Finance

Dalio’s Bridgewater Associates has placed at least $6.7 billion in short positions against European stocks, according to data group Breakout Point, which aggregated the firm’s public disclosures.
Dalio’s firm is generally bearish on the global economy and has already positioned itself against sell-offs in U.S. Treasuries, U.S. equities and both U.S. and European corporate bonds.

Ray Dalio, Bridgewater Associates, Founder, Co-Chairman & Co-CIO, at the WEF in Davos, Switzerland on May 24th, 2022.
Adam Galica | CNBC

Billionaire investor Ray Dalio is right to have bet against European stocks, and global markets still have a rough road ahead, according to Beat Wittmann, partner at Zurich-based Porta Advisors.
Dalio’s Bridgewater Associates has at least $6.7 billion in short positions against European stocks, according to data group Breakout Point, which aggregated the firm’s public disclosures. It is unknown whether Bridgewater’s shorts are outright bets against the stocks, or part of a hedge.

The Connecticut-based fund’s 22 short targets in Europe include a $1 billion bet against Dutch semiconductor equipment supplier ASML Holding, $705 million against France’s TotalEnergies and $646 million against French drugmaker Sanofi, according to the Breakout Point data. Other big names also shorted by the firm include Santander, Bayer, AXA, ING Groep and Allianz.
“I think he’s on the right side of the story, and it’s quite interesting to see what strategies have performed best this year,” Porta’s Wittmann told CNBC on Friday.

“It’s basically the trend-following quantitative strategies, which performed very strongly – no surprise – and interestingly the short-long strategies have been pretty disastrous, and of course, needless to say that long-only has been the worst, so I think right now he is on the right side of this investment strategy.”
The pan-European Stoxx 600 index is down more than 16% year-to-date, although it hasn’t quite suffered the same degree of pain as Wall Street so far.
However, Europe’s proximity to the conflict in Ukraine and associated energy crisis, along with the global macroeconomic challenges of high inflation and supply chain issues, has led many analysts to downgrade their outlooks on the continent.

“The fact that all these shorts appeared within few days indicates index-related activity. In fact, all of shorted companies belong to the STOXX Europe 50 Index,” said Breakout Point Founder Ivan Cosovic.
“If this is indeed the STOXX Europe 50 Index-related strategy, that would imply that other index’s components are also shorted but are currently under disclosure threshold of 0.5%. It is unknown to us to which extent these disclosures may be an outright short bet, and to which extent a hedge against certain exposure.”
Dalio’s firm is generally bearish on the global economy and has already positioned itself against sell-offs in U.S. Treasuries, U.S. equities and both U.S. and European corporate bonds.

‘I don’t think we are close to any bottom’

Despite what was shaping up to be a slight relief rally on Friday, Wittmann agreed that the picture for stock markets globally could get worse before it gets better.
“I don’t think we are close to any bottom in the overall indexes and we cannot compare the average downturns of the last 40 years, when we had basically a disinflationary trend since the [Paul] Volcker time,” he said.
Volcker was chair of the U.S. Federal Reserve between 1979 and 1987, and enacted steep interest rate rises widely credited with ending high inflation that had persisted through the 1970s and early 1980s, though sending unemployment soaring to almost 11% in 1981.
“We have a real complex macro situation now, unhinged inflation rates, and if you just look at the fact in the U.S. market that we have the long Treasury below 3.5%, unemployment below 4%, inflation rates above 8% — real interest rates have hardly moved,” Wittmann added.
“If you look at risk indicators like the volatility index, credit spreads, default rates, they’re not even halfway gone where they should be in order to form a proper bear market bottom, so there’s a lot of deleveraging still to go on.”
Many loss-making technology stocks, “meme stocks” and cryptocurrencies have sold off sharply since central banks began their hawkish pivot to get a grip on inflation, but Wittmann said there is more to come for the broader market.
“A lot of the heat is being addressed right now, but the key indicator here I still think is high yield debt spreads and default rates, and they have simply not reached territory which is at any stage here interesting to invest in, so the pain will go on for quite a while.”

WATCH LIVEWATCH IN THE APP More

Driving the new record high in risky ratings was a spate of downgrades on Chinese real estate developers as worries grew over their ability to repay debt.
Moody’s said it issued 91 downgrades for high-yield Chinese property developers in the last nine months.
That’s a record pace, the agency said, considering it issued only 56 downgrades for such companies in the 10 years ending December 2020.

Fixed asset investment data for the first five months of 2022 showed real estate investment declined at a greater scale than it did during the first four months of the year. Pictured here on May 16 is a development in Huai’an City in Jiangsu province in east China.
CFOTO | Future Publishing | Getty Images

BEIJING — A measure of risk levels for debt in Asia has surpassed its 2009 financial crisis high, thanks to a surge in downgrades of Chinese property developers since late last year, ratings agency Moody’s said Wednesday.
Among the relatively risky category of Asian high-yield companies outside Japan that are covered by Moody’s, the share with the most speculative ratings of “B3 negative” or lower has nearly doubled from last year — to a record high of 30.5% as of May, the firm said.

That’s higher than the 27.3% share reached in May 2009, during the global financial crisis, the report said. That year, only three Chinese property developers were part of that risky share, versus 24 in May 2022, Moody’s said.
It’s not clear whether the new record indicates a financial crisis is imminent.
High-yield bonds are already riskier than products deemed “investment grade,” and offer higher return but greater risk. “B3 negative” is the lowest rating for a category that denotes assets that are “speculative and are subject to high credit risk” in Moody’s system.

Spate of downgrades

Driving the new record high in risky ratings was a spate of downgrades on Chinese real estate developers as worries grew over their ability to repay debt.

Moody’s said it issued 91 downgrades for high-yield Chinese property developers in the last nine months.

That’s a record pace, the agency said, considering it issued only 56 downgrades for such companies in the 10 years ending December 2020.
Some Chinese developers’ bonds have received more than one downgrade, the report noted. Names on the Moody’s “B3 negative” or lower list include Evergrande, Greenland, Agile Group, Sunac, Logan, Kaisa and R&F. Evergrande entered the list in August, while several were added only in May.
“Our downgrade is a reflection of the current very tough operating environment for China property developers combined with a tight funding environment for all of them,” Kelly Chen, vice president and senior analyst at Moody’s Investors Service, said in a phone interview Thursday.
“We’ve all seen contracted sales have been quite weak, and we haven’t seen very significant rebound responding to the supportive policies,” she said, noting the effect would likely be seen in the second half of the year.

Financing challenges

The central Chinese government and local authorities have tried to support the property market in the last several months by cutting mortgage rates and making it easier for people to buy apartments in different cities.
“For the developer financing, I think the market knows that since the second half of last year the commercial banks turned fundamentally cautions on the sector, especially the private [non-state-owned] ones,” Hans Fan, deputy head of China and Hong Kong research at CLSA, said in a phone interview last week.
Some cautiousness remains, he said. “Year-to-date what we see is that the banks are lending more to the state-owned enterprises for M&A purposes,” he said. “That’s something encouraged.”

Read more about China from CNBC Pro

At a top-level government Politburo meeting in late April, Beijing called for the promotion of a stable and healthy real estate market and urged support for local governments in improving regional real estate conditions. Leaders emphasized that houses are for living in, not for speculation.
However, Chinese real estate developers also face a tough financing environment overseas.
“Companies rated B3N and lower have historically faced challenges issuing in the US dollar bond market,” Moody’s said in Wednesday’s report. “With credit conditions tighter today, the US dollar bond market has also remained relatively shut to Asian high-yield issuers.”
As a result, the agency said that rated high-yield issuance plunged 93% in the first five months of the year from a year ago to $1.2 billion.

More defaults expected

China’s massive real estate sector has come under pressure in the last two years as Beijing seeks to curb developers’ high reliance on debt for growth and a surge in house prices.
Many developers, notably Evergrande, have issued billions of dollars’ worth in U.S. dollar-denominated debt. Investors worried defaults would spill over to the rest of China’s economy, the second-largest in the world.
Evergrande defaulted in December. Several other Chinese real estate developers have also defaulted or missed interest payments.
Moody’s expects to see more China real estate developers defaulting this year, Moody’s Chen said. She said the agency covers more than 50 names in the industry, and more than half have a negative outlook or are on review for downgrade.
The firm estimates that real estate and related sectors account for 28% of China’s gross domestic product. On Tuesday, Moody’s cut its 2022 forecast for China’s GDP growth to 4.5% from 5.2%, based on the impact of Covid-19, the property market downturn and geopolitical risks.
Data released this week showed the real estate market remains subdued.
Real estate investment during the first five months of this year fell by 4% from the same period a year ago, despite growth overall in fixed asset investment, China’s National Bureau of Statistics said Wednesday.
Property prices across 70 Chinese cities remained muted in May, up 0.1% from a year ago, according to Goldman Sachs’ analysis of official data released Thursday.

WATCH LIVEWATCH IN THE APP More

Live, Mondays, 1 PM ET

Investors may want to consider a special fund focused on high dividend yielding large-caps, according to a leading ETF fund manager.
Christian Magoon believes his firm’s actively managed Amplify CWP Enhanced Dividend Income ETF (DIVO) will provide upside to investors during this volatile and inflationary market backdrop. It’s described as an enhanced dividend income ETF made up of blue-chip dividend payers including Chevron, UnitedHealth, McDonald’s and Visa.

“Those kinds of high quality names… have a built-in hedge, and that hedge is growing their earnings,” the Amplify ETFs CEO told CNBC’s “ETF Edge” Monday. “If we get into a crash scenario, having blue chip companies that are profitable and [have] strong balance sheets, we think will be helpful.”
The Morningstar-rated five star ETF has a dividend income of about 5%, Magoon said.
DIVO has been outperforming the S&P 500 so far this year. But it’s still off almost 14% year-to-date, based on Thursday’s market close. The S&P is off 23%.
Meanwhile, over the past five years, DIVO has underperformed the index. And, one ETF expert believes DIVO will face pressure along with the rest of the broader market.
“It’s kept up with the S&P 500 with much lower volatility over the past five years, and I think that really kind of lends that idea of a tactical overlay versus a pure passive writing calls on a broad index,” said ETF Action CEO Mike Akins. “Over time, that type of strategy is going to lose ground significantly to the marketplace because we’re in more up-markets than we are down.”

Akins, who runs a data and analytics research platform, notes alternative strategies such as managed futures are faring well in the volatile market. While many ETFs in the futures space are also holding up nicely, he warns they are typically nearly impossible to time.
“The problem is, is so many of these strategies are used tactically, and as we know, trying to time when these strategies are going to add benefit to your portfolio is extremely difficult,” Akins said.
Disclaimer More

Thoma Bravo founder Orlando Bravo said there’s “more pain to come” for the technology industry.
Tech stocks reversed historic gains in 2022 owing to fears over high inflation and interest rate rises.
Investors asking tech firms for a path to profitability are “not going to love what they see,” Bravo said.

Private equity boss Orlando Bravo has a somber warning for the technology industry.
“I think there’s more pain to come,” Bravo, founder of buyout firm Thoma Bravo, told CNBC’s “Squawk Box Europe” Thursday.

For years, the tech sector has led the stock market, with the likes of Apple and Microsoft becoming some of the most valuable companies in the world.
But in 2022, tech stocks have faced a reckoning as central banks move to tame runaway inflation. The U.S. Federal Reserve on Wednesday made its most aggressive interest rate hike since 1994.
Higher rates make growth-oriented companies’ future earnings less attractive. Tech companies, especially those backed by venture capital, tend to prioritize growth over short-term profitability.
“When those companies really start getting down to answering the investor question, the path to profitability, they’re not going to love what they see,” said Bravo.
Bravo has a net worth of $6.3 billion, according to Forbes.

“That requires a lot of cost reductions, it requires a lot of pain,” he added. “And it’s difficult to execute especially in a public setting.”
Once buzzy tech firms have seen their valuations slashed in both the public and private markets lately, with companies that benefited from the societal effects of the Covid-19 pandemic getting hit harder than others.
Shares of Netflix and Zoom have plunged around 63% and 70%, respectively. Peloton, the fitness equipment company, has lost more than 90% of its value.
The effects of the sell-off in tech stocks is also being felt by privately held firms, with “buy now, pay later” firm Klarna reportedly set to have its valuation cut by a third in a new round of funding.

WATCH LIVEWATCH IN THE APP More

Check out the companies making headlines before the bell:
Jabil (JBL) – The contract electronics manufacturer saw its stock rise 1.2% in premarket trading after beating top and bottom-line estimates for its latest quarter. Jabil earned an adjusted $1.72 per share, 10 cents above estimates, and said it continued to see solid demand from its customers.

Commercial Metals (CMC) – The metal products manufacturer reported an adjusted quarterly profit of $2.61 per share, beating the $2.02 consensus estimate, and revenue also topped Wall Street forecasts. Commercial Metals also said it was anticipating upbeat financial performance for the current quarter amid a strong construction market. The stock rallied 4.6% in the premarket.
Tesla (TSLA) – Tesla fell 3.8% in premarket trading after Reuters reported that Tesla has increased prices on its U.S. models amid a jump in the price of raw materials and supply chain snags.
Twitter (TWTR) – Twitter gained 2.3% in premarket action following a Wall Street Journal report that Elon Musk will reiterate his desire to own Twitter at an all-hands meeting today. Musk has threatened to pull out of his Twitter buyout deal, accusing the company of withholding information on spam accounts.
Warner Brothers Discovery (WBD) – The media company’s stock slid 4% in the premarket after J.P. Morgan rated the stock “neutral,” citing a macroeconomic environment that could impact ad spending.
KLA (KLAC) – The maker of semiconductors and electronics equipment said it expected an adjusted current-quarter profit of $4.93 to $6.03 per share, compared with the $5.50 consensus estimate. It also announced a $6 billion share repurchase program and a 24% dividend hike ahead of its 2022 Investor Day.

Revlon (REV) – Revlon filed for Chapter 11 bankruptcy protection as the cosmetics maker deals with a debt load of roughly $3.3 billion. Shares slid 4.4% in the premarket.
Amazon.com (AMZN) – Amazon said its annual “Prime Day” shopping event would be held from July 12 to 13. Last year’s “Prime Day” event generated an estimated $3.5 billion in sales. Amazon fell 2.8% in premarket trading.
Abbott Laboratories (ABT) – Abbott said it was halting production of its EleCare specialty baby formula at its Sturgis, Michigan plant after severe storms flooded areas of the plant. Abbott said the flooding would likely delay production and distribution for a few weeks, and its stock fell 2% in the premarket.
— CNBC’s Peter Schacknow contributed reporting.

WATCH LIVEWATCH IN THE APP More

Foreign economists are forever urging China to increase its consumer spending. On June 18th each year, the country tends to oblige. That is the date of the “618” shopping festival, promoted by jd.com, which was founded on the same day in 1998. The company started life in a modest, four-square-metre shop in Beijing, selling vcds and dvds. But during the sars epidemic of 2003-04, when the capital’s shopping districts fell quiet, it moved online. It was hugely successful, becoming one of China’s biggest e-commerce firms—a triumph of commerce over a coronavirus.China’s retailers will hope this year’s 618 marks a similar victory. After months of lockdowns and restrictions to contain another coronavirus outbreak, China’s shoppers now have a bit more freedom to move about and an occasion to splash out. China’s vast machinery of production and distribution also appears more ready to serve them. By June 10th, almost 55% of the listed companies operating in Shanghai had announced a resumption of work, notes cicc, a bank. And over half of the couriers surveyed by Kuaidi100, a data provider, said that they have been busier in the build-up to this year’s 618 than last year’s. In Shanghai and the nearby provinces of Jiangsu and Zhejiang, power plants are now consuming about as much coal as last year, points out cicc, a sign that their local economies are plugging themselves back in. Indeed, despite all the logistical impediments they faced, China’s manufacturers, miners and utilities were able to churn out more stuff last month than they did in 2021, according to figures released on June 15th. Industrial production rose by 0.7% in May compared with a year earlier, defying fears of another decline. China’s exports also fared better than expected, growing by almost 17% in dollar terms in May, compared with a year earlier. Much of the shipping traffic that could not pass through Shanghai migrated to the port of Ningbo in Zhejiang instead. China’s proliferation of ports, which once looked like overcapacity, now looks like helpful redundancy. When a country has to shut down a vital global trade hub, it is handy to have a second one 150km to the south.The constraints on China’s ability to make things and distribute them are, then, lifting. But what remains fettered and caged is the consumer’s willingness to buy them. Consumer confidence is at a record low. Retail sales fell by almost 10% in real terms in May, compared with a year earlier, having declined by 14% the month before (see chart). Catering shrank by more than a fifth. In places like Shanghai and Beijing, people still face mandatory covid testing and “mini-lockdowns” in neighbourhoods where cases appear. That makes mingling in markets and malls a risky endeavour. Demand for housing is also strikingly subdued. Sales of new flats (measured by floor space) fell by over 30% in the year to May. The government has cut mortgage rates a little. It has also allowed local authorities to ease some regulatory curbs on property purchases. But the main restriction now seems to be poor morale. China’s forever war against covid seems to have vanquished another formidable foe: property speculation. The one exception to this gloomy consumer data is online sales, which grew by 7% last month, compared with a year ago. During this year’s 618 festival, many retailers are hoping to usher their customers into virtual-shopping spaces in the metaverse. They are dangling before them digital collectibles and non-fungible tokens, based on characters from “Journey to the West”, a classic of Chinese literature, and “Transformers”, a movie franchise. Under China’s draconian zero-covid policies, “real life” can lose much of its vivacity and spontaneity. The metaverse might seem unusually appealing. At least you don’t have to take a covid test to get in. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

In everyday parlance equity means fairness. To an investor or a stockbroker, though, it is an ownership stake. The word means both things thanks to the English Court of Chancery, which operated from around the 15th to the 19th centuries and handed out rulings based on “equity”, or fairness, rather than common law. Under common law a borrower who missed a mortgage payment would forfeit their land, but in Chancery they could reclaim it by repaying the debt. Over time, “equity” came to mean the ownership stake in property itself. Today’s legal and regulatory systems are tasked with ensuring that finance is fair. And Gary Gensler, the head of the Securities and Exchange Commission, America’s markets watchdog, is not happy. In a speech on June 8th he worried that “market segmentation and concentration” mean there is no longer a “level playing-field” in the stockmarket. It is “not clear”, he said, that the “market system is as fair and competitive as possible for investors”.A fair market is transparent, accessible and uses a reasonable method to arrange buyers and sellers—think of a public farmers’ market with clearly stated prices and an orderly queue. A decade ago this was a decent (if simplified) description of most equity trades. Three-quarters of them, by volume, were conducted on public exchanges; only a quarter were done “off-exchange”. No more. In 2021, during the “meme-stock” craze when retail bets sent GameStop shares soaring, the share of off-exchange trades swelled to a peak of 47%. Retail punters are far less likely to have their orders executed on public exchanges than institutional investors. More than 90% of retail orders are sent to a concentrated group of marketmakers that pay brokers to deliver the orders to them (a practice called payment for order flow). At first glance, this system is not obviously bad for retail investors. Brokers—Charles Schwab, say, or Robinhood—are obliged to seek “best execution” for their customers. In order to direct a retail order to a marketmaker, like Citadel Securities or Virtu, they must beat the prevailing price offered by public exchanges—the so-called “national best bid and offer” (nbbo)—a feature known as “price improvement”. That means retail traders probably get better prices than most institutions. Marketmakers are happy to pay for their business because the flows are not risky. It is easy to match retail flows against each other. By matching trades they can give a lower price than the best offer to the buyer, a higher price than the best bid to the seller, and have some left over—a slice of which they pay to the broker, and the rest of which they keep. The payments mean brokers do not need to charge customers commission.Yet there are flaws. Post-trade price improvement makes it impossible for punters to know ahead of trading which broker would ultimately give them the best execution price. As Mr Gensler put it, “price improvement without competition…is not necessarily the best price improvement.” Marketmakers and brokers might start to hang on to more of the benefits, instead of passing them on to punters. Larry Tabb of Bloomberg, a data firm, has found that American retail investors in March 2022 collected 47% of the benefit ($3.7bn on an annualised basis), while brokers were paid 13%($900m). The marketmakers themselves took some 40% ($3.1bn).Moreover, the system of price improvement relative to the nbbo only benefits customers if the nbbo is a good benchmark—a claim that is getting shakier. For a start, the nbbo is measured for orders of 100 shares or more. This was sensible in 2014, when just 15% of trades were in smaller quantities. By March 2022, though, the share had climbed to 55%. And if trading volumes continue to move off-exchange, the benchmarks will become ever less meaningful. One solution from Mr Gensler is for exchanges to hold auctions for retail stock orders, a practice typically used to fill retail orders for equity derivatives. By redirecting retail flows to exchanges, this would radically reshape American stockmarkets—to the benefit of exchanges and the detriment of marketmakers—and is therefore likely to be fiercely resisted. Hours after Mr Gensler spoke Dan Gallagher, a former sec commissioner now at Robinhood, said the current structure represented “a really good climate for retail”. A shakeup could face legal challenges, too. But Mr Gensler is right to be trying. Taking a punt on today’s violent stockmarkets is daunting enough. Investors should get a fair shot at it.Read more from Buttonwood, our columnist on financial markets:Tech investors are prizing cash generation again (Jun 9th)The return of the inventory cycle (Jun 2nd)Is China “uninvestible”? (May 21st)For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

U.S. stock index futures were modestly higher during overnight trading on Wednesday after the Federal Reserve implemented the largest interest rate hike since 1994.
Futures contracts tied to the Dow Jones Industrial Average added 0.22%. S&P 500 futures were up 0.23%, while Nasdaq 100 futures advanced 0.29%.

The major averages ended Wednesday’s session higher, with the Dow and S&P 500 both snapping five-day losing streaks. The 30-stock benchmark added about 304 points, or 1%, while the S&P 500 advanced 1.46%. The tech-heavy Nasdaq Composite was the relative outperformer, rising 2.5%.
The Federal Reserve on Wednesday announced a 75 basis point rate hike, which had been widely anticipated by the market.
“Clearly, today’s 75 basis point increase is an unusually large one, and I do not expect moves of this size to be common,” Federal Reserve Chairman Jerome Powell said at a news conference following the decision.
Stocks took a leg higher after Powell said that a 50 or 75 basis point increase “seems most likely” at the next meeting in July, indicating the central bank’s commitment to fighting inflation. Powell did caution, however, that decisions will be made “meeting by meeting.”
Individual members’ forecasts show that the Fed’s benchmark rate is now on track to end the year at 3.4%.

“At this point the market has done much of the Fed’s work for them in terms of stocks and bonds selling off over the past week – not to mention the entire year – so it’s not that surprising that both markets moved higher today (stock and bond prices higher; bond yields lower), given that they had sold off so much coming into today’s meeting,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

Stock picks and investing trends from CNBC Pro:

Despite Wednesday’s bounce, the major averages are still lower over the last week and month, and remain sharply below their records.
The S&P 500 and Nasdaq Composite are both in bear market territory, down roughly 21% and 32% from their all-time highs in January and November, respectively. The Dow, meantime, is 17% below its Jan. 5 all-time intraday high.
Rampant inflation, which is at the highest level in 40 years, has weighed on the major averages, as have fears around slowing economic growth and the possibility of a recession.
“The market was very prepared, even late to the story,” Morgan Stanley chief U.S. equity strategist Michael Wilson said following the 75 basis point hike announcement. “There’s relief here,” he noted, before adding that the hike won’t solve the inflation problem overnight.
“It also raises the risk of a recession because you’re bringing forward rate hikes even faster, and I don’t think it’s going to help the bond market,” he said on CNBC’s “Closing Bell.”
Economic data out Thursday includes weekly jobless claims numbers, with economists surveyed by Dow Jones forecasting a 220,000 print. Housing starts will also be released, while Adobe and Kroger will report quarterly updates.

WATCH LIVEWATCH IN THE APP More