Weekend Bite, a Seeking Alpha original series: This week, we’re joined by Susannah Streeter, Senior Investment and Markets Analyst at Hargreaves Lansdown. She shares her thoughts on the European energy crisis, if Bitcoin and Ethereum are still in play, and a reminder that investors need to hear from time to time. Kim Khan also shares the Catalyst Watch for next week on what is certain to move markets.
Stock index futures point to another decline this morning following a tough past four sessions, with the market set to record its fourth down week out of the last five. The benchmark S&P 500 (SP500) is off 4% going into the last trading day of the week, while the Nasdaq (COMP.IND) and Dow (DJI) are down 4.6% and 3.7%, respectively. It’s also quadruple witching day, which refers to the simultaneous expiration of market index futures, stock futures, market index options and stock options. The event can lead to higher volatility, which is not the greatest recipe in the current environment.
Catalyst: FedEx (FDX) sent shudders down traders’ spines late Thursday after sounding the alarm on macro weakness and withdrawing its full-year guidance. CEO Raj Subramaniam said he expects the economy to enter a worldwide recession, and would have to implement cost-cutting initiatives (closing 90 offices and five corporate locations, freezing hiring, reducing flights, etc.) to deal with softer global shipment volumes. FDX shares tumbled nearly 20% in response, and the sentiment was seen elsewhere, with the company serving as a barometer for “everybody else’s business.”
“The [Federal Reserve] might have a hard choice to make,” noted Anastasia Amoroso, Chief Investment Strategist at iCapital. “Before they were saying, we’re going to try to have a soft landing and bring down inflation. Now they may have to make a choice. It’s either a soft landing or bringing down inflation. In other words, they may have to engineer more of a crackdown on economic growth to bring down inflation.”
Next up: Bulls defended the important S&P support level of 3,900 again on Thursday, but a close below that level today could open the gates for further drawdowns – especially in the traditionally weak second half of September. Meanwhile, the University of Michigan is set to release its preliminary measure of September consumer sentiment at 10:00 a.m. ET, which could shift direction shortly after the start of trading. Economists expect the index to rise to 59.7 from 58, and inflation expectations will be watched to see if they drop from 4.8%. (7 comments)
Things are coming thick and fast as Germany attempts to avoid a collapse of its energy market. The government is now looking to take control of some domestic players to ensure critical supplies following a sanctions war sparked by Russia’s invasion of Ukraine. Flows across the Nord Stream 1 pipeline have been cut off, while a crude import ban will go into effect later this year, threatening power stations, factories and even the heating of homes.
The latest: Germany has already conducted a series of government bailouts and rescue loans for energy firms, but the need to source alternative supplies is racking up losses to the tune of hundreds of millions of euros per day. Controlling stakes and further capital injections seem like the only way out of the bind, with an outright nationalization of key energy assets even on the table. “Things are complex, we are working it through very carefully,” declared German Economy Minister Robert Habeck.
In the latest move, Berlin said it would take over Rosneft’s (OTC:RNFTF) German unit, including stakes in three crude refineries that account for 12% of the country’s oil processing capacity. The subsidiary of the Russian oil giant was placed under trusteeship on Friday, giving it federal regulatory control of the facilities in Schwedt, Karlsruhe and Vohburg. The move was executed through the German Energy Safety Act and can be renewed every six months.
Outlook: Germany is also in advanced talks to take state ownership of Uniper (OTC:UNPPY) and two other large gas importers known as VNG and Securing Energy for Europe (formerly Gazprom Germania). The three are central pillars of the country’s key energy infrastructure, managing, storing and directing flows. Teams of traders at the companies also buy and sell billions of euros in energy contracts each year to keep the market humming and stable. (3 comments)
Traders are not a fan of Adobe’s (ADBE) new acquisition, as selling continues into premarket trading this morning. The stock already plunged over 16% on Thursday to $309, after Adobe – the owner of platforms like Photoshop, Illustrator, Acrobat and XD – announced the purchase of a design software firm known as Figma. The $20B transaction will be financed by an equal mix of cash and stock, with Figma CEO Dylan Field and company employees receiving 6M additional Adobe restricted shares that will vest over four years.
Bigger picture: Figma specializes in what it calls a “web-first collaborative design platform” that allows employees to use digital tools together on various types of projects. It’s a relatively unknown company, but its cloud-based collaboration tools have gained a faithful following among developers and product managers. Figma was only valued at $10B last year, and had been expected to see annual recurring revenue of $400M for 2022, which is only 2% of its sale price.
“While we think the acquisition makes strategic sense, let’s be honest. It feels like Adobe was losing some momentum to Figma and it was better to buy them out and combine forces,” said Evercore analyst Kirk Materne. “We think the company overpaid for Figma,” added Oppenheimer analyst Brian Schwartz, noting that the high price tag “indicates it was a defensive move, and the deal adds another layer of execution risk over the next few quarters.”
Bottom line: Adobe expects Figma to add to earnings by the third year after the deal’s completion, suggesting that company profits may see a negative impact from the deal for the next two years (at least). However, Figma does have gross profit margins of about 90% and operating cash flow is positive. Adobe also reported earnings yesterday that beat estimates, though guidance was mixed for the current quarter. (131 comments)
China’s warming ties to Russia are on full display at a meeting of the Shanghai Cooperation Organization ((SCO)) in Uzbekistan. The relationship between the countries had been growing over the past decade, as the two nations seek to counter the power and economic strength of the U.S. and its allies. In terms of size, the SCO is one of the world’s largest regional organizations, covering nearly 60% of the area of Eurasia, 40% of the world population, and more than 30% of global GDP.
Snapshot: “In the face of historical changes in the world and times, as major countries, China is willing to work together with Russia to play a leading role and to inject stability into the turbulent world,” President Xi Jinping declared at the start of the two-day conference. Bilateral trade between the nations, which topped $140B last year, grew by nearly a third in the first seven months of 2022, with commodities like heavily-discounted Russia oil making up a significant amount of the cross-border flows. Natural gas being transported via the Power of Siberia pipeline also hit records this summer, and China even announced that it would start paying for gas in rubles and yuan as the countries shun the U.S. dollar’s reserve currency status.
Meanwhile, Vladimir Putin praised China’s “balanced position” on the war in Ukraine, with many Chinese companies – from semiconductors to automakers – taking advantage of the exodus of Western brands from Russia. “We understand your questions and concerns in this regard,” Putin continued, adding that details of the war would be explained during meetings at the summit. In turn, Xi expressed appreciation for “Russia’s adherence to the one-China principle and stressed that Taiwan is a part of China,” especially after House Speaker Nancy Pelosi’s visit to Taipei in August.
Go deeper: Putin last met with Xi during a visit to Beijing for the Winter Olympics in February. At that gathering, the two authoritarian leaders framed their “no-limits” partnership and shared their opposition to the “further enlargement of NATO.” There’s also some new interesting dynamics at play, as India – which is a member of the Quadrilateral Security Dialogue and the Shanghai Cooperation Organization – has been scooping up cheaper Russian oil and much-needed weapons, while Iran just signed a memorandum to become a permanent member of the SCO. (4 comments)
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