The major US stock moving averages ended the final session of the third quarter with another day of losses on Friday, adding to the recent weakness. With investors still concerned about the Federal Reserve’s aggressive policies, the Dow and S&P 500 hit new lows for 2022. The trade came amid PCE price data that rose more than forecasters expected. Meanwhile, comments from a senior Fed official continued to point to a hawkish stance from the central bank. While the Dow and S&P 500 both marked 52-week intraday lows during the session, the Nasdaq remained just below its previous 2022 low of 10,565.84, which fell back in June. Still, it represented the lowest close for the Nasdaq since July 2020. Ten of the 11 S&P sectors closed in the red during the final session of the quarter. In a signal of what to expect in the fourth quarter, Federal Reserve Vice Chair Lael Brainard signaled that the central bank does not plan to return to an accommodative stance anytime soon. Preview next week’s big events in Seeking Alpha’s Catalyst Watch.
Following a cable crash earlier in the week, UK bond turmoil forced the Bank of England to enter the market as government borrowing costs soared amid fears over the government’s tax cut plans. The central bank suspended the scheduled start of its gilt sales next week and said it would temporarily purchase long-dated bonds and buy them up “to any extent necessary”. In response, the 10-year gilt yield fell, falling 36 basis points to 4.15%, while sterling surged above $1.08 before quickly erasing those gains.
Background: Gilt yields were on track for their strongest monthly rise since at least 1957 after Prime Minister Liz Truss unveiled her so-called “mini-budget”. The plan included sweeping tax cuts for individuals, businesses and home purchases, while subsidizing rising energy costs. The Treasury even forecast that it would take £45bn from government revenues over the next five years, sending shockwaves through financial markets.
“Should dysfunction in this market persist or worsen, there would be a significant risk to UK financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction in the flow of credit to the real economy,” the Bank of England said in a statement. “In line with its objective of financial stability, the BoE stands ready to restore the functioning of the market and reduce any risks of contagion to credit conditions for UK households and businesses.”
go deeper: In a rare rebuke of a G7 country, the IMF urges Truss to “reassess” tax cuts and warns the new measures are likely to fuel a cost-of-living crisis. “Given the heightened inflationary pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this stage, as it is important that fiscal policy does not conflict with monetary policy. Furthermore, the nature of UK policies is likely to increase inequality.” (155 comments)
No gas this winter
The Nord Stream pipeline system, which carries Russian gas to Europe, reported “unprecedented” damage on Tuesday, with management saying it was impossible to predict when operations would resume. Both Europe and Russia said sabotage cannot be ruled out as the cause of the destruction, and Swedish authorities said two powerful underwater explosions were spotted in the same area of the Baltic Sea where gas had bubbled to the surface.
Price Movement: Benchmark Dutch Natural Gas Front Month Futures closed the session increased by 7% to €186.10/Mwh while UK natural gas futures increased by up to 34% before you settle down 6.2% higher at £255.65/MWh. European leaders have previously accused Moscow of weaponizing energy – citing using maintenance problems as a pretext to limit flows – while the new leaks guarantee a disruption in gas supplies to Germany this winter.
The developments follow an escalation in the war in Ukraine, with Vladimir Putin announcing a “partial mobilization” that will enlist up to 300,000 additional troops. Russia has also declared victory in a series of referendums held in Donetsk, Luhansk, Kherson and Zaporizhia regions over the past week. “As for the risk of Russia using these voices and the subsequent annexation of these areas as a pretext for nuclear strikes – we are aware of this risk, we understand it is real,” said Yuriy Sak, an adviser to Ukraine’s Defense Minister Oleksii Reznikov.
Note: Nord Stream 1 halted gas production earlier this month, with Moscow claiming sanctions prevented it from carrying out essential maintenance work, while Nord Stream 2 never opened as Germany failed to certify it for commercial operations due to Russia’s invasion of Ukraine . (129 comments)
Prepare for impact
Floridians were urged to evacuate before Hurricane Ian struck Cayo Costa on Wednesday afternoon as a Category 4 hurricane. Storm surges reached up to 18 feet in some coastal areas, while maximum sustained winds reached 150 mph, leaving people who were not evacuated stranded in their homes. Extensive infrastructure and property damage was also recorded in areas such as Fort Myers and Cape Coral, while nine deaths were reported in ongoing rescue efforts.
Snapshot: Power to some 2.5 million customers in Florida was disrupted while personnel from 14 Gulf Coast oil rigs were evacuated, halting about 11% of the region’s oil production. Meanwhile, widespread traffic disruptions were recorded, including airport closures and over 2,000 flight cancellations on Wednesday. Florida’s largest seaport in Jacksonville, known as Jaxport, as well as Port Canaveral also joined Port Tampa Bay and was completely closed.
“You’re looking at a storm that changed the character of our state,” said Gov. Ron DeSantis, calling Ian a “500-year flood event.”
Catastrophic damage: Economic losses in the region could exceed $45 billion if current projections come true, ranking Ian the eighth costliest US hurricane. Ian is now traveling to the Carolinas, where a state of emergency has been declared due to hurricane and tropical storm conditions. (64 comments)
The tech slowdown became fully visible after Facebook parent company Meta Platforms (META) announced plans for its first-time job cuts. Macro headwinds are clearly hitting the sector, as is an advertising slump exacerbated by Apple’s (AAPL) iOS privacy changes. Meta also awaits its big investments in virtual reality (oculus), the Metaverse (Horizon Worlds) and a short video (roll) to bear fruit as Facebook, Instagram and WhatsApp growth peaks.
Quote: “I was hoping that the economy would have stabilized more significantly by now,” CEO Mark Zuckerberg said at a weekly Q&A with employees. “But from what we’re seeing it doesn’t seem to be there yet, so we want to plan a bit conservatively.”
Budgets will continue to be cut for “all teams,” even those that are growing, while priorities are realigned to reflect the cut spend. Meta whose shares are dropped by 60% YTD isn’t alone in its downsizing efforts, as many companies made similar decisions over the summer. Twitter (TWTR) froze hiring in May, Snap (SNAP) cut 20% of its workforce in August, while Alphabet (GOOGL) has said it will slow hiring in the second half of 2022.
Other technical issues: Apple also dragged the Nasdaq lower on Thursday as the iPhone maker slumped after a rare downgrade by Bank of America. “We see a risk for this outperformance over the next year as we anticipate material negative results [estimates] Revisions due to weaker consumer demand (services are already slowing and we expect products to follow),” analyst Wamsi Mohan wrote in a note to clients Drop 5% and wipe out the market value of over 100 billion dollars. (67 comments)
The IPO market may be drying up in the current investment environment, but one company still appears to be performing at its best. Porsche AG advanced 3% to €85/share during its first trading session in Frankfurt, after parent company Volkswagen AG (OTCPK:VWAGY) set the final price for the sports car maker at the top end of its marketed range of €76.50 to €82.50. The IPO values Porsche at around 75 billion euros, making it Europe’s largest IPO in ten years despite many difficult market conditions.
Larger picture: As part of the listing (and as a nod to the well-known line of vehicles), 911 million Porsche shares were split into 455.5 million preferred shares and 455.5 million common shares. Just a quarter of the non-voting preferred stock was sold, while a holding company controlled by the Porsche and Piech families bought 25% of the company — with voting rights — giving them a majority that could halt key strategic decisions by the automaker, according to Tafel. Investors in the IPO also included sovereign wealth funds of Qatar, Abu Dhabi and Norway, and mutual fund company T. Rowe Price.
Volkswagen, which will retain a 75% stake in Porsche, is expected to raise €19.5 billion from the IPO. The parent company plans to pay out nearly half of the proceeds to VW shareholders in the form of a special dividend, while the remaining amount will pave the way for the EV shift and investment in software. In terms of earnings, Porsche made a profit of 4 billion euros on sales of 33.1 billion euros last year.
Engineered for Magic: Porsche hired Italian investment bank Mediobanca – which took Ferrari (NYSE:RACE) public in 2015 – as financial advisors on the IPO. While the two companies are in the luxury car business, Ferrari has focused solely on expensive sports cars, while Porsche is expanding into the more affordable market and SUVs. Ferrari is also run independently from its former parent company Fiat and the Agnelli family and trades freely on the open market, while only 10% of Porsche’s shares have been offered to retail investors and carry no voting rights. (15 comments)