Wall Street Breakfast: What Moved Markets

Stocks fell sharply on Friday as rising fears of a Russian invasion of Ukraine added to a spike in near-term inflation expectations and weakened consumer sentiment. U.S. National Security Advisor Jake Sullivan warned at a Friday afternoon White House briefing that a Russian invasion could take place during the Olympics, sending Treasury yields tumbling, oil prices surging and the S&P 500 falling back below its 200-day moving average. The benchmark 10-year yield, which broke above 2% on Thursday for the first time since 2019, fell back to about 1.93% on Friday. The week’s volatility in the bond market started after hotter than expected inflation data, which spooked investors and prompted St. Louis Fed President James Bullard to call for accelerating rate hikes. For the week, the Dow Jones average fell 1%, the S&P 500 shed 1.8% and the Nasdaq Composite retreated 2.2%.

Chance your arm

It’s official. Nvidia (NASDAQ:NVDA) this week terminated its planned acquisition of Arm Ltd. (ARMHF) from SoftBank (OTCPK:SFTBY) due to “significant regulatory challenges.” Nvidia had been seeking a tie-up with the processor designer since September 2020, and with the transaction valued at “$40B in cash and stock” at the time (and $80B currently), it would have been the chip sector’s largest deal on record. Arm was founded in 1990, and was an independent company until 2016, when SoftBank bought it for $32B.

Backdrop: Nvidia’s purchase faced scrutiny from the moment it was announced. The deal would have given one of the biggest semiconductor companies control over designs that rival firms rely on to develop their own competing chips. The Federal Trade Commission ended up suing on antitrust grounds, while the U.K.’s competition regulator announced an investigation into the sale. Clients like Microsoft (NASDAQ:MSFT) and Qualcomm (NASDAQ:QCOM) also feared that Nvidia could one-up its business over those who don’t have a substitute for Arm technology.

As for Softbank, the company will make some money from the transaction getting called off. A breakup fee of $1.25B will be recorded as profit in Q4, while semiconductor industry veteran Rene Haas will replace Simon Segars as Arm’s new chief executive. Following the collapsed deal, SoftBank is planning to take Arm public, with an IPO expected to happen in the fiscal year ending March 2023.

More on Nvidia: The company became the seventh-largest U.S. firm on Monday after surpassing Meta Platforms (FB) for the first time (the Facebook parent has lost $267B in market cap since earnings last week). Putting that in perspective, Nvidia was the 15th-largest American company as of a year ago and the 50th largest as of two years ago. Despite a valuation of $618B, it may have more room to run, with Wells Fargo writing a research note outlining that Nvidia’s Ampere GPU architecture was still “early in its cycle.”

Disney gets an A+

The magic returned to Disney (DIS) late Wednesday as several upside surprises gave a much-needed boost to beaten-down shares. The stock rose as much as 10% in after-hours trading, with the Mouse House tacking on another 11.8M Disney+ subscribers (vs. 7M consensus) to reach 129.8M paying users at the end of the holiday quarter. “We are more confident than ever in this platform,” CEO Bob Chapek announced on an earnings call with investors.

More content: Company executives also reiterated plans to spend $33B on new content this fiscal year as a key driver for new subscriptions in the U.S. and internationally. The investment includes $11B on sports and sports rights, as well as $22B on entertainment, with hits like Star Wars series The Book of Boba Fett, and two new Marvel titles, Eternals and Hawkeye. “We are not nearly tapped out in each of our major franchises,” Chapek added on the call.

“These results speak volumes for Disney’s storied brands and its ability to rise above the competition in an increasingly crowded digital media market,” noted media analyst Paul Verna with Insider Intelligence.

Don’t forget the parks: The company saw all-time-high revenue at its “theme parks, experiences and consumer products” division, which doubled over the prior year to reach $7.2B and exceeded pre-pandemic levels. Visitors flocked to its attractions across the U.S., Europe and Asia, while profit margins in part rose because of lower spending on labor due to two new park navigation apps: Genie+ and Lightning Lane. Attendance trends were also up double digits (vs. Q4) at Disneyland and Walt Disney World, and per-capita spending was up 40% Y/Y, amid higher outlays on food, beverages and merchandise.

Protests spread

A third border crossing between the U.S.-Canada was blockaded by truckers on Thursday, building on the “Freedom Convoy” movement that has been protesting vaccine mandates and other coronavirus restrictions. The Emerson crossing between Manitoba and North Dakota was shut down in both directions, in addition to the Coutts crossing linking the province of Alberta with Montana, as well as the critical Ambassador Bridge connecting Windsor, Ontario, to Detroit. Tensions began several weeks ago when Canadian trucker vaccine mandates kicked in on Jan. 15, while an American ban followed shortly thereafter.

Crisis deepens: Homeland Security Secretary Alejandro Mayorkas and Transportation Secretary Pete Buttigieg phoned their Canadian counterparts about the situation, urging them to use federal powers to resolve the standoff. Windsor Mayor Drew Dilkens also made a plea for a court injunction, citing economic damage, while Canadian officials successfully asked a court to freeze millions of dollars in donations through crowd-funding site GiveSendGo after cutting off a similar effort on GoFundMe. Meanwhile, the Detroit International Bridge Company, which owns the Ambassador Bridge, pushed Canada to end the protest by rescinding the vaccine mandate or removing the vehicles so trade can resume.

The demonstrations have already disrupted production lines and even shut down the plants of nearby automakers like Ford (NYSE:F), GM (NYSE:GM), Stellantis (NYSE:STLA), Toyota (NYSE:TM) and Honda (NYSE:HMC). “We hope this situation is resolved quickly because it could have widespread impact on all automakers in the U.S. and Canada,” a Ford spokesman declared. Putting it in perspective, the Ambassador Bridge is the busiest international land-border crossing in North America, responsible for 30% of about $600B in annual two-way trade between the U.S. and Canada.

Could the protests boost rail or air transport stocks like Canadian Pacific (NYSE:CP), Genesee & Wyoming (NYSE:BIP), CSX (NASDAQ:CSX), Expeditors International (NASDAQ:EXPD) or UPS (UPS)?

Things could get worse: In a bulletin to local and state law enforcement agencies, the Department of Homeland Security said it has received reports that truckers are planning to “potentially block roads in major metropolitan cities.” A convoy could begin in Southern California as early as this weekend, possibly disrupting traffic around the Super Bowl, and reach Washington in March in time for the State of the Union address. North of the border, demonstrations are going into their third week in Ottawa, where truckers have clogged up traffic and paralyzed the Canadian capital.

Inflation nation

Bonds on Thursday got battered by another jump in inflation, which sped up to 7.5% in January to mark a fresh four-decade record, or the highest pace seen since the early 1980s. That led the benchmark 10-year Treasury yield to cross the 2% level, ending the session 6 bps higher, while the two-year yield jumped the most since 2009. While yields are still low by historical standards, the speed of the recent Treasury movement is highlighting a meaningful shift for borrowing costs across the economy, or an input that investors use to value stocks and other assets. It was only a month ago that the 10-year yield was hovering around 1.5%.

Bigger picture: For those doubting recent signals from the Fed, it’s pretty clear that the hawkish monetary era has arrived. St. Louis Fed Chair James Bullard, a voter on the FOMC this year, said he now favors a half-point interest rate hike in March, the first increase of that magnitude since 2000. While Bullard is on the more hawkish side of the central bank, other policymakers have also expressed urgency about rate increases and reducing the size of the Fed’s balance sheet, which could put further upward pressure on yields.

In fact, Fed-funds futures now point to a more than 70% chance the Fed will raise short-term rates from their current level (near zero) to at least 1.75% by the end of the year, according to data from CME Group. That was up from a 22% probability on Wednesday and 1% a month ago. Economists also keep lifting the pace of their forecasts, with Goldman Sachs (joining Bank of America) in raising rate hike expectations to seven times for 2022, up from five projected earlier.

Outlook: Equities, especially tech and growth stocks, came under pressure after the explosive inflation data, and many are warning that the recent volatility could rise across all asset classes in case of a policy mistake (acting too late, too strong, or not strong enough). However, should the rate hikes successfully put a lid on price pressures this year, early losses could be followed by strong gains for equities. In terms of the 10-year Treasury yield, the rate is likely to settle into a range between 2% and 2.5%, according to strategists at Morningstar and Neuberger Berman.

Super Crypto

With the ability to advertise on the largest stage in the world, Crypto companies are set to take a big part in Super Bowl LVI on Sunday. In recent times, watching commercials has turned into somewhat of a similar tradition as the game itself, with many firms shelling out up to $7M for a 30-second slot. Some are even calling it the “Crypto Bowl,” a play on the “Dot-Com Bowl” in 2000, when early, speculative internet companies sought to gain mainstream acceptance (remember the Pets.com liquidation?).

Snapshot: New crypto brands like Coinbase (NASDAQ:COIN) and Crypto.com are not the only ones getting in on the action. Old timers, like Budweiser (NYSE:BUD), are also throwing their hat in the ring, running an online NFT contest during the big game. Others will make a point of exploring blockchain technologies, while an ad from crypto exchange FTX features a trading spoof on now-retired quarterback Tom Brady. “I’ve missed out on a lot, but I’m not going to miss out on this,” reads another FTX commercial called “The Dust Bowl,” which warns viewers to get into the sector while they still can.

Elsewhere, the U.S. this week seized about $3.6B in Bitcoin (BTC-USD) stolen during a 2016 hack of the Bitfinex currency exchange – the largest financial confiscation to date. Ilya Lichtenstein and his wife Heather Morgan were arrested for the alleged conspiracy, and were accused of conspiring to launder 119,754 Bitcoins (BTC-USD) that were stolen from the platform. Using fictitious identities, the couple deposited stolen funds into accounts at a number of virtual currency exchanges and darknet markets, and then withdrew the capital in a practice known as “chain-hopping.”

What’s the fair value of Bitcoin? Around $38,000, or 13% below the current trading price, according to JPMorgan analysts led by Nikolaos Panigirtzoglou. The estimate is based on Bitcoin (BTC-USD) being about four times as volatile as gold, though JPMorgan’s long-term theoretical target – which would mirror the total amount of gold held privately for investment purposes – suggests the crypto could potentially reach $150,000. “The biggest challenge for Bitcoin going forward is its volatility and the boom and bust cycles that hinder further institutional adoption,” the strategists added in the research note.

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