of a testing phase to reallocate the shift in demand on the grid in preparation for future peak loads induced by additional EV demand (see Bloomberg newsletter – Feb 8th).
- European car sales will not recover to pre-crisis levels this year as chip shortages continue to roil production in the first half. New car registrations in the EU will likely rise by 7.9% to 10.5 million units. While that would end two years of declines, it would still leave sales almost 20% below their pre-crisis peak. Carmakers expect to have difficulty sourcing chips until efforts to increase production kick in during the second half of the year.
- A growing number of EV makers are adding lidars to their line-up while Tesla remains skeptical of the technology. Lidar, short for light detection and ranging, is a sensor technology that sends out laser pulses then measures the time it takes for them to bounce off an object and return. That data is used to calculate how far away things are and create a 3D map of the objects in an area. Lidar’s ability to map surroundings and measure object velocity makes it a good complementary sensor in partially or fully autonomous vehicles. Lidars are unique in that they offer long and wide visual ranges. Falling costs and a boom in supply are driving greater adoption – there are now over 150 lidar producers globally and there have been a spate of recent public listings by Velodyne, Lunimar and Innoviz, among others. Tesla currently uses self-driving software algorithms capable of autonomous driving based on camera vision instead. As of January, 17 automakers globally have announced a total of 21 lidar-equipped passenger car models either in production or coming soon. The number will increase as systems like GM’s lidar-based Ultra Cruise are added to specific models. Some car companies are adding lidars on their vehicles even if their current software is not making full use of the capability. The idea is that future iterations of driving software will be able to tap into the sensors without physical upgrades to the vehicle being required. 70% of the current and upcoming lidar-equipped models are from Chinese automakers, signally their lead in the race. There is an EV angle here too – many of the auto companies integrating lidar into their production models are also China’s homegrown EV brands, from NIO, Xpeng to Li Auto. EVs are now where buyers get access to the latest technology of any type, not just the drivetrain. That is helping create a tailwind of adoption as the Chinese EV market moves beyond the policy-dependent phase that characterized recent years. As the price of lidar declines further and consumers come to expect more advanced safety features as standard, there will likely be more automakers adopting the technology to their vehicles. this will mean high-end vehicles at first, but eventually include automakers’ most popular models.
- Volvo has vowed to have half of its vehicles fully electric by mid-decade. More than a quarter of its vehicles sold last year were rechargeable either as hybrids or full-electrics. The brand’s first all-electric vehicle, the 2022 Volvo VC40 Recharge, led the group. Those 2021 electric sales will be bolstered even more this year with the arrival of the all-electric C40 Recharge. The all-electric SUV comes with a $55,300 price tag.
o https://www.bloomberg.com/news/articles/2022-02-04/volvo-xc40-recharge-electric-suv-review-fast-but-with-troubling-tech?srnd=hyperdrive
Consumer / Retail
China Market
- Alibaba shares jumped in Hong Kong as SoftBank said it was not involved in the Chinese tech giant’s filing of additional ADRs, allaying investor fears that the firm’s largest shareholder might be looking to cash out. SoftBank continues to hold just under 25% of Alibaba despite an immaterial cash settlement on Alibaba forward exchange contracts that was disclosed in its earnings filing.
- China has turned traffic lights red in some cities to curb the spread of COVID’s omicron variant. The travel ban underscores the sweeping administrative power Chinese authorities have and their willingness to use it in order to achieve COVID zero.
o https://www.bloomberg.com/news/articles/2022-02-09/chinese-city-turns-traffic-lights-red-to-stymie-omicron-s-spread?srnd=premium-asia
Market Update
- Stocks rose on Tuesday’s regular session while a selloff in sovereign bonds paused, bringing some relief for markets from the concerns about tightening monetary policy that have whipsawed assets this year
- U.S. equity futures advanced after the S&P 500 closed near session highs; meanwhile, dip-buying lifted the Nasdaq 100 and a U.S. small-cap gauge outperformed
- 10-year U.S. Treasury yield retreated from levels last seen in 2019, but bond markets remain wary as the Federal Reserve gears up to raise interest rates to quell inflation
- Investors continue to weigh up still-robust corporate earnings against worries about a rapid withdrawal of pandemic-era stimulus; data this week is expected to show U.S. inflation continues to overheat, potentially stoking bets on a more aggressive Fed lift off in March
- About 76% of S&P 500 firms have reported upbeat results, with profits coming in more than 6% above projected levels; while growth rate might be slowing, there is still positive revision going forward which suggests companies are clearly expecting profit growth to outpace inflation for at least another year which is a positive sign
- S&P 500 futures rose 0.4%, while the S&P 500 rose 0.8% to 4,521.54
- Nasdaq 100 futures rose 0.4%, while the Nasdaq 100 rose 1.2% 14,747.03
- 10-year Treasury yield fell 2 bps to 1.94%
- WTI crude rose 0.3% to $89.62 a barrel
- Gold was at $1,828.16 an ounce, up 0.1%
- JPM strategists have identified what they say is a near bulletproof indicator to strengthen their argument that stock markets are poised to rally. The buy signal is triggered when the VIX rises by more than 50% of its 1-month moving average, which it last did January 25th. The indicator has proven 100% accurate outside of recessions over the last 30 years. The strategists believe the uptrend cycle is far from over. In addition to the VIX signal, they also looked to more gains in earnings, a bottoming in Chinese activity and say investor sentiment has become too negative of late.
o https://www.bloomberg.com/news/articles/2022-02-08/jpmorgan-strategists-see-sure-fire-sign-it-s-time-to-buy-stocks
Summary
- Micro Observation – Stocks rose on Tuesday’s session while a selloff in sovereign bonds paused, bringing some relief to recent market volatility sparked from the concerns about tightening monetary policy. The calm on Tuesday’s session, however, could be short-lived as investors remain on edge about the upcoming release of U.S. CPI data on Thursday. January’s inflation numbers are expected to remain elevated at about 7%, supporting a faster and more aggressive March lift-off of rate hikes.
o Nvidia-Arm deal – SoftBank has confirmed during its earnings call on Tuesday that its deal with Nvidia on the latter’s proposed acquisition of Arm has fallen through due to regulatory concerns. SoftBank is now planning an IPO for Arm within the fiscal year ending March 2023. Nvidia’s stock price has not taken any material impact from said news. In fact, the stock’s momentum remained strong, gaining 2% on Tuesday trading and another 1.12% in late-trading, a testament to investors’ optimism of the chipmaker’s continued strength in growing its presence in graphics and computing processors in coming years even on its own. Nvidia is currently the largest chipmaker by market cap and dominates the graphic and AI processor market at the moment. It has recently expanded its foray into the metaverse by leveraging its prowess in AI processing technology, while also extending its CPU efforts to ensure adequate capitalizing on opportunities arising from data center demand. The company also provides GPU and AI processor chips for other emerging technologies like autonomous driving. Its products are also equipped with complementing software, ensuring a recurring stream of higher-margin revenues that bolster its cash generation abilities over the longer-term.
- Macro
o Focus remains on the upcoming release of January inflation data, which is expected to remain elevated at 7%. This is expected to draw further urgency for the Federal Reserve to take action on reining in runaway inflation, stoking more investors’ angst across the broader equities market. However, corporate earnings – especially growth forecasts – remain investors’ focus as it could be compensatory for the potential impacts of hastened withdrawal of pandemic-era stimulus.
o Oil’s rally has resumed after a slight two-day decline due to premilitary reports of lowering U.S. oil and gasoline stockpiles again by the American Petroleum Institute. The official data from the EIA is scheduled for release Wednesday, which is expected to show similar results.