FT : Markets brace for chaotic trading after India bans wheat exports

Markets brace for chaotic trading after India bans wheat exports
‘Bombshell’ move follows earlier denials and is set to drive food prices higher and worsen supply problems

India has banned exports of wheat, in a move that is likely to push food prices higher and fuel hunger in poor countries that depend on imports of the commodity.

The Indian government said that it was implementing a ban on overseas sales “in order to manage the overall food security of the country and to support the needs of the neighbouring and other vulnerable countries”.

However, it said that it would still allow exports for which letters of credit had already been issued and it would consider sales to countries looking to meet their food security needs.

The announcement, one of latest protectionist measures taken by food exporting countries following this year’s surge in prices, follows denials by Indian government officials that they would stop wheat exports.

India had been filling the export supply gap in the international wheat markets left by Ukraine after the Russian invasion, but concerns had heightened about export restrictions amid a heatwave which has hit the country since March.

The U-turn came after Indian government data this week showed domestic inflation surging to the highest level in eight years, with rising food prices alarming policymakers.

Traders predicted chaotic trading on the international wheat markets when they open at the start of next week as the ban would be a blow to buyers looking for wheat supplies. “It’s an absolute bombshell,” said Swithun Still, a grain trader based in Switzerland. “There will be panic on the wheat futures markets when they open,” he added.


One of the world’s largest wheat producers, India had a bumper harvest last year while some other key exporters including Canada and Argentina suffered from bad weather.

India’s wheat exports rose to a record high of more than 7mn tonnes in the year ended March as war all but halted exports from Ukraine.

But searing heat in March and April, where temperatures of up to 45C hit large parts of India’s wheat belt, have heightened concerns about the country’s domestic supply. With several more weeks of heat expected before the onset of the annual monsoon next month, the government recently downgraded its forecast for the current crop by 5 per cent to 105mn tonnes for the year to June.


Wheat prices are at eye-watering levels due to supply concerns caused by the Ukraine war and droughts around the world. The US Department of Agriculture forecast that global supplies for the coming crop year would fall for the first time in four years. “The USDA made it clear that we are heading towards a global food crisis,” said Carlos Mera, analyst at Rabobank. “The coming 12 months will be very challenging.”

Wheat futures in Chicago, the international benchmark, closed at $11.6725 a bushel, up 50 per cent from the start of the year while the European wheat futures market was at €410.75 a tonne, just shy of its record high in March.

India’s consumer price index for April rose 7.8 per cent from a year earlier, according to data released on Thursday, the highest since 2014.

Concerns about the rapid increase in prices prompted the Reserve Bank of India to raise interest rates unexpectedly this month for the first time in four years.

FT : Boohoo and Asos bullish despite pandemic threat to fast fashion

Boohoo and Asos bullish despite pandemic threat to fast fashion
Online retailers retain lofty growth ambitions even as costs surge

In a few frantic weeks early last year, online fashion retailers Asos and Boohoo upended years of British high street history as they picked over the remains of bankrupt groups Arcadia and Debenhams.

The absorption of brands with centuries of retail heritage by companies that came of age only in the 2000s seemed to encapsulate the narrative of the pandemic: store-based retailers would be eclipsed by nimbler online rivals far faster than anybody thought.

Since then, life has become much tougher for the fast fashion brigade. Cost pressures are mounting as the price of raw materials, labour and freight have risen sharply, just as demand has eased with the brands predominantly 20-something customer base facing the biggest income squeeze in years.

Shortly before the pandemic, Boohoo’s market value overtook that of British high street behemoth Marks and Spencer. It is now worth about a third of the value of its more traditional rival. Asos has also hit problems, warning in April of a sharp fall in sales growth and profits months after it fired its chief executive.

But while investors fret that the renewed pressures could make the fast fashion model unsustainable, the companies’ confidence is undiminished.


Boohoo chief executive John Lyttle: ‘The opportunity is huge with half a billion potential customers across our key markets’ © Marco Kesseler/FT
Last week, even as Boohoo warned on sales for the fourth time in the past 12 months, it reiterated its intention to become an online player comparable in scale to the biggest high street operators, such as H&M and Zara-owner Inditex.

“The opportunity is huge with half a billion potential customers across our key markets,” said chief executive John Lyttle.

He added that the price rises, along with the changes in demand patterns and higher rates of product returns, were “temporary, not structural, and will subside as the effects of the pandemic begin to ease”.

He also predicted that while cost pressures would persist into 2023, sales growth would eventually recover to around 20 per cent each year at profit margins of 10 per cent.

Analysts were more cautious. “The transition period seems to get longer at every outing,” said Panmure Gordon analyst Tony Shiret. “The sales have not sustained at the level they expected.”

Boohoo’s house broke Jefferies is forecasting relatively modest revenue growth of 11.6 per cent even for the year to February 2024.

Boohoo is not alone in having ambitions that contrast starkly with current reality. Its UK rival Asos held a series of investor meetings last year outlining how it would attack a market it put at £430bn.

It is aiming to increase annual sales from £3.9bn to £7bn “over the next three to four years” and lift profit margins from 2 per cent to “at least 8 per cent over the long term”.

Similarly, Berlin-based Zalando, a larger company with more diverse operations, said this year had “started slowly” with lower confidence related to fears about inflation, but co-chief executive Robert Gentz was unperturbed.

Gentz was adamant that the company would not be rowing back on its near-term target of €30bn of sales across its platforms, or its long-term aim to serve 10 per cent of the European fashion market. “We are still at a very early stage of the journey,” he said while presenting results last week.



Action on costs
The online operators’ optimism stems in part from their confidence that they can mitigate the pressures. They are investing heavily in warehouse automation that will help offset rising labour costs. They have also moved production from places such as China and South Asia to Morocco and Turkey to shorten delivery times and reduce transport costs until freight rates return to more normal levels.

Asos’s chief operating officer Mat Dunn, who is running the company until a replacement for former chief executive Nick Beighton is found, said container lines were “making a lot of money and adding capacity again”. He was “even more optimistic” that air freight costs would come down as flight schedules returned to normal.

But not everyone is convinced costs will revert to pre-pandemic levels. Simon Irwin, an analyst at Credit Suisse, pointed out that the pandemic had accelerated the retirement of older, larger aircraft and their replacement with smaller jets.

“Even when we do get back to pre-pandemic flight numbers, there could be structurally less surplus [freight] capacity out there,” he said.

The retailers are also counting on consumers returning to work, going on holiday and attending parties and celebrations, events that typically drive clothing purchases but have suffered a big hit during the pandemic.

Lyttle said he believed Boohoo’s core audience of younger shoppers would be among the least affected by the coming squeeze on living standards.

But Dunn acknowledged the “vast majority” of ecommerce operators had not been tested in an inflationary environment. “The effect of [inflation] on disposable incomes is very hard to predict,” he said.


Room to grow
Online operators still have a lot to aim at despite their heady growth. Even in the UK, which offers the biggest opportunity for Boohoo and Asos, market shares are a long way behind the likes of Next, Primark or M&S.

Both are also targeting the US. “Its economy is growing faster . . . and consumers there display similar attitudes and behaviours to UK consumers,” said Jacqueline Windsor, a partner in PwC’s retail practice.

“But it is [geographically] much bigger and the density is much lower, so it is harder to serve in an efficient way,” she added, noting that even Amazon had found it hard to roll out next-day delivery nationwide.

Boohoo is constructing a warehouse in Pennsylvania to speed up deliveries and reduce dependence on costly and time-consuming air freight from the UK.

Asos opened a facility in Atlanta two years ago, although the company still made an operating loss in the US last year.

Dunn acknowledged “there were a lot of other things that Asos had to get right in the US”, but said that “you cannot compete at scale without your own warehouse”.

Strong economic growth in the US and lower levels of online penetration justified the significant investment needed, he added.

While Zalando’s ambitions are firmly anchored in Europe, the US is also among the markets targeted by Shein, a privately owned Chinese fast fashion group that has a ruthlessly efficient supply chain, rock-bottom prices and dispatches parcels direct from southern China, avoiding the customs duties that apply to large consignments.

Lyttle said the rapid growth of Shein demonstrated the size of the online opportunity.

But it is also a sign of how much more competitive online clothing is now than even a decade ago.

“You have the fast fashion players, the rollout of international fascias like Zara and H&M, the non-clothing retailers getting into clothing and then you have Amazon,” said PwC’s Windsor. The cost of customer acquisition in particular “is soaring” as a result.

This raises the risk that scale is achieved only by permanently sacrificing profitability. Operating margins across the sector have already been depressed by elevated costs, with Boohoo estimating that around £60mn was wiped off its profits in the year to February.

Rebuilding them will be a gradual process, with companies restricted on how much they can pass on rising costs to their value-conscious customers.

“We have got to remain competitive [on price],” said Lyttle.

Barrons : Steel Prices Are Rising, Too. These Stocks Can Benefit.

Steel Prices Are Rising, Too. These Stocks Can Benefit.

The war in Ukraine shocked the outlook for European steel companies more than most sectors, both lifting prices for the commodity and increasing the costs of production.

The question for investors is whether the balance of those opposing forces will come out in the companies’ favor. Analysts, meanwhile, have share-price targets well above the current market prices for three stocks: ArcelorMittal (ticker: MT.Netherlands), ThyssenKrupp (TKA.Germany), and Salzgitter (SZG.Germany).

Steel, essential for making cars and constructing buildings, is closely tied to the economic outlook. Steel prices, having jumped as much as 50% after Russia invaded Ukraine, are predicted to weaken somewhat in the coming months. Inflation, rising interest rates, and geopolitical turmoil are increasing the risk of a recession.

Yet prices for the commodity are still buoyed by concerns about supply, with production in Ukraine and Russia exports at risk. So far, the boost in prices more than covers higher production costs. These sharp gains are one reason that analysts see plenty of room for the shares of the three companies to increase.

“Ultimately, demand is the biggest concern for investors right now,” says Andrew Jones, a steel research analyst at UBS in London. “Prices are fantastic. Margins are great. It’s just that people don’t believe it’s sustainable.”

ThyssenKrupp and Salzgitter trace their origins back to Germany’s rapid emergence as an industrial powerhouse in the 19th century. Arcelor was the amalgamation of the corporate ambitions of Luxembourg, Spain, and France—it merged with India’s Mittal in 2006 to become the world’s largest steel company.

ArcelorMittal, based in Luxembourg, also engages in mining and has operations in North America, Brazil, and Africa. Shares have slipped 7.4% this year to 26.05 euros ($27.02). But the average price target among 14 analysts is €43.41. The company’s first-quarter earnings and sales rose on higher steel prices.

ArcelorMittal lowered its earnings guidance for this year, based on weaker prospects for Europe. But in an earnings statement, CEO Aditya Mittal said that “it is clear that the longer-term fundamental outlook for steel is positive.” The stock is cheap, fetching 2.9 times earnings. It’s valued at a 10% discount to its peers.

In addition to steel, ThyssenKrupp, based in Essen, Germany, sells components technology and industrial engineering. Shares are down 21% this year to €7.89. Deutsche Bank analyst Bastian Synagowitz has a price target of €17 for the stock. The company fetches 4.7 times this year’s projected earnings and is valued at a 10% premium to its peers.

ThyssenKrupp beat quarterly earnings expectations on May 11, and raised its projections for full-year earnings to €2 billion from a previous high-end estimate of €1.8 billion. “We showed resilience and improved our earnings significantly,” said ThyssenKrupp CEO Martina Merz in a statement, adding that the company is looking at “how the geopolitical changes may change supply and value chains in the medium and long term.”

Salzgitter, based in the northern German city of that name, has gained 8.3% this year to €36.04. Jefferies analyst Alan Spence has a target price of €55. Salzgitter said its first quarter pretax profit of €465.3 million was a record-high quarterly operating result for the company. The company fetches 3.4 times this year’s expected earnings, and is valued at a 20% discount to its peers.

Last month, it raised its earnings forecast for the year, saying it expects commodity and energy costs as well as steel prices to remain “at the current level.”

Barrons : Why Value Investing Is Facing a ‘Tectonic Shift’

Why Value Investing Is Facing a ‘Tectonic Shift’

The father of value investing, Benjamin Graham, still looms large over Tweedy, Browne, the New York–based firm that served as his broker back in the early 20th century.

The $5.9 billion Tweedy, Browne International ValueTBGVX +1.58% fund (ticker: TBGVX) hews to one of the famed investor’s key investing tenets: Buying stocks that trade at discounts to their intrinsic values will build wealth over time.

While Graham’s intrinsic-value principle hasn’t changed in the nearly 100 years since he created it, what’s different now are the metrics used to determine that value, portfolio co-manager Thomas Shrager says. Classic measurements such as book value, he notes, are less useful because markets have become more efficient.

One of the metrics that Shrager, 64, and fellow co-manager Robert Wyckoff, 69, now use in their analysis is enterprise value to earnings before interest and taxes, or Ebit. They look for valuation multiples between 10 and 15, but buy when those multiples are at significant discounts, ideally around 30%. Those types of discounts are similar to what someone who is looking to buy the business outright would want to see, Wyckoff says.

“It just makes sense to try to buy businesses at discounts to real-world observable valuations that have been paid for comparable businesses,” he says.

The co-managers’ conservative strategy has paid off, particularly for long-term investors. For the past 15 years, International Value has ranked in the top 1% of Morningstar’s foreign large value category, with a 3.7% annualized return. Its benchmark index, MSCI EAFE, has returned an annualized 1.6% over the same time frame. In 2011, Morningstar gave the seven-manager International Value team its International Stock Manager of the Year award.

Morningstar rates the no-load International Value a five-star bronze fund, although the 1.37% fee for retail shares is considered high by the research firm.

Value investing should have even brighter days ahead, according to Wyckoff and Shrager. The duo predicts that the shift to value that began in the fourth quarter of 2020 is a “tectonic change.” As the global economy began to recover from Covid-19 lockdowns, value stocks started to outperform growth stocks, as they typically do during economic rebounds.

The veteran team expects value’s dominance to accelerate now that the Federal Reserve is set to raise interest rates several times to temper inflation. Higher interest rates weigh heavier on growth stocks because more of their value is tied to earnings in the distant future. Plus, value stocks are simply cheaper than growth stocks after years of underperformance, Wyckoff says.

The pair’s years of experience and the fund’s strong record make their predictions worth considering. Wyckoff and Shrager have helmed the fund since 2007 and 2003, respectively, and have been at Tweedy since 1991 and 1989.

The managers seek to build a portfolio with three types of companies, though all should have strong balance sheets, a diversified customer base, and little debt.

The first are the portfolio stalwarts—high-quality businesses with strong brands and little competition that can compound value over time. That is evident in the fund’s top two holdings, Nestlé NESN +0.67% (NESN.Switzerland), and Diageo DGE +3.06% (DGE.UK), each bought more than 20 years ago. It’s those types of holdings that underscore International Value’s 11% portfolio turnover.

The second kind of holding the fund seeks are cyclical companies with average levels of growth; they may hold these shares for three to five years. One example is Swedish manufacturer Trelleborg (TREL-B.Sweden), a stock Wyckoff says remains attractively valued. Rubber seals, one of its predominant products, is an inexpensive but critical component of machines. “A business like that gets pricing power because they’re critical for the ultimate success of the enterprise,” he says.

Lastly, Wyckoff and Shrager are attracted to deep-value companies, especially those where insiders are buying the stock. In February, the fund bought Finnish company Kemira (KEMIRA.Finland), a supplier of chemicals for water-intensive companies, for around 12 euros ($12.63) a share, close to the price insiders paid. That represented a sharp discount to its estimated intrinsic value of €17 a share.

Insider buying also alerted the managers to Haitian International (1882.Hong Kong), Taiwan’s largest maker of plastic-injection molding machines. Supply-chain bottlenecks weighed on the share price, and in January they bought in at around 21 Hong Kong dollars ($2.68) a share, near where insiders bought, a price between five to six times their estimates of normalized Ebit. Wyckoff says that valuation multiple should be at least 10 to 11 times, implying a share value of HK$28 to HK$30.


The fund has a 42% exposure to Europe but had little direct exposure to Russia and Ukraine. The war will have an indirect impact on holdings such as Swedish automotive supplier Autoliv ALV +4.35% (ALV), Shrager says, since Ukraine was a major manufacturer for car harnesses. Higher raw-material costs across the board could eventually flatten operating income for European industrial companies in the near term, he says. In general, Tweedy analysts are still calculating the impact on earnings power from higher input costs on all businesses.

Inflation’s overall impact may be less of a bugaboo for a value fund, since it holds mature companies with cash flows, but it’s still a worry. Shrager says they’re reviewing their holdings to see which companies have the pricing power to pass through higher costs, which should be many of their holdings.

Stock markets are likely to go through some rocky times as they adjust to the Federal Reserve’s rate hikes, Wyckoff says. Yet he notes that when markets falter, the fund’s conservative strategy gains the most ground compared with its benchmark, thanks to the strong balance sheets of its holdings.

Barrons : Peloton’s Cheaper Than Ever for a Takeover

Peloton’s Cheaper Than Ever for a Takeover

It has been just over three months since activist investment firm Blackwells Capital targeted Peloton Interactive PTON +16.52% , and the case for change, including a sale of the company, may have only grown stronger.

Peloton Interactive (ticker: PTON) stock plunged 8% this past week after fiscal-third-quarter earnings and forward guidance came in below Wall Street expectations. The weak results—coupled with Peloton’s plans to borrow $750 million in a balance-sheet-saving move—came three weeks after Blackwells reiterated its calls for Peloton to sell itself.

Now, any potential buyer would be able to scoop up the company at an even deeper discount: Its shares have lost about half their value since Blackwells’ stake was made public on Jan. 23. They tumbled to a new intraday low this past week of $11.25. Peloton, which had a $45 billion market capitalization less than two years ago, is now a $4.5 billion company—making it an easy acquisition for a well-heeled tech giant like Apple AAPL +3.19% (AAPL) or Amazon.com AMZN +5.73% (AMZN).

Blackwells declined to comment. Peloton didn’t respond to a request for comment.

Even in its salad days, Peloton was viewed as a takeover candidate that could nestle in with a tech giant or leading fitness brand like Nike NKE +4.74% (NKE). But with the sudden drop in price, any potential buyers may want to tread carefully.

“The question is: Is it too cheap to ignore, or is it cheap for a reason?” Simeon Siegel, managing director at BMO Capital Markets, tells Barron’s, adding that the brand should focus on its loyal customers, rather than chasing growth.

Barrons : How a Digital Token Designed to Be Stable Fueled a Crypto Crash

How a Digital Token Designed to Be Stable Fueled a Crypto Crash

Bitcoin and other cryptocurrencies went from bad to worse as selling pressure spread across the tech landscape. But the latest crypto crash was also fueled by stablecoins, a type of token that’s supposed to hold up when everything else tanks.

Stablecoins are designed to maintain a fixed value, typically at $1 per token. But a fast-growing “algorithmic” stablecoin called TerraUSD collapsed this past week to a few pennies on the dollar. That appears to have shaken confidence in the largest stablecoin, Tether. Prices for Tether, or USDT, dipped to 95 cents for a few hours on Thursday, then rebounded to nearly a dollar.

The episode could shake the foundations of crypto. Stablecoins are the bedrock of trading and lending activities, providing liquidity to individual traders, funds, and market makers on both centralized exchanges and decentralized-finance, or DeFi, networks. More than 90% of trading volume in crypto occurs in stablecoins, according to CoinMarketCap. Without stablecoins doing their job—holding their dollar pegs through periods of extreme turmoil—the crypto market may face a loss of confidence, affecting trading activity and prices for tokens ranging from Bitcoin to Dogecoin.

“USDT de-pegging is alarming for all cryptocurrency markets,” says Clara Medalie, research director at Kaiko, a crypto data firm.

This isn’t just a concern for traders and firms in the $1.3 trillion crypto market. Regulators worry that if stablecoins take off as privately issued digital money, they could pose risks to broader markets and monetary policies. A run on a stablecoin could, in theory, lead to heavy selling in assets held as reserves for coin issuers, such as commercial short-term debt. Stablecoins could also substitute for the dollar in international commerce and cross-border payments—making it harder for governments to keep tabs on monetary policies and capital flows.

“The outstanding stock of stablecoins is growing at a very rapid rate, and we really need a consistent federal framework,” U.S. Treasury Secretary Janet Yellen told the Senate Banking Committee on Tuesday, partly in reference to TerraUSD.

Bitcoin’s high volatility and drawbacks as a medium of exchange opened a door for stablecoins to step through. Tether and USD Coin, or USDC, have soared in issuance over the past few years. They’re now worth a combined $130 billion, making them the third- and fourth-largest cryptos, behind Bitcoin and Ether.

“Once you’re in the ecosystem, stablecoins allow you to act as though you have U.S. dollars, when really you own crypto,” says Stéphane Ouellette, CEO of crypto derivatives broker FRNT Financial .

The coins serve numerous purposes: Traders use them to maintain liquidity between transactions and to buy other cryptos; they also play a key role in market-making and are widely used by hedge funds and other proprietary trading firms. Tether, in particular, is the most systemically important; it’s the basis for thousands of “pair trades” on exchanges and DeFi platforms, along with “smart contracts” for lending and borrowing cryptos.

Demand for stablecoins is so high as collateral for trading and borrowing that yields top 8% on many DeFi platforms and centralized sites—and even touched 20% for TerraUSD.

There’s also profit in stablecoins, and it’s attracting banks, payment companies, and fintechs to the space. The bank Silvergate Capital (ticker: SI) aims to revive the stablecoin project originally started by Meta Platforms FB +3.86% ’ (FB) Facebook, part of a broad push into crypto banking and brokerage products. Visa (V) is offering settlement services in USDC. The company backing USDC, Circle Internet Financial, is trying to go public via a special-purpose acquisition vehicle, or SPAC, called Concord Acquisition (CND). Recent investors in Circle include BlackRock (BLK) BLK +2.49% and Fidelity Investments.

The New Crypto Dollars
Like every other cryptocurrency, stablecoin transactions are recorded on blockchains such as Ethereum. While transaction fees may be steep, the coins are well suited for peer-to-peer transfers that bypass traditional banking systems, cutting out intermediaries. That’s one reason they’re often used for remittances or cross-border payments. Soon after Russia invaded Ukraine, Kyiv began welcoming crypto donations in three tokens, including Tether.

There are basically two kinds of stablecoins: asset-backed and algorithmic. Tether and USDC are the two largest asset-backed coins. The companies backing the coins aim to maintain their pegs by holding reserves equivalent to their outstanding issuance. Every time a dollar’s worth of the coins is minted, the companies are supposed to buy a dollar’s worth of reserves; when the coins are redeemed, those reserves may be sold.

Algorithmic coins like TerraUSD are more complex. They aim to maintain their pegs through arbitrage and incentive mechanisms involving other cryptocurrencies. When the price deviates from a dollar, traders can profit through a swap with another token. That is supposed to prevent the price of the stablecoin from deviating much above or below a dollar.

Breaking the Buck
TerraUSD relied on a complex mechanism of minting and burning another token, LUNA, to maintain its dollar peg. A cascade of selling in TerraUSD destabilized its peg, however, and crashed prices for LUNA.

Crypto entrepreneur Do Kwon, based in Korea, had tried to shore up LUNA and TerraUSD with plans to purchase up to $10 billion worth of Bitcoin as collateral through the “Luna Foundation Guard.” Before the crash, the foundation held $3.5 billion in Bitcoin.
The selling pressure arose from withdrawals on a DeFi lending protocol called Anchor that offered yields of 20% on TerraUSD deposits. Roughly $14 billion worth of TerraUSD was deposited in Anchor before the crash. Less than $200 million is left.

“I understand the last 72 hours have been extremely tough on all of you—know that I am resolved to work with every one of you to weather this crisis, and we will build our way out of this,” Kwon said on Twitter on Wednesday. “As we begin to rebuild [Terra], we will adjust its mechanism to be collateralized.”

Still, the Luna Foundation Guard may be running out of money. Its reserves are down to less than $90 million worth of cryptos, and it holds no Bitcoin in its wallet. The crash also took a toll on the Terra blockchain, which briefly shut down on Thursday “to prevent governance attacks,” according to Terra’s Twitter feed. The world’s largest crypto exchange, Binance, also suspended trading in TerraUSD and LUNA.

Some crypto participants say that while the episode has been painful, it signals that the market is actually functioning. “The market flushed out a weakly designed system, and the speculators that were behind it took a financial hit,” says Ryan Selkis, CEO of crypto data firm Messari.

Yet the crash had contagion effects. Luna’s stockpiling of Bitcoin rippled across other cryptos. Traders expecting a meltdown in TerraUSD appear to have sold Bitcoin, contributing to the token’s declines. That, in turn, weakened demand across crypto markets, which lost more than $400 billion in market cap as scores of tokens declined by more than 20%, including Bitcoin, Ether, Cardano, and Solana.

USDT hasn’t emerged without a black eye, either, underscoring how contagion from one crypto can spread to others and the broader market.

In theory, USDT shouldn’t deviate far from its peg. Tether Ltd., the company backing the token, says USDT is “backed 100%” by reserves at a one-to-one ratio, and promises that investors can always redeem its tokens for an equivalent amount of real money. If a hedge fund were to send the company one million USDT tokens, for instance, the company would send the fund $1 million, even if the price differs on secondary markets.

The token also relies on arbitrage mechanisms with market makers and trading firms to hold its peg. If the price of USDT falls by even a fraction of a penny on exchanges like Coinbase or FTX, institutional traders can buy USDT at a discount and redeem it with the company, profiting off the spread, or difference, to a buck.

Those mechanics do appear to have worked. The coin was at about 95 cents on the dollar at 3:30 a.m. in New York on Thursday, but by 9 a.m. it was above 99 cents.

Why did the price get so low? Overnight selling pressure before banks opened for business may have contributed—leaving a gap between selling on the secondary market and redemptions with Tether. Moreover, Tether redeems tokens only with “eligible contract participants” such as proprietary trading firms, and it isn’t automatic.

Some market participants say USDT’s loss of dollar peg wasn’t a deal breaker for the token. “The market is functioning, and it’s expected to see minor de-risking of other stablecoins following the Terra de-peg,” says John Kramer, director of trading at market maker GSR.

Ouellette, who deals in Tether through his derivatives firm and a separate hedge fund, describes the situation as a “little spooky,” but adds that it looked like typical “arbitrage friction,” exacerbated by hedge funds that had tried to attack USDT and profit off a decline.

Still, Tether hasn’t inspired confidence with its limited disclosures and reserve practices. Based in the British Virgin Islands, Tether issues a periodic “assurance opinion” on its reserves from a Cayman Islands auditor. The last one was from December. In it, Tether said that 84% of its reserves were in cash and equivalents, Treasuries, short-term deposits, and commercial paper. The rest consisted of $4.1 billion in “secured loans”; $3.6 billion in “corporate bonds, funds, and precious metals”; and $5 billion in “other investments,” including “digital tokens.”

The company said Thursday that it had reduced its holdings of commercial paper by 50% over the past six months, and now holds the majority of its assets in Treasuries.

Still, Tether has run into legal troubles, settling charges last year with New York state and the Commodity Futures Trading Commission over its reserves and disclosure practices.

“Unlike algorithmic stablecoins, Tether holds a strong, conservative, and liquid portfolio,” a Tether spokesperson tells Barron’s. Tether has maintained its stability “through multiple black-swan events” and never refused a redemption, the spokesperson adds. Tether added in a statement that “it is business as usual” and was processing more than $2 billion in redemption requests “without issue.”

Crypto Rules Are Coming
The volatility in stablecoins may only build momentum to bring some rules and supervision to the space.

The Biden administration, for one, wants coin issuers under federal supervision, potentially even carrying FDIC deposit insurance. Biden called on Congress to pass supervisory rules for stablecoins in a recent executive order on crypto.

Congress is also working on a variety of rules for stablecoins; a draft bill in the Senate would establish a process for banks and credit unions to issue stablecoins, among other measures. Sen. Patrick Toomey (R., Pa.) recently introduced a framework for regulating “payment stablecoins,” though it wouldn’t address algorithmic coins, which are looking far less stable than asset-backed coins.

U.S. regulators and lawmakers have expressed several concerns. One is about the liquidity and quality of issuers’ reserve assets—whether they can readily meet redemption requests in a panic scenario. Another growing concern is contagion to broader financial markets if there’s a run on a major stablecoin like USDT.

Many trading firms hold large amounts of USDT for market-making and liquidity. Those institutions need to be confident that USDT is fully backed and that they’ll be fully repaid in dollars when redeeming large amounts. “I don’t know too many institutional market participants that are concerned about the reserves in Tether,” says Selkis.

Yet if those trading firms were to lose faith in Tether, they may quickly try to sell their holdings on secondary markets. Without a government backstop like the Fed or Treasury Department, USDT would be at the mercy of the market, potentially causing shockwaves to other cryptos and trading at brokerages from Coinbase Global COIN +16.02% (COIN) to PayPal Holdings PYPL +6.11% (PYPL).

“If you’re a regulator, I think what they’re worried about is not that the crypto community goes poof; it’s that the losses at Coinbase then feed to PayPal and then feed to a bank,” says Bryan Routledge, a professor of finance at Carnegie Mellon University.

Stability Is All Relative
If anyone might emerge stronger from this, it’s Circle, the company backing USDC. Based in the U.S., Circle says its reserves now consist of cash and Treasuries, fully backing every token.

CEO Jeremy Allaire said on Thursday that the company had issued $1 billion in USDC over the prior 24 hours, which he attributed to a “flight to quality” as investors sought issuers that were fully backed and transparent. “There are others that have chosen not to participate in a regulatory framework,” he said. “Naturally, there are more questions about that.”

Circle, of course, is trying to be a model citizen as it aims to go public. Its revenue model centers partly on generating income from reserve assets and lending activities. Rising interest rates should boost the yield on its reserves. The firm is awaiting regulatory approval for its SPAC merger from the Securities and Exchange Commission. Allaire said he expects the merger to be completed later this year.

Circle probably won’t be profitable for at least another year, though. It’s projecting adjusted operating profits of $76 million in 2023, assuming that USDC in circulation reaches $190 billion, with 30,000 institutional accounts and $50 billion in lending volume. More shocks to the crypto ecosystem would probably derail those plans, and Circle’s profits.

>>> US Close Dow +1.47% S&P +2.39% NAsdaq +3.82% Russell +3.06%

Closing Stock Market Summary

The S&P 500 rallied 2.4% on Friday, bouncing from an oversold condition and closing back above the psychological 4,000 level. The Nasdaq Composite (+3.8%) and Russell 2000 (+3.1%) outperformed with gains over 3.0% while the Dow Jones Industrial Average rose 1.5%. 

It was a risk-on day from the get-go, starting from strong showings in foreign equity markets and continuing into the close of U.S. markets. All 11 S&P 500 sectors finished higher with gains ranging from 1.1% (utilities and health care) to 4.1% (consumer discretionary), with individual leadership belonging to the battered mega-cap stocks. 

Presumably, risk sentiment was aided by a recognition that the S&P 500 was able to push higher after nearly entering bear market territory yesterday, as well as the ability for the market to sustain an early rally effort. 

News factors that supported cause were reports from Bloomberg indicating that Shanghai was aiming to have no community spread of COVID-19 by May 20, spurring hopes for a relaxation of restrictions this month, and that Beijing refuted rumors of potential COVID-related lockdowns. Crude futures rose 3.7%, or $3.92, to $110.32/bbl amid improved demand expectations. 

Short-covering activity, meanwhile, was evident in the post-earnings pops in Affirm Holdings (AFRM 23.71, +5.67, +31.4%) and Duolingo (DUOL 89.77, +22.79, +34.0%), and the outsized gain in Robinhood Markets (HOOD 10.69, +2.13, +24.9%) on news that Emergent Fidelity disclosed a 7.6% active stake in the company.

The bullish price action contributed to a decline in the CBOE Volatility Index (28.87, -2.80, -9.1%), reflecting reduced hedging interest, and declines in safe-haven assets like Treasuries, gold ($1,808.30/ozt, -$15.40, +0.8%), and the U.S. dollar (104.57, -0.28, -0.3%).

Selling interest in Treasuries pushed yields higher: the 2-yr yield rose eight basis points to 2.59%, and the 10-yr yield rose 12 basis points to 2.94%.

In Fedspeak, Fed Chair Powell and Cleveland Fed President Mester (FOMC voter) both reiterated support for 50-basis-point rate hikes in the next two meetings after seeing this week's inflation data. On a related note, hopes for peak inflation were reinforced today by a flat m/m change in import prices for April and by downwardly revised export prices for March (to 4.1% from 4.5%). 

Separately, Twitter (TWTR 40.70, -4.38, -9.7%) shares fell about 10% amid growing doubts about Elon Musk's takeover of the company. Mr. Musk tweeted that the deal was temporarily on hold following recent analysis that showed spam/fake accounts represented less than 5% of Twitter users -- less than his expectations -- but later said that he was still committed to the deal. 

Reviewing Friday's economic data: 

  • The preliminary University of Michigan Index of Consumer Sentiment for May dropped to 59.1 (consensus 63.5) from the final reading of 65.2 for April. In the same period a year ago, the index stood at 82.9.
    • The key takeaway from the report is that the decline in sentiment was broad-based across income, age, education, geography, and political affiliation with inflation factoring prominently in consumers' assessment of their current financial situation.
  • Import prices were flat in April after increasing 2.9% in March. Excluding oil, import prices rose 0.4% after increasing 1.2% in March. Export prices rose 0.6% after increasing 4.1% in March. Excluding agriculture, export prices also rose 0.5% after increasing 4.1% in March.

Looking ahead, investors will receive the Empire State Manufacturing Survey for May and Net Long-term TIC Flows for March on Monday. 

  • Dow Jones Industrial Average -11.4 YTD
  • S&P 500 -15.6% YTD
  • Russell 2000 -20.2% YTD
  • Nasdaq Composite -24.5% YTD

>>> Baupost Group (Seth Klarman) discloses updated portfolio positions in 13F fi

Baupost Group (Seth Klarman) discloses updated portfolio positions in 13F filing: New GTN BRBR POST positions
Highlights from 2022 Q1 filing as compared to Q4 2021:
  • New positions in: GTN (~1.29 mln shares), BRBR (~0.48 mln), POST (~0.38 mln)
  • Increased positions in: IS (to ~7.94 mln shares from ~4 mln shares), DBX (to ~10.57 mln from ~8.1 mln), EHC (to ~3 mln from ~0.72 mln), NUVB (to ~10.44 mln from ~8.62 mln), FISV (to ~3.99 mln from ~3.05 mln) QRVO (to ~6.65 mln from ~5.95 mln), LSXMK (to ~11.16 mln from ~10.51 mln) LSXMA (to ~5.62 mln from ~4.98 mln), GOOG (to ~0.24 mln from ~0.23 mln),
  • Maintained positions in: LBTYK (~53.97 mln shares VSAT (~16.29 mln shares), TBPH (~13.64 mln shares), LBTYA (~7.66 mln shares), SSNC (~3.77 mln shares), VRTV (~3.56 mln shares), WTW (~1.23 mln shares), FB (~0.97 mln shares),
  • Closed positions in: PSTH (from ~9.55 mln shares), NLOK (from ~5.78 mln)
  • Decreased positions in: JOBY (to ~1.97 mln shares from ~9.62 mln shares), DBRG (to ~18.37 mln from ~22.88 mln), VRNT (to ~2.21 mln from ~3.75 mln), INTC (to ~16.59 mln from ~18.04 mln), TUMQ (to ~11.13 mln from ~11.71 mln), NXST (to ~1.15 mln from ~1.71 mln), LFG (to ~3.12 mln from ~3.5 mln), ATRA (to ~8.12 mln from ~8.48 mln), GRAB (to ~6.11 mln from ~6.4 mln), MU (to ~3.11 mln from ~3.25 mln)

>>> Carl Icahn discloses updated portfolio positions in 13F filing: Affirms IFF

Carl Icahn discloses updated portfolio positions in 13F filing: Affirms IFF position, lowered NWL LNG DK holdings
Highlights from 2022 Q1 filing as compared to Q4 2021:
  • New positions in: IFF (~0.64 mln shares)
  • Maintained positions in: IEP (~257.05 mln shares), CVI (~71.2 mln shares), BHC (~34.72 mln shares), XRX (~32.11 mln shares), FE (~18.97 mln shares), DAN (~14.29 mln shares), WBT (~11.15 mln shares), HRI (~4.02 mln shares), SWX (~2.9 mln shares)
  • Decreased positions in: NWL (to ~33.07 mln shares from ~43.7 mln shares), LNG (to ~9.72 mln from ~16.17 mln), DK (to ~1.34 mln from ~6.98 mln)

>>> Starboard Value (Jeffrey Smith) discloses updated portfolio positions in 13F

Starboard Value (Jeffrey Smith) discloses updated portfolio positions in 13F filing: New LPSN MRCY KSS HUM positions
Highlights from 2022 Q1 filing as compared to Q4 2021:
  • New positions in: LPSN (~6.41 mln shares), MRCY (~3.58 mln), KSS (~3.33 mln) HUM (~0.97 mln)
  • Increased positions in: CYXT (to ~20.77 mln shares from ~16.53 mln shares), GDDY (to ~8.25 mln from ~6.79 mln), ARTE (to ~0.5 mln from ~0.29 mln), EHTH (to ~2.24 mln from ~2.05 mln), ENOV (to ~4.11 mln from ~3.92 mln) ACAQ (to ~0.51 mln from ~0.38 mln), IQMD (to ~0.11 mln from ~0.1 mln)
  • Maintained positions in: NLOK (~16.7 mln shares), ACM (~7.1 mln shares), GCP (~6.54 mln shares), MD (~5.92 mln shares), GDOT (~5.29 mln shares), PZZA (~2.76 mln shares), WTW (~2.14 mln shares)
  • Decreased positions in: CTVA (to ~6 mln shares from ~8.9 mln shares), ACIW (to ~6.24 mln from ~8.99 mln), HUN (to ~16.52 mln from ~18.03 mln), CERN (to ~2.26 mln from ~3.43 mln), ON (to ~6.62 mln from ~7.57 mln), ELAN (to ~6.9 mln from ~7.69 mln), CVLT (to ~3.84 mln from ~4.29 mln), MMSI (to ~0.87 mln from ~1.3 mln)