Axios Markets

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January 11, 2022

☀️ Good morning, Markets people! Today’s newsletter is 1,228 words, 5 minutes.

🚨 This morning, Fed chair Jerome Powell heads to his confirmation hearing before the Senate Banking Committee.

  • In his opening statement, he’ll pledge to use the Fed’s tools to prevent higher inflation from becoming entrenched. See his full statement here.

1 big thing: Putin's (natural) gaslighting of Europe

Photo illustration of Vladimir Putin surrounded by yellow stars and pipelines.

Photo illustration: Shoshana Gordon/Axios. Photo: Alexei Nikolsky\TASS via Getty Images

European natural gas prices continue to go nuts, as the market has become a theater in the growing conflict between Russia and the West, Axios' Matt Phillips writes.

Why it matters: Russia is increasingly seen as treating its energy assets as political tools, rather than mere sources of revenue, upending a market once driven largely by basic questions of supply and demand. For now, that geopolitical game of chess is squeezing the balance sheets of Europe's energy companies and ordinary consumers.

  • "One thing [President Vladimir] Putin does very well, he uses what looks like market activity for geopolitical purposes," Anna Mikulska, a fellow at the Center for Energy Studies at Rice University, tells Axios.

Catch up fast: European gas demand rebounded last year on the economic snapback from the pandemic and expectations for a cold winter. Other factors — from less-windy weather for windmills, to a drought that hurt hydropower — also boosted demand for natural gas. Additional gas supplies expected from Russia never materialized.

  • The result: Exploding prices.

State of play: The panic, which had shown signs of abating in the fall, suddenly worsened again last month, as Russian gas began flowing out of Germany — Europe's biggest economy — into Poland.

  • A fresh panic hit the market, sending prices to absurd levels. At one point in December, European natural gas prices were up more than 850% in 2021.

The big picture: Some see the surge in gas prices as an effort by Putin to punish Europe for delays in approving the Nord Stream 2 pipeline. This gas pipeline under the Baltic Sea, built at great expense to supply Russian gas to Germany, is currently mired in European court and is opposed by the U.S., which sees the pipeline as an effort to cement Russian influence in Europe.

Yes, but: It could be a mistake to see the current chaos in the natural gas market as a grand design by Putin.

  • Russia's own gas stockpiles were low going into the winter making refilling them a priority rather than resupplying Europe, analysts say.

It's possible that Putin — an agile operator — saw a sharp market reaction as a chance to assert his importance on the global stage, by recasting what had been, essentially, a momentary bottleneck into a reminder of Russia's economic importance.

  • "What I sense is, they kind of sleepwalked into this," says Nikos Tsafos, a geopolitical energy analyst at the Center for Strategic & International Studies. "And then when everyone woke up, I think Putin saw an opportunity to exploit this."

The bottom line: Like many things about Russia, it's not always crystal clear what's going on. And that's why Kremlinology is a word.

Bonus chart: Europe's natural gas problem

Data: FactSet; Chart: Axios Visuals
Data: FactSet; Chart: Axios Visuals

2. Catch up quick

Aptiv, an auto parts supplier, will acquire software maker Wind River from private equity firm TPG for $4.3 billion. (Reuters)

Dairy prices are spiking as the cost of feeding cows soars and Omicron infections at processing plants idle part of the workforce. (Bloomberg)

3. Meme stock test

Outside view of the closed AMC Theater, amid the coronavirus pandemic

Photo: Valerie Macon/Getty Images

AMC Entertainment’s apes helped provide a lifeline — more than $1 billion in equity issuance — that’s kept the movie theater operator out of bankruptcy.

  • The big question: Whether that help extends to the debt market.

Why it matters: CEO Adam Aron’s new year’s resolution is to replace billions in high-interest rate debt with something cheaper — an effort that could provide a litmus test for the limits of the meme stock mob’s power to rescue companies.

  • Any attempt to tap the debt market to refinance this year may serve as a dry run for AMC's more existential need to refinance billions coming due a few years down the road.

Be smart: Most high-yield bonds and all leveraged loans — the markets where highly indebted corporates like AMC borrow money — are not available to the retail investors that powered the meme stock mania. That means it’s mainly just institutional investors who buy the debt.

State of play: While meme stock prices are divorced from fundamentals, we haven't (yet) seen an equivalent phenomenon in the debt market.

  • Unlike stock, buying debt at its face value offers no upside. Those debt investors just want confidence the company can pay its coupons for however many years the bond is outstanding, and then have the wherewithal to repay the money at the end.

Between the lines: Pandemic-hit businesses like cruises and airlines have tapped the debt market fervently over the past year. But many of these companies don’t sit in industries battling collective decline the way movie theaters are fighting off streaming. And they have valuable physical assets, whereas there's uncertain demand for big-box retail spaces like movie theaters.

  • Importantly, AMC also has lower credit ratings from agencies like S&P Global and Moody’s — which many investor mandates are tied to.

The bottom line: Aron is aware of the limitations of meme stock status — his tweets' pleading tone acknowledge as much.

4. More Fed trading fallout

Outgoing Fed vice-chair Richard Clarida at his 2018 confirmation hearing. Andrew Harrer/Bloomberg via Getty Images

Outgoing Fed vice chair Richard Clarida at his 2018 confirmation hearing. Andrew Harrer/Bloomberg via Getty Images

Richard Clarida, the second-highest official at the Federal Reserve, will resign early after new details of his trading activity early in the pandemic were revealed, Axios' Neil Irwin writes.

  • His term as vice chair was to end on Jan. 31; he will instead step down Friday.

Why it matters: Questionable trading activity by a handful of top officials undermined the central bank's reputation for ethical behavior.

Between the lines: Clarida’s departure a mere 17 days earlier than planned doesn’t change things for policy. But it will help chair Jerome Powell and vice chair nominee Lael Brainard as they seek to assure senators that they will maintain high ethical standards.

  • Powell's confirmation hearing for his second term as chair will take place this morning. Brainard is up Thursday.

Catch up quick: In late February 2020, with the markets going haywire as coronavirus arrived in the U.S. — and the Fed beginning its efforts to prop up markets and the economy — Clarida bought stocks.

  • When the trades were revealed in 2021, the Fed initially explained them as part of routine portfolio rebalancing.
  • As the New York Times first reported last week, he had also sold the same fund a few days earlier as markets were falling, suggesting the trades were more tactical.

The bottom line: Central bankers' credibility depends on public confidence they are acting in the best interest of the economy, not their own portfolios. Trading behavior in 2020 put that credibility at risk for the Fed.

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5. Not-so-private capital

SEC chair Gary Gensler

SEC chair Gary Gensler. Photo: Bill Clark/Getty Images

The SEC is drawing up plans to pull back one of the benefits of being a private company: privacy.

  • The agency wants large private companies to face disclosure requirements similar to those of public companies, the WSJ reports.

Why it matters: Private capital has exploded in recent years — and it’s the new frontier for regulators of all stripes who want to have better visibility into large swaths of the economy.

  • SEC chair Gary Gensler summed it up on CNBC yesterday: "[I]f you want to tap into the broad public [for capital], there’s a basic bargain: Share information, disclose information that’s important to that investor.”

Our thought bubble, via Kia Kokalitcheva: The SEC is looking at ways to stem the trend of large fundraising rounds completed via private investors instead of in the public markets, where they would have previously been done.

Worth noting: Regulators have also expressed interest in expanding their scope in the debt markets — with an eye toward more oversight of private debt, or shadow banking.