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Bond markets flashing red and an oil plunge could make things worse

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The U.S. high-yield index has widened 115 basis points and investment grade 30 basis points over the last month, leading many to ask whether these credit bonds are the real canary in the coalmine for global markets.

One catalyst for the underperformance in the investment grade space has been the acceleration of rating downgrades at the upper end of the capital structure. According to Goldman Sachs analyst Lotfi Karoui: “$90 billion worth of bonds have migrated into ‘BBB’ territory (from A); this is the highest amount since the fourth quarter of 2015.” A triple-B bond is rated one notch above junk so investors get a high return to something that’s perceived to be quite a risky investment.

The risk is for further negative actions especially as, according to Deutsche Bank research, ‘BBB’ bonds constitute about 60 percent of the overall U.S. investment grade market.

A continual downgrade drift would exert pressure on lower parts of the capital structure and could eventually increase the size of the high-yield bond market — a cohort that has also been struggling this year as interest rates have gone up.

The high-yield market also continues to exhibit a higher risk factor to oil prices and that has had a big impact on that market. According to the Goldman Sachs report, almost a quarter of the gross issuance in these bond markets this year has been in energy-related industries (albeit a large chunk has gone into refinancing and debt repayments) and constitutes about 16 percent of the outstanding market.

As the price of oil has slumped 30 percent since October, downside risks for high yield have increased especially as the oil plunge in 2014 elicited a wave of defaults in the energy sector and subsequently in the high yield market. This time around though, the breakeven level for many of these high-yield shale companies appears to be about $20 lower than it was back in 2014 to 2016, at around $51 per barrel, according to Goldman analysts.

Any further drop in the oil price from here would be a worrying development — credit investors are hence also keeping a close eye on the OPEC meeting.

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Delivery employees said to be cut

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At the Model 3 launch in July 2017, Musk said over half a million buyers had put down deposits on the new car. That helped send Tesla shares up almost 15 percent over the following six weeks.

The company delivered 145,610 Model 3s in 2018, but all of them at prices far above $35,000. Musk said last week a $35,000 version that could be sold profitably was perhaps six months away. Even with two price cuts this year, the lowest price tag on a Model 3 is now $42,900.

Musk maintains that Model 3 demand is “insanely high,” but his company has not released any figures to demonstrate that.

Asked about the reservations list last week by analysts, outgoing Chief Financial Officer Deepak Ahuja declined to disclose how many people remained, calling it “not relevant.”

Musk has said Tesla has multiple ways of stoking demand, if it chose to, such as offering leases or boosting marketing efforts.

The Model 3s now rolling out of Tesla’s Fremont, California, factory are going to Chinese and European buyers, Tesla says.

The two laid-off employees said delivery targets for North America — made up of mostly U.S. buyers — this quarter would be 55 percent to 60 percent of what they were in the last quarter of 2018.

If Tesla does not cut prices soon, it risks losing potential customers — and ones already on its reservation list — to a slew of German and Asian competitors whose electric vehicles will hit the U.S. market this year. Each of the new entrant’s first 200,000 buyers will be eligible for a full federal subsidy.

Having met that number already, the U.S. tax credit for Tesla buyers drops in half to $3,750 for the first six months of 2019, then falls by half again in the second six months.

Musk said last month his “rough guess” was that Tesla would begin building the $35,000 Model 3 in mid-2019.

One of the sources said that could recharge U.S. demand: “If there was a Model 3 for $35,000 that was still a really good car, that blows away the competition, I could see demand going through the roof.”

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Summit with North Korea’s Kim Jong Un to be held in Hanoi: Trump

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Biegun said Kim Jong Un committed during an October visit by U.S. Secretary of State Mike Pompeo to the dismantling and destruction of plutonium and uranium enrichment facilities and that “corresponding measures” demanded by North Korea would be the subject of his talks.

At the same time, he set out an extensive list of demands that North Korea would have to meet eventually, including full disclosure of its nuclear and missile programs, something Pyongyang has rejected for decades.

On Saturday, Biegun said his talks in North Korea had been productive and Trump looked forward very much to his meeting with Kim in Hanoi.

“We have some hard work to do with the DPRK between now and then,” Biegun said in South Korea before a meeting with its foreign minister, Kang Kyung-wha.

“I am confident that if both sides stay committed, we can make real progress.”

Trump, eager for a foreign policy win to distract from domestic troubles, has been keen for a second summit despite a lack of significant moves by North Korea to give up its nuclear weapons program. He and Biegun have stressed the economic benefits to North Korea if it does so.

“North Korea, under the leadership of Kim Jong Un, will become a great Economic Powerhouse,” Trump said on Twitter.

“He may surprise some but he won’t surprise me, because I have gotten to know him & fully understand how capable he is,” Trump said.

Trump announced the plan for his second meeting with Kim in his annual State of the Union address on Tuesday.

Trump said much work remained to be done in the push for peace with North Korea, but cited the halt in its nuclear testing and no new missile launches in 15 months as proof of progress.

The Singapore summit yielded a vague commitment by Kim to work toward the denuclearization of the Korean peninsula, where U.S. troops have been stationed since the Korean War.

While in the U.S. view North Korea has yet to take concrete steps to give up its nuclear weapons, it complains that Washington has done little to reciprocate for its freezing of nuclear and missile testing and dismantling of some facilities.

North Korea has repeatedly urged a lifting of punishing U.S.-led sanctions, a formal end to the war, and security guarantees.

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Starbucks ‘unlikely’ to be overtaken in China by Luckin in 2019: CEO

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A customer exits a Luckin Coffee outlet in Beijing, China, on Tuesday, Jan. 15, 2019.

Gilles Sabrie/Bloomberg | Bloomberg | Getty Images

A customer exits a Luckin Coffee outlet in Beijing, China, on Tuesday, Jan. 15, 2019.

“I think it’s unlikely,” said Johnson when asked if Luckin might overtake Starbucks in China by the end of 2019, pointing to the 18 percent growth in new Chinese stores the company racked up in the fourth quarter.

“Just this last quarter we entered 10 new cities in China,” he said, adding that each of those cites is larger than Los Angeles, the sprawling southern California metropolis with a population of around 4 million.

Luckin has said it is targeting a total of more than 4,500 stores in China by the end of 2019, which would take it past Starbucks, which has long dominated the Chinese coffee market and currently has over 3,600 stores in the country.

Many Luckin units are much smaller “points of presence” and not comparable to full-service Starbucks cafes, Johnson said.

Johnson, who replaced Howard Schultz as Starbucks chief executive in April 2017, said he expects the company to be able to repeat last quarter’s growth in China due to what he described as “a first-mover advantage” in the Asian giant.

“I think we will simply because much of that growth, it’s about building new stores,” he said, noting that Starbucks opens a new store every 15 hours on average in China.

Johnson added that “thus far” U.S-China trade tensions has not affected the company’s bottom line.

“We haven’t seen much impact,” he said.

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