Newsletter - May 20, 2022
Oil / Commodities
- Oil headed for a modest weekly gain as optimism about the outlook for demand eclipsed concerns about tighter monetary policy and an economic slowdown that have combined to roil wider financial markets. WTI eased below $111 a barrel after ending higher Thursday, and is up 0.3% so far this week. It is on course for a fourth consecutive weekly gain that would be the best run since mid-February. Global fuel product markets are tightening, especially in the U.S., where gasoline and diesel prices have risen to unprecedented levels in the run-up to summer driving season. Nationwide travel is expected to approach levels seen before the pandemic. Oil has surged almost 50% this year as demand recovered from the impact of the pandemic and Russia’s invasion of Ukraine sent shock waves through global markets. While the U.S. and U.K. have announced bans on Russian exports, flows to Asia have picked up. China is seeking to replenish strategic stockpiles with cheap Russian oil even as officials grapple to suppress COVID outbreaks. With an easing of virus outbreaks in China, and peak-demand season in the U.S., risks are skewed to the upside. Oil’s jump has contributed to the fastest inflation in decades, prompting the U.S. Federal Reserve to vow that it will go on raising interest rates until there are clear signs that price pressures are easing. That has spurred wild shifts in investors’ appetite for risk, swinging equity, bond and commodity markets. Oil markets remain in backwardation, with Brent’s prompt spread at $2.33 a barrel in backwardation compared to $1.80 a week ago.
o https://www.bloomberg.com/news/articles/2022-05-19/oil-heads-for-fourth-weekly-gain-on-outlook-for-products-demand
Tech
- Apple executives previewed its upcoming mixed reality headset to the company’s board last week, indicating that development of the device has reached an advanced stage. The company’s board convenes at least four times a year. a version of the device was demonstrated to the directors during the latest gathering. In recent weeks, Apple has also ramped up development of rOS, its reality operating system. That progress suggests that the product’s debut could potentially come within the next several months. The launch of the headset would represent the company’s first major new product category since the Apple Watch in 2015, and vault the tech giant into a still-nascent industry. Apple’s sales have been soaring, hitting record levels in recent quarters. But supply chain snags and concerns about slowing consumer spending have weighed on its stock. The headset features advanced processors, on par with those in the latest Macs, as well as ultra-high-resolution screens. Though the first model will offer both VR and AR, the company is also working on stand-alone AR glasses, codenamed N421, for release later this decade. Unlike AR, VR overlays digital information and images on top of the real world. When the actual product and its category is launched, Apple will step up competition with other tech giants including Meta Platforms, Sony, and Microsoft. Google is also working on standalone AR glasses for the future. Meta is launching a mixed-reality headset in coming months similar to Apple’s device. That product, codenamed Project Cambria, will be priced higher than $800. Apple’s device could cost upwards of $2,000. Last year, the company believed it would sell about one unit per day per Apple retail store. The market for AR and VR headsets has grown 92% over the past year to over 11 million units. Meta’s Quest 2 headset currently dominates the market, with about 78% of sales in 2021. Apple’s entrance into the category, because of its marketing prowess and product ecosystem, will likely expand the industry’s sales considerably over time.
- Tether, the operator of the world’s most used cryptocurrency, said it had reduced the amount of commercial paper in the reserve backing its $74 billion stablecoin, revealing information about its holdings while dollar-pegged assets face tougher scrutiny from regulators. Tether had assets totalling at least $82.4 billion as of March 31st, along with $82.2 billion in liabilities relating to the digital tokens it issues. Tether is the issuer of USDT, a stablecoin which relies on a reserve of U.S. dollar and dollar-equivalent assets to maintain a one-to-one peg with the currency. The quality of those reserves has previously been called into question for an over-reliance on assets with limited liquidity, with criticism levied at Tether over its lack of transparency on the matter. The crypto company has been brought under an intense spotlight over the last week following the collapse of algorithmic stablecoin Terra, which briefly knocked USDT off its peg with the dollar during a period of mass market instability. In a statement Thursday, Tether noted a 17% decrease in its commercial paper holdings to $20.1 billion compared to the previous quarter, and added that it had completed a further 20% reduction on that amount since April 1st, which will be included in its upcoming report for the second quarter. Conversely, Tether said it had increased its investments in money market funds and U.S. Treasury bills, rising more than 13% to a total of $39.2 billion. The average rating of its commercial paper and certificates of deposits has increased from A-2 to A-1, while secured loans have decreased by $1 billion. The value of USDT had slipped as low as 95 cents on crypto exchanges during the May 12th de-peg, but Tether said it continued to offer redemptions at $1 throughout that time. The latest attestation further highlights that Tether is fully backed and that the composition of its reserves is strong, conservative and liquid. JPMorgan analysts said in a report Thursday that continued heavy redemptions of USDT would induce forced sales of commercial paper, which could potentially cause a spill over in contagion to traditional financial markets.
- Luna and TerraUSD’s latest downfall have fed a digital asset rout, helping wipe out more than $300 billion from the combined value of all cryptocurrencies in the week ended May 13th. Bitcoin, which traded for more than $60,000 as recently as October, now goes for half of that. UST was created as a stablecoin. These coins have become an important part of the crypto world as a stand-in for traditional cash. Since they are designed to have a constant value, they are easier to use to pay for things in the real world. But unlike other stablecoins, the UST was not backed by dollars or other assets held in a bank account. Instead, it was supposed to be worth $1 because it could be redeemed for $1 worth of a linked token, Luna. If Luna was worth $10, you could redeem one UST for 1/10th of a new Luna, which you could sell on an exchange for $1. If Luna was worth 10 cents, you’d get 10 Lunas. Luna itself was supposed to climb in a value as the network grew more popular, because its holders accrued usage fees. It was essentially a mullet network – in the front, a boring, business-like stablecoin, and in the back, the Luna get-rich-quick party. UST launched in 2020, but gained little traction until March 2021 when founder Do Kwon introduced a third part of the network: Anchor, a quasi-bank for crypto where users could deposit their Terra stablecoins and earn 20% interest. Kwon pitched it as a safe alternative to banks, citing the decentralized system requires no central intervention using a set of game theoretic incentives powered by an algorithm. In 2021, Luna’s price increased 100-fold, and nearly $10 billion worth of UST were created. But UST had a flaw, one it shared with money market funds or banks before the invention of deposit insurance. If users lost confidence in the system, they could rush to sell or redeem their coins, and others might follow, fearing they would not get their $1 per token back if they waited too long. In theory, the network could always issue more Luna to those who wanted out. But that was a risk too. The more tokens issued, the further the price of Luna would drop, which in turn would mean the network would have to issue even more, exacerbating the decline into a death spiral. The crisis began May 7th when Luna had already been drifting down as part of a general slump in asset prices. After a trader made a large swap of UST for rival stablecoins, its price dropped to 99 cents, prompting speculation the dollar peg was at risk. Kwon had amassed a few billion dollars’ worth of Bitcoin as a reserve to back UST in case of emergency, and on Twitter projected his confidence about the coin’s stability. The next day, the UST redemptions continued, forcing Luna to issue more tokens. Luna fell by more than half, to less than $30, then lost another 2/3 in value the next day. The death spiral had already begun despite Kwon’s efforts in rallying supporters on Twitter. By the morning of May 13th, 6.5 trillion Lunas were in circulation, and the price had dropped to $0.00001834. UST’s price dropped below 20 cents, because even if it could be redeemed for an immense pile of Luna tokens hypothetically worth $1, there was no one to buy them.
- Twitter executives told employees on Thursday that the $44 billion deal to sell the company to Elon Musk is moving forward as planned, and they will not renegotiate the agreed-upon price of $54.20 a share. executives also addressed a number of questions about the transaction, including whether Twitter would try and legally force Musk to buy the company based on his agreement. The Thursday meeting was the latest in a string of internal gatherings intended to help employees better understand the sales process. Investors remain uncertain of whether the deal would go through, given Musk’s recent tweets raising concerns about the company’s actual daily active user volume. Twitter’s stock price remains in the $30-level, which is still below the take-private price offering of $54.20 apiece.
- President Biden has embarked on his first presidential trip to South Korea and Japan, where he is set Friday to visit Samsung’s semiconductor complex as he seeks to bolster supply chains that reduce reliance on China. In a visit that runs through Tuesday, President Biden will meet with regional leaders in a bid to firm up support for his plans to help Ukraine fend off Russia’s invasion and counter security threats posed by China and North Korea, which may conduct its first nuclear test since 2017. President Biden’s trip to Samsung underscores the emphasis he has placed on strengthening semiconductor alliances among the world’s largest chip making countries to try to ease shortages that have dragged on the global economy. Samsung’s complex in Pyeongtaek houses some of the biggest chip production lines in the world and makes a wide range of products from memory chips to logic chips for Qualcomm and other companies. Samsung is currently responsible for a third of global memory chip production and controls just less than 20% of outsourced chips for tech clients. South Korea’s largest company has been expanding its facilities at home and in the U.S. to keep up with soaring demand. The Biden administration had been pushing Congress to approve a broad China competition bill that includes $52 billion in funding for domestic semiconductor research and manufacturing. Lawmakers still have to work out differences between the Senate- and House-passed versions of the legislation, a process that could take until the end of the summer. The White House has often used the continuing global semiconductor shortage and its impact on inflation as arguments for approval of the massive subsidies program. But analysts say the shortage will last through 2023, and the domestic supply of chips coming online will not meaningfully alleviate the immediate crunch.
- Applied Materials, the biggest maker of machinery used to manufacturer semiconductors, slipped in late trading after persistent chip shortages weighed on its forecast for the current quarter. sales will be about $6.25 billion in the fiscal third quarter, which runs through July. Analysts had estimated $6.69 billion on average. Profit will be $1.59 to $1.95 a share, compared with an average prediction of $2.05. The chip industry is ordering machinery from Applied Materials and its peers at a frantic rate, trying to build enough production capacity to end industry-wide shortages that are hurting growth across the economy. But those same shortages are leaving Applied Materials without the components it needs to make its equipment. Lockdowns in parts of China where critical suppliers are located has cut the company off from components needed to finish building machines. While demand remains strong, the biggest issue regarding supply persists. Some suppliers are currently operating at less than 50% capacity. Those constraints are expected to cost Applied Materials about $150 million of sales in the current fiscal quarter.
- Klarna is looking to tap investors for more cash in a move that would reduce its valuation by about a third. The Swedish fintech company, which was valued at $46 billion last June, would be worth about $30 billion under its latest plans. The company is seeking about $1 billion in its new funding round. In February, Klarna was exploring a valuation of about $50 billion to $60 billion with funding from new and existing investors. The company, which offers buy-now-pay-later credit to shoppers, now operates in 20 markets globally, though its yearly operating losses have almost doubled in 2021 to $487 million. Investors include SoftBank, Sequoia Capital, and Permira and its 2021 fundraising made it Europe’s most valuable start-up. But offering online shoppers the option to pay in instalments has come under increasing scrutiny from regulators. The U.K. said last year it will start regulating the interest free BNPL sector as its popularity soars. This month, the Swedish Authority for Privacy Projection said it had launched an investigation into Klarna’s checkout service. The current macro climate plagued by a stock market drop combined with the continued crises of the Ukraine war, surging inflation and a pandemic well into its third year has caused significant pain at start-ups around the world. fundraising has slowed, with the number of megarounds ($100+ million) and the total amount raised declining in the first quarter for the first time in two years. The number of tech companies going public in the current quarter is set to be the lowest since 2016.
- Helppy Oy, a scrappy Finnish start-up led by a former Goldman Sachs investment banker, has set its sights on revenue of roughly 100 million euros in two or three years by transforming home car for the elderly. It has obtained 3 million euros in equity funding from investors in a seed round led by Alliance Venture. Existing backers from last year’s 0.5-million-euro pre-seed round also invested. Annual recurring revenue is now at the 1-million-euro level with strong underlying profitability, and the company was almost at break-even before the current funding round. Helppy was created to help make it easier for families to navigate the logistics of arranging care for an elderly relative living in his or her own home. Helppy has automated the background work and customers can book a range of services from one place, such as cleaning, nursing and help with chores. They know who visits their relative and get notes on how they are doing.
o https://www.bloomberg.com/news/articles/2022-05-17/startup-helppy-bets-elderly-care-can-bring-100-million-revenue?srnd=premium-asia
Electric Vehicles
- Tesla plans to keep employees at its Shanghai factory working in a so-called closed loop system until mid-June, even as Chinese authorities move to ease wider lockdown restrictions in the city. Thousands of Tesla workers in Shanghai have been sleeping on the floor of Tesla’s factory doing 12-hour shifts, six days a week, to reboot production after a weeks-long pause because of the lockdown. Tesla wants to move those workers into a dormitory and keep them in a form of closed loop until June 13th at this stage. The EV maker is also trying to start a second shift at the factory as soon as next week so that car production can resume operating around the clock once the supply of auto parts and other components become smoother. With two shifts running 24 hours a day at its Shanghai factory, production may be able to ramp up closer to around 2,100 cars a day the facility pushed out in normal times. For now, the factory is running at about 45% capacity, similar to auto parts suppliers in the surrounding area.
- Chinese EV maker NIO debuted in the Singapore Exchange without raising funds, giving investors a third venue to trade its shares after NY and Hong Kong. NIO opted for a listing by way of introduction, meaning it did not go through a traditional IPO process and did not raise funds. Having shares available in Hong Kong and Singapore gives the company a hedge against the risk of being delisted stateside due to regulatory issues.
- Tesla has been removed from the S&P 500 ESG Index. The index says Tesla’s score on environmental, social and governance standards has remained fairly stable over the past year, but has slipped down the ransk against improving global peers. The index prodivder also cited concerns related to working conditions and the firm’s handling of an investigation into deaths and injuries linked to its driver-assistance systems. A lack of low-carbon strategy and codes of business conduct also counted against Tesla. Tesla had recently criticized ESG metrics as fundamentally flawed in an annual report. The S&P 500 ESG Index is tracked by at least 16 ETFs. There were $11.7 billion in assets indexed to S&P ESG gauges broadly at the end of 2020. This exclusion will lead to sme forced selling since funds benchamrekd to the ESG index canot hold the stock now. The exclusion risks undermining the concept of ESG as a whole. With one of the leaders and most important solutions to climate change now out, and companies like Exxon Mobil being one of the biggest contributors to climate change still in is a paradox. Although Tesla runs on a self-declared mission to accelerate the world’s transition to sustainable energy, some remain skeptical of the work it is doing around social and governance factors, which had a negative impact on its overall ESG score. Allegations of racial discrimination and poor working conditions, as well as NHTSA probes after multiple deaths and injuries linked to Autopilot also boded ill for Tesla’s fate of being included in the ESG index.
- Ford CEO Jim Farley has taken on podcast hosting for his weekly show “Drive” debuting May 25th on Spotify. Ford’s CEO has interviewed celebrities, fellow executives, and royals for the show. In seven snappy 20- to 25-minute episodes, Farley will delve deep into what drives his guests. Ford has not contributed any money into the production. Spotify is footing the bill for putting the show together and it is sponsored by consumer-relationship software giant Salesforce. Farley’s podcasting premiere is part of a larger trend spurred by the ultimate celebrity CEO of the day, Elon Musk. Auto executives are stepping further into the spotlight to build and burnish their personal brand, and ideally boost their company’s share price.
- VW is proposing the revival of Scout, a dormant off-road vehicle brand the automaker had acquired rights to when it bought truck manufacturer Navistar last year. The plan is to better compete in the lucrative U.S. pickup and SUV segments with an American badge instead of a German one, and have an answer for electric up-and-comers like Rivian. Scout vehicles competed with the Ford Bronco as well as models from Land Rover and Jeep in the two decades before the business ceased production in 1980. But VW will have some work to do schooling more consumers to build recognition of the brand after such an extended absence.
- Mercedes Benz is planning to cut some entry-level vehicles from its product line and shave 25% off its share of entry level cars in the segment by 2026. The company will also focus on higher priced, higher margin vehicles in the coming years. Last year, Mercedes sold 2 million vehicles worldwide, while BMW sold 2.5 million, beating Mercedes for the first time in five years. Today, Mercedes has seven models in the entry level luxury segment. In the future, it plans to have four. Entry level vehicles at Mercedes currently include the A-Class sedan, CLA coupe, and GLA SUV. The brand aims to increase its sales share of top-end vehicles by 60% over the next four years. The group includes sales of the S-Class, Mercedes-AMG, Maybach and G-Wagen lines. The strategy is key to maintaining the current strong level of Ebit margins. During the day with investors May 19th, Mercedes announced a modest uplift of Ebit margin targets to 14% by 2025, versus 12.7% in 2021. But even with some improvements, it would still be disappointing compared to competitors. The brand had also unveiled examples of its high-end vehicles that would place it closer to competitors like Bentley and Rolls Royce. A highly bespoke concept called the Mercedes Maybach Haute Voiture, a play on the term haute couture using the French word for car, and a limited-to-150 edition Mercedes Maybach S680 S-Class V12 designed by Virgil Abloh were two examples shown of what the carmaker will focus on more in the future. The plan to focus more on vehicles with higher profit margins comes at a time when the brand had already increased pricing due to substantial market complications. Global semiconductor shortages, the war in Ukraine, and extensive pandemic-related shutdowns in China have caused supply chain issues, production delays and high pricing at dealerships for virtually every luxury automaker. The possibility of gas rationing in Germany is another recent challenge. The company had already started to build its new strategy prior to the current headwinds and would continue with the plan after the market normalizes. In the first quarter, Mercedes sold 10% fewer vehicles compared to the prior year but saw profits surge by 20%.
o https://www.bloomberg.com/news/articles/2022-05-19/mercedes-benz-to-trim-entry-level-car-lines-focus-on-high-end?srnd=hyperdrive
Consumer / Retail
China Market
- Chinese banks cut a key interest rate for long-term loans by a record amount, a move that would reduce mortgage costs and may help counter weak loan demand caused by a property slump and COVID lockdowns. The five-year loan prime rate, a reference for home mortgages, was lowered to 4.45% from 4.6%. that was the largest reduction since a revamp of the rate in 2019. A majority of economists surveyed had predicted a cut by five to 10 bps. The cut is a significant move to boost loan demand as consumer and business confidence has been battered by COVID lockdowns and a downturn in the property sector that has seen a string of developer defaults and falling home prices. The lower rate will be applied to new mortgages immediately, while existing mortgages will not be repriced until next year at the earliest. The one-year loan prime rate was kept unchanged at 3.7%. the move comes after the PBOC cut the floor on the rate for new mortgages Sunday to 20 bps below the five-year LPR. Combined with Friday’s reduction that means the lowest possible rate banks can offer to homebuyers will be 4.25%. Even before the latest rate cuts, some banks had already been lowering the cost for new mortgages, with lenders in more than 100 cities cutting mortgage rates by 20 to 60 bps since March. However, that has not been enough to turn around demand. Medium- to long-term household loans, a proxy for mortgages, contracted by 31 billion yuan in April, meaning more people repaid loans than look on new loans. That marks the second monthly decline since the data series began in 2007, after a 46 billion yuan contraction in February. Total loan growth also slumped sharply to the worst level in almost five years. It is unlikely the recent rate cuts would be enough to stimulate the property sector, as COVID lockdowns continue to damage people’s income prospects and confidence in the sector. Economists are only expecting a moderate rebound from mortgage rate cuts, as the property sector still faces headwinds like stringent regulations, moderate to tight liquidity conditions, and dampened consumer demand due to COVID outbreaks.
- Shanghai has detected the first cases of COVID outside of quarantine in six days, raising questions about whether the easing of the city’s lockdown will be impacted. Total infections in the Chinese financial hub rose to 858 on Thursday from 719 on Wednesday, with three found outside of government quarantine facilities. Authorities started to ease the lockdown earlier this week after the city hit a milestone of three days of zero community transmission. The end of the Shanghai lockdown is fuelling Chinese assets, with the stock market outperforming global peers this month, despite slow progress on the ground in the city. Even in areas without new cases, many restrictions remain in place. Many of the city’s population are still largely stuck inside their compounds. Residents must produce a pass to exit their compounds and can only leave by bike or on foot. Only one resident per family is allowed to leave during appointed hours for grocery errands. Spreading cases in Beijing have also spurred a localized lockdown in some areas of the Fengtai district for seven days and started three rounds of mass testing across four districts.
- China’s plans to bolster growth as COVID outbreaks and lockdowns crush activity will see a whopping $5.3 trillion pumped into its economy this year. The figure, which sums all monetary and fiscal measures announced so far, equates to roughly a third of China’s $17 trillion economy, but is actually smaller than the stimulus in 2020 when the pandemic first hit. That suggests even more could be spent if the economy fails to pick up from its current funk. The mainstay of policy this year is fiscal spending and government investment, while the central bank is only playing a supportive role so far. There is still a lot of room for a stronger fiscal policy, which is more effective in supporting growth for now. The $5.3 trillion in support extended so far includes China’s general budget expenditure with the amount of money issued through local government special bonds and tax and fee cuts, while monetary policy support includes hundreds of billions of yuan in liquidity unleashed by the PBOC through policy loans, cuts to reserve ratios for banks, as well as cheap loans to help small businesses and green projects during the pandemic. But China may need additional support if its economy continues to slump rapidly, especially given added pressure by recent COVID lockdowns. Whatever China puts up in support this year, it is still dwarfed by the massive stimulus plan that helped the economy return to its high growth trajectory after the global financial crisis in 2008. The 4 trillion yuan in additional investment announced at the time alone accounted for 13% of the economy. The PBOC was also more aggressive during that period, cutting its benchmark lending rate by more than 200 bps in a single year and bringing down the reserve requirement ratio by as many points. But there are more challenges to shore up growth this time, as China faces it alone while other major economies are siding to a tightening cycle.
- Economist are cutting their forecasts for China’s full-year economic growth in recent days after the country reported worse-than-expected April data while still signalling that its tough anti-COVID curbs are not going anywhere. The forecast range has dropped from about 3.6% to 5%, to 2% to 4.1%. Economists are projecting a contraction of 2.7% in the second quarter, down from previous estimates of 1.5% growth. Recent improvements in China’s COVID situation, along with continued policy support, should facilitate a recovery in the second half. But the economists also estimated that every additional month of severe lockdowns would trim annual growth by as much as 0.6 percentage point. Stimulus is failing to get much traction due to restrictions on activity.
- China’s beleaguered carbon market is facing more delays getting emissions allowances, as it struggles to resolve data fraud problems. The Ministry of Ecology and Environment has postponed the release of the latest batch of permits to the second half of the year. Traders had initially been expecting the permits by June. Allowances are allocated partially retrospectively, and the latest tranche will cover the two-year period through the end of 2022. The carbon market has been plagued with problems even before its launch in the middle of last year. trading has mainly been lackluster, and volumes have been particularly thin this year. Beijing’s decision to prioritize coal use in response to energy shortages also appears to have blunted the market’s development. Only about 2,200 power companies are currently required to be in the market. A plan to add large aluminum and cement producers may not take place until 2023. Provincial inspections earlier this year found widespread problems with the emissions data submitted by power plants, who have to pay for every ton of CO2 they generate that exceeds an allocated amount. Four consulting firms that help utilities prepare their submission were also criticized in connection with negligence or falsifying data. The unfinished data fraud rectification work, the delay sin adding more industries, and the long waiting period before the next compliance deadline have led to the recent muted trading.
- Canadian Prime Minister Justin Trudeau has joined the country’s closest intelligence allies in banning Huawei Technologies from 5G wireless networks. The Canadian Industry Minister Francois-Phillippe Champagne said Thursday that the Chinese state-championed telecommunications firm poses a threat to Canada’s national security. ZTE Corp. equipment will also be prohibited. Firms that already have Huawei or ZTE gear installed will have to remove it by the end of 2027. The latest decision is not expected to post significant challenges to domestic telecom companies like BCE Inc. and Telus Corp., which have already taken pre-emptive moves to exclude equipment from state-championed Chinese firms in their respective 5G build-outs.
o https://www.bloomberg.com/news/articles/2022-05-19/trudeau-government-said-to-ban-huawei-from-5g-in-canada?srnd=premium-asia
Russia-Ukraine Development
- Ukraine’s central bank may return to regular monetary policy decisions in June or July. The Group of Seven has agreed to more than $19 billion in short-term financial aid to Ukraine. Russia’s war shadowing U.S. President Biden as he heads to South Korea and Japan. The administration welcomed congressional passage of $40 billion in aid for Kyiv and announced a new package of weapons that the U.S. said will be sent directly to the frontlines. A top Kremlin official said Russia is intent on taking all of the Donetsk and Luhansk regions of Ukraine, even as the campaign on the ground there is struggling after heavy losses.
o https://www.bloomberg.com/news/articles/2022-05-20/ukraine-latest-g-7-finance-chiefs-in-bonn-focus-on-war-fallout
- The Group of Seven industrialized nations will agree on more than 18 billion euros in aid for Ukraine to guarantee the short-term finances of the government in Kyiv. The amount will include $7.5 billion committed by the U.S. and money from the EU. The Ukrainian government has said that the country needs $4 billion to $5 billion per month in short-term funding, while over the longer term it will require a recovery strategy similar to the Marshall Plan for Europe after WWII. The overall reconstruction effort will cost about $600 billion. the IMF expects Ukraine’s economy to contract 35% in 2022 as a direct result of the war.
o https://www.bloomberg.com/news/articles/2022-05-20/g-7-to-agree-more-than-19-billion-in-ukraine-aid-germany-says
Market Update
- The Fed remains undeterred from raising rates by 50 bps coming June and July despite the faltering stock market. Kansas City Fed President Esther George said Thursday that the market rout was no surprise in light of the central bank’s repeated caution that it will continue raising interest rates to cool the hottest inflation in decades. While she acknowledged equities were having a rough week, her remarks in the interview did nothing to soften the hawkish tone set by Fed Chair Jerome Powell on Tuesday, who warned that officials seek clear and convincing evidence that price pressures are retreating. The tightening in financial conditions is an intended consequence of Fed hikes and quantitative tightening. The Fed wants to slow down aggregate demand and financial continues need to tighten to do that. The Fed seems to be welcoming the latest market rout. The stock market has to decline a lot more before it will get close to wiping out the gains during the pandemic. Falling equities assist the Fed’s goal of slowing growth because of the wealth effect in which investors curtail some spending in response to market drops. The recent decline in stocks have caused economists to cut their U.S. economic forecasts for the current and following year. Each $1 of lost financial wealth translates into a drop of spending of two to three cents over the course of a year. The stock market is not the only goal of Fed tightening. Higher rates for home mortgages and vehicles reduces demand in those markets, where supplies have been short, and a stronger dollar has the effect of cutting export demand for U.S. manufacturers and trimming import prices. While the near-term policy outlook is unchanged, market turmoil and any indications of slower growth could set the stage for a policy shift from peak Fed hawkishness.
- U.S. equity futures pushed higher in Asia trading Friday after China’s latest measure to bolster its economy injected a note of optimism at the end of another volatile week for global markets; futures on the S&P 500 and Nasdaq 100 rose more than 1%, shrugging off modest losses on Wall Street Thursday
o S&P 500 futures rose 1.2%, while the S&P 500 fell 0.6% to 3,900.79
o Nasdaq 100 futures rose 1.8%, while the Nasdaq 100 fell 0.4% to 11,875.63
- Chinese lenders lowered the five-year loan prime rate by a record amount in an effort to boost mortgages and loans amid a property slump and COVID lockdowns; the move is positive in terms of raising the market’s sentiment, but investors continue to grapple with concerns about an economic slowdown in part as the Federal Reserve hikes interest rates to quell price pressures, as global shares are on course for a historic seventh week of declines
- Traders in the U.S. will be bracing for more volatility later Friday due to the monthly expiration of options tied to equities and ETFs; the process is notorious for stirring up market swings
- Treasury yields ticked higher, and the dollar was steady after its biggest one-day drop since 2020
o 10-year Treasury yield advanced 3 bps to 2.87%
- Brent crude fell 0.3% to $111.65 a barrel
- Spot gold rose 0.2% to $1,846.30 an ounce
Summary
- Micro – U.S. equities declined in Thursday’s regular session as investors continued to digest weaker-than-expected earnings from consumer staples that are stoking increasing fears of inflation, tighter rates, and an inadvertent recession. But a historic easing of the five-year loan prime rate in China aimed at boosting its domestic economy amid a property slump and COVID lockdowns seem to be lifting sentiments. S&P 500 and Nasdaq 100 futures rose more than 1% in Asia trading Friday. But traders are bracing for more volatility as the week approaches an end due to monthly expiration of options tied to equities and ETFs – the process has been notorious for stirring up market swings.
- Macro – Benchmark Treasury yield continued to rise, hovering at 2.87%, as markets continue to price in the prospects of rising interest rates to quell inflation. Oil is also on track towards the fourth straight week of gains, hovering at about $111 a barrel. A demand boost is coming back as China’s lockdowns ease, and the summer travel season approaches for Americas. The AAA is estimating U.S. travels to increase this summer and reach pre-COVID levels.