Stocks finished sharply higher on Friday, snapping a five-day losing streak thanks in part to stronger than expected retail sales data and a moderation in inflation expectations. Financial stocks paced Friday’s gains, with Citigroup surging 13% as it reported the best second-quarter results of any big bank so far. Meanwhile, comments from the president of the Atlanta Federal Reserve indicated that he likely would not support a potential 100-basis point rate hike at the central bank’s upcoming policy meetings. But Friday’s rally still was not enough to overcome three days of selling earlier in the week, leaving the three major market indexes with weekly losses of 1.6% for the Nasdaq, 0.9% for the S&P 500 and 0.2% for the Dow.
Claiming that Elon Musk has engaged in “bad faith” efforts, Twitter (TWTR) filed suit against him in an effort to keep the Tesla (TSLA) CEO from walking away from a deal to acquire the social media giant. The case was filed in the Delaware Chancery Court, and explicitly targeted Musk’s X Holdings I and X Holdings II corporations, which were formed in April for the “express purpose” of arranging and financing the acquisition. Last Friday, Musk said he was terminating the $44B purchase, largely due to disagreements with Twitter over the percentage of its accounts that are either fake, spam or originate from bots.
The case: In its suit, Twitter reasoned that it has fully cooperated with Musk’s requests for information about fake accounts, the deal is still in effect, and it asked the court to order “defendants to specifically consummate the closing in accordance with the terms of the agreement.” The company also said Musk engaged in an exit strategy that “is a model of hypocrisy” and called into question his concerns about spam bots on the site. To support this argument, Twitter revealed that when Musk first announced the acquisition deal, he “raised a clarion call to ‘defeat the spam bots.'”
More excerpts: Twitter maintains that when “the market declined” and the price of the deal became less attractive to Musk, he then “shifted in narrative, suddenly demanding ‘verification’ that spam was not a serious problem, and claiming a burning need to conduct ‘diligence’ he had expressly forsworn.” “Musk apparently believes that he – unlike every other party subject to Delaware contract law – is free to change his mind, trash the company, disrupt its operations, destroy stockholder value, and walk away,” according to the suit. Twitter is hoping for a quick end to the saga, seeking a four-day trial in September, while Musk had only four words to tweet on the matter: “Oh the irony lol.”
Questions remain: While things head to the courtroom, there is bound to be many settlement talks that take place in the background. Will Musk shoot to get a lower price for the deal based on a “material adverse effect”? Walk away by only paying a termination fee or damages? And how much hardball will Twitter be willing to play to uphold “specific-performance” clauses, which forces Musk to close the deal with every closing condition including financing of the transaction? (62 comments)
Things are likely to be more affordable for American tourists visiting Europe this summer, with the exchange rate between the euro and the dollar now about equal. It’s the first time since 2002 (in the early years of the euro’s existence) that the ratio came close to 1:1, but could come at a cost of global economic stability. Towards the end of the week, the euro even dropped below parity at $0.9998 and is down almost 12% YTD.
What’s happening? Looking to tame inflation, the Fed is on track to continue hiking interest rates by 75 bps per meeting, in comparison to the ECB, which is still hesitant to get too aggressive. EU recession fears are more pronounced than they are in the U.S., especially given the grim energy outlook and the shutting of the Nord Stream 1 pipeline for annual maintenance. Similar to the situation in Europe, ultra-dovish policies in Japan are keeping the yen under pressure, leading to a strong wave of constant dollar buying in the forex markets. The yen and the euro are by far the most traded currencies against the dollar, so when both are weak, it makes it harder for anything else to rival the greenback.
“I really wouldn’t say [the euro at] 0.95 [against the dollar] would be unreasonable,” noted George Saravelos, global head of FX research for Deutsche Bank. “Even if this [Nord Stream] gas returns in terms of full flow after the maintenance period, the [risk] premium is unlikely to go away.” European policymakers have also historically welcomed a weaker currency to stimulate growth by making exports more competitive, but it can exacerbate the inflation issue as it drives up price gains by making imports more expensive.
Thought bubble: The Bank of Japan wants to ride things out by sticking to its yield curve control policies, hoping that the current levels of inflation aren’t sustainable due to hiccups in the post-COVID recovery. Over in Europe, the ECB is now entertaining the thought of raising rates, but is fearful about what that would mean for peripheral yields in member states like Italy. Meanwhile, last Friday’s strong U.S. jobs report indicates that the Fed won’t be scared about getting too aggressive, keeping pressure on the euro and yen and sending many investors towards the safe-haven dollar. (152 comments)
The Federal Reserve ended Wednesday a little bruised around the face as a black eye inflation reading underscored the now-infamous “transitory” forecast from Jay Powell and Co. The Consumer Price Index surged by an annual 9.1% in June, marking the fastest pace in four decades and risking more entrenched expectations. The central bank is not the only one in the spotlight, with President Biden telling reporters last December (when inflation was at 6.8%) that it was “the peak of the crisis” and “you’ll see it change sooner than – quicker than – more rapidly than it will take than most people think.”
Snapshot: While core inflation, which excludes volatile categories like groceries and gas, fell under 6% for the first time since January, things look more troubling when diving into the details. The figure climbed 0.7% from the previous month – which is the most rapid clip seen over the past year – and suggests that the inflation issue goes well beyond the supply chain and energy prices (e.g. rents rose at the fastest pace since 1986). Financial markets whipsawed following the data, while the U.S. dollar index climbed to the highest level since the early 2000s as investors priced in even more aggressive monetary policy.
The Fed’s Beige Book, which is a summary of current market conditions, was also published on Wednesday, but didn’t provide a better picture of the economic backdrop. Several of the central bank’s 12 regional districts reported growing signs of a slowdown in demand, five districts recorded an increased risk of recession, and the remaining four districts saw economic growth that either slowed or declined. That could translate into a so-called “hard landing,” especially after the 2y10y yield curve steepened yesterday to a nearly 12.4 basis point gap.
Full percentage point? Many Fed officials have already cemented expectations for a 75 basis point increase later this month, but the latest inflation report is putting 100 bps on the table (Canada hiked by a similar amount on Wednesday). In fact, the CME Group’s FedWatch tool now puts a 75% probability for a full percentage point hike on July 27, with another three-quarters of a percentage point coming in September. “Everything is in play,” Atlanta Fed President Raphael Bostic told reporters, while Cleveland Fed President Loretta Mester added that “we don’t have to make a decision today.” (853 comments)
Q2 results from JPMorgan Chase (JPM) and Morgan Stanley (MS) on Thursday did not set a good tone for earnings season. Both stocks slid following lower-than-expected earnings, triggering pain for bank shares across the board. With fears that the U.S. could tip into recession, investors also watched what bank executives had to say about the state of the economy as much as figures surrounding the lenders’ balance sheets.
Financial bellwether: JPMorgan posted a worse-than-expected 28% fall in quarterly profit as global investment banking fees slid in a “challenging macro environment.” The division is coming off the SPAC boom, as well as IPOs and other dealmaking that rocketed higher in 2021. The bank additionally set aside another $428M to cover possible future loan losses, playing some defense in case things go sour.
On the upside, JPMorgan reported its best earnings from lending in over a decade, benefiting from the rising interest rate environment. It also sounded positive on the U.S. consumer and commercial landscape, with cash balances and defaults holding up well, and spending on Chase credit cards even rising 21% from a year ago. The bank even raised its net interest income guidance for 2022 despite “waning consumer confidence and high inflation. “
Go deeper: JPMorgan temporarily suspended its share buyback program as it builds more capital to meet tougher requirements from the Fed. CEO Jamie Dimon didn’t mince words on the matter, unleashing a series of critiques about the central bank’s annual exercise. “We don’t agree with the stress test,” he declared. “It’s inconsistent. It’s not transparent. It’s too volatile. It’s basically capricious.” (30 comments)
After spending a few days in Israel to reassert America’s presence in the Middle East, President Biden on Friday became the first U.S. leader to fly directly from Tel Aviv to Saudi Arabia. On the itinerary is somewhat of a resetting of relations, including energy security, Israeli-Saudi ties and establishing a cohesive regional front to counter Iran. The trip will be a big policy U-turn for Biden, who has previously labeled the Kingdom a “pariah” and refused to talk with Crown Prince Mohammed bin Salman in the aftermath of the killing of U.S.-based columnist Jamal Khashoggi.
What’s in it for the Saudis? Riyadh is looking for ironclad security guarantees, especially after Biden ended U.S. support for offensive operations in Yemen. He ordered the removal of Patriot missile batteries and other advanced military systems in 2021, even as the kingdom was being hit by rocket attacks from Iranian-backed Houthi rebels. Arms transfers from China to the Saudis have also expanded by nearly 400% over the past four years, with the U.S. continuing to refuse to sell drones to the Kingdom.
What’s in it for the U.S.? WTI crude oil (CL1:COM) tumbled below $91 on Thursday – erasing all the gains seen in the wake of Russia’s invasion of Ukraine – though U.S. gasoline prices remain expensive at the pump, averaging $4.58 per gallon nationwide. Biden is set to ask Saudi Arabia to pump even more, in the latest effort to tame high energy prices that are weighing on the economy. According to the International Energy Agency, the Saudis and UAE are the only two producers with significant spare capacity, holding just under 3M barrels a day of idle output between them (about 3% of global demand).
Outlook: “The world has never witnessed such a major energy crisis in terms of its depth and its complexity,” IEA Executive Director Fatih Birol warned at an energy forum in Sydney earlier this week. “We might not have seen the worst of it yet. This is affecting the entire world.” (45 comments)
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