Market comment 2022

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Ukraine's two leading suppliers of neon, which produce about half the world's supply of the key ingredient for making chips, have halted their operations as Moscow has sharpened its attack on the country, threatening to raise prices and aggravate the semiconductor shortage. Some 45% to 54% of the world's semiconductor-grade neon, critical for the lasers used to make chips, comes from two Ukrainian companies, Ingas and Cryoin, according to Reuters calculations based on figures from the companies and market research firm Techcet. Global neon consumption for chip production reached about 540 metric tons last year, Techcet estimates.

Exclusive: Russia's attack on Ukraine halts half of world's neon output for chips | Reuters

Taiwanese firms, such as TSMC, already have "safety stocks" of neon standing by, according to the Economy Ministry of Taiwan speaking to Reuters, and so do not anticipate any real impact on the global supply chain. But that's likely only in the short term. Speaking with The Register, Intel has also largely dismissed what it is calling "a potential local interruption." "Intel has assessed the possible impact of the conflict on Intel's supply chain," an Intel spokesperson says. "Intel's strategy of having a diverse, global supply chain minimizes its risk to potential local interruption. However, we are monitoring the situation carefully." Market research firm, Techcet, provided Reuters with much of the data for its report, and its president has estimated that the larger semiconductor manufacturers will likely be able to cover the shortfall for an extended period of time, while smaller companies would bear the brunt of the supply chain disruptions.

Major chipmakers could weather neon shortages as result of war in Ukraine for 'two months or more' | PC Gamer

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Chinese authorities are preparing to give U.S. regulators full access to auditing reports of the majority of the 200-plus companies listed in New York as soon as mid-this year, making a rare concession to prevent a further decoupling between the world’s two largest economies. The China Securities Regulatory Commission and other national regulators are in the process of drafting a framework that will allow most Chinese firms to keep their listings, people familiar with the process said, asking not to be named discussing a private matter. However, the government is prepared to accept that some state-owned enterprises and private companies that hold sensitive data will be delisted, they said.

China Weighs Giving U.S. Full Access to Audits of Most New York-Listed Companies - Bloomberg

• Delisting risk of Chinese ADRs looks to be receding
  
• Remains to be seen to which companies this applies
  

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“Suppose for a moment that Putin never intended to conquer all of Ukraine, that, from the beginning, his real targets were the energy riches of Ukraine’s east, which contain Europe’s second-largest known reserves of natural gas (after Norway’s),” Bret Stephens writes in the New York Times. Stephens is not alone in this: National Review’s Michael Brendan Dougherty and prominent Substacker Glenn Greenwald have both recently advanced versions of this claim. Yet their arguments do not stand up to even light scrutiny: They are not consistent with the structure of Russia’s military campaign, public statements by Russian authorities, or even a basic cost-benefit analysis.

Russian President Putin’s war in Ukraine is not a work of secret genius - Vox

• Pretty comprehensively debunked
  

China has sent another signal of progress toward resolving an audit dispute that’s threatened U.S.-listed Chinese companies with delisting. The China Securities Regulatory Commission said in a statement to CNBC Friday that it convened a meeting this week with some accounting firms and told them to consider preparing for joint inspections. Chinese and U.S. regulators’ consultations on audit supervision and cooperation are overall going well, the commission said. Since March, the U.S. Securities and Exchange Commission has started to name specific U.S.-listed Chinese stocks for failing to adhere to the Holding Foreign Companies Accountable Act. Passed in 2020, the act would allow the SEC to delist Chinese companies from U.S. exchanges if American regulators cannot review company audits for three consecutive years.

China securities regulator on U.S.-listed Chinese stocks audit delisting

Simon Ward from Janus Henderson says a key measure of the US money supply - six-month real M1 - has fallen to near zero from a peak of almost 25pc during the pandemic, when the Fed flooded the system with emergency liquidity. The broader M2+ measure has turned negative. These signals imply that the underlying props of the Wall Street boom are crumbling. The effect is compounded by a powerful downswing in the inventory cycle. Mr Ward said the closest parallel is the US recession of 1970, which led to a 35pc fall in equities. Slowing money growth also implies that inflation will come down of its own accord gradually without the need for a violent squeeze by central banks.

The monetary props of the global asset boom are rapidly crumbling

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Three out of 10 food companies in Belgium are considering reducing or even shutting down their production, according to the professional association Fevia. With extreme price spikes and supply issues, it is their only way out of producing at a loss. “It is clear that the price spiral we have entered is not just ‘a bit more expensive’,” a Fevia spokesperson said. “Every day this looks more like the crisis of the 1970s.” With high energy bills, rampant food inflation and shortages in supermarkets, food companies are facing skyrocketing costs. On top of that, the pandemic has had a harsh impact on the sector, while harvests have been poor due to unpredictable weather and the bird flu has had an impact on production, too. The war in Ukraine and the sanctions against Russia directly affect vegetable oil prices, while maize and other grains also rise in prices.

Nearly 1 in 3 food companies forced to reduce or shutdown production

However, many Chinese companies with ADRs have already secured secondary listings in Hong Kong, with the Hong Kong Exchange having loosened its listing requirements to accommodate the demand from ADRs for a secondary listing or dual listing. Ahead of the 2024 deadline, companies like Yum China have already completed a Hong Kong share listing. This means their shares could continue trading even if they were delisted from U.S. markets. The process of converting holdings from ADRs to HKEX shares is quite simple and quick. Investors can typically instruct the custodian to convert ADRs into Hong Kong shares without restrictions. The depositary will be canceled, and the custodian will deliver the Hong Kong shares to the investor with the entire process taking about two business days electronically and involving a reasonable cost. This should help minimize any impact on these securities.

Making Sense of the Sell-Off, Then Rally in Chinese ADRs | T. Rowe Price

Chinese authorities are preparing to give U.S. regulators full access to auditing reports of the majority of the 200-plus companies listed in New York as soon as mid-this year, making a rare concession to prevent a further decoupling between the world’s two largest economies.  The China Securities Regulatory Commission and other national regulators are in the process of drafting a framework that will allow most Chinese firms to keep their listings, people familiar with the process said, asking not to be named discussing a private matter. However, the government is prepared to accept that some state-owned enterprises and private companies that hold sensitive data will be delisted, they said.

China Weighs Giving U.S. Full Access to Audits of Most New York-Listed Companies - Bloomberg

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The fallout of the Russia and Ukraine war has just helped tip two of world's poorest countries into full-blown crises, and the list of those at risk - and the queue at the International Monetary Fund's door - will only get longer from here. They may be far from the fighting in Ukraine, but a mass resignation of Sri Lanka's cabinet on Monday and drastic weekend maneuvers by Pakistan's Prime Minister Imran Khan to avoid his removal, show how far the economic impact spreads. Both Sri Lanka and Pakistan have seen their long-festering public disquiet about economic mismanagement come to a head, but there is a double-digit list of other countries also in the danger zone. A handful were already on the brink of debt crises in the wake of the COVID pandemic, the war's resulting surge in energy and food prices, however, have undoubtedly made things worse. Turkey, Tunisia, Egypt, Ghana, Kenya and others that also import the majority of their oil and gas as well as basic foodstuffs, such as wheat and corn, which have all soared between 25% and 40% this year, have also been facing heavy pressure.

Russia-Ukraine fallout starts felling fragile 'frontier' economies

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Before tensions escalated between Ukraine and Russia in February, a bullish stock market story had been unfolding: Wall Street analysts were revising up their forecasts for 2022 and 2023 corporate earnings. Since then, geopolitical risks spiked, becoming the top concern among investors. The stock market got rocked, sending the S&P 500 (^GSPC) to a low of 4,114 on February 24. Meanwhile, inflation data continued to confirm prices were rising at a troubling rate, which caused Federal Reserve Chair Jerome Powell and his colleagues to signal that they were willing to get more aggressive in tightening monetary policy. Despite these headwinds, something surprising happened: Analysts continued to revise their forecasts for earnings higher... It’s simple: The economy continues to be in great shape, supported by massive tailwinds. Among other things, businesses and consumers have very healthy finances. Businesses continue to invest aggressively in their operations. Consumers — despite having gripes about inflation — continue to spend on goods and services. Consumer finances have been bolstered by $2.5 trillion in excess savings, which has allowed companies facing higher costs to preserve profit margins by raising prices.

The most bullish story in the stock market right now: Morning Brief

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China was the worst-performing of the major markets in the first quarter — with the Shanghai Composite SHCOMP, -2.61% dropping by 14% — but value-minded investors such as Charlie Munger are tempted. After all, China is still growing fast, and authorities have begun to temper their regulatory zeal. What could go wrong? 

In a note to clients, Bank of America strategist Winnie Wu said it’s still too early for Chinese stocks.

“While valuation has become more attractive, earnings forecasts will probably continue to be revised down,” she said. China’s credit cycle typically leads the gross domestic product cycle by 12 to 18 months, and corporate earnings trend broadly in line with nominal GDP growth. Credit growth has only just bottomed, meaning GDP, and therefore earnings growth, won’t turn around until the first half of 2023.



And while China isn’t tightening the screws on companies further, it hasn’t been loosening them, either. “Policy noises is lower compared to 2H21, but there are no coordinated, strong easing measures either,” she said.

“Geopolitical risks remain, with uncertainty on the ADR delisting situation. More recently, the rise in COVID cases and the sharply tightened lockdown measures in Shanghai and other parts of China, will probably take a toll on the economy in 2Q22 and undermine market confidence.” The note was written in advance of NIO saying lockdowns would affect production.

“We are cautious on the sectors that could be more vulnerable to the lockdown measures, ie real estate, consumer discretionary (auto, hotels, apparels), and transportation infrastructure. We have also become more negative on insurance and media sectors, for their weak earnings momentum,” said Wu. What the bank does like are tech hardware and semiconductor, healthcare, diversified financials and chemicals.

It's still not time to invest in China, argues Bank of America. Here's why. - MarketWatch

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And this earnings season, there will be one clear factor separating the winners from the losers. “Really, what the market’s going to be focused on is margins: How are corporates being able to manage the increased inflation and cost input inflation that they’re seeing come through,” Erin Browne, PIMCO portfolio manager, told Yahoo Finance Live. “That’s going to be the key differentiator for stocks.” Margins are a closely watched measure of profitability every earnings season. But in an environment in which inflation is running at 40-year highs and has yet to show meaningful signs of peaking, the ability for companies to maintain pricing power and pass on the higher costs to consumers has taken on increased importance. Generally speaking, profit margins for S&P 500 companies are expected to shrink in the first quarter, compared to the previous quarter and 2021. That’s especially true for non-energy firms that have gotten hit by soaring oil and other energy commodity prices seen so far in 2022...

“What’s unique about tech companies is that in an inflationary environment, they can still satisfy the investors because they’re nimble, they’re flexible, and they can stop chasing revenues if they choose to,” Ados told Yahoo Finance Live. “They can change the equation between their margins and their revenue growth.” “We’re going to see lower SG&A [selling, general and administrative] costs, lower marketing spends, lower revenue growth, but bigger margins,” she added. “That’s going to satisfy investors.”

The No. 1 factor that will set stocks apart this earnings season: Morning Brief

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A “calamity” may be coming for markets, potentially in 2023, Jeffrey Gundlach, chief executive officer and chief investment officer of DoubleLine, warned Tuesday on stage at the Exchange ETF conference in Miami.  The Treasury market’s yield curve is signaling “trouble ahead,” Gundlach said, referring to the recent inversion of 2-year TMUBMUSD02Y, 2.413% and 10-year yields TMUBMUSD10Y, 2.777%, which historically has preceded a recession. 

The setup in the stock market is “very similar” to the one seen in the fourth quarter in 1999, he warned, in a reference to the lead-up to the bursting of the dot-com bubble.  Read: Why an inverted yield curve is a bad tool for timing the stock market The S&P 500 has been “massively juiced” by quantitative easing and low rates under central banking policy, according to Gundlach, who said that he favors stocks outside the U.S. “One of the hardest things” in the investment business is “to change after you’ve been right,” he said.  While the S&P 500 saw an unusually strong run over the past few years, it’s down so far in 2022 amid heightened concern over the Russia-Ukraine war and expectations for the Federal Reserve to battle soaring inflation in part through interest rate hikes. Gundlach said he expects that European stocks will outperform the U.S., particularly when a recession arrives

‘Calamity' may be coming, stock-market setup similar to 1999: Jeffrey Gundlach - MarketWatch

A trade rupture between Germany and Russia could put a dent in German manufacturing – one of three global manufacturing centers besides the U.S. and China, S&P Global’s Chief Economist Paul Gruenwald told CNBC’s “Squawk Box Asia.” Trade between Germany and Russia jumped significantly in 2021 compared to the year before, with the value of goods surging 34.1% to 59.8 billion euros ($65 billion), according to Germany’s Federal Statistical Office. Research and consultancy firm Wood Mackenzie also warned that the global economy could undergo “more permanent changes” with global trade possibly altered by the crisis. A financial shock could be on the cards if there’s a “trade rupture” between Russia and Germany, warned S&P Global’s chief economist on Tuesday.

'Trade rupture' between Russia, Germany could cause financial shock: S&P Global

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When using this methodology to measure the correlation between the Fed’s balance sheet and S&P 500 since quantitative easing began in January 2009, we get a correlation coefficient of 0.036.[i] What does that mean? Well, a correlation of 1.00 implies two variables move in lockstep, -1.00 implies they move in opposite directions always, and 0 implies no relationship. A correlation of 0.036 is about as close to zero as you can get.[ii] That means there is basically no relationship between changes in the Fed’s balance sheet and the S&P 500. Don’t like the weekly frequency? Even calculated monthly, the correlation is just 0.12—not statistically significant.[iii]

No, the Fed’s Balance Sheet Doesn’t Explain Stocks’ Moves | MarketMinder | Fisher Investments

With no sign that the Chinese government is prepared to ease restrictions soon, concern is mounting about the economic damage they are causing, and the shock waves an extended lockdown will send around the world. Shanghai is the epicenter of the current Covid outbreak, but it's not alone — analysts at Nomura estimate that full or partial lockdowns are in place in 45 Chinese cities, affecting a quarter of the population and about 40% of the economy. Premier Li Keqiang warned on Monday for a third time in a week of the threat the upsurge in Covid posed to the Chinese economy. Here's three reasons why the rest of the world should be watching Shanghai closely, too.

Why Shanghai's lockdown matters to the global economy - CNN