Wall Street rebounded to close sharply higher Friday in light trading ahead of the holiday weekend, after the S&P 500 posted its worst performance for the first half of any year since 1970. Investors were focused on warning signs from several companies that lowered their profit guidance, adding to investor concerns that persistent inflation at 40-year highs could continue to put pressure on stock prices. Bond yields continued their recent retreat, with the benchmark 10-year Treasury dropping 24 basis points for the week to close at 2.89%, after sliding to as low as 2.80%. For the week, all three major market indexes posted losses, with the Dow Jones average edging 1.3% lower, the S&P sank 2.2%, and the Nasdaq fell 4.1%.
Russia defaulted on its foreign debt for the first time since the Bolshevik Revolution after a 30-day grace period to disburse two Eurobond interest payments expired. It was a largely symbolic move given that the Kremlin has enough money to pay off the debt, but is barred from doing so because of the heavy Western sanctions leveled on the government. Last month, the U.S. Treasury Department effectively blocked Moscow from making the payments after letting a sanctions loophole expire that had previously allowed it to transfer cash to debtholders via American banks.
Quote: “Anyone who understands this situation knows that this in no way a default,” Russian Finance Minister Anton Siluanov declared. “There is money and there is also the readiness to pay. This situation, artificially created by an unfriendly country, will not have any effect on Russians’ quality of life.”
While a formal default (by a ratings agency or court) would be another sign of isolation, in this case it doesn’t mean much, as Russia currently cannot borrow internationally. In fact, it doesn’t need to, thanks to surging energy export revenues that have grown even more plentiful since the invasion of Ukraine. The grim status could influence its standing as an economic and financial pariah, however, as more multinationals flee the country or discourage foreign direct investment for the future.
Next steps: Bondholders are likely to take a wait-and-see approach. Claims only become void three years from now and much could change before then in terms of the scope of the war or sanctions. Debtholders may also have a difficult time repatriating the cash since the Kremlin hasn’t waived its sovereign immunity and no foreign court would have jurisdiction there. Note that Russia under Boris Yeltsin also defaulted on its domestic debts in 1998 – which led to a wave of inflation and a devalued ruble – but the economy was able to recover quickly due to rising oil prices and international aid. (170 comments)
The European Union agreed to a framework to eliminate carbon emissions from new cars and vans by 2035, effectively closing the chapter on the internal combustion engine. Many automakers are already in the process of switching over to cleaner fleets, but the industry now faces some pressure to hit the accelerator. The bloc’s proposal was first raised in July 2021, but with the final endorsement in the bag, it will be up to members of the European Parliament to get the deal over the finish line.
Areas of compromise: Environment ministers extended a CO2 exemption granted to so-called “niche” manufacturers – or those producing less than 10K vehicles per year – until the end of 2035. Italy, home to Ferrari (RACE) and Lamborghini (OTCPK:AUDVF), also gave up demands for a five-year delay in the EU’s plan for carmakers to clean up their fleet. Meanwhile, alternative technologies like synthetic fuels and plug-in hybrids may be included in the future if they can achieve the complete elimination of greenhouse gas emissions.
“This is a big challenge for our automotive industry,” announced Agnes Pannier-Runacher, the French Minister of Energy Transition who chaired the meeting. “I have full confidence that the European car industry can manage,” added Frans Timmermans, Vice President of the European Commission. “Our carmakers are among Europe’s industrial leaders and they can continue to be that as they embrace this global shift.”
Other EV news: Electric vehicle makers have not emerged unscathed in the recent supply chain crisis, especially given the rising costs of raw materials like lithium, nickel, cobalt and palladium. The deteriorating environment even prompted a warning from Tesla (NASDAQ:TSLA) CEO Elon Musk last month, telling top managers he had a “super bad feeling” about the economy and the company would slash its workforce by about 10%. The latest round of layoffs came Tuesday night, with Tesla shuttering its office in San Mateo, California, and cutting around 200 employees who were working on Tesla’s Autopilot driver-assistant system. (367 comments)
How is the economy going to deal with a possible onslaught of interest rate hikes? That’s a question Jay Powell was asked at the ECB Forum on Wednesday as inflation risks continue to mount across the globe. Other central bankers also attended the annual forum in Sintra, Portugal, but most appeared to indicate that a new regime of monetary policy could make a “soft landing” quite challenging. Let’s hear what they had to say:
Fed Reserve Chair Jerome Powell: “We are raising interest rates, and the aim of that is to slow growth down so that supply will have a chance to catch up. We hope that growth could still remain positive. But if you look at the strength of the economy, households are in very strong financial shape, they’ve still got a lot of excess savings – from forced saving of not being able to travel and things like that – and fiscal transfers. The same thing is true with business, with very low rates of default and lots of cash on the balance sheet. The labor market is also tremendously strong, still averaging very high job growth per month. Overall, the U.S. economy is in the position to withstand tighter monetary policy, we think.”
ECB President Christine Lagarde: “I don’t think we are going to go back to that environment of low inflation. There are forces that have been unleashed… that we’re facing now that are going to change the picture and the landscape within which we operate. Certainly in this part of the world, the energy shock that we have suffered, are suffering, and will continue to suffer has had a major impact. I think this is not specific to Europe, but there is certainly a dependency of European countries and the euro area to external supply from foes. That is certainly a strong driving force of inflation on the price of energy and food… as well as supply shocks.”
Bank of England Governor Andrew Bailey: “I think the U.K. economy is probably weakening rather earlier and somewhat more than others. Unfortunately, there is going to be a further step-up in U.K. inflation later this year because that’s a product of the way the energy price cap interacts with the energy prices we have observed over the last few months. I would imagine that will put a bit more persistence [on the U.K. inflation rate] and we will have to explain that.” (15 comments)
Micron Technology (MU) reported earnings after the bell on Thursday, providing clues to the latest happenings in the chip industry. However, things don’t look any better than a few months ago, with the memory maker publishing mixed FQ3 results and issuing guidance that was well below consensus forecasts. Revenue of $6.8B-$7.6B is expected in the coming quarter, compared to analyst estimates of $9.05B, prompting shares of Micron to slide 5% in extended trading.
Quote: “Recently, the industry demand environment has weakened, and we are taking action to moderate our supply growth in fiscal 2023,” CEO Sanjay Mehrotra declared. “We are well-poised to emerge stronger on the other side of this downturn, so we are really executing well, working closely with our customers to understand the latest demand trends and various end-market segments, and adjusting our plans as necessary and as fast as we can.”
Micron specializes in DRAM, which is used in PCs and servers, as well as NAND memory, which is used in smaller devices like smartphones and USB drives. Chip prices surged during the pandemic amid heavy demand for stay-at-home electronics, but the industry is beginning to see signs of easing as inventories build and companies plan for a decline in consumer spending. There have also been efforts to reshore more of the crucial supply chain to the U.S., with legislation to support foundries and incentives for semiconductor manufacturing and R&D.
China competition bill: The measure, which includes $52B for the domestic chip industry, is facing uncertainty in Congress amid controversy over it being tied to a broader spending package. “Let me be perfectly clear: there will be no bipartisan USICA as long as Democrats are pursuing a partisan reconciliation bill,” tweeted Senate Minority Leader Mitch McConnell. “Senate Republicans are literally choosing to help China outcompete the U.S. in order to protect big drug companies,” responded White House Press Secretary Karine Jean-Pierre. “This takes loyalty to special interests over working Americans to a new and shocking height. We are not going to back down in the face of this outrageous threat.” (206 comments)
Things looked pretty shaky in the cryptoverse as a continuous flow of damaging headlines continued to rock the sector. The staunch believers are calling it a “crypto winter” before things heat up again, while the naysayers are pointing to the final demise of “tulip mania” they have been warning about for years. Those in between are acknowledging that a shakeout is underway, but feel that only the strongest players will survive in a similar fashion to the aftermath of the dot-com crash. Bitcoin (BTC-USD) traded under $20,000 again on the developments, and only time will tell which camp prevails.
The latest: The failure of the TerraUSD “stablecoin” project in May sent shockwaves through the crypto market, while the Celsius Network froze accounts and now is preparing for a possible bankruptcy. Popular crypto-focused hedge fund Three Arrows Capital was also ordered to liquidate on Wednesday and crypto exchange CoinFLEX issued new “Recovery Value USD” tokens in an attempt to resume withdrawals. Meanwhile, Coinbase (NASDAQ:COIN) and BlockFi have said they would slash their workforces by a fifth, though others remain undeterred, like MicroStrategy’s (NASDAQ:MSTR) Michael Saylor, who scooped up another 480 Bitcoins for $10M despite undergoing massive unrealized losses.
Growing concerns over the industry even prompted the SEC to deny an application to convert the Grayscale Bitcoin Trust (OTC:GBTC) – which has $13B of assets under management – into the first spot ETF. The move would have potentially led to more institutional investment, but instead turned into another negative headline surrounding the sector. Grayscale is suing the SEC in response, after the agency felt that its product failed to meet requirements “designed to prevent fraudulent and manipulative acts… and protect investors and the public interest.”
DeFi outlook: Sam Bankman Fried, the 30-year-old billionaire founder of FTX, believes that more failures among crypto exchanges are coming amid the ongoing slump that has wiped off $2T in market value since November. “Some third-tier exchanges are already secretly insolvent,” he told Forbes in an interview. Increasing worries are also enveloping the broader DeFi industry, such as crypto lenders whose loans are backed by little collateral and lack access to liquidity in the event of a downturn. “It’s just a risky structure,” said Eric Budish, an economist at the University of Chicago Booth School of Business. “It strikes me as diversified as the same way that portfolios of mortgages were diversified in 2006. It was all housing – here it’s all crypto.” (83 comments)
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