Wednesday Morning Reads

Morning Reads










Correction territory

U.S. indices managed to cut their losses on Tuesday, but the drop was still deep enough to push the S&P 500 into correction territory for the first time since Mar. 2020's COVID-related selloff. The key index fell 1% during the session, resulting in a 10.6% decline since peaking at 4,818 on Jan. 4. While commodity prices remain elevated, the S&P 500 could climb back out of the hole today, with futures contracts tied to the index pointing a 1% gain ahead of the open. Meanwhile, the Dow and Nasdaq climbed 0.8% and 1.4%, respectively.

Bigger picture: Current market fears are centered around sanctions, though the first wave of them appeared to be quite targeted and not that economically damaging. Measures from the U.S. were leveled against two of Russia's largest financial institutions, three members of Russia's elite, as well as sovereign debt, but left the crucial energy sector untouched. Moscow has also taken steps to insulate its economy since the annexation of the Crimean Peninsula in 2014, trimming its budget, broadening its trade portfolio, diversifying away from U.S. Treasuries and dollars, and bolstering hard currency reserves.

"The market sees the various sanctions as modest and perhaps not as aggressive as feared," said Chris Weston, head of research at brokerage Pepperstone. "For now, one could assess there is a vibe across markets that Russian troops will hold Donbass, but push no further."

Central bank policy: Besides escalating tensions between Moscow and Kyiv, Wall Street is also dealing with a surge in inflation and quantitative tightening. Investors have been trying to size up the Fed's path forward in recent months and some economists are warning that inflation could even top 10% should Russian actions result in an energy supply shock. Bets on aggressive rate hikes are moving up again in response, with swaps traders now pricing in a better than 35% chance of a half-point move in March, up from under 15% earlier this week. Fed Governor Michelle Bowman has also suggested a 50 bps increase could be in the cards if the next inflation readings come in too high.

Energy concerns

Just months after the COP26 Summit in Glasgow, energy security is dominating climate action in the headlines, as the prospect of a war involving Russia rattles the energy market. Germany on Tuesday halted the Nord Stream 2 pipeline - which is designed to double the amount of its gas imports - after the country made the decision to phase out nuclear power in 2011 and discontinue coal power by 2030. With Germany now relying on Russia for 55% of its gas imports, fears of an energy crisis are growing, as well as increasing worries that crude could even hit $100 a barrel.

Quote: "Germany is right on Nordstream2. The pipeline has to be assessed in light of the security of energy supply for the whole of Europe," tweeted European Commission President Ursula von der Leyen. "We are still too dependent on Russian gas. We have to strategically diversify our suppliers and massively invest in renewables." Russia's Gazprom (OTCPK:GZPFY) owns the entire Nord Stream 2 pipeline, but paid half of the $11B in development costs, with the rest coming from Shell (NYSE:SHEL), Germany's Uniper (OTC:UNPPY) and Wintershall (OTCQX:BASFY), Austria's OMV (OTCPK:OMVJF) and France's Engie (OTCPK:ENGIY).

Germany's decision to halt Nord Stream 2 "is no small joke," said Daniel Tenengauzer, head of markets strategy at BNY Mellon, adding that a potential war or stricter sanctions could have a cascading effect on Germany's manufacturing economy. President Biden likewise said he would do everything in his power to insulate American consumers from Russian sanctions, but recognized that that costs would likely rise. "Defending freedom will have costs for us as well, here at home. We need to be honest about that. I want to limit the pain the American people are feeling at the gas pump. This is critical to me."

Go deeper: Renewed importance on energy independence could weigh on policymakers' efforts to decrease the usage of fossil fuels, with coal imports to the EU in January climbing 56% from the prior year. The U.K. Coal Authority also recently allowed a mine in Wales to increase output by 40M tons over the next two decades, while Australia is planning to open or expand more coking coal mines. Over in the U.S., U.S. Energy Secretary Jennifer Granholm is urging American producers to raise their oil and gas output, even telling the National Petroleum Council in December to "get your rig count up."

Emission-less travel

Speaking of cleaner energy, Airbus (OTCPK:EADSY) said it plans to test a hydrogen-powered engine on a modified A380 by the middle of the decade. The move could bring lower-emissions to commercial air travel, which is responsible for 2.4% of the world's annual total. Airbus hopes the development will result in a zero emissions aircraft entering service by 2035 and has even released mockups of three "hybrid-hydrogen" concept planes to make "zero-emission flight a reality."

How it will work: Airbus chose the A380, the world's largest passenger jet, for the test program because it has room to store massive liquid hydrogen storage tanks and the extra equipment. The adapted jet will have the experimental engine mounted on the rear fuselage, along with four conventional engines on its wings. A partnership was also inked with CFM International, a joint venture between France's Safran (OTCPK:SAFRY) and General Electric (GE), to develop the hydrogen-powered engine.

Several complex engineering challenges will need to be ironed out first. Those include a cryogenic distribution system, a liquid hydrogen to gas conversion process, as well as special cooling and coating materials. Note that the hydrogen combustion engine, which burns the element in a gas turbine to generate thrust, is different than hydrogen fuel cells (like the ones used in EVs), which generate electricity from hydrogen to power an electric motor.

Outlook: Rival Boeing (BA) is also looking to lower emissions, but has increased its focus on more sustainable aviation fuels due to the economics behind the new technology. While sustainable aviation fuels are more expensive than conventional jet fuel, storing hydrogen requires additional equipment that adds weight, reducing the amount of people or cargo that can go on a plane. Richard Aboulafia, managing director at AeroDynamic Advisory, even goes as far to say that "hydrogen is what happens when engineers and economists don't talk to each other."

'Freedom Convoy'

Another story that's been flying under the radar due to Russia's recent actions in Ukraine is that Canada has managed to clear out protesters in downtown Ottawa, which have been camping out there for weeks. The "Freedom Convoy" movement, which started with truckers demonstrating against COVID vaccine requirements and restrictions, even spread to several border crossings with the U.S., including the crucial Ambassador Bridge that connects downtown Detroit with Windsor, Ontario. Prime Minister Justin Trudeau ended up invoking emergency measures to quell the protest, which gave powers such as compelling towing companies to remove trucks from designated areas.

Economic price tag? The disruption was said to cost the Canadian capital over $800K per day in policing expenses, and that does not include the collateral damage felt by businesses in the surrounding areas. It also upended U.S. cross-border trade worth $350M a day, with the auto industry alone facing losses as high as $1B, including manufacturers like Ford (NYSE:F), General Motors (NYSE:GM) and Chrysler-maker Stellantis (NYSE:STLA). While the Ambassador Bridge has been cleared, it's going to take several weeks for things to return to normal, said Peter Nagle, auto research analyst at IHS Markit.

The Emergencies Act also allowed authorities to declare certain areas as no-go protest zones, where demonstrators could be subject to arrest. "You can disagree with elected officials. You can certainly disagree with me. But you can't harass your fellow citizens who disagree with you. You can't hold a city hostage. And you can't block a critical trade corridor and deprive people of their jobs," added Trudeau. Others argue that the invocation of emergency powers threatens civil liberties, while their expansive nature could set a dangerous precedent for future civil protests.

More controversy: The Canadian government instructed banks to lock the private and/or business accounts of individuals involved in the weeks-long demonstration, saying it was crucial during the declared emergency period. "We were very clear that we would be following the money, that we would be using financial tools to disrupt illegal blockades and occupations," Finance Minister Chrystia Freeland declared. "These measures were put in place to disrupt illegal activity in Canada." While the accounts are now in the process of being unfrozen, organizers of the Freedom Convoy dubbed the move financial warfare, saying it would "sow mistrust in both the banking system and the government and the repercussions will be felt for years to come."

Today's Markets

In Asia, Japan closed. Hong Kong +0.6%. China +0.9%. India -0.1%.
In Europe, at midday, London +0.4%. Paris +1.1%. Frankfurt +0.7%.
Futures at 6:20, Dow +0.8%. S&P +1%. Nasdaq +1.4%. Crude -0.8% $91.18. Gold -0.6% to $1896. Bitcoin +3.3% to $38,849.
Ten-year Treasury Yield +2 bps to 1.97%

Today's Economic Calendar

7:00 MBA Mortgage Applications
8:55 Redbook Chain Store Sales
9:00 Fed's Daly Speech
10:00 State Street Investor Confidence Index
11:30 Results of $22B, 2-Year FRN Auction
1:00 PM Results of $53B, 5-Year Note Auction

Companies reporting earnings today »

What else is happening...

Best and worst stocks sensitive to Ukraine/Russia - J.P. Morgan.

Digital World Acquisition (DWAC) soars on launch of TRUTH Social.

Cautious sales guidance spooks investors at Home Depot (HD).

Macy's (M) ends lower on supply chain and labor concerns.

Supreme Court rejects Energy Transfer's (ET) Dakota Access appeal.

Activision (ATVI) postponing 2023 Call of Duty release - Bloomberg.

Volkswagen (OTCPK:VWAGY) said in advanced talks for Porsche IPO.

Roku (ROKU) rebounds as Citi's suggests stock could double.

Teladoc (TDOC) falls despite earnings beat, bullish 2022 outlook.

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.

He is a co-founder of Option Millionaires, and he is best known for his weekly webinars with Scott, as well as his high level training webinars and charts found in the forums.

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