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Wall Street Breakfast

Author: bmotrader   |   Latest post: Tue, 2 Jun 2020, 9:57 AM

 

Wall Street Breakfast: U.S.-China Tensions Resurface

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Escalating tensions between the world's two largest economies saw S&P 500 futures fall 1% to start the week, while European stocks tumbled as investors returned from a May Day break. President Trump said China made a "horrible mistake" and the government was putting together a report that would be "very conclusive," while Warren Buffett tried to soothe ("never bet against America"), although he doesn't see any attractive investments (see more below). Meanwhile, the weakest earnings season in more than a decade continues, with nearly 150 companies in the S&P 500 expected to report quarterly results this week.

U.S. looking to rip supply chains from China

These discussions include "how we restructure ... supply chains to prevent something like this [coronavirus economic fallout] from ever happening again," said Secretary of State Mike Pompeo, after citing "significant evidence" that COVID-19 emerged from a Chinese laboratory. Tax incentives and potential re-shoring subsidies are among measures being considered to spur changes, while the U.S. is pushing to create an alliance of "trusted partners" dubbed the "Economic Prosperity Network." "We've been working on [reducing the reliance of our supply chains in China] over the last few years but we are now turbo-charging that initiative," added Keith Krach, undersecretary for Economic Growth, Energy and the Environment at the U.S. State Department.
 

More PPP loans may be needed

That's according to White House economic adviser Larry Kudlow, who said "we waited a little bit too long when the last tranche ran out. Let's not make the same mistake again." He's not in a rush to provide more funds to individuals, however, with 175M Americans having already received assistance, either through direct payment or enhanced unemployment. During the interview on CNN's "State of the Union," host Jake Tapper outlined that that $175B of the second round of $310B of PPP loans have already been approved.
 

The Oracle speaks

Asked why he hasn't invested in any companies during the pandemic crisis like the company did during the financial crisis, Warren Buffett said "we haven't seen anything attractive" and the Fed "did the right thing and very promptly." In fact, Berkshire Hathaway (BRK.A, BRK.B) sold $6.5B of equities in the month of April, and offloaded its entire stake in all airlines it held. Buffett still gave an upbeat assessment of the United States' ability to withstand crises, and said "American magic" will overcome coronavirus uncertainty.

Next steps

With a new forecast of up to 100K coronavirus deaths in the U.S., the medical community is watching three critical areas in its fight against COVID-19: Testing, treatments and vaccines. On Sunday, Roche's (OTCQX:RHHBY) COVID-19 antibody test and Gilead's (NASDAQ:GILD) experimental drug remdesivir received emergency use authorization from the FDA, while Moderna (NASDAQ:MRNA) inked a production deal for 1B experimental vaccine doses on Friday. Estimated timelines for a vaccine are still murky, with some seeing a solution by the end of the year, while others say it cannot be reasonably expected until the end of 2021.

Uncertain road to recovery

Crude futures are off 8% to start the week as oil executives see signs that fuel consumption is starting to recover, but say it's likely to be a slow, painful process. "I believe we have seen the bottom," said Marco Dunand, co-founder of Mercuria Energy Group, one of the five largest trading houses. Traders feel the recovery in demand is likely to take more than a year before it reaches a pre-pandemic rate of about 100M bbl/day, though some say it may never reach those levels.

Virtual roadshows and remote IPOs

There probably couldn't be a better way to highlight demand for its product as Norway's Pexip kicked off a virtual IPO roadshow amid the coronavirus pandemic. The company competes with Zoom (NASDAQ:ZM) and Bluejeans (NYSE:VZ), and says its video conferencing software is used by the U.S. military and the German government. "Pexip has for example never met the two U.S. based cornerstone investors face-to-face, all interaction with them have been done by video," CEO Odd Sverre Ostlie declared.

Hot on the heels of Facebook

Just two weeks after Facebook (NASDAQ:FB) shelled out $5.7B for a nearly 10% stake in Jio, a subsidiary of Indian conglomerate Reliance Industries, Silver Lake announced it would jump on the bandwagon. The private-equity firm has struck a deal to invest $750M in the telecom and technology giant, valuing the entity at $65B - a 12.5% premium to the value implied by the Facebook investment. Jio owns a suite of diversified services, including music streaming, smartphones, broadband, on-demand live TV and payments.

Another hit to brick-and-mortar

It's the first major retailer to fall during the coronavirus pandemic, but it's unlikely to be the last. J. Crew has filed for Chapter 11 bankruptcy protection as part of a financial reorganization that will hand over control to top creditors, including hedge fund Anchorage Capital, by converting $1.65B of its debt into equity. The company also plans to hold onto its Madewell brand, which it had considered spinning off into a public company.

Mandatory mask policies

Uber (NYSE:UBER) is in the process of developing technology to detect if drivers are wearing masks or face coverings before they go online and start accepting trips, and is also looking into ways to hold riders accountable, according to CNN Business. While it didn't elaborate on how the technology would work, Uber already has a Real Time ID-check feature that periodically asks drivers to take selfies. The policy is expected to be rolled out in the coming weeks as the ride-sharing giant comes to terms with new realities imposed by the COVID-19 pandemic.

Today's Markets

In Asia, Japan closed. Hong Kong -4.2%. China closed. India -5.8%.
In Europe, at midday, London -0.3%. Paris -4%. Frankfurt -3.5%.
Futures at 6:20, Dow -1.3%. S&P -1.1%. Nasdaq -1%. Crude -7.8% to $18.23. Gold +0.8% to $1714.20. Bitcoin -5.1% to $8658.
Ten-year Treasury Yield -4 bps to 0.6%

Today's Economic Calendar
Auto Sales
10:00 Factory Orders
12:30 PM TD Ameritrade IMX

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