Morning Reads





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 Markets

In Asia, Japan -0.9%. Hong Kong -1.8%. China -2.4%. India -0.4%.
In Europe, at midday, London -0.3%. Paris -1%. Frankfurt -0.9%.
Futures at 6:20, Dow -0.8%. S&P -1.2%. Nasdaq -1.7%. Crude -0.3% to $109.94. Gold +0.4% to $1855.20. Bitcoin -4% to $29,292.
Ten-year Treasury Yield -5 bps to 2.81%

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

Companies reporting earnings today »

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.'

Known to most as Uranium Pinto Beans, Jason has more than 15 years under his belt of trading stocks, options and currencies. His expertise primarily lies in chart analysis, and he has a strong eye for undervalued stock. Because he’s got the ability to identify great risk/reward trades he usually enjoys taking the path less traveled and reaping the benefits from the adventure.

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