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An intense selloff hit Wall Street on Monday as traders got rattled by worries of entrenched inflation and a possible recession. The S&P 500 slumped nearly 4% to enter a bear market, now off more than 21% from its record high in January. The rout even hit the energy industry (a rare segment that has performed well in 2022), while cooling valuations rocked the risky crypto sector (Bitcoin tumbled below $21,000) and Treasury yields spiked to levels not seen in a decade (10-year jumped 28 bps to 3.44%).
Bigger picture: While the S&P 500 hit the bear threshold in May, the benchmark index quickly rebounded within the same day and has avoided closing in bear territory over the past month. Some similar price action could be seen overnight, with S&P 500 futures rallying 1%, though many analysts caution that things could be different this time around. "We're definitely seeing a risk-off atmosphere, a flight to quality," noted Charlie Ripley, senior investment strategist at Allianz Investment Management. "In that environment, people need to raise cash."
The selloff came just in time for the latest Fed meeting, which will see FOMC officials meet over the next two days and announce policy changes and economic forecasts on Wednesday. Expectations over the past month priced in a half a percentage point rate hike, but an upshift transpired following the elevated CPI reading seen on Friday. Traders now see a 99.8% chance of a 75-basis-point move, according to the CME Group's FedWatch tool that measures pricing in the fed funds futures markets.
Behind the curve: "What we need to see is clear and convincing evidence that inflation pressures are abating and inflation is coming down. And if we don't see that, then we'll have to consider moving more aggressively," Fed Chair Jerome Powell said at a recent Wall Street Journal conference. The central bank raised rates by a half percentage point at its meeting in May - marking the first such increase since 2000 - to a range between 0.75% and 1%. The last time the Fed raised rates by 0.75 percentage points was at a meeting in 1994, when the central bank rapidly raised rates to stave off a potential rise in inflation. (14 comments)
It has been nine years in the making, but Amazon (AMZN) just announced it will begin Prime Air drone deliveries later this year as it attempts to get the long-delayed project off the ground. The service will initially be available in Lockeford, California - which is about 40 miles south of Sacramento - and will use feedback from the service to improve its operations. To fly delivery drones in the U.S., companies have to be approved by the FAA, and the retail behemoth is one of only three firms that has received Part 135 certification.
How it works? "Once onboarded, customers in Lockeford will see Prime Air-eligible items on Amazon. They will place an order as they normally would and receive an estimated arrival time with a status tracker for their order. For these deliveries, the drone will fly to the designated delivery location, descend to the customer’s backyard, and hover at a safe height. It will then safely release the package and rise back up to altitude," Amazon (AMZN) wrote in a blog post.
"We've created a sophisticated and industry-leading sense-and-avoid system that will enable operations without visual observers and allow our drone to operate at greater distances while safely and reliably avoiding other aircraft, people, pets, and obstacles. It can also detect moving objects on the horizon, like other aircraft, even when it’s hard for people to see them. If obstacles are identified, our drone will automatically change course to safely avoid them."
The competition: Alphabet's (GOOG) (GOOGL) Wing launched commercial service just north of Dallas in April, and hopes to soon press the button on wide-scale deployment. Walmart's (WMT) drone delivery program is also available to more than 4M households in the U.S., making it possible for customers to get diapers or dinner ingredients delivered in 30 minutes or less. Meanwhile, Uber Eats (UBER) has promised to ratchet up drone delivery operations in the near future, but until now, the technology has been mainly focused on small-scale trials. (4 comments)
Brexit has been out of the news for some time... that is, until yesterday. Embattled U.K. Prime Minister Boris Johnson announced his intention to override the so-called Northern Ireland Protocol, which sought to prevent a hard border from being erected between the Republic of Ireland (part of the EU) and Northern Ireland (part of the UK). At the time, this was seen as essential to protect a 1998 peace deal that brought an end to the decades of sectarian violence, often referred to as "The Troubles."
Backdrop: The Northern Ireland Protocol has been in place since 2020 and followed years of deliberations and negotiations on how to govern trade following Brexit. The agreement separates portions of the United Kingdom by creating a border in the Irish Sea between mainland Britain and Northern Ireland. Communities that strongly identify as British in the latter region despise the arrangement, saying it isolates them from the U.K., while some British companies have even severed ties with Northern Ireland businesses due to the increased paperwork.
A new regime for border checks would be created under the new legislation sponsored by Johnson, who said they would ease political tensions and business disruptions. Goods from Great Britain destined to stay in Northern Ireland would go through a "green lane" with no checks, while goods heading across the open border into the Republic of Ireland and the EU single market would face "red lane" checks. The bill would also end the role of the European Court of Justice in policing the protocol, terminate EU control over state aid and VAT in Northern Ireland, and give ministers a reserve power to rip up other clauses of the protocol if needed.
Outlook: The European Union is furious at the new bill, saying it risks a trade war with the bloc and threatened to take up legal action. Critics also say the move could break international law and badly damage Britain's reputation on the world stage, as Johnson tries to win back support following the row over Partygate. Meanwhile, the U.K's relationship with Washington may come under strain as President Biden has repeatedly said that stability in Northern Ireland is a personal priority.
The U.S. Department of Defense has signed a $120M deal with Australia's Lynas (OTCPK:LYSCF) to build the first "heavy" rare earths separation facility in Texas. The contract, which will be entirely bankrolled by the Pentagon, builds on a similar award granted to MP Materials (NYSE:MP) in February for a heavy facility in Mountain Pass, California. Last year, the DoD awarded the two companies contracts to construct "light" rare earths facilities as Washington looks to counter China's dominance of critical mineral supply chains. Premarket action: MP +3% to $35/share.
What are rare earths? The term refers to a group of 17 elements that are used in everything from high-tech consumer electronics to military equipment. Despite the name, there are deposits of them all over the world (some of them are even hundreds or thousands of more times abundant than gold), but the elements are still called "rare" as it is unusual to find them in pure form or in concentrated quantities. As a result, they are difficult to mine and refine profitably, and in the past, there have been strict U.S. environmental regulations related to extracting and processing (think toxic wastewater and radioactive residues).
"Putting aside any geopolitical issues, what we've seen from the pandemic is that any singular supply chain has risk associated with it. So this is a terrific opportunity to address that risk," Lynas (OTCPK:LYSCF) CEO Amanda Lacaze declared.
Go deeper: The U.S. is highly dependent on rare earths for its military capabilities like lasers and guidance systems (a Congressional Research Service report in 2020 even found that each F-35 required 920 pounds of the materials). Chinese dominance of the market has meanwhile allowed the country to control prices, leading to additional barriers to entry and putting pressure on upcoming challengers. In fact, Beijing's "Made in China 2025" strategy aims to create a vertically integrated supply chain that dominates mining, magnets and high-tech manufacturing that could also impact everything from defense components to electric vehicles. (1 comment)
In Asia, Japan -1.3%. Hong Kong flat. China +1%. India -0.3%.
In Europe, at midday, London -0.8%. Paris -1.1%. Frankfurt -0.6%.
Futures at 6:20, Dow +0.8%. S&P +1%. Nasdaq +1.3%. Crude +0.8% to $121.91. Gold -0.5% to $1822.80. Bitcoin -6.7% to $22,341.
Ten-year Treasury Yield -7 bps to 3.30%
Today's Economic Calendar
FOMC meeting begins
6:00 NFIB Small Business Optimism Index
8:30 Producer Price Index
Companies reporting earnings today »
What else is happening...
Oracle (ORCL) surges as outlook offers some hope for battered software.
Prologis (PLD), Duke Realty (DRE) to combine in all-approved $26B merger.
All 36 ARKK holdings fall, making Cathie Wood's deflation call seem far off.
Crypto.com, BlockFi plan to lay off employees as downturn intensifies.
Trump SPAC (DWAC) drops on new subpoena related to SEC inquiry.
Biden administration said to pursue policy to cut nicotine in cigarettes.
Brown-Forman (BF.B), Coca-Cola (KO) launch Jack & Coke canned cocktail.
Redbox (RDBX) surges in likely short squeeze, outstripping acquisition price.
Aviation update: American Airlines' (AAL) regional carriers hike pilot pay.