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02 May 2022
- Elon Musk ended up buying Twitter for 44 billion in cash. Like most of Musk’s recent moves, the purchase of Twitter has provoked conflicting reactions, especially regarding the much-touted freedom of speech and the publication of the algorithm as open source. While users are universally enthusiastic, analysts are more likely to point to the significantly inflated price, as well as the fact that Musk had to sell $4 billion worth of Tesla stock for the deal (the 4.4M shares sold equate to 2.6% of Musk’s stake in Tesla at prices between $872 to $999 per share). Tesla shares fell 15% after the sale was announced but then erased some of the losses thanks to Musk’s tweet that he would not sell any more shares.
- The loans Musk agreed to with investment banks are also a problem. $13B in loans will be secured against Twitter and a $12.5B margin loan tied to his Tesla stock, making Musk America’s most leveraged CEO. Musk will additionally need to pledge about $65B in Tesla shares – or about a quarter of his current total – for the loan, on top of existing facilities. That could be a considerable risk for a Tesla shareholder. “If an executive with a significant pledged ownership position fails to meet the margin call, it could lead to sales of those shares, which can trigger a sharp share drop in stock price. This exposes shareholders to significant stock price risk due to an executive’s personal financing decisions,” said June Frank, managing director at ISS Corporate Solutions.
- Martins Kazaks of the ECB said Tuesday morning that he would like to see the first rate hike by the ECB come in July, right after the bond purchases stop (I prefer the first rate hike in July after APP ends at the start of the month.). Two to three rate hikes sound reasonable to him, and he sees no reason to stop hiking at the zero bound. On the other hand, ECB Vice President Luis de Guindos said July rate hikes are feasible but not likely.
- The Bank of Japan on Thursday reaffirmed its massive stimulus program and commitment to keeping interest rates low to continue to support the economy. The central bank also said it would offer to buy an unlimited amount of 10-year government bonds in the market each day to maintain its target interest rate of 0.25%. This is in stark contrast to rate tightening almost everywhere else, and the decision has driven the yen to a 20-year low against the US dollar. BoJ Governor Haruhiko Kuroda has clarified that he will ease monetary policy further if necessary. However, he said it is not appropriate for interest rates to rise above 0.25%. Bart Wakabayashi, co-branch manager from State Street, commented that “The BOJ is not promoting a weak yen, but their policy is in a way supporting a weak yen”.
Indices
US stocks have had another significant decline, both weekly and monthly. The S&P 500 had its worst month (-8.8%) since the start of the pandemic in March 2020, and the Nasdaq 100 even notched its worst monthly decline (-13.3%) since the 2008 financial crisis, falling into bear territory as it posted a 24% drop since its peak.
The most significant contributor to the losses was Amazon stock, which lost 14% on Friday after reporting its first quarterly loss since 2015 due to poor online sales. Apple also contributed its share to the decline, whose results, while a positive surprise, the company warned that supply chain constraints could impact revenues in the current quarter.
Thanks to encouraging quarterly earnings reports, stocks in Europe were not too bad. However, concerns over developments in Ukraine, a slowing economy, high inflation and tightening monetary policy eventually led to modest declines. Europe’s STOXX Europe 600 Index ended the week 0.64% lower, Germany’s DAX Index gave up 0.31%, and France’s CAC 40 Index slid 0.72%. The UK’s FTSE 100 Index advanced 0.30%.
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US30 -1.85% |
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US100 -3.83% |
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US500 -2.75% |
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GER40 -0.18% |
Commodities
Silver was among the worst losing commodities last week, falling to its lowest level since late February after an eight-day decline. It was not helped by Friday’s slight appreciation thanks to investors taking profits on a vigorously strengthening dollar.
On the other hand, natural gas is clearly benefiting from the uncertainty surrounding events in Ukraine. Russian President Putin is trying to get Western gas buyers to pay for gas in Russian roubles, which has so far been unsuccessful, although he has already suspended gas supplies to Poland and Bulgaria. While this is a reasonably powerful weapon for Putin, it may eventually backfire if European states manage to secure the commodity elsewhere.
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Gold -2.62% |
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Silver -7.23% |
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BRENT -8.26% |
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NATGAS -11.40% |
Forex
The dollar continues to go on a merry-go-round. The U.S. Dollar Index, which tracks the U.S. currency against a basket of developed-country currencies, hit 20-year highs on Thursday just below 104. It has already gained 7% since the start of the year and is one of the best-performing assets this year. The U.S. currency has benefited from the Fed’s aggressive approach to raising interest rates but also from its safe-haven status as the Japanese yen and gold have disappointed in this regard.
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EUR/USD +0.05% |
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USD/JPY +1.76% |
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GBP/USD -1.56% |
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USD/CAD +1.05% |
Macro
The US economy contracted by 1.4% in Q1 for the first time since the end of 2020, which was significantly worse than the expected 1% growth (after 6.9% growth in Q4). Falling inventory investment and a record trade deficit were mostly to blame; however, solid consumer spending (up 2.7%) and business investment (up 7.3%, well above expectations) do not yet suggest a recession.
The Eurozone economy grew slightly in the first quarter (+0.2%), but the growth was slower than forecast by the European Commission just before the war started (+0.3%). Germany’s GDP grew 0.2% in the first quarter, while France’s economy stagnated. Italy’s GDP contracted 0.2%. Inflation in the euro area accelerated to 7.5% in April, reaching the highest level since the euro was launched.
What to watch out for this week
- The most-watched event of the new week will definitely be the two-day FOMC meeting and the interest rate decision on May 4. The question is not whether rates will rise but whether they will rise by more than 0.5%. The market is expecting at least five more hikes of at least 0.25% by the end of the year, but the post-policy meeting press conference will be highly anticipated, where the hawkish monetary policy stance is expected to be confirmed. Markets are certainly interested to see how Fed chief Powell will approach the issue of raising rates by 0.75%, what the plans are for reducing its almost $9 trillion balance sheet and the Fed’s view on when inflation may peak.
- In addition to the Fed meeting, the labour market reports are also expected. Wednesday will give us some indication of the ADP Employment Change (scheduled to drop from 455,000 in March to 395,000 in April); Friday’s nonfarm payrolls report is expected to show that the U.S. economy added 380,000 jobs in April (431,000 in March), while the unemployment rate is expected to tick down to 3.5%. The U.S. economy unexpectedly contracted in the first quarter, but mainly due to a trade deficit as imports surged and a slowdown in the pace of inventory accumulation. Demand remained strong, however, so recession fears are not yet high. However, the outlook is still worsened by events in Ukraine, the situation around the coronavirus in China, and an aggressive approach from the Fed.
- The Bank of England is also expected to raise interest rates for the fourth consecutive day on Thursday. The Bank is deciding between fighting inflation, approaching 7%, and avoiding a recession. A 0.25% hike is expected, which would allow the BoE to start selling the bonds it holds on its balance sheet.
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