Newsletter - May 16, 2022
Oil / Commodities
- China’s electricity output plummeted last month as virus restrictions in Shanghai and other parts of the country pummelled economic activity from factory floors to steel mills and shopping malls. Electricity generation fell in April from March to 608.6 billion kWh, a decline of 4.3% on the same period last year. thermal power output plunged to an even greater degree, down 12% for the biggest drop since 2008, as the share of renewables increased at the expense of coal and gas and China installed more solar capacity than expected in the first quarter. The moderation in China’s appetite for fossil fuels has come at an opportune time for the world’s biggest energy importer, as well as global markets contending with higher prices resulting from the war in Ukraine. The lower requirement also saw domestic coal, gas and crude output ease from the highs hit in March. But cratering industrial activity has put China’s growth target for the year even further out of reach, and among commodities, both steel output and oil refining have been hit hard. Steel production is still 5.2% lower on year in April, while refining activity fell sharply on both measures due to strict mobility restrictions. Aluminum, however, notched a fresh record high as smelters ramped up output to tap elevated margins after the surge in prices following Russia’s invasion of Ukraine.
- Wheat jumped by the exchange limit after India’s move to restrict exports, exposing just how tight global supplies are after the war in Ukraine and threatening to drive up food prices even more. The Indian government will suspend overseas sales to manage its food security according to a notification dated May 13th. This drew criticism from the agriculture ministers of the Group of Seven nations, who said such measures would make the world’s crisis worse. Benchmark futures rose as much as 5.9% to $12.47 for half a bushel in Chicago, the highest in two months. Prices have surged about 60% this year, increasing the cost of everything from bread to cakes and noodles. The surprising thing is India is not even a prominent exporter on the world stage. The fact that it could have such a major impact underscores the bleak prospect for global wheat supplies. War has crippled Ukraine’s exports, and now droughts, floods and heat waves threaten crops in most major producers. India’s decision to halt wheat exports came as a record-breaking heat wave parched the crop during a crucial period, spurring estimates of slumping yields. The output risk created a dilemma for India, which has tried to fill the gap as the shortfall in Ukraine’s exports push buyers toward alterative regions.
o https://www.bloomberg.com/news/articles/2022-05-15/world-s-food-problems-piling-up-as-india-restricts-wheat-exports?srnd=premium-asia
Tech
- Last week’s trading ended on a higher note for big tech on hopes a relentless selloff may be nearing exhaustion. But Friday’s rally has not completely wipe out a sobering signal from Apple shares. After acting as a ballast for the broader market for most of the year, the stock broke down last week, with losses through Thursday exceeding 9%. Even after Friday’s rebound, Apple is still underperforming the S&P 500 for the year, which is worrisome. The stock has been afloat for the bulk of the year as market volatility and turmoil continues. And its latest underperformance might be part of a larger trend of investor risk aversion. And further losses could help send the S&P 500 lower again given its weight. It is mathematically impossible for the S&P 500 to rise when the largest stocks keep falling. However, Apple’s latest rout could be a sign that investors are finally capitulating and stocks are poised for an extended rebound. One positive sign is that retail investors have continued pouring money into stocks this year in spite of the selloff and are still buying Apple. The stock was the second most purchased by retail traders in the five days preceding May 11th. For now, risks related to Apple include China’s lockdowns and the related disruptions over the economy and global supply chains, which have already cost Apple billions of dollars in lost sales in recent quarters.
- Apple is testing future iPhone models that replace the current lightning charging port with the more prevalent USB-C connector, a move that could help the company conform with looming EU regulations. In addition to testing models with a USB-C port, Apple is working on an adapter that would let future iPhones work with accessories designed for the current lightning connector. If the company proceeds with the change, it will not occur until 2023 at the earliest. The company will be retaining the lightning port for this year’s new product models. Apple already implements the USB-C port charging for most of its products. That means Apple customers can use similar chargers for the iPhone in the future if the switch occurs. UBSC-C chargers are slightly larger than the lightning connector, but can offer quicker charging speeds and data transfers. The new connectors would also be compatible with many existing chargers for non-Apple devices, like Android phones and tablets. But the minority of Apple accessories, like the AirPods, Apple TV remote, and MagSafe battery pack and the MagSafe Duo charger still use lightning. The USB-C adapter in development could mitigate that issue but it is unclear if Apple would include that in the box or make customers pay extra for it. And the shift would lessen Apple’s control over the iPhone accessories marketplace. Apple forces accessory makers to pay it to use the lightning connector and partake in a stringent approval process. USB-C is a standard used by many consumer device makers, making it less likely that Apple will be able to exert its usual level of control. A key reason for the change might be the EU’s decision to force phone and other device makers to adopt USB-C. in April, legislation for such a requirement was approved by a majority vote.
o https://www.bloomberg.com/news/articles/2022-05-13/apple-plans-to-change-iphone-charging-port-to-meet-new-eu-law?srnd=technology-vp
Electric Vehicles
- Two years into the SPAC merger boom for EV start-ups, companies are having a tough time finding cash to actually produce cars. First, Lordstown Motors said it would back off investing in the tools to build its electric trucks until capital markets loosen up. Tow days later, EV start-up Canoo issued a going concern notice to alert investors warning it would run out of cash. The story has changed for some of the constituents in the cohort, as they burn huge amounts of cash. Every day that the market goes down, their liquidity gets challenged. Convertible debt for many of the smaller EV start-ups with little or no revenue is costing more than 10% now. They cannot issue much secured debt because they lack hard assets to put up as collateral.
o https://www.bloomberg.com/news/articles/2022-05-13/electric-car-spacs-run-low-on-cash-goev-ride-fsr-nkla?srnd=hyperdrive
- GM’s Cruise self-driving unit is working with the automaker’s BrightDrop electric van business on a plan to develop autonomous delivery vehicles. Cruise and BrightDrop have started early-stage work that could eventually put a self-driving system into the electric vans, potentially creating a driverless package-delivery service. The nascent project could be a logistical next step for GM, whose Cruise unit has mostly been focused on getting its robotaxi business running and generating revenue. Cruise’s other current priorities are the development of its Origin autonomous vehicle and a delivery initiative with Walmart to bring goods from stores to customers. The Origin is a four- to six-passenger shuttle that is purpose-built for a ride-sharing service. GM CEO Mary Barra has high hopes for both units, with a goal for the automaker to double revenue to $280 billion by 2030. Of the projected revenue gains, Cruise is targeted for about $50 billion, while BrightDrop’s electric vans would account for about $10 billion.
- Hyundai plans to announce next week that it will build a new EV assembly plant in southern Georgia. The plant is part of the $7.4 billion Hyundai had pledged in 2021 to invest in the U.S. Hyundai sales in the U.S. have increased since it transformed its fleet to meet Americans’ demands for SUVs. It set a U.S. retail sales recording the first quarter after increasing deliveries by close to 20% in 2021. The company said in April it will spend $300 million to expand its assembly plant in Montgomery, Alabama to make a hybrid version of the Santa e crossover and an EV for its luxury Genesis brand, the GV70, this fall. Hyundai had pledged in 2021 to invest billions in the U.S. by mid-decade, a commitment that covers EV plants, hydrogen refuelling stations and unmanned flying taxis.
o https://www.bloomberg.com/news/articles/2022-05-12/hyundai-to-pick-georgia-for-new-ev-plant-creating-8-000-jobs?srnd=hyperdrive
Consumer / Retail
China Market
- China’s economy is paying the price for the government’s COVID Zero approach, with industrial output and consumer spending sliding to the worst levels since the pandemic began and analysts warning of no quick recovery. Industrial output unexpectedly fell 2.9% in April from a year ago, while retail sales contracted 11.1% in the period, weaker than a projected 6.6% drop. The unemployment rate climbed to 6.1% and the youth jobless rate hit a record. China’s economy has taken the brunt of the impact from the government’s stringent efforts to keep the virus at bay. Bloomberg Economics estimates GDP declined 0.68% in April from a year ago, the first contraction since February 2020. Some are expecting the Chinese economy to shrink further in the second quarter, putting the government’s ambitious full-year growth target of around 5.5% further out of reach. While the government faces mounting pressure to launch new stimulus to stabilize the economy, the effectiveness of any new policies depends on how Beijing adjusts to its zero-tolerance policy against COVID. Shanghai is now expecting the city to return to normal life and production between mid- to late June. The 10-year yield on Chinese government bonds remained lower than the U.S. Treasury, at 2.83% compared to the latter’s 2.91%, erasing the yield premium Chinese government bonds once held over the U.S. for years. China’s April activity data laid bare the damage from COVID lockdowns in Shanghai and other parts of the country. The data point also foreshadow a deeper slowdown this year than expected. Disruptions in China, the world’s factory, are worsening the global growth outlook and complicating the inflation picture. Supply chain snags have affected companies from Tesla to Apple, while export growth slowed last month to the weakest pace (3.9%) since June as operations at the world’s largest port in Shanghai took a knock. On the policy support front, the PBOC took steps on Sunday to ease a housing crunch by reducing mortgage rates for first-time homebuyers. However, it left the interest rate on one-year policy loans unchanged on Monday, as inflation pressure and worries about capital outflows reduce the scope for more easing. The jump in jobless rate will be of particular worry to China’s leadership as well. China’s fixed asset investment increased 6.8% in the first four months of the year, likely supported by the government’s push to expand infrastructure spending. However, cement output was down 18.9% in April and production of crude steel and steel products both dropped more than 5%. The production of cars plunged 44% and total manufacturing output dropped 4.6%. electricity generation fell 4.3% in April from a year ago, as power demand from factory floors to steel mills and shopping malls wanes amid the virus restrictions. China’s housing market is a crucial source of growth for the domestic economy but has been in a slump for almost a year, with sales dropping at a double digit pace every month since August 2021 and prices of new homes also falling after a government crackdown on indebted property developers. Investment in property development fell 2.7% in the first four months of the year, while the value of homes sales dropped 32%.
- China’s central bank effectively cut the interest rate for new mortgages in an attempt to prop up the ailing housing market and boost the slowing economy. First time home buyers will now be able to borrow money at an interest rate as low as 4.4%, down from the 4.6% previously. The change is aimed at supporting housing demand and will promote the stable and healthy development of the property market. The cut sends a loud and clear signal that policy makers are pushing for property policy easing with concrete measures. The announcement is a step in the right direction, and more important than the previous local easing given that this is a national level policy. But more support is still needed to stabilize the current domestic market. Home sales continued to fall across major cities at the beginning of this month, dropping by a third in 23 major cities in the first week of May compared to the same period last year. That was on top of combined sales by the top 100 developers halving in the first four months of the year.
- The Chinese central bank refrained from cutting interest rates despite mounting evidence of a sharp slowdown in economic growth, suggesting policy makers may be concerned about the currency’s depreciation and capital outflows. The PBOC kept the rate on its one-year medium-term lending facility at 2.85% Monday. Economists had been split on the decision previously, with only half of economists predicting a reduction between 5 bps and 15 bps. The PBOC also rolled over the maturing 100 billion yuan of medium-term lending facility loans without providing additional liquidity. Officials have expressed concerns about inflation pressure and capital outflows as the Fed and other major economies begin hiking interest rates. Foreign outflows from Chinese bonds reached a record in March as China’s yield premium over the U.S. disappeared. The yuan has depreciated about 6.5% against the dollar since the end of March, making it the worst performing currency in Asia during the period. The PBOC’s stimulus has been relatively modest this year. it cut the MLF rate in January and made a smaller-than-expected reduction in the amount of cash banks must keep in reserve in April. Policy makers have relied instead on using structural tools to target weaker areas of the economy, such as relending programs for small businesses.
- Shanghai is on the brink of meeting the goal of three days of zero community transmission of COVID that officials have said is required to start easing the harshest elements of the city’s punishing six-week lockdown. The city reported a second day of no COVID infections outside of government-mandated quarantine for Sunday, and total cases fell to 938 from 1,369 on Saturday – the first time the daily tally has been below 1,000 since March 23rd. Officials have said they are seeking to stop community spread of the virus by May 20th.
- The economic consequences from China’s COVID lockdowns are starting to be felt by companies and consumers worldwide, and expectations are that the reverberations will only get stronger. Supplies of Adidas sneakers and B&O speakers have been hit. Automakers from Toyota to Tesla are facing unprecedented costs and production hurdles. Sony is struggling to make enough PlayStations. All construction projects have been backed up waiting on raw materials. Beijing’s COVID Zero policy has idled factories and warehouses, slowed truck deliveries and worsened container logjams. As the country accounts for about 12% of global trade, it was only a matter of time before the upheaval began to trickle across economies, threatening to further stoke rising inflation. While the impact so far does not appear severe, this is likely only the beginning. The full significance of China’s COVID restrictions has yet to be even seen as lockdowns continue in Shanghai and other cities shut to contain smaller outbreaks, adding to supply chain congestion that is already reeling from the war in Ukraine. Once Shanghai opens up again and everything is back into rotation, and you see all the vessels heading towards the U.S., that can pose additional challenges with additional congestion.
o https://www.bloomberg.com/news/articles/2022-05-14/china-lockdowns-create-supply-chain-chaos-from-apple-to-tesla?srnd=premium-asia
Russia-Ukraine Development
- NATO members rallied around Finland and Sweden on Sunday after they announced plans to join the alliance, marking another dramatic change in Europe’s security architecture triggered by Russia’s war in Ukraine. Most NATO foreign ministers gathering in Berlin over the weekend embraced the bloc’s norther enlargement, a process that requires unanimity among 30 allies. The one country to voice concerns was Turkey, with Foreign Minister Mevlut Cavusoglu unhappy that Finland and, particularly, Sweden have had relations with Kurdish militants who have been active in easter Turkey. Sweden is sending a team of diplomats to Ankara for talks this week and NATO Secretary General Jens Stoltenberg said he expects to work through the last-minute wrinkles in the enlargement plan.
- With President Putin’s invasion of Ukraine stalling, other former Soviet states are weighing prospects for pulling away from Moscow’s orbit even as they fear risks of potential border conflict. The war is sending tremors along an arc of instability stretching from Ukraine’s neighbour Moldova through the Caucasus and into Kazakhstan in central Asia. President Putin’s intentions have become an urgent national security question in countries with so-called frozen conflicts or that have large pro-Russian minorities. Russia may open other fronts in case President Putin needs to camouflage its failure in Ukraine inside a bigger crisis. At the same time, the Russian government understands that resources are not unlimited and already in tight situation given the current war in Ukraine. The arc represents a region sandwiched between rival powers jostling for dominance. Turkey is looking to boost its influence after helping its ally Azerbaijan defeat Armenia in a 2020 war, China is expanding its presence along trade routes to Europe, and Iran has an interest in bolstering its position in the Caspian Sea area. Ripples are being felt as far as the Balkans, with political divisions in Croatia over the war and Serbia facing European pressure to loosen Kremlin ties. With Ukraine defending fiercely, it is unclear if Russia can achieve its goals there and whether it has an appetite to expand a conflict that has brought huge military losses and international isolation for few gains.
o https://www.bloomberg.com/news/articles/2022-05-15/ukraine-russia-war-these-ex-soviet-states-are-worried-about-putin-s-invasion?srnd=premium-asia
Market Update
- Goldman Sachs Senior Chairman Lloyd Blankfein is warning of a looming U.S. recession. He claims that the U.S. is in a very high risk of an economic downturn and urges companies and consumers to prepare for it. With high fuel prices and a shortage of baby formula tangible measures of Americans’ unease, U.S. consumer sentiment declined in early May to the lowest level since 2011. U.S. consumer prices rose 8.3% in April from a year ago, slowing slightly from March but still among the fastest rate in decades. Goldman Sachs’ economic team now expects U.S. GDP to expand 2.4% in the current year, down from the previous forecast of 2.6%. The firm also reduced its 2023 estimate to 1.5% from 2.2%, claiming the need for a growth slowdown to help temper wage growth and reduce inflation back down toward the Fed’s 2% target. While the slowdown will push up unemployment, Goldman Sachs was optimistic a sharp rise in joblessness can be avoided. Unemployment rate is projected to rise to 3.7% by the end of 2023, after falling to 3.4% over coming months. While some inflation will go away as supply chain snarls and COVID lockdowns in China ease, some will be stickier, such as energy prices.
- U.S. government bonds have already lost 8.8% this year through the end of last week, putting them on course for their first back-to-back annual declines in at least five decades. A global gauge is down more than 12%. Yet, the 10-year Treasury yield has fallen 30 bps since hitting 3.2% on May 9th, its highest since 2018. At the same time, stocks have dropped sharply amid fears over growth, exacerbated by the war in Ukraine and COVID lockdowns in China. With inflation pressures still rampant everywhere, no one is betting with conviction that yields in any of the world’s major markets have peaked. But the argument goes that the asset class still offers a powerful hedge as the Federal Reserve’s aggressive tightening campaign threatens to spur a downturn in the business cycle that could ripple across global assets.
o https://www.bloomberg.com/news/articles/2022-05-15/bonds-suddenly-look-like-a-smart-hedge-again-even-after-12-loss
- U.S. equity futures fell, and stocks wavered in Asia trading Monday as poor Chinese economic data fuelled concerns about the global economic outlook
- Chinese figures showed that industrial output and consumer spending hit the worst levels since the pandemic began, hurt by ongoing COVID lockdowns; authorities are now taking measured steps to help the economy, including a cut to the interest rate for new mortgages over the weekend to bolster an ailing housing market, but the one-year policy loan rate was left unchanged Monday
- 10-year U.S. Treasury yield dropped to 2.91%, as traders continue to question whether economic worries will help stem this year’s Treasury selloff, which has been driven by inflation and tightening of U.S. monetary settings
- The risk of an economic downturn amid price pressures and rising borrowing costs remains the major worry for markets; many traders remain wary of calling a bottom for equities despite a 17% drop in global shares this year considering the volatile, fragile and unstable movements ahead
- Oil was dented by the weak Chinese figures released Monday but remains in sight of $110 a barrel; Shanghai is close to the necessary threshold for loosening its six-week lockdown, which could spur bets on rising energy demand
- S&P 500 futures fell 0.6%, while the S&P 500 rose 2.4% on Friday to 4,023.89
- Nasdaq 100 futures fell 0.7%, while the Nasdaq 100 rose 3.7% on Friday to 12,387.40
- 10-year Treasury yield was at 2.91%
- WTI crude fell 1.4% to $108.97 a barrel
- Gold was at $1,807.90 an ounce
Summary
- Micro – U.S. equity futures lost some of its strength in Asia trading Monday, as weak Chinese data following six weeks of extended COVID lockdowns are sending ripples through the global economy. China’s economic contraction in April underscores the added pressure of shutdowns on already-fragile supply chains, stoking higher prices to worsen the inflation environment across major economies, risking higher interest rate hikes ahead that could send the economy into a downturn.
- Macro – Benchmark Treasury yield fell to 2.91% 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. And China’s weakening economy amidst protracted COVID disruptions are compounding economic pressures stemming from the war in Ukraine, spelling further uncertainties ahead. Meanwhile, oil weakened but still trades in sight of $110 a barrel, as weak Chinese economic data is also foreshadowing weak demand in the near-term. But with Shanghai close to a full reopening some time in June, demand could rebound. And coupled with supply risks stemming from Russia’s war in Ukraine and ensuing sanctions, oil prices could rebound on higher demand.