Gapping down
In reaction to earnings/guidance:
- ASX -1.2%
Other news:
- T -22.8% (AT&T and Discovery close WarnerMedia transaction)
- NIO -9% (has suspended production amid supply chain issues)
- XPEV -7.5% (in sympathy with NIO)
- LI -6.2% (in sympathy with NIO)
- ZH -3.9% (files for ordinary share offering, no amount given)
- CRGY -3.5% (files for $75 mln common stock offering)
- NVDA -3.4% (asks stockholders to approve a Charter amendment to increase the number of authorized shares from 4 bln to 8 bln shares)
- ADAP -1.8% (files for $400 mln mixed securities shelf offering)
- TWTR -1.7% (Elon Musk has decided against joining TWTR's Board of Directors)
- ALLT -1.5% (files for 12,785,917 share offering by selling shareholder)
- AAPL -1.3% (EU to send another antitrust charge to Apple related to case that Spotify (SPOT) brought to their attention over music streaming rights, according to Reuters)
Analyst comments:
- BCRX -5.7% (downgraded to Neutral from Buy at BofA Securities)
- CCCC -3.7% (downgraded to Neutral from Buy at BofA Securities)
- COMM -2.2% (downgraded to Underperform from Mkt Perform at Raymond James)
Gapping up
News:
- SAIL +29.6% (confirms agreement to be acquired by Thoma Bravo for $6.9 bln; stockholders to receive $65.25 per share in cash)
- VERU +24.8% (Novel COVID-19 Drug Candidate Reduces Deaths by 55% in Hospitalized Patients in Interim Analysis of Phase 3 Study; Independent Data Monitoring Committee Halts Study Early for Overwhelming Efficacy)
- AFMD +12.9% (Presents Updated Clinical Data from Phase 1/2 Study of AFM13 Precomplexed with Cord Blood-Derived NK Cells at AACR Annual Meeting)
- GRCL +9.1% (to present data at AACR Annual Meeting 2022 showcasing early first-in-human results for GC502 in r/r B-ALL)
- SPPI +7% (announces that the resubmitted Biologics License Application for eflapegrastim has been accepted for filing)
- XAIR +5.5% (Beyond Cancer Announces New Preclinical Data Presented at American Association for Cancer Research (AACR) Showing Ultra-High Concentration Nitric Oxide Therapy Anti-Tumor Effect)
- SURF +4.3% (Presents New SRF388 Data at the American Association for Cancer Research (AACR) Annual Meeting 2022)
- FSM +2% (reports Q1 production of 103,098 Gold Equivalent Ounces)
- WBX +2% (commences construction at its Arlington manufacturing facility, the company's first U.S.-based EV charger manufacturing facility)
- NRXP +1.9% (files for 7,824,727 share common stock offering by selling shareholders)
- TSVT +1.2% (bio presents new preclinical data on bbT369, an investigational dual-targeting gene-edited CAR T cell therapy, at the AACR Annual Meeting)
- AMRC +1% (provides SCE project update)
- SHOP +1% (plans 10:1 split of A and B shares, details "Founder share" aimed at making Tobi Lütke a 40% shareholder)
Analyst comments:
- CTT +1.6% (upgraded to Outperform from Neutral at Robert Baird)
- ESNT +1% (upgraded to Overweight from Neutral at JP Morgan)
- CCJ +0.9% (upgraded to Outperform from Sector Perform at RBC Capital Mkts)
- EPAM +0.8% (upgraded to Outperform from Peer Perform at Wolfe Research)
Early premarket gappers
- Gapping up:
- VERU +33.3%, SAIL +26.8%, AFMD +15.1%, SURF +4.3%, FSM +2.7%, GRCL +1.7%, NTR +1.6%, TSVT +1.2%, CF +1.2%, AMRC +1%
- Gapping down:
- T -23.2%, NIO -8.4%, XPEV -6.8%, LI -5.4%, NRXP -4.2%, ZH -3.9%, ADAP -3.7%, NVDA -2.6%, ALLT -2.1%, CRGY -1.9%, TWTR -1.8%, LOW -0.9%, ASX -0.9%
Morgan Stanley: This Yield Curve Inversion Is Different
By Guneet Dhingra, strategist at Morgan Stanley
"The only thing we have to fear...is fear itself" – Franklin D Roosevelt (March 4, 1933)
An economic recession in the US is on the minds of all investors today – in no small part due to the inversion of the 2s10s Treasury curve. Observations over the last 70 years suggest that almost every time the 2s10s yield curve has inverted,a recession has followed close behind (it’s correlation, not causality though). We think that this time is different.We think that an inverted yield curve is here to stay, without necessarily being a signal fora recession ahead. To borrow FDR's famous words, the only thing investors have to fear about an inverted yield curve today...is fear itself.
Believers in the predictive power of the yield curve posit that inverted curves reflect rate cuts in the future, which in turn must be a sign of a growth slowdown ahead,and ultimately a recession. Unless one believes that the curve inversion in 2019 predicted the 2020 Covid recession, it is likely that the predictive power of the yield curve inversion would have been debunked in 2020 itself
The signal from the yield curve inversion worked better a couple of decades ago, when yield levels were closely tied to inflation, GDP and, ultimately, Fed policy. However, the yield curve today is uniquely affected by two factors which limit the macro signal in the curve.
First, a number of technical distortions mean that the yield curve is artificially flatter than comparable points in the past. A combination of:
- a significant amount of Fed QE,
- significant demand from defined benefit US pension funds, and
- sporadic flight-to-quality demand for Treasuries
... has depressed 10-year and 30-year yields well below the levels consistent with inflation and growth. We estimate that these distortions have kept the curve up to 50-100bp flatter than its true level. Arguably, a 2s10s curve below -75bp should be the new recession signal, instead of 2s10s below 0bp.
Second, the Fed's intention to deliver restrictive policy fits with inverted curves. The March FOMC dot plot shows that the Fed expects to see a terminal fed funds rate close to 3% in 2023, about 50bp higher than the Fed's perception of the neutral rate at around 2.5%. In essence, the Fed is telegraphing an inverted curve, and the rates market is reflecting the Fed's policy path. Importantly, the inversion priced into markets doesn't reflect rate cuts back to zero in 2024, but rate cuts back to a neutral rate of 2.5% (Exhibit 1) – hardly a signal for a recession down the line.
Our view that the yield curve inversion is different this time found resonance across various research teams at Morgan Stanley. In our collaborative note on yield curve inversion, our economics team highlighted strong economic fundamentals and alternative recession models signalling a low probability of recession. Our US bank analysts highlighted the case for continued loan growth for banks in the coming years even with some inversion. Our credit strategy team highlighted continued improvement in balance sheet leverage, strong liquidity and low defaults – not the hallmarks of late-cycle. Our REITs team notes the strong fundamentals for commercial real estate as well.
Can the curve keep inverting deeper without signalling a recession? The answer depends on how high markets can price the terminal rate. From a historical perspective many investors see 1994 as a template for this hiking cycle. In 1994, the terminal rate ended up 100-150bp above the Laubach-Williams estimate of the then neutral rate in that cycle. Investors currently see the long-run dot as the neutral rate – around 2.5% – and therefore markets could price a terminal rate100-150bp above neutral, at around 3.5-4.0%, and yet hope for a soft landing like in 1994.
Finally, could the Fed’s plans for its balance sheet limit curve inversion? The yield curve can steepen if the Fed considers selling Treasuries (not our base case), but the curve should not steepen due to quantitative tightening, where the Fed is merely allowing Treasuries to mature off its balance sheet. Contrary to popular perception, quantitative tightening (QT) is not the opposite of quantitative easing (QE). The ultimate impact of QT on the rates market depends on the US Treasury, not the Fed. And we think that the US Treasury will respond to QT by increasing short-term Treasury supply – more likely to flatten the curve than steepen it.
Stunted growth
Making fertiliser affordable is an urgent need to avoid a food inflation crisis. European producers are stopping and starting output because of soaring natural gas prices. The spiking cost of the input for churning out ammonia and urea means the crucial crop nutrients are unaffordable for many farmers. State aid can help if it arrives on time.
Ammonia and urea help farmers turbocharge their output, enhance leafy growth, and make plants look lush. Supplies are under threat because Russia is the second largest producer of ammonia, urea and potash. Elsewhere, Norway’s $14 billion Yara International, one of the world’s biggest fertiliser makers and present in more than 50 countries, has just restarted production in Italy and France after curtailing it last month. Austria’s Borealis cut its ammonia production around the same time and was considering a halt for economic reasons.
Cash-strapped farmers operating on wafer-thin margins are compounding the disruption. Urea Egypt futures prices are at $1,010 per metric tonne. In 2020 the price was $246. A large farm in Europe, of say 120 acres, would need to spend over $1,000 on urea in 2022, assuming it uses 20 pounds (9.1 kg) of urea per acre. In 2020, the same farm would have paid about $270.
To avoid the hefty costs, farmers are stretching out their existing stocks and hoping yields don’t suffer. Given that urea is typically spread on crops in the winter months in Europe, lower yields may only become apparent next year. Production cuts, even temporary ones, will spur a vicious cycle. If less fertiliser is available, that will further drive up prices.
To ensure steady supply, rich-world governments could subsidise the costs of Yara and other fertiliser makers, as politicians in poorer countries routinely do. Taking emergency action to bring urea prices back down to non-stressed levels where they were two years ago would cost over $140 million per month based on Europe’s consumption in 2019. But urea only accounts for some 20% of nitrogen-based fertiliser consumption, per Fertilizers Europe, so the actual bill would be a lot higher.
The stop and starts of private companies make efforts to construct aid harder, and European governments are laser-focused on immediate crises like keeping the continent’s lights on. But officials will rue their inertia if they wait for crops to fail.
Thoma Bravo agrees $6.9bn deal for cyber security group SailPoint
Leveraged buyout market is roaring back to life after a pause amid rising volatility and war in Ukraine
US private equity group Thoma Bravo is buying cyber security company SailPoint Technologies for $6.9bn, the latest in a flurry of deals that signals the leveraged buyout market is roaring back to life after a pause amid rising volatility and the war in Ukraine.
Thoma Bravo, which manages more than $100bn in assets, will pay $65.25 a share for SailPoint, two people with direct knowledge of the details told the Financial Times. The deal is expected to be announced later on Monday morning.
Texas-based SailPoint is used by businesses to give employees secure access to remote working software and to protect cloud computing infrastructure from hackers.
The purchase price is a 31.5 per cent premium to SailPoint’s closing share price on Friday and is the second time Thoma Bravo is investing. The group first bought into SailPoint in 2014 and listed it on the New York Stock Exchange three years later. It exited its holding by the end of 2018, filings show.
Monday’s takeover highlights the increased interest in acquisitions among private equity buyers, particularly in the software sector, which sold off sharply at the start of the year.
Thoma Bravo and SailPoint declined to comment.
In March, Thoma Bravo agreed the $10.7bn takeover of enterprise software company Anaplan, the first large takeover after Russia invaded Ukraine in late February.
Elliott Management has also led two large private equity-backed deals this year, taking software company Citrix private alongside Vista Equity Partners for $16.5bn in January, and buying television ratings company Nielsen for $16bn with Canadian group Brookfield late last month.
Private equity groups in the US have been able to raise billions in traditional bank financing, or from private lenders, despite rising geopolitical risks, inflation and the prospect of higher interest rates.
A consortium led by Advent International and Permira Advisers was able to close the $14bn buyout of cyber security company McAfee in early March, raising billions from bank lenders as markets fell sharply in the days after Russia invaded Ukraine.
For its takeover of Anaplan, Thoma Bravo bypassed bank lenders and instead raised financing from a group of private lenders led by Owl Rock, Blackstone, Apollo Global and Golub Capital.
The people with knowledge of the transaction said SailPoint’s financing will also come from private lenders, including some that financed the Anaplan takeover.
Private equity groups had their strongest ever start to the year in the first quarter, deploying vast cash piles accumulated during the pandemic. There were $288bn of private equity-backed deals, a 17 per cent rise compared with the first three months of 2021, according to Refinitiv data.
Bankers and lenders have also told the FT they have seen a sharp rise in private equity deal activity in recent weeks.
However, the market for private equity buyouts comes as the overall deal market slowed sharply this year. Just over $1tn of deals were struck in the first quarter, 23 per cent lower than in the same period last year.
Hedge Fund CIO: "We Have Never Experienced An Economic Cycle That Looks Anything Like This"
By Eric Peters, CIO of One River ASset Management
“My massive bias is to believe things always work out okay,” said Simplicity, walking Occam’s Razor. “But today somehow feels unique, and when I look at supply and demand in oil, grains, base metals too, there’s an undeniable tail risk here,” he said, having analyzed the fundamentals of such things over a long career.
“Without a perfect North American growing season, there will be shortages, perhaps we’ll have them even with perfection, it’s too early to be sure.” And Simplicity paused, sharpened by decades of trading markets that oscillate wildly in times of great uncertainty as producers, consumers and speculators struggle to balance supply and demand. “It’s critical to size your positions small enough so that you don’t discover you’re trading a 3-year perspective with a 3-day stop-loss.”
Overall:
“One thing is certain: To be effective, the Fed will have to inflict more losses on stock and bond investors than it has so far,” said Bill Dudley, former Fed President, saying bluntly what his active-duty central bankers barely dare whisper.
“Market participants expect higher short-term rates to undermine economic growth and force the Fed to reverse course in 2024 and 2025 - but these very expectations are preventing the tightening of financial conditions that would make such an outcome more likely,” explained Dudley, scratching the surface of the disquieting predicament the Federal Reserve now finds itself in.
And because the world’s developed-market central banks adopted US policy in recent decades, the Fed’s quandary is now a global phenomenon. “This would mean hiking the federal funds rate considerably higher than currently anticipated. One way or another, to get inflation under control, the Fed will need to push bond yields high and stock prices lower,” Dudley said.
Cooling an over-heated, capacity-constrained, hyper-financialized economy, in a time of deglobalization and war, without first tightening financial conditions is proving rather difficult. Like all complex problems, this one took decades to create.
Back when the US economy had less debt and leverage, when financial assets had lower valuations, and when wealth was less concentrated, the ups and downs of the real economy drove financial markets. In such a world, the Fed quite easily used conventional rate policies to influence our behaviors to achieve their objectives.
When those became less effective, they introduced unconventional policies, and forward guided their intentions to become highly predictable. The effect was the hyper-financialization of our economy.
Now, with such high levels of debt, leverage, valuations, and wealth-concentration, it is financial markets that drive the real economy, not the other way around. We have never experienced a modern economic cycle that looks anything like this. And Dudley may be right in his prescription. But if it is one thing, it is certainly not certain.
* * *
Rate of Change: “Looking back on the 1970s, you find 3 distinct inflationary cycles,” said the CIO. “Inflation first peaked in 1970 at just over 6%, then backed off,” he continued. “It peaked again in 1975 at around 12%, declined, then made a final push to nearly 15% in 1980.” That was it. “In the first two cycles, equities fell when inflation rose, and rose when inflation fell,” he said. “Then in the third cycle, inflation went up and for some reason equities did too. I don’t know why. But maybe it’s not only about inflation, but also the rate of change of inflation.”
Autarky: “What’s the really fancy word for it?” asked the CIO, annoyed that he couldn’t recall it. I simply shrugged, quite happy to keep it simple. “Anyhow, screw it, it’s some word that refers to nations which strive to become self-sufficient, economically independent,” he said. “There will be a move toward that for the years, decades probably. What the hell is that word?” he asked, sighed. “But the thing is, not every country can become self-sufficient so as much as everyone will want to if they need to, hardly anyone can, and that’ll slow the whole process.”
“This is really driving me nuts,” said the CIO. “But I’m not going to Google it, I’ll remember the word, it’s right there, I can just about touch it,” he said. I had already found it but didn’t want to rob him of the pleasure. “What’s more likely to happen will be a shift toward trade blocks, unions of like-minded nations, partners, allies.” I was tempted to suggest such a world would be bifurcated, but that word is a bit much for me, and besides, I was pretty sure that meant two-worlds, when in fact there could be three or more. “This word is driving me crazy.”
Domo Arigato: “The age of optimization and maximization is over,” said the CIO. “It will be replaced by a resurgence of manufacturing, and Japan is filled with such companies,” he said. “Japanese equities have been penalized for years because they employed inadequate financial engineering.” Now they’re comparatively cheap. “With the weakening Yen, Japan’s minimum wage priced in US dollars is the cheapest in the G-7,” he said. “The percent of Japan’s workforce near the minimum wage is high. And the real exchange rate is back to where it was in 1975."
China’s Auto Sales Drop More Than 10% as Covid Restrictions Hit
Lockdowns in Shanghai and Jilin province affect production and consumer purchases
China’s car sales fell more than 10% in March, as car makers grappled with extended manufacturing halts and the country’s strict Covid-19 lockdowns disrupted supply chains.
Passenger-car sales dropped 10.5% year over year in March to 1.58 million vehicles, as the shutdowns in cities affected auto production and consumer purchases, the China Passenger Car Association said Monday. Quarterly sales were also affected, falling 4.5% from a year earlier to 4.92 million vehicles, the association said.
Since March, with Covid cases rising, China has resorted to strict lockdowns in Shanghai and the northern province of Jilin to contain the spread of the highly contagious Omicron variant. Both areas, major centers of auto manufacturing in China, are home to plants run by auto makers such as SAIC Motor Corp., General Motors Co. and Volkswagen AG.
Monday’s data points to further evidence of how China’s policy to use stringent lockdowns to snuff out the virus is weighing on economic growth, with car and component production disrupted due to plant shutdowns and logistics delays. Some of the larger manufacturers are operating in a bubble-like environment, with workers living in the closed factory campus to maintain operations.
The world’s biggest car market is likely to see pressure grow, including from weakened demand said Cui Dongshu, secretary-general of the association.
“The Covid infections have had a tremendous impact on the production of car makers, while consumers are going out less for car purchases,” Mr. Cui said.
Sales of electric and plug-in hybrid cars in the quarter were a bright spot for the industry. Sales of such vehicles more than doubled to 1.07 million vehicles from a year earlier, the association’s data showed.
Tesla Inc.’s TSLA -3.00% Shanghai factory is in the midst of the longest production halt since it started manufacturing in late 2019, after shutting operations on March 28 because of the lockdown there.
With the city still shut down, Tesla has drafted plans to prepare for a scenario where the company wouldn’t be able to resume production until the end of April, people familiar with the matter said. A Tesla spokeswoman didn’t immediately respond to a request for comment.
Can crypto fill the gap left by Russian money in the UK?
By connecting himself so personally to the concept, the chancellor is taking a big punt himself
Out with the oligarchs. In with the cryptogarchs.
That’s certainly how it came across. One minute the UK government, in line with western policy towards Kremlin-linked business figures, was imposing stiff sanctions on the likes of Roman Abramovich and Mikhail Fridman, effectively ending an era of ingratiating such Russian billionaires. The next it was throwing its weight behind “UK Crypto”, an effort to “seize the capitalist energy” of the City of London and make the UK a “hospitable place for crypto”.
Not since El Salvador took the contentious and unprecedented decision to adopt bitcoin as legal tender last year has a government rolled out a red carpet for crypto with such panache.
This portrayal is, of course, a little unfair. Last week’s unveiling by the Treasury of its plans to embrace a crypto ecosystem is cautious, once you read the small print. There is much talk of effective regulation. There is an emphasis on stablecoins — those supposedly anchored to old-world currencies such as the dollar — rather than Wild West bitcoin or ethereum. And the greatest enthusiasm seems directed at the architecture that underpins crypto, so-called distributed ledger technology such as blockchain, which has widespread support.
NFTs — the art world’s incarnation of crypto — are as insubstantial a mania as any since the tulip bulb madness of 17th-century Holland
The government is quite right to be expressing support for innovation and cutting-edge technology. As long as the frameworks are thought through, making the UK a magnet for digital investment is a laudable policy — and a crucial one if the City is to retain its prowess in international finance.
Some aspects of the crypto landscape may genuinely fulfil some of the stated benefits, such as greater efficiency, though problems scaling blockchain have been persistent, and the long-made criticism still applies: this is a technology looking for a problem, rather than a much-needed solution.
But merits aside, the look last week was not a good one. Chancellor Rishi Sunak’s enthusiastic embrace of so-called non-fungible tokens, as he urged the Royal Mint to develop an NFT to sit alongside its suite of collectable commemorative coins, was particularly ill-judged.
Wanting to strike a cutting-edge image is all very well. But NFTs — the art world’s incarnation of crypto — are as insubstantial a mania as any since the tulip bulb madness of 17th-century Holland. By connecting himself so personally to the concept, the chancellor is taking as big a punt as any NFT investor (even if the risk of that association has been trumped in recent days by the mounting row over his wife’s tax status).
The government says it wants to be “in on the ground floor” of this nascent market so that it can “lead the way”. Yet plenty of other countries, from Singapore to Spain, have been earlier adopters of crypto policies. To date, the UK has been shockingly slow to curb dubious practices. Promised legal changes to give the Financial Conduct Authority powers over misleading crypto advertising have yet to materialise. Nothing of note has been done to tackle social media misinformation.
During my multiple visits to British secondary schools in recent months, as part of the FT’s Financial Literacy and Inclusion Campaign, students have frequently asked questions about crypto investment. Many have felt encouraged to buy crypto by social media influencers. Many have lost large sums. Few have really understood what they have been doing, or the risks involved. Cracking down on social media “pump and dump” abuses, and forcing crypto operators to explain risks clearly, would be an admirable government initiative — but launching a chummy campaign for the industry, and endorsing it with its own NFT is hardly that.
At the same time the crypto cult exudes an oligarch-like arrogance. It is ruinously wasteful of energy, clashing head-on with the government’s supposed green credentials. It has a casual attitude to tax liabilities, largely unchallenged by HM Revenue & Customs. (The FCA estimated there are 2.3mn crypto investors in the UK, but HMRC has sent capital gains tax “nudge letters” to barely 8,000.)
Full-on bitcoin aficionados, of course, might argue that this is core to crypto’s raison d’être: it was conceived as an anarchic revolt against the state’s control of the monetary system. Sure enough, at a Miami conference last week, tech entrepreneur Peter Thiel hailed crypto as a “revolutionary youth movement” against the “finance gerontocracy”. So its use — as a wildly speculative punt and an anonymised means to pay for illegal drugs, launder money or evade sanctions — is maybe natural enough.
Such talk would, you might think, make the Treasury wary. Instead, it seems blinded by the bling. In the aftermath of the 2008 financial crisis, Adair Turner, then chair of the now defunct Financial Services Authority watchdog, memorably lambasted much of the finance industry as “socially useless”. How much more fitting is that description of today’s crypto craze?