Good morning. Happy Friday.
The Asian/Pacific markets leaned up. Japan, China, South Korea, India, Australia and New Zealand did well; the Philippines was weak. Europe, Africa and the Middle East currently lean down. South Africa and Saudi Arabia are up; the UK, France, Germany, the UAE, Finland, Hungary, Spain, Italy and Austria are down. Futures in the States point towards a moderate down open for the cash market.
————— Masterclass Overview –>> here —————
The dollar is up. Oil and copper are nearly flat. Gold and silver are down. Bonds are up. Bitcoin is down.
Stories/News from Seeking Alpha…
Bulls like hawks
Economically assured destruction
Check out Wall Street Breakfast’s original Seeking Alpha show The Weekend Bite! On this week’s episode we discuss the market correction, where to allocate capital with Catherine Faddis, CEO of Grace Capital and strong dividend yield stocks with Steven Cress, Head of SA’s Quant Strategy.
U.S. President Joe Biden will talk with China President Xi Jinping this morning and Biden is expected to impress upon the Chinese leader that there will be consequences for involvement in the Russia-Ukraine conflict. Biden will “make clear that China will bear responsibility for any actions it takes to support Russia’s aggression, and we will not hesitate to impose costs,” Secretary of State Antony Blinken said Thursday.
The message doesn’t vary from that conveyed in talks between senior officials of the two countries on Monday. China has denied it has been asked to assist Russia militarily and maintained that it’s completely impartial, but U.S. diplomats have reportedly told allies that Beijing has indicated it could help Russia with weapons. The call is expected to take place at 9 a.m. ET.
China may be reluctant to court an economic battle with the West, though, given problems it’s facing domestically that have forced the government to reassure risk markets, not to mention its continued battle to contain COVID. Widely followed J.P. Morgan strategist Marko Kolanovic wrote in a note yesterday that economic tail risks from China likely won’t materialize.
“During the Cold War, peace was preserved by the virtue of ‘mutually assured destruction’; for the time being, the current relationship with China may be preserved by the equivalent of economically assured destruction,” he said.
Biggest rally in decades: Stock markets in Shanghai (SHCOMP) and Hong Kong (HSI) are taking a breather today after the biggest two-day rally in 1998. BTIG said China stocks saw the volume and velocity of a “washout,” but warned that 9% gains weren’t usually indicative of a low. The buying of the beaten-down shares was spurred by a government pledge for stock-friendly policies that would stabilize markets, stimulate the economy and not expand a trial of property tax reform.
“This ‘equity put’ saw Vice premier Liu’s all-in attempt to try to clear up all investor concerns in one go, from ‘as soon as possible’ end to tech sector crackdown, to a commitment to resolving property developer risks,” eToro strategist Ben Laidler said. “We see little appetite from the authorities to provoke more trade disruption,” he added. “As the world’s largest manufacturer and exporter they have the most to lose. The market is one of the world’s cheapest, with a P/E ratio of 9x.”
Kolanovic said he is still bullish on Chinese equities “as the fiscal carry-over for 2021 allows for the front-loading of stimulus in 2022.” In the latest BofA fund manager survey, only 1% saw a China credit event as tail risk.
COVID crackdown tweaks: Xi signaled for the first time yesterday that the government is willing to make adjustments to its COVID-zero policy that is putting more strain on the economy. Shenzhen, a vital tech hub, is still under lockdown amid a new outbreak.
China will “strive to achieve the maximum prevention and control effect at the least cost and minimize the impact of the epidemic on economic and social development,” Xi told the Politburo standing committee, according to Bloomberg.
Morgan Stanley said there would be a hit on global oil demand if China’s COVID policy “ultimately were to be unsuccessful.” (2 comments)
GameStop loss
GameStop (GME) slumped in extended-hours trading after the retailer posted a mixed earnings report that included an unexpected loss for the quarter.
Revenue rose 6.21% to $2.25B. Hardware and accessories sales accounted for 52.7% of total sales vs. 54.8% a year ago, while software sales rose to 34.9% from 34.4% last year. Collectibles revenue was 12.4% of the total vs. 10.8% a year ago. (68 comments)
FedEx falls on costs
FedEx (FDX) traded lower after FQ3 profit missed expectations. Higher purchased transportation costs and wage rates were a profit headwind during the quarter.
FedEx Ground operating results declined primarily due to increased rates for purchased transportation and employee wages, network inefficiencies, and expansion-related costs. These costs were partially offset by higher revenue per package, a boost from two additional ground commercial operating weekdays, and a net fuel benefit. FedEx Freight third quarter operating income nearly tripled, driven by a continued focus on revenue quality and profitable growth. (27 comments)
ARKK lows
The struggle for Cathie Wood’s ARK Innovation ETF (ARKK) continues. Wood’s ETF is -36% YTD and is currently working towards its fifth-straight downward month. Meanwhile, this week has been particularly difficult, as 23 of its 35 holdings fell to 52-week trading lows, about two-thirds of the total. (154 comments)
Fuel to Uranium fire
Newly introduced Sprott Uranium Trust (OTCPK:SRUUF) units allowed retail investors to indirectly purchase physical uranium; the trust acquired ~52M lbs of uranium in the past nine months, or around a quarter of global annual demand. Caxton Associates, a multi-billion-dollar macro hedge fund, filed to disclose that the company owns over 18M of the Trust’s 209M units. (3 comments)
Blankfein sees doves?
The Federal Reserve’s forecast of seven quarter-point interest rate hikes “is not so hawkish,” as real (inflation-adjusted) yields are “still negative to the horizon,” Goldman Sachs Senior Chairman Lloyd Blankfein wrote in a Twitter post. (3 comments)
Russian bonds
JPMorgan Chase (JPM) has processed funds allocated for interest payments on dollar bonds held by the Russian government and transmitted the money to Citigroup (C), Bloomberg reported. JPMorgan was the correspondent bank Russia used to send the payment to Citi, which is acting as payment agent on the bonds. (36 comments)
Today’s Economic Calendar
10:00 Existing Home Sales
10:00 Leading Indicators
12:30 PM Fed’s Barkin Speech
1:00 PM Baker-Hughes Rig Count
2:00 PM Fed’s Evans Speech
What else is happening…
Restaurant Brands (QSR) starts the process of pulling out of Russia.
Moderna (MRNA) seeks approval for second booster shot in all adults.
GE’s Culp (GE) to take pay cut this year in nod to shareholder vote.
U.S. Steel (X) guides Q1 earnings below Wall Street consensus.
Metaverse heats up as ProShares launches the latest ETF (VERS).
Buffett’s Berkshire Hathaway (BRK.A, BRK.B) boosts stake in Occidental to 14.6%.
Tesla (TSLA) halts sale of bonds tied to auto leases.
Bank of America (BAC) is still Mike Mayo’s No. 1 pick among large banks.
Homeshare spending soars in positive sign for Airbnb (ABNB).
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Good morning. Happy Thursday.
The Asian/Pacific markets did great. Japan, China, Hong Kong, South Korea, India, Taiwan, Australia, Malaysia, Singapore and the Philippines – all did great. Europe, Africa and the Middle East are currently mixed. Denmark, Poland, Turkey, South Africa and Hungary are up; Germany, Greece, Finland and Italy are down. Futures in the States point towards a down open for the cash market.
————— Masterclass Overview –>> here —————
The dollar is down. Oil and copper are up. Gold and silver are up. Bonds are up. Bitcoin is up.
Stories/News from Seeking Alpha…
Bulls like hawks
The Federal Reserve kicked off its tightening cycle with an expected quarter-point hike and the stock and bond markets had different reactions. The FOMC hiked rates by a quarter-point. That was expected, but the summary of economic projections took what many saw as a hawkish tilt, with the median forecast for rates to end 2022 at 1.9%, up from 0.9% in December, and the majority of Fed officials looking for seven hikes this year. Officials see rates at 2.8% at the end of 2023, up from 1.6% at the previous Fed meeting.
Threading the needle: Stocks sold off right after the release of the statement and dot plot, with the S&P 500 (SP500) (NYSEARCA:SPY) dipping into negative territory. But they quickly resumed rally mode as Fed Chairman Jay Powell spoke, seemingly taking heart at him downplaying the possibility of recession.
“Asset markets treated the FOMC statement and projections as unambiguously hawkish on release but reacted more positively as the press conference progressed,” Standard Chartered strategist Steve Englander wrote. “Powell’s mention that the balance-sheet drawdown may be worth an extra hike and comment on the easing of goods price inflation (however small) may have calmed market fears a bit. We think the Fed is probably pleased with this reaction,” he said. “Equity markets closed higher, suggesting that investors saw the Fed stance as threading the needle between tolerating inflation and threatening a major downturn.”
At the close, the S&P finished up more than 2%, with Nasdaq (COMP.IND) (NASDAQ:QQQ) up more than 3% and the Dow (DJI) (NYSEARCA:DIA) more than 1.5% higher. Stock index futures are slightly lower this morning. The S&P 500 is now up 4.4% in the last two sessions.
“Don’t ignore blasts of strength like this,” LPL Financial strategist Ryan Detrick said.
“Here are some other recent times stocks gained this much: Mar and Apr 2009, Aug 2011, Oct and Nov 2011, Dec 2014, Aug 2015, Dec 2018, Mar and Apr 2020,” he tweeted. “These weren’t times to be overly bearish going forward.”
Notably, stocks are coming off a correction in the broader market and a bear market among growth names. But this looks like a vote of confidence from the equity market that, after admitting it is behind the curve, the Fed won’t overreact and slam the brakes too hard. While Powell definitely came out with a hawkish message, the U.S. economy looks less vulnerable to shocks and a possible recession than other global economies, Goldman Sachs economist Steffan Ball said on Bloomberg.
Trouble with the curve: The Treasury market doesn’t look too convinced that a soft landing is on the cards. Bonds followed a similar path as stocks yesterday afternoon, with prices plunging and yields spiking on the release of the statement, especially on the short end, then changing direction as Powell spoke. At the end of the press conference, the 2-year yield (NASDAQ:SHY) was up 5 basis points, while the 10-year yield (NYSEARCA:TBT) (NASDAQ:TLT) was lower. Still, that was further flattening of the yield curve and an inverted 2s-10s curve is generally considered a warning of an impending recession. The curve continues to flatten today, with the 2-year down 2 basis points to 1.95% and the 10-year down 3 basis points to 2.15%, putting the spread at 20 basis points.
That is “a remarkably flat curve for the very beginning of the rate hiking cycle,” ING economists said. “The 2yr went into the meeting at quite an aggressive discount versus the funds rate anyway, one reminiscent of rate hike cycles that were typical before the great financial crisis, when 50bp hikes were not unusual,” ING added.
On average, “it takes around three years from the first Fed hike to the recession,” Deutsche Bank’s Jim Reid said. “However the bad news is that all but one of the recessions inside 37 months (essentially three years) occurred when the 2s10s curve inverted before the hiking cycle ended. With all the recessions that started later than that, none of them had an inverted curve when the hiking cycle ended,” he added. “In fact, hiking cycles that ended with the curve still in positive territory saw the next recession hit 53 months on average after the first rate hike, whereas the next recession for hiking cycles that ended with an inverted curve started on average in 23 months, so just under two years.” (3 comments)
Berkshire at $500K
The coveted Berkshire Hathaway class A shares (NYSE:BRK.A) closed above half a million dollars apiece for the first time on Wednesday. The shares touched as high as $506,028.97 and closed at $504,036.00, up 1.2% for the day.
The company that holds a diverse collection of businesses from Dairy Queen fast-food restaurants to Geico auto insurance to Precision Castparts aerospace components now has a market cap of $735.9B, less than $100B from Tesla’s (NASDAQ:TSLA) $843.5B. (45 comments)
Alibaba layoffs
Alibaba (BABA) and Tencent Holdings (OTCPK:TCEHY) are reportedly close to cutting thousands of jobs due to Beijing’s ongoing regulatory crackdown on China’s tech sector.
According to a report from Reuters, BABA is planning layoffs that could surpass 15% of the e-commerce giant’s 39,000-person workforce. TCEHY is also on track to cut between 10% and 15% of its more than 94,000 employees, according to Reuters. (39 comments)
Ukraine crypto
Ukraine took a leap to make use of the decentralized marketplace after President Volodymyr Zelenskyy signed a bill into law that legalizes cryptocurrencies in the country.
Specifically, the law determines the legal status, classification, ownership and regulators of virtual assets, in addition to setting registration requirements for virtual asset services providers, the Ministry of Digital Transformation stated. (54 comments)
Robinhood stock lending
Robinhood Markets (HOOD) rose 15% after news that it’s getting close to offering an option to let users loan out their stocks to other financial institutions, according to Bloomberg. The move would help it compete more directly with conventional brokerages like Fidelity Investments and Morgan Stanley’s (MS) E*TRADE, and Charles Schwab (SCHW).
Code describing the service was discovered in a beta version of Robinhood’s iPhone app by developer Steve Moser, who shared the information with Bloomberg. (5 comments)
Today’s Economic Calendar
8:30 Initial Jobless Claims
8:30 Philly Fed Business Outlook
8:30 Housing Starts and Permits
9:15 Industrial Production
10:30 EIA Natural Gas Inventory
4:30 PM Fed Balance Sheet
What else is happening…
Hong Kong stocks (HSI) rally again, Kolanovic particularly favors China shares.
Starbucks (SBUX) powers higher with return of Howard Schultz viewed favorably.
Sen. Warren introduces bill to block mergers.
Netflix (NFLX) to test password crackdown through payment for extra members.
Kohl’s (KSS) jumps on report Hudson’s Bay, Sycamore preparing bids in high $60s.
Euro energy traders ask for liquidity from governments to ‘buffer’ margin calls.
Lockheed’s (LMT) F-35 hit with 35% cut in Pentagon budget request.
CF Industries (CF) hikes U.S. fertilizer shipments as Russian exports cut.
Riot (RIOT) Blockchain stock drifts down even after record year.
—————
Good morning. Happy Wednesday. Happy Fed Day.
The Asian/Pacific markets did great. Japan, China, Hong Kong, South Korea, India, Australia, Indonesia, Singapore and Thailand – all did great. Europe, Africa and the Middle East are currently up big. The UK, Denmark, Poland, France, Germany, the UAE, Greece, South Africa, Finland, Switzerland, Norway, Hungary, Spain, the Netherlands, Italy, Israel, Austria, Sweden and Saudi Arabia are all doing great. Futures in the States point towards a big gap up open for the cash market.
————— Masterclass Overview –>> here —————
The dollar is down. Oil and copper are up. Gold and silver are down. Bonds are down. Bitcoin is up.
Stories/News from Seeking Alpha…
It’s showtime!
Fed Chair Jay Powell will be in the hot seat this afternoon following the conclusion of the Federal Reserve’s two-day policy meeting. The central bank is widely expected to raise interest rates by a quarter of a percentage point, bringing an end to the “transitory era” that some are dubbing as one of the worst Fed inflation calls of all time. Currently, markets are pricing in seven rate hikes this year, which would average a 25 basis point hike for each meeting remaining in 2022, though Powell has emphasized that policymakers aren’t on “auto-pilot” and need to be nimble in assessing incoming data.
How it works: In simple terms, raising interest rates slows down the economy as borrowing costs become more expensive. That means more consumers, businesses and corporations hold off on purchases or investments, thereby cooling demand and dampening prices. It’s a delicate balancing act and a soft landing can be tricky. Wait too long to raise rates and inflation can surge – suppressing activity and risking a “stagflation” scenario – while acting too early could leave workers on the sidelines and possibly trigger a recession.
“The Fed is currently navigating in an economic and financial environment that is more complicated than any other in recent history,” said Luis Alvarado, investment strategy analyst at Wells Fargo Investment Institute.
Go deeper: Keep an eye on the scale and pace of the coming tightening cycle with the release of the Fed’s latest ‘dot plot.’ At his press conference at 2:30 p.m. ET, Powell is also expected to provide more guidance on the central bank’s plan for shrinking its nearly $9T balance sheet. Earlier this month, the Fed Chair said he expected the runoff would “take about three years to get where it needs to be” during his Congressional testimony on Capitol Hill. (19 comments)
Wild swings
Things are getting volatile out there as a new wave of COVID infections rocks China at the same time as Russia’s war in Ukraine. While the swings were seen in many areas of the market, one stands out above the rest: oil. After surging to $120 a barrel last week, WTI crude dropped precipitously to under $100 on Tuesday, entering a bear market just five days after settling near 14-year highs. “The collapse has been spectacular,” wrote Fawad Razaqzada, market analyst at online broker ThinkMarkets.
What happened? Traders are betting on a hit to demand due to the strict measures seen in China, where 45M people are now under lockdown as coronavirus cases climb to over 5,000 a day. Besides China being the world’s largest importer of crude, there are reports that the U.S. could lift sanctions on Venezuelan oil and some are even saying the entire roller-coaster ride has been based entirely on emotion (fear on the way up, hope on the way down). The volatility has weighed on China’s stock indexes over the past few sessions, and the swings renewed again overnight, with shares in Shanghai closing up 3.5% and the Hang Seng Index skyrocketing 9%.
Investors are also fearful of another disruption to the fragile global supply chain due to China’s zero-COVID strategy. For example, a lockdown has been declared for the southeastern manufacturing hub of Shenzhen, which features the world’s biggest electronics suppliers, and the nearby key port of Yantian could also be impacted. While the lockdown is set to last for one week, any additional disruptions – or other cities that are added to the lockdown list – could cause additional supply chain chaos.
Commentary: “When we look at the global economy, there are just so many uncertainties that pop up every single day, and there are things we couldn’t have predicted far beyond that,” noted Julie Biel, senior research analyst at Kayne Anderson Rudnick. “I think we have all gotten very attached to our fancy Excel models, our dot plots and our forecasts, but frankly, I think you can throw them all out the window. Why not instead focus on being more of a business analyst by finding really strong, proven and durable business models, while going back historically and seeing which companies have performed well during a financial or oil crisis.” (9 comments)
Ditching disposables
Ahead of its annual shareholder meeting today, Starbucks (NASDAQ:SBUX) laid out some steps it could take on the sustainability front. One of those included plans to establish an electric-vehicle charging network with partner Volvo Car USA at Starbucks stores nationwide. The other centered around reducing its disposable cup use, which is not only a crucial utensil for coffee giant, but features its iconic green-and-white colors.
Wait, what? Starbucks is embarking on 20 different types of tests – across eight markets – to figure out the best way to ditch the single-use cup. One will test financial incentives for reusable mugs or deterrents for disposables, while another will explore washing stations, where customers will be able to have their personal cups cleaned before ordering a beverage. A borrow-a-cup program is also in the works, where a deposit is paid for a reusable cup until they are returned to stores (plastic straws will additionally be replaced with compostable options).
Starbucks’ environmental commitments have made the stock popular among ESG investors, but shares have slipped 35% from highs notched in July as the company battles costs and economic uncertainty. That landscape even prompted the company last month to cut its EPS outlook for fiscal 2022. “Although demand was strong, this pandemic has not been linear and the macro environment remains dynamic as we experienced higher-than-expected inflationary pressures, increased costs due to Omicron and a tight labor market,” CEO Kevin Johnson said at the time.
It won’t be easy: Back in 2008, Starbucks set a goal to have a quarter of consumers use reusable cups by 2015, but it fell seriously short of the target. The company has also offered a $0.10 discount on every order for a personal cup or mug since the 1980s, but few customers have taken up the offer (or even know about it). “Disposable cups and lids make up 40% of Starbucks’ packaging waste,” according to its Chief Sustainability Officer Michael Kobori.
Default looms
Ukrainian President Volodymyr Zelenskyy is scheduled to deliver a speech to the U.S. Congress at 9 a.m. ET as his country continues to fight against invading Russian forces. The remarks will come a day after President Biden signed a massive spending bill into law, which includes more than $13B in aid for Ukraine, on top of another $200M assistance package announced this past weekend. Zelenskyy is expected to renew his calls for more weapons, like MiG fighter jets and S-300 surface-to-air missile systems, as well as a no-fly zone over Ukraine.
Peace agreement? Securing a deal with Moscow on ending the war is beginning to “sound more realistic,” Zelenskyy declared before the address. “It takes patience and work, in particular, [from] our representatives, our delegation in negotiations with the Russian Federation. It is difficult, but important, because any war ends in an agreement. Meetings continue, however, time is still needed for the decisions to be in Ukraine’s interests.”
NATO defense ministers are also gathering for a two-day meeting in Brussels to discuss the latest happenings in Ukraine. NATO Secretary-General Jens Stoltenberg noted that 100K U.S. troops in Europe were already on “heightened alert,” while 40K troops under NATO command were deployed to the alliance’s eastern flank. “NATO has a responsibility to ensure that this crisis does not escalate beyond Ukraine,” he said before the gathering, “and that’s also the reason we have increased our presence.”
Brink of default: Russia today faces an interest payment of $117M on two dollar-denominated bonds, and while it has the money to make the coupon, sanctions are hampering its ability to execute a transfer. Finance Minister Anton Siluanov has threatened to repay the loan in rubles if banks are unable to process the payment, but ratings agencies like Fitch have said that would constitute a “default.” This time around, analysts caution that the pending financial disruption would not come close to Moscow’s default in 1998 under Boris Yeltsin (it took the county six years to regain investment-grade status), and there is also a 30-day grace period before Russia would be assigned any default designation. (11 comments)
Today’s Economic Calendar
7:00 MBA Mortgage Applications
8:30 Retail Sales
8:30 Import/Export Prices
10:00 Business Inventories
10:00 NAHB Housing Market Index
10:00 Atlanta Fed’s Business Inflation Expectations
10:30 EIA Petroleum Inventories
2:00 PM FOMC Announcement
2:30 PM Chairman Press Conference
What else is happening…
Saudis to consider accepting Chinese yuan for oil sales.
Two Fox (FOX) journalists killed while covering war in Ukraine.
Head-to-head: Cathie Wood’s (ARKK) vs. Nasdaq 100 ETF (QQQ).
PayPal (PYPL) says cryptos will ‘redefine the financial world’ – CTech.
Mark Zuckerberg: NFTs coming to Instagram (FB) ‘in the near term.’
Snowflake (SNOW) touches 52-week low amid rise in cloud stocks.
Raskin withdraws from Federal Reserve Vice Chair nomination.
Travel and leisure stocks gain as vacations are still a go.
GM (GM) set to begin production on Cadillac’s first EV model.
Volatility watch: Nickel trading on LME will resume today.
—————
Good morning. Happy Tuesday.
The Asian/Pacific markets were mixed. Japan and the Philippines did well, but China and Hong Kong got crushed, and South Korea, India, Taiwan and Thailand did poorly too. Europe, Africa and the Middle East are mostly down. The UK, France, Germany, the UAE, Finland, Norway, Sweden, Saudi Arabia and the Czech Republic are weakest. Futures in the States point towards a positive open for the cash market.
————— Masterclass Overview –>> here —————
The dollar is down. Oil and copper are down. Gold and sivler are down. Bonds are up. Bitcoin is unchanged.
Stories/News from Seeking Alpha…
China in the mix
National Security Adviser Jake Sullivan and China’s top diplomat, Yang Jiechi, met for seven “intense” hours in Rome on Monday, as the U.S. grows concerned over Chinese involvement in the conflict in Ukraine. Reports suggest that Moscow asked China for surface-to-air missiles, drones and armored vehicles as the lingering invasion exhausts its resources. The Kremlin denied the reports, saying it has ample supplies, while a Chinese spokesman also rejected the “malicious” rumors as “disinformation” before the meeting.
Quote: “Should they provide military or other assistance, that of course violate sanctions or support the war effort, there will be significant consequences,” Press Secretary Jen Psaki told reporters. “In terms of what those specifics will look like, we would coordinate with our partners and allies to make that determination.”
Response: “China is not a party to the crisis, nor does it want sanctions to affect China,” Foreign Minister Wang Yi declared. “China has a right to safeguard its legitimate rights and interests.”
At the meeting, the White House also warned Beijing not to bail out strategic ally and trading partner Russia, with a pending default on the cards for the nation. “President Putin is being put in a position to make choices about where he is going to have to put his financial resources,” stated Deputy Treasury Secretary Wally Adeyemo. “They’re in a position where they are going to have to make choices about what debts they pay going forward and those choices will ultimately put him in a position about whether he continues the invasion.”
Market angle: Panic selling of Chinese equities has taken hold over the last couple of sessions as coronavirus cases continue to surge in the country, with Dongguan (the fifth-largest contributor to China’s GDP) now under lockdown. Stocks in Shanghai plunged 5% overnight and shares in Hong Kong sold off another 5.7%, while Beijing’s closeness to Moscow is not helping the situation. Investors are even staying away from the dip-buying opportunity despite Chinese shares being off 40% from a year ago levels. (16 comments)
Inflation all over
Inflationary pressures are being felt everywhere, from the production line to consumers’ pockets. For the second time in less than a week, Tesla (NASDAQ:TSLA) is raising prices in the U.S. and China to cope with the cost of raw materials. Prices have surged in recent months, from aluminum and palladium used in bodywork and catalytic converters to nickel and lithium that power EV batteries.
Quote: “Tesla & SpaceX are seeing significant recent inflation pressure in raw materials & logistics. And we are not alone,” Elon Musk tweeted earlier this week, before challenging Vladimir Putin to a duel over Ukraine.
The latest increases saw Tesla raise prices for all its American (and Chinese) models by 5%-10%. Its cheapest vehicle, the Model 3 Rear-Wheel-Drive, even went up $2,000 to $46,990. Last week, the company raised prices of its U.S. Model Y SUVs and Model 3 Long Range sedans and some China-made Model 3 and Model Y vehicles.
Supply chain complications: CNBC on Monday reported that Tesla bought “millions of euros worth of aluminum” from Rusal, the Russian metals giant founded by sanctioned oligarch Oleg Deripaska. The transactions go back to 2020, though there’s no indication that Rusal aluminum has been used in U.S. production. Its willingness to work with Russian suppliers is also not unusual. Almost all of the world’s biggest automakers buy from at least one tier-1 supplier in Russia, according to global supply chain research firm Interos. (5 comments)
Content policy
Facebook parent Meta (NASDAQ:FB) opened a can of worms last week after temporarily easing its hate speech policies. The social network allowed posts calling for violence against Russian soldiers, and even the death of Vladimir Putin or Belarus’ Alexander Lukashenko, in the context surrounding the invasion of Ukraine. The policy, which kept up related posts unless they included “method and location,” was only applied to users in Ukraine, Russia and surrounding countries, but has since been modified.
Clarification: Facebook is “narrowing the focus” of the guidance to make it “explicitly clear that it is never to be interpreted as condoning violence against Russians in general.” Users will also not be allowed to share a post that “calls for the death of a head of state” – likely a reference to Russian President Vladimir Putin.
“I want to be crystal clear: our policies are focused on protecting people’s rights to speech as an expression of self-defense in reaction to a military invasion of their country,” tweeted Meta President of Global Affairs Nick Clegg. “The fact is, if we applied our standard of content policies without any adjustments we would now be removing content from ordinary Ukrainians expressing their resistance and fury at the invading military forces, which would rightly be viewed as unacceptable.”
Flashback: Following the invasion of Ukraine, Facebook blocked Russian state media RT and Sputnik in Europe, as well as all advertising from Russian businesses. Emails also showed that Meta allowed praise of the far-right Azov battalion, which are accused of harboring neo-Nazi and white supremacist ideology. In response to Meta’s content policy decisions, Moscow closed off Facebook and Instagram for some 80M users across the country, while cracking down on other tech companies like Twitter (NYSE:TWTR). The violence still continues on the ground, with Russian forces shelling residential neighborhoods in Kyiv on Monday night as negotiators from the two countries prepared for a fresh round of ceasefire talks. (6 comments)
Raskin roadblock
In a pivotal moment for Democrats in the 50-50 Senate, Sen. Joe Manchin (D-WV) has revealed that he couldn’t support the nomination of Sarah Bloom Raskin, citing her progressive views of climate risks. “Her previous public statements have failed to satisfactorily address my concerns about the critical importance of financing an all-of-the-above energy policy to meet our nation’s critical energy needs,” he wrote on Twitter. Raskin was slated to become the Fed’s Vice Chairwoman of Supervision, or the government’s most influential overseer of the American banking system.
Commentary: “Unless there is a white knight hiding somewhere in the Republican caucus, it looks like Raskin’s nomination is effectively toast,” said Isaac Boltansky, director of policy research at brokerage firm BTIG.
The delay not only affects Raskin, but prolongs the confirmation process for Jerome Powell’s second term, as well as Lisa Cook and Philip Jefferson for Fed governor seats. Democrats had hoped to confirm all of them as a package, but Manchin’s decision could push the Biden administration to ditch Raskin. The GOP had previously flagged concerns about her business dealings, and their absence from a vote in February meant the necessary quorum was not there to confirm the nominees.
Go deeper: After leaving her role as Deputy Treasury Secretary, Raskin went on to lobby Kansas City Fed President Esther George in 2017 on behalf of fintech Reserve Trust, looking to score a special account at the central bank (it previously denied access to its payments system). Following her personal intervention, the Kansas City Fed approved the company’s second request in 2018, but it maintains the reversal was not the result of Raskin’s call. Having a “master account” still remains Reserve Trust’s largest selling point to customers and it even advertises as such on the homepage of its website. (5 comments)
Today’s Economic Calendar
FOMC meeting begins
8:30 Producer Price Index
8:30 Empire State Mfg Survey
8:55 Redbook Chain Store Sales
4:00 PM Treasury International Capital
What else is happening…
After leading Disney (DIS), Bob Iger steps into the Metaverse.
Governors call for a pause on the federal gasoline tax.
Chevron (CVX) set to trade Venezuelan oil if U.S. relaxes sanctions.
Lyft (LYFT) follows Uber (UBER) in adding fuel surcharge to fares.
‘We feel really good’: AT&T (T) touts new ‘safe’ dividend.
Trump SPAC (DWAC) continues to sink after launch of Truth Social.
Foxconn (OTC:FXCOF) in talks to build $9B factory in Saudi Arabia.
Germany to replace ageing Tornados with Lockheed (LMT) F-35s.
Citigroup (C) expands exit from Russia to other businesses.
—————
Good morning. Happy Monday.
The Asian/Pacific markets were mixed. Japan, India and Australia did well; China, Hong Kong and the Philippines were very weak. Europe, Africa and the Middle East currently lean up. France, Turkey, Germany, Finland, Italy, Austria and Sweden are up; Poland, the UAE, South Africa and Saudi Arabia are down. Futures in the States point towards a positive open for the cash market.
————— Masterclass Overview –>> here —————
The dollar is down. Oil and copper are down. Gold and sivler are down. Bonds are down. Bitcoin is unchanged.
Stories/News from Seeking Alpha…
Russian default?
Russia is due to make a key interest rate payment on its foreign debt on Wednesday, but with sanctions strangling its economy, Moscow is threatening to repay international bondholders in rubles. Finance Minister Anton Siluanov pointed to measures that have frozen nearly half of Russia’s $643B in foreign reserves, as well as the heavy strain on its financial system. Moscow is specifically set to make a combined $117M in interest payments on two dollar-denominated bonds – which are currently trading at $0.20 on the dollar – though neither of them are allowed to be repaid in rubles.
Snapshot: It will be up to the ratings agencies to consider if this will be deemed a default, given the numerous technical factors that go into the classification. Russia also has a 30-day grace period after the coupon payments come due, so it will be at least another few weeks before a formal default could be declared. The ruble has already collapsed by more than 40% since the invasion of Ukraine on Feb. 24, and this time around there won’t be any help from the West.
“In terms of servicing debt obligations, I can say that no longer we think of Russian default as improbable event,” said IMF Director Kristalina Georgieva. “Russia has the money to service its debt, but cannot access it.” A “deep recession” is in store for the country, she added, though it’s unlikely to trigger a global financial crisis as banks’ global exposure to Russia is “definitely not systemically relevant.”
On the ground: A Russian airstrike on a Ukrainian military training center just 10 miles from the Polish border killed 35 people early Sunday. Following the attack, the U.S. warned of full NATO response if Poland is hit, while American journalist Brent Renaud was shot dead in a northwest suburb of Kyiv. Fighting has intensified around the capital over the past week, while Russian forces continue to bombard cities across the country.
Treasury trouble
The rout in Treasuries is picking up speed as inflationary fears spur forecasts for an abrupt shift towards aggressive monetary tightening. The 10-year yield climbed 9 basis points overnight to 2.09%, touching a level last seen in July 2019. That’s ahead of start of the FOMC’s March meeting tomorrow, where interest rates are expected to rise by 25 bps and Jay Powell will be drilled on the pace of the coming tightening cycle following the release of the latest “dot plot.”
Bigger picture: After Russia’s invasion of Ukraine in late February, traders poured into safe-haven assets like Treasuries, but that didn’t last long. Markets are now pricing in rate hikes at each of the Fed’s subsequent meetings for 2022, meaning another six increases this year. Government bonds in Europe were also stung last week after the ECB cut its growth forecasts and raised inflation predictions against the backdrop of the war in Ukraine.
“It’s a mixture of positioning and illiquidity,” noted Eugene Leow, rates strategist at DBS Bank in Singapore. “It makes sense to turn bearish on Treasuries based on fundamentals and what the Fed is communicating.”
Go deeper: Hedge funds are expanding bearish wagers on the Treasury market, according to the Commodity Futures Trading Commission, with net short bets across the curve hitting the highest level since April 2020. (5 comments)
Fuel surcharges
The recent surge in gas prices is prompting Uber (NYSE:UBER) to add a “temporary fuel surcharge” to fares across the country, which will be in effect “for the next 60 days.” The fees will go directly to drivers and couriers, who are responsible for paying for the gas they use. The new pricing is set to begin Wednesday, though Uber will “continue to monitor gas prices and may make additional changes.”
By the numbers: “Rides customers will pay a surcharge of either $0.45 or $0.55 on each Uber trip, and Eats customers will pay either $0.35 or $0.45 on each Uber Eats order, depending on their location,” Uber wrote in a blog post.
The ride-hailing giant was also quick to highlight the benefits of switching to an electric vehicle. Drivers who drive BEVs receive extra incentives, such as $1 more per trip up to $4,000 annually through Uber’s Green Future Program. Moreover, U.S. drivers are eligible to receive $6,000 off the Nissan LEAF, discounted pricing for other EVs, as well as incentives related to home charging installation.
Prices at the pump: The national average for a gallon of gas currently stands at $4.32 per gallon, according to data from AAA, compared with nearly $2.85 a year ago. In California, the largest market for gig work in the U.S., the price of gas is now $5.74 per gallon on average. (7 comments)
Supply chain risk
COVID restrictions have come to an end in many parts of the world as governments establish “live with the virus” policies, but one nation stands out in this regard: China. The country has continued to pursue a “zero-COVID” strategy, imposing strict lockdowns and containment measures to prevent viral transmission among its population. However, a growing wave of local cases is seeing authorities double down on the policy and that’s getting investors nervous about the economy.
What happened? China just placed the 17.5M residents of Shenzhen into lockdown for at least a week, which will be accompanied by three rounds of city-wide testing. All bus and subway systems were closed, while businesses, barring those that provide essential services, have been shuttered. The decision resulted in Foxconn (OTC:FXCOF), a key Apple (NASDAQ:AAPL) supplier, to halt production as the virus spreads across the technology hub. Shenzhen also features the headquarters of tech giants Huawei, Tencent (OTCPK:TCEHY) and EV maker BYD (OTCPK:BYDDY).
Similar measures are impacting Hong Kong, Shanghai and other regions as a spike in coronavirus infections leads to a worsening outbreak. The Hang Seng Index (HSI) plunged 5% overnight, shares in Shanghai dropped more than 2%, while the bad news keeps piling up as U.S. officials said Russia asked China for military assistance for its war in Ukraine. The developments could also compound supply chain disruptions that have contributed to a rise in global inflation.
Analyst commentary: “The COVID situation in China has deteriorated at an alarming pace over the past week, but abandoning zero-COVID now could be perceived as conceding that the strategy did not work in the first place,” said Ting Lu, chief China economist at Nomura. “With the much worsening pandemic and Beijing’s resolution in maintaining its [zero-COVID strategy], we believe China’s ‘around 5.5%’ GDP growth target this year is becoming increasingly unrealistic.” (22 comments)
Today’s Economic Calendar
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