Newsletter - May 5, 2022
Oil / Commodities
- Oil steadied ahead of an OPEC+ meeting on supply after surging on the EU’s plan for a phased ban on Russian crude. WTI traded above $108 a barrel after closing up 5.3% on Wednesday. The EU plans to ban Russian oil over the next six months and refined fuels by the end of the year to increase pressure on President Putin over his invasion of Ukraine. The bloc is also targeting insurers in a move that could dramatically impair Moscow’s ability to ship oil around the world. OPEC+ will likely ratify another small production increase when members gather later Thursday, with the threat to demand in China from anti-virus lockdowns offering another reason or caution. Still, there are signs that a lack of capacity is hobbling the group’s ability to deliver even modest increases. The EU aims to conclude the sanctions package by the end of the week, or May 9th, at the latest. To get the curbs over the line, the bloc needs to address concerns from Hungary and Slovakia on phase-out timing and queries from Greece on banning transport of oil between third countries. U.S. inventory data, meanwhile, showed declines in nationwide gasoline and distillate stockpiles. Stockpiles of diesel on the east coast slumped to the lowest on record last week as local refiners rushed to supply global markets, suggesting a potential shortage of the industrial, transport and heating fuel. Oil market remains in backwardation, with the spread between Brent’s two nearest December contracts well above $13 a barrel on Thursday, more than triple the gap at the start of the year.
o https://www.bloomberg.com/news/articles/2022-05-04/oil-steadies-before-opec-meet-after-surging-on-eu-russian-ban
Tech
- Meta Platforms is slowing or pausing hiring for some mid- to senior-level positions, part of a broader plan to cut costs and cope with the challenges facing the social media giant. The move follows a generally upbeat earnings report last week, with the Facebook platform returning to user growth, but the company warned that the Ukraine war was weighing on sales. Meta said at the time that it would be reining in its spending plans for the year in light of weaker revenue outlook. That marks a reversal from rapid staffing growth in recent years.
- Verizon is considering taking a page out of AT&T’s books and raising prices for its wireless service to pass along inflation-related costs to consumers. AT&T had recently announced the decision to increase rates on older calling plans by $6 or more. But a similar strategy is unlikely for Verizon. Instead, Verizon could be looking at an introduction of higher-priced unlimited plans or added fees. Like many companies, wireless carriers are seeing wages rise due to the inflationary environment. AT&T said April that pay increases would add a $1 billion or more to its costs. Both Verizon and T-Mobile also raised employees’ starting pay to $20 an hour in recent months in response to a tight job market. But some are skeptical of claims that wireless carriers are raising prices in the name of inflation – the market is left with few options that include only AT&T, Verizon and T-Mobile after the latter acquired Spring in 2020, leaving users more captive to their current providers.
- The Federal Reserve gave a much needed shot in the arm of technology stocks on Wednesday by ruling out more aggressive rate hikes and reassuring the U.S. economy remains strong. The megacap tech complex, which includes Apple, Microsoft and Amazon, rallied after Fed Chair Jerome Powell said a 75 bps is not something that the committee is actively considering. The commentary sent the Nasdaq 100 index up 3.4%, its biggest one-day jump in about a week. Both Apple and Google gained more than 4%, while Microsoft gained 2.9% and Nvidia advanced 3.7%. FB rose 5.4%. There is some restored optimism that the economy could get a soft landing afterall, and the Fed is not going to drive the economy into a ditch and create a recession, but inflation remains too hot to tell and tech stocks are not entirely out of the woods yet.
o https://www.bloomberg.com/news/articles/2022-05-04/powell-gives-tech-a-lift-by-taking-larger-hikes-off-the-table?srnd=technology-vp
Electric Vehicles
- CATL shares plunged in early Asia trading Thursday after posting its sharpest ever drop in quarterly earnings last week and disclosing a sizable derivatives liability. The Shenzhen-traded shares tumbled 10.8%, their biggest intraday decline since September 2020. CATL’s net income fell 24% to 1.49 billion yuan for the three months ended March 31st, while underlying profit dropped 41% to 977 million yuan. The world’s biggest EV battery maker admitted it had been grappling with higher input costs. The company also disclosed a 1.79 billion yuan derivatives liability, its first such charge since listing. Morgan Stanley analysts are questioning the company’s transparency after cutting CATL’s price target to 325 yuan. While CATL still generates about 20% of its revenue overseas, it reports no foreign exchange gains or losses. CATL also recorded around 1.2 billion yuan of hedging losses in the first quarter that was booked under “other comprehensive income”, leaving risks for that amount to be reclassified to profit and loss, depending on when CATL closes the positions.
- Sila, one of a wave of young companies trying to pack more power into batteries, will open its first standalone factory in a small city in central Washington state, as the U.S. tries to build up its own energy storage supply chain and expand production of EVs. Sila has purchased a facility in Moses Lake ot make its silicon-based anode material, which the company says can boost energy density of lithium-ion batteries by 20%. The company said buying and equipping the building for the first phase of production will cost $100+ million, with full operation expected in the first half of 2025. Until now, Sila has made its material, which can replace graphite in battery anodes, at its headquarters in the San Francisco Bay Area. The company’s initial phase of production is estimated to make enough anode material for 100,000 to 500,000 EVs per year, depending on whether the substance completely or partially replaces the graphite in their batteries. Partnering companies include BMW and Mercedes Benz. But the facility is expected to expand supply for as many as 10 million cars per year, and Sila may seek federal funding for expansion. As the global battery industry booms, more of it can and should be based in the U.S.
o https://www.bloomberg.com/news/articles/2022-05-03/sila-to-make-advanced-battery-materials-in-washington-state?srnd=hyperdrive
Consumer / Retail
- Booking Holdings reported revenue in the first quarter that beat analyst estimates, benefiting from pent-up demand for leisure travel. The U.S.’s biggest online travel company reported revenue rose 136% to $2.7 billion in the three months ended March 31st, while analyst projected $2.54 billion. Gross bookings representing all travel services excluding cancellations totalled $27.3 billion, the highest quarterly amount ever for the company. That beat the average estimate of $25.39 billion. Despite an uncertain macroeconomic environment, there is continued strengthening of global travel trends in the second quarter of 2022, and the company is preparing for a busy summer travel season ahead. Airbnb also reported strong results Tuesday, citing substantial demand for travel heading into the busiest time of the year. There have also been observations of higher than historical demand for the fourth quarter, which indicates that consumer confidence to travel remains strong beyond the summer months. But the market punished Expedia, which earlier this week reported an 80% jump in revenue in the first quarter, signalling investors’ rising concern about inflation and the risk for recession. Travel companies from hotels to airlines have been saying consumers are willing to pay the rising prices so far, but there appears to be a limit. Hilton also gave a profit forecast that fell short of analysts’ expectations. However, positive signs include boosted airline capacity for transatlantic flights in the remaining three quarters of the year, with continued profits even with oil prices well above $100 a barrel.
o https://www.bloomberg.com/news/articles/2022-05-04/booking-beats-estimates-sees-busy-summer-travel-season-ahead?srnd=premium-asia
China Market
- China may soon reveal more policies intended to rescue the economy after top leaders vowed to meet growth targets without compromising on the country’s stringent COVID Zero strategy. The PBOC said late Wednesday it would conduct normalized financial supervision over online platforms, echoing language used last week by the Communist Party’s Politburo. The Politburo had issued its sweeping pledge to support the economy, which is in the throes of the country’s worst COVID outbreak since 2020. Authorities continue to deploy strict lockdowns in places like Shanghai and Jilin province to contain inflections, which have pummelled factory activity and consumer spending, imperilling the government’s growth target of about 5.5% for the year. The country could be looking at some support for technology platform businesses, possible easing of real estate curbs and a boost in fiscal spending.
- Chinese stocks continued to fluctuate after returning from a three-day break, as investors weighed Beijing’s vow to boost growth against strict COVID lockdowns and gloomy economic data. The benchmark CSI 300 Index advanced 0.5% at the midday break on Thursday during Asia trading, led by consumer shares, erasing earlier losses of as much as 0.7%. Capping gains was a 14% plunge in battery giant CATL on disappointing earnings, as well as Hangzhou Hikvision that tumbled 10% on the risk of fresh U.S. sanctions. The market’s late-morning rebound came after Shanghai authorities said more than 70% of the city’s industrial firms have resumed production as of Wednesday, an encouraging development for the regional economic powerhouse following a five-week lockdown. In April, China’s services activity slumped to a two-year low. The overnight rally on Wall Street failed to have a meaningful impact on Chinese shares, in a sign that the Fed’s latest rate hike and signalling of more to come this year continue to raise concerns about the allure of domestic assets.
- China’s services activity slumped to its weakest level in more than two years in April as COVID outbreaks and lockdowns continued to pummel consumer spending and threaten economic growth. The Caixin China Services purchasing managers’ index dropped to 36.2 in April, the lowest since February 2020. That was below the median estimate of 40 in a survey of economists and was the second month below 50, marking a contraction in output. China’s economy continues to reel from a series of restrictions to contain the rapidly spreading virus. April data captures the impact of city-wide lockdowns in Shanghai.
- China set its reference rate for the yuan at a stronger-than-expected level for a third consecutive day, as it sought to keep the currency stable following a record drop last month. The PBOC set the fixing at 6.5672 per dollar, compared with the average estimate of 6.5699 in a survey of analysts and traders. China’s financial markets reopened after a three-day break. The onshore yuan edged higher to 6.6045 per dollar, while the offshore yuan is little changed at 6.6248. The stronger yuan fixing suggests authorities are keen to keep the currency stable after weakness seen in recent weeks. With the USD weakening post FOMC decision, there should be some pressure off the yuan in the near-term. The offshore and onshore yuan fell more than 4% against the dollar in April, marking their worst declines on record. The losses follow a bout of volatility in Chinese equities as the nation’s COVID Zero strategy weighs on sentiment and slows economic growth.
- Shares of Hangzhou Hikvision Digital Technology tumbled 10% as the U.S. considers imposing new sanctions on surveillance-technology giant, potentially the harshest measures so far against a major Chinese company. The Biden Administration is weighing whether to add the maker of cameras and surveillance systems to its Specially Designated Nations and Blocked Persons List. The sanctions would be related to alleged human right violations by China against Muslim minorities in its far-Western region of Xinjiang. A final decision is unlikely this month. Hikvision was already blacklisted by the U.S. in 2019 along with seven other Chinese technology giants, making it more difficult for it to do business with American companies. But the more severe sanctions under consideration would not just bar Americans from doing business with the company, but also make its global customers potential targets of U.S. actions. The fresh, tougher sanctions would take the Biden Administration’s economic war against China in a new direction, marking the first time a Chinese technology company has been added on the SDN list. Hikvision, whose cameras are used by agencies and corporations across Europe and Asia, is among the companies Beijing is counting on to spearhead advances into AI. Its cameras have been used in cities from Paris to Bangkok, and are considered pivotal to crime prevention as well as helping build smart cities or networked urban environments.
- Pinduoduo and JD.com have been included in the U.S. latest add of another 80 companies to an expanding list of firms that face possible delisting from American exchanges because of non-compliance to U.S. audit requirements. The addition to the rolling list starts the three-year clock to comply with PCAOB audit inspection requirements. The addition of these names to SEC’s list is largely within expectation and part of the process previously announced. Traders mostly shrugged off the latest round of additions as the overall market continued its rally on Wednesday.
o https://www.bloomberg.com/news/articles/2022-05-04/jd-com-pinduoduo-added-to-chinese-companies-facing-delisting
Russia-Ukraine Development
- The U.S. has rushed cyber forces to Lithuania to help defend against online threats that have risen since Russia’s invasion of Ukraine. The so-called hunt forward missions involve cyber teams going to nations where they have been invited by partner countries, where they scan networks with the goal of building the host countries’ resilience and share any new information about threats with government and private industry circles back in the U.S. The U.S. has initiated the hunt forward missions in 2018 and has now carried out 28 in 16 countries, on more than 50 networks. Estonia, Montenegro, North Macedonia and Ukraine have been among the nations publicly identified as having participated. The agency has insisted that the U.S. operations in Ukraine and Lithuania at the moment were limited to friendly networks and should not trigger an escalatory response from Russia. General Paul Nakasone, who leads U.S. Cyber Command, told Congress last month that U.S. support to Ukraine and NATO allies and partners since Russia’s invasion had helped bolster efforts to repel Russian cyberattacks. Ukrainian authorities have reported a more than threefold increase in cyberattacks since the war started compared with the same period last year. Microsoft issued a report late last month saying Russian cyberattacks against Ukraine have been relentless sand destructive.
o https://www.bloomberg.com/news/articles/2022-05-05/u-s-sent-cyber-team-to-lithuania-over-threat-of-russian-hacking?srnd=politics-vp
Market Update
- Federal Reserve Chair Jerome Powell assured Americans that policy makers will do what it takes to curb surging inflation, acknowledging the moves could cause some pain as the U.S. central bank deployed its most powerful policy tightening in decades. The Fed raised interest rates by 50 bps on Wednesday for the first time since May 2000 and Chair Powell said similar moves were on the table for June and July. Still, investors took heart that he also pushed back against a larger 75 bps increase, with stocks notching their largest rally on the day of a Fed meeting in a decade. The Fed has also decided to start reducing their holdings of Treasuries and MBS beginning next month. The hope is that the combination of rising borrowing costs and a shrinking balance sheet will deliver a soft landing that avoids recession while tamping down inflation, though Chair Powell implied this might not be possible without hurting growth. Fed officials have said they want to raise rates until they reach the level that neither speeds up nor slow down the economy – known as the neutral rate currently estimated at between 2% and 3%. Chair Powell framed the Fed’s aggressive plan to rein in inflation as a way to ultimately help workers whose wage gains this year have been eroded by price increases in essentials like food, gasoline and rent. Real wages, which take into account inflation, have decreased for 12 consecutive months.
- Federal Reserve Chair Jerome Powell beat back the market’s most aggressive predictions for the path of interest rates Wednesday, setting off a dovish surge in stocks and bonds. But in pouring cold water on the prospect for a jumbo-sized 75 bps rate hike next month, he may have inadvertently set the stage for more turbulence going forward if inflationary pressures increase. The Fed was seemingly trying to send a message of sustained expectations for 50 bps increases, but unintentionally gave a very dovish message that caused an easing of financial conditions. The move has already prompted some market watchers to wonder how long the Fed can stick to such an approach. Inflation remains challenging for the Fed because in 2021, a complacent Fed led inflationary expectations escape the realm of being within its ability to comfortably manage. Now, financial markets remain in a volatile phase as investors assess the success of the Fed in reining in inflation without risking a substantial economic dislocation. U.S. labour market data releasing this Friday will also draw focus on how wages are evolving. The government next week is set to release a new round of CPI data as well, which is expected to show how the war in Ukraine and lockdowns in Chia could add new wrinkles to the economy, especially after the Fed stressed Wednesday the inflationary effects of both.
o https://www.bloomberg.com/news/articles/2022-05-05/treasuries-turbulence-far-from-over-as-skeptics-doubt-fed-path?srnd=premium-asia
- Stocks rose, bonds jumped, and the dollar remained lower Thursday amid a bout of investor relief after the Federal Reserve raised interest rates as expected at 50 bps while countering fears of super-sized hikes; U.S. futures also steadied following the S&P 500’s biggest advance since 2020
o S&P 500 futures shed 0.1%, while the S&P 500 rose 3%
o Nasdaq 100 futures dropped 0.1%, while the Nasdaq 100 added 3.4%
o 10-year Treasury yield fell 4 bps to 2.93%
- Fed Chair Jerome Powell said a 75 bps hike is not something that the committee is actively considering, spurring the market rally; the Fed raised rates a half point and signalled similar moves for June and July
- Removing some of the uncertainty has been helpful in getting some of the cash that has been on the sideline back into the markets, whether it is bonds or equities; the U.S. central bank also clarified it will start reducing its holdings of Treasuries and MBS in June at an initial combined monthly pace of $47.5 billion, stepping up over three months to the cap of $95 billion
- The market reaction is likely to revolve as investors digest Chair Powell’s latest comments; a global wave of monetary tightening alongside commodity-fuelled price pressures could yet hurt economic growth, especially as Russia continues its war in Ukraine and China continues its COVID curbs that threaten to snarl global supply chains further
- Swaps linked to Fed meetings are now pricing in less than 150 bps of further rate increases over the June, July and September decisions; that hints at doubts about the scope for another three hikes of 50 bps apiece
- Gold rose 1% to $1,901.95 an ounce amid the drop in yields and cooling policy tightening expectations
- WTI crude rose 0.2% to $107.98 a barrel
Summary
- Micro – U.S. equities rallied in Wednesday trading after the Fed raised interest rates by 50 bps as expected, and signalled similar hikes for the coming June and July meetings to quell inflation. Fed Chair Jerome Powell has also indicated that a jumbo-sized 75 bps rate hike is not something the committee is actively considering at the moment, setting off a somewhat more dovish tone that has quelled investors’ concerns and signalled a potential for orchestrating a soft landing afterall. However, Chair Powell warned that the Fed is committed to quelling inflation even if it comes at some pain in the near-term. In response to the comimttee’s latest commentary, U.S. equities – especially technology stocks that have taken a beating in recent months – rallied, sending the tech-heavy Nasdaq 100 up 3.4% which marked its biggest intra-day jump in a week. But inflation remains hot and it is too soon to tell if tech stocks are entirely out of the woods, as the Fed could amp up the hawk again and bring about more aggressive increases to borrowing costs that could stifle growth and erode valuations.
- Macro – Equities and bonds soared while the dollar dropped after the Fed decided on a 50 bps rate hike Wednesday and signalled similar moves in the coming June and July meeting. The Fed has also decided to start reducing their holdings of Treasuries and MBS beginning June at a monthly rate of $47.5 billion with gradual increases over the next three month to its monthly cap of $95 billion. The hope is that the combination of rising borrowing costs and a shrinking balance sheet will deliver a soft landing that avoids recession while tamping down inflation, though Chair Powell implied this might not be possible without hurting growth. Fed officials have said they want to raise rates until they reach the level that neither speeds up nor slow down the economy – known as the neutral rate currently estimated at between 2% and 3%. For now, swaps linked to Fed meetings are pricing in less than 150 bps of further rate increases over the June, July and September decisions. Elsewhere, oil traded above $108 a barrel ahead of the OPEC+ meeting later Thursday which could end in moderate increases to monthly output. Traders are mulling on the increasing risk of an EU ban on Russian crude, which could further pressure the global supply crunch. The bloc is planning to ban Russian oil over the next six months and refined fuels by the end of the year as part of refreshed sanctions against President Putin’s decision on invading Ukraine. A decision could be reached as soon as May 9th. U.S. inventory data is also showing declines to stockpiles, with diesel on the east coast slumping to a record low last week as local refiners rushed to supply global markets, which suggest an extended shortage of the industrial, transport and heating fuel required for domestic demand.