Newsletter - May 12, 2022
Oil / Commodities
- Chinese oil buyers are spoilt for choice right now even as lockdowns hurt demand as they can opt for everything from discounted Russian crude and sanctioned Iranian oil to regularly-taken Middle Eastern barrels. While a wave of sweeping anti-virus curbs has put a dent in current consumption, China has an ample list of supplies that refiners can tap once usage rebounds. The complex picture shows that China has emerged as one of the beneficiaries of the conflict in Europe, which sparked a surge in crude prices in the highest since 2008 followed by a period of volatility. Beijing has stood by Moscow’s invasion of Ukraine, effectively clearing the way for refiners in the world’s largest oil importer to discreetly take Russian barrels that are being shunned by the U.S. and U.K. In addition, the EU is working on its own ban. Chinese oil consumption remains at the center of attention as renewed lockdowns raise questions over how much demand will drop and for how long. In May, Chinese state refiners are planning to process 4% less than April. The COVID situation is feeding into an increased level of uncertainty surrounding oil demand and the outlook for Chinese refinery runs. The prospect of an EU ban on Russian oil will inevitably turn some attention onto China, whether they can pick up more barrels once their demand woes are over.
o https://www.bloomberg.com/news/articles/2022-05-12/china-is-spoilt-for-choice-of-oil-as-many-avoid-russian-barrels
- Oil resumed its decline as the fallout from Russia’s war in Ukraine and China’s COVID resurgence continued to rattle the market. WTI futures have whipsawed wildly this week, tumbling below $99 a barrel and climbing as high as $110. Investors are weighing a raft of news, from shrinking U.S. fuel stockpiles ahead of the summer driving season, rising inflation and the outlook for China’s virus lockdowns. Adding further volatility is uncertainty about the EU’s proposed ban of Russian oil imports. The EU already softened potential penalties, but Hungary has hardened its stance against the embargo. The IEA will provide its snapshot of the overall oil market later Thursday. U.S. distillate inventories fell by 913.000 barrels last week to 104 million barrels according to EIA data released Wednesday. Crude stockpiles rose by 8.5 million barrels.
- Saudi Aramco overtook Apple as the world’s most valuable company, stoked by a surge in oil prices that is buoying the crude producer while adding to an inflation surge throttling demand for technology stocks. Even if the move proves short-lived and Apple retakes the top spot again, the role reversal underscores the power of major forces coursing through the global economy. Soaring oil prices, while great for profits at Aramco, are exacerbating rising inflation hat is forcing the Federal Reserve to raise interest rates at the fastest pace in decades. The higher rates go, the more investors discount the value of future revenue flows from tech companies and push down their stock prices. With the Fed on pace to further raise rates by at least another 150 bps this year and with no prospects yet of a resolution for the conflict in Ukraine, it may be a while until tech regains dominance.
- China’s industrialized southern provinces are racing to restock coal in case demand recovers later this month or supplies are disrupted by the heavy rains sweeping the region. The economic powerhouse of Guangdong has asked its utilities to add another 5% to inventories this month, while neighbouring Guizhou has set aside more money for coal purchases. Premier Li Keqiang announced Wednesday measures to help bolster nationwide energy supplies after reiterating that Beijing will not allow provinces to cut off power to factories. The concern is that parts of China could see a repeat of the energy crisis that struck in the fall. The restocking mandate comes as southern areas brace for what could prove a record-breaking rainy season. Much of the burden on electricity demand is being met by fuller reservoirs and increased hydro power, which is easing pressure on coal consumption. But prolonged heavy rains also threaten to jam up the transport networks upon which the flow of coal depend. The industrialized regions of the south are coal-scarce and far from the miners in the interior that are churning out record quantities of China’s mainstay fuel. Then there is the risk that coal demand will rebound strongly as industries are freed from the virus curbs that have throttled activity and provinces ramp up production to catch up to their full year targets.
o https://www.bloomberg.com/news/articles/2022-05-12/china-pushes-utilities-to-restock-coal-ahead-of-demand-rebound?srnd=premium-asia
Tech
- TerraUSD stablecoin collapsed Wednesday, triggering a stampede out of many of the digital asset market’s most popular tokens and related equities. It is a nervous time for crypto markets following the collapse of the controversial stablecoin UST and as the majority of institutional crypto investors that invested last year are losing money. Most rival algorithmic stablecoins, which use a complex combination of computer code and trader incentives to maintain their pegs of one-to-one to the dollar, are also below that threshold. TerraUSD, and its related token Luna, had a long way to fall. They both recently climbed into the top 10 tokens by market value after Terra founder Do Kwon established the Luna Foundation Guard, which bought billions of dollars of Bitcoin to back it up. Investors had rushed to take advantage of yields that might reach almost 20% on Anchor Protocol, which is powered by the Terra blockchain.
- Instacart, the largest online grocery delivery platform in the U.S., said it confidentially filed documents for an IPO. The listing could happen as soon as this year. A beneficiary of the coronavirus pandemic, Instacart’s pace of growth as decelerated. It announced in March it was cutting its valuation about 40% to $24 billion. The company was previously valued at $39 billion in March 2021 during its funding round that included Andreessen Horrowitz, Sequoia, and D1 Capital Partners, as well as Fidelity and T. Rowe Price.
- Google is staking tis vision for the future on what it is calling “ambient computing”. Computers should be able to help users with whatever they need seamlessly and be all around. At its annual I/O conference, Google introduced a fleet of product updates and upcoming devices, including a new Pixel-branded tablet and smartwatch. The Pixel Watch will be released in the fall, but prices have not been revealed yet. The Pixel Tablet is slated to launch in 2023, but pricing information also has not yet been disclosed. The companyhas also previewed the Pixel 7 and Pixel 7 Pro, which is planned for release coming fall. The lower-priced Pixel 6a and the Pixel Buds Pro is also coming soon. Google also teased a pair of AR glasses that uses its Google Translate service. Google’s first attempt at internet-connected eyewear – Google Glass -w as a famous flop that left the search giant more cautious about the futuristic field. In the decade since launching that device, Google has had skunkworks projects on similar AR technology, but has kept most of its hardware line to more conventional smartphones, laptops and home speakers. Google has also developed a new Wallet app for consumers to store and use credit cards, event tickets and car keys, separating from its long-time Pay app. Consumers in the U.S. and Singapore will have access to both apps, with Pay used for financial management and transferring money to friends or family, while in 39 other markets the Wallet app will replace Pay. The company has also unveiled a series of planned upgrades to its search and maps services. The new features include ways for people to search for nearby items using images and identify physical objects with their smartphone cameras. On Google Maps, the company promised a way for people to explore detailed 3D digital models of landmarks and neighbourhoods before setting foot in person. People in emerging markets are more likely to search with voice features than typing, which has driven Google to invest more in its voice assistant feature. And according to Google, younger internet users have started turning to social media apps for entertainment and information on world events and daily decisions. And noticing that many turn to Instagram or TikTok to figure out where to go, Google is reimagining their role in that decision making process to ensure it is staying relevant with user needs. Google will start letting people use photos and text together in local searches with new “multisearch” update that taps its computer vision and data resources. This feature identifies products nearby which will likely appeal to marketers that pay for ads in a certain geographic proximity to users. Google is also expanding the utility of Lens, its feature for identifying objects in the real world, which investors are eager to see contribute more to its e-commerce operations. Google said there are over 8 billion visual searches on Lens a month, up threefold from a year ago.
o https://www.bloomberg.com/news/articles/2022-05-11/google-is-remaking-search-maps-for-the-tiktok-generation?srnd=technology-vp
- Coinbase, like the rest of the cryptocurrency market, is having a really tough week. In its most recent quarterly report, Coinbase added a risk disclosure: if the company were to file for bankruptcy, the court might treat customer assets that the exchange is custodian for as Coinbase’s assts. And that members would be at the back of the line for repayment, forcing normal people, unaccustomed to the ins and outs of federal bankruptcy court, to claw back their money along with everybody else owed money by the exchange. It is a huge amount at stake. Coinbase was custodian for $256 billion of customer money on March 31st. CEO Brian Armstrong quickly took to Twitter to elaborate and clarify that the company is not at risk of going bankrupt and that users’ funds are safe.
- Sonos is introducing its own voice-activated digital assistant, pushing into a market dominated by Amazon and Apple. The new service, called Sonos Voice Control, is focused on controlling media content and the company’s devices, rather than serving up information in the style of Amazon’s Alexa or Apple’s Siri. Still, it marks an ambitious expansion for a company best known for sound bars and other studio accessories. The service was part of a new line-up of products announced Wednesday that also included a new lower-cost sound bar aimed at TVs. Sonos Voice Control can manage music and video playback, adjust volume and allow users to specify which speakers in their home they want the audio to play on.
o https://www.bloomberg.com/news/articles/2022-05-11/sonos-launches-its-own-voice-assistant-taking-on-alexa-and-siri?srnd=technology-vp
Electric Vehicles
- Subaru plans to invest around 250 billion yen on EV battery capacity over the next five years and will add an EV production line to its main factory in Gunma prefecture in Japan that should begin producing cars from 2027. The new line will involve an investment of around 100 billion yen. Japan’s EV penetration has largely lagged behind global peers, with its penetration rate at barely 1%. Now a catch-up game is underway with Honda planning to spend 5 trillion yen over the next decade to make cleaner cars and Toyota investing $624 million to make EV components in India. Subaru, which makes almost 70% of its sales in the U.S., aims to have 40% of new global car sales electric by 2030.
- Faraday Future, the EV start-up that shook up its executive ranks last month, said a recently completed internal investigation found that its leaders did not demonstration a commitment to maintain integrity and ethical values. The material weakness in financial reporting was disclosed in the company’s third quarter financial report filed late Friday. The start-up in April limited the role of its founder, Jia Yueting, after completing the probe into allegations of fraud. At the time, Faraday Future said another VP resigned and that it fired other employees who were not executive officers. Its chairman stepped down to a lesser role on the board in February. The internal probe was launched in late 2021 after a short-selling research firm claimed Faraday Future misrepresented SUV preorders following its merger with a SPAC. In Friday’s filing, Faraday Future said senior managers failed to reinforce the need for an attitude of compliance and internal control awareness with certain of FF’s governance, accounting and finance policies and procedures. Those failings led to inaccurate and incomplete disclosures of certain relationships, arrangements and transactions.
- A federal judge has rejected Tesla’s request to block its trial over claims the automaker is responsible for the death of a Florida teenager who crashed a Model S into a wall at 116 miles an hour in 2018. In the complaint, the teenager’s father alleged that Tesla was negligent for removing a speed limiting device from the car after his wife had asked for it to be installed. The after-market device was designed to cap the car’s speed at 85 mph. The family also argued that the teenager could have survived the impact of the crash if it was travelling at a lower speed but still lost his life because of the intense fire, which the suit attributes to a defective design in the battery. U.S. Magistrate Judge Alicia Valle denied Tesla’s request to dismiss the case without sending it to a trial over claims the company’s handling of the speed limiter was negligent and battery was defective. Valle found that the family had showed the removal of the speed limiter without consent or notice may have had an impact on events in the case. The judge also ruled the family can seek punitive damages on the negligence claim. A jury will have to determine whether the vehicle’s battery was defective based on finding by an expert retained by the family that the design lacked certain fire-retardant materials.
- Rivian reaffirmed guidance to deliver 25,000 battery EVs this year, despite ongoing supply chain snarls hampering its ramp in production. The company has built about 5,000 vehicles since start of productions in September. That includes 2,553 units built in the first quarter against a backdrop of assembly line pauses due to parts shortages. The company, which manufactures a mix of pickup trucks, SUVs and commercial vans delivered 1,227 vehicles to customers in the first quarter. citing ongoing supply chain bottlenecks in production, Rivian has been forced to stop production for longer periods than anticipated, resulting in approximately a quarter of the planned production time being lost due to supplier constraints. The company also encountered increased shipping and logistics costs as it tried to circumvent parts shortages. While a lack of semiconductors remains a problem, the worst of the shortage has passed. Rivian does not foresee any issues around the supply of battery cells over the next five years, but it is trying to reach longer-term deals for battery metals supply as global EV output and competition grows.
- Panasonic is being asked by Tesla to speed up development of its next-generation 4680 cells. Anticipation had been building for the Japanese company to unveil plans to construct a new battery factory in the U.S., but instead the CFO spoke at a post-results briefing about ongoing robust demand for batteries, including the 2170 cells it supplies for Tesla’s EVs. Panasonic has been scouting sites in Oklahoma and Kansas for its multibillion-dollar factory. The newly planned plant is part of its push to increase investment in EV cell production, which it sees critical for future growth. At its planned U.S. factory, Panasonic is aiming to manufacture 4680 batteries, which are bigger and more powerful. The Japanese company is betting that the newly-developed technology – championed by Tesla CEO Elon Musk as the key to unlocking $25,000 EVs – will open up doors to supply other automakers too.
o https://www.bloomberg.com/news/articles/2022-05-11/panasonic-seeing-robust-tesla-demand-for-batteries-development?srnd=hyperdrive
Consumer / Retail
China Market
- China’s tightening COVID rules and extended lockdowns are making a 2020-style V-shaped economic recovery a dim possibility this time around. The slump in output may not be as deep as two years ago when most of the country was under some form of restriction from late January through much of February following the outbreak in Wuhan. Currently, areas making up only about 30% of GDP are under full or partial lockdown. Given the strength of the omicron variant in evading stringent controls, there is greater risk of cities shutting down and then reopening repeatedly over several months. Major hub Shanghai is still in lockdown after five weeks, and while cases are easing, Beijing and other cities are also starting to tighten restrictions. Consumer confidence and spending are weakening, while producers find it hard to evade the present threat of disruption. This accordingly puts the government’s GDP growth target of 5.5% on the line. The economy today must also weather the COVID crisis alongside weakness in other key growth drivers, including property. Home sales continue to drop while real estate investments are plunging, and property developers are under severe financial strain after Beijing tightened rules last year to curb runaway prices and control debt. Central banks around the world are also hiking interest rates to curb soaring inflation, and global demand for China’s exports – a key driver of the economy’s 2020 rebound – is set to slow.
- Fresh challenges are confronting Chinese borrowers in global debt markets after authorities doubled down on its COVID Zero policy. High yield dollar bonds from Chinese issuers are extending losses after dropping for a record eight straight months through April. Issuance has tumbled as global money managers balk at extending credit, with lockdowns weighing the economy. Refinancing concerns are flaring as defaults mount and inflation drives rates up globally. The focus remains on China’s offshore junk note market, dominated by property developers, after stress levels remained at their most elevated level in April. Yields have been rising again in recent weeks, exceeding 22%. Investors continue to weigh the implications of a slowing economy as patience wanes for further details on prospective supportive measures. Issuers need to pay only $1.5 billion of junk dollar bonds coming due this month, a respite before a combined $12.1 billion in June and July. In the domestic market, firms facing repayment pressure have just 3.9 billion yuan of local securities due through June, compared with 6.8 billion yuan in July.
o https://www.bloomberg.com/graphics/china-credit-2022-05/?srnd=premium-asia
- The PBOC is making stabilizing economic growth a top priority and will step up support for weak sectors. The PBOC has guided loan interest rates lower from an already low level. The central bank has so far taken relatively modest easing action in recent months despite the sharp slump in activity as the government locked down cities like Shanghai to contain COVID outbreaks. The PBOC made a smaller than expected cut in the reserve requirement ratio for banks last month and refrained from cutting policy interest rates. Even so, lending rates in the economy have come down. The weighted average interest rate for corporate loans was 4.4% in the first quarter, down 0.21 percentage point from the end of 2021.
- China’s top political advisory body plans to host a forum next week with some of the nation’s largest private sector firms including Baidu, an event that will be closely scrutinized by investors debating whether Beijing will dial back its clampdown on the technology industry. The Chinese People’s Political Consultative Conference aims to host the symposium next week with attendees including officials from government agencies such as the Cyberspace Administration of China and business executives including Baidu founder Robin Li. While the conference is focused on the broader theme of developing China’s digital economy, investors will likely watch for signs of whether Beijing intends to wind down its year-long crackdown on the tech sector. Sentiment toward the industry has swung wildly in recent weeks. The stocks surged after Chinese authorities issued a sweeping set of pledges to boost economic stimulus in late April. But the rally was short-lived, in part because of a lack of concrete measures to prop up a sector that has shed more than $1 trillion in value. It is currently unclear whether next week’s forum will trigger policy changes or easing. The timing could also shift given the difficulty of organizing a major conference while cities from Beijing to Shanghai grapple with shifting COVID lockdowns.
Russia-Ukraine Development
- Germany could weather a ban on Russian gas if it prepares properly according to its economy minister, as Kyiv and Moscow clashed over natural gas supplies sent via pipelines to Europe. The U.S. is looking to send to Ukraine an advanced version of a dive-bombing, armour-piercing drone. European Commission President Ursula von der Leyen called Russia the most direct threat to the world order during a visit to Japan, where she discussed cooperation between the bloc and Tokyo in their response to the invasion.
o https://www.bloomberg.com/news/articles/2022-05-11/ukraine-latest-war-affects-physical-gas-supplies-for-first-time?srnd=premium-asia
Market Update
- Stocks fell in Asia trading Thursday after elevated U.S. inflation bolstered the case for aggressive monetary tightening and sparked a slide on Wall Street; U.S. contracts made modest gains after the S&P 500 hit the lowest on Wednesday since March 20201 and the tech-heavy Nasdaq 100 shed about 3%
- Treasury curve has flattened on concerns that Federal Reserve monetary tightening will trigger an economic slowdown; 10-year U.S. Treasury yield slipped to 2.9%
- U.S. inflation moderated but topped expectations at 8.3%, signalling persistent price pressures; traders are raising bets the Fed will roll out another half point interest rate hike in September following similar increases in June and July, especially as Russia’s war in Ukraine and China’s COVID lockdowns are creating shortages and stoking costs
- S&P 500 futures rose 0.3%, while the S&P 500 fell 1.7% to 3,935.18
- Nasdaq 100 futures added 0.4%, while the Nasdaq 100 fell 3.1% to 11,967.56
- 10-year Treasury yield declined 2 bps to 2.90%
- WTI crude was at $104.46 a barrel, down 1.2%
- Gold was at $1,854.36 an ounce, up 0.1%
Summary
- Micro – U.S. equities plummet in Wednesday trading after the April CPI print came in hotter than expected. April inflation rose 8.3% compared to the prior year and 0.6% compared to March, exceeding estimates of 8.1% and 0.4%, respectively. However, the core core inflation rate, which excludes impact from highly volatile food and fuel prices, rose only 0.31%, the smallest gain since September which shows signs that the trend is slowing. The rising inflation number continues to encourage sentiment that the Fed remains behind the curve on inflation. It is likely now that the Fed may increase rates by 50bps in September too, and the likeliness of a 25bps increase is slim.
o https://seekingalpha.com/news/3836764-sp-500-nasdaq-dow-jones-stocks-inflation
- Macro – Benchmark Treasury yield slipped to 2.9% as concerns rise that Federal Reserve moentary tightening will trigger an economic slowdown. The hot inflation print for April is also encouraging bets that the Fed will roll out faster and more aggressive rate hikes through September, especially as Russia’s war in Ukraine and China’s COVID lockdowns stoke higher costs by hampering already-fragile supply chains. Elsewhere, oil fell as it continues to fluctuate on the evolution of supply risks from Russia’s war in Ukraine and demand risks from China’s extended COVID lockdowns. U.S. fuel stockpiles are also shrinking ahead of the summer driving season. Adding further volatility is uncertainty about the EU’s proposed ban of Russian oil imports, especially as members like Hungary remain in a hardened stance against the embargo.