Newsletter - March 11, 2022
Oil / Commodities
- Uranium spot prices soared to the highest level since the 2011 Fukushima nuclear disaster on concern potential sanctions aimed at Russia are poised to roil an already tight market. The price for benchmark Ux U308 uranium jumped to $59.75 per pound on Thursday, the highest since March 2011 when meltdowns at the Fukushima Dai-Ichi facility shut Japan’s fleet of nuclear plants, which sent a shock-wave across the atomic industry and dashed demand for uranium, the fuel used in reactors. The White House is considering sanctions on Russia’s state-owned atomic energy company, Rosatom, intensifying concerns over disruptions to uranium exports from Russia. Rosatom accounts for more than 35% of global uranium enrichment. Russia accounted for 16.5% of the uranium imported into the U.S. in 2020. Yet, the World Nuclear Association cited that there is still significant potential to increase uranium production outside of Russia. Nuclear plants typically have enough fabricated fuel on site to keep operating for at least a year, and in many cases, much longer.
- Xiang Guangda, the tycoon and owner of Tsingshan Holding, whose big short bet on nickel helped trigger one of the most dramatic price spikes in history, has told his banks and brokers that he does not intend to reduce his position. The move could mean that the nickel market could be set for more fireworks once it reopens. The LME said Tuesday it would start a process to try to close out short positions by matching market participants with long and short positions before the market reopened to reduce the risk that this week’s squeeze is repeated when trading resumes. But Xiang, whose short positions through Tsingshan still stook in the region of 150,000 tons, has shown little interest int his overture. The LME acknowledged late Thursday that there was little appetite from holders of long and short positions to voluntarily reduce the number of positions before reopening the market, particularly from those with short positions. Tsingshan’s difficulties paying its margin calls have put its banks and brokers in a bind, as they have had to make hefty margin calls of their own at the LME to cover their short positions on the exchange. On Monday, a unit of China Construction Bank failed to pay a margin call on time, but was given additional time by the LME and made the payment the following morning. Tsingshan has since secured credit promises from banks including JPM and China Construction Bank that could allow it to avoid defaulting on its margin calls.
- Surging energy costs remain the central complaint in Europe, though disrupted supply chains, sanctions and worries about a looming demand drop are also weighing on enterprise as the Russia-Ukraine conflict continues. The abrupt shock of war nearby, combined with broad effects and an uncertain duration, will pile pressure on governments to cushion the low as well as testing their resolve to confront Russia. Other economic disruption is being inflicted by the geography of the crisis. In Germany, the heartland of the euro-zone economy, Porsche stopped production of its Taycan EV in Stuttgart because it lacks cable trees made in Ukraine. Meanwhile, its parent VW, has halted exports to Russia and stopped production at an auto factory in Kaluga outside Moscow. Most onerous is the energy impact. If current prices persist, the extra cost of importing gas and oil will amount to an income shock of 550 billion euros or 4.5% of annual GDP. Goldman Sachs now reckons inflation ill reach toward 8% and the euro zone will suffer a contraction in the second quarter. if gas supply is turned off, Germany and Eastern Europe almost certainly face a crunching blow to output, pushing the euro area into recession.
o https://www.bloomberg.com/news/articles/2022-03-11/shockwaves-spread-as-europe-s-economy-reels-at-energy-fallout?srnd=premium-asia
Tech
- Tech valuations are back in focus, especially with the recent selloff in major U.S. tech and internet stocks, as March 10 marks the anniversary of the peak of the dot-com era, after which some of the market’s then-biggest names began a collapse they would take years to recover from. The Nasdaq composite index hit an intraday peak of 5,132.52 on this date in 2000, before going on to lose 78% of its value and finally bottoming in October 2002. It would not recover its former peaks until mid-2015. The recent falls come after tech and internet names had led the index higher for years. The scale of that rally means that tech valuations are one again in a central focus for investors. While there are near-term headwinds, the tech sector today appears to be on a much stronger foundation than back in the late ‘90s as many dot-com companies had little profits. Major names today are flushed with cash on their balance sheets that could be used to weather any storm or make acquisitions to boost future growth.
- Twitter will begin labelling state-backed media accounts from Belarus and tweets that share links to these media organizations in an effort to curb misinformation about the war in Ukraine. Twitter is already doing the same for posts linked to state-backed media from Russia. Labelling tweets linked to state-backed media decreased their reach on Twitter by 30%.
- Oracle gave an upbeat forecast for its cloud-computing business, helping its shares recover from a decline in extended trading after the company reported disappointing quarterly profit and lowing growth in its corporate finance applications. The company is guiding cloud revenue growth for the fiscal year at a percentage rate in the mid-20s. total revenue in the current quarter will gain as much as 5%.
- Amazon’s stock split and massive buyback decision could be the boost needed for the stock to break out of a spell of prolonged share price weakness. The stock advanced 5.4% during Thursday trading even as other megacaps fell. Trading on a split-adjusted basis is expected to begin on June 6th following shareholder approval. Analysts are saying it is encouraging that Amazon is turning more shareholder friendly with the company joining the likes of Apple and Alphabet which have used splits to make their stocks more attractive to retail investors. Historically, average returns during the year of split announcements are 25%, compared with 9% for the overall market. Companies in the discretionary, tech and health care sectors have averaged between 26% and 38% in the 12 months following a stock split announcement. The buyback news might be even more significant to Wall Street. Amazon’s previous repurchases gave its shares an average 12-month return of 100%, showing how well-timed they have been.
o https://www.bloomberg.com/news/articles/2022-03-10/amazon-stock-split-and-buyback-could-deliver-much-needed-liftoff?srnd=technology-vp
Electric Vehicles
- Ford and PG&E plan to test the use of new electric trucks to power homes during blackouts as the California utility giant seeks to reduce the impact of outages during wildfires and storms. The companies will test the ability of Ford’s new F-150 Lightning EV to send power flowing back to a house and connect with the grid. Ford’s battery-powered F-150 is the first of its kind that can be used as a backup power source. PG&E will test five trucks this year, including a partnership with GM.
- Panasonic is gearing up to become a major manufacture of a new, more powerful battery championed by Tesla that the Japanese electronics maker says meets the demands of its high-flying customer. Over the past year and a half, Panasonic has been working to develop a bigger 4680 battery it intends to sell to Tesla. Because of the battery’s larger volume, fewer cells and related parts are needed to power an EV, leading Tesla CEO Elon Musk to tout the technology as the key to unlocking $25,000 EVs. While a common inclination may be to look for ways to pack more energy into already existing cell sizes, changing the entire shape took considerable nerve. Tesla has acknowledged that Panasonic’s new batteries are viable and meet the level of performance it is seeking. Panasonic is slated to begin mass production of 4680 cells in the fiscal year starting April 2023, with plans to establish two additional production lines as well as facilities at its Wakayama factory in western Japan. Ahead of that, the company is setting up a prototype production line for the batteries, also in Japan.
- EV maker said its plans to accelerate production are being constrained by overstretched supply chains, extending its stock slide after the start-up’s rough start to the year. Rivian said it expects to build 25,000 vehicles in 2022, a figure weighed down in part by component shortages. Without these hurdles, its factory would have capacity to build about 50,000 vehicles. The company expects shortages to last through at least 2022, adding additional challenge to the production ramp up process. Rivian’s expectations for EBITDA and capital spending make a cash burn of more than $7 billion worse than prior analyst expectations. After starting productions in September, Rivian produced 1,015 vehicles the rest of the year, short of its target. Following COVID disruptions and a planned shutdown of assembly lines on New Year’s Day, Rivian has built another 1,410 vehicles this year. Rivian recently hit a rate of production that was two times what it achieved in the fourth quarter, indicating improvements on assembly lines. Reservations for Rivian’s consumer EVs stood at 83,000 as of March 8th. The company said last week that it plans to raise prices for new customers by 17% for the R1T and 20% for the R1S. The announcement marked another stumble for Rivian, which was forced to roll back the price hike for prior customers following a backlash, saying it made a mistake in applying it broadly. The company noted there were no mass cancellations following the decision to raise prices. After the reversal, more than half of those who did cancel had reinstated their orders.
o https://www.bloomberg.com/news/articles/2022-03-10/rivian-slides-as-quarterly-results-fall-short-of-expectations?srnd=premium-asia
Consumer / Retail
- Rihanna’s lingerie brand Savage x Fenty is working on an IPO that could value the company at $3 billion or more. A listing could happen as soon as this year. the company raised $125 million in January in a funding round led by Neuberger Berman with participation from previous investors L Catterton, Avenir Growth Capital, Sunley House Capital Management, and Jay-Z’s Marcy Venture Partners.
o https://www.bloomberg.com/news/articles/2022-03-11/rihanna-s-lingerie-company-said-to-weigh-ipo-at-3-billion-value?srnd=premium-asia
China Market
- Chinese Premier Li Keqiang said he would step down from his post after this year, pointing to a coming reshuffle amid questions over the future of President Xi. Li currently leads the State Council and oversees a range of ministries, including serving as commander-in-chief of the military as part of his responsibilities as Premier. The country is preparing for a twice-a-decade Communist Party congress in the second half of this year in which top party posts will be reshuffled. While President Xi is expected to stay on for a precedent-breaking third term as leader after removing presidential term limits in 2018, authorities have yet to provide a concrete comment on such plans. Premier Li also serves as the No. 2 member of the Politburo’s supreme Standing Committee, a position he is young enough to retain even if he steps down from the Premier job.
- China sought to reassure investors that VC still has a role to play in the technology sector after a year-long crackdown on online gaming, tutoring and other areas that hammered shares of big tech companies including Alibaba and Tencent. Beijing’s sweeping crackdowns on big tech has opened the door for a new generation of start-ups that have been selected under an ambitious government program aimed at fostering a technology industry that can compete with Silicon Valley. The so-called little giants are getting Beijing’s support to help the country shake off its foreign dependence on everything from chips to medicine.
- Didi has suspended preparations for its planned Hong Kong IPO after failing to appease Chinese regulators’ demands that it overhaul its systems for handling sensitive user data. The Cyberspace Administration of China informed Didi executives their proposals to prevent security and data leaks had fallen short. Its main apps, removed from local app stores last year, will remain suspended for the time being. Didi’s IPO in Hong Kong, which was originally scheduled for this summer, has now been halted. Didi is concurrently working to finalize its fourth quarter results as required for a listing prospectus. The CAC could make the probe results public in the coming weeks. Didi’s own listing was expected to precede a wave of Chinese debuts closer to home, particularly from the sensitive internet arena. A suspension of its listing plans stokes persistent uncertainty over the government’s intentions for the giant industry following an unprecedented series of regulatory actions levelled against big tech companies like Alibaba and Tencent.
- Chinese tech shares tumbled to a fresh low, tracking overnight weakness in their U.S. peers, as renewed regulatory concerns unnerved investors still reeling from wild price swings this week. Friday’s sell-off comes as the U.S. SEC identified five Chinese firms this week that could be subject to delisting if they failed to comply with certain auditing requirements – BeiGene, Yum China, Zai Lab, ACM Research and HUTCHMED. While analysts say the risks of delisting is unlikely to materialize in the near-term, the news unnerved investors already on edge following Beijing’s yearlong crackdowns and the fallout from the war in Ukraine.
o https://www.bloomberg.com/news/articles/2022-03-10/china-stocks-trading-in-u-s-tumble-10-after-wild-ride-in-asia
- China’s daily COVID infections exceeded 1,000 for the first time in two years, as the highly infectious omicron variant spawns outbreaks at a scale only seen at the peak of the start of the pandemic in Wuhan. This has presented significant challenge to China’s ongoing zero-tolerance approach to the virus. Most of the newly reported infections in Shanghai are among people who have already been isolated for being close contacts to confirmed cases. Just two of the 75 COVID cases reported in the city Friday were in the community.
o https://www.bloomberg.com/news/articles/2022-03-11/china-covid-infections-top-1-000-for-the-first-time-in-two-years?srnd=premium-asia
Russia-Ukraine Development
- President Biden on Friday is set to call for an end of normal trade relations with Russia, clearing the way for increased tariffs on Russian imports. His announcement to revoke the trade privileges will come alongside the Group of Seven nations and EU leaders. Suspending normal trade relations with the U.S., which other countries call most favoured nation status, would put Russia in the company of countries like Cuba and North Korea. It would allow the U.S. to hit Russia with significantly higher tariffs than it applies to other WTO members, which has a core principle non-discrimination among members and treating all members equally. The EU said last week it is seeking to remove Russia’s most-favoured nation status, and Canada withdrew the designation for Russia. Russia is far more dependent on the EU than the U.S., selling about one-third of its exports to the bloc, versus just 5% to the U.S. in 2020 according to the IMF.
- The campaign to starve Russia of technology, stripping the nation of everything from iPhones to Airbnb listings to defense electronics, is an unprecedented experiment that risks pushing President Putin further into China’s orbit. Using export controls as a tool, the U.S. is leading an effort to deprive Russia of components it needs for high-end industry and advanced weapons, with the hopes of ensuring that President Putin feels the pain of his decision to invade Ukraine. Many of the U.S.’ biggest companies have gone beyond official sanctions, effectively establishing a tech boycott of the nation. A senior Biden administration official acknowledged the experimental nature of the tech broadside, given the unprecedented extent of ongoing sanctions against Russia. While nobody knows how the export-control move will play out, the economic separation espoused by both the U.S. government and tech companies feels like exactly what is needed.
o https://www.bloomberg.com/news/articles/2022-03-11/tech-walls-off-russia-like-never-before-posing-new-risks-for-u-s?srnd=premium-asia
- About 40,000 civilians had left combat zones on Thursday, while Russian attacks continue to hamper evacuations from southern cities including Mariupol. The mayor of Kyiv said almost half the capital’s citizens have fled since Russia began attacking the city two weeks ago. China reiterated support for cease-fire talks without criticizing the invasion ordered by Russia. EU leaders meeting in France remained split over how quickly Ukraine’s membership process should advance, with several eastern members asking for a stronger declaration in support of Kyiv’s bid. EU leaders will reconvene later Friday morning for the second day of their informal summit at Versailles.
- Russia announced an export ban for more than 200 products after the economy was hit by sanctions over the invasion of Ukraine. It stopped short of curbing sales of energy and raw materials, the country’s biggest contribution to global trade. The restrictions cover items previously imported into Russia, from medical equipment and agricultural machinery to railway cars and turbines. The ban applies until the end of this year. Russia also announced suspension of exports of several types of timber and timber products to states that are undertaking hostile actions against Russia.
- China has reiterated support for cease-fire talks between Russia and Ukraine, while continuing to avoid criticizing the invasion ordered last month by President Putin. Premier Li Keqiang did not respond to reporter questions that pointed out China has not yet condemned the war or called it an invasion, which would imply a violation of the UN-guaranteed sovereignty Beijing says it upholds. Talks in Turkey between Russian Foreign Minister Sergei Lavrov and his Ukrainian counterpart Dmytro Kuleba failed to make progress in halting the war. Kuleba said after the talks that the Russian side would continue to press its attack until Ukraine surrenders. Lavrov, for his own part, reiterated that Russia was seeking the demilitarization of Ukraine.
- Ukraine and Russia failed to make progress in halting the war and bridging the vast differences between them at the first high-level talks between their foreign ministers since the Russian invasion began. Russia indicated it will continue attacks until its goals are met according to Ukrainian Foreign Minister Dmytro Kuleba. The least of Russian demands is that Ukraine would need to surrender. Meanwhile, Russian Foreign Minister Sergei Lavrov said Russia is open to serious talks between the two presidents but those contacts must have added value. He reiterated that Russia is seeking the demilitarization of Ukraine. Ukraine President Volodymyr Zelenskiy had earlier said he is willing to consider some compromises on Russia’s demand that his country abandons ambitious to join the NATO and adopt a neutral position. Ukraine is insisting on security guarantees from neighbours ad allies such as the U.S., the U.K., and Germany and will not cede a single inch of its territory to Russia.
o https://www.bloomberg.com/news/articles/2022-03-10/ukraine-and-russia-fail-to-make-progress-in-talks-to-halt-war
- JPM and Goldman Sachs are both pulling back from Russia in response to the country’s invasion of Ukraine last month. JPM is currently engaging in limited activities in the country, while Goldman Sachs has planned to close its operations there altogether.
o https://www.bloomberg.com/news/articles/2022-03-10/goldman-sachs-to-exit-russia-in-wall-street-s-first-pullout
- Russia’s government moved closer to seizing and even nationalizing foreign-owned companies that are leaving the market over the invasion of Ukraine, while planning measures to coax others into staying. In the first explicit response to the exodus of foreign businesses from Ikea to McDonald’s, the Economy Ministry has outlined new policies to take temporary control of departing companies where foreign ownership exceeds 25%. Under the proposals, a Moscow court would consider requests from board members and others to bring in external managers. The court could then freeze shares of foreign-owned companies as part of an effort to preserve property and employees.
- The U.K. has frozen assets of Chelsea Football Club owner Roman Abramovich, as the government dramatically stepped up its sanctions against prominent Russians over the invasion of Ukraine. Abramovich and six others face a full asset freeze and travel ban, and are prohibited from transacting with U.K. citizens or businesses. The move effectively derails Abramovich’s plan to try to sell Chelsea, which plays in England’s biggest football league, and raises major questions about the future of the club. Chelsea cannot sell new tickets for matches, including games in the European Champions League, and the club’s merchandise stores will be closed. Player transfers have also been banned, as are new contracts. Abramovich had earlier announced intentions to sell Chelsea, with proceeds going to all victims of the war in Ukraine. But the plan lacked details and left open the possibility that Russian victims would also benefit from the sale. According to the Treasury, the U.K. government would consider a conversation on an application to sell the club, but Abramovich would not be allowed to benefit from the proceeds. The latest measures are worth an estimated 15 billion pounds. They bring to 18 the number of wealthy Russians sanctioned since the invasion of Ukraine.
o https://www.bloomberg.com/news/articles/2022-03-10/u-k-freezes-roman-abramovich-s-assets-in-fresh-russia-sanctions
Market Update
- The Senate passed a full year $1.5 trillion federal funding bill that wards off a possible government shutdown while also providing Ukraine with aid to respond to the Russian invasion of its territory. A bipartisan sense of urgency to approve the $13.6 billion for humanitarian and security aid in response to Russia’s attack led to an overwhelming 68 to 31 vote on the legislation. The measure now heads to President Biden for signing. With a Friday midnight deadline to prevent a government shutdown looming, the House also sent the Senate a stopgap bill to keep federal operations funded through March 15th. That bill also passed. Missing from the legislation is $15.6 billion in emergency funding for COVID, which was stripped out after some House Democrats objected to paying for it with cuts to state and local government aid. Democrats will now look for ways to fund the COVID response, but cuts likely will have to be found elsewhere to get a standalone bill through the Senate. The annual spending for the Pentagon alone comes to $743.4 billion, $28.4 billion above the president’s request of $715 billion for the year.
- Many Americans are saying their salaries are not keeping up with prices. In February, 73% of lower earners, defined as those with household income of less than $25,000 annually, said they had felt the impact of inflation recently, but only 9% said their wages had kept up with living costs. Across all income levels, just 18% of consumers said their wages were keeping pace with the higher cost of living. That struggle is reflected in Labour Department data reported Thursday, which showed that inflation-adjusted average weekly earnings fell 2.3% in February from a year earlier. However, over the past two years, the increase in U.S. nominal wage growth has actually outpaced inflation, rising 10.6% versus a 9.7% increase in the CPI. Those with household incomes of $100,000 or more were better able to cope with inflation that hit a fresh 40-year high of 7.9% last month. Most people (62%) said inflation had affected their spending – 38% of consumers said they tried to spend less by cutting non-essential spending and cancelling or putting off trips, while 42% said they either saved less, tapped into savings, borrowed money or took out a loan.
o https://www.bloomberg.com/news/articles/2022-03-10/are-pay-raises-keeping-up-with-the-inflation-rate-american-workers-say-no?srnd=premium-asia
- Treasuries rose as a broad risk-off mood took hold amid hot U.S. inflation data and continued negative news out of Ukraine; Treasuries pared an overnight decline that took the 10-year yield briefly above 2%
- The latest evidence of inflationary pressure snapped fledgling rallies across global markets as hopes of progress in talks between Russia and Ukraine faded; the data compounded investors’ concerns about the risks to the global economy from the conflict-driven surge in commodity markets over the past couple of weeks
- Chinese stocks traded in the U.S. had their worst day since 2008 Thursday amid renewed regulatory concerns; the U.S. has identified five Chinese firms that could be delisted
- Oil is on track for its biggest weekly loss since November as its searing gains fade; though oil prices have retreated, signs of broader price gains have raised the potential for more aggressive action from the Federal Reserve ahead of the upcoming rate cycle lift-off scheduled next Wednesday
- Money-market traders ratcheted up positioning for higher U.S. rates this year to close to seven quarter-point moves
- S&P 500 futures fell 0.4, while the S&P 500 fell 0.4% to 4,259.52
- Nasdaq 100 futures dropped 0.7%, while the Nasdaq 100 fell 0.8% to 13,591.00
- 10-year Treasury yield fell 2 bps to 1.97%
- WTI crude edged up 0.3% to $106.26 a barrel
- Gold fell 0.4% to $1,989.88 an ounce
Summary
- Micro – Global equities retracted Thursday after failed talks between Ukraine and Russia on a potential compromise stoke returning fears on what the ongoing conflicts might mean for the global economy. U.S. inflation data released Thursday also added to pressures, showing 7.9% price increases in February, marking another 30-year record high. U.S.-listed Chinese stocks fared worst, posting the largest declines since 2008 following the U.S. SEC’s identification of five companies that are at risk of delisting on non-compliance to the Holding Foreign Companies Accountable Act, and renewed regulatory concerns following Didi’s decision to halt its Hong Kong IPO process after the CAC refused to sign off on the company’s ongoing cybersecurity probe. With price pressures remaining at stubborn, record high levels, and ongoing macroeconomic challenges ballooning uncertainties over the global economic outlook ahead of the Fed’s rate hike lift-off anticipated for next week, the markets is expected to see further volatility within the foreseeable future.
- Macro – U.S. inflation data showed price increase of 7.9% in February, marking another 40-year high. The situation will likely get worse after record high energy and commodity prices as well as other exacerbated supply chain constraints resulting from ongoing Russia-Ukraine conflicts start to hit consumer wallets further. The development is likely making it even more difficult for the Federal Reserve’s plans on curbing the hottest inflation in decades, especially as it looks to start raising interest rates next week. Traders are now pricing in as many as seven quarter-point rate hikes this year, while some are expecting half-point increases still if price pressures persist, which could further stifle economic growth. Yet, on the other hand, an overly aggressive measure could risk pushing the economy into a recession.