Newsletter - January 19, 2022
Oil / Commodities
- Japan’s LNG inventories slumped to a seven-month low as colder weather increased demand and Europe hoarded shipments of the super-chilled fuel. LNG shipments are rerouting from Asia to Europe to take advantage of more attractive prices, leaving less supply for Asian importers. In the last four years, Japan’s LNG inventories have dropped an average of 2% between the end of December and January. This year’s storage is already down 14% in the same period. Japan has also received 10% fewer LNG deliveries in the one-month period through January 17th compared to last year due to Europe’s heightened demand.
- The main grid operator for Texas said the vast majority of its power-generating units are in compliance with new rules that require them to be able to operate during winter weather. Texas power regulators put the new winterization requirements in place after a deep freeze took down scores of power plants last year, resulting in catastrophic blackouts that left more than 200 people dead.
- Oil extended gains from the highest close since 2014 after a key pipeline running from Iraq to Turkey was hit by an explosion, taking out crucial supply from an already tight market. Futures in New York advanced as much as 1.9% to climb over $87 a barrel. Goldman Sachs is now forecasting the global benchmark Brent to top $100 in the third quarter. Recent supply tightening due to demand resilience against omicron, and the return of political unrest in the Middle East across UAE, Libya and Kazakhstan has created a perfect storm for oil. By the time the holiday driving season propels global fuel use above 100 million barrels a day in July, the world’s reserve capacity will be almost entirely held in Saudi Arabia, the UAE and Iraq, and could amount to just 2.3 million a day of spare capacity – the lowest since 2018. This is expected to push crude towards an all-time high which is currently set at $150 a barrel in 2008.
o https://www.bloomberg.com/news/articles/2022-01-19/dwindling-opec-spare-capacity-sets-oil-up-for-sizzling-summer?srnd=premium-asia
- Gold held the previous day’s loss as bond yields climbed on speculation that the Federal Reserve will be more aggressive in tightening monetary policy to contain decades-high inflation. A March rate hike is almost for sure in the books. While a quarter-point increase is still the most likely scenario, swap markets are now pricing in more than 25 bps of tightening by the end of March. The yield on 10-year Treasuries have spiked to the highest since January 2020, weighing on demand for non-interest bearing bullion. Still, bullion’s traditional role as an inflation hedge and the uncertainty over omicron’s impact is supporting demand for the haven asset.
o https://www.bloomberg.com/news/articles/2022-01-19/gold-holds-decline-as-bond-yields-climb-on-fed-rate-hike-bets?srnd=premium-asia
Tech
- Microsoft announced a $69 billion deal to acquire Activision on Tuesday morning. The deal comes amidst an ongoing sexual harassment scandal and is set to close in mid-November. Shareholders of Activision would get $95 a share. Microsoft had been searching for a gaming partner since the summer of 2020 that would deliver a stable of consumer users. The company reaffirmed it was on the hunt for acquisitions during the Paley International Council Summit in November to add casual and social games for Xbox. Some reasons the transaction happened include:
o Size – the completion of the transaction would make Microsoft the world’s no. 3 global gaming company ahead of Tencent and Sony.
o Mobile – It is the fastest-growing segment of gaming and Microsoft has almost no presence in it. Meanwhile, Activision owns mobile-gaming studio King, maker of Candy Crush.
o Bypass App Store Fees – Microsoft seeks to compete against Apple on the fees that the latter charges for game distribution, which now exceeds the former’s share of revenues from game sales and subscriptions. The Activision acquisition would better position Microsoft for bypassing Apple’s App Store and attract gamers directly.
o Metaverse – The acquisition will offer more massive and devoted game communities to create their own metaverses and take Microsoft’s metaverse play beyond just office collaboration.
o The Three Cs – The company’s strategy has been around cloud, content and creators. And Microsoft wants to get Activision’s games on its cloud-gaming service Game Pass.
o https://www.bloomberg.com/news/articles/2022-01-18/microsoft-to-buy-activision-blizzard-in-69-billion-gaming-deal
- Airlines around the world are adjusting to new flight rules to the U.S. due to 5G rollout by AT&T and Verizon near key American airports which could interfere with key safety systems. Dubai’s Emirates Airlines, Japan Airlines and ANA Holdings said Tuesday they will drop some routes to the U.S. and will not be flying their 777 jets from the U.S. mainland. Meanwhile, Korean Airlines said its 777 and 747-8 aircraft are affected by the 5G service and is rearranging its fleet. Air India also warned flights to the U.S. will be curtailed or revised from January 19th. AT&T and Verizon agreed late Tuesday to delay switching on hundreds of 5G cell towers near U.S. airports following last-minute talks with government officials over safety concerns. New 5G service at 50 airports is scheduled to start July 5th instead, while the duration of delays for additional airports is still in discussion.
o https://www.bloomberg.com/news/articles/2022-01-18/u-s-faa-wireless-companies-negotiating-possible-5g-agreement?srnd=technology-vp
- Sony shares fell as much as 9.8% in Tokyo, their biggest intraday drop since March 2020, after PlayStation rival Microsoft announced a $69 billion deal to acquire Activision. The blockbuster acquisition escalates Microsoft’s spending spree to secure intellectual property assets for its Xbox Game Pass service, which has been adding paying subscribers by offering them a growing portfolio of games to play. This challenges Sony’s traditional console business model that combines high-profile exclusive titles with hardware sales to earn revenue – games and network services account for about 30% of Sony revenue. Sony has maintained a consistent lead in sales and exclusive games over Microsoft’s competing offerings in past years. But now, Microsoft has signalled its determination to speed freely to close that gap.
- YouTube is cutting its investment in original programming, ending a six-year experiment with making premium television shows. YouTube will still fund original programming for kids and Black creators, and it will honour existing commitments. Spending will be redirected to Shorts, a feature designed to rival TikTok and live shopping. YouTube will also focus on music and unscripted programming such as celebrity documentaries to drive subscriptions, as opposed to original series.
- SoFi surged after the Office of the Comptroller of the Currency granted it a U.S. banking charter. The online lending platform acquired Golden Pacific Bank as a path to getting the full-fledged banking license. While the entity will have a national reach and SoFi’s well-established digital lending platform, the OCC said that the new license did not cover crypto transactions. The stock rose by as much as 16% to $14 in post-marking trading Tuesday.
- Ericsson filed U.S. trade complaints seeking to block imports of Apple devices, escalating a legal battle that shows licensing talks between the two over 5G telecommunications technology are going poorly. Ericsson claims that a wide swath of Apple products from iPhones and tablets to smart watches and speakers have infringed some of its patents. Since the preceding licensing agreement had expired, the two have been unable to reach agreement on terms and scope of a new licensing arrangement.
- Google and Apple warned U.S. lawmakers Tuesday that bipartisan antitrust legislation aimed at curbing the power of big tech companies will threaten the privacy and security of users. Apple is pushing to protect its App Store from government oversight and changes that would disrupt its business model. Google, meanwhile, criticized the legislation in a blog post, saying it would hamstring popular products such as Google Search and Gmail. Both Google and Apple said the bills under consideration would hinder security and privacy and end up harming consumers. Current bills in discussion include a requirement for Apple’s App Store to allow iPhone and iPad users to install apps outside of the App Store. Google argues that the legislative push will make its offerings less useful and secure, damaging American competitiveness.
Electric Vehicles
- Toyota shares fell as much as 4.7% Wednesday morning, their biggest intraday loss since March 2020, after the company warned it expects to miss its production target for the fiscal year. The company cited it would be very difficult to meet a target of making 9 million vehicles in the year through March due to supply chain challenges. It is now cutting February production by about 150,000 units. It is noteworthy that even Toyota, with its relatively strong supply chain management, cannot meet production targets, foreshadowing that the situation at other companies must be even more challenging.
- Ford is expected to record a gain of $8.2 billion in the fourth quarter on its investment in Rivian after the EV maker’s blockbuster IPO late last year. The legacy automaker disclosed the gain Tuesday along with several special items it intends to report when Ford releases earnings on February 3rd. Ford, which has invested a total of $1.2 billion in Rivian since early 2019, has a 12% stake that the company has said was valued at more than $10 billion in early December.
- Nikola has announced a long-term supply agreement with Proterra for battery technology, giving the electric big-rig maker a second source for the critical components. Proterra will start delivering prototype systems to Nikola next quarter, with full production of trucks using Proterra’s battery packs starting in the fourth quarter. The technology will also be used for hydrogen-fuel-cell electric trucks, which are due to go into production in 2H 2023. Nikola has previously disclosed Romeo Power as a pack supplier and discussed working with multiple cell suppliers, without disclosing their names.
o https://www.bloomberg.com/news/articles/2022-01-18/nikola-signs-battery-deal-with-proterra-for-electric-big-rigs?srnd=premium-asia
- CATL is moving deeper into the battery-swap game as the world’s largest maker of EV batteries seeks to make switching to an EV cheaper and more convenient for consumers. CATL unveiled its latest battery plan at a briefing Tuesday, showing off a range of specially designed modular batteries that fit three to a pack. Each ahs a driving range of 200 km and can be swapped out in as little as one minute, giving drivers the option of powering up or powering down depending on their needs. CATL will also build fast-battery-swap stations to cater for the new packs in 10 cities around China. It said its battery packs should be compatible with about 80% of EVs on the market. Tesla, which counts CATL as a supplier, has a fast-charging solution of its own but its points take about 15 minutes to charge an EV around 50%. Six Chinese companies, including Aulton New Energy Automotive, Geely and NIO plan to build more than 8,000 battery-swapping stations in the nation by 2022, and 26,000 by 2025. Utilities and oil and gas companies such as Sinopec are also increasing investment in battery-swapping infrastructure in preparation for dwindling demand at gas stations. NIO currently has the most extensive battery-swapping network with more than 700 stations. CATL had set up a battery-asset-management company with NIO in 2020, which allows NIO customers to buy a car with leased, swappable and upgradeable batteries. last month, the battery giant entered into an agreement with the provincial government in Guizhou to build a battery-swapping network in the region. New energy passenger vehicle sales in China surged almost 170% to 2.99 million units in 2021. The China Passenger Car Association has raised its forecast for 2022 NEV sales to more than 5.5 million, from a previous estimate of 4.8 million.
- Oil giant BP now says its fast chargers are about to become more profitable than its fuel pumps. Nearly all automakers are pursuing ultra-fast chargers though slower, level 2 chargers are in the mix as well as battery swapping stations. Some automakers are building the networks on their own, while others are striking JV deals or configuring their battery technologies to be compatible with fast-charging. In October, Tesla announced plans to triple its already extensive supercharger network over the two years – BNEF estimates this amount to 84,000 superchargers globally by the end of 2023. Ionity, a JV between BMW, Ford, VW, Daimler and Hyundai, said it will invest nearly 700 million euros to increase its network to 7,000 ultra-fast chargers in Europe by 2025. VW is also partnering with BP, Enel and Iberdrola to roll-out 18,000 ultra-fast chargers in Europe; 10,000 in the U.S. with subsidiary Electrify America; and 17,0000 in China in a JV with Star Charge JAC and FAW called CAMS. Stellantis is aiming for 35,0000 ultra-fast chargers in Europe by 2030, while GM is working with EVGo to instal 3,250 in the U.S.; the latter is also distributing 40,000 slow chargers to dealers to install in their communities. NIO aims to have 4,000 swap stations by 2025, with 1,000 outside of China and 20 planned for Norway by the end of 2022.
o https://www.bloomberg.com/news/articles/2022-01-18/automakers-develop-charging-networks-for-greater-ev-cred?srnd=hyperdrive
Consumer / Retail
- Cathay Pacific is offering pilots a bonus of up to $3,700 if they are willing to ensure a 4+ closed loop schedule, which entails three to four weeks of travelling non-stop, staying in hotel isolation between flights, and then spending up to two weeks in quarantine at the end of their deployment before allowed to return home. The carrier is now operating at just 2% of pre-pandemic passenger capacity and 20% of pre-COVID cargo capacity, the lowest level at any time since the onset of the pandemic.
o https://www.bloomberg.com/news/articles/2022-01-19/cathay-pacific-offers-3-700-bonuses-to-pilots-to-keep-flying?srnd=premium-asia
China Market
- Data shows China’s economy grew 8.1% in 2021, but slowed dramatically in December to 4%. President Xi states the fundamentals of the Chinese economy remain unchanged and remains resilient, with sufficient potential for positive long-term prospects.
- China’s property sector shrank at the fastest pace at 2.9% in the final three months of 2021, compared to a 1.6% contraction in the preceding quarter, as the country’s housing slump continued to take its toll on the economy. It marked the sector’s first consecutive decline since 2008. Construction also saw output decline by 2.1% during the same period. The two sectors combined made up 13.8% of national output in 2021, Lower than 14.5% in 2020. Property investment in December shrank 14% from a year earlier and only grew by 4.4%. the GDP data released Monday also confirmed weakness in consumption. Hotels and catering grew 4.7% in the fourth quarter, slowing from a 5.7% expansion previously. Manufacturing growth rose 3.1%. value added of manufacturing industry accounted for 27.4% of GDP in 2021, up 1.1 percentage points compared to a year ago.
o https://www.bloomberg.com/news/articles/2022-01-18/china-s-property-sector-contraction-worsens-in-blow-to-economy?srnd=premium-asia
- China Three Gorges Corp., the world’s largest hydropower company, is adding wind and solar capacity under plans to diversify its business as the era of mega-dam projects fades. The state-owned firm currently has capacity to generate about 26 gigawatts of electricity using solar panels or wind turbines, from 16 gigawatts in 2020. It aims to hit a target of 70 to 80 gigawatts by 2025. China’s solar and wind projects have jumped 30% in 2021, while power generation from hydroelectric plants have seen zero growth.
o https://www.bloomberg.com/news/articles/2022-01-18/china-hydro-giant-will-add-wind-and-solar-as-dam-prospects-cool?srnd=premium-asia
Market Update
- Surging Treasury yields have caused a steeper selloff of U.S. equities on Wednesday, showing how the prospect of Federal Reserve monetary tightening to fight high inflation continues to weigh on markets; U.S. futures wavered after the S&P 500 suffered a broad drop and the tech-heavy Nasdaq 100 sank 2.6%
- The slide in Treasuries is stirring expectations that the benchmark 10-year yield will top 2%; speculation is growing that the Fed may deliver more than a quarter-percentage rate hike in March
- Oil extended a rally, underscoring global price pressures after a pipeline running from Iraq to Turkey was hit by an explosion, taking out crucial oil supply
- An index of Chinese property stocks rallied after the PBOC pledged to use more monetary policy tools to aid the economy and ease credit stress amid a real-estate slump
- Investors continue to wrestle with whether the Federal Reserve will need to tighten monetary policy to guide inflation lower or become less aggressive with tightening to counter softening economic growth due to omicron disruptions; and paired with rising bond yields, the market is expected to encounter further volatility ahead
- S&P 500 futures were steady, while the S&P 500 fell 1.8%
- Nasdaq 100 fell 0.1%, while the Nasdaq 100 fell 2.6%
- 10-year Treasury yield hit 1.88%
- WTI crude rose 1.8% to $87 a barrel
- Gold was at $1,813.04 an ounce
- Rising yields and anxiety earnings growth is poised to slow dealt another gut punch to tech stocks, pushing the Nasdaq Composite Index to the brink of a correction. The tech-heavy index slumped 2.6% Tuesday, taking its drop from the November 19th record to 9.7%. the two-month drought without a record is the longest since April 2021. Along the way, the gauge surrendered a key technical level, the average price over the past 200 days, for the first time since the aftermath of the pandemic bear market in 2020. At 60 days, the latest drawdown is already more than twice as long as the two previous corrections. This time, investors have been reluctant to return as dip buyers amid speculation that the Federal Reserve will have to raise interest rates sooner to battle inflation. The earnings momentum also is not helping the Nasdaq. As economic recovery broadens, the growth edge that tech firms once enjoyed is diminishing. The CBOE NDX Volatility Index just closed above 25 for two straight weeks, a streak that was only seen one other time in the past nine months. According to the BoA’s latest survey of global fund managers, net allocation to the technology sector fell to the lowest level since the 2008 global financial crisis – net allocation to the tech sector fell 20% month-over-month to 1%, while overweight positions on bank stocks rose 41%. Central bank tightening remains the #1 risk to markets in 2022, which is bad news for expensive tech stocks that are valued on future growth expectations and good for bank stocks, which have suffered for most of the past decade amid ultra-low or negative yields. The market continues to differentiate between defensive, strong balance sheets and cash generative technology on one hand, and unprofitable very long duration technology on the other. The very long duration unprofitable companies had arguably and likely reached bubble territory and have now adjusted most aggressively.
- Benchmark Treasury yields look poised to surge past 2% as traders lay bets that the Federal Reserve could opt for a super-sized rate hike in March. 10-year Treasury yield rallied to 1.88% on Wednesday, set for its fastest monthly increase since November 2016. There is growing speculation that the Fed will respond to rampant inflation by making its first half-percentage point increase since 2000 that month. 30-year U.S. yields have climbed above 2.2% for the first time since June on Wednesday.
o https://www.bloomberg.com/news/articles/2022-01-19/treasury-10-year-at-2-looks-a-done-deal-on-march-fed-bets?srnd=premium-asia
Summary
- Micro observation – Equities continued on a decline on Tuesday, as the possibility of rate hikes in March are becoming more prominent. The swap market is now pricing in a 50bps rate hike in March, as opposed to the 25bps that most have been expecting. 10-year Treasury yield is on track to topping 2%, as prospects of Federal Reserve monetary policy tightening are becoming more apparent.
o Microsoft – Tuesday’s top headline is none but Microsoft’s acquisition of the scandal-battered Activision in hopes of expanding its gaming competencies, especially in mobile, cloud-based, and metaverse gaming experiences. Microsoft seeks to acquire Activision for total consideration of $69 billion or $95 per share. Activision traded up close to 26% on Tuesday, closing at $82.31.
o Lucid – The stock declined by more than 7% on Tuesday trading, alongside other EV pureplay stocks including Fisker, Rivian and Tesla, as well as legacy automaker stocks like Ford and GM. Some of Lucid’s declines may also be attributable to the lock-up period expiry on some of the insider shares beginning January 19th, with another slew on January 23rd. While this could cause some volatility ahead, the stock has been largely resilient in recent weeks against broader market declines, and because much of the shares in lock-up are held by large interest owners like the Saudi Arabia PIF, we do not see any extended sell-offs that could result in lasting material changes to the stock’s valuation due to the lock-up expiry.
o SoFi – The virtual banking app has finally received its bank charger approval which has been in a conditional/temporary status since its acquisition of a small, local financial institution Golden Pacific Bank last year. The charter would now allow SoFi to lend cash it receives as part of deposits from customers, meaning lowered borrowing costs related to cash it used to provide as part of its lending program. This is expected to drive higher margins in the near-term as its service continues to expand. The new bank charter, however, does not include approval for crypto services, which has surged in momentum over the past year.
o AT&T and Verizon – The telecom giants have been largely resilient against Tuesday’s market declines after pushing out the new 5G service after multiple delays from ongoing negotiations with aviation regulators. However, the roll-out is not yet complete, with delays to the deployment of some cell towers near certain airports until July at the earliest. Meanwhile, close rival T-Mobile traded down close to 1.5% on Tuesday.
- Macro
o 10-year Treasury yield hit 1.88%, while 30-year Treasury yield hit 2.2% for the first time since June. Rising bond yields are indicating rising expectations of faster and more aggressive rate hikes coming March, and has in turn furthered the equities market rout observed over past weeks. The swap market is also now pricing in a 50 bps rate hike in March instead of the 25bps that the majority currently expects based on considerations that the Fed may need to counter runaway inflation with a more aggressive stance.
o Oil has also extended a rally after an explosion at the pipeline that connects Iraq and Turkey, adding pressure to already tightening supplies. Oil demand remains resilient amidst ongoing omicron disruptions with the U.S. stockpiles continuing to diminish, while oil supply continues to tighten due to political unrest in the UAE, Libya and Kazakhstan. Analysts predict oil prices to surpass $100 and even hit $150 in the summer with demand peaks ahead of travelling season.