Newsletter - May 24, 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
- Samsung plans to raise spending by more than 30% to 450 trillion won over the half decade to 2026 to shore up businesses from chips to drugs, as South Korea’s conglomerates grapple with growing economic and supply shocks. Hyundai has also recently announced plans to spend 63 trillion won by 2025 in areas including EVs, robotics, aviation technology and hydrogen-powered vehicles. Retail and chemical giant Lotte Group said it will pour about 37 trillion won into boosting the nation’s economy, from hotels and duty-free stores to hydrogen power generation and an EV rental business. Samsung is focusing particular attention on its technology flagship, the crown jewel of a sprawling empire that spans shipbuilding, technology, healthcare and finance. Samsung is currently the worlds’ largest maker of smartphones, displays, memory chips and consumer appliances, and has unveiled plans last year to invest $141 billion through 2030 to delve deeper into advanced chipmaking. Samsung and SK Hynix had also previously pledged to contribute more than 510 trillion won of investment into semiconductor research and production through 2030 under a national blueprint devised by the previous president’s administration. Samsung is also building an advanced $17 billion U.S. chip plant in Texas.
- Social media stocks tanked after Snap cut revenue and profit forecasts below the low end of its previous guidance. The company’s shares plunged 29%, which dragged down stocks of other social media companies reliant on advertising. The company has also circulated an internal memo warning of a hiring slowdown in response to a challenging macroeconomic environment. The company’s second quarter forecast, for 20% to 25% y/y revenue growth, was already below analysts’ estimates. The latest warning of further turmoil immediately hit other companies reliant on ads. Underlying growth appears to be slowing as similar social media companies mature with more competition. Meta Platforms has cut spending because of the macroeconomic environment. Twitter has recently announced a hiring freeze and other cost cutting measures to save cash.
o https://www.bloomberg.com/news/articles/2022-05-23/snap-falls-after-saying-revenue-will-come-in-below-guidance?srnd=technology-vp
- Adobe cited it remains open to further M&A activity. The maker of creative and marketing software bought Frame.io last year for $1.3 billion and acquired Workfront in 2020 for $1.5 billion. Both companies make video collaboration software tools. Adobe, with the aid of acquisitions, has expanded its marketing, analytics, and e-commerce products which the company is counting on to spur efforts in reaching $20 billion in annual revenue. While Adobe estimates the market may be worth as much as $110 billion, it faces strong rivals such as Salesforce and Twilio as well as a sluggish global economy that may eb curtailing spending in these areas. While a number of smaller tech companies have been shaken up by the current valuation downturn, it is an opportunity for larger, more diversified firms like Adobe.
- Zoom offered a glimpse of optimism that it can expand beyond its consumer-friendly video software that helped the company to a pandemic boom. The software maker projected revenue would increase about 10% in the current period, better than analysts’ estimates, but still its slowest quarterly sales growth. The shares initially jumped 21% in extended trading after the company announced results, but gave up most gains by Monday night in New York. Business customers are expected to make up nan increasingly larger share of revenue. New products aimed at enterprise customers are driving further adoption. Zoom’s customer base has now increased 24% to 198,900 in the period ended April 30th. Investors might be overlooking Zoom’s potential as a key tool for hybrid workplaces as major industries embrace remote work. The company is focusing on its enterprise offerings by adding products for customer service contact centers and analytics. Zoom recently announced the acquisition of Solvvy, a conversational AI start-up, and unveiled Zoom IQ, a call analytics tool for sales departments. The new product launches encapsulate the company’s strategy’ to expand horizontally and vertically to ensure customers are getting more out of the platform’s offerings.
o https://www.bloomberg.com/news/articles/2022-05-23/zoom-s-85-selloff-has-analysts-calling-for-a-rally-tech-watch?srnd=technology-vp
- GME said Monday it has launched a digital asset wallet that will allow gamers to store, send and receive cryptocurrencies and NFTs. The digital wallet will be able to be used across decentralized apps, which run on a blockchain and are not controlled by a central authority, without players having to leave their web browsers. The GME wallet is a self-custodial Ethereum wallet, meaning the user controls the keys to their assets, not a third party. The wallet extension can be downloaded from Google’s Chrome webs tore and will allow transactions on GME’s NFT marketplace expected to launch in the second quarter of the company’s fiscal year.
- Coinbase has gone from one of the stock market’s most hotly anticipated debuts to one of its most spectacular crashes in a little more than a year, leaving some analysts and investors bewildered by poor execution at the largest U.S. crypto exchange. The firm’s market value has shrunk by about $51 billion since the end of its first day of trading last April. Its shares fell to an all-time low in early May, and even after recovering somewhat are still down 80% from their debut. That is a steeper drop than Bitcoin’s 53% slump in the same period. The recent bear market and regulatory pressure in crypto have played a big role. Poor execution also played a part. Coinbase’s new NFT marketplace took months to launch, then fizzled. The company missed analysts’ revenue projections in the first quarter and guided for sequential declines in trading volume in the current quarter, in part because it has lost ground to its rivals. Coinbase’s market share slipped to 4.8% of monthly crypto trading volume from 7.1% in November, as some users switch to rival providers such as DigiFinex and FTX US. Coinbase is expected to lose about $1.4 billion this year.
- Broadcom is looking to acquire enterprise software provider VMware, which could become the largest tech takeover. The potential purchase could be valued at upwards of $50 billion including debt. Overall M&A volumes have been down compared to last year’s record pace. But takeovers of technology companies have been a bright spot this year, with transaction volumes jumping 46% to $263 billion.
o https://www.bloomberg.com/news/articles/2022-05-23/megadeals-come-roaring-back-as-broadcom-eyes-vmware-takeover
Electric Vehicles
- An auction for a controlling stake in a Chinese lithium mine has garnered 3,448 bids, underscoring the scramble to secure the battery metal key to clean energy transition. The 54.3% stake in Yajiang Snowway Mining Development, which owns the mine in Sichuan, was sold for about 2 billion yuan. That is nearly 600x higher than the starting price of about 3.35 million yuan. The auction indicates a bullish Chinese primary market for future lithium prices as well as the strategic importance of Sichuan spodumene assets.
- The age of light vehicles in the U.S. is now 12.2 years on average, up almost two months from 2021. That is a record high and marks the fifth straight year of increases. This could potentially complicate efforts to expand the use of new safety and emissions reduction technologies. Analysts are pointing to the global chip shortage, supply chain snags and inventory challenges as reasons keeping drivers in their old cars longer. The rising cost of new vehicles - $46,526 on average last month – was another deterrent for prospective buyers. The combination could put a damper on manufacturers’ efforts to introduce newer safety technologies to spur faster adoption of more fuel-efficient hybrid and EVs. Carmakers sold over 15 million cars in the U.S. in 2021. EVs made up just over 3% of the total, with hybrids accounting for another 6.4%. vehicles now average 12,300 miles in 2021, up more than 10% from the prior year. coupled with increasing average age, strong average chiel miles travelled points to the potential for a notable increase in repair revenue in the coming year.
- BMW remains committed to its output targets for 2022 even as congested ports in China, closures in Ukraine and other supply chain struggles continue to weigh on sales. Output is expected to remain at roughly the same level as last year as guided. The chip shortage remains BMW’s most pressing issue.
- Elon Musk’s enthusiasm for China does not seem to have dimmed despite the lockdown-induced issues recently. However, his suppliers do not necessarily share the same view. Executives at Taiwan based Tesla suppliers offered candid comments in the latest earnings season about diversifying manufacturing way from China s they assessed the fallout from the government’s punitive lockdowns. In mid-April, Tesla’s parts supplier Delta Electronics also waxed lyrical about plans to add more capacity outside of China, even though it admitted the country will remain its largest manufacturing base. A week later, Tesla’s camera module supplier Primax Electronics unveiled a target to lower manufacturing in China to below 50% of total output by 2024, with diversification of productions to Thailand, the Czech Republic, and potentially the U.S.
- Lucid Motors will receive as much as $3.4 billion in financing and incentives over the next 15 years for its planned factory in Saudi Arabia, which will make as many as 155,000 EVs annually. The details, revealed last Wednesday in conjunction with a ceremonial signing event, underscore the substantial scope of the project as the EV maker plots its second production facility. Saudi Arabia, which owns a majority of Lucid’s shares, recently committed to buying up to 100,000 EVs from Lucid over the next 10 years. The factory, located in the King Abdulla Economic City, is expected to start productions by 2026 with construction to begin later this year.
- American car buyers are less interested in EVs than their overseas counterparts, put off by high pries and not enough charging stations. A new survey of 13,000 potential car buyers conducted by EY showed that only 28% of U.S. respondents said they intend to go electric in their next vehicle purchase, compared to 52% globally. EVs accounted for only about 3% of overall U.S. auto sales last year. Most were concerned about the lack of charging infrastructure and high prices of EV models.
- Tesla Insurance is currently available in just eight states, including California, Illinois and Texas. In the company’s latest earnings call, CEO Zachary Kirkhorn said Tesla had become the second largest insurer of its cars in the Lone Star State. Eventually, coverage will be available to 80% of the U.S., and the company plans to eventually go international. The car insurance industry is currently inefficient according to Elon Musk. There are so many middle entities, from insurance agents to the final reinsurer, with at least half a dozen companies each taking a cut. Tesla charges premiums based on real-time driving data used to compile a monthly safety score. Five factors impact the score: forward collision warnings per 1,000 miles travelled, hard braking, aggressive turning, unsafe following, and forced Autopilot disengagement. This differs from traditional determinants such as credit score or age.
- The NYC cab driver union is pressing the city to raise taxi fares, to boost wages for cabbies as fuel prices jump and inflation broadly soars, in a step that would boost the cost of a ride by as much as $2. The change would allow drivers to take home $25 per hour after expenses. The current hourly average is closer to $10 to $12. The city’s Taxi and Limousine Commission has not boosted fares since 2012 for yellow taxes, which can pick up passengers in Manhattan, and green cabs, which can pick up passengers in other boroughs but not in the busiest parts of Manhattan.
o https://www.bloomberg.com/news/articles/2022-05-23/nyc-taxi-drivers-call-for-first-fare-increase-in-a-decade?srnd=premium-asia
Consumer / Retail
- Credit Suisse Group CEO Thomas Gottstein does not think banks will ever return to working full-time from the office. The comments add to a growing chorus in Europe supporting flexible work policies, as lenders seek to attract and retain talent. It is also in stark contrast to the more hard-line tone adopted by some U.S. counterparts, which have generally been less willing to align with the demands of their workforce.
o https://www.bloomberg.com/news/articles/2022-05-23/credit-suisse-ceo-says-we-ll-never-go-back-to-office-full-time
China Market
- President Biden is seeking to show U.S. resolve against China, yet an ill-timed gaffe on Taiwan risks undermining his bid to curb Beijing’s growing influence over the region. President Biden had provoked China with a vow to defend Taiwan militarily. After saying that U.S. policy on Taiwan had not changed at all during a news conference in Tokyo, he then answered “yes” when asked if the U.S. would act militarily to defend the island in the event of a Chinese attack. White House later walked back on the remark, saying the president was only promising U.S. aid to help Taiwan defend itself in the event of hostilities. President Biden’s remarks cast new light on Washington’s decades-old approach of strategic ambiguity about whether U.S. forces would defend Taiwan against China, while also adopting a “One China” policy under which Taiwan is not recognized as an independent country. President Biden’s latest misstep highlights the current tension around Taiwan at a time when Chinese officials have expressed concern about American efforts to box in their country.
o https://www.bloomberg.com/news/articles/2022-05-23/biden-says-us-military-will-defend-taiwan-from-any-china-attack
- Taiwan is a vital stronghold in a string of archipelagos that the U.S. and Japan relies on to contain China and safeguard trade routes. Taiwan has thrived under American protection to become a critical supplier of semiconductors and other high-tech goods. Today, the island of 23.5 million people is also among Asia’s most vibrant democracies. The dispute between the U.S. and China on Taiwan’s sovereignty dates to the end of the Chinese Civil War in 1949, when Chiang Kai-Shek – leader of the Nationalist Party that ruled China after the overthrow of the Qing Dynasty in 1912 – abandoned the mainland to Mao Zedong’s Communists. The U.S. backed Chiang as China’s rightful leader until President Richard Nixon sought to establish ties with Beijing in the 1970s. The result was the One China policy, in which Washington recognized the People’s Republic as the sole legal government of China, without clarifying its position on Taiwan’s sovereignty. China agreed to tolerate informal U.S. relations with Taipei then, but has since affirmed the right to take Taiwan by force to prevent its independence. Since taking office, President Biden has repeatedly sued language about Taiwan that appeared to change that U.S. policy, although the White House has insisted it remains unchanged. In his latest remark, President Biden cited it would defend Taiwan militarily, but White House officials later clarified that the president had meant the U.S. would provide military equipment to Taiwan, not send troops. His words came days after China’s top diplomat warned the U.S. that increased support for Taiwan would lead to a dangerous situation. A U.S.-China clash over Taiwan has re-emerged as one of the world’s biggest geopolitical risks. While the two nuclear-armed powers have plenty of incentives to avoid war, China’s rapid military rise has raised the risk of miscalculation. It fired carrier killer missiles into the South China Sea in August 2020, in an apparent warning that its military could threaten the ships Washington has long relied on to project power. Previous President Donald Trump oversaw a dramatic expansion of ties with the government in Taipei, including the first fighter jet sale in three decades. The Biden administration has sought to maintain that shift, criticizing what it says are China’s aggressive actions in the Taiwan Strait. It has held trade talks with Taipei, approved arms sales and conducted naval drills in nearby waters. Although the Communist Party has never ruled Taiwan, it views control over the island as essential to completing its goal of reversing China’s century of humiliation by colonial powers. President Xi has shown an increased willingness to assert such sovereignty claims from the South China Sea to the Himalayan Plateau and Hong Kong, where China has cracked down on opposition and imposed strict security laws following pro-democracy protests.
- China’s cabinet introduced 33 policies on Monday to support businesses and consumer spending as its economic activity stumbles following the worst outbreak of COVID since 2020. The State Council’s measures, which total tens of billions of dollars’ worth of relief, include stimulus intended to aid companies that have buckled under the weight of the outbreaks and anti-COVID curbs, along with tools to boost infrastructure investment and improve supply chain disruptions.
o Fiscal Push – There is a plan to extend value-added tax rebates to more industries, which will increase tax refunds by over 140 billion yuan and boost overall tax relief this year to 2.64 trillion yuan from 2.5 trillion yuan originally announced in March. The government will also extend policy allowing small businesses in five COVID-stricken industries to defer payments on some social insurance programs until the end of the year. The policy sought to cover more struggling industries, resulting in 320-billion-yuan worth of deferred payments in 202. There will also be cash subsidies and other social incentives to boost hiring and reduce unemployment rates.
o Financial Support – the PBOC will double the scale of an existing tool that provides funds to banks to encourage lending to small businesses. This includes a pledge to support banks to defer principal and interest payments within this year on small business loans and truckers’ car loans, as well as mortgages and consumer loans.
o Supply Chains – the government has pledged to fine-tune policies to help companies resume production and improve services for companies included on whitelists, which allows firms to operate during COVID outbreaks. There has also been a pledge to keep freight logistics smooth, remove restrictions on the movement of trucks in regions deemed low risk of COVID, and scrap all unreasonable fees and requirements, such as height limits. The amount of emergency loans to airlines will also be increased by 150 billion yuan and the industry will be supported to issue bonds of 200 billion yuan.
o Consumption and Investments – The government will relax car purchase restrictions and reduce purchase taxes on some passenger cars by 60 billion yuan. Cities have also been encouraged to adopt their own policies to meet the needs for residents to have basic housing or to improve their housing conditions. The government will start constructing projects for irrigation facilities, transportation facilities, and residential community renovation. There is also a promise to support the issuance of 300-billion-yuan worth of bonds to support railway construction.
o Energy Safety – local governments have been called to maintain coal output, along with a pledge from the State Council to accelerate procedures for coal mine operations, thus ensuring supply. There is also a plant o start constructing a batch of new hydro power and coal-fired power projects.
o People’s Livelihood – a pledge to provide due benefits for the unemployed and those with low income, and link social benefit standards with price inflation.
- UBS and JPM have downgraded their forecasts for China’s economic growth this year again after its April activity slump, creating an even tougher uphill battle for the world’s second largest economy. UBS has cut the growth forecast from the previous 4.2% to 3%, citing the impact of COVID Zero. While the economy will likely rebound in the second half as the government refines its restrictions and reduces disruptions to transportation and supply chains, that easing likely will not be as rapid as it was in 2020 given the nature of omicron. The lingering restrictions and lack of clarity on an exit strategy from the current COVID policy will likely dampen corporate and consumer confidence and hinder the release of pent-up demand. Growth in the April-June quarter is expected to slow to 1.4% from the prior year. GDP in the quarter is expected to contract by an annualized 8% from the previous quarter. JPM has also cut their forecast from 4.3% to 3.7%, assuming a deep contraction in the second quarter as well due to COVID restrictions.
- Many Chinese are hoarding cash, underscoring the waning confidence in the country’s economy amidst an unprecedented COVID lockdown that has furthered the downward spiral in real estate, which accounts for a quarter of its growth. Real estates and equity investments are perceived as highly susceptible to snap government policy changes. Savings deposits in China’s banks have increased to 109.2 trillion yuan at the end of April. Deposits in China increased 7% in the first four months of the year, compared with 5.5% in the same period last year. In the past few decades as China’s economy developed and boomed, buying a house for its value to increase was the safest way for Chinese from most socioeconomic classes to invest for the future. Over 70% of China’s wealth is tied up in real estate. But that view has altered over the past year, as the government tried to tamp down excessive borrowing and speculation in the housing market.
- Didi’s shareholders have voted in favour to delist the stock from the NYSE, capping an 11-month ordeal that wiped out around $70 billion of its market value and turned the ride-hailing giant into a symbol of China’s tech crackdown. It plans to file the required paperwork with the U.S. SEC on or after June 2nd in order to delist. The desilting would work in favour of ongoing procedures with Chinese regulators who are demanding an overhaul of the company’s data systems. That would allow the company to begin preparing for a Hong Kong share float, the best outcome investors have said they can hope for. While the news has brought a slight relief rally, some investors could be forced to sell because their mandates do not allow them to hold unlisted shares. Hedge funds have already reduced their Didi holdings by 29% to about $231.9 million during the first quarter.
o https://www.bloomberg.com/news/articles/2022-05-23/didi-gets-green-light-to-depart-us-markets-during-china-probe?srnd=technology-vp
Russia-Ukraine Development
- A diplomat at Russia’s UN mission in Geneva has resigned in protest at President Putin’s invasion of Ukraine, becoming the first envoy to publicly criticize the war. Boris Bondarev, who was involved in disarmament work at the mission, cited President Putin has become both a war criminal and a dictator. While some other Russian Officials, like Kremlin’s climate envoy Anatoly Chubais, have quietly left their positions following the start of the war, Bondarev posted a resignation statement in English and Russian on Facebook, saying he had never been so ashamed of his country.
o https://www.bloomberg.com/news/articles/2022-05-23/russia-diplomat-quits-in-rare-public-protest-over-war-in-ukraine
Market Update
- Stocks declined in Asia trading Tuesday after a profit warning from Snap weighed on tech shares and fuelled concerns about risks to economic growth; S&P 500 futures fell, just as the benchmark was starting to pull back from the brink of a bear market amid fears the Federal Reserve’s tightening could hurt economic growth
- Oil and the dollar fell, while Treasuries fluctuated; equities remain volatile as investors assess the outlook for monetary policy, inflation and the impact of China’s COVID policies on the global economy
- The Fed is set to release meeting minutes from the May meeting coming Wednesday, which will give markets insights into the U.S. central bank’s tightening path; Kansas City Fed President Esther George said she expects the central bank to raise interest rates to 2% by August, with the further course of tightening being guided by how surging inflation cools off
- S&P 500 futures fell 1.4%, while the S&P 500 rose 1.9% to 3,973.75 Monday
- Nasdaq 100 futures fell 2.1%, while the Nasdaq 100 rose 1.7% to 12,034.28 on Monday
- 10-year Treasuries declined 3 bps to 2.82%
- Brent crude fell 1.2% to $112 a barrel
- Spot gold rose 0.1% to $1,855.51 an ounce