Highlights

Wall Street Breakfast

Author: bmotrader   |   Latest post: Thu, 15 Apr 2021, 10:13 AM

 

Wall Street Breakfast: Erdonomics

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Emerging markets are on watch after Turkish President Recep Tayyip Erdogan sacked another central bank governor a few days after a larger-than-expected interest rate hike. It's the fourth time Turkey's premier has fired the head of the country's central bank since taking office in 2014, adding to the drama for both local and foreign investors. The lira responded by tumbling as much as 17% against the dollar, while the BIST 100 plunged nearly 10%, highlighting how money managers can never be too at ease with monetary policy in Ankara.

Backdrop: Turkey's interest rate currently stands at 19%, which has attracted foreign investors to park their cash in the currency. The lira was at one point the best-performing emerging market currency of 2021, having recovered almost a fifth from a low against the greenback. Naci Agbal, appointed in November, had been raising interest rates to fight an inflation rate running above 15%, and sharply increased the rate last week by 2 percentage points, double what economists expected. That was the final nail in the coffin for Naci, as Erdogan believes in an unconventional approach that higher rates cause inflation rather than prevent it.

Turkey has lost "one of its last remaining anchors of institutional credibility," wrote Phoenix Kalen, director of emerging market strategy at Societe Generale. Local individual investors are likely to stock up on dollars again and foreign investors could sell Turkish assets, she added, warning, "Turkey may soon be headed toward another currency crisis."

Outlook: Turkey already spent billions of dollars to support the lira in 2020 due to the economic shutdowns related to the coronavirus pandemic. Interventions could return again if investors continue to pull funds from developing markets. Sahap Kavcioglu, the newly appointed head of the central bank, has defended similar monetary approaches expressed by Erdogan, and was a member of parliament in AKP from 2015 until 2018. "At this point, it doesn't matter who Agbal's replacement is or what they say, as it's clear that Erdogan is running the show," declared Win Thin, global head of currency strategy at Brown Brothers Harriman.

Stocks - The bond connection

The relationship between stocks and bond yields couldn't be stronger, with the two joined at the hip for the last several weeks. Overnight, the yield on the 10-year Treasury note slipped 5 bps to 1.68%, prompting the Nasdaq to advance 0.8%, while the Dow and S&P 500 inched down 0.3% and 0.1%, respectively. Fed Chair Jerome Powell is also scheduled to speak at 9 a.m. today, discussing central bank innovation at an event hosted by the Bank for International Settlements.

Note: Weighing on some value names this morning, like the banks, are recent moves by the Fed to restore some capital requirements that were suspended in the early months of the coronavirus crisis (the decision also weighed on bank shares on Friday). During the pandemic, the Fed allowed banks to exclude Treasury securities they hold, as well as central bank deposits, from their supplementary leverage ratios (SLR). That exclusion now expires on March 31, 2021, lowering the SLR for all banks that are required to report it.

Stimulus checks are also finding their way into various sectors of the market. On Friday, BofA Global Research said that U.S. equity inflows hit a weekly record of $56.76B in the week ending March 17, up sharply from $16.83B a week earlier. A new poll from Mizuho Securities also found that two out of five stimulus check recipients plan to invest at least some part of the proceeds into Bitcoin and stocks, while the Treasury distributed $242B in stimulus checks through March 17, or around 60% of the expected total.

Thought bubble: For now, it appears that growth stocks and value names cannot go up at once. "Either tech stocks get too low... or long-term interest rates get too high. Until that happens, the rotation will just continue to play out," said Mad Money's Jim Cramer. "We aren't there yet, but I'm confident that we’ll get there eventually because that’s what always ends these vicious kinds of rotations."

Automotive - Data concerns

Beijing has restricted the use of Tesla (TSLA) cars by military personnel or employees of some state-owned companies over national security concerns, according to reports from the WSJ. The concerns stem from the fact that Tesla vehicles cameras can record images constantly and can obtain data including when, how and where the vehicles are being used, as well as the contact lists of mobile phones synced to them. Beijing is concerned that some data could be sent back to the U.S.

Sound like a case of TikTok? Under the Trump administration, the U.S. pushed the Chinese video sharing app to relocate data on American users to the U.S. It also lobbied allies to shut out Huawei - the leading 5G-equipment maker that was dubbed a Trojan horse which can spy and steal sensitive information once inside critical infrastructure in the West. In 2018, Congress even passed legislation prohibiting federal agencies from buying equipment made by several Chinese firms.

Concerns about commercial espionage have become overblown, CEO Elon Musk declared while pointing to TikTok (BDNCE), which was threatened with a U.S. ban last year despite the platform's videos mostly showing people "just doing silly dances." Musk also said Tesla would never provide the U.S. government with data collected by its vehicles in China or other countries. If it did, the company would be shut down everywhere it used its cars, which provides "a very strong incentive for us to be very confidential."

Go deeper: China has become a vital market for Tesla, accounting for 25% of its global sales of 500,000 vehicles in 2020. The EV maker has also been seen as a model foreign company in China, winning strong support from Shanghai authorities to set up shop in the city, before encountering its first serious run-in with Chinese authorities last month over purported quality issues. But many have still touted Tesla as a tech company, not as an automaker, precisely due to the troves of data it amasses from the millions of miles its cars drive in the real world.
     
M&A - Railroad merger

Creating the first rail network linking the United States, Mexico and Canada, Canadian Pacific Railway (CP) has agreed to buy Kansas City Southern (KSU) for $25B in cash and stock. The deal will value Kansas City Southern at $275 a share, sending the stock up 15% in premarket trade. The acquisition would need the regulatory nod from the US Surface Transportation Board, and the companies expect the M&A process to take until mid-2022.

The tie-up is being pitched as a net win for North America by enabling efficient integration of the continent's supply chains. The U.S., Mexico and Canada replaced NAFTA last year with a revamped regional pact called USMCA, which was expected to encourage trade and investment. "Over the coming months, we look forward to speaking with customers of all sizes, and communities across the combined network, to outline the compelling case for this combination and reinforce our steadfast commitment to service and safety as we bring these two iconic companies together," said Canadian Pacific CEO Keith Creel.

Some history: Last September, Kansas City rejected a takeover bid valued at roughly $20B from Blackstone (BX) and Global Infrastructure Partners. Canadian Pacific has meanwhile been trying to target a U.S. railroad for years in its quest to create a transcontinental network. It abandoned the two prior efforts in 2014 and 2016, due to resistance from the takeover targets, as well as opposition from rivals, shippers and U.S. regulators.

Outlook: Canadian Pacific Kansas City would operate about 20,000 miles of railway, employ 20,000 people and generate annual revenue of about $8.7B, according to a press release. The transaction is also expected to "create jobs across the combined network, while efficiency and service improvements are expected to achieve meaningful environmental benefits." It could additionally reduce the need for trucks to link production sites and allow cargo to avoid congested California ports.

Energy - Crude optimism sees Aramco defend dividend

Describing the last twelve months as one of the most "challenging years" in recent history, Saudi Aramco (ARMCO) reported net income of 183.76B riyals ($49B) in 2020, down 44% from 330.69B riyals ($88.2BB) the previous year. The result was slightly below analysts' expectations of 186.1B riyals, but still represents the highest annual profit of any public company globally. Revenues were impacted by lower crude oil prices and volumes sold, as well as weakened refining and chemicals margins.

Bigger picture: Aramco maintained its $75B dividend payout for 2020, despite concerns that it would take on additional debt to maintain it. Free cash flow slumped almost 40% to $49B last year, well below the level of its anticipated dividend. The behemoth state oil firm also cut capital expenditure for the year ahead, lowering its guidance for spending to around $35B from a prior range of $40B-$45B (capex was $27B in 2020).

"With more deployment of the vaccines we will see more demand pickup so we are very optimistic about 2021 in terms of growth in demand, especially in the second half, and we can see the prices so far responding to what we are seeing in the market," Aramco CEO Amin Nasser declared. "Looking ahead, our long-term strategy to optimize our oil and gas portfolio is on track and, as the macro environment improves, we are seeing a pick-up in demand in Asia and also positive signs elsewhere."

Go deeper: The outlook could benefit shares of top western oil and gas companies that got hammered in 2020 due to the coronavirus pandemic. Royal Dutch Shell's (RDS.A, RDS.B) profit tumbled to its lowest in at least two decades, BP (NYSE:BP) dropped to multi-year lows, while Exxon Mobil (NYSE:XOM) posted its first-ever annual loss. As economies reopen with the deployment of more vaccines, crude demand could rebound to pre-pandemic levels, though OPEC+ will still face a balancing act on oil production levels.

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