Chance your arm

It's official. Nvidia's (NASDAQ:NVDA) planned acquisition of Arm Ltd. (ARMHF) from SoftBank (OTCPK:SFTBY) has been terminated due to "significant regulatory challenges." Nvidia had been seeking a tie-up with the processor designer since September 2020, and with the transaction valued at "$40B in cash and stock" at the time (and $80B currently), it would have been the chip sector's largest deal on record. Arm was founded in 1990, and was an independent company until 2016, when SoftBank bought it for $32B.

Backdrop: Nvidia's purchase faced scrutiny from the moment it was announced. The deal would have given one of the biggest semiconductor companies control over designs that rival firms rely on to develop their own competing chips. The Federal Trade Commission ended up suing on antitrust grounds, while the U.K.'s competition regulator announced an investigation into the sale. Clients like Microsoft (NASDAQ:MSFT) and Qualcomm (NASDAQ:QCOM) also feared that Nvidia could one-up its business over those who don't have a substitute for Arm technology.

As for Softbank, the company will make some money from the transaction getting called off. A breakup fee of $1.25B will be recorded as profit in Q4, while semiconductor industry veteran Rene Haas will replace Simon Segars as Arm's new chief executive. Following the collapsed deal, SoftBank is planning to take Arm public, with an IPO expected to happen in the fiscal year ending March 2023.

More on Nvidia: The company became the seventh-largest U.S. firm yesterday after surpassing Meta Platforms (FB) for the first time (the Facebook parent has lost $267B in market cap since earnings last week). Putting that in perspective, Nvidia was the 15th-largest American company as of a year ago and the 50th largest as of two years ago. Despite a valuation of $618B, it may have more room to run, with Wells Fargo writing a note on Monday outlining that Nvidia's Ampere GPU architecture was still "early in its cycle."

Unmet pledges

Officials in Washington are losing patience with China, which continues to fail to meet its purchase commitments under the "Phase 1" trade deal signed during the Trump administration. Specifically, Beijing had promised to buy an extra $200B worth of U.S. agriculture, energy and manufactured products over 2017 levels (in the two years through the end of 2021). The concerns even go beyond the purchase agreements, according to U.S. Trade Representative Katherine Tai, and include China's state-centered industrial policy.

Trade data: Economists will get a fresh read of that information today, with the U.S. likely to report a record trade deficit of $83B for December. Be on the lookout for a specific number from China, though data through November showed that China's imports from the U.S. amounted to less than 60% of its pledges. The U.S. has meanwhile maintained tariffs on more than $300B of annual Chinese exports, but analysts differ to whether those are in fact leverage, or are hurting the U.S. more than China.

Remember, tariffs are mainly paid by American companies and consumers. Chinese exporters also haven't had to lower prices to keep their goods competitive, and in fact, have seen a boon from the pandemic as pent-up demand and savings saw a large appetite for Chinese-made goods. So what to do? Raising tariffs would be controversial at a time when the U.S. is seeing its highest inflation in decades, while cutting the duties would risk accusations that the administration is going soft on China ahead of mid-term election campaigns (hence, the duties have been "maintained").

Indo-Pacific Economic Framework: Looking for a new strategy, the Biden administration is readying its first broad economic policy for the Asia-Pacific. The framework is expected to be unveiled "within weeks" and will look to fill a hole left by the 2017 departure from the Trans-Pacific Partnership. While the deal isn't expected to try to return the U.S. to TPP measures, like tariff cuts and other traditional market-opening tools, it could include other trade provisions, standards and benefits to counter Beijing's growing influence in the region.

Budget deal

Aviation stocks are still heading higher as a "return to normalcy" trade lifts sector sentiment, with an extra boost from a budget carrier merger. Frontier Airlines (ULCC) has agreed to buy Spirit Airlines (SAVE) in a $2.9B cash-and-stock deal, marking the first airline combination since 2016. It would also create the fifth-largest U.S. airline and tighten competition against traditional carriers.

Antitrust angle: The key question surrounding the deal is will it be able to receive U.S. regulatory approval especially under a Biden administration that has pushed for more scrutiny of corporate takeovers. Lockheed Martin's (LMT) planned purchase of Aerojet (AJRD) was blocked late last month, while the U.S. Department of Justice is trying to disrupt American Airlines's (AAL) domestic alliance with JetBlue (JBLU).

"This is a completely different thing, where you've got two low-cost leaders getting together to figure out ways to drive more growth," Spirit CEO Ted Christie told CNBC. "This is the type of transaction the administration should in fact support," added Frontier Chairman Bill Franke. "Even at the end of the day, even on combination these two airlines will control less than 10% of the market. It's not an overpowering event and it takes place inside a market where 80% of the airline markets are controlled by four other airlines."

Other stats: 1) The airlines would have 1,000 daily flights to 145 destinations in 19 countries, 2) Their fleets include more than 280 jets made up of models from the Airbus A320 family, 3) Spirit has a market share of 5% in the U.S., while Frontier has 3.5%.

Still cycling

Investors are definitely getting a workout with the continuous flow of Peloton (PTON) news. Off the back of rumored buyout, the WSJ reported overnight that co-founder John Foley is stepping down as CEO, while the company overhauls its board and cuts costs with a wave of layoffs. The announcement comes ahead of Peloton's Q4 earnings report, which will be released later today after the bell.

What's happening? Barry McCarthy, the former chief financial officer of Spotify (SPOT) and Netflix (NFLX), will succeed Foley as CEO and will join the company's board. President William Lynch is also stepping down from his executive role but will remain on the board with several other director shakeups. Peloton will cut a further 2,800 jobs, impacting 20% of corporate positions, but it won't affect its instructor roster or content slate.

The latest moves are aimed at coping with the drop-off in demand and widening losses. Peloton sees them cutting roughly $800M in annual costs and reducing capital expenditures by roughly $150M this year. It's already announced it will wind down the development of its Peloton Output Park, the $400M factory it was building in Ohio, and slash its delivery teams and amount of warehouse space.

Market movement: PTON shares are down 4% premarket after rising nearly 21% yesterday on takeover news. Over the last year, the stock has plunged 80% to a market cap of approximately $10B.

Today's Markets

In Asia, Japan +0.1%. Hong Kong -1%. China +0.7%. India +0.3%.
In Europe, at midday, London +0.4%. Paris +0.7%. Frankfurt +0.3%.
Futures at 6:20, Dow +0.1%. S&P +0.1%. Nasdaq +0.1%. Crude -2.1% $89.44. Gold flat at $1821.60. Bitcoin +2.8% to $43,807.
Ten-year Treasury Yield -1 bps to 1.93%

Today's Economic Calendar

6:00 NFIB Small Business Optimism Index
8:30 Goods and Services Trade
8:55 Redbook Chain Store Sales
1:00 PM Results of $58B, 3-Year Note Auction