AM Brew, May 16th, 2022

As of 12:00 noon London time, the Morning is pointing to a very weak New York open. China reported very disappointing data with industrial output falling 11.1% which was much worse than the 6.6% expected drop. Also, China's unemployment rose to 6.1% with youth jobless particularly worrisome. All the professionals we are talking to are expecting a recession, and it appears we are already in a downturn. Higher risk assets almost always do poorly in the early stages of a recession.

China's graph of industrial output and retail sales highlight the severity of this downturn as compared with the initial covid lockdown:

McDonalds announced that they are permanently withdrawing from Russia. Although unsurprising, McDonalds made significant profits in Russia and had a good business there. It could be argued that staying in Russia would have been humanitarian, as taking burgers away from locals and leaving all the profits to local oligarchs is not exactly the best solution. De-globalization is not good for markets. Still, MCD expects to report 40% operating margins despite the Russia debacle - MCD has a very good franchise - they have increased the dividend every year since 1972.

As recession is now the expected scenario, longer dated bonds have started to outperform low duration bonds, and the curve is flattening, which is almost a self-fulfilling recession prophecy, as recessions are predicted by curve inversion. High yield bonds & CLOs are underperforming, as investors seek safety:

Energy stocks may be one of the best havens in this storm, as global demand should be healthy as the economy comes out of recession and the energy stocks at around 4% of the index could easily be 8%.

JetBlue is going hostile with its bid for Spirit airlines, but strangely dropped their bid 10%. Along the same lines, TWTR dropped to the low $40s from the high $40s after Musk postured doubtful comments. TWTR & ATVI look interesting at these levels but do your own research as we are not risk-arb experts.

The one piece of good news on the horizon this week is that China is highly likely to ease Shanghai restrictions after two straight days of no covid in Shanghai. The Chinese government gets to save face while the world gets a much needed return to normalcy. This should be bullish for risk assets.

S&P500 Futures are down -0.30%, NASDAQ Futures down -0.45%, Crude Futures down -1.1%, Gold down -0.36%, and potentially most importantly, Bitcoin back above $30,000 after trading below for the majority of the morning.

Our contacts are starting to say that the market for risk assets, especially technology risk assets, will be weak. This suggests we are at least halfway through the technology bear market, as we were not hearing it so negatively two weeks ago. Experts are almost always late to the party.

Tomorrow is shaping up to be the volatile day of the week, with retail sales data plus expected comments from Powell. Our position is that tomorrow's data will not provide negative surprises.

India curbed wheat exports, causing wheat futures to spike again:

Inflation is not subsiding yet, as de-globalization is really causing unexpected inflation. Wheat has now gapped up and is approaching the Ukraine highs of early March.

Our weekend chartbook has an interesting take on Uranium and in particular market leader CCJ. We hope these charts are informative. Petr is taking a much needed week off with his lovely bride, who is also toiling around the clock.