Newsletter - March 16, 2022
Oil / Commodities
- The Ukraine war threatens staple crops from Europe’s key grain-growing regions, which means escalating food prices that have already been plaguing consumers will only get worse, raising the threat of a full-blown hunger crisis. The UN warned that already record global food costs could surge another 22% as war stifles trade and slashes future harvests. Global food prices are currently at an all-time high, with a benchmark UN index soaring more than 40% over the past two years. Food insecurity has doubled in that period, and 45 million people are estimated to be on the brink of famine. Everything that goes into growing food is also becoming pricier. Russia, a big supplier of every major type of crop nutrient, urged domestic fertilizer producers to cut exports earlier this month, stoking fears of shortages of crop inputs that are vital to growers. Russia’s move adds uncertainty to the global market when farmers in Brazil – the world’s largest fertilizer importer – are already having trouble getting nutrients for crops.
o https://www.bloomberg.com/news/articles/2022-03-13/how-russia-s-invasion-of-ukraine-is-tearing-apart-the-global-food-system?srnd=premium-asia
Tech
- Foxconn has resumed partial operations and production at its two Shenzhen campuses, one of which makes iPhones, after adopting measures to curtail the potential spread of COVID. The company said it had won approval to resume business after adopting a closed loop system across its campuses, under which employees are relatively protected from external infection.
- The semiconductor industry remains a very global businesses. But thew hole trend of trying to make things sovereign in every region and having its own supply chain is rather driven by politics and not by the semiconductor industry. Russia, which has been sanctioned by the U.S. and Europe, is now a clear example of how semiconductors have become increasingly important political tools. The chips were some of the first goods that Washington and Brussels targeted to cut Russia off from the global economy. On the flip side, Russia and Ukraine export palladium and neon used to make semiconductors, though chipmakers have downplayed the potential impact. The U.S. and Europe are now intending to claw back their share of the chip market after collapses in recent decades. The U.S. accounted for nearly 40% of the world’s silicon wafer production in the 1990s, while the EU accounted for more than 20%. The U.S. is now below 15% while the EU has about 10%. In an effort to shift production away from Asia, President Biden plans to put $52 billion into domestic semiconductor research, development and production as part of its broader China competition bill, though it is still pending approval. Meanwhile, the EU’s 27 member states, are only just scrutinizing the European Commission’s recent proposal worth $48 billion to build up the bloc’s chip capacity. China has already been spending what could amount to $150 billion by 2030 to jumpstart production.
- Apple’s iPhones led the mobile industry to a milestone in January, when handsets with 5G capability accounted for more than half of smartphone sales for the first time. Phones with 5G made up 51% of units sold, as the emerging technology is now seen as a key enabler for transformative technologies such as autonomous driving and factory automation. China is being the most aggressive nations in expanding its availability of 5G. The country’s telecom watchdog has said the country will push 5G coverage by adding 600,000 base stations this year, elevating the total number to well above 2 million. The country also drives 5G handset sales for the world’s biggest mobile manufacturers. Apple remains a market leader in the region, accounting for 37% of sales. Samsung, which was the first to introduce 5G-compatible devices in 2019, was limited to a 12% share of the global 5G market because of its laggard status in China.
- Amazon has won unconditional approval from the EU for its plan to buy MGM for $8.45 billion, a bet that a nearly century-old Hollywood icon can feed an insatiable demand for streaming content. MGM’s vast backlog provides an abundance of streaming material, not to mention an opportunity to mine the iconic James Bond and Rocky franchises for new films and TV shows.
- Intel pledged to invest 17 billion euros to build a cutting-edge semiconductor production site in Germany, marking the beginning of Europe’s ambitious attempt to lure global chipmakers back to the region. Intel’s latest spend is part of a plan to devote 80 billion euros to the region over the next decade. France will become home to a new chip research center, and the company will expand its existing production site in Ireland. Intel also announced it is negotiating with Italy about opening a new packaging site. The EU has now set itself the ambitious goal of making 20% of the world’s chip supply by 2030, quadrupling its production.
o https://www.bloomberg.com/news/articles/2022-03-15/intel-plans-19-billion-german-factory-in-bid-for-lastest-chips?srnd=hyperdrive
Electric Vehicles
- BMW said its profitability for its automotive business is expected to decline this year, as the fallout from the war in Ukraine impacts supply chains and weighs on the global economy. Returns from automaking will be between 7% and 9%, down from more than 10% in 2021. The carmaker also expects auto deliveries to remain at 2021 levels as the ongoing violence in Ukraine weighs on production. In the absence of the war, BMW said it would have targeted 8% to 10% profitability for its automotive business. BMW also does not expect the ongoing chip supply shortage to ease until the second half of the year.
- Panasonic is engaged in talks over the site for a new U.S. factory that would supply Tesla and potentially other EV manufacturers with next-generation lithium ion batteries. Panasonic is looking at several locations for the multibillion-dollar factory, including one in Oklahoma and another in Kansas. The plant could begin operating as soon as 2024. In the new U.S. plant, Panasonic will make a newly developed, bigger and more powerful 4680 battery.
- Mercedes opened a battery factory in Alabama months before it started assembling electric SUVs nearby in an effort to challenge Tesla in the U.S. EV market. The German manufacturer will produce lithium-ion batteries at the new Bibb County plant, and start making the EQS and EQE sports utility models at its existing factory in Tuscaloosa in the coming months. Mercedes also announced a partnership with Chinese-owned battery company Envision, which it said will set up a U.S. cell facility that will supply modules by the middle of the decade. Mercedes has budgeted 40 billion euros this decade for electrifying its line-up to defend its position in the premium car market. The company said it has invested $1 billion in Alabama between the battery plant, logistic centers and the production lines it has upgraded to make EVs.
- Ford’s Turkish partner, Koc Holding, will join forces with the U.S. automaker’s battery venture to build one of the world’s largest battery plants by 2025. Koc has signed an initial accord to be a part of the JV between Ford and South Korea’s SK Innovation to make EV batteries. the plant, the first in Tureky, is part of a push by Ford to produce 2 million EVs a year by 2026. Demand for its first EV is emboldening the automaker to ramp up production and raise sales expectations. Its Turkish partnership with Koc expects batteries produced at the new plant in Ankara to power models including Ford’s Transit commercial vans. The Ankora plant will have capacity to build 30 to 45 gWh of batteries. Ford plans to have 240 gWh of global battery capacity by 2030, with 140 gWh coming from JVs with SK. The remaining 100 gWh will be sourced from Europe and China including the proposed plant in Ankara.
o https://www.bloomberg.com/news/articles/2022-03-14/ford-plans-giant-ev-battery-plant-in-turkey-with-sk-koc-holding?srnd=hyperdrive
Consumer / Retail
- Faithful AMC investors are cheering its unorthodox investment in Hycroft Mining Holding, a troubled gold and silver mining company. The investment follows a challenging run for Hycroft, which went public in early 2020 through a SPAC merger. It had lost around 80% of its value since its debut, and the company asked its lenders to grant it some breathing room on its debt last month. Hycroft’s largest shareholder, Mudrick Capital, has experienced this phenomenon before. Mudrick was an architect of AMC’s narrow escape from bankruptcy last year. When AMC’s shares jumped in earlier 2021, Mudrick encouraged the theatre operator to capitalize on the rally. The company issued about $400 million worth of new shares and used the proceeds to pay down debt. Today, Hycroft said it would sell up to $500 million of additional shares in a future at-the-market issuance. It may use proceeds from that and the AMC investment to help finance new technology to better process its reserves. In addition to Gold, AMC has spent months touting a move into crypto, with plans to create its own token and accept cryptocurrencies as payment. Hycroft rallied as much as 05% Tuesday after AMC said it was taking a 22% equity stake in the company.
China Market
- China’s support for Russia in the war in Ukraine is showing its limits as the domestic costs for President Xi start to outweigh the benefits of confronting the U.S. China has shown that it will try to prevent its geopolitical struggles with the U.S. from hurting the domestic economy. Yet, a rapidly worsening COVID situation and the need to maintain stability in a pivotal year for President Xi has made it less likely for him to allow President Putin’s invasion of Ukraine to blow back at home. Signs of domestic pressure were evident Tuesday, as U.S. warnings against Chinese financial and military support for Russia deepened investor concerns that the world’s two largest economies might decouple. Foreign Minister Wang Yi said that China is not a part directly involved in the ongoing Russia-Ukraine crisis and it does not want to be affected by sanctions even more. The comment is consistent with China’s appeals to deescalate the crisis, even as Beijing attempts to blame the U.S. for instigating the war and its diplomats push Russian conspiracy theories about bio labs in Ukraine. Beijing’s actions appear calibrated to minimize the chances that it gets pulled into a global confrontation or dragged further down economically as it seeks a way past the pandemic.
- Equities across Hong Kong and China surged in Asia trading Wednesday after China’s state council vowed to keep its stock market stable amid a historic rout that erased $1.5 trillion in value over the past two sessions. The Hang Seng China Enterprises Index, which tracks mainland companies listed in Hong Kong, jumped as much as 12% on Wednesday, its biggest gain since the global financial crisis. A gauge of Chinese tech firms soared by a record 20%. Some of the most beaten down stocks like Alibaba and Tencent gained at least 20%. A report released by the official Xinhua news agency also cited that concerns over Beijing’s tech crackdown should end soon. Chinese equities have seen intense selling recently amid regulatory fears and speculation that Beijing’s ties with Russia may bring additional U.S. sanctions. Investors had been weighing cheap valuations against lingering risks for tech firms including a possible U.S. delisting of Chinese stocks.
- Creditors to Yanggu Xiangguang Copper, one of China’s biggest copper smelters, have stopped providing more loans over concerns about its ability to repay. The lenders of Xiangguang include Chinese and foreign banks. The local government is lobbying the banks to extend debt maturities and resume some financing, but no agreement has been made yet. Xiangguang held a combined liability of 11 billion yuan as of September last year. The situation with Xiangguang, which can make about 450,000 tons of copper and 20 tons of gold each year, highlights how financing pressures remain elevated in China even as Beijing seeks an economic expansion at about 5.5%.
- China’s home prices fell at a faster pace in February, as easing measures failed to prevent the property industry downturn from worsening. New home prices in 70 cities declined 0.13% last month from January when they dropped 0.04%. Values in the secondary market dropped 0.28%, the same pace as January. A liquidity crisis at developers including China Evergrande Group has led to defaults and fears of contagion that have reverberated throughout the industry and the wider economy. Local governments have recently pivoted to stimulating demand, such as by cutting mortgage rates and down payments. But the measures have done little to revive home sales, which have been falling since July. Sales slid 22% in the first two months of 2022 from a year earlier.
- Ant Group has sold its entire stake in the tech outlet 36Kr Holdings, the latest asset disposal in its bid to comply with demands by China’s regulators. In early March, China’s banking regulator said Ant has yet to complete rectification efforts sought by authorities. Shares of Alibaba, which owns a third of Ant, fell 10% in NY trading on Monday, while 36 Kr Holdings tumbled 12%. Guo Shuqing, chairman of the China Banking and Regulatory Commission, said this month that Beijing’s overall rectification campaign for Ant and 13 other Chinese fintech platforms was not over, despite a smooth completion of their self-inspection efforts. Beijing has already previously pressed Alibaba to sell off assets in its sprawling media portfolio, including its major stake in Weibo and streaming platform Youku, in a bid to curb the company’s influence over social media in China.
o https://www.bloomberg.com/news/articles/2022-03-15/jack-ma-s-ant-sells-china-media-firm-shares-as-scrutiny-persists?srnd=technology-vp
Russia-Ukraine Development
- Officials from Russia and Ukraine are set for further talks Wednesday. Ukrainian President Zelenskiy called the negotiations difficult but said had room for compromise. Meanwhile, Russian President Putin said Ukraine’s leadership was not serious about resolving conflict. Russian forces continue to shell infrastructure while fortifying existing positions. U.S. President Biden will travel to Europe for NATO and EU summits on March 24th. President Zelenskiy will deliver a virtual address to Congress later Wednesday. NATO defense ministers are meeting in Brussels.
- Russia would be in default if it does not pay in U.S. currency the coupon payments that are due Wednesday on its dollar debt within a 30 day grace period according to Fitch Ratings. On the foreign currency side, the nation has $117 million in interest payments due Wednesday, a key moment for debt holders who have already seen the value of their investments plunge since Russia invaded Ukraine last month. These payments are the first non-ruble debt obligations to come due since the Moscow-based government said it would treat differently creditors in countries that had joined sanctions against Russia following its invasion of Ukraine. Separately, Russia would be in default if it has not, within 30-days of a March 2nd payment due date, cured its obligations with regard to the ruble-denominated bond coupons that were due earlier this month. That sets April 1st as a potential key date for the country, which has not defaulted on local currency bonds since 1998 and last failed to meet foreign debt obligations back in 1918.
o https://www.bloomberg.com/news/articles/2022-03-15/russia-to-default-if-dollar-coupons-paid-in-rubles-fitch-says?srnd=premium-asia
Market Update
- Treasuries held stead as investors awaited the Federal Reserve decision; a quarter-point Fed rate increase, the first since 2018, to fight high inflation is widely anticipated but there is less certainty beyond that, as markets expect a total of seven such moves this year while policy makers also have to factor in growth risks emanating from the war and the isolation of Russia in retaliation
o U.S. 10-year Treasury yield held at about 2.15%
- A meeting of top financial leaders in China said the nation will ensure proactive monetary policy and seek to manage the risks stemming from the property sector and vowed market stability; the statement led a rally amid Chinese tech stocks that had plunged earlier during Asia trading Wednesday
- Investors remain on alert for wider volatility stirred by Russia’s war in Ukraine; WTI crude has shed most of the gains since the invasion and remained below $100 a barrel, weighed down by COVID lockdowns in China that pose a threat to demand
- Nickel trading is due to resume Wednesday on the LME, over a week after being suspended amid a historic short squeeze
- U.S. data showed producer-price inflation at 10%, underscoring inflationary pressures; meanwhile, NY state manufacturing activity weakened considerably in early March
- S&P 500 futures rose 0.5%, while the S&P 500 rose 2.1%
- Nasdaq 100 futures rose 1%, while the Nasdaq 100 rose 3.2%
- WTI crude was at $97.14 a barrel, up 0.7%
- Gold was at $1,918.75 an ounce
- Economists are forecasting the FOMC to proceed with four interest rate hikes in 2022 and three in 2023. That would be up from three increases this year flagged in its December dot plot. Yet, there is quite a bit of uncertainty over the committee’s thinking and markets are pricing ins even rate hikes in 2022, or one every meeting. The 2024 dots could prove important as well, as they could show whether the committee expects to raise the Fed’s benchmark overnight policy rate above its neutral setting to cool down inflation. Neutral refers to the rate that neither speeds up nor slows down the economy. It was estimated to lie around 2.5% in the Fed’s December quarterly forecasts. The FOMC is expected to commence lift-off with a 25bps rate hike this meeting. The policy path thereafter is more uncertain, giving evolving macroeconomic challenges. The FOMC has also completed its program of asset purchases this month, and at its last meeting announced general principles around shrinking its balance sheet through runoff of maturity of existing securities. Officials could lay out more details on the pace at which they will allow their massive $8.9 trillion balance sheet to shrink. That may include setting out caps on how many billions of dollars’ worth of Treasuries and MBS will be allowed to mature every month without reinvestment.
o https://www.bloomberg.com/news/articles/2022-03-16/fed-to-hike-and-steepen-its-rate-policy-path-decision-day-guide?srnd=premium-asia
Summary
- Micro – Global equities improved during Tuesday’s regular session ahead of the upcoming FOMC meeting, which would determine the extent of the rate hike cycle lift-off and shed light on what is to come thereafter. Chinese tech stocks soared in Asia trading Wednesday following release of a recent report from the official Xinhua news cited Chinese authorities believe concerns over Beijing’s broad tech crackdown would end soon, and vowed to keep its stock market stable amid a historic rout that erased $1.5 trillion in value over the past two sessions. Investors and traders remain on the side lines as they await further guidance from the FOMC on the upcoming rate hike cycle and balance sheet runoff plans. We expect further volatility in coming weeks as markets adjust to the ever-evolving macroeconomic challenges, especially as ongoing geopolitical tensions between Russia and Ukraine show little signs of improvement.
- Macro – U.S. inflation data showed price increase of 7.9% in February while PPI rose to 10%. The ongoing geopolitical tensions in Russia and Ukraine threatens further price pressures ahead, as it continues to impact critical global food and energy supply chains. Meanwhile, oil prices have retreated below $100 a barrel for the first time in weeks on signs of weakening demand due to COVID outbreaks in China while the Russia-Ukraine war continues to evolve. On the other hand, the U.S. Federal Reserve will be proceeding with its two-day policy meeting beginning Wednesday. A quarter-point rate hike lift-off is expected, with the committee to provide further detail on what to expect thereafter. The FOMC is expected to draw greater support for at least four rate hikes this year amidst stubborn inflation pressures, while markets are pricing in as many as seven rate hikes – one at each meeting – this year.