Newsletter - January 12, 2022
Oil / Commodities
- Oil steadied after its biggest one-day gain this year as investors embraced risk assets and industry estimates showed another draw in U.S. stockpiles. WTI crude traded above $81 a barrel after rallying 3.8% on Tuesday. the industry-funded American Petroleum Institute reported that U.S. crude inventories sank by about 1 million barrels last week. The snapshot also showed a drop in crude at the key storage hub in Cushing, although gasoline holdings jumped. Crude’s rally on Tuesday to the highest close since November 11th came alongside gains in raw materials and equities after Federal Reserve Chair Jerome Powell sought to reassure investors the central bank can rein in inflation without damaging the U.S. economy. If he succeeds, that will safeguard oil demand.
- Sony will continue to make PS4s throughout 2022 as it navigates disruptions to the global supply chain that have limited output of its pricier PS5. The strategy would add about a million PS4 units this year to help offset some of the pressure on the company’s PS5 production. The older console uses less advanced chips, is simpler to make and provides a budget-friendly alternative to the PS5. Increasing production orders by adding the cheaper-to-make PS4 may give Sony more leverage when negotiating with manufacturing partners for a better deal.
- Meta Platform’s Facebook must face the U.S. government’s monopoly lawsuit alleging that the company abused its dominance and should be broken up. Facebook’s notion to dismiss the FTC’s revised antitrust complaint was denied on Tuesday. The FTC has now alleged enough facts to plausibly establish that Facebook exercises monopoly power. The agency has also explained that Facebook not only possesses monopoly power but that it has wilfully maintained that power through anticompetitive conduct. The FTC is seeking a court order to unwind Facebook’s acquisitions of Instagram and WhatsApp, arguing the two deals were part of a pattern by Facebook and CEO Mark Zuckerberg to eliminate companies as competitive threats by buying them. The lawsuit will now proceed to the discovery stage, where the two sides will gather evidence for trial.
- Meta Platforms has named DoorDash CEO Tony Xu to its Board, adding a technology-company founder with significant commerce experience to the group advising CEO Mark Zuckerberg. Meta has made commerce a business priority over the past two years, aiming to become a bigger force in online shopping as more and more transactions happen on the web. The company has built shopping features directly inside its apps in an effort to eliminate the need for consumers to leave its ecosystem to make purchases, and to increase sales opportunities for businesses. Commerce will also play a significant role in the metaverse.
- Taiwan’s GlobalWafers is close to clearing an important regulatory hurdle in its $5.3 billion acquisition of German silicon wafer manufacturer Siltronic AG. China’s State Administration for Market Regulation has indicated it is largely comfortable with the antitrust remedies proposed by the companies and could make a formal decision shortly. The deal still requires the green light from Germany’s economy ministry and those discussions are ongoing. The takeover would be GlobalWafer’s largest ever and also one of the chip industry’s biggest in recent years. Siltronic is a leader in making silicon wafers used in smartphones, computers, navigation and digital displays. It has production sties and offices in Germany, the U.S. and other advanced manufacturing countries.
- Amazon is currently the only megacap tech stock with unanimous analyst buy ratings, even after the e-commerce giant lagged behind its peers by a huge margin for the past 18 months. Morgan Stanley grew more optimistic on the shares after their worst annual performance since 2014, raising its price target and foreseeing 30% upside. BoA, meanwhile, named Amazon its top pick for 2022. While Amazon has underperformed its megacap peers, it should not be mistaken as something underlying is wrong. The company is laying the groundwork for future returns – Amazon ahs invested almost $100 billion in the last two fiscal years, which is more than the company’s combined investments since its founding to 2019. Amazon is expected to enjoy significant expansion in profit margins from 2023 to 2025 as larger revenue pools from AWS, advertising and its third-party market place have the potential to contribute more than $70 billion in profits. Several of the headwinds related to rising wage inflation and supply chain constraints should also ease throughout the year. Priced at 48x estimated earnings for next year, Amazon is more than twice as expensive as Alphabet and Meta Platforms.
- Tesla has won approval to build more test cars at its unfinished German factory as the U.S. EV maker continues to wait for final permitting of the project. Tesla can test as many as 2,000 EVs at the Berlin factory, up from 250 previously. Progress at the site has been slower than hoped, with backlash from environmental groups concerned about water use and wildlife postponing the start of production by several months. Tesla is estimated to have invested around 5 billion euros in the Gruenheide region for its plant.
- U.S. auto sales will climb just 3.4% this year to 15.4 million cars and trucks as chi shortages continue to constrain vehicle inventory. The National Automobile Dealers Association said the lingering chip shortage slashed inventory on dealer lots by 59% in December compared to a year earlier, and inventories will likely remain diminished in the second half of 2022. While inventory is slowly improving, the chip shortage has cut global auto production by 11.3 million vehicles.
- NIO and Chinese steel producer Baoshan Iron & Steel have announced a strategic partnership to collaborate in areas including products and supply chain. The two companies will strengthen cooperation in green, low-carbon areas.
- DocuSign shares rose 7% Tuesday after CEO Daniel Springer purchased approximately $5 million worth of the company’s stock. The company’s shares have performed erratically over the last month since the company gave a disappointing quarterly forecast that led investors to shave off more than one-third of DocuSign’s value in one day. Cathie Wood’s flagship ARKK ETF has also sold off approximately 58% of its holdings in the company last week.
Consumer / Retail
- Global air-cargo growth slowed sharply in November as demand was hit by supply chain disruptions due to COVID restrictions that left workers stuck in quarantine. Demand for air freight rose 3.7% for the same month in 2019, which is less than half of the 8.2% increase see in October and significantly lower than in the previous month. Freight has been in a rare bright spot during the pandemic, helping offset weak passenger traffic thanks to strong consumption demand. But labour shortages and constraints across the logistics system have unexpectedly resulted in lost growth opportunities. As the omicron variant brings more disruptions, with the Chinese Lunar New Year holidays coming up, some ports including Ningbo are already facing lockdowns, causing expectation for a volatile start to the year for ocean freight logistics.
- China Minsheng Bank is now in damage control mode, as it reels from mounting losses on loans to developers including China Evergrande Group. It has restructured its real estate finance group to give more power to local branch managers, made reducing holdings of property debt a top priority for 2022 and plans to cut salaries for some staff by half. Minsheng has about 130 billion yuan of exposure to high-risk developers, amounting to 27% of its so-called tier-1 capital, the most among big Chinese lenders. The bank will take years to work through the bad debt problem and a capital injection from a stronger rival cannot be ruled out.
- Goldman Sachs has cut its forecast for China’s economic growth this year to 4.3% due to increased difficulty in containing the more contagious omicron variant. This is down from the bank’s previous projection of 4.8% growth after incorporating a 0.9 percentage point drag from COVID-related restrictions, which will be partly offset by monetary and fiscal easing. Goldman Sachs’ forecast is below the median projection of 5.2% growth for the world’s second largest economy. Several expect Beijing to set a growth target floor of 5% this year. Goldman Sachs maintained its call for a 50-bps cut in the reserve requirement ratio in the first quarter. it now sees a 10-bps reduction in the interest rate on policy loans such as medium-term lending facilities, and lenders’ one-year loan prime rate in the first half of the year. Morgan Stanley also flagged similar risks to its growth forecasts if omicron continues to spread further in the country, predicting growth of 4.9% for the Chinese economy in the first quarter.
- China is ordering a half-day break on Wednesday in Tianjin to allow workers to get tested for COVID, adding pressure to vital supply chains. Toyota has already halted production in Tianjin since Monday in response to the municipality government’s move to test citizens for COVID. Meanwhile, VW has also suffered shutdowns of JV plants in the region due to recent outbreaks. Worries are already growing that China’s lockdowns could hurt demand and possibly ripple through the global economy.
- Chinese tech shares rallied by the most in over a week as investors took advantage of attractive valuations in the battered sector and the prospect of looser monetary policy conditions. Gains were led by JD.com and Meituan, which advanced at least 9.4% each. Supporting the rally are views that Beijing’s regulatory crackdown has peaked, and the equity selloff is bottoming out, while China’s monetary policy is set to turn loose in sharp contrast to the Federal Reserve.
- Tencent is nearing a deal to acquire Chinese gaming handset maker Black Shark, a move that could help the tech behemoth further its ambitions for the metaverse. Black Shark is a niche maker of gaming phones and accessories. The smaller firm, whose investors include Xiaomi, will pivot to making VR headsets for its new parent after the deal. Developing specialized hardware is one of the key pillars to realizing the metaverse. Meta was one of the earliest movers, buying VR headset maker Oculus in 2014, while top Chinese rival ByteDance last year purchased Pico, a domestic VR headset maker.
- Federal Reserve Chair Jerome Powell reassured investors the central bank will tackle inflation to extend the economic expansion; Powell told the Senate Banking Committee that officials will not hesitate to act if needed to contain price pressures, and that they will probably start shrinking its balance sheet this year at a pace quicker than the last time because the economy was in a much stronger position
- The next focus for traders is Wednesday’s U.S. CPI report that is expected to show unrelenting price pressure; markets have been buffeted by volatility at the start of the year on the prospect of faster interest rate increases to deal with the surge in inflation
- On the flip side, corporate fundamentals remain strong, with expectations for double-digit earnings growth this year, which should bode well for stock prices in 2022
- Chinese shares edged higher after local inflation came in lower than expected, adding to rate cut calls
- U.S. futures fluctuated after the S&P 500 halted a five-day slide and the Nasdaq 100 outperformed
o S&P 500 futures were little changed, while the S&P 500 rose 0.9% to 4,713.07
o Nasdaq 100 futures were little changed, while the Nasdaq 100 rose 1.5% to 15,844.12
- 10-year Treasury yield held a drop and steadied at 1.74%, while the curve flattened
- WTI crude was at $81.50 a barrel, up 0.3%
- Gold was at $1,819.65 an ounce
- JPM Asset Management’s fixed-income chief says it is a good idea to hide out in the most liquid assets from money market funds to Treasury bills as the U.S. central bank pares stimulus that underwrote asset prices through the pandemic. He predicts 10-year Treasury yields to rise to as high as 3% this year from 1.77% currently. The baseline trading range is seen at a more modest 1.875% to 2.375%. he also calls for declines of 15% to 40% in equities.
- Citadel’s Ken Griffin sold a $1.15 billion stake to Sequoia Capital and Paradigm, valuing the firm at approximately $22 billion. After the outside investment, Griffin will own roughly 80% of the trading business worth about $17.5 billion. The recent stake sale to Paradigm also hits at a future in crypto. Paradigm is a VC fund aimed at crypto companies and protocols.
- Federal Reserve Chair Jerome Powell said there is room for privately issued stablecoins to exist alongside a possible central bank digital currency. The Fed plans to publish a report on digital currencies in the coming weeks. The central bank has not said whether it plans to launch its own digital dollar. The Fed and other U.S. watchdogs have previously said stablecoins need more regulation and should be issued by banks.
- Micro observation – The market saw a rebound on Tuesday with the Nasdaq 100 leading gains of 1.5% after week-long losses
o Megacap stocks
§ Amazon – gained more than 2% on Tuesday after bank analysts unanimously agreed the stock is currently undervalued. Key catalysts include expanding margins in the upcoming two years after the company invested more than $100 billion in the last two years in expanding and improving its business offerings.
§ Facebook – the FTC has gained approval on reopening the antitrust lawsuit that seeks to break-up the company. The antitrust regulators have allegedly found new information proving that Facebook had acquired Instagram and WhatsApp to prevent rising competition that could threaten the company’s future. The litigation will now proceed to discovery phase, where both parties will source and present evidence.
§ Rivian – rebounded close to 3% yesterday as part of broader market gains
§ Lucid – gained close to 9% on Tuesday trading. We believe the stock’s latest rally is a result of investors’ anticipation on better-than-expected earnings in coming weeks. The company is expected to have enjoyed a continuation of rising reservations, indicating robust demand, and is progressing with its expansion plans to Europe this year based on hints dropped across its social media accounts and LinkedIn job postings. After a blockbuster rally buoyed by the company’s start of customer deliveries on its flagship Air sedan, investors will now shift focus to its ability to ramp up productions and execute objectives laid out in its growth plan
§ Tesla – shares gained less than 1% on Tuesday trading, despite news of local regulatory approval on increasing vehicle testing at the Berlin plant from 250 vehicles to 2,000 vehicles. This puts the plant one step closer to beginning volume productions, which has been delayed for months due to concerns raised by local environmental advocates.
§ The National Automobile Dealers Association is expected only nominal growth of 3.4% in car sales to 15.4 million vehicles this year due to protracted chip supply shortages
- Macro – the latest combination of Federal Reserve remarks and upcoming expectations for stronger-than-expected consumer price increases in December will likely stir further volatility in the markets in the near-term. Meanwhile, analyst expectations for strong double-digit earnings growth this year might offset some of the impact, which should bode well for equities this year
o Federal Reserve Chair Jerome Powell has reassured that the agency will increase rates more if they have to in order to tame inflation. He also reiterated that the Fed will likely start shrinking its balance sheet this year at a quicker pace given the economy is much stronger.
o The U.S. CPI report due Wednesday is likely to show stronger-than-expected price pressures, adding incentive for the Fed to raise rates sooner. Economists are expecting CPI prices to have risen 7% in December from a year earlier. That would top November’s 6.8% annual rise and be the largest increase since 1982.