Newsletter - May 9, 2022
Oil / Commodities
- Oil fluctuated as investors weighed a pledge by the G7 to ban imports of Russian crude against a cut in official prices by Saudi Arabia and the impact of China’s energy-sapping lockdowns. WTI traded near $110 a barrel after earlier losing as much as 1.7%. Leaders of the most-industrialized countries made the vow in response to President Putin’s war in Ukraine after holding a video call with Ukraine President Zelenskiy on Sunday. A similar plan by the EU has yet to be agreed as some member states object. Saudi Arabia cut prices for buyers in Asia as COVID lockdowns in China weighed on consumption in the top importer. State-controlled Saudi Aramco lowered prices for the first time in four months, dropping its key Arab Light grade for next months’ flows to $4.40 a barrel above the benchmark it uses. Raw material prices have also been buffeted as leading central banks including the U.S. Federal Reserve tighten policy to quell a powerful surge in inflation. Some traders are expecting a pullback in oil prices as the EU struggles to get unanimity on a Russian oil ban. The downside may be limited, however, as the bloc continues with its efforts to reach consensus, keeping the market on tenterhooks. Oil remains in backwardation, with the spread between Brent’s two nearest December contracts climbing to $13.91 a barrel, close to the level seen in the initial weeks after Russia began its invasion of Ukraine.
- After facing mounting antitrust scrutiny in recent years, Apple has started to loosen up. Two years ago, Apple began letting users choose third party web browser or email apps as their system default. This means when you click a link in messages, you have the option to launch it in Chrome instead of Safari. Or when you want to click an email address, you can have the new message window open up in Microsoft Outlook instead of Apple Mail. The company went a bit further last year, allowing users to choose alternative music apps like Spotify or Pandora for use in Siri. This year, Apple began letting third-party subscription apps point users to the web to complete payments, bypassing its up-to-30% App Store fees. But Apple continues to battle with antitrust issues over its payment services. The company has continued to stand by its decision to reserve the iPhones’ near field communications technology, which empowers Apple Pay and its newest tap-to-pay feature, for its own use. For now, iPhone users must use Apple Pay if they want to buy something via phone tap, and that has been increasingly frustrating to rival financial apps. Rivals like PayPal and Square cannot launch tap-to-pay iPhone apps with their own features and interface. It also means if they want to access the iPhone user base, they must pay an up-to-0.15% fee for every Appel Pay credit card transaction. And the EU is now throwing its weight into the fight by making a formal antitrust complaint. But it is not surprising that Apple does not want to open up its NFC technology to rivals. Apple Pay is expected to bring in north of $1 billion per year on feels, compared with the nearly $20 billion a quarter Apple makes from services overall. While the $1 billion per year for Apple may seem minimal, that could be the difference between reaching or not reaching annual growth targets in the services segment. The bigger concern is future revenue. Visa said earlier this year that 20% of its U.S. transactions are contactless. And the ratio will only keep growing in coming years. If Apple opens up its tap-to-pay features to third-party apps today, the future impact may become losses of billions. For now, Apple has argued that its refusal to open up its NFC technology to third-parties is due to privacy and security.
- Microsoft has an initial $1.3 billion at stake in a test beginning later this month on whether its HaloLens AR goggles can be turned into an effective combat system for the U.S. Army. The monthlong test from MAY 23 TO June 17 will be evaluated by the Pentagon’s testing office to determine whether the headset is ready for full production and initial deployment. The new Integrated Visual Augmentation System would let commanders project information onto a visor in front of a soldier’s face and would include features such as night vision. So far, the Army has indicated the goggles show promise but are not ready for combat deployment. The project has been called a potential $21.9 billion program over 10 years for as many as 121,500 goggles, spare parts, logistics and program management support. In this month’s testing, soldiers will be assessed while wearing the device in day and night as they share graphics, information on positions, and the ability to detect and engage targets. The goggles will be evaluated on whether the field of view and comfort allows for good mobility so soldiers can accomplish tasks. Whatever the final program value over the next decade, a positive Rapid Fielding Report from the test office could free up at least $1.3 billion in spending that is on hold or requested, starting with $167 million in unspent fiscal 2021 procurement money and $405 million this year. there is also $333 million of a $373 million order placed in March 2021 for the initial 5,000-goggle order; only $40 million has been paid to Microsoft. The Army will not take delivery until the May test is successfully completed. There is also an additional $400 million requested in fiscal 2023 procurement funds for a new order of as many as 6,898 sets of goggles.
- Chinese automaker BYD has come under fire for pollution at one of its factories that residents say has caused nosebleeds in hundreds of children. A team has been sent to BYD’s factory to investigate gas emissions after receiving complaints from neighbours. The investigation includes third-party testing institutions and experts who will try to get to the bottom of the issue that has seen scores of parents in Changsha protest. More than 600 children living near the production plant in the city’s Yuhua district have been reporting repeated nosebleeds since April. BYD said over the weekend that its emissions comply with regulations and noted it has taken steps to reduce the odour caused by the plant.
Consumer / Retail
- China’s exports and imports struggled in April as worsening COVID outbreaks cut demand, undermined production and disrupted logistics in the world’s second largest economy. Export growth in April slowed to 3.9% in dollar terms from a year earlier, compared to an increase in March of 14.7%. That marks the weakest pace since June 2020 but faster than the media estimate of a 2.7% gain in a survey of economist. Imports were unchanged in April after sliding 0.1% in March. Economists had expected a 3% decline. COVID outbreaks in China and the government’s COVID Zero approach have weighed on China’s economy and threatened globally supply chains. April’s weak data showing captures the impact of COVID restrictions on the trade and manufacturing hub Shanghai – home to the world’s largest port – where most of the population have been under some form of lockdown for more than five weeks. The government is trying to get production back on track, with some operating under a closed-loop system, while others have cited an inability to resume operations with lockdowns tightening again.
- New home sales in 23 major Chinese cities plunged 33% by area during a five-day national holiday compared with a year earlier, despite policy makers’ pledges of support for the property market. Lenders seized control of the property where China Oceanwide Holdings planned to develop one of lower Manhattan’s tallest towers after the company failed to make mortgage payments. China-based developers have continued to struggle overseas as the government restricted international capital flows. China Premier Li Keqiang warned about the nation’s employment situation after Beijing and Shanghai tightened virus curbs. Real estate stocks fell as much as 4.4% Friday, amid broader market declines. A gauge tracking junk dollar notes also fell for the third week in the past four.
- Chinese regulators have further tightened their grip on the internet industry, banning younger users from sending virtual gifts on livestream platforms, which could affect companies including ByteDance and Kuaishou. Livestream apps are now banned from providing minors with facilities for online transfers or virtual gift-purchase services under the new rules. Before the new guidance and despite rules aimed at curbing online spending by minor users, many young people were able to send virtual gifts or cash tokens to livestream performers, with some platforms claiming a commission fee from the contributors. Platforms have also been ordered to stop providing livestream feeds to minors after 10pm.
- Japanese Prime Minister Fumio Kishida plans to gradually phase our imports of Russian oil as he joined other G7 leaders in stepping up pressure on President Putin by pledging to halt crude imports from his country. Oil fluctuated in trading to start the week in Asia trading with investors weighing the impact of the move by the bloc. WTI crude traded near $110 a barrel after earlier losing as much as 1.7%. Crude has had a tempestuous year as Russia’s invasion of Ukraine has upended globally commodity markets. Ukrainian President Zelenskiy marked a day of remembrance for the defeat of Nazi Germany, a day before President Putin is expected to address a military parade in Moscow and may lay out the next steps of his war. U.S. first lady Jill Biden finishes her trip to the region after crossing into Ukraine to meet Zelenkiy’s wife Olena Zelenska.
- A Ukrainian intelligence officer of the Azov regiment holed up in Mariupol’s massive Azovstal steel factory said surrender would amount to suicide. He said the Ukrainian troops had enough food and weapons to hold out for a while. Describing their increasingly grim, and likely ultimately hopeless, circumstances, Illia Samoilenko also made clear his bitterness with the Ukrainian government in Kyiv. He cited Kyiv had failed in its defense of southern Ukraine, where Russia made much faster progress than in the north and had abandoned Mariupol’s garrison to its fate. Samoilenko noted the troops in Azovstal are basically “dead men”, and most already know it which is why they fight so fearlessly.
- Lockheed Martin is working to almost double its production capacity for Javelin missiles to 4,000 a year and achieving that goal will require the supply chain to crank up. The Ukrainian army has used Lockheed’s missiles to great effect in destroying Russian tanks and armaments, and the company is ramping up production to ensure the U.S. military’s supplies are not depleted. Right now, Lockheed can build about 2,100 Javelins a year. One way to hasten the process is for Congress to pass the Bipartisan Innovation Act that would propel domestic design and manufacturing of microprocessors, reducing the reliance on foreign supply. Each Javelin requires about 250 microprocessors. Lockheed is working with partners including Intel to support the defense industry’s needs.
- U.S. first lady Jill Biden made an unannounced visit to Ukraine where she met with displaced children and the wife of President Zelenskiy, Olena Zelenska, in the town of Uzhorod. The two met for roughly an hour and took part in arts and crafts with some of the displaced children. Leaders from the G7 countries on Sunday will discuss potential new sanctions against Russia over its war in Ukraine. Zelenskiy is expected to join the call.
- Stocks fell in Asia trading Monday and the dollar climbed as high inflation, monetary tightening and the prospect of an economic slowdown spurred another bout of risk aversion
- U.S. futures retreated, providing little respite for investors after the fifth straight weekly decline in global shares and bonds
- Oil hovered around $110 per barrel, as crude is being buffeted by the demand hit from China’s outbreak and supply risks linked to Russia’s war in Ukraine
- Treasury yields were in sight of levels last seen in 2018; inflation data this week from the U.S. and elsewhere could drive further bond-market swings
- Volatility remains the catchword in global markets on growth, inflation and war risks; the short-term outlook for stocks remains messy and there may be more downside as markets worry about a significant economic slowdown or hard landing and aggressive interest rate hikes in an effort to quell inflation
- S&P 500 futures fell 1%, while the S&P 500 fell 0.6% Friday to 4,123.34
- Nasdaq 100 futures slid 0.8%, while the Nasdaq 100 fell 1.2% Friday to 12,693.54
- 10-year Treasury yield was at 3.13%
- WTI crude rose 0.1% to $109.84 a barrel
- Gold was at $1,875.10 an ounce, down 0.5%
- Retail day traders are losing all of the meme stock gains harvested since the start of 2020. Nursing losses in 2022 has become a norm. A lot of day traders that benefited from the pandemic-era rally started trading right around COVID so their only investing experience was the wacked-out, Fed-fuelled market. That all changed with the Fed pivot in November, but they did not realize that because they have never seen a market that was not supported by the Fed. Famous names from the height of the meme stock frenzy have lost more than half of their values since peaks observed in 2021. From the start of 2020 to November 2021, a basket of retail stocks favoured by retail traders that Goldman Sachs tracks had more than doubled. This year, the same basket has plunged 32%, more than twice the S&P 500’s declines. Retail investors accounted for roughly 24% of the total stock trading at one point. In 2022, when about $9 trillion has been erased from the value of U.S. equities, the day-trader army has held relatively firm, at least in terms of positioning, which contrasts with professional money managers who have been retreating. Hedge funds have been cutting risk for months, ending their equity exposure to a two-year low. But signs are creeping up that the day trader crowd is souring on the market. In April, retail investors snapped up $14 billion in stocks, the second slowest uptake in any month since late 2020. In the options market, where they used to rush to bullish calls for quick profits, activity is now tilting toward bearish puts. With personal savings as a percentage of disposable income having fallen back to pre-COVID levels, analysts are doubtful that individual investors will have much more financial and emotional capital to continue buying the dip aggressively.
- Micro – U.S. equities are expected to remain volatile this week, as markets wait eagerly for the release of April CPI data coming Wednesday to see if the Fed’s monetary tightening have been working so far. The market’s brief rally following the Fed’s rate hike decision last week of 50 bps and announcements for similar hikes coming June and July were thwarted by the realization of the cold reality of still-meek macroeconomic conditions that are increasing risks of a recession. If April CPI data comes in at a weaker-than-expected level, expectations that the Fed have fallen behind the curve again with decisions to raise rates in 50 bps increments will likely hurt equities and bonds again. But if improvements are shown, then markets may be more content with the Fed’s tightening plans in coming months and restore some calm to the current market storm.
- Macro – Benchmark Treasury yield remains above 3% as investors digest the rising rate environment ahead, as well as the Fed’s ability to orchestrate a soft landing in quelling the hottest inflation in four decades. Oil has also risen close to $110 a barrel, erasing earlier losses as traders mull on impacts of the G7’s latest decision on a phase ban of Russian crude. Saudi Aramco has also lowered prices for the first time in four months for its key Arab light grade as a result of weakening demand in Asia due to China’s COVID lockdowns. Supply risks resulting from Russia’s invasion of Ukraine and the recent demand risks stemming from China’s COVID outbreak remain key determinants for oil performance in the near-term.