Wall Street Breakfast: What Moved Markets

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Wall Street Breakfast

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Stocks bounced higher on Friday to close a chaotic week in the financial markets, helped in the end by Federal Reserve Chairman Jerome Powell's reassurance that rate hikes on the order of 75 basis points were off the table for now. The day was spiced up by Elon Musk's announcement that his planned acquisition of Twitter was "temporarily on hold" because of concerns about fake accounts, which sent the stock reeling 9.7%. Robinhood shares soared 25% after Sam Bankman-Fried, the founder of cryptocurrency exchange FTX, revealed a 7.6% stake in the company. But Friday's gains were not enough to erase sharp losses for the full week, as investors worried about the Fed's ability to turn back raging inflation without knocking the U.S. economy into a recession. The Dow Jones index ended with its seventh weekly loss in a row, marking its longest losing streak since 2001, while the S&P 500 slid 2.4% for its longest weekly losing streak since 2011, and the Nasdaq Composite fell 2.8%

Role reversal

It happened once during the intraday session on Monday, but Saudi Aramco (ARMCO) officially topped Apple (NASDAQ:AAPL) as the world's most valuable company on Wednesday. The state-owned energy giant closed the session with a market capitalization of $2.43T, while the iPhone maker ended the day valued at $2.37T. In fact, it's a trend that has accelerated this year, with the energy sector buoyed by a surge in oil prices following an inflation surge that has curbed demand for high-flying tech stocks (Aramco shares are up 30% YTD, while Apple's stock has slid 20% since the start of the year).

Commentary: "While Apple's stock has held up better than most peers, it is still subject to the great tech multiple compression, which has been witnessed as a result of central bank tightening and ramping inflation," explained Neil Campling of Mirabaud Securities. "Investors will now worry if consumers' belt tightening will lead to lower appetite to buy the ultimate consumer accessory, the iPhone."

Some say the correlation is not exactly identical since Aramco's float is less than 2%, compared to the 84% of Apple shares that are held by the public. Others point out that Aramco only trades on the Saudi Stock Exchange, known as Tadawul, making the connection somewhat of an apples (no pun intended) to oranges comparison. Saudi Aramco is also the only non-American company in the top 10 market cap rankings, and if U.S. investors want to scoop up shares they face limited choices, such as buying into the iShares MSCI Saudi Arabia ETF (NYSEARCA:KSA) that has Aramco as 5% of its holdings.

Go deeper: For the past two years, investors have been laser-focused on "pandemic winners" in the technology sector. However, a historic collapse in energy investment during the coronavirus crisis has led to shortages of oil, gas, coal and refining capacity, leading some to believe the energy sector could be the next "pandemic winner." In addition, the Saudis, who are one of the world's top crude exporters, have been under pressure to raise output following Russia's invasion of Ukraine and subsequent sanctions against Vladimir Putin's regime. (21 comments)

No guarantee

The Senate finally confirmed Fed Chair Jerome Powell for a second four-year term following delays surrounding other nominees the Biden administration had pitched for the central bank. In his first term, Powell has had to battle two major crises, including the COVID pandemic and 40-year high in inflation, recently turning to tighter monetary policy to combat the price pressures. "Chairman Powell presided as Fed chair during some of the most challenging moments in modern American history," Senate Majority Leader Chuck Schumer said after the bipartisan 80-19 vote, which also saw the confirmations of Fed Vice Chair Lael Brainard and governors Lisa Cook and Philip Jefferson.

Snapshot: A tricky economic environment has been in place since the onset of the coronavirus pandemic. When consumer price inflation started to climb shortly after the deflationary shock in March 2020, the Fed had assured America that inflation was "transitory" as extraordinary accommodative monetary policy took hold. Since then, "transitory" quickly became unpopular as inflation surged to levels not seen since the 1980s, causing the central bank to swiftly shift gear to more hawkish actions. At the previous FOMC meeting in the beginning of May, the Fed's policymaking arm even increased the benchmark target range by the most in 22 years, while the CPI report this week came in at a flaming 8.3% for April.

"Inflation is just way too high here in the United States," Powell said later in an interview on American Public Radio's Marketplace program. The central bank's tools for taming that inflation are only focused on demand, and "supply is a big part of the story here." There are additional factors such as the war in Ukraine and new lockdowns in China to limit the spread of COVID-19, so there is no guarantee "whether we can execute a soft landing or not... it may actually depend on factors that we don't control."

Outlook: If the economy performs as the Fed expects, the central bank will raise the interest rate an additional 50 basis points at each of the next two meetings. "If things come in better than we expect, then we're prepared to do less. If they come in worse than we expect, then we're prepared to do more," Powell continued. "I will also say that the process of getting inflation down to 2% will also include some pain, but ultimately the most painful thing would be if we were to fail to deal with it and inflation were to get entrenched in the economy at high levels, and we know what that's like." (17 comments)

House of Mouse

Shares of Disney (DIS) initially moved higher after the bell on Wednesday, but then extended a selloff seen in the prior session by falling 2.6% to $102.40 in AH trading. The new 52-week low saw investors focus on the company's top and bottom line misses, as well as widening losses at its direct-to-consumer segment. Operating losses for Disney's streaming business, which also includes ESPN+ and Hulu, tripled to $877M from a year ago, driven by higher programming and production expenses.

On the bright side: The House of Mouse reported 7.9M new Disney+ subs to reach 137.7M subscribers, avoiding a slowdown that has recently plagued streaming rival Netflix (NFLX). CEO Bob Chapek also affirmed the "very achievable" targets of signing up between 230M-260M subscribers to Disney+ by September 2024, and having the streaming video-on-demand business achieve profitability before then. A slate of big-budget productions will additionally be released in the coming months, like Black Panther and Avatar sequels, Toy Story prequel Lightyear, and a new Star Wars franchise series called Obi-Wan Kenobi.

"To get their streaming business to scale, at least the way they've built it, they need to expand the aperture of the service beyond Disney-branded content," wrote Morgan Stanley analyst Ben Swinburne. "They're spending significantly less than Netflix is. There’s an opportunity for them to spend more efficiently on content, and lean on this strong library of familiar IP that they have, but they just have to go out and prove it."

More magic: A strong rebound was seen at Disney's parks, experiences and products segment, with revenue more than doubling to $6.7B during the quarter. Operating profit of nearly $1.8B, which was close to pre-pandemic levels, beat analyst estimates by 18% and compared to a year-ago loss of $406M. With regards to the legal tussle down in Florida... Disney leadership wasn't asked any questions on the conference call after the state's legislature repealed special tax privileges related to the district that houses the Walt Disney World theme park. (121 comments)

Formula shortage

The White House announced a raft of measures on Thursday to alleviate the ongoing baby formula shortage, which has worsened in recent weeks because of a major product recall and supply chain problems. In fact, during the first week of May, 43% of baby formula supplies were out of stock across the country, compared to 31% two weeks prior, according to retail pricing data website Datasembly. Many stores have also implemented quotas on how much formula one person can buy at a time, while pediatricians are recommending not to dilute formula (which could be harmful to the kidneys) or switching to other brands.

Flashback: Abbott Nutrition (ABT), the nation's largest baby formula manufacturer, shuttered its production facility in Sturgis, Michigan, in February following reports of contaminated formula that was linked to the deaths of at least two infants. A voluntary recall was issued for Similac, Alimentum, EleCare and other products as the company implements "corrective actions and enhancements" to resume operations. Following FDA approval, Abbott can resume production at the facility within two weeks and make the product available in about six to eight weeks.

In response to public outcry, President Biden spoke with the CEOs of Walmart (WMT), Target (TGT), Reckitt (OTCPK:RBGLY) and Gerber (OTCPK:NSRGY) to explore ways to tackle the worsening crisis. Among the solutions discussed were cutting red tape to get more formula to store shelves faster and urging states to provide consumers flexibility on the types of formula they can buy with WIC dollars. Biden also called on the FTC and state attorneys general to crack down on price gouging, as well as upping supply via increased exports (about 98% of U.S. supply is produced domestically).

Defense Production Act? "There are a range of - there are a range of options, including that, under consideration, but I would note the issue here is that a manufacturer was taken offline because they did not produce a safe baby formula," Press Secretary Jen Psaki said at a White House briefing. "So what we're doing here at this point in time is working with other manufacturers who can produce safe baby formula. We've had success in increasing our productivity - their productivity over the last four weeks, and we're going to continue to work on that." (113 comments)

What's next?

It's been quite an interesting week in cryptoland, with stablecoin TerraUSD (UST-USD) losing its dollar peg (it's now worth 10 cents) and sister token Luna (LUNA-USD) crashing to $0. Bitcoin (BTC-USD) also plunged to as low as $26,292, losing 32% of its value since the beginning of the month, before rebounding as much as 12% on Friday to $30,947. The crypto sector has been swept up in broad selling of risk assets like tech stocks, as well as worries over the industry as a whole and fears of more liquidations.

The skeptics: While crashes have hit Bitcoin before, some say enthusiasm among dip buyers - that used to help prices quickly rebound - is fizzling. One of the biggest advantages of crypto was that it was supposed to provide a hedge against inflation, though that theory has gone up in smoke with Bitcoin getting even more devalued than real-world currencies in a time of red-hot inflation. Another long-term incentive was that crypto could provide a store of value via anonymous transactions and wallets, but not only have governments gotten better at tracking the assets, they are on the verge of regulating them big time.

The believers: Bitcoin and cryptocurrencies are widely known for their violent price swings, and have been selling off along with traditional markets due to macroeconomic uncertainty. "Crypto is going through the lull that the internet went through," added billionaire entrepreneur Mark Cuban. "The use of Smart Contracts to improve business and profitability" will be the next driver, though "the chains that copy what everyone else has, will fail." Meanwhile, El Salvador, the first-ever country to adopt Bitcoin as legal tender, bought the dip again, scooping up 500 more Bitcoins for $15.4M to mark its largest purchase of the crypto on record.

Stronger together: All of the industry worries are prompting some big players to look at combining their resources. Sam Bankman-Fried, the billionaire founder of crypto exchange FTX, disclosed a 7.6% stake in Robinhood (HOOD), sending the beaten-down shares of the popular retail brokerage up 20% in premarket trading on Friday. While Bankman-Fried has no "intention of taking any action toward changing or influencing the control of [Robinhood]," he might call for the company to consider "strategic alternatives or operational or management initiatives." Robinhood recently jumped heavily into crypto space with many currencies, wallets and an international presence, while FTX opened a waitlist for a new stock trading platform in February. (7 comments)

U.S. Indices
Dow -2.1% to 32,197. S&P 500 -2.4% to 4,024. Nasdaq -2.8% to 11,805. Russell 2000 -2.6% to 1,793. CBOE Volatility Index -4.4% to 28.87.

S&P 500 Sectors
Consumer Staples +0.3%. Utilities -1.3%. Financials -4.9%. Telecom -0.2%. Healthcare -2.%. Industrials -2.6%. Information Technology -3.5%. Materials -2.5%. Energy -2.9%. Consumer Discretionary -3.4%.

World Indices
London +0.4% to 7,418. France +1.7% to 6,363. Germany +2.6% to 14,028. Japan -2.1% to 26,428. China +2.8% to 3,084. Hong Kong -0.5% to 19,899. India -3.7% to 52,794.

Commodities and Bonds
Crude Oil WTI +0.4% to $110.16/bbl. Gold -3.9% to $1,810.3/oz. Natural Gas -5.2% to 7.622. Ten-Year Bond Yield -0.2 bps to 2.928.

Forex and Cryptos
EUR/USD -1.32%. USD/JPY -1.03%. GBP/USD -0.59%. Bitcoin -17.3%. Litecoin -28.1%. Ethereum -23.%. XRP -26.5%.

Top S&P 500 Gainers
Viatris (VTRS) +11%. Electronic Arts (EA) +8%. International Flavors & Fragrances (IFF) +8%. Duke Realty (DRE) +8%. Etsy (ETSY) +7%.

Top S&P 500 Losers
Twitter (TWTR) -18%. The Boeing (BA) -15%. Signature Bank (SBNY) -14%. Ball (BLL) -14%. WestRock (WRK) -13%.

Where will the markets be headed next week? Current trends and ideas? Add your thoughts to the comments section.

This article was written by

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