Newsletter - May 11, 2022
Oil / Commodities
- Heavy rainfall sweeping across southern China is swelling reservoirs and promising ample hydropower generation that will further suppress coal demand already weakened by pandemic restrictions. China has the world’s largest fleet of power-producing dams, with about 394 gigawatts of capacity. Hydropower generation as already up 13% over the previous year through the end of March. Continued strong output from them could help ease the burden on coal. The government has taken a slew of measures to increase supply of the fuel to ensure there is no repeat of last year’s shortages that caused widespread power curtailments. Concerns about coal supply were already abating after a slump in demand caused by China locking down large swathes of its population to prevent the spread of COVID. Consumption across key terminals in 25 provinces during the week of May 4th was down almost 6% from the previous year, while inventories had risen about 35%.
- Oil surpassed $100 a barrel as China’s COVID cases eased ahead of U.S. inflation data that may influence the pace of interest rate hikes. WTI futures rebounded after plunging around 9% over two days. Infections in Shanghai and Beijing dropped on Tuesday, providing some cautious optimism of improvement after lockdowns led to surging inflation in April. The U.S. CPI print is scheduled for later Wednesday. The ongoing Russia-Ukraine war has also fanned inflation, driving up the cost of everything from food to fuel, with retail gasoline in the U.S. hitting a record ahead of the summer driving season. Oil is still up more than 30% for the year after a robust start underpinned by economies rebounded from the pandemic. A big U.S. CPI print on Wednesday might usher further speculation of more aggressive Fed rate hikes. Investors are also watching for the outcome of proposed sanctions by the EU on Russian oil. The American Petroleum Institute reported U.S. crude stockpiles rose by 1.62 million barrels last week. Fuel inventories also expanded.
o https://www.bloomberg.com/news/articles/2022-05-10/oil-extends-losses-below-100-ahead-of-us-inflation-figures?srnd=premium-asia
Tech
- Bitcoin held a partial rebound from this week’s selloff amid steadier sentiment in global markets and expectations of help for a stablecoin whose struggles have cast a cloud over the cryptocurrency sector. The world’s largest token hovered around $31,000 in Asia trading Wednesday, after bounding from a brief dip below $30,000 a day earlier. Ether, Solana, and a range of other virtual coins have made modest gains. The regulatory focus appears to be weighing on sentiment for stablecoins still amid softening demand to some extend for the broader crypto ecosystem. U.S. stock indexes and Bitcoin could continue to move in tandem for a while longer, after correlation between the two reached a record level.
- SEC chair Gary Gensler is ratcheting up his criticism of digital asset exchanges, arguing that some platforms are shirking rules and may be betting against their own customers. Chair Gensler reiterated Tuesday that most digital assets fall under his agency’s purview and venues trading them should register with the regulator. The SEC is also beefing up its enforcement efforts. Chair Gensler raised concerns that crypto exchanges are not putting up proper walls between different parts of their businesses such as custody, market-making, and offering a trading venue, with the commingling of such services not in clients’ best interests. Chair Gensler also raised issues with stablecoins, digital assets that are typically pegged to the dollar or another fiat currency. The three largest stablecoins – Tether, USD Coin, and Binance USD – are all affiliated with exchanges, which allows trading on related crypto exchange platforms to potentially avoid AML and KYC controls.
- Elon Musk vowed to reverse the permanent ban on former President Donald Trump’s Twitter account following completion of his acquisition of the social media company. Musk, who reached an agreement to acquire Twitter for about $44 billion late last month, said he believes the company has overstepped on policing user speech and wants to push it toward a more free-speech-focused approach.
- EA Games reported revenue for the current quarter that missed analysts’ estimates, as the video game publisher continues to feel the effects of an industry-wide downturn and the flop of last fall’s Battlefield game. The company guided June-quarter revenues between $1.2 billion and $1.25 billion, falling short of consensus estimates of $1.45 billion. EA has yet to release any major titles in 2022 and is still dealing with the fallout from Battlefield 2042, which was released last November to mediocre reviews and poor fan reception. Earlier Tuesday, EA said it was also ending the lucrative licensing agreement it had for nearly three decades with FIFA. The related game will be renamed EA Sports FC, effective next year. The company is also expected to soon share more information about its upcoming Star Wars titles, such as sequels to 2019’s popular Star Wars Jedi: Fallen Order. On Monday, EA announced that it is developing a mobile game based on The Lord of the Rings, in partnership with Middle Earth Enterprises.
- Roblox reported bookings that declined from a year ago and missed analysts’ estimates, continuing a trend that saw the time players spent on the platform growing slower than during the pandemic. In North America, Roblox saw fewer hours per DAU during the first quarter relative to the same period in 2021 when most were subject to COVID lockdowns. Investors also questioned how Roblox will make money from its young, dedicated users. Right now, games are free-to-play, but the company generated revenue through sales of in-game currency, Robux, and the 73 cents it skims from every dollar spent in-game on user-generated content. Roblox also participates in ad deals, including with Marvel, Gucci and Chipotle. Ads in Roblox have been controversial because most of its user base are younger than 18 years old. In April, advertising watchdog Truth in Advertising sent a complaint to the U.S. FTC complaining that Roblox has failed to establish any meaningful guardrails to ensure compliance with truth in advertising laws. For now, the company seems to be pivoting back to focus on its younger audience as part of plans to improve its net bookings. Roblox said a year ago that it hoped to expand its players older than 16 years old. The company said Tuesday its 9- to 12-year-old user base is not fully penetrated and wants to increase their numbers.
- SoftBank’s Vision Fund investment unit may have lost more money in one quarter than it ever has before ahead of the company’s upcoming earnings release Thursday. The world’s biggest tech fund is estimated to have lost about $18.6 billion on its public portfolio alone during the quarter ended March 31st, even greater than the record $18.3 billion drop marked in the fiscal second quarter. that would mean a loss for the Vision Fund unit of about $10 billion, accounting for SoftBank’s stake I each fund. It is a drastic reversal from a year ago when the company had earned more money in a single quarter than any Japanese company in history. SoftBank’s two Vision Funds have been hit hard by plunging tech valuations as global interest rates climb and China tightens its regulatory grip on the industry. South Korea’s Coupang and China’s Didi Global have been among the biggest drags for the Vision Fund, with each of them posting their biggest quarterly share-price slump of 40% and 50%, respectively. Jitters over further tech valuation falls are denting SoftBank’s reputation and raised concern over the sustainability of the business. The lack of transparency over how much of the funds’ assets are collateralized is another factor fanning market anxiety.
- Apple’s iPod, a ground-breaking device that upended the music and electronics industries more than two decades ago, is coming to an end. The company announced Tuesday it would discontinue the iPod Touch, the last remnant of a product line that first went on sale in October 2001. The touch-screen model, which launched in 2007, will remain on sale until supplies run out. iPod models have been phasing out since 2014, as new product releases have gradually eclipsed popularity of the music streaming device. Apple has integrated an incredible music experience across all of its products over the years. The iPod was credited with helping to turn Apple from a nearly bankrupt company to an eventual $3 trillion behemoth. The iPod set the stage for the development of the iPhone, iPad and AirPods, products that now make up most of Apple’s revenues.
o https://www.bloomberg.com/news/articles/2022-05-10/apple-discontinues-ipod-ending-era-that-began-under-steve-jobs?srnd=technology-vp
Electric Vehicles
- Canoo fell in extended trading after warning shareholders that there is substantial doubt that the EV start-up has enough cash to keep doing business. The company said Tuesday it has lined up $300 million in funding from an existing shareholder and an equity purchase agreement with Yorkville Advisors. Canoo also filed a $300 million universal shelf offering. But the company said the timing of the funding raises doubts about its future. Canoo had just $104.9 million in cash and cash equivalents as of March 31st. Canoo may sell up to $250 million in shares to Yorkville as part of a standby equity purchase agreement. Another $50 million in shares will be sold through a PIPE. A special purpose vehicle connected to CEO Anthony Aquila’s own family office is putting up the money and the transaction is expected to occur as promptly as practicable and is subject to customary closing conditions. Canoo is attempting start of productions in the fourth quarter, but the company is not certain it can hit its projected target of 3,000 to 6,000 units this year. the company used about $120 million net cash in operating activities in the first quarter, compared with $54 million in the same period in 2021.
- Apple continues to ramp up hiring from Ford, Rivian and Mercedes to hasten the development of its first electric and autonomous vehicle. The project has been in flux for more than a year amid several executive departures, most notably that of Doug Field, who ran the operation prior to leaving in September to Ford. The project’s latest hiring spree adds to a long list of reasons still to believe that the Apple car remains in the works. But the car project seems to be lacking strong leadership and vision from the car world. An Apple-designed car would sync well with the Apple ecosystem and bring new-age bells and whistles that could be an especially competitive rival to Tesla, Lucid and Rivian.
- Chinese miners and battery makers are forging closer ties as the accelerating shift to EV highlights the shortage of a metal key to the clean energy revolution. Lithium jumped more than 400% in China over the past year, unnerving Beijing and sparking a flurry of deals from Argentina to Zimbabwe. Battery manufacturers are rushing to secure supplies of lithium as EV demand pushes prices higher. Much of the industry’s new developments involve smaller players in China looking to secure resource supply overseas, a strategy that the country has employed to gain control of the supply chain. China’s increasing domination of the battery metals industry is also forcing the U.S. and Europe to respond as supply chain woes during the pandemic showed the importance of having materials readily available locally. The Biden Administration has been pushing to accelerate U.S. production of key battery metals.
- Shares of Rivian tanked earlier this week after shareholders got their first chance to unload the shares. Selling restrictions on certain Rivian insiders and investors ended Sunday, freeing up a sizable chunk of the EV maker’s float for public trading. The stock has now collapsed 87% from its November high. The focus now turns to the company’s two most prominent corporate backers – Amazon and Ford – and whether they start reducing their stakes. Abut 720 million Rivian shares are estimated to have become eligible for sale as the market opened. The company had a float of about 182.5 million shares as of April 11th. Amazon owns about 17.7% of Rivian, while Ford owns 11.4%. Few expect Amazon to lighten its position, but Ford is a different story. There have been speculations that Ford is planning a sell of 8 million Rivian shares through Goldman Sachs. JPM is also selling a block of 13 million to 15 million shares in Rivian for an unknown seller. Both blocks are priced at $26.90, a discount of 6.7% to the stock’s Friday close. Abdul Latif Jameel, a Saudi Arabia-based group and an investor in Rivian, said it has no plans to sell shares. Jameel holds 114 million Rivian shares, representing a 12.8% stake, through Global Oryx, making the third largest Rivian owner after T Rowe Price and Amazon. Rivian’s IPO lockup expiry is slated to spell more volatility and weakness in the stock.
o https://www.bloomberg.com/news/articles/2022-05-09/rivian-slumps-amid-report-ford-is-selling-shares-at-a-discount
Consumer / Retail
- Nike has escalated its legal battle with sneaker marketplace StockX, saying it purchased four pairs of counterfeit shoes on the platform despite the company’s promises that it is only marketing authentic footwear. The company has asked a federal judge to let it add claims of counterfeiting and false advertising to the current trademark-infringement lawsuit against StockX. Nike sued StockX in February in federal court in Manhattan, accusing the marketplace of blatantly freeriding on Nike’s trademarks and goodwill with a service called Vault NFTs. StockX argued that tis NFTs are not digital sneakers but simply listings for physical sneakers that are stored in its vault and can be traded by users.
o https://www.bloomberg.com/news/articles/2022-05-10/nike-escalates-feud-with-stockx-says-site-is-selling-fake-shoes
China Market
- Researchers at Shanghai’s Fudan University found China risks a tsunami of COVID infections resulting in 1.6 million deaths if the government abandons it long-held COVID Zero policy and allows the highly infectious omicron variant to spread. The peer reviewed study found that the level of immunity induced by China’s March vaccination campaign would be insufficient to prevent an omicron wave that would swamp intensive care capacity, given low vaccine rates among the elderly and the nation’s reliance on less effective, domestic shots. The research estimates the free spread of omicron without mass testing drives and strict lockdowns could lead to 112.2 million symptomatic cases, 5.1 million hospital admissions, and 1.6 million deaths, with the major wave occurring between May and July. The research comes as the WHO calls on China to rethink its COVID Zero strategy, saying the approach no longer makes sense as the omicron variant spreads and the country’s economy suffers.
o https://www.bloomberg.com/news/articles/2022-05-10/china-s-zero-covid-policy-is-unsustainable-says-who-chief?srnd=premium-asia
- China’s planned stimulus this time around is unlikely to do much to reverse the global economic slowdown compared to previous rounds in response to the 2008 financial crisis and the property market decline in 2016. With China’s economy more than twice as large today, accounting for more than 18% of global output, policymakers are reluctant to unleash something on the scale of the 2008 4-trillion-yuan blitz, which left a legacy of debt and record corporate defaults. Beijing has promised a package of extra government spending and tax cuts worth about 4.5 trillion yuan. Even though it is also quietly allowing local governments to increase off-balance sheet debt to fund infrastructure, that is less than half the size of the 2008 support relative to GDP. Also unlike 2008, China is currently contending with virus outbreaks and appears determined not to use the property sector to bolster the economy. Warnings of a global recession are growing in number. The IMF last month slashed its world growth forecast for 2022 to 3.6%, down from 4.4% in January before the war.
- China stocks rallied for a second day as declining virus cases boosted sentiment among traders in the nation’s battered equity market. A drop in COVID cases in Shanghai and increased expectations of policy impetus to buoy growth in the second half are factors working together at this stage. Longer-term funds could be buying the dip, while short-term money could also be getting more active to trade a technical bounce. The nascent rebound is once again spurring hopes that the worst may be over for Chinese equities after a monthslong selloff triggered by COVID lockdowns, regulatory crackdowns and rising global interest rates. Policy measures and vows of market stability from authorities since mid-March have so far brought only fleeting gains. Morgan Stanley strategists are suggesting that Chinese equities are nearing the late stage of a bear market, but the final leg will be bumpy. Near-term volatility is expected to remain elevated, given the uncertainties surrounding China’s COVID situation, global macro slowdown and monetary tightening.
o https://www.bloomberg.com/news/articles/2022-05-11/morgan-stanley-says-asia-em-stocks-in-bear-market-s-late-stage?srnd=premium-asia
- China’s factory and consumer prices rose faster than expected in April as COVID lockdowns battered supply chains and pushed people to stockpile food. The PPI rose 8% from a year earlier compared to 8.3% in March, above the median estimate of 7.8% increase. Consumer growth accelerated to 2.1% from 1.5% in March, faster than the projected 1.8% gain. While commodity prices are inching down from the very high levels spurred by the war in Ukraine, costs remain elevated and have squeezed manufacturers’ profits. COVID outbreaks in China and restrictions intended to contain them have indirectly added to operating costs, making it tougher for factories to maintain production, obtain raw materials and ship out finished goods. Panic buying and stocking among consumers have also likely pushed up demand, buoying a high CPI. As supply chain disruptions gradually resolve, inflationary pressure may fade away too. Food vegetable costs jumped 24% from a year ago, compared to an increase of 17.2% in March due to ongoing lockdowns. Pork prices continued to fall, plunging 33.3%. wholesale vegetable prices in the first week of May have continued to drop but are still almost 12% above the price in the same week last year. a 28% jump in fuel costs also contributed to higher consumer prices. Core CPI, which excludes volatile food and energy prices, rose 0.9% compared to March’s 1.1%. With Shanghai handling around a fifth of China’s port volume and the country accounting for 15% of world merchandise exports, shortages of manufactured goods could intensify, adding to existing global inflationary pressures. This channel is likely to overweigh the effect of slower growth in China on global inflation through a weakening of commodity demand and prices.
- Investors are keeping a close eye on whether Sunac China Holdings makes a key dollar bond interest payment by Wednesday’s deadline. If Sunac, China’s fourth largest developer by sales, fails to pay up, cross-default on its other offshore debt could result. Meanwhile, the Federal Reserve has listed China’s housing market as one of the near-term risks to the U.S. financial system, along with the Russia-Ukraine war and inflation. China’s junk-rated offshore notes fell for a fifth session Tuesday, hitting its lowest level since March 2020. Developer shares also dropped as much as 0.7% Wednesday.
- Premier Li Keqiang’s warning of China’s complicated and grave employment situation on Saturday was particularly dire, even for someone who has sounded the alarm for months. It was also notable that he had no mention of the country’s ongoing COVID Zero strategy. Just days earlier, the Politburo Standing Committee warned China’s citizens not to question COVID-control policies, a statement that by contrast contained no mention of the economy. Besides confusing local officials who must find a way to eliminate COVID and growth the economy, the mixed messages from China’s most powerful leaders raise questions about whether there has been a split at the top over the best way out of the pandemic. While it is still a stretch to say that President Xi and Premier Li are personally at loggerheads, their statements do represent divergent views within the system on COVID and its impact, nonetheless. While the Standing Committee last week made no mention of balancing COVID controls with economic growth, Premier Li’s statement emphasized unemployment, which climbed to 5.8% in March, the highest since May 2020.
- Chinese online property platform KE Holdings began trading in Hong Kong without raising funds as it expands its investor base amid a risk of delisting from the U.S. market.
o https://www.bloomberg.com/news/articles/2022-05-11/chinese-online-platform-ke-holdings-starts-trading-in-hong-kong
Russia-Ukraine Development
- The U.S. House on Tuesday night approved a more than $40 billion emergency Ukraine spending bill that pays for new weapons and provides economic and humanitarian assistance. The legislation, which is significantly larger than the $33 billion aid package President Biden had requested last month, now heads to the Senate where approval is likely next week. The bill includes $19.7 billion for the Defense Department, more than $3 billion above the level asked by the Biden administration. This includes the $6 billion in direct security assistance to Ukraine and $9.05 billion to replenish weapons stocks sent from the Pentagon to Ukraine. The package would provide $4 billion in foreign military financing for Ukraine and other countries affected by the invasion to help them purchase weapons. The bill also includes $8.8 billion in direct economic support for Ukraine, along with funds to repair the U.S. Embassy in Kyiv, document war crimes and protect against nuclear fuel leaks. The measure would provide $4.35 billion for global food and humanitarian aid to be administered by the U.S. Agency for International Development as well, plus another $700 million in global food funding at the State Department.
- Russia’s attempted missile strike on the southwester-most corner of Ukraine last Friday was still a rarity compared to the now-familiar routine elsewhere in Ukraine since Russia invaded in late February. The southwester-most corner of Ukraine between Moldova and Romania has been largely untouched by the war, providing a transit corridor for cargoes no longer able to use seaports that once handled 70% of Ukraine’s trade. Odesa has been less fortunate. On Monday, it was hit again by multiple missile strikes. Mariupol, further east, lies in ruins. But as the invasion settles into a war of attrition, with logistics playing a decisive role, this ethnically mixed and traditionally pro-Russian region known locally as Bessarabia is growing in strategic importance. Fears have rising since late April when missiles twice struck the crossing at Zatoka, which carries the only road and rail connection between Bessarabia and the rest of Ukraine. With Russia’s blockade of sea ports around Odesa forcing trade to reroute, cargo volumes through Ukraine’s smaller Danube river ports have quadrupled since the start of the war, to 850,000 metric tons in April. Ukraine’s infrastructure ministry said it aims to boost that to 1 million metric tons per month and increase rail freight capacity to the EU. Russia may have other plans. The latest missile strike on a steel bridge close to the port was primarily an attempt to cause serious economic damage to the area and disrupt logistics. Trucks now have to drive through Moldova to get from one part of Ukraine to the other, or to and from the Romanian border. That road crosses a second bridge, whose destruction would complete there region’s isolation from the rest of Ukraine. The continued loss of main roads that connect Ukrainian towns remains a concern for Ukrainian troops that are desperately trying to regain footing in its ongoing conflict against Russia’s aggression.
o https://www.bloomberg.com/news/articles/2022-05-10/russia-ukraine-war-missiles-target-transit-and-infrastructure-in-southwest
Market Update
- Most Asian stocks rose Wednesday amid a China rally sparked by declining COVID cases, which spurred hopes that growth-sapping lockdowns could be loosened
- Treasuries were steady ahead of a U.S. inflation report; the U.S. CPI is expected to moderate but stay above 8%, as disruptions linked to Russia’s war in Ukraine and China’s COVID outbreak are stoking the cost of living, while investors look for evidence that the price pressures sapping the global economy are peaking. A high U.S. print will give the Fed license to raise rates even faster, and would be very bad for technology stocks. The bar is low for a surprise from the U.S. inflation data amid ebbing consumer sentiment. Things are going to be just a bit better at the margin, and the Fed overall is going to tighten less, which will lead to a market that begins to find its feet and move higher in coming quarters as inflation comes off the boil.
o 10-year Treasury yield was 2.99%
- A Wall Street advance Tuesday also brought some respite from this year’s equity rout, which has been fuelled by fears of an economic downturn as borrowing costs jump; U.S. equity futures also pushed higher
o S&P 500 futures rose 0.4%, while the S&P 500 rose 0.2% to 4,001.05
o Nasdaq 100 futures rose 0.7%, while the Nasdaq 100 rose 1.3% to 12,345.86
- Ukraine and Russia clashed over natural gas sent via pipelines to Europe in a spat that could disrupt supplies
o WTI crude rose 1.5% to $101.21 a barrel
- Gold was at $1,838.20 an ounce
Summary
- Micro – U.S. equities rallied during regular trading Tuesday, bringing investors some respite to the market’s latest selloff. But investors continue to put a close eye on the upcoming release of April’s U.S. consumer inflation print to determine if rising prices are nearing a peak. The data is expected to stay above 8% but stronger-than-expected price pressures could further encourage the Fed to raise rates faster, which could be disastrous for already-fragile tech valuations. But if data shows signs of moderating price pressures, the Fed overall is going to tighten less, which will lead to a market that begins to find its feet and move higher in coming quarters as inflation comes off the boil, especially as supply-related price increases start to ease.
- Macro – Treasury steadied as investors look to Wednesday’s release of U.S. CPI data. Oil rose above $101 a barrel, as traders continue to mull on the impact from a slew of still-evolving events spanning slowing demand from China due to COVID outbreaks, and depressed supply levels due to Russia’s war against Ukraine and ensuing sanctions that could count an EU ban soon.