Good morning. Happy Friday.
The Asian/Pacific markets did great. Hong Kong, South Korea, India, Taiwan, Australia, Indonesia and the Philippines posted solid gains. Europe, Africa and the Middle East currently lean up. France, Germany, South Africa, Finland, Switzerland and Norway are up; Portugal, Hungary and Poland are down. Futures in the States point towards a moderate gap up open for the cash market.
————— VIDEO: Comparing Market Tops —————
The dollar is down. Oil is down; copper is up. Gold and silver are up. Bonds are up. Bitcoin is up.
Stories/News from Seeking Alpha…
Windfall tax
Check out original Seeking Alpha show The Weekend Bite! This week we break down a hidden opportunity in the crypto sector, and give 3 stock picks for the current market environment. With Mike Fay, Founder of Blockchain Reaction, and Steven Cress, Head of Quantitative at Seeking Alpha.
The UK introduced a 25% windfall oil and gas tax on Thursday. Prime Minister Boris Johnson’s Conservative government became the first to put into action an argument that the energy industry has profited too much from a surge in commodity prices that are stoking inflation. About 5 billion pounds is expected to be raised, which will finance a one-time payment of 650 pounds to about 8M of the poorest households.
Statements: “The oil and gas sector is making extraordinary profits,” Chancellor of the Exchequer Rishi Sunak said in Parliament. “Not as the result of recent changes to risk taking or innovation or efficiency, but as the result of surging global commodity prices.”
The tax “sends the wrong signal to the whole sector, against a backdrop of rising business taxation elsewhere,” Rain Newton-Smith, chief economist at the Confederation of British Industry, told the BBC.
How it works: Details of the final legislation remain vague. There will be a sunset clause; however, the clause will be price dependent, with no specified date. There will be an investment tax incentive; however, the incentive appears lower than existing incentives. And there may or may not be a “baseline” profitability measure which determines the quantum of the “windfall” profits. Furthermore, investors are left guessing at exactly who will pay the tax.
The UK has a somewhat complicated tax and royalty regime for North Sea producers. All UK resident companies pay corporate income tax on worldwide pre-tax profits. If BP (BP) earns a profit refining oil in Whiting Indiana, it will pay tax on those profits to the UK Treasury. However, the UK also charges North Sea producers a “ring fence” corporate tax, a “supplementary charge”, a “petroleum revenue tax” and a “value added tax.” Deloitte estimates the effective “government take” on pre-tax profits for UK North Sea producers at between 62% and 81%.
And although the Chancellor did not specify who will pay the incremental 25% tax, it’s likely to be imposed on UK producers, rather than UK-domiciled entities alone. That is to say, BP (BP) is unlikely to be charged a windfall tax on profits earned in Indiana, but Total (TTE) will bear the higher rates on UK North Sea production.
Start of a trend? Could the UK’s decision spur movements in other countries for similar taxes? The Wall Street Journal described the decision as “Boris Johnson Goes Bernie Sanders.” Undoubtedly, proponents of windfall taxes will point to a right-wing government embracing such policies as a starting point.
President Joe Biden has called for eliminating tax breaks for oil and fossil fuel companies, but a windfall tax seems remote. While it is a literal Conservative Party, the UK Parliamentary majority has a track record of tax moves that U.S. Republicans would consider as extremely left-wing. In 2011 Tory Chancellor George Osborne put a “supplementary charge” on oil and gas production to the tune of 2 billion pounds.
Energy tax increases “would disincentivize additional production, decrease supply, and subsequently increase energy costs for families at a time of historic inflation and record-high gasoline prices,” Anne Bradbury, CEO of the American Exploration and Production Council, told the Houston Chronicle. “For these reasons, members of both parties have consistently rejected attempts to target energy producers with new taxes and fees.” (90 comments)
Elon sued
A Twitter (TWTR) investor has sued the company and billionaire Elon Musk, accusing the company’s would-be acquirer of manipulating the market in order to reduce the transaction’s $44B price tag.
William Heresniak is charging Musk with deliberately making market-moving statements in order to drive the stock price lower – notably Musk’s pronouncement a few weeks ago that the deal was “on hold” until he saw more data about the nature of fake/spam accounts on the platform. (91 comments)
Peso tether
Tether (USDT-USD) launched a new stablecoin pegged to the Mexican peso, marking the stablecoin issuer’s entry into Latin America. MXN₮ tokens will be supported initially in the Ethereum (ETH-USD), TRON (TRX-USD) and Ploygon (MATIC-USD) blockchains, Tether said. Tether’s expansion into Mexico prompts a “unique opportunity” thanks to the multibillion-dollar flow of remittances into the country, as well as the difficulties involved with internal money transfers, the release said.
Some “40% of Mexican companies are looking to adopt blockchain and cryptocurrencies in some form making Mexico a prime location for the next Latin American crypto hub,” Tether said, citing data from crypto payments firm TripleA . (2 comments)
Lower offer
Almost one in five (19.1%) of home sellers have lowered their price during the four-week period ended May 22, the highest rate since October 2019, suggesting homebuyers are starting to reject historically high prices, according to a report from real estate brokerage Redfin.
The median home sale price jumped 16% Y/Y to a record $400K, as the supply-side of the housing market remains tight, Redfin noted, citing data from more than 400 U.S. metro cities.
Furthermore, pending home sales fell 5.4% Y/Y. And new listings of homes for sale were also down 0.9% from a year ago. Active listings (the number of homes listed for sale at any point during the period) fell 13% Y/Y – the smallest decline since April 2020, Redfin said. (86 comments)
Today’s Economic Calendar
8:30 International Trade in Goods (Advance)
8:30 Personal Income and Outlays
8:30 Retail Inventories (Advance)
8:30 Wholesale Inventories (Advance)
10:00 Consumer Sentiment
1:00 PM Baker-Hughes Rig Count
What else is happening…
GameStop (GME) rallies again, meme traders vindicated after SEC slaps fine on broker-dealer.
Broadcom (AVGO) confirms deal to purchase VMware (VMW) for $61B in cash, stock.
Cathie Wood jumps back into Nvidia (NVDA), scooping up nearly 250K shares.
Costco (COST) keeps churning out double-digit sales growth.
Aurora Cannabis (ACB) down following $125M bought deal financing.
Nitrogen prices plummet 30%, sending fertilizer makers lower.
Chevron (CVX) shares hit all-time high; unveils streamlined corporate structure.
Gap (GPS) shares crash on big earnings miss, slashed sales guidance.
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Good morning. Happy Thursday.
The Asian/Pacific markets were mixed. China, India, Thailand and the Philippines did well; Taiwan, Australia and New Zealand were weak. Europe, Africa and the Middle East are currently doing well. France, Turkey, Germany, Greece, South Africa, Finland, Norway, Spain, Portugal and Israel are up. Hungary is down big. Futures in the States point towards a moderate gap up open for the cash market.
————— VIDEO: Comparing Market Tops —————
The dollar is unchanged. Oil is up; copper is down. Gold and silver are down. Bonds are down. Bitcoin is down.
Stories/News from Seeking Alpha…
An emboldened Fed
The Federal Reserve minutes of the May meeting gave investors a pretty clear roadmap for the summer. The minutes, out Wednesday afternoon, painted a picture of an FOMC strongly focused on inflation, with rate hikes of 50 basis points in the June and July meetings. But some members also indicated that price pressures may not be getting worse.
Stocks rally: The market appeared to take the minutes as more dovish than hawkish. Half-point hikes were already priced in for the next couple of meetings and there was no mention of 75-basis-point moves that had become the base case for a few Wall Street banks at the end of April.
The S&P 500 (SPY) rose about 1% to finish out the session and S&P futures (SPX) are up again this morning. Treasury yields (SHY) (TBT) (TLT) continue to creep lower today.
Data dependence: “We think that after the July meeting the Fed is likely to become more ‘data dependent’ with regard to rate hikes, which essentially means that the policy path after July will depend upon the trajectory of inflation and progress toward correcting the supply/demand imbalances in the labor market,” BlackRock fixed income strategist Bob Miller said.
There are already signs that the U.S. economy is weakening. Of the last 19 major economic indicators, 13 have missed economists’ expectations, Nomura noted. The question is whether that will bring about a Fed pause, which stock bulls are hoping for, or will it stiffen the central bank’s resolve.
If there are signs of falling inflation and improved labor market imbalances “the Fed gains some breathing room and can shift policy adjustments to 25 bps increments, while still pursuing something in the estimated range of neutral,” Miller said.
Pantheon Macro economist Ian Shepherdson says the door is still open to a smaller hike in July given the minutes show policymakers “appear utterly oblivious … to the rollover in housing demand, which has been evident in the mortgage applications data since the turn of the year.” That will change in the June minutes, he added.
But Nomura strategist Charlie McElligott says those hoping for a Fed pause will likely be disappointed, noting Fed chief Powell’s willingness to endure “some pain” in getting price stability.
“I think that if anything, the Fed is seeing the results of their (financial conditions index) tightening campaign through these broad measures ‘slowing’ and could actually become incrementally ’emboldened’ to keep PUSHING on their hiking path until they see the ‘whites of the eyes’ of sustainably lower inflation as opposed to the notion of ‘pausing and hoping’ for the inflation data to move lower – a view that is increasing held by some in the market,” he said. (7 comments)
Elon equity
Twitter (TWTR) is higher premarket after a newly amended ownership filing from Elon Musk stating that he’s raised his aggregate equity commitment for a proposed $44B takeover of the company.
Musk had previously received a commitment letter for up to $12.5B in margin loans. On May 4, according to the SEC filing, Musk let some of those commitments expire, committing another $6.25B in equity financing. On Tuesday, he let the rest of them expire with commitments for another $6.25B in equity financing.
That brings the aggregate principal amount of the equity commitment in the $44B deal to $33.5B. Tesla stock (TSLA), which is ultimately backing Musk’s equity commitments (and backed the margin loans) for the Twitter deal, is little changed premarket. (84 comments)
GameStop déjà vu
GameStop echoed the meme heyday and soared more than 29% on Wednesday to record its best session of the year. The stock is down about 4% premarket.
The big gain coincided with an increase in online buzz about another short squeeze setting up on the stock. Volume on GameStop (GME) was over 9.9M shares, which was more than double normal trading activity.
According to financial analytics firm ORTEX, short interest on the stock grew to its highest level in over a year prior to Wednesday’s open, while the cost to borrow surged as well. These metrics attracted significant interest on Twitter, Stocktwits, and more as eager meme stock investors eye another opportunity to attack short positions. The company reports earnings next week. (33 comments)
Nvidia issues
Nvidia (NVDA) shares dropped sharply in extended trading after the chipmaker reported strong first-quarter results but issued weak guidance for the upcoming quarter.
However, the company said it expects second-quarter sales to be $8.1B, well below the $8.44B analysts were expecting. Nvidia attributed the shortfall to roughly a $500M decline due to Russia’s invasion of Ukraine and COVID-related lockdowns in China. (255 comments)
Today’s Economic Calendar
8:30 GDP Q1
8:30 Initial Jobless Claims
8:30 Corporate profits
10:00 Pending Home Sales
10:30 EIA Natural Gas Inventory
11:00 Kansas City Fed Mfg Survey
1:00 PM Results of $42B, 7-Year Note Auction
4:30 PM Fed Balance Sheet
What else is happening…
Snowflake (SNOW) plunges as Q1 earnings miss expectations, cloud software peers fall.
The least affordable housing market in 40 years is rolling over; is it a systemic risk?.
‘Big Short’ investor Michael Burry appears to compare current market to 2008 crash.
Meta Platforms (FB) picks Azure to be strategic cloud provider.
Williams-Sonoma (WSM) soars after comparable sales, margins top estimates.
Actively managed ETFs saw their 25th straight month of net inflows in April.
Baidu (BIDU) Non-GAAP EPADS of $1.77 beats by $0.94, revenue of $4.48B beats by $320M.
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Good morning. Happy Wednesday.
The Asian/Pacific markets were mixed. China, South Korea and Taiwan posted gains; India and New Zealand were weak. Europe, Africa and the Middle East are currently mixed. Turkey, Greece, Norway, Spain, Austria and Saudi Arabia are up; South Africa, Hungary, Israel and Sweden are down. Futures in the States point towards a down open for the cash market.
————— VIDEO: State of the Market —————
The dollar is up. Oil is up; copper is down. Gold and silver are down. Bonds are up. Bitcoin is down.
Stories/News from Seeking Alpha…
Horror in Texas
A mass shooting at the Robb Elementary School in Uvalde, Texas, has rocked the nation, with at least 19 children and two adults slaughtered during the attack. The 18-year-old gunman, Salvador Ramos, shot his grandmother before heading to the school with a handgun and possibly a rifle that he had purchased on his birthday, hinting on social media that “the kids should watch out” ahead of the attack. The gun control debate has resumed following the massacre, with efforts to change any U.S. gun policies waxing and waning in Congress in the years since Sandy Hook.
Statement: “As a nation, we have to ask when in God’s name are we going to stand up to the gun lobby. When in God’s name we do what we all know in our gut needs to be done,” President Biden said in a televised speech. “I am sick and tired of it. We have to act. And don’t tell me we can’t have an impact on this carnage. I spent my career as a senator and vice president working to pass common sense gun laws. We can’t prevent every tragedy, but we know they work and have positive impact. The gun manufacturers spent two decades aggressively marketing assault weapons, which make them the most and largest profit. For God’s sake, we have to have the courage to stand up to the industry. It’s time to turn this pain into action.”
While Democrats have repeatedly tried to enact new gun-control measures, like universal background checks and a renewed assault weapons ban, the restrictions have failed to make their way into legislation. Last year, the House passed a pair of bills to expand background checks on firearms purchases and close the loophole for private and online sales, though it wasn’t able to clear the 60-vote filibuster threshold in the evenly divided Senate. Strong Republican opposition has derailed the measures, saying the laws would do little to prevent most of these tragedies and would compromise the Constitutional right of Americans to bear arms. Instead, they advocate for more security on school grounds and better tools to deal with a growing mental health crisis, as well as arming more law-abiding citizens and preventing guns from getting into the hands of criminals.
On the move: Fear of gun control sent firearm shares higher in the post-market session on Tuesday, with some of them since paring their gains. Related stocks include Smith & Wesson (NASDAQ:SWBI), Sturm, Ruger (NYSE:RGR), Vista Outdoor (NYSE:VSTO), Sportsman’s Warehouse (NASDAQ:SPWH), AMMO (POWW) and Olin Corporation (OLN). (156 comments)
Fed minutes
Any Fed talk these days is being put under the microscope as the central bank embarks on a tightening cycle in its fight against inflation. It was only three weeks ago that the FOMC hiked rates by 50 bps for the first time since 2000, meaning minutes from the May meeting will be released later today at 2:00 p.m. ET. Investors will particularly be watching for any new details and discussions from the officials, which have pledged to raise borrowing costs until it has fully tamed inflation.
On watch: References to “financial conditions” and changed language surrounding the projected path of inflation and risks to the Fed’s forecasts. The speed and extent of monetary policy tightening, as well as potential sales of mortgage-backed securities and the shrinking of the central bank’s balance sheet. Meanwhile, Fed Chair Jerome Powell has previously used the words “soft” and “softish landing” when referring to engineering the way out of the current inflation situation, but last week he referenced a “bumpy landing” that could lead to “some pain.”
A series of 50-basis-point rate hikes are now expected over the next several months, triggering fears that the increases could send the world’s largest economy into recession. Cooling signals were on full display on Tuesday as new homes sales dropped almost 17% M/M in April due to rising mortgage rates and property prices. It’s also making markets a lot more volatile, with the uncertainty translating into outsized losses and rally attempts over on Wall Street.
Commentary: “A slowing economy doesn’t mean that the Fed should shift from being hawkish to dovish, but it does raise the question of how much a given level of rates causes activity to slow,” noted Standard Chartered strategist Steve Englander. “If the economy is already below potential and is responding to rates of three to six months ago, the slowdown has further to go. The path of rate hikes could be flattened while still putting downward pressure on demand.” (2 comments)
Where’s the beef?
Shares of Wendy’s (WEN) jumped 15% in after-hours trading on Tuesday after its largest shareholder Trian proposed a potential acquisition of the fast-food chain. Trian Partners, which is run by famed billionaire investor Nelson Peltz, owns a total of 41.6M shares in the company, or a 19.4% stake. Other potential strategic moves could include a business combination (such as a merger, consolidation, tender offer, etc.) or a transaction that would result in the acquisition of control of the company.
Quote: “Wendy’s was one of America’s most beloved brands, but the business had lost its way after the passing of its founder Dave Thomas,” according to a listing on Trian’s portfolio page. “Now the largest shareholder with three board seats, Trian has helped implement an operational turnaround focused on improving and growing the core Wendy’s brand.”
Wendy’s will “carefully” review any proposal submitted by Trian, with the goal of “maximizing value for all stockholders.” The company’s global same-store sales grew 2.4% in the first quarter, but net income fell 10% to $37.4M, or $0.17 per share. It has also recently tried to drive traffic by enhancing its breakfast menu offerings and increasing the number of its locations, but shares have stumbled 32% this year, heavily trailing rivals McDonald’s (MCD) and Burger King (QSR).
Long history: Trian and Peltz have been Wendy’s investors since 2005 and pushed the company to divest the Tim Hortons brand in 2008. Shortly thereafter, Triarc Cos., the investment arm of Peltz, purchased Wendy’s for $2.2B, combining the hamburger chain with Arby’s. In 2011, Wendy’s sold the majority of Arby’s to a private equity firm for $130M, and since then, Trian and Peltz have attempted to implement several operational turnarounds of the core Wendy’s brand. (8 comments)
Russian default
The U.S. Treasury Department does not plan to renew a license that allows Russia to pay its debtholders through American banks, almost guaranteeing the first Russian foreign debt default since the Bolshevik Revolution. Up until now, the Kremlin had been using JPMorgan (JPM) and Citigroup (C) as channels to pay its obligations, but the provision that allows it to do so will expire at midnight. Note that Russia defaulted on its domestic debts in 1998, which led to a wave of inflation and a devalued ruble, but the economy was able to recover quickly due to rising oil prices and international aid.
Snapshot: Institutional investors carrying Russian debt likely sold their holdings before tonight’s deadline, according to attorney Jay Auslander, who has previously litigated similar crises like the one in Argentina. Entities that are still holding the bonds are either distressed debt investors or those willing to litigate things in court over the next several years. Russia has also prepaid its two bonds that are due this month, so expect a default around late July, when the grace period for the bonds expires.
Some don’t understand the strategy here as sanctions already prevent Russia from borrowing in international markets. Moreover, much of the economic pain that a default can bring to a nation’s financial sector has already happened in Russia and it appears that the only ones being hurt in this situation would be U.S. bondholders. Others point out that a sovereign default could elevate Moscow’s borrowing costs, putting pressure on its banking system and hurting economic growth in the long run.
Treasury Secretary Janet Yellen: “If Russia is unable to find a way to make these payments, and they technically default on their debt, I don’t think that really represents a significant change in Russia’s situation,” she told reporters last week at a G7 finance ministers meeting. “They’re already cut off from global capital markets, and that would continue.”
Today’s Economic Calendar
7:00 MBA Mortgage Applications
8:30 Durable Goods
10:00 State Street Investor Confidence Index
10:30 EIA Petroleum Inventories
11:00 Survey of Business Uncertainty
11:30 Results of $22B, 2-Year FRN Auction
12:15 PM Fed’s Brainard Speech
1:00 PM Results of $48B, 5-Year Note Auction
2:00 PM FOMC Minutes
What else is happening…
Ray Dalio: We’re headed into a period like the 70s, so buy inflation-hedge assets.
Coinbase (COIN) becomes first cryptocurrency firm to enter Fortune 500 list.
Microsoft (MSFT) pushes further into the metaverse at annual Build developer.
Alibaba (BABA), Baidu (BIDU) drop as SEC says ‘significant audit issues remain.’
M&A: Oracle (ORCL) expected to win EU approval for Cerner (CERN) deal.
Nordstrom (JWN) soars after raising guidance in retail sector shocker.
Best Buy (BBY) rallies after earnings to skip past retail sector slump.
Oatly (OTLY) banks on new management to spark a turnaround.
McDonald’s (MCD) said expected to win proxy fight with Carl Icahn.
Low income countries: Pfizer (PFE) to provide medicines at not-for-profit prices.
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Good morning. Happy Tuesday.
The Asian/Pacific markets suffered big losses. Japan, China, Hong Kong, South Korea, Taiwan and Philippines each dropped more than 1%. Indonesia did well. Europe, Africa and the Middle East currently lean down. France, Germany, the UAE, South Africa, the Netherlands and Israel are down; Greece is up. Futures in the States point towards a relatively big gap down open for the cash market.
————— VIDEO: State of the Market —————
The dollar is unchanged. Oil is up; copper is down. Gold and silver are up. Bonds are up. Bitcoin is down.
Stories/News from Seeking Alpha…
Snap warning
Stock markets are set to renew a selloff this morning as a grim forecast from Snapchat owner Snap (SNAP) gave investors another excuse to shed tech shares. The company warned of a macro environment that “deteriorated further and faster than we anticipated,” saying it was unlikely to meet its (already conservative) revenue and profit guidance for Q2. Nasdaq futures are feeling the most pressure, down nearly 2%, while contracts linked to the S&P and Dow Jones slipped 1.2% and 0.8%, respectively.
Commentary: “$SNAP down 52% YTD before this announcement,” tweeted Stephanie Link, Chief Investment Strategist at Hightower Advisors. “Now another 25%? Why Price/Sales valuations are impossible metrics.”
Remember, Snap only reported earnings a month ago, meaning that the economic landscape appears to have changed drastically over the last several weeks. The firm will also slow hiring and postpone some planned staff additions until next year, according to an internal memo, while evaluating the remainder of its 2022 budget to look for cost savings. The latest outlook additionally pummeled digital advertising stocks, including shares of Meta Platforms (FB), Pinterest (PINS) and The Trade Desk (TTD).
Next stop: “These are pretty binary markets at the moment,” explained Deutsche Bank’s Jim Reid. “If the US doesn’t fall into recession over the next 3-6 months then it’s easy to see markets rallying over this period. However if it does, the correction will likely have further to run and go beyond the average recession sell-off (that we were close to at the lows last week) given the rich starting valuations.” (6 comments)
Future of globalization?
The latest gathering of the world’s political and business elite, plus the usual smattering of celebrities, is taking place this week at the Swiss Alpine resort of Davos. While the annual meeting of the World Economic Forum is usually broadcast in January, it was delayed multiple times this year due to COVID-19. As a result, headlines aren’t making as much of their usual waves, but then again, many have already dismissed the rich and powerful idealists that gave rise to the terms “Davos Man” and “Davos Woman.”
Snapshot: The program this year will focus on six thematic pillars, including fostering global and regional cooperation, securing the economic recovery and shaping a new era of growth, building healthy and equitable societies, safeguarding climate, food and nature, driving industry transformation, and harnessing the power of the Fourth Industrial Revolution. “Global challenges need global solutions,” said Børge Brende, President of the WEF. “We’re not seeing these global solutions and that’s where we have to push at Davos.”
However, based on recent corporate earnings calls and investor conferences, things appear to be moving in the opposite direction. Mentions of nearshoring, onshoring and reshoring were at their highest level since at least 2005, according to data provider Sentieo, with a deglobalization approach at work amid a strong shift towards nationalism and protectionism. Geopolitical threats and pandemic supply chain shortages have exacerbated those forces, but the folks at Davos seem to be warning of other unintended fallout.
Quotes: “If a meaningful part of decades of productivity gains driven by globalization was reversed in a short period of time, this would drive inflation up and result in a major, protracted recession,” declared Airbus (OTCPK:EADSY) CFO Dominik Asam. “Companies are saying I need my production closer to my customers,” added Blackstone (BX) President Jonathan Gray. “Tension between the U.S. and China was accelerated by the pandemic and now this invasion of Ukraine by Russia – all these trends are raising serious concerns about a decoupling world,” noted José Manuel Barroso, non-executive chairman of Goldman Sachs International (GS). (2 comments)
Crypto risks
The European Central Bank is ramping up its warnings about the crypto market, deflating further sentiment that has plagued the industry over the past six months. Flagship crypto Bitcoin (BTC-USD) slid another 5% to under the $29,000-level overnight, adding to its 57% loss seen since a high of $67,802 recorded back in November. The latest warnings came as part of the ECB’s Financial Stability Review following similar caution expressed by regulators in the U.K. and the U.S.
Excerpt: “Investors have been able to handle the €1.3T fall in the market capitalization of unbacked crypto assets since November 2021 without any financial stability risks being incurred,” the ECB said in its report. “However, at this rate, a point will be reached where unbacked crypto assets represent a risk to financial stability. Given the speed of crypto developments and the increasing risks, it is important to bring crypto assets into the regulatory perimeter and under supervision as a matter of urgency.”
Earlier this week, ECB president Christine Lagarde told Dutch television that crypto assets were “worth nothing, based on nothing and there is no underlying asset to act as an anchor of safety.” Last month, ECB executive Fabio Panetta, also compared the sector to a Ponzi scheme, calling for a regulatory crackdown to prevent a lawless frenzy of risk-taking. “Such dynamics can only continue as long as a growing number of investors believe that prices will continue to increase and that there can be fiat value unbacked by any stream of revenue or guarantee. Until the enthusiasm vanishes and the bubble bursts.”
Go deeper: Despite skepticism about decentralized currency and stablecoins, the ECB is still interested in rolling out a digital euro, otherwise known as a central bank digital currency. In the case of CBDCs, the government is the counterparty and takes liability for the money, “so the central bank will be behind it and I think that is vastly different from any of those things,” Lagarde noted. The central bank hopes to build a CBDC prototype for testing by 2023, before deciding whether to launch it three years later. (13 comments)
Almost anywhere
China’s zero-COVID policy is having many knock-on effects across its economy, as well as for multinationals located in the country. Airbnb (ABNB) is shutting down its domestic operations from the summer, halting its rental home offerings and experience listings. Other Western firms like LinkedIn (MSFT) and Uber (UBER) have all pulled out of China in recent years, citing a challenging regulatory environment and technology crackdowns.
Backdrop: Prior to the coronavirus pandemic, Airbnb had struggled to carve out a place in the market as local competitors like Tujia, Meituan and Mayi challenged its inroads into the massive market. It even held talks to acquire key competitor Xiaozhu, but things did not materialize. Airbnb logged around 25M stays in mainland China since launching in 2016, though total bookings have only accounted for about 1% of the internet-based travel provider’s overall revenue.
“We will continue to incur significant expenses to operate our business in China, and we may never achieve profitability or sizable supply penetration in that market,” stated the company’s most recent 10-K filing, adding that the country was not of significant importance to its overall business.
Outlook: Despite its withdrawal from the Chinese market, Airbnb will by no means ignore Chinese travelers or other outbound traffic. “People go to China but primarily they travel to China and they go to other communities, especially around Asia,” CEO Brian Chesky said on an earnings call earlier this month. According to data provider Skift, Chinese outbound tourism spend even topped $277B in 2019 (before the pandemic), which was $120B more than U.S. expenditure in the same year. (3 comments)
Today’s Economic Calendar
9:45 PMI Composite Flash
10:00 New Home Sales
10:00 Richmond Fed Mfg.
12:20 PM Jerome Powell Speech
1:00 PM Results of $47B, 2-Year Note Auction
1:00 PM Money Supply
What else is happening…
Buy Now, Pay Later: Klarna (KLAR) turns to layoffs to cut costs.
Zoom (ZM) pops after beating estimates, raising full-year guidance.
GameStop (GME) rallies after launching wallet for crypto and NFTs.
Musk continues to put pressure on Twitter (TWTR): ‘Bots very suspicious.’
South Korean police request to freeze assets of Luna Foundation Guard.
Report: Broadcom (AVGO) may pay around $140/share for VMware (VMW).
In a videogaming first, Activision (ATVI) worker group unionizes.
Starbucks (SBUX) exits Russia after suspending its business in March.
Shareholders vote: DiDi Global (DIDI) takes next step to delist from NYSE.
JPMorgan Chase (JPM) boosts net interest income guidance as rates rise.
Bank of America CEO: Recession and contraction risks ‘get overquoted.’
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Good morning. Happy Monday. Hope you had a good weekend.
The Asian/Pacific markets leaned down. Japan and Thailand did well; Hong Kong, Indonesia, Singapore and the Philippines were weak. Europe, Africa and the Middle East currently lean up. The UK, Poland, Germany, South Africa, Hungary, Spain, the Netherlands, Portugal, Israel and Austria are up; the UAE, Russia, Saudi Arabia and the Czech Republic are down. Futures in the States point towards a gap up open for the cash market.
————— VIDEO: State of the Market —————
The dollar is down. Oil and copper are up. Gold and silver are up. Bonds are down. Bitcoin is up.
Stories/News from Seeking Alpha…
A new framework
Looking to boost its economic profile in Asia and create another counter-balance to China, President Biden has unveiled a new U.S. strategy called the Indo-Pacific Economic Framework. Joining the deal are a dozen initial partners, including Australia, Brunei, India, Indonesia, Japan, Malaysia, New Zealand, the Philippines, Singapore, South Korea, Thailand, and Vietnam. Together, the countries represent 40% of global GDP and “some of the world’s fastest-growing, most dynamic economies.”
Fine print: The IPEF is not structured as a free trade deal, but is rather a framework that is being called a “21st-century economic arrangement.” As a result, most of its components will likely not have to go through Congress, where there is little appetite for new trade deals. Many still remember the Trans-Pacific Partnership, which was scrapped by the Trump administration, only to see the remaining signatories go on to ratify the agreement (now known as CPTPP) without the United States. China also magnified its influence in the area with the Regional Comprehensive Economic Partnership, which became the largest trade bloc in history after being signed in November 2020.
Exact details of the IPEF have not been scoped out yet, but the deal will focus on four economic pillars: the digital economy, supply chain pledges, clean energy, and tax and anti-corruption. There will be firm commitments that will be enforceable, according to U.S. Commerce Secretary Gina Raimondo, but will steer clear of tariff arrangements and other traditional market opening tools. Those have become toxic in American politics in recent years despite “greater market access” historically serving as a carrot for the U.S. to set stricter labor standards and intellectual property protections.
Commentary: “The United States needs to enhance its economic competitiveness in the region,” said Ali Wyne, senior analyst for Global Macro at Eurasia Group. “Even those countries that have significant and growing apprehensions about China’s foreign policy and strategic objectives appreciate that they cannot meaningfully decouple from its economy over the short term.” (2 comments)
#Monkeypox
Pharma companies focused on vaccines and therapeutics against the smallpox virus are making headlines amid an ongoing outbreak of its close relative monkeypox. Drugmakers SIGA Technologies (SIGA) and Chimerix (CMRX) added more than 68% and 41% last week, while vaccine makers Emergent Biosolutions (EBS) and Bavarian Nordic (OTCPK:BVNRY) surged over 23% and 79%, respectively. Their recent price performance and valuations may suggest further upside ahead, with most of the companies up another 15%-40% in premarket trading.
Latest update: The World Health Organization said on Saturday that over 92 cases of monkeypox have been confirmed in at least 12 countries. Another 28 suspected cases are currently under investigation, according to the global body, which called the recent outbreaks “atypical as they are occurring in non-endemic countries.” The U.S. confirmed its first monkeypox infection last Wednesday following reports of scattered cases in Europe.
Monkeypox is a rare viral disease endemic in Nigeria, the Democratic Republic of the Congo, and the Central African Republic. While the virus does not readily spread between humans, smallpox vaccines can offer 85% effectiveness in preventing monkeypox, which has a mortality rate ranging from 1% to 15%. Since the U.S. stopped routine smallpox vaccinations in 1972 following the eradication of the disease, young Americans could become particularly vulnerable in the event of a monkeypox outbreak, a narrative that has seen investors support the companies mentioned above.
Outlook: “As we enter the summer season in the European region, with mass gatherings, festivals and parties, I am concerned that transmission could accelerate, as the cases currently being detected are among those engaging in sexual activity, and the symptoms are unfamiliar to many,” said Dr. Hans Kluge, WHO Regional Director for Europe. Monkeypox symptoms are milder than those of smallpox, with the disease leading to skin rashes and lesions that can spread throughout the body. (144 comments)
Merger Monday
Chipmaker Broadcom (AVGO) is in talks to acquire cloud service provider VMware (VMW) in what could be one of the biggest deals of 2022. It would see the deal-hungry semiconductor group diversify into the enterprise software business as sentiment in the market sends stock prices lower. Demand for cloud computing services and data centers has surged in recent years and VMware has long been considered one of the industry’s most important companies.
Backdrop: M&A has played a central role in Broadcom’s growth strategy. It acquired Symantec’s enterprise security business in 2019 for $11B, scooped up CA Technologies in 2018 for about $18B and landed Brocade Communications in 2016 for $5.9B. Broadcom also tried buying U.S. chip giant Qualcomm (QCOM) for $117B in 2018, though it withdrew its bid after the deal was blocked by the Trump administration on national security concerns.
Many outlets have leaked the Broadcom-VMware talks, but the discussions are still ongoing and could fall apart. At the time of writing, VMware has a market cap of about $40B, while Broadcom has a market cap of $223B. Premarket movement: AVGO -5.4%; VMW +21.2%.
Go deeper: A deal would be a windfall for billionaire Michael Dell, who owns about 36% of VMware’s outstanding shares (and is company chair). He acquired the business in 2016 alongside private equity firm Silver Lake in a $67B takeover of tech conglomerate EMC. In November, Dell Technologies (DELL) completed the spinoff of its 81% equity ownership in VMware, with company shareholders receiving an $11.5B cash dividend (including Dell, which received $9.3B). (31 comments)
To the moon
A day doesn’t go by without Elon Musk making headlines, especially in recent weeks. His space venture called SpaceX (SPACE) is looking to bring in up to $1.7B in new capital, at a price of $70 per share, according to a company-wide email obtained by CNBC. That would boost its valuation to $127B, making it the second largest startup in the world behind China’s ByteDance (BDNCE), which owns popular video-sharing app TikTok.
Bigger picture: Private SpaceX shares were last valued at $56 per share in February following a 10-for-1 split. The new valuation of $70 would represent a 25% increase in share price as the firm works on two capital-intensive projects. Its next generation rocket Starship hopes to take the first humans to Mars (and the moon), while its global satellite internet network Starlink (STRLK) recently gained publicity after being deployed in Ukraine.
SpaceX is separately conducting a secondary sale to company insiders and existing shareholders for up to $750M in common stock. Don’t forget that Elon Musk had also been raising serious capital to fund his takeover of Twitter, before saying it could not move forward until there is “transparency over bots and fake accounts.” Meanwhile, Tesla (TSLA) shares have lost nearly half their market value after tumbling from an all-time high of $1,243 seen back in November.
Ready for liftoff: The space industry is on its way to achieve $1T in revenue by 2040, according to Citigroup, after reaching $424B in 2020 and expanding 70% since 2010. “Fundamentally, with the new generation of space being driven by the commercial sector, the launch industry is seeing a secular shift from being largely cost-plus pricing-based to being value-based in order to open up new markets and maximize profitability. Previously, the launch market had a limited number of government-supported companies that were concerned more with military capability and creating revenue and jobs than with increasing operational efficiency.”
Today’s Economic Calendar
8:30 Chicago Fed National Activity Index
12:00 PM Fed’s Bostic: Economic Outlook
What else is happening…
FedEx (FDX) helps bring 78,000 pounds of infant formula to the U.S.
J.M. Smucker (SJM) recalls Jif products for potential salmonella contamination.
Hyundai (OTCPK:HYMTF) confirms plans for $5.5B EV plant in Georgia.
DiDi (DIDI) shareholders expected to vote for a delisting in New York.
Biden says U.S. would respond militarily if China invades Taiwan.
Streaming notches new record high in Nielsen TV share measure.
Boeing’s (BA) 737 MAX not ready to fly in China any time soon.
3M (MMM) ordered to pay $78M to veteran in latest earplug trial.
Energy shares rise with oil futures as U.S. reserves sink to 35-year low.
Bitcoin (BTC-USD) mining in China roars back even after last year’s crypto ban.
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