This Week In Markets 8th-12th November 2021 (China, Tesla, Brexit Updates & US CPI Preview)

Okay, very good morning to you. It's Monday the 8th of November. Hope you had a fantastic weekend. And going to go through quite a few different things actually in the briefing. Quite a focus on China following some trade data over the weekend. We've also got a significant Communist Party meeting that's happening from Monday through Thursday, so a bit of an update what to expect from that, as well as updates on the property market as well in mainland China. Then we're going to talk about US politics UK politics and Brexit. We're also going to talk about Tesla and Elon Musk. I'm sure you would have seen Elon Musk's tweet that he did on Saturday asking through a poll what he should do with some of his stock options coming up at the moment. So we'll delve into that and then we'll look at COVID in Europe, a bit of an update that's probably worth looking at in compared to how Europe is at the moment when looking at the UK and the US. And then the week ahead with main focal point being US CPI data, which we'll get on Wednesday, where the headline is is expected to have risen to 5.8% from the same month a year ago. So incredibly high number, but will that have a market impact? We'll explain in a moment. I'm not going to share any charts this morning, having a few technical issues with that. So just going to get straight into the news. And as ever, any questions at all for me on anything I'm going to cover, feel free to drop a comment below. Happy to help engage and assist if I can. So to kick things off, let's talk China. And so I just go back to here. So China posted a record monthly trade surplus in October as exports surged despite global supply chain disruptions. This data came out over the weekend where exports rose 27.1% in dollar terms last month. That was the 13th straight month of double-digit growth, and that was above analysts' expectations of 22.8%. What was helping it? Booming global demand ahead of the winter holiday season, easing in a power supply crunch that had been impacting the domestic scene as well, and improvement in supply chains that had badly just been disrupted through the course of the initial coronavirus pandemic. Worth noting though that imports did miss analysts' expectations, and what analysts have said is that likely points to then overall weakness more in the domestic demand situation, which as we will talk about in a moment, being heavily impacted currently by what's been happening with the outbreaks of COVID across several Chinese provinces. And this in the context of their zero, um, kind of policy against then that outbreak. In, in sense, they just lock down immediately and aggressively, zero tolerance policy. Um, so a few other things in China though to be aware of. The Communist Party meets for the first time in more than a year this week. It's going to be happening from basically today through Thursday. Between each party congress, the Communist Party's Central Committee meets several times in meetings called plenums that cover different topics. The agenda no one actually really knows. It's only revealed in a communiqué we'll get afterward, so in the coming days. But Xi, as per the headline here, is set to unveil a new doctrine that could let him rule for life. That's not unexpected. That's very much been in the pipeline for a long time. And people are aware of that as he looks to consolidate power for the long time and make appropriate changes to ensure that that takes place. A couple of other things China-related, though, to be aware of. One was ongoing friction, of course, with the US, although in the trade data, the biggest trading partner with China is still the US and vice versa. One of the things here is that there's still this kind of trade negotiation brewing in the background, and so both are still trying to posture at this point in time. The latest from China has talked about China's military has built up mock-ups in the shape of US Navy aircraft carriers. You can see it here in some satellite imagery. It's quite amazing. This is actually in the desert. It looks like they've just laid down some markings that just happen to be the exact same shape as a US Navy aircraft carrier. So suggestions then possibly as training targets. The mock-ups kind of reflect China's efforts to build anti-carrier capabilities specifically against US Navy, as tensions of course run high with Washington over the sovereignty over Taiwan and in the South China Sea at the moment. The other thing, as I mentioned, of course, that China is still trying to, to deal with at the moment is, is COVID. China reported 50 new local COVID-19 infections on Saturday. Now, 50 sounds extremely low, but again, as I just said, with a zero tolerance policy, takes one and they lock the whole town down essentially. Um, and so authorities have said stringent curbs will remain to disrupt the virus domestic transmission as it stands at this moment in time. So that continues to happen. Talking of COVID just quickly, uh, to just transition over to mainland Europe, this is a chart that you probably haven't looked at in quite a while. And as much as we've been seeing more positive trends develop in the likes of the UK, where case rates have declined quite quickly— I'm looking at a 7-day rolling average here of daily new confirmed cases per million people— the UK has dropped off a decent amount over the course of the last week or so. The United States is pretty much leveling at a fairly contained level. But if you look at mainland Europe, there's some quite troubling signs at the moment. We saw the Netherlands last week, as you can see here, this green line, go back into reestablishing some quite stringent protocols. Germany is another one that's seeing a very high uptick. And as you can see here, the most by far of what we've had in, in terms of daily new confirmed cases, pretty much since the pandemic begun. And so the three German parties that are aiming for a coalition agreement next month will present proposals today. So looking out for that on how they will address the spread of COVID-19, which is getting quite aggressive at the moment in mainland Germany. You can see here France, Italy as well. France seeing a slight uptick, Italy the same, but very much more acceleration being seen in Germany and Netherlands at this current point in time. So worth bearing that in mind. A quick look then at at Tesla. You probably would have seen lots about this. I'll drop a link. I did quite a lengthy post on my kind of personal LinkedIn profile at the weekend, so I'll share the link in the video to this if you want to look at it in more detail. But essentially, you probably would have seen Elon Musk at the weekend do this, which was a poll where he said, much has been made lately of unrealized gains being a means of tax avoidance. So I propose selling 10% of my Tesla stock. Do you support this? And the poll at the moment has had over 3.5 million votes, and the majority of which, 58%, are saying yes at this point in time. So a couple of things here for context, because actually the NASDAQ future gapped a little lower overnight, and so definitely Tesla's shares at the open are going to be closely under, under scrutiny. And 10%, what would that be akin to? Be valued at about around $21 billion US based on the 170.5 million Tesla shares that Musk holds. His fortune obviously stands now at around $338 billion as context, and about one-third or one-quarter of that consists of Tesla stock options, which he's free to exercise at any time. The, the kind of the way that his remuneration package has been constructed is the securities come from two big awards he received back in 2012 and 2018, and the older ones' options or contracts expire in August next year. So generally tend to have a 10-year lifespan. The company has also recently disclosed that Musk has taken out loans using his shares as collateral as well. And with the sales, Musk might want to repay some of those loan obligations, which are also on the agenda as well. So there's definitely method to the madness of using a Twitter poll to survey public opinion of what he should do. My belief, as you— if you follow the Market Maker podcast, you would have heard me and Piers talking about before, is that we both don't believe Musk has any intention of sticking with Tesla for the long term. And the idea being that, you know, his blood flows with a very entrepreneurial spirit. And so he's taken Tesla through this meteoric rise, which he's obviously had a really strong input into that process. However, as Tesla becomes more mature and starts operating like a kind of regular business at some point in time from an operational perspective, it's unlikely that's really going to float his boat and keep him interested for someone of his characteristics. And kind of like in a similar thing, to what we've talked about before in the podcast between Steve Jobs being this groundbreaking innovator to someone like Tim Cock— Tim Cock, excuse me, Tim Cook, who otherwise is taking Apple to this absolute next level, but is very much just not really reinventing the wheel too much, but just super well-organized at developing further diversification of the business, further product mixes, and then just running a super large organization really well. And does that take someone other than Elon Musk to achieve that for Tesla's longevity? Probably. The timing, of course, is quite key. His options he received in 2012, I said, are set to expire and the share price, as you know, has risen like 35% or so in the last 2 weeks. And the market cap of Tesla is now tracking at just over $1.25 trillion, which is obviously one of the largest companies in the world and has gone up in the last 2 years from a market cap of around $75 billion to $1.25 trillion. So absolutely optimal time to strike, really, to exercise some of these options, because a lot of the share price at the moment, one would argue, has been a bit of a a squeeze higher, less based on actual underlying fundamentals. And so at some point, this kind of exponential rise in their shares won't, won't last forever. So a good time to, to, to make a move as far as Musk is concerned. The problem he has, of course, is that by doing so and selling his shares, how can he do that without it being too self-inflicting as the share price comes off? That kind of downplays then the size of the payoff that he could have. Insider sales, as they call them, which is when you get the senior members of a firm who, as part of filings for big listed organizations to declare with transparency their shareholdings, typically are met quite negatively. If someone at the top is selling their shares, usually it would be signs of they think the share price is very high, so therefore they want to exercise them with the most maximum kind of impact for the value that they'll get for them, or they think that, you know, perhaps there's something not, not beyond further growth of that stock price. And so it can cause a bit of a lack of confidence. So, um, I think the poll in itself then, to counteract that, is a bit of a masterstroke. It kind of creates dual optics to the degree of declaring your willingness to pay tax. Big Tech are under a lot of pressure at the moment You've seen that unrealized gains being something that politicians in the US have been going after for some time, particularly given the, the scope and meteoric rise of some of these tech firms, whilst also giving the impression, of course, that, you know, big part of what fuels Tesla is a lot of retail interaction with this stock. And so therefore, by publicly posturing, if you like, to create the optics that you're giving the people the option of what you should do, I think also satisfies that angle as well. Um, no, so no surprise then, I think, that the people have voted yes. And, um, you know, I think this now— the reason why I think it's such a masterful move from Musk is that although Tesla shares may come under some selling pressure because of this news today, I think that's going to be perhaps fairly contained. When I say fairly contained, even if they finish down 10%, I still consider that contained because they're up 35% the last 2 weeks. So to be quite frank, even if they came off 20%, that wouldn't be that big a move in, in context. So don't look at them like you would in comparative to a normal stock in, in that extent in terms of a big, big tech business. But just having a look at then a few other things here, if he executes then this The fact that he's come out and already said it, I think then that, that will alleviate perhaps the shock and horror that might have led to a lot of retail traders just bailing on their long position. The fact that he's kind of put the market on advanced notice also, I think, buys him some room for maneuver to exercise more of these as we go through into Q4 in the summer of next year because of aforementioned reasons for him to play loan obligations. To him to manage his, his tax and, and for him to maximize the amount that he can get out of the Tesla rally. I think all of this is necessary, and I think this is just a real kind of a, a form of forward guidance in a way. And forward guidance is adopted in order to offset and mitigate volatility, and he's absolutely aware of this. So yeah, that's the latest on, on Tesla. As I said, I'll drop a link on the video and you can have a read of of what I've kind of discussed in a bit more detail if you're interested. All right. But back to the macro. Quick look at the US on the political side of things. We did see late on Friday the Democrats set aside divisions between progressives and centrists, and they've actually passed a trillion-dollar package on the infrastructure side of things. And that's been given to Joe Biden now to sign into law. A couple of things to be aware of here. This isn't all of the packages done and dusted. Just the infrastructure one. So Democrats still have a lot of work to do on the second pillar of Biden's domestic agenda, which is the sweeping expansion of social safety nets and programs to fight climate change. And the value of that, of course, is $1.75 trillion. That bill did clear a procedural hurdle on Saturday over the weekend, which will enable Democrat leaders to quickly schedule a final vote when the time comes. But that's the key one, of course, which has been highly contentious even amongst Democrats. Don't forget as well, something that got kicked, kicked down the road for a later day is also getting ever closer once again, which is the debt ceiling. Remember, they delayed that before and voted for a short-term kind of resolution, which was that Congress faces then the looming December third deadline for the debt ceiling. So a lot of pressure still remains on Joe Biden at the moment, so we continue to watch that with great interest. Um, on UK politics, Brexit— this is something that came out over the weekend, and this is the Irish foreign minister who basically has said that the EU could abandon the entire Brexit agreement with the UK if London goes through its threat to suspend parts of the withdrawal deal or Article 16, which you might have read about quite a bit of recently. London has dismissed concessions from Brussels made last month that would simplify Irish Sea customs checks, saying they do not go far enough, and is refusing to accept the oversight of the deal from obviously the European Court of Justice, the ECJ. And that's what the friction is at the moment. So it continues to be on Northern Ireland Protocol, but the kind of words are getting more venomous at the moment between the two sides, particularly over Europe's response here to some of the threats we were hearing of last week about the UK considering seeking legal advice on alternatives, and particularly the idea of the impact of triggering Article 16. All right, let's have a look at the week ahead. And just a quick look over the calendar, really, it's, it's it's a much more quieter week than certainly what we had last week with the whole central bank, Fed, Bank of England payroll extravaganza. Today is pretty quiet overall. You've then got on Tuesday, you're looking out for the US PPI number. You also get then German trade data in the morning. Wednesday is the main focal point. This is when you're going to get US CPI, and you also get initial jobless at the same time, a day earlier than, than normal because there's a national holiday happening. I think it's Veterans Day in the US on Thursday. Markets open, but it's a national public holiday, so government offices are shut. And then you get UK GDP on Thursday, and then you've got University of Michigan sentiment coming out, the preliminary number for November, on Friday as well. So they're kind of your main things. But let's have a look at the, the kind of the main star on the billing, which is US CPI. And as you can see here, it is expected to have risen to 5.8% from the same month a year ago on Wednesday. That would put us over that peak that we saw around the period of the financial crisis and put us up at a multi-decade high going back to the late '80s, early '90s. That would mark a step up, of course, from the 5.4% reading we had in September, which was already the highest since 1990. Core CPI, just to put it back into a little bit of context though, though the headline reading will be 5.8%, the core year-on-year is expected at 4.3%, up from 4% previously. Economists and policymakers will obviously scrutinize this very carefully, given any further signs of inflationary pressures are broadening out beyond some of the most sensitive to pandemic-related disruptions to see, to try and ascertain how long-lasting or how far these inflation pressures will become. But the Fed acknowledged more directly last week— remember, we had the Fed meeting, of course— they said the risk that inflation will continue rising and highlighted severe supply chain disruptions that are fueling today's price pressures. So to me, reaction effect to what is a pretty milestone historic high reading of CPI could well be quite tempered as far as market reaction is concerned, because what the Fed as well as the Bank of England, other central banks have said, is that inflation might well have further to run on the upside, but we remain to the fact that it will be somewhat transitory and is a reflection of severe supply chain disruptions. And so the fact that this number comes out up in the high 5% numbers is, is a very worrying figure in isolation, but in context, I don't think it's as big a deal now that we've had the Fed so recently. As I said, you get University of Michigan on Friday, which should improve given waning COVID numbers, as I just showed you on that chart, and generally strengthening incomes that we've had. Rising gasoline prices and a general concern, though, over the rising cost of living could put a cap on that improvement though, according to analysts at ING. As far as the UK calendar is concerned, I mentioned you've got UK GDP on Thursday. The economic rebound is expected to have slowed sharply in Q3, economists have said. The Bank of England forecast in its latest monetary policy report that output growth slowed to 1.5% in the 3 months to September, down from 5.5% expansion in the previous quarter and well below what it had previously expected. And again, hence one of those reasons why they held off from hiking rates last week. They said last week the weaker near-term outlook mainly reflects the impact of supply constraints, both domestic and global, although UK demand is expected to be a bit weaker as well. So again, given how telegraphed and transparent the information has been from the bank, given the meeting just last week. That GDP number, um, I don't think it's going to have a massive impact on markets or overall sentiment for sterling at this point. As far as earnings is concerned, just to wrap things up, US earnings rumble on. However, if you're an index stock trader, there's nothing really too much to be worried about. However, there are some interesting names, kind of retail favorites that will be coming out, includes AMC, Roblox coming out after market today. You've got, um, Palantir coming out pre-market on Tuesday, Coinbase after market on Tuesday as well. So a couple of interesting names that I'm sure will generate some headline buzz. DoorDash and others as well, all coming out. You can, you can ascertain this, this graphic on my, my Twitter handle, which you can find below. All right, that is it. Gonna leave it there, let you guys get on with the day. Have a good one and have an excellent week ahead. Take care.