Newsletter - May 17, 2022
Oil / Commodities
- European gas prices hit a four-week low after EU reassures buyers that they can keep importing Russian supplies without breaching sanctions. Companies were told to make a clear statement that they consider their obligations fulfilled once they pay in euros or dollars. The announcement eases a weekslong standoff between the EU and Russia over energy supplies. Moscow has demanded that payments be made in rubles, with buyers opening two accounts at Gazprombank so that a currency exchange can be made. European companies were concerned that this might violate sanctions against Russia for its invasion of Ukraine. Russia’s natural gas shipments to Europe via Ukraine are set to remain curbed on Tuesday. however, EU imports of LNG and warmer weather as summer approaches have also contributed to the downward price trend. The record amounts of LNG imports into the content have driven storage back to more comfortable levels.
o https://www.bloomberg.com/news/articles/2022-05-17/european-gas-futures-slide-as-russia-payment-standoff-recedes
Tech
- Bitcoin bounced above $30,000 on Tuesday in cautious trading as the fallout over a collapsed stablecoin continued to keep sentiment in check. Other coins like Ether and Avalanche also posted modest gains. Bitcoin is still nursing a 21% loss so far in May – the worst monthly slump in a year – following last week’s crypto sector turmoil over the collapse of the TerraUSD algorithmic stablecoin, also known by its ticker UST, and Tether’s brief dip from its dollar peg. The event is increasing the likelihood of tighter stablecoin regulations, which could lower risks in related investing going forward. An alternative government-backed medium may even displace them altogether. Investors have fled from cryptocurrencies and stablecoins alike since the crash began. The total circulation of Tether, the largest and most systemically important stablecoin, has dropped by more than $7 billion since May 7th when UST’s de-peg became apparent. The tick in higher Bitcoin prices has been accompanied by slightly brighter signs from blockchain trends. On-chain data show the number of addresses holding between one to 10 Bitcoins has increased from 689,000 to 694,000 since May 9th, an indication of confidence in the cryptocurrency’s recovery. The total market value of virtual coins has dropped about $420 billion this month to $1.36 trillion. Bitcoin is 56% off its record high from November last year.
- Despite the recent fallout of the tech sector in both public and private markets, VCs, optimistic by nature, are already talking up the silver linings. When big public companies cut back, the first thing they stop working on are innovative ideas that take years to pay off. This response creates opportunity for new founders and early start-ups, at the same time that market conditions make many start-ups cheaper to invest in. Valuations become more reasonable, allowing VCs to take more risks. And there is still plenty of money sitting around. VCs in the U.S. had more than $230 billion to invest as of mid-May. More than 1,000 start-ups raised funds from seed and angel investors during the March-quarter, pushing the total value of early-stage deals to the highest in at least a decade. The current changes in the market may eventually work out for investors and founders who can afford to be patient, but it does not mean much to the thousands of tech workers who have recently lost their jobs.
- Game developer Take-Two Interactive Software gained in late trading after fourth quarter earnings topped analysts’ estimates, boosted by games such as NBA 2K22, though a forecast for the coming year suggests that an industry-wide slump is poised to crimp sales. The video game industry is getting punished by widespread hardware shortages and inflation, as well as users spending less time playing games than they did during the height of the pandemic. Consumer spending on video games in the U.S. from January through March dropped 8% from the same period last year. CEO Strauss Zelnick summed up the year by saying Take-Tow took pivotal steps to invest in talent, broaden its product line-up and agreed to a transformational pending combination with mobile game developer Zynga this year.
- Microsoft plans to nearly double its budget for employee salary increases and boost the range of stock compensation it gives some workers by at least 25% in an effort to retain staff and help people cope with inflation. The move will mainly affect early to mid-career employees. In addition to contending with cost-of-living increases and a tight Seattle housing market, Microsoft is locked in a fierce battel for talent against rivals like Amazon, Google and Meta Platforms, as well as start-ups. Fields like cybersecurity, AI, the metaverse and cloud computing have been especially competitive. The pandemic has also led many workers to relocate and reconsider employment options. The stock increase will apply to employees at Level 67 in the company’s internal scale, which represents the last tier before an employee is made a company partner.
- SpaceX employees are offering to sell shares via a private placement that would value the launch and satellite company at around $125 billion. the shares are being offered in a so-called employee tender at $70 each. That compares with a split-adjusted $56 apiece during a sale in October at a valuation of about $100 billion.
- Elon Musk declared he will not proceed with his $44 billion takeover of Twitter unless the social media platform can prove bots make up fewer than 5% of its users, causing yet more uncertainty over the deal. Musk’s online pronouncement complicates an already chaotic takeover, potentially one of the largest acquisitions the internet industry has seen. He recently butted heads online with Twitter CEO Parag Agrawal over the way the social media platform accounts for bots, stoking speculation Musk may try to lower the price or even walk away. Musk told a tech conference in Miami that fake users make up at least 20% of all Twitter accounts, possibly as high as 90%. Meanwhile, the company regularly states in its quarterly results that the average of false or spam accounts represented fewer than 5% of its monthly daily active users during the quarter.
o https://www.bloomberg.com/news/articles/2022-05-17/elon-musk-says-twitter-must-prove-bot-claims-for-deal-to-proceed?srnd=premium-asia
Electric Vehicles
- Swedish battery-maker Northvolt became the first European firm to start commercial shipments to a carmaker last week, giving shape to the continent’s five-year push to counter Asian dominance in supplying energy cells for EVs. While Northvolt’s launch marks a success for Europe kickstarting an independent battery industry, skyrocketing prices for raw materials including lithium and cobalt have become a concern. For years, China has fostered closer ties with mining companies in Africa and South America, potentially exposing manufacturers elsewhere to supply bottlenecks. Northvolt, which plans to sale up production over the rest of the year, recently said it had secured more than $50 billion in contracts from EV manufacturers including BMW, VW, Volvo and Polestar. On Monday, the company also said it had started commercial EV battery recycling at Hydrovolt in Fredrikstad, Norway, a JV with Hydro. Hydrovolt is Europe’s largest EV battery recycling plant, with capacity to process around 25,000 batteries annually.
- Rivian’s shares fell almost 7% Monday on word the EV start-up is in a dispute with a key seat supplier that could jeopardize its delivery van contract with Amazon. Rivian alleged in a lawsuit that Commercial Vehicle Group threatened to stop supply seats unless the carmaker agreed to pay approximately twice the agreed-upon price. the suit involves supplies of vehicle components such as the driver seat, jump seat and trim used for battery-powered vans Rivian is building for Amazon. Rivian alleged in the suit filed in March that it had fewer than 100 seat packages left for installation and that it faced imminent shutdown of its entire production line for battery-powered vans. It also claimed Commercial Vehicle Group would not allow it to place new orders for additional seat packages at the higher prices.
- The global lithium industry needs as much as $42 billion of investment by the end of the decade in order to meet demand for the crucial battery-making material, with attempts to build supply chains outside of China subject to much higher costs. The sector will require $7 billion of investments each year from now until 2028. That would help it meet forecast demand for 2.4 million tons a year by 2030, which is four times higher than the 600,000 tons that is estimated to be produced in 2022. The forecast comes as Europe and North America look to reduce reliance on Chinese imports and develop their own lithium production. The strategy could require around twice as much capital than relying on getting the refined product from the Asian powerhouse. In the U.S., President Biden’s administration has been pushing to accelerate production of key battery metals, with more than $3 billion in grants to help process elements including lithium. Meanwhile, Canada has also earmarked up to C$3.8 billion in this year’s budget to build a domestic critical metals supply chain. The shortfall of raw materials to produce batteries is limiting the production of EVs, meaning their makers may have to get involved in mining if they want to make the cars at scale. While lithium’s major producers have large investments planned, those alone will not be sufficient and new mins are needed. Automakers could potentially step in and they have more than one reason to do so. Unlike investors, automakers are not just looking for a return from profits generated by lithium. They are looking to secure supply for their batteries.
o https://www.bloomberg.com/news/articles/2022-05-16/lithium-sector-needs-42-billion-as-pivot-from-china-adds-costs?srnd=premium-asia
Consumer / Retail
China Market
- Hong Kong authorities are deliberating whether to curtail public access to the messaging service Telegram, potentially reviving fears the former British colony is moving closer toward Beijing-style internet controls. The Privacy Commissioner for Personal Data is considering invoking regulations for the first time to restrict access to a platform it found to be rampant with doxing. The widespread doxing – or online exposure of sensitive and personal data – was aimed at government officials as well as citizens. If taken, such an action is likely to stoke fears that national security legislation enacted in 2020 will further encroach on civil liberties, as part of a continuing effort by Beijing to exert its influence over the city. The report comes days after the appointment of a new leader who is a vocal supporter of the China-imposed national security law.
- Chinese cities are making it easier and more affordable for families with more children to own multiple properties, as authorities struggle to revive the housing market and boost birth rates. Hangzhou said Tuesday that households with three children are now allowed to buy one more residence. The third child has to be born after May 31st last year. such families can also enjoy precedence over other prospective buyers when purchasing new homes. The emerging policy trend is in line with the Chinese government’s years-long principle that houses are for living in, not for speculation, a stance it maintained after vowing last month to rekindle demand for homes. COVID outbreaks have exacerbated a housing slowdown that began last year during a crackdown on excessive leverage in the industry. The central bank on Sunday lowered the floor on mortgage rates for first time homebuyers, a move that will likely do little to arrest the slump.
- As China’s COVID Zero becomes harsher and more economically disruptive, China has repeatedly invoked the spectre of millions of vulnerable elderly people dying as justification for its strict virus approach. About 216 million Chinese aged 60 an older have been fully vaccinated, almost 82% of that age group. And 164 million have received boosters. But the statistics get worse the older you get, with only about 50% of people aged 80 or over having been vaccinated. And China is now paying the price for this vulnerability, with its economy struggling under thew eight of chaotic lockdowns and increasingly unpredictable measures aimed at snuffing out all cases and shielding the community. What is unusual is China’s reluctance to compel the segment of the population most susceptible to bad outcomes from COVID to get inoculated. It stands in contrast to authorities’ strict enforcement of mass lockdowns and testing, and the pressure put on students and employees at state-owned enterprises to get vaccinated. China’s early COVID success can be to blame for its lack of urgency, with officials largely keeping the virus out through much of 2020 and the first half of last year after quelling the initial outbreak in Wuhan. The lack of a clear and visible threat meant vaccinating seniors, who are less likely to work or utilize public spaces like schools and shopping malls, was less of an imperative. For those aged 80 and over, China is seeing little difference in the death rate for those who got the original strain of the virus in Wuhan and those who are now getting omicron, which has proven milder in many parts of the world at least partially because of the rollout of vaccines.
- Shanghai is tentatively unravelling a punishing lockdown that confined millions in their homes for weeks amid signs that its outbreak is coming under control, even as flareups in distant cities show how China is locked in a seemingly endless battle to ward off the hyper-infectious omicron variant. The city reported a third consecutive day of no new COVID cases in the broader community, hitting a crucial milestone that authorities have said will allow them to unwind the strict curbs that hampered economic activity and curtailed almost every aspect of daily life for residents. Meanwhile, Tianjin is seeing a new flareup being emerged, likely set off by an infection from a worker at a cold storage facility. The city of nearly 14 million detected 28 infections during a mass testing drive, after an earlier outbreak in January caused disruptions for global carmakers Toyota and Volkswagen. The city of Guang’an in Sichuan Province is also seeing more than 400 infections in about a weeks’ time. The new outbreaks, along with continuing cases in the Chinese capital of Beijing despite a growing list of curbs show how officials are engaged in a serious effort to quash omicron.
- Tencent and Alibaba are struggling to keep up with even the most staid utilities as China’s crackdown in internet giants takes its toll. Tencent results on Wednesday are expected to show revenue rose by a mere 4.3% in the March quarter, while growth at Alibaba is projected at 7.1%. both would be record lows and lagging the 8.6% average growth reported by the 10 largest utilities including Duke Energy and The Southern Co. last year. It is a remarkable turn of events for two corporate stars that once embodied China’s modern economic miracle, before President Xi’s sweeping tech-sector crackdown forced the internet industry to cut staff, freeze investments into new arenas, and give away billions to social causes. Since, China’s tech giants have made peace with a new era of caution and stricter government oversight. VCs are hitting the brakes on some of the country’s hottest internet trends like community buying, sounding the death knell for high-profile start-ups and squeezing valuations of others. TikTok-owner ByteDance and online exporter Shein could postpone their stock market debuts. All that has disillusioned investors who can no longer count on China Tech Inc. to drive their portfolios. There has been a fundamental shift in growth story for China tech, where focus will redirect towards quality and sustainable growth, unlike the unconstrained growth in years past. This may result in a downshift in revenue and user growth as companies become more conscious about how they go about user acquisition, M&A and opening up their platforms to competition.
- China’s most senior diplomat vowed to counter any perceived U.S. efforts to disrupt a once-in-five-year Communist Party meeting at which President Xi is set to secure a precedent-breaking third term. Beijing should resolutely respond to any words and deeds by Washington to suppress and contain China before the 20th party congress later this year according to Yang Jiechi. Without naming the U.S., Yang also said some individual country was striving to maintain its hegemony, a common reference to America. Yang also added that Beijing should continue to promote its comprehensive strategic partnership with Moscow, as the U.S. repeatedly raises concerns about China’s diplomatic support for Russia’s President Putin. Yang also defended President Xi’s unwavering commitment to the COVID Zero strategy, and urged the nation’s 1.4 billion population to follow through with the strategy. China’s relationship with the U.S. will be in the spotlight later this week when President Biden makes his first visit to allies South Korea and Japan since taking office. President Biden plans to hold a summit in Tokyo with the leaders of Japan, India and Australia, a grouping known as the Quad, which is largely aimed at countering China’s expanding influence in the region.
o https://www.bloomberg.com/news/articles/2022-05-17/china-vows-to-stop-us-from-disrupting-xi-s-big-party-congress?srnd=premium-asia
Russia-Ukraine Development
- The U.S. Senate overwhelmingly voted to move toward passage of a $40 billion package of military and humanitarian assistance for Ukraine, bringing the legislation closer to approval in Congress over the next few days. Ukraine said 53 severely wounded fighters were evacuated from the Azovstal steel plant in the port city of Mariupol, the first evacuation of military personnel from the complex after a UN-led effort to get civilians out earlier this month. Meanwhile, President Putin warned that Russia would respond if Sweden and Finland move forward with NATO membership, while Turkey again raised objections to their accession. Germany remains open to seizing the Russian central bank’s reserves abroad to finance Ukraine’s reconstruction, with talks already in process in the G-7 and EU. Regarding the EU’s ongoing deliberations over a possible Russian oil ban, the bloc’s foreign ministers have decided the pass the deadlock over the matter back to ambassadors for more discussion. For now, the EU said gas importers in the bloc could continue paying for Russian fuel without breaking sanctions imposed on Moscow. The European Commission, in guidance sent to member states Friday, said companies should make a clear statement that they consider their obligations fulfilled once they pay in euros or dollars. On the ground, Ukrainian artillery fire has prevented Russian troops from crossing the Donetsk River, halting their progress after President Putin refocused his efforts on taking and holding territory in the eastern part of the country. Taking any further territory in the Donetsk region will be a difficult talks for Russia if a river crossing cannot be undertaken successfully.
o https://www.bloomberg.com/news/articles/2022-05-16/ukraine-latest-gas-prices-dip-on-eu-plan-for-payments-to-russia?srnd=premium-asia
Market Update
- U.S. equity futures rose in Asia trading Tuesday as some semblance of risk appetite returned to markets roiled by concerns about global economic growth, surging prices and policy tightening; contracts on the S&P 500 and Nasdaq 100 bounced back after a Wall Street drop
- A challenging global economic outlook amid elevated food and fuel costs and tightening monetary settings continue to shape sentiment, although one bond-market measure – the five-year breakeven rate – is signalling inflation may have peaked
- Oil jumped to about $114 a barrel and an index of agricultural prices is at a record high
- U.S. data released Monday showed New York state manufacturing activity unexpectedly shrank in May for the second time in three months, which followed Chinese figures revealing a collapse in economic activity due to COVID; the reports are fanning concerns of a global economic downturn alongside persistent price pressures that are forcing the Federal Reserve and other major central banks to tighten monetary policy to quell inflation that shows little sign of letting up
- New York Fed President John Williams downplayed deteriorating liquidity conditions in financial markets, saying it was to be expected as investors grapple with uncertainty over global events and shifting U.S. monetary policy; for now, traders are looking forward to Fed Chair Jerome Powell among a slate of Fed speakers later Tuesday for further commentary
- S&P 500 futures rose 0.6%, while the S&P 500 dropped 0.4% to 4,008.01 Monday
- Nasdaq 100 futures rose 0.8%, while the Nasdaq 100 dropped 1.2% to 12,243.58 Monday
- 10-year Treasury yield advanced 4 bps to 2.92%
- Brent crude fell 0.1% to $114.10 a barrel
- Spot gold was little changed
- Investors are piling into cash as global growth optimism sinks to an all-time low and stagflation worries rise according to the Bank of America’s latest fund manager survey. Cash levels among investors hit the highest level since September 2001, while stagflation fears were at their highest since August 2008. Hawkish central banks are seen as the biggest tail risk by investors, followed by a global recession. The results come after the longest weekly losing streak for the world’s stocks since the global financial crisis as central banks turn off the monetary taps at a time of stubbornly high inflation. Investors seem to be bracing for an imminent bear market rally, but ultimate lows have not yet been reached. Fears of a recession were followed by the risks from inflation and the war in Ukraine. The bearishness has been extreme enough to trigger BofA’s own buy signal, a contrarian indicator for detecting entry points into equities. The survey also revealed the biggest “short” in tech stocks since August 2006. Frothy tech shares have been particularly punished in the latest selloff amid concerns about future earnings as rates rise.
o https://www.bloomberg.com/news/articles/2022-05-17/bofa-clients-hoard-cash-at-2001-high-as-stagflation-woes-surge?srnd=premium-asia
Summary
- Micro – U.S. equities plummeted Monday while contracts edged higher in Asia trading Tuesday in a sign of returning risk appetites by investors. But uncertainties over the global economic outlook, surging prices and policy tightening remain points of concerns for equity investors, as the combination stokes higher costs, and inadvertently, tighter monetary policies ahead which could erode the future valuations of company earnings and valuations.
- Macro – Benchmark Treasury yield advanced four bps to 2.92% as the selloff returns. Weaker-than-expected New York state manufacturing activity in May, followed by a collapsing Chinese economy in the midst of ongoing COVID restrictions are fuelling concerns of a global economic downturn alongside persistent price pressures forcing major central banks to tighten monetary policy to quell inflation which shows no signs of letting up. The risk-off environment is corroborated by increasing stagflation worries expressed through the latest survey of fund managers conducted by Bank of America. The results show investors are piling into cash as they stay on the sidelines with regards to investing in public markets. Cash levels among investors hit the highest level since September 2001, with stagflation fears surpassing August 2008 levels. Persistent inflation exacerbated from an ongoing war in Ukraine and China’s latest COVID restrictions are fuelling fears of a recession that could spell for further losses in equity ahead. The survey results also revealed the biggest short in tech stocks since August 2006, as investors mull on concerns about eroding future earnings as interest rates rise. Elsewhere, oil rebounded to trade at about $114 a barrel as mobility restrictions start to ease in China, lifting the cloud over demand risks from the world’s largest importer.