MORNING READS
- China's economy is showing signs of returning to normal despite tens of millions of coronavirus cases (FXI).
- No More
- Big Tech
- Goldman (GS) expects to eliminate jobs next month. Bloomberg
- Unions claim that Southwest (LUV) didn't accept recommendations to upgrade technology before winter storm. Washington Post
- Tesla (TSLA) CEO Elon Musk tells workers that they shouldn't be "bothered by stock market craziness." CNBC
- Regulators will investigate power outages during winter storm (XLU, ED, DUK, GNRC, D, FE). Reuters
- Novartis (NVS) aiming to pay $245 mln to settle exforge generics lawsuit. Bloomberg
- China will increase oversight of education technology (TAL, GOTU, EDU). Bloomberg
Futures
Options
PREMIUM
PREPPER
January
$3T club: The first trading day of 2022 resulted in a historic day for the U.S. stock market as Apple (AAPL) became the first company in history to reach a valuation of $3T. The tech giant crossed the market cap milestone in afternoon trading, with shares climbing nearly 3% to $182.88 apiece. Lifting investor confidence was the belief that Apple will keep launching best-selling products as it explores new markets like self-driving electric cars and augmented-reality glasses, though sentiment soured not too long after as tech got wrecked.
End of easy money: Just a day later, a new era of monetary policy hit investors in the face following previous estimates that any tightening would be limited and gradual. FOMC minutes showed that officials were fully on board with a faster scale back of the central bank's asset purchase program, which would give it greater flexibility to raise interest rates (that commenced in March). Stocks tanked on the news, with the Nasdaq ending the day down more than 3% for the worst start to a calendar year since the financial crisis.
New era of transplants? In a last-ditch effort to save his life, doctors at the University of Maryland Medical Center transplanted a genetically modified pig heart into patient David Bennett, a 57-year-old handyman from Maryland. He died two months after the highly experimental procedure, but the medical community hopes the xenotransplantation surgery will one day pave the way for endless supply of organs. Several biotech companies were involved with the endeavor, including United Therapeutics (UTHR) and Kiniksa Pharmaceuticals (KNSA).
Game over? Microsoft (MSFT) made headlines by announcing the $69B acquisition of Call of Duty maker Activision Blizzard (ATVI), which would be the biggest deal in its history and more than 2.5x what it paid for LinkedIn five years ago. It would also make Microsoft the world's No. 3 gaming company by revenue and result in the tech industry's largest-ever takeover (topping Dell's (DELL) $67B purchase of EMC in 2016). The FTC later sued to block the deal in December, so prepare for a drawn-out legal battle that might include precedent of so-called vertical deals, whether withholding games from platforms would be profitable and if Microsoft has made good on its past promises.
February
Free speech vs. misinformation: Spotify (SPOT) went into damage control mode as listeners, creators and shareholders found themselves on different sides of the fence on what to do about controversial content on its platform. The straw that broke the camel's back was a podcast featuring mRNA virologist Dr. Robert Malone on the show of popular host Joe Rogan, who signed a reported $100M deal with Spotify back in 2020. Citing "vaccine misinformation," Neil Young, Joni Mitchell and Nils Lofgren pulled their music from Spotify in response, while calls to boycott the platform grew on social media. Spotify eventually included a disclaimer to any podcast episode that addresses COVID-19 to pacify both sides of the debate.
$30T and counting: America's national debt topped $30T for the first time, marking a record amount of red ink (the figure hit $31T in November). The gloomy fiscal milestone added to worries about the long-term economic health of the country, as it grapples with red-hot inflation and a higher interest rate environment - and can make servicing the debt even more challenging. Other factors like an aging population, elevated healthcare costs, and a tax system that doesn't bring in enough revenue to cover spending are also worrying as the federal government kicks the can down the road.
Freedom convoys: Border crossings between the U.S.-Canada were blockaded by truckers, building on the "Freedom Convoy" movement protesting vaccine mandates and other coronavirus restrictions. Tensions began when Canadian trucker vaccine mandates kicked in on Jan. 15, but spilled over into the U.S. after an American ban followed shortly thereafter. The demonstrations disrupted production lines and supply chains, and even shut down the plants of automakers like Ford (F), General Motors (GM) and Stellantis (STLA).
It's war: Financial markets went on a roller-coaster ride on Feb. 24 as traders monitored the latest happenings in Ukraine. Russia used air, land and naval forces for an invasion that shocked the world, and while Western intelligence officials warned that Kyiv would fall to Russian forces in just days, the Ukrainians are still holding strong in what became one of the biggest developments of the year. WTI crude oil surged to $130 a barrel for the first time since 2008, before dropping back to trade near the $90 level, while U.S. gasoline prices started to ascend rapidly to eventually hit an average of $5.00 per gallon nationwide.
March
Sanctions smackdown: Financial fallout from the crisis in Ukraine escalated rapidly, along with an intensification of violence and battles throughout the country. Western sanctions sent the ruble into a nosedive, with the currency tumbling 30% to an all-time low versus the dollar, before recovering. Russia's central bank more than doubled its key interest rate to 20%, freed local bank reserves to boost liquidity and banned Russian residents and companies from transferring foreign currency abroad. Meanwhile, the Moscow Exchange closed for nearly a month to shield stocks from a brutal selloff.
Nickel crisis: Things also got crazy in commodity markets as prices went into overdrive. The London Metal Exchange was forced to suspend all trading in its nickel contracts (LN1:COM), as the cost of LME three-month nickel - the key pricing benchmark for the global physical supply chain - shot up to $101,365 a ton, up from $30,000 just sessions earlier. China's Tsingshan Holding Group, the world's biggest producer of nickel used in stainless steel and EV batteries, made a sour nickel bet by building up a massive short position, only to face an influx of margin calls and $8B in paper losses.
Fast exit: Western food diplomacy was one of the first things that flourished in Russia after the Iron Curtain fell in 1989. In fact, the following year's opening of the first McDonald's (MCD) in Moscow's Pushkin Square came to "symbolize the entire opening of the USSR to the West," according to Marc Carena, former managing director of the company's Russian operations. Three decades of investment in the country came to an abrupt end following the invasion of Ukraine, with the Golden Arches becoming the most prominent company to close (and then sell) all of its locations in Russia. It followed millions of dollars in foreign direct investment, with a network of 850 restaurants and 62,000 employees.
Recession risk: The yield on the 2-year Treasury briefly exceeded the 10-year for the first time in three years, in a warning sign that the coming Fed rate hikes would trigger a recession. A technical recession did eventually occur in the summer, but employment stayed intact and U.S. GDP grew again in Q3 (many are still wondering if a deeper recession is in store for 2023). The 10-year Treasury went on to hit highs of over 4.20% in October, while the spread on the 2s10y even reached 80 basis points at one point as the yield curve inversion deepened throughout the year.
April
Tapping more reserves: The White House announced plans to release around 180M barrels of oil from the Strategic Petroleum Reserve, in what became the largest release from stockpile since it was created in 1975. The decision saw 1M barrels released daily over the course of six months, but analysts are still debating the benefits and whether it was responsible for putting a dent in inflationary. Two other mega releases of 30M and 50M barrels were coordinated in the previous six months, while the Biden administration later announced plans to refill the SPR at between $67-72 per barrel, after reserves fell to their lowest level since 1984.
Tweetstorm: Bringing the social-media activist (and troll) inside the company fold, Twitter (TWTR) appointed Elon Musk to its board following a drama-filled fest that continued throughout the year. The announcement followed weeks of discussions between Musk, Twitter CEO Parag Agrawal and independent board chair Bret Taylor, as top brass learned that the Tesla (TSLA) CEO was accumulating a 9.2% stake in the platform. Musk eventually made a $44B offer for the company, which he was forced to abide by despite many attempts to wiggle out of the deal. Who will be Twitter's CEO in 2023?
Taking flight: The first commercial drone deliveries in the U.S. hit the skies as Alphabet's (GOOG, GOOGL) Wing unleashed its aircraft over the suburban towns of Frisco and Little Elm, which are located just north of Dallas, Texas. If successful, the service could revolutionize how goods are currently transported around cities. Walmart (WMT) also rolled out a drone delivery program for items like diapers and dinner ingredients, while Amazon Prime Air (AMZN) joined the pack in December.
King dollar: The greenback reached its highest level in two decades, outpacing many assets from stocks and bonds to gold and bitcoin. Strength in the dollar was seen as the world stayed far behind matching the Fed in interest rate hikes, as well as concerns about economic growth and weaker comparative currencies. The euro remained on the back foot due to the war in Ukraine, China's severe COVID restrictions led to a weaker yuan, and Japan's widening policy and trade gap sent the yen into freefall this year.
May
Overturned: In a rare breach of tradition and secrecy, the U.S. Supreme Court voted to strike down the landmark Roe v. Wade decision, according to a leaked initial draft majority opinion that was later confirmed. Corporate America got involved, with Amazon (AMZN), Apple (AAPL) and others promising to reimburse employees if they travel out-of-state for abortions. Companies like Levi's (LEVI) and Yelp (YELP) even called on business leaders to take a stand against the ruling, while Live Nation (LYV) said it would cover bail expenses if any of its employees were arrested for protesting peacefully.
Formula shortage: The White House announced a raft of measures to alleviate a baby formula shortage after President Biden spoke with the CEOs of Walmart (WMT), Target (TGT), Reckitt (OTCPK:RBGLY) and Gerber (OTCPK:NSRGY) to explore ways to tackle the crisis. Things worsened after Abbott Nutrition (ABT), the nation's largest baby formula manufacturer, shuttered its production facility in Sturgis, Michigan, following reports of contaminated formula that was linked to the deaths of at least two infants. Many stores even implemented quotas on how much formula one person can buy at a time, while pediatricians recommended not to dilute formula (which could be harmful to the kidneys) or switching to other brands.
Crypto trouble: Cracks started appearing in the crypto market as stablecoin TerraUSD (UST-USD) lost its dollar peg and sister token Luna (LUNA-USD) crashed to $0. The not so stable "stablecoin" was a DeFi harbinger of things to come, with Celsius, one of the largest crypto lending platforms, pausing all withdrawals a few weeks later due to "extreme market conditions." Don't forget the bankruptcies of crypto hedge fund Three Arrows Capital and crypto lender Voyager Digital.
NATO expansion: Joining Finland in its recent quest to join NATO, Sweden broke a nearly 200-year policy of military neutrality formed in the aftermath of the Napoleonic Wars. The governing Social Democratic Party approved an application to join the alliance, but expressed reservations against the deployment of nuclear weapons and foreign bases on their soil. The European Commission, the executive arm of the EU, also unveiled new sanctions on Russian energy, including a phase-out of crude oil imports within six months and refined products by the end of the year.
June
Go big or go home: 75 basis points became the new 50 basis points as Jay Powell and Co. started to show their aggressive side. In what was unthinkable just months earlier, the Federal Reserve hiked rates by a whopping three-quarters of a percentage point for the first time since 1994, and went on to do so again at three of its next policy meetings. By the end of the year, the Fed Funds Rate soared to a range of 4.25%-4.50%, while Powell vowed to "stay the course [on countering inflation], until the job is done."
Up in smoke: The FDA ordered JUUL products off the shelves in the U.S., dealing a major blow to the once high-flying company whose products "played a disproportionate role in the rise in youth vaping." Marlboro owner Altria (MO) bought a 35% stake in Juul for $12.8B in late 2018 to diversify its portfolio and to join forces with a company that was threatening its traditional cigarette business. Things didn't go so well, with the FDA banning flavored e-cigs in 2020, prompting JUUL's market share to tumble from 70% to 42%, and then to 36% as of March 2022. Altria most recently valued its JUUL stake at $1.6B, an eighth of its original investment, and that was before the FDA threatened its entire U.S. business.
Discretionary spending: Retailers were caught off guard as spending habits of Americans changed rapidly in an unrelenting inflationary environment. Consumers shifted away from higher-margin goods such as kitchen appliances and TVs to basics like food and toiletries, and emphasized a focus on value and affordability. In response, companies like Target (TGT) announced a series of steps to "right-size" inventory for the balance of the year, such as additional markdowns and order cancellations, but its stock remained under pressure as higher costs whacked profitability.
Forced default: Russia defaulted on its foreign debt for the first time since the Bolshevik Revolution after a 30-day grace period to disburse two Eurobond interest payments expired. It was a largely symbolic move given that the Kremlin had enough money to pay off the debt, but was barred from doing so because of the heavy Western sanctions leveled on the government. The U.S. Treasury Department effectively blocked Moscow from making the payments after letting a sanctions loophole expire that had previously allowed it to transfer cash to debtholders via American banks.
Stay tuned... A recap of the second half of 2022 comes tomorrow.
Today's Markets
In Asia, Japan -0.9%. Hong Kong -0.8%. China -0.4%. India +0.4%.
In Europe, at midday, London -0.1%. Paris +0.1%. Frankfurt +0.2%.
Futures at 6:30, Dow +0.2%. S&P +0.4%. Nasdaq +0.7%. Crude -1.4% to $77.83. Gold -0.2% to $1811.60. Bitcoin -0.5% to $16,593.
Ten-year Treasury Yield -1 bps to 3.88%
Today's Economic Calendar
8:30 Initial Jobless Claims
10:30 EIA Natural Gas Inventory
11:00 EIA Petroleum Inventories
1:00 PM Results of $35B, 7-Year Note Auction
4:30 PM Fed Balance Sheet