Daily Deck: 07/04/2022
ECB Activating Lines of Defense for Bonds; Leverage Debt Sustaining Losses; Tesla: Problems Go Beyond Sh Lockdown
Daily News Snapshots
Grocery, Restaurant Executives See Inflation Altering Consumer Spending https://www.wsj.com/articles/grocery-restaurant-execs-warn-inflation-is-hitting-consumer-spending-11656519421
Unrelenting inflation is increasing pressure on restaurants and supermarkets as they compete for the increasingly price-conscious consumers. Some packaged food makers are seeing more Americans making food at home to save money. Kraft Heinz already raise prices 14% from 2019. But the consumer staples company said it would raise prices again this year on some items.
How the ECB Plans to Keep Markets in Check as It Hikes Rates https://www.bloomberg.com/news/articles/2022-07-04/how-the-ecb-plans-to-keep-markets-in-check-as-it-hikes-rates?srnd=economics-vp
Reinvesting Pandemic Era Bond Holdings became active on Friday. A new instrument to avoid the so-called fragmentation – unwarranted blow outs in member states’ yields – is due soon.
Reinvesting pandemic era bond holdings: The ECB will redirect proceeds of maturing debt from the total 1.7 trillion-euro portfolios accumulated during Covid to vulnerable states. An average of 17bn euro bonds expires each month. About 12bn euro is from stronger nations and can be used to help struggling ones. ECB have divided countries into donors (Germany, France, and Netherlands), and recipients (Italy, Greece, Spain, and Portugal), and neutrals. The reinvestments are scheduled to run until 2024 though the deadline can be extended.
Anti-fragmentation Instrument: the goal is to offer a more permanent solution allowing the ECB to raise rates as needed in monetary union where fiscal policies diverge. Government bonds will be purchased when yields of member states are deemed to have risen in ways that isn’t justified by economic fundamentals. The proposals will be considered in ECB July 20th meeting. Officials want a backstop with maximum potency. The upshot could be a plan that’s unlimited in size. To avoid swelling in money supply, ECB could execute liquidity-absorbing operations where banks receive interest for parking money at central bank or selling other bonds in portfolio such as those core states like Germany.
Banks Get Burned by Risky Debt, Imperiling Buyout Activity https://www.wsj.com/articles/banks-get-burned-by-risky-debt-imperiling-buyout-activity-11656853381?mod=hp_lead_pos1
Investment banks such as Bank of America, Credit Suisse, and Goldman Sachs are facing to lose billions on leveraged buyouts that they agreed to finance before market soured. Lenders are generally parcel out of leveraged loans to institutional investors such as mutual funds and collateralized loan obligation managers. When market goes south before banks offload, lenders risk getting stuck with paper they must discount heavily to move. The sellers of newly issued buyout debt were receiving an average 94.9 cents on the dollars as of June 23, down from 99.2 cents at the end of January. Lenders to Citrix’s largest PE-sponsored backed leverage buyout is looking at $1bn loss at the $15bn debt funded for the deal.
China Covid Outbreaks Widen as Mass Testing Finds More Cases https://www.bloomberg.com/news/articles/2022-07-04/china-covid-outbreaks-widen-as-mass-testing-turns-up-more-cases?srnd=premium-asia
Many Major Economies to Hit Recession in Next Year, Nomura Says https://www.bloomberg.com/news/articles/2022-07-04/many-major-economies-to-hit-recession-in-next-year-nomura-says?srnd=premium-asia
Many major economies will enter recession over the next 12 months amid tightening governing policies and rising living costs, pushing the global economy into a synchronized growth slowdown. Nomura expects the euro zone, the UK, Japan, South Korea, Australia, and Canada, to fall into recession along with the US. Still central banks are looking to restore their inflation-control credibility even if its means tightening too much could sacrifice growth activities. Nomura forecasted different depth of recessions varying among nations. For the US, Nomura forecasts a shallow but long recession of five quarters from Q1 2022.
Bed Bath and Beyond is burning through its cash reserves: https://www.wsj.com/articles/bed-bath-beyond-is-burning-through-its-cash-reserves-11656667800
Bed Bath and Beyond ousted its chief executive and revealed deep losses, faces not just a strategic crisis but a financial one. The retailer ended in May with roughly $100mm in cash, after burning through more than $300mm of its reserves and borrowing over $200mm from its credit line. It has already sold off real estate to raise funds. Now it is working with advisors on cash management and are trying to find buyer for its BuyBuy Baby business. Bed Bath Beyond is now running by board member Sue Gove while the board search for new executive to replace Mark Tritton. Senior secured notes by the company dropped 21 points to trade at new low of 38 cents on Thursday. Finance Chief Gustavo Arnal told analysts that the company has sufficient liquidity. The company hired Berkeley research group to help with its cash inventory and balance sheet management.
Tesla’s Bumpy Quarter Might Be About More Than Lockdowns in China https://www.wsj.com/articles/teslas-bumpy-quarter-might-be-about-more-than-lockdowns-in-china-11656856728
The smooth acceleration in growth shown by Tesla in the past two years faltered in the Q2. Elon Musk hints that the problem runs deeper than lockdown in Shanghai. Tesla reported quarterly deliveries of 255k down from 310k in Q1. The new came as no surprise given the pandemic related shutdown affecting its Shanghai factor in April and May. But it was below consensus expectation at 264k. But Tesla said June was its best month for vehicle production to date. Implying that it has accelerated out of the problems sustained in April and May.
Tesla isn’t the only auto manufacturer reporting problems. GM on Friday warned that its Q2 profits will be lower than expected due to a large batch of unfinished vehicles in its inventory because of missing parts.
Calendar Events Today:
Independence Day holiday. None scheduled.
Commentary:
Economics Calendar:
None.
Equity Market:
$NDX closed +0.71%, to 11,585. The tech-index rally was led by previously heavily shorted names including security software $OKTA +6%, Chinese Ecommerce $PDD +5%, and Biotech $MRNA +5%. From a technical perspective, we continue to think we’re in a bear market. And we’re in a relatively expensive range of the current bear leg.
$HSI trades lower today during Asia session by -0.53%, to 21,746. We think the Chinese market index offers better medium-term outlook. We see continue to see a near term top at 23,000. And we don’t expect the recent days decline to break below 20,900. The decline today is led by pause in momentum from the previously well-traded Chinese consumer names such as Sunny Optical -6%.
Rates Market:
10y2y spread remains resilient at 0.05% as 10y yield trades at 2.89% while 2y yield trades at 2.84%. We think, despite a steep rally since mid-June, 10y treasury continues to trade in bear market. And we think from a technical perspective, 10y yield will likely trade higher. Floor at 2.8% offers great risk/reward opportunity.