Written and published July 27th, 2022

• It's Fed’s day! The thing to look for is what uncle Jay says about the future path of the interest rates. They cannot relent but they have to acknowledge softening in data.

• Big Oil Transition to Clean Energy …

  When companies buy an asset (think M&A), the goal is to either acquire growth, get a foothold in an adjacent industry, squash competition or just enter into an emerging industry. But all along the acquirer wants to ensure that the acquisition will not be terribly dilutive, if not accretive, as far as the earnings are concerned.

  

  The fossil fuel industry is flush with cash but hasn’t been spending a lot on renewables while still pledging net zero over the next three decades. You could be forgiven if you wonder why that is the case. Surely they have nibbled a bit.

  Shell acquired Sprint Energy, an Indian renewable power group, from Actis for $1.55bn; Total bought a US wind & solar farm developer for $2.4bn; BP took a 40% stake in an Australian renewables project; and Chevron, laggard in the green energy spent $3.15bn in Renewable Energy Group.

  One of the challenges for the oil firms is that potential targets are still trading at high multiples (so an acquisition would be dilutive). Second, is that the oil firms haven’t really spent time to understand the renewable sector. “At some point in time, I would expect there to be a time for large, inorganic [growth], but you don't want to start if you are a relative newcomer on the block,” said Ben van Beurden. “We've been looking at a lot of large things before that didn’t work out, or that we didn’t decide to do … and today I am congratulating myself for not having done it.”

  Others say that there aren’t that many candidates to buy. “Yes it makes sense but there's no obvious deal to be done,” said a senior investment banker. “There are not that many targets that would be really transformative and the bigger ones like RWE or Orsted, aren’t really executable.”

  

  There are two takeaways from the comments above :

  1. For real impact oil majors have to play a large role and that will happen if they see profits in renewables.

  2. The Biden Admin’s debacle with ‘build-back-better’ could bring down the prices of renewable firms and create opportunities for the big oil companies to pick some cheap assets. “Maybe in a year’s time after more buybacks and more dividends, there will be more serious discussion about what else to do with the money,” said Jim Peterkin, head of oil and gas at Credit Suisse.

  
  Can China's Experience in the Payment Network Be a Lesson for the US? …
  Alipay and WeChat dominate the payment systems in China with 2 billion users (combined). And, as TikTok has shown, Chinese tech companies have made considerable progress in using users' information to tailor services to the consumers. As any ML/AI practitioner would tell you,  data is key to building good prediction systems. So, when Apple launched its own buy-now-pay-later (BNPL) service, the US consumer finance regulator raised its eyebrows.
  
  Rohit Chopra, the head of the agency said that Apple’s entry into this space raises ‘a host of issues’ including how firms would use consumer data. “Is it being combined with browsing history, geolocation history, health data, and other apps.” if Mr. Chopra is looking into this, be sure that Europeans will not be far behind. “Big Tech’s ambitions when it comes to buy now, pay later are inextricably linked to the desire to dominate the digital wallet,” he said.
  
  They haven’t commented on Apple’s new CarPlay that aims to control your car’s entire dashboard. As much as we love technology, their entry into these spaces is like a camel's nose in the tent. You will not have a tent to hide.

• Additional Noteworthy News: Nat gas prices are up another 12% in Europe as they wrestle with         declining supplies from Russia.
• Wuhan locks down a million residents (overnight)

Corporate Corner:

• MSFT (+3.5%) missed on revs and profits and reported a slowdown in its cloud business. But it issued an optimistic guidance.
• Alphabet (+3.7%) missed on financials but it appears investors were expecting even worse
• Boeing (+4.4%) in spite of missing on revs and profits but reported a positive operating CF (that is a key metric).
• Hilton (+4.8%), the hotel operator topped the estimates and gave an optimistic guidance
• Spotify (+6%) reported wider than expected loss but saw a 14% jump in paying subscribers
• Garmin (-9.3%) beat on bottom-line but missed on top mainly b/c of underperformance in the fitness segment.
• Tempur Sealy (-6.9%) missed the estimates and cut its full-year forecast
• Shopify (-6.8%) reported wider loss and said the losses will accelerate in the current quarter
• Chipotle (+9%) reported a strong quarter after passing on higher input costs to the burritos eaters.
• PayPal (+6.8%) reported that Elliot has taken a stake in the firm.
• Teva (+22.9%) after reports of a settlement with the authorities on opioid crisis
• Enphase Energy (+9%), the solar company, reported a strong quarter

Data Check:

• Goods trade balance fell to 98.2bn (from 105bn) … a positive for GDP
• Durable goods … a positive for the GDP number
• Headline +1.9% (exp. -0.4%)
• Capital goods +0.5% (exp. 0.3%)
• Ex-trans +0.3% (exp. 0.2%)
• Pending home sales at 10 AM

Trading Desk:

Equities: The US futures are up - Dow +158, S&P +37, Nasdaq +188, and VIX -43 (24.26). The European shares are up - FTSE +70bps, DAX +66bps, CAC +56bps, AEX +93bps, and STOXX +31bps. The Asian shares ended mixed. HK -1.13%, Nikkei +22bps, ASX +23bps, Mumbai +1% and Shanghai -5bps.

Commodities: The WTI +1%, Brent +86bps, gold -7.6bsp, and copper +38bps.

Currencies: The DXY index -12bps, euro +29bps, yen down 5bps, pound +11bps, and AUD -7.2bps. Bitcoin +2.1% ($21.3k).

Bonds: The US10y yields are down a shade (2.783%), gilts +4.5bps (1.963%), and bunds +1.6bps (0.945%).