(ZH) QT Will Be The First Casualty In The Great Tightening

QT Will Be The First Casualty In The Great Tightening

Wider credit spreads are likely to prompt central banks to ease up on QT sooner than expected, with the hope that interest rates will do most of the heavy lifting in reducing inflation.
The perils of tightening liquidity in a highly indebted world are becoming startlingly clear (again). Risk assets are getting clobbered, but even more worrisome for central banks is the widening of credit spreads.
The reason is the sharp fall in excess liquidity. It is excess liquidity -- liquidity created above and beyond the needs of the real economy -- that keeps assets supported. When it is in decline as it is currently, assets no longer have a safety net, leading to risk aversion and spread widening.
Balance-sheet reduction from the Fed, the ECB et al will contract liquidity yet more. But just as rising liquidity floats all boats, falling liquidity can simultaneously sink them all. Every dollar of the monetary base supports $10 of credit, but every $1 destroyed in QT takes $10 of credit with it.
QT therefore stands to be the first casualty in the move to tighter monetary policy in the US, Europe and elsewhere. Indeed, Europe took a step towards this with its announcement today that it would be flexible in using PEPP redemptions to support bonds. This is potentially an early shift towards dropping sequencing altogether, allowing the ECB to raise rates while the balance sheet is neutral or expanding.
The Fed, like the ECB, also finds itself in an impossible position. Growth in the US is easing at an increasing rate, meaning a recession could be on the cards in the not too distant future. The Fed will very likely have to pause or even reverse course much sooner than it or the market currently anticipates -- although that is not the story for today’s FOMC, with a 75-bp hike baked in.
Nevertheless, watch US high yield and junk credit spreads carefully -- especially in the days after the FOMC’s announcement -- as they could yet push the Fed in a direction the ECB is already heading in. Credit spreads are the most direct link between the real economy and markets, and when credit blows out it triggers the self-reinforcing feedback loops between asset prices and the health of the economy that lead to the regime change of a recession.
Credit spreads across the board in the US have been widening with increasing speed, with high-yield spreads close to doubling this year. Leading indicators show that spreads are set to get even wider.
Credit will come under increasing pressure, and could force the Fed to take action, just as occurred in 2020 when it announced its corporate credit facility. Easing up on QT would be an obvious option to support excess liquidity, while rising interest rates (hopefully) continue to restrain consumer inflation.

>>> US Close Dow +1% S1P +1,46% Nasdaq +2,50% Russell +1,36%

Closing Stock Market Summary

The major indices enjoyed a rebound today, but that wasn't asking much of the market. Entering today, the S&P 500 was down 10.4% from its intraday high last Monday and the Nasdaq Composite was down 11.6%. To say that the market was oversold on a short-term basis was not an overstatement.

The magnitude, and speed, of those losses left it ripe for a rebound try, and it garnered support from a concurrent rebound in the Treasury market and an FOMC decision that went mostly as (recently) expected.

Briefly, the FOMC voted to raise the target range for the fed funds rate by 75 basis points to 1.50-1.75% and said it anticipates additional rate hikes will be appropriate. That vote was not unanimous, however. Kansas City Fed President George dissented, preferring a rate hike of only 50 basis points at this meeting.

The accompanying summary of economic projections revealed upward revisions to the median estimate for PCE inflation (to 5.2% from 4.3%) and core CPE inflation (to 4.3% from 4.1%) this year, a downward revision to the change in real GDP (to 1.7% from 2.8%), a higher unemployment rate (to 3.7% from 3.5%), and, most importantly, a sharp upward revision to the median estimate for the fed funds rate (to 3.4% from 1.9%).

The range of projections for the 2022 fed funds rate (3.1-3.9%) was more in-line with what the fed funds futures market has priced in; hence, there weren't any major surprises in the Fed's revised interest rate projections.

That understanding was a bit of a calming influence that enabled the market to stand its higher ground during Fed Chair Powell's press conference, which featured a declaration from the Fed Chair that he does not expect 75-basis point rate hikes to become common, and an allowance that the July meeting is likely to feature either a 50-basis point rate hike or a 75-basis point rate hike.

By the closing bell, however, the S&P 500 was little changed from the level it was trading at just before the 2:00 p.m. ET release of the policy directive. What that suggested to us is that today's gains were driven more by rebound-minded action following the large losses than they were by any genuine excitement over what the FOMC and Fed Chair Powell communicated today.

To be fair, the 2-yr note yield and 10-yr note yield moved lower following the Fed's communications. Treasuries were already rallying from their own short-term oversold condition, but the gains were extended after the close of the Treasury market's cash session when the Fed Chair was speaking. As of this writing, the 2-yr note yield was at 3.23%, down 20 basis points from where it settled on Tuesday, whereas the 10-yr note yield was at 3.32%, down 16 basis points from where it settled on Tuesday.

That move was likely aided by some short-covering activity, but in any case it didn't corroborate a bearish takeaway from what was learned today. A mixed batch of economic data, which featured weaker-than-expected retail sales for May, and the Fed's downward revision to the change in real GDP for 2022, could be considered bond friendly.

By and large, market participants were friendly to the majority of stocks today. Advancers led decliners by a nearly 3-to-1 margin at the NYSE and the Nasdaq; 21 of 30 Dow components ended with a gain; and ten out of 11 S&P 500 sectors closed higher. The lone sector holdout was the energy sector (-2.1%), which got clipped by lower oil prices ($115.25, -3.68, -3.1%) and an admonishment of top oil companies by President Biden, who said refinery margins well above normal "at a time of war" are not acceptable.

The mega-cap stocks were the key movers. The Vanguard Mega-Cap Growth ETF (MGK) gained 2.6% versus a 1.0% gain for the Invesco S&P 500 Equal Weight ETF (RSP). 

In other important central bank news today, the ECB held an emergency meeting to develop a plan that it believes will mitigate the bond fragmentation issue in the eurozone. The ECB's action prompted a rebound bid in eurozone bond and equity markets, which had also gotten into a short-term oversold condition.

Reviewing today's economic data:

  • The MBA Mortgage Applications Index increased 6.6% week-over-week, with purchase applications up 8% and refinancing applications up 4%
  • Total retail sales decreased 0.3% month-over-month (consensus +0.2%) following a downwardly revised 0.7% increase (from 0.9%) in April. Excluding autos, retail sales increased 0.5% (consensus +0.7%) following a downwardly revised 0.4% increase (from 0.6%) in April.
    • The key takeaway from the report is that spending activity weakened in May, with high gas prices likely curtailing discretionary spending on goods. Excluding gasoline station sales, retail sales were down 0.7% month-over-month in May. This could eventually pique concerns that the Fed will be raising rates aggressively into an economic slowdown.
  • The New York Fed's Empire State Manufacturing Survey for June was weaker than expected at -1.3 (Briefing.com consensus 3.0), but it was improved from the -11.6 reading in April. Nonetheless, a number below 0.0 is still indicative of a contraction in manufacturing activity.
  • The Import-Export Price Index for May showed a 0.3% decline in nonfuel imports and a 2.9% increase in non-agricultural exports. That left the year-over-year changes at 5.9% and 19.3%, respectively.
  • Business Inventories increased 1.2% month-over-month in April, as expected, following an upwardly revised 2.4% increase (from 2.0%) in March.
  • The June NAHB Housing Market Index dipped to 67 (consensus 68) from 69 in May.

Looking ahead, market participants will receive the May Housing Starts and Building Permits Report (8:30 a.m. ET), the Weekly Initial Claims Report (8:30 a.m. ET), and the June Philadelphia Fed Index (8:30 a.m. ET) on Thursday.

  • Dow Jones Industrial Average: -15.4% YTD
  • S&P 400: -18.7% YTD
  • S&P 500: -20.5% YTD
  • Russell 2000: -22.9% YTD
  • Nasdaq Composite: -29.1% YTD

FT : THG pursuers set to give up their chase of ecommerce group

THG pursuers set to give up their chase of ecommerce group
Investment groups Belerion and King Street ready to drop £2bn approach as ‘put up or shut up’ deadline nears

Two investment firms are set to abandon their pursuit of ecommerce retailer THG, presenting a fresh setback for the company’s investors.

The Manchester-based group said last month that Belerion Capital and King Street Capital Management had made an “unsolicited, highly preliminary and indicative non-binding proposal” of 170p a share, or around £2bn.

The overture was rejected as inadequate but making it public set the clock ticking on a “put up or shut up” deadline of June 16 under UK takeover rules.

A person familiar with the approach said a formal statement confirming withdrawal was likely on Thursday. The parties may not then make a further approach for six months, unless another party tables a bid.

Belerion is already a shareholder in the group and Iain McDonald, its chief investment officer, has been a non-executive director since 2010. Belerion and King Street both declined to comment, as did THG.

Their intention to abandon their pursuit was first reported by Bloomberg News.

THG shares climbed after the approach became public but never reached the 170p bid price, suggesting investors were sceptical about a firm offer materialising or the company recommending its acceptance. THG co-founder Matt Moulding still holds a “special share” giving him power to veto any hostile takeover, although he has pledged to relinquish this.

The shares have since fallen back and closed on Wednesday at 104p, mirroring a wider retracement in both technology and retail stocks amid worries about the impact of inflation on consumer spending. The group floated in September 2020 at 500p a share and the stock reached 800p in the aftermath of the IPO.

Bid speculation has rarely been far from THG since the shares began to fall last summer. That pace of decline picked up after an investor day in October that left many with concerns about the company’s governance and strategy.

The company said at the time of its full-year results that it had received various “unacceptable” proposals.

Candy Ventures, an investment group controlled by property tycoon Nick Candy, is also subject to the June 16 deadline. It said in May it was “in the early stages of considering a bid” for THG but did not respond to requests for comment.

It usually invests in small companies quoted on London’s junior stock market and few analysts expected it to make a firm bid for THG, which is capitalised at £1.28bn.

WSJ : Bill Gates Says NFTs and Crypto Are ‘100%’ Based on Greater Fool Theory

Bill Gates Says NFTs and Crypto Are ‘100%’ Based on Greater Fool Theory
The Microsoft co-founder joked that ‘expensive digital images of monkeys’ would improve the world

Microsoft Corp. MSFT +2.15% co-founder Bill Gates said he thinks cryptocurrencies and NFTs are “100%” based on the greater fool theory.

The 66-year-old billionaire was referring to the notion that overvalued assets will keep going up because there are enough people willing to pay high prices for them. He joked that “expensive digital images of monkeys” would “improve the world immensely.”

Mr. Gates, who for years has lampooned cryptocurrencies, said Tuesday at a TechCrunch event in Berkeley, Calif., that people bought cryptocurrencies and NFTs based on the idea that, no matter its price, it could be sold for higher because “somebody’s going to pay more for it than I do.”

He said that he wasn’t involved in “any of those things” either long or short. Other wealthy investors and executives, including Warren Buffett and Jamie Dimon, have also expressed skepticism about cryptocurrencies. Mr. Buffett once called bitcoin “rat poison squared.”

NFTs, or nonfungible tokens, are digital proofs of a purchase for goods like art, digital music and sneakers. After surging in popularity, their demand appears to be flatlining recently. Rising interest rates have crushed risky bets across the financial markets—and NFTs are among the most speculative.

In referencing NFTs, Mr. Gates appeared to be commenting on a monkey from the Bored Ape Yacht Club NFT collection.

He said he preferred asset classes “like a farm where they have the output or a company where they make products.”

His comments come as bitcoin and other cryptocurrencies have slid sharply in recent days amid a broad global market rout, undoing much of the gains at the beginning of the pandemic when a wave of investors started betting on digital currencies.

The price of bitcoin recently traded just above $20,000 on Wednesday. It has lost more than two-thirds of its value since its record high in November, the fourth worst selloff in the cryptocurrency’s 13-year history.

Further waves of reckoning have swept through the cryptocurrency industry this week. Crypto exchange Coinbase Global Inc. said it would cut almost a fifth of its staff and crypto lender Celsius Network LLC, one of the largest crypto lenders, told users on Sunday night that it was pausing all withdrawals, swaps and transfers between accounts because of extreme market conditions. The company has hired a law firm to examine restructuring options.

Mr. Gates is the world’s fourth-richest person with a net worth of $113 billion, according to the Bloomberg Billionaires Index. He wrote in a Q&A session on Reddit last month that he didn’t own any cryptocurrencies.

“I like investing in things that have valuable output,” he said.

“The value of crypto,” he added, “is just what some other person decides someone else will pay for it.”

Business Of Fashion : Fashion’s Top M&A Targets

Fashion’s Top M&A Targets
The market may be cooling, but a number of in-demand brands remain of interest to financial backers. BoF identifies the top targets.

KEY INSIGHTS
  • Ganni and Jacquemus are among the high-potential labels that financial backers are targeting.
  • Investors are looking for solid revenue growth, profits and brand DNA, as well as direct-to-consumer success and social media fluency.
  • “There is less forgiveness for underperforming companies or brands that are not relevant to today’s consumers,” said Elsa Berry of Vendôme Global Partners.

In the investment community, fashion has long been considered a risky bet. It’s difficult for brands to differentiate themselves in a saturated market, and even harder to achieve the scale required to turn a significant profit.
However, early in the pandemic, appetite for fashion acquisitions increased as investors saw distressed assets as good deals. (Licensing firm Authentic Brands Group, for instance, picked up Lucky Brand Jeans in August 2020 and Brooks Brothers in September 2020.) Then, as winners emerged from the crisis — with 2021 sales significantly up from 2019 — valuations rose, putting still-flush investors in a race to partner with top brands.
Now, the tables have turned once again. As inflation rises and consumer spending slows, dozens of fashion brands are looking for backers. But potential acquirers are thinking twice before they cut a deal, as stock markets sink and the likelihood of a global downturn grows. In the first quarter of 2022, total transaction value in the global M&A market dropped to $725 billion, nearly 23 percent lower than the previous quarter, according to research firm Global Data.
“Buyers have become very selective,” said Elsa Berry, founder of Vendôme Global Partners, which has advised brands including Dries Van Noten and Bally. “There is still a lot of money looking for investment opportunities, but growth, profits and brand DNA need to be solid. There is less forgiveness for underperforming companies or for brands that are not agile or not relevant to today’s consumers’ interests and expectations.”

So, which are still worth pursuing? BoF spoke with industry executives, financial advisors and investors to identify seven fashion labels with strong identities and sound business models.

Isabel Marant
2022 Estimated Revenue: $320 million
The preeminent export of French bohemian-bourgeois chic since 1994, designer-founder Isabel Marant sold a 51 percent stake in her namesake business in 2016 to Paris-based fund Montefiore Investment, which has helped to steadily increase the label’s sales and expand its reach beyond hero products like the wedge sneaker, a global hit in the early 2010s. The company’s balanced distribution — both geographically and between wholesale, direct retail and e-commerce channels — as well as its accessible-luxury prices, gave it a leg up during the pandemic. Now, Montefiore is seeking an exit at a valuation of about $1 billion, according to multiple sources, most likely to a strategic partner that could help manage further retail expansion. While talks with interested buyer did not continue in February 2022, a deal could be back in play, the source said.

Ganni
2022 Estimated Revenue: $180 million
Ditte and Nicolaj Reffstrup’s transformation of a sleepy Coppenhagen-based knitwear label into a trendy global player known for its accessible, print-heavy separates, is well-documented. In 2017, LVMH-linked investment firm L Catterton took a majority stake in the business, providing the capital to grow its retail network to 36 stores. Now the company — whose mix of desirability and price point could help it weather a downturn — is a prime target for a new investor that could push it above $500 million in annual sales.

Jacquemus
2022 Estimated Revenue: $200 million
Unlike most of the brands on this list, Jacquemus, which blends Mediterranean sensuality with youthful ease, is not seeking a backer, despite the fact that the digital-first label — 70 percent of overall sales are generated via e-commerce — is of interest to plenty of parties. It’s all thanks to designer Simon Porte Jacquemus’ ability to attract attention online — consider his show in the lavender fields — and create hero products — like his teeny-tiny handbags — that are both conceptual and commercial hits.
Now, he has hired former Paco Rabanne and Lemaire head Bastien Daguzan as chief executive to take the label to the next level. A beauty partnership with Spanish fragrance giant Puig — the owner of Rabanne — is in the works, and a Nike collaboration is launching in June 2022.

Amiri
2022 Estimated Revenue: $250 million
Los Angeles-based Mike Amiri has done particularly well in menswear and denim: his ripped, skinny jeans and ornate baseball jackets capture a certain American West Coast fashion niche. In 2019, the designer received a minority investment from Italian entrepreneur Renzo Rosso’s group OTB. The Diesel-owner tends to prefer majority investments in brands — Marni, Maison Margiela and Jil Sander are all part of OTB — so he would be a likely buyer if the brand was to sell. Amiri’s focus on denim, Rosso’s specialty, also helps.

Sézane
2022 Estimated Revenue: $140 million
Morgane Sezalory‘s direct-to-consumer label Sézane, founded in 2013, used classic French tropes — with stripes and florals galore — to develop an easy-to-understand aesthetic that has appeal far beyond Saint-Germain-des-Prés. Its “French girl style” is a hit in the US, where other Paris-based contemporary brands have struggled to succeed because of poorly plotted distribution strategies and sizing that’s not so friendly to many American consumers. Sézane’s online-first approach smartly positioned it as a competitor to Los Angeles-based Reformation.

Amina Muaddi
2022 Estimated Revenue: $58 million
An antithesis to the subdued flats and chunky sneakers that dominated women’s footwear for a decade past decade, Amina Muaddi’s colourful, plastic-fantastic heels — hefty with embellishment and sculptural in shape — managed to buck pandemic trends, with sales hitting $22 million in 2020 after just two years in business. A key challenge in the footwear business is distribution, and scaling up once distribution is secured: most luxury consumers tend to favour well-known brands more than in any other category. A partner could support an expansion into retail and a deeper product assortment.

Casablanca
2022 Estimated Revenue: $40 million
French-Moroccan designer Charaf Tajer made a name for himself co-founding the Paris-based streetwear label Pigalle with Stéphane Ashpool and working with Virgil Abloh and Supreme. With Casablanca, which he launched in 2019, he became the focal point (and a contender for several high-profile creative director positions, according to sources.) The line taps into the growing demand for resort wear for both men and women, with a heavy emphasis on relaxed silhouettes like boxer shorts and bowling shirts, done in silk twills printed with novel, tongue-in-cheek motifs.

WWD : Respect and Utility Key in NFT Success, Says Tag Heuer’s Frédéric Arnault

Respect and Utility Key in NFT Success, Says Tag Heuer’s Frédéric Arnault
The chief executive officer explained why an NFT viewer was the Swiss watchmaker’s first Web3 move.

PARIS — Forget wearing your heart on your sleeve: thanks to Swiss watchmaker Tag Heuer, it’s your NFT collection you’ll be able to display on your wrist, proof of ownership and all.

Owners of its Connected Calibre E4 smartwatch will now be able to showcase their digital collection using the dedicated viewer in its new Lens watch face.

With still and animated digital collectibles supported, it’s a far cry from having to pull out one’s smartphone to open a digital wallet or using static images as device backgrounds or phone cases, the watchmaker’s chief executive officer Frédéric Arnault told WWD.

“That’s not really your NFT, it’s an image of it,” he pointed out, adding that given the value of digital artwork, “you want to be able to showcase it on something as unique and special as it is.”

Proof of ownership will also be displayed as a hexagonal cloud of particles gravitating around the digital artwork, which can be resized to its owner’s liking.

Putting an NFT viewer in a smartwatch felt right to address the needs of collectors, given their affinity toward tech devices and appetite to showcase their digital identities and ownership credentials.

“A watch is a great format for yourself [to admire your collection] and as a conversation starter. [Collectors] are passionate, they talk about them all the time,” he continued, admitting that he was among them.

And the intuitive display has also allowed non-NFT enthusiasts to start seeing the point, the executive added.

This could also pave the way to changing the way time is displayed.

Although Tag Heuer’s most successful watch faces remain those mimicking mechanical timepieces such as the most-downloaded Heuer 02 with its chronograph-style display, Arnault believes connected devices offer new creative avenues and that NFTs will, in time, be a key in moving away from watch hands.

Case in point: while an NFT takes pride of place in the new Lens display, time is indicated by a discreet triangle and circle near the bezel, indicating hours and minutes, respectively.

Asked why the brand didn’t dive into the Web3 space with its own digital artwork, the executive felt there was a positioning challenge toward the NFT community, which numbers around 500,000 around the world but is rapidly growing.

“It’s difficult for a brand to land in that space without showing respect and recognition towards what the community is. Our approach is to show that we are part of it, first by accepting crypto payments and now giving the ability to visualize existing NFTs,” said the executive.

He credited NFTs’ potential monetization for drumming up interest in creators and attracting large volumes of investment that have financed creativity on a scale that didn’t previously exist.

Artistic considerations aside, “what’s most important is why a digital collectible has value. What utility lies behind it: services, access, drops? Launching an NFT collection is a very involving choice because you have to have a vision on how to maintain value so that clients will want to have and continue to be part of the community,” he continued.

Among those successful in harnessing “a good concept with real engagement strategies in terms of drops and the whole universe [each brand] has created around these avatars,” he named Rtfkt, Takashi Murakami’s “Murakami.Flowers” and Bored Ape, who gained “the most traction [by being] the first to work their brand differently, giving the intellectual property to their community [and in succession] creating a universe, a land, a metaverse.”

Given the outsized importance of community in the Web3 space, which he likened to the watch collecting world, Arnault is convinced that blockchain and NFTs will fundamentally change the face of luxury.

“What clients have in their wallet will change the way CRM is done and how brands engage with them,” he said, although he admits it will take time given the steep technological and time-consuming barriers to entry.

Innovations that will lessen the environmental impact of their current energy-intensive production will also be key.

“I’d be surprised if no one finds a way to make crypto efficient within the next decade,” he said, naming quantum computing as another coming paradigm shift for crypto as calculations speed up.

If recent cryptocurrency crashes have made headlines by wiping out billions, Arnault viewed them as a good thing that “repels speculators and puts an end to dilettante projects,” expressing the opinion that the field’s unicorns were now being built.

As for the shape Tag Heuer’s Web3 presence will take, the executive declined to share specifics but noted that “going too fast or being first” wasn’t necessary.

“I could tell you what we’re not going to do right now, or within the next five years, but I never want to say never. A month in crypto is [equivalent to] a year. You have to be agile, to question the way you function — it’s a risk-taking mind-set,” he said.