Newsletter - May 13, 2022
Oil / Commodities
- Iron ore is headed for its biggest weekly drop since mid-February as China’s spreading virus restrictions and worsening property crisis prevented a recovery in demand. The steel-making ingredient was steady near $126 a ton in Singapore on Friday and is down around 9% this week. Beijing reported a slight increase in COVID cases, while officials denied the city will be locked down amid growing concern the capital’s response to its outbreak will be intensified. In the property market, China’s fourth largest developer Sunac China Holdings missed a dollar bond payment this week. The latest default is spurring fears that there could be more to come, which would further weaken a sector that is important for iron ore demand. Iron ore has fallen around a quarter from this year’s peak in early March as the virus restrictions spread. The lockdowns are making it hard for the government to deploy infrastructure spending, and are occurring at a time of year when construction typically ramps up after winter. While steel production could increase to support what is supposed to be peak construction season, looming control measures remain a serious downside risk.
- China’s Shandong province issued a tender on Thursday for the construction of 10 offshore solar plants in the seas surrounding China’s largest peninsula by 2025 to power New Zealand. The capacity planned is 11.25 gigawatts, more than peak consumption in New Zealand. China is also planning 455 gigawatts of wind and solar in a series of massive projects on barren and desert lands in its interior, as it ramps up clean energy to meet growing power demand and eventually get to net zero carbon emissions. Shandong, which already has the most rooftop solar installations in China, has said it would eventually build 42 gigawatts of solar and 35 gigawatts of wind power in its offshore areas. China is targeting 1,200 gigawatts of wind and solar by 2030, nearly double the level from 2020, and plans from utility giants and provincial governments show it will likely get there years earlier. Shandong’s solar projects will start construction this year and will be located in shallow waters close to shore.
o https://www.bloomberg.com/news/articles/2022-05-13/china-s-shandong-to-build-massive-solar-farms-out-to-sea?srnd=premium-asia
Tech
- Digital asset turmoil is sweeping through exchange-traded products, with one tracking the troubled Luna token seeing its price almost evaporate in what may be the biggest ETP wipeout ever. LUNA SW tumbled 99% to 0.01 Swiss Francs on Thursday, having closed at 22.29 Swiss Francs on May 6th. That was before the UST stablecoin, to which Luna is linked, crashed from its dollar peg – triggering a collapse in Luna’s price. UST was designed to keep its peg to the dollar through an algorithm-based system through which it can be swapped for Luna, and vice versa, to keep its value stable. When UST crashed from the peg in the past few days, UST’s backers increased the supply of Luna coins in a so far unsuccessful attempt to bring the stablecoin back to $1. The huge increase in supply caused Luna’s price to crater. The total circulating supply of LUNA has surged to 1.46 billion tokens from 377 million yesterday. The LUNA SW product tracking Luna now faces the prospect of delisting.
- The blockchain behind the collapsed UST stablecoin and the affiliated Luna token stopped processing new transactions for the second time in less than a day. Terraform Labs said in a tweet from their verified account that validators, the entities responsible for verifying transactions on the blockchain, took the step to come up with a plan to reconstitute the Terra network. The blockchain was closed briefly to pass through a software update that would help prevent attacks against the network in the wake of the collapse of its algorithmic stablecoin and the related Luna token that had roiled cryptocurrency markets. UST was trading at just $0.11 as of noontime in Singapore, while the Luna token has sunken to virtually zero compared with its all-time high of $119.51. The relationship between UST and Luna was central to attempts to maintain the former’s $1 peg. Traders could swap a unit of the stablecoin, whether it was trading at, below or above $1, for one unit of Luna and vice versa. The effect of unloading UST at prevailing prices was to dramatically increase the supply of Luna, further depressing the price of that token.
o https://www.bloomberg.com/news/articles/2022-05-12/terra-developers-halt-new-transactions-on-stablecoin-blockchain?srnd=technology-vp
- Coinbase was sued over its role in the promotion and trading of a stablecoin cryptocurrency that allegedly turned out to be “anything but”. The digital asset trading platform was accused of misleading investors about its stability, leading to millions of dollars in losses according to the proposed class-action complaint filed Thursday in federal court in northern California. The complaint came a day after Coinbase shares and bonds plunged to new lows, signalling investor skepticism about the prospects of the crypto exchange in a worsening bear market. The GYEN token issued by Coinbase is a stablecoin backed by hard asses with its value pegged to the price of the Japanese Yen. But in November 2021, when Coinbase started trading GYEN, the asset immediately came untethered from the Yen according to the lawsuit. Investors placed orders believing the coin’s value was, as advertised, equal to the Yen but the tokens they were purchasing were worth up to 7x more than the Yen. Just as suddenly, the GYEN’s value plunged back to the peg, falling 80% in one day. When the price plunged, Coinbase froze trading of the GYEN token, and compounded the harm by restricting many customers’ ability to sell the asset. As a result, purchasers of GYEN collectively lost untold millions in a matter of hours.
- BitMEX co-founder Arthur Hayes should spend significantly more than a year in federal prison for failing to implement an AML program at the pioneering cryptocurrency exchange according to a U.S. prosecutor. Hayes pleaded guilty in February to violating the U.S. bank secrecy law. Federal prosecutors on Thursday submitted their sentencing recommendation to U.S. District Judge John Koeltl in Manhattan. As part of Hayes’ plea deal, prosecutors had agreed that under federal sentencing guidelines his offense called for a prison term of six to 12 months. He also agreed to pay a $10 million fine. If convicted at trial, Hayes had faced as much as five years in prison on each count of his October 2020 indictment. But prosecutors said a one-year sentence was not enough. And compliance by cryptocurrency platforms will be unattainable if their operators believe there are no meaningful repercussions for failing to comply with the law. Hayes’ lawyers had asked Koeltl to impose no jail time and allow him to live abroad and travel freely, saying the case is a landmark that will help the U.S. government prosecute financial crimes at cryptocurrency exchanges throughout the world. The Probation Office recommended a two-years’ probation.
- A massive selloff in cryptocurrencies wiped over $200 billion of wealth from the market in just 24 hours. The broad plunge in the crypto complex, driven by the collapse of the UST stablecoin, hit major tokens hard. Bitcoin plunged by as much as 10% in the last day to its lowest level since December 2020, while Ethereum dropped as much as 16%. As central banks across the world moved to aggressively tighten monetary policy to fight inflation, digital tokens have faced selling pressure amid a broader flight from risk assets.
o https://www.bloomberg.com/news/articles/2022-05-12/more-than-200-bilion-wiped-off-cryptocurrency-market-in-a-day?srnd=premium-asia
- Masayoshi Son had investors bracing for such a bad earnings report that even a $20 billion loss in SoftBank’s Vision Fund was enough to send shares surging. The stock rallied as much as 12% in Asia trading Friday for its biggest such gain in six months, a shar reversal after Thursday’s 8% drop. There appears to be some relief that the Q4 report was not worse, allowing the share to regain some ground it lost the previous day. SoftBank on Thursday reported a record annual loss at its Vision Fund unit as a selloff in tech shares pummelled the value of its portfolio companies. Despite the sombre numbers, investors honed in on Son’s emphasis on defensive driving. Son explained in a slide that the company has allocated 2.9 trillion yen of cash, or roughly twice the 1.3 trillion yen due for bond redemptions in fiscal 2022 and 2023. Recent stock falls also makes it an opportune time for the Japanese conglomerate to accelerate its plan to buy back stocks. The company pledged a buyback plan allowing repurchases of up to 250 million shares for up to 1 trillion yen by November 8th. Expectations over continued share buybacks, along with signs of recovery in U.S. technology heavyweights are factors supporting the stock. Tech valuations gained momentum in late U.S. trading and some of that optimism appears to have spilled over into Japan.
- Elon Musk is in talks to raise enough equity and preferred financing for his proposed buyout of Twitter to eliminate the need for any margin loan linked to his Tesla shares. Musk’s advisers, led by Morgan Stanley, have begun soliciting interest from potential investors for as much as $6 billion in preferred equity financing. Musk had originally lined up $12.5 billion of margin loans as part of his $44 billion deal to buy Twitter. That was halved to $6.25 billion after he disclosed $7.1 billion in equity commitments from investors including Larry Ellison, Sequoia Capital, Qatar Holding and Saudi Prince Alwaleed bin Talal. Since then, Musk has received commitments for another $1 billion in equity and is in talks for more. That additional equity, on top of the preferred financing, would be enough to erase the margin loan, cutting the risk of the deal for both Musk and his lenders. It would also alleviate pressure on Tesla’s stock, which is the cornerstone of Musk’s $216 billion fortune. The EV maker has tumbled more than 25% since he agreed to purchase Twitter, stoking concerns among investors that he may sell even more than the $8.5 billion already disposed of to fund the buyout. The preferred equity may have a 20-year maturity and include a feature allowing interest to be paid in kind at a rate of 14%. The interest rate would be increased by 75 bps in the seventh, eighth and ninth year. the financing may alternatively be structured with a 10% interest rate and warrants.
o https://www.bloomberg.com/news/articles/2022-05-12/musk-seeks-to-scrap-tesla-margin-loan-with-new-twitter-funding?srnd=premium-asia
Electric Vehicles
- Demand for metals used in everything from wind turbine blades to batteries will surge for decades to come, driven by efforts to decarbonize the global economy and shift away from fossil fuels. Metals will remain in high demand, delivering windfall gains for countries that export them. The adoption of low carbon power generation implies a permanent increase in demand for copper, nickel, cobalt, and lithium, and an eventual drop in the use of fossil fuels. The long-term outlook for metals and other commodity classes has profound implications for developing nations, two-thirds of which are reliant on raw material exports for much of their income.
- Mercedes announced last month that one of its EV prototypes drove more than 1,000 km (621 miles) on a single charge, braking a range barrier that long seemed elusive for a four-seat sedan. After years of criticism for entering the EV game late, the manufacturer stepped up its efforts last year with the launch of its battery-powered flagship, the EQS. Then in December, Mercedes became the first automaker to win approval to deploy a hands-free driving system in Germany, pulling ahead in the race to offer higher levels of automation in one of the world’s most competitive car markets. Dubbed Drive Pilot, Mercedes’ handsfree driving system is capable of Level 3 automated driving, a notch higher than Tesla’s Autopilot. Drive Pilot will go on sale next week as an option for the S-Class and EQS models at a cost of 5,000 euros and 7,430 euros, respectively. Mercedes’ Drive Pilot Level 3 autonomous driving system allows drivers to take their hands completely off the wheel and stop paying attention to road conditions. Current limitations include restricted approval for stretches of Germany’s Autobahn highway network at a speed of up to 60 km per hour, meaning it is largely limited to handling slow-moving traffic jams. Lane changes are not allowed, and the software usually does not work in tunnels. Drivers must remain awake and able to retake the wheel if the system alerts them to do so, and Mercedes does not recommend holding devices like a tablet or laptop between the driver’s body and the airbags.
- Surging gas prices are encouraging greater EV adoption in the U.S. According to AAA, from May 2 to May 6, the national average for a gallon of regular gasoline increased by five cents to $4.24. The conventional wisdom has been that plugging in and charging up a battery-powered car will cost less than filling up a gas tank. But EVs are more expensive, with many models on the market priced beyond the means of the average U.S. consumer. The cheapest Tesla, Model 3, starts at $47,000; the Ford Mach-E has a similar base price but actual sales have run above the MSRP due to limited supply. Ford’s F-150 Lightning is priced more competitively at just under $40,000. Federal tax deductions for qualifying purchases can meaningfully change a buyer’s math. Add to that any applicable state rebates or credits from a power utility and before you know it, you have reduced your cost, potentially by several to many thousands of dollars. Currently $7,500 is the maximum amount available to buyers of new EVs. The credit is a deduction on your federal income tax return for the calendar year in which the vehicle was purchased in. Hybrid plug-ins are eligible for a maximum rebate of about $4,500. The federal credit is available until a company sells 200,000 of a particular model, then the credit is phased out. Tesla models are no longer eligible for a tax credit. GM ahs also reached the threshold. Toyota is almost there, with cumulative sales of eligible vehicles coming in at 183,000 as of the end of 2021. California, as the state with the largest number of EVs on the road, not surprisingly has a wide range of EV rebates, all detailed on the website of the California Air Resources Board. The heftier awards that are part of the California Clean Vehicle Rebate Project are income eligible, among other requirements. In New York, the Drive Clean rebate of up to $2,000 is given for any new EV purchase or lease. There are two requirements – you must keep the vehicle for a minimum of three years and agree to do so and you must be a resident of the state. Some local utility providers have also been offering incentives, rebates or discounts on an at-home charger, which on average costs about $700.
- Foxconn has completed its transaction with Lordstown Motors to acquire the electric truck startup’s Ohio factory for $230 million and take over production of its Endurance pickup truck, a critical step as the iPhone manufacturer seeks to diversify into EVs. Foxconn will invest $55 million for 55% of a JV for product development, and will take on approximately 400 Lordstown employees. The facility will become Foxconn’s first EV manufacturing hub for North America. On Thursday, EV maker Fisker also reaffirmed its plan to have Foxconn build the upcoming Fisker Pear model at the Ohio factory starting in 2024. Another potential customer would be Apple, which has been exploring getting into the auto business for years. The completion of the Foxconn deal to purchase Lordstown Motors’ Ohio facility was a relief to the stock’s investors. Foxconn had previously made a $200 million down payment toward the purchase. Had the deal fall through, Lordstown Motors would have had to pay the money back – something it did not have enough cash to do. The transaction creates a lifeline for Lordstown Motors for now. Foxconn will operate the Ohio factory, including some equipment that Lordstown Motors will continue to own, such as its hub-motor assembly and battery module lines.
o https://www.bloomberg.com/news/articles/2022-05-11/lordstown-motors-rises-after-closing-sale-of-factory-to-foxconn?srnd=hyperdrive
Consumer / Retail
- Chinese fast fashion giant Shein has quickly become the third most valuable start-up in the world. But its slowing sales growth from the lofty heights of the pandemic is adding pressure to its $100 billion valuation. The online-only retailer of inexpensive clothes, beauty and lifestyle products has become a global phenomenon, with a following of mostly tweens and teenagers in the West making its app one of the most downloaded in the world. However, its annual sales growth slowed from an eye-popping 250% in 2020 to around 60% in 2021. What worries Shein’s top executives is that expansion remained strong in the first half of 2021, but decelerated at a worse-than-expected pace in the second half, with the slowdown continuing into 2022. The trend is reflected in transaction data in the U.S., Shein’s biggest market – for the first quarter, sales growth fell to 57%, down from a quarterly range of 105% to 264% in 2021. While Shein’s high double-digit sales growth still outstrips fast fashion giants like H&M or Inditex’s Zara, Shein’s slowdown comes as it has persuaded investors including General Atlantic that it is worth about $100 billion – more than the market cap of H&M and Zara combined, and behind only ByteDance and Ant Group on the list of most valuable start-ups in the world. As one of the top online exporters in China, Shein’s slower growth shows the increasing challenges suffered by the entire sector. The weakening yuan and growing geopolitical tension with the U.S. remain serious headwinds to business. The declaration also comes as the company gets caught between the polar opposite pandemic approaches of the U.S. and China. While life in America normalizes to pre-COVID norms and shoppers venture out more, China’s rolling COVID lockdowns as the country continues to try and stamp out all infections has disrupted Shein’s production and logistics operations. Internally, the company’s young consumer base may also be shifting away from Shein. Web traffic to Shein.com, which more than doubled or even tripled during the first eight months of 2021 compared to the same period in 2020, dropped to low double-digit growth by late 2021. Web traffic in April inched up just 8% compared to a year ago.
o https://www.bloomberg.com/news/articles/2022-05-12/shein-s-breakneck-growth-slows-testing-100-billion-valuation
China Market
- A public outcry at perceived efforts from China to stop people from leaving the country has erupted, reflecting growing unhappiness over the government’s punishing lockdowns and strict measures to fight COVID. The National Immigration Administration said Thursday it will strictly limit unnecessary outbound travel for Chinese citizens and tighten the approval of entry and exit documents to prevent the virus being brought into the country. Frustration is swelling about the economic and social cost of China’s COVID Zero policy. In addition to domestic lockdowns that underpin the strategy, the country has essentially sealed itself off from the world for the past two years, leaving it isolated as global peers shift to living with the virus. China only reported 128 million entries and exits in 2021, less than 20% of 2019’s tally. The country issued only 335,000 passports in the first half of 2021, 2% of the same period in 2019. And the uncertainty about when normal life can resume based on current lockdowns signals more departures from the country to come.
- China’s biggest chipmaker and a major iPhone supplier cut their outlooks for the second quarter, joining a growing list of manufacturers warning about the fallout from lockdowns aimed at curbing the country’s worst COVID outbreak in two years. SMIC estimates a month-long lockdown in Shanghai could spur component shortages and logistics tangles and erase roughly 5% of its output in the second quarter. Pegatron also slashed its outlook for notebook shipments to a decline of between 5% and 10% from the first three months, versus previous guidance for a rise of 25% to 30%. The pain for manufacturers could deepen if lockdowns persist, or if global macroeconomic uncertainty undermines demand for electronics. While factories have been given special allowances to reopen under strict guidelines and systems, snarls in the supply chain – from a shortage of delivery drivers to a lack of materials – continue to disrupt local operators and global giants including Tesla and Sony. Apple predicted that supply constraints in the current quarter could cost up to $8 billion in lost revenues. The COVID pandemic in China as well as the war in Ukraine could shave about 200 million units off global smartphone shipments this year. The majority of the amount will be shouldered by Chinese smartphone vendors.
- China’s stock market has some room for recovery as the Asian nation may begin to ease lockdowns in major cities in the second half of the year. The recent market selloff is overdone and a base case scenario points to a recovery. Stringent COVID Zero policies and crackdowns on private enterprise have combined to sap investor confidence in Chinese equities this year. A slew of disappointing economic data from China this month also highlighted the growing toll of a lockdown-dependent approach, raising concerns that markets will remain under pressure unless China shifts its strategy. The government in Shanghai said Friday it plans to achieve no community spread of the virus by mid-May, a milestone that has eluded the city despite nearly six weeks of strict lockdown measures. The lockdown imposed on its 25 million residents has been one of the longest and most punishing since the experience of Wuhan, where the pathogen first emerged in 2019.
o https://www.bloomberg.com/news/articles/2022-05-13/china-stocks-set-for-recovery-post-lockdowns-credit-suisse-says
Russia-Ukraine Development
- White House Cyber Director Chris Inglis said Friday he expects Russia’s use of disruptive cyber attacks to continue so long as there is war in Ukraine. The enduring war has shown Russia is not perhaps as competent as they might have imagined, both in the physical world and the cyber world. And for as long as Russia persists in this egregious behaviour, cyber-attacks will likely remain in their playbook. U.S. officials continue to signal their concern about rising security threats amid the war.
- Some EU nations are saying it may be time to consider delaying a push to ban Russian oil so they can proceed with the rest of a proposed sanction package if the bloc cannot persuade Hungary to back the embargo. The idea of pushing off the move against Russian oil, which Hungary has said would be too damaging to its economy, is gaining support. Other countries, however, are worried that removing consideration of the plan now would be a sign of weakness. Hungary’s Viktor Orban has suggested before that any oil ban would need to be discussed by EU leaders at a summit. The next one is scheduled for the end of May. The EU’s proposal seeks to ban crude oil imports from Russia over the next six months and refined fuels by early January. The bloc had offered Hungry and Slovakia until the end of 2024 to comply with the sanctions and the Czech Republic until June of the same year since they are heavily reliant on Russian crude. But Hungary remains on a hardened stance against the embargo. EU sanctions require the unanimous backing of all 27 members. Aside from the oil ban, the bloc’s proposal for a sixth round of sanctions includes plans to cut three more Russian banks off the international payments system SWIFT and would ban providing consulting and public relations services to Russian companies, among other steps. An EU strategy to wean itself off Russian energy by 2027 that is due next week is expected to outline a limited investment that will be needed in the shorter term on oil infrastructure to guarantee the security of supply to countries that are fully dependent on pipeline oil from Russia.
- Italy’s energy giant Eni SpA is set to pay Gazprom for gas supplies in May even if the initial euro payment is converted to rubles. The move comes after Gazprom tried to reassure European buyers including Eni that the payment would not violate EU sanctions since Russia’s central bank would not be directly involved. European countries have been scrambling for weeks to figure out how they can meet Russia’s demand for ruble payments and keep crucial gas flowing without breaking sanctions designed to punish Moscow for its war against Ukraine. A Russian decree in March called for companies to open two accounts – one in euros and one in rubles – a move the EU rejected as a breach of sanctions. The EU is expected to provide in coming days a new assessment to clarify its initial guidelines, as both companies and governments have been calling for further direction on how to complete the transactions.
- The EU is pushing member states to boost the amount of Ukrainian military aid the block will finance by 500 million euros to 2 billion euros. Member states have yet to agree to the proposal regarding the European Peace Facility, with Germany the main holdout at a meeting of EU political and security ambassadors this week. The European Peace Facility reimburses governments for military deliveries to Ukraine. Berlin is not currently against the proposal, but the government needs to go through the proper procedures, including parliamentary approval, and could not immediately sign off on the new funding. A small group of other nations, along with Germany, also indicated that a new tranche of money was not urgent because reimbursements are paid out after weapons are delivered.
- Russian setbacks in Ukraine have begun to prompt more explicit warnings in China about Moscow’s value as a diplomatic partner, in a sign of growing unease over President Xi’s strategic embrace of President Putin’s latest actions. Russia was headed for defeat and being significantly weakened by the conflict, a former Chinese ambassador to Ukraine told a Chinese Academy of Social Sciences-backed seminar in remarks widely circulated online. The ex-ambassador said the so-called revival or revitalization of Russia under the leadership of President Putin is a false proposition that does not exist at all. And the failure of the Russian blitzkrieg, the failure to achieve a quick outcome, indicates that Russia is beginning to fail. While China has said it does not support the war, it has repeatedly defended President Putin’s rationale for invading and opposed U.S.-led efforts to force Russia’s withdrawal. Chinese diplomats have reaffirmed plans to expand strategic ties with Moscow, a policy course set when President Xi declared a no limits friendship with President Putin in February, just weeks before the invasion. The Biden Administration has repeatedly warned China against any effort to support Russia’s war effort, raising the threat of secondary sanctions.
o https://www.bloomberg.com/news/articles/2022-05-12/rare-russia-criticism-within-china-shows-simmering-policy-debate?srnd=premium-asia
Market Update
- Stocks rebounded sharply in the final hour of New York trading Thursday, with the S&P 500 almost wiping out a selloff that pushed it to the brink of a bear market earlier in the day; the turnaround came as Federal Reserve Bank of San Francisco President Mary Daly said a 75 bps increase in rates is not a primary consideration, while adding the U.S. is in a strong place and should be able to withstand monetary tightening
- The caution born from rising rates held firm on Thursday as data showed prices paid to U.S. producers rose more than forecast in April, reinforcing bets the Fed will further tighten policy
- Confidence remains shaken among market participants and people are not yet in the mood to take on risk; even when periods of relative clam is observed, it does not often last very long; although peak inflation may be soon approaching, the issue of inflation is not going to subside enough to avoid stagflation from becoming a bigger problem according to some traders, which therefore, any near-term bound should be sold even if it lasts a couple of weeks
- S&P 500 fell 0.1% to 3,930.08
- Nasdaq 100 fell 0.2% to 11,945.50
- 10-year Treasury yield declined 5 bps to 2.87%
- WTI crude rose 1% to $106.74 a barrel
- Gold futures fell 1.8% to $1,821.20 an ounce
Summary
- Micro – U.S. equities plummet during early Thursday trading before regaining momentum to pare losses before close. Remarks by Federal Reserve Bank of San Francisco Mary Daly confirming that a 75 bps rate hike is currently not a primary consideration have assuaged some market concerns about overly aggressive policy tightening that could force the economy into a recession. However, volatility remains the theme as inflation persists at 40-year high levels while mounting macro headwinds that include an ongoing war in Ukraine and protracted COVID lockdowns in China remain fluid, threatening already-fragile supply chains and stoking costs.
- Macro – Benchmark Treasury yield fell to 2.87% as investors sought haven assets amidst rising inflation that is encouraging bets for further Fed tightening. Markets continue to grapple with a higher-than-expected inflation print for April, weakening investors’ confidence in risk assets.