Newsletter - January 22, 2022
Oil / Commodities
- JPM is analyzing what a surge in oil to $150 a barrel this quarter could mean for the economy. Such a shock would be enough to reduce global growth by more than three quarters to around 0.9% in the first half of the year, versus the 4.1% they currently forecast. Inflation at the worldwide level would also more than double to 7.2% rather than the projected 3%. That could potentially force central banks to constrain monetary policy even faster than they now intend. The latest geopolitical tensions between Russia and Ukraine raise the risk of a material spike this quarter. After surging to its highest level since 2014 this week, oil retreated on Friday with Brent Crude at $87.62 a barrel.
- Biden administration officials are in talks with Qatar about possibly supplying Europe with LNG if a Russian invasion of Ukraine leads to shortages. Some European nations have expressed fears that punishing Russia with harsh sanctions over the Ukraine crisis would wind up damaging their economies and prompt Russian President Vladimir Putin to cut off or scale back gas supplies in the middle of winter. Europe gets more than 40% of its natural gas from Russia and about a third of Russian gas flowing to Europe passes through Ukraine. Qatar currently provides about 5% of Europe’s natural gas. The U.S. has been stepping up pressure on the EU to agree on a package of sanctions. Meanwhile, Putin has denied that he plans to invade Ukraine, but is demanding concessions and security guarantees from NATO that the military alliance says it cannot provide.
- Three top investment banks are expecting oil to top $100 a barrel during the year as supplies continue to dwindle with a recovery in crude demand. Energy costs have been a major driver of inflation around the world, and triple digit oil prices threaten to add more pressure on central banks to raise interest rates, threatening economic growth. BoA is expecting Brent crude to rise to $120 a barrel in mid-2022, while Morgan Stanley upped its forecast for Brent to $100 by the third quarter. Goldman Sachs is expecting crude to hit $100 by the third quarter as well. Oil prices have surged with a spate of outages in countries from Libya to Nigeria and geopolitical tensions in the Ukraine and Middle East. Without more abundant supply but a robust demand recovery, oil prices will need to rise to the level at which demand destruction kicks in.
- With the Federal Reserve intending to withdraw stimulus from the market, riskier assets have suffered. Bitcoin, the largest digital asset, lost more than 12% Friday and dropped below $36,000 to its lowest level since July. Since its peak in November, it has lost over 45% of its value. Other digital currencies have suffered just as much, if not more, with Ether and meme coins mired in similar drawdowns. Bitcoin’s decline since the November peak has wiped out more than $600 billion in market value, and over$1 trillion has been lost from the aggregate crypto market. Crypto is vulnerable to current market selloffs given its naturally higher volatility historically, but given how large market caps have gotten, the volatility is worth thinking about both in raw dollar terms as well as in percentage terms.
- The Biden administration is preparing to release an initial government-wide strategy for digital assets as soon as next month and task federal agencies with assessing the risks and opportunities that they pose. The Biden administration’s increased focus comes at a time of broad consumer interest in the volatile crypto market. Bitcoin fell below $37,000 on Friday, compared with an all-time high of nearly $69,000 in November. The White House’s directives will be meant to ensure that the U.S. remains competitive as the world increasingly adopts digital assets. The administration is also expected to weigh in on the possibility of the U.S. issuing a government-backed coin, known as a central bank digital currency, or CBDC.
- Shopify plunged the most since March 2020 after a report that it has terminated contracts with several warehouses and fulfilment partners. Recent reports indicate that Shopify is expected to have about half of its previous capacity for e-commerce orders for merchants once changes are implemented. The reported cited executives at four fulfilment companies in Shopify’s network. Analysts are speculating that Shopify is looking to grow its own distribution warehouses instead of relying on third parties. Shopify has confirmed it has cancelled contracts but declined to provide more details on the number of fulfilment centers and warehouses impacted by the changes. The company said its capacity to handle orders will not be affected. At least three analysts have cut their share price targets on Shopify since Tuesday, pushing the average target to its lowest since July as e-commerce growth slows with pandemic restrictions lifting and as shoppers return to brick-and-mortar stores.
- Cable operators would face more competition for the roughly one-third of Americans living in apartment buildings under an order advanced Friday at the U.S. FCC. The order would prohibit cable service providers from entering into certain revenue sharing agreements with a building owner and seek to ease alternative providers’ access to the wiring of buildings. The order would affect more than one-third of the U.S. population who live in apartments, mobile home parks, condominiums and public housing. The order needs to succeed in a vote before the FCC, which is split with two Democrats and two Republicans as a Democrat nominated by President Joe Biden awaits Senate confirmation.
- Adobe is facing new investor concern about the company’s ability to boost sales beyond its core audience of design professionals. Its shares have jumped almost 20x since early 2012 as its dominance in the creative market grew and the company expanded into marketing and e-commerce. But the stock has dropped almost 26% since hitting a record high in November and Adobe gave an annual revenue forecast that fell short of estimates, spurring more than a dozen analysts to cut their target prices. Adobe’s bid to sell its signature digital design products to customers such as small businesses and social media influencers is running into competition from upstarts like Figma, Lightricks and Canva, which was early to recognize a market of non-professionals that crave access to content creation tools. While Adobe has unveiled a nascent offering in 2016 aimed at targeting that audience, its first comprehensive tool was not released until December. During that period, Canva surged to a $40 billion valuation, making it one of the world’s most valuable private companies. In a sing of the competitive pressure, Adobe cut the Express tool’s price to $9.99 per month to beat Canva’s fee of $12.99. The company is now placing greater reliance on its digital experience segment, which includes marketing, analytics and e-commerce products, to drive Adobe’s quest to reach $20 billion in annual revenue and beyond. The company estimates the market to be worth as much as $110 billion, compared with a potential $63 billion for design tools. But analysts suggest the uneven economy and shifting customer priorities may stall growth. Marketing tech spend was likely pulled forward in 2020/2021 more than most investors think.
- Amazon’s Alexa had widespread outage in Europe on Friday. Outages in the UK, France, Italy and Spain spiked in the thousands on Friday morning. The outage is part of at least three that AWS has reported in the past 30 days, and has since been fixed.
Consumer / Retail
- While Chinese bulls are getting some vindication as the nation’s stocks and bonds rally, the past week shows investors need to be prepared for violent swings. For instance, the Hang Seng China Enterprises Index was down for five straight days before rallying the most since July on Thursday. With the PBOC ramping up monetary easing this past week and pledging to do more, its dovish tone sets it apart from tighter policy in most major economies. Signs the Communist Party may pull back on its campaign against the real estate sector is adding to bullishness as traders look for alternatives to pricey global tech shares. However, their optimism might continue to be tested by volatility. Even as stocks ended the week higher in Hong Kong, measures of expected swings rose as derivatives traders bought protection. The city’s VIX equivalent climbed 11%, the most in two months. Reasons for caution remain. Many weaker developers with looming maturities are still shut out of the dollar bond market, and concerns over hidden debt risks are keeping traders on edge. China’s crackdown on the tech industry also shows no signs of letting up, with Beijing vowing to curb their influence and root out corruption tied to disorderly expansion of capital. Volatility remains the theme.
- Beijing is reeling from an extended COVID outbreak linked to imported frozen food and international mail, putting greater pressure on authorities to contain the spread two weeks before the start of the Winter Olympic Games. The outbreak sees a combination of delta and omicron infections.
- Nasdaq has fallen more than 1% in every session of the past week. A full week of big down days has not happened since the dot-com bubble burst, first in April 2000 then in September 2001. Back then, the Nasdaq went on to fall another 28% before the market bottomed roughly a year later. The Nasdaq 100 tumbled 7.5% this week as what started as an aggressive selloff in speculative corners spread to the rest of the market. Disappointing results from pandemic darlings like Netflix accentuated investor angst that as the economy recovers, tech’s growth edge is disappearing. Add that to stretched valuations and there was room for a pullback. Down almost 12% in January, the Nasdaq 100 is on course for its worst month since the 2008 global financial crisis. Investors appear to be paying up for near-term hedges as share prices spiralled down. The CBOE NDX Volatility Index, a gauge of cost options tied to the Nasdaq, jumped 8 points over the four days to 34.06, the highest level since last March. It is hard to tell if this is the start of a bottoming process or something worse.
- Strategists believe a broader and more disruptive selloff is needed to materially impact the direction of monetary policy. The first clues could arrive next week, when the Fed is expected to signal it is ready to raise rates to rein in the economy right after the Nasdaq 100 and its bloated valuations tumbled into a correction. The Fed has signalled it intends to move swiftly to push price gains back toward its 2% target. Republicans and Democrats have expressed concern that the Fed has been over-stimulating the economy and Biden’s comments that the central bank should target inflation suggest politicians can live with some market pain. Meanwhile, the market’s reaction to the Fed’s hawkish stance has been violent, culminating with a dizzying selloff in tech shares whose elevated valuations are no longer justifiable as borrowing costs rise.
- With the central bank reducing its purchases as it moves closer toward raising interest rates, Barclay’s strategists are anticipating rising dislocations in the Treasury market. For shorter-dated securities, there has been a slight widening of bid-ask spreads, a signal of decreased liquidity. Valuations across the front-end of the yield curve have also been pressured by an increase in dealers’ inventories, which would continue if their stockpiles keep growing. Further out on the curve, pricing dislocations have also risen in 10- to 22.5-year Treasuries, though they are typically more volatile given the dynamics in that sector. Such signals of how the Fed’s retreat may weigh on the market’s functioning is drawing renewed attention ahead of the bank’s meeting next week, when it may move to wind down its purchases more rapidly.
- Morgan Stanley saw a plunge of more than 60% in its U.S. rates trading business last year, fuelled by a fourth-quarter flop in one of its most complex desks, as uncertainty about how the Federal Reserve would combat inflation wreaked havoc across Wall Street. The firm’s U.S. structured rates book suffered about $50 million of losses in Q4 2021, leaving that area in the red for last year. The rates loss implies wider upheaval in bond markets that struck in late 2021 and sparked Wall Street’s worst debt-trading quarter in three years.
- Selling has gotten intense enough that the volatility indexes are pricing more turbulence in the here and now than in the future. The inverted VIX is sometimes viewed as a positive for those hoping markets will calm. As the S&P 500 suffered its worst week since October 2020, traders are paying up for near-term protection. The Cboe Volatility Index, a gauge of option costs, has surged 7 points to 26 over the span, pushing its spot price above that of its three-month futures for the first time in more than a month. Such an inverted curve has occurred four other times in the past year, and all coincided with market bottoms.
- S&P 500 dropped 1.9% on Friday to 4,397.94
- Nasdaq 100 dropped 2.8% on Friday to 14,438.40
- Micro observation – Nasdaq 100 fell more than 6% while the S&P 500 fell more than 5% in last week’s trading with mixed earnings reports from banks to tech companies like Netflix and Peloton did little to prop momentum. Investors continue to migrate away from high-valuation tech shares ahead of upcoming monetary policy tightening by the Federal Reserve. We expect further volatility next week as the Fed gathers for another meeting to determine the timeline and extent of the impending rate hikes. Growth tech stock earnings are also expected to pick up in speed starting next week with Apple, Intel and Robinhood reporting results. Telecom giants including AT&T and Verizon will also be reporting earnings next week. The market remains significantly volatile and sensitive to any and all news. Extended intra-day pullbacks observed across stocks like Netflix, Peloton, Shopify and BABA last week on negative news further corroborates the market’s sensitivity in recent weeks as it adds to mounting macro headwinds that have put pressure on asset price performances.
o Lucid – Lucid dropped by more than 2.5% on Friday trading, paring weekly declines at about 8%. The volatility likely stems from the latest lock-up expiry, which has stoked investors’ fear of potential price pressures ahead especially with rate hike concerns. However, the stock continues to outperform comparative peers like Rivian, Fisker, Canoo and Nikola this past week, and has maintained on par with industry leader Tesla.
o Netflix – Largely traded flat after a +20% plunge on lackluster 2021 financial results with weakening subscription volumes. The mediocre outlook has likely played a role in further dampening investors’ sentiment, driving further declines on Friday trading.
o Peloton – Peloton surged almost 12% on Friday trading after a plunge of close to 24% on Thursday, paring some of the losses. The stock has come a full circle from its pre-pandemic levels after its pandemic run on frontloaded demand, which has since soured, leading to recent decisions to cut jobs and halt productions.
o Shopify – The stock fell almost 14% on Friday trading after reports of cancelled contracts with third party fulfilment centers, which could dampen its growth prospects ahead. However, analysts are expecting the company to take fulfilment and distribution in-house instead to ensure proper scaling in the long-run. While recent reports are speculating a reduction of capacity by as much as 50%, Shopify has reiterated that the recent contract cancellations will have no impact to current capacity.
o BABA – Declined more than 7% in last week’s trading despite recent gains on news of the PBOC’s loosening monetary policy to ensure economic growth and stability. Recent declines come after a mid-week report indicating an active probe by U.S. regulators on Alibaba’s cloud business in the U.S. for alleged violation of national security rules.
o U.S. Equities – The Nasdaq 100 and S&P 500 continues to close lower on Friday as news on tech stocks like Netflix, Peloton and Shopify further dampen sentiment on growth stocks. We are expecting further volatility leading up to next week’s FOMC meeting which would likely shed more light on the timeline and extent of upcoming policy tightening measures, including the impending rate hikes.