The china impact
Regulators’ investigation into ride-hailing firm Didi has the potential to impact electric car manufacturer Tesla, according to Morgan Stanley.
As Chinese regulators tighten their grip on data protection, the bank warned that the increased scrutiny could affect how foreign companies operating in China store data required for autonomous driving.
“The regulations around autonomous driving in China should become stricter over time and may present some increasing challenges to foreign automakers in the years ahead,” Morgan Stanley’s Adam Jonas wrote in a note published Tuesday.
On Wednesday, Tesla’s stock fell about 1.8 percent.
China is an important market for the electric vehicle manufacturer. According to the company’s most recent quarterly report, Chinese sales accounted for approximately 29 percent of Tesla’s revenue in the first quarter of 2021. That comes after Tesla’s sales in China more than doubled in 2020, accounting for roughly a fifth of the company’s total revenue that year.
However, Tesla’s brand reputation in the country has been harmed. In June, China’s vehicle safety authority announced a voluntary recall of approximately 285,000 Tesla vehicles via software update due to reported issues with driver-assistance systems.
Despite mounting pressure in China, Morgan Stanley remains bullish on Tesla. The firm maintained its overweight rating on the stock and set a price target of $900, implying a more than 36% increase from the stock’s Tuesday close.
Jonas believes Tesla will be able to “expand its production and commercial footprint outside of China.” In the long run, the analyst believes the company’s operations in the country could be run by a separate “Tesla China” legal entity.
As Treasury rates rise, market voices take on a greater sense of urgency. While making room for slower growth instead of a more rapid expansion, we’re testing yields and compressing bond bears for 11 months while positioning for the possibility of a slower/longer expansion.
The fact that most people are baffled as to why yields are falling tells part of the story: The market enjoys challenging popular unquestioned assumptions and putting long-standing trends to the test. So far, the yield decline has not undone the 11-month upward trend in yields. The yield has given back about a third of its massive gain from August to March, but it is still above a rising 200-day average.
Similarly, the crushing setbacks in financial stocks, transportation, industrials, and small caps have not completely invalidated their overall outperformance patterns. But, once again, it’s close, and the market’s leadership profile is murky.
It’s also worth noting that the yield has risen from 1.29 percent to 1.30 percent, and there has been an attempt all day to bid up banks/industrials. Perhaps the market is betting that the yield move has reached its apex?
The yield decline would be more concerning if credit markets softened or the VIX trended higher, both of which would indicate increased stress. That hasn’t happened yet.
The incremental investor dollar is flowing to mega-growth stocks (AMZN, AAPL again today), but it is not a hasty exit from cyclicals. The most recent leaders are not purely “defensive” sectors, though pure staples names are popping up a little today. When growth slows, this market tends to gravitate toward steady long-term growers rather than recession plays – so far, a benign but tricky rotation. Essentially, the market is allowing the selected defensive players (quality growth) to maintain the lead established by the offense (cyclicals, financials, etc.).
These dependable but not super-fast growers dominate the new highs list. Charter, Danaher, Estee Lauder, Nike, and Moody’s are a few examples. Above and beyond FAANMG. To be honest, the yield curve is flattening and growth is slowing in the first half of 2018.
Nothing indicates that this pattern must continue. Leadership has been indecisive, keeping traders on their toes. This could be a bid of a last-minute buying panic in Treasuries. Traders are probably clenching their teeth in anticipation of the Fed minutes, which are expected to be more hawkish than the meeting message suggests. Lower long-term yields have resulted from the Fed’s hawkishness, and vice versa.
Under the surface, the more serious issue may be the market’s somewhat narrow leadership. The majority of stocks are not matching the index’s new highs. Only half of S&P 500 stocks are above their 50-day moving average, and new lows on the Nasdaq today nearly match new highs, etc. It does not always have a negative impact on the S&P, but it is a potential drag, as are generally positive sentiment and fading seasonal tailwinds.
Only 25% and 36% upside volume on the NYSE/Nasdaq so far today, with plenty of harvesting going on beneath the surface.
The VIX was a little twitchy, briefly rising above 17, but there was no real change in the setup: it is still in a downtrend and is stuck around 15-16. Because historical (realized) volatility has been quite low, the VIX has been propped up by a steady hedging impulse, possibly Fed minutes, and concern about possible seasonal air pockets to come.