A daily market update from FS Insight — what you need to know ahead of opening bell

“The philosophers have only interpreted the world, in various ways. The point, however, is to change it.” — Karl Marx

First news

• On an anti-woke bender, Texas puts politics first as major Wall Street firms keep dropping from its list of allowed muni debt underwriters.

Overnight

• Shares of Japan’s Aozora Bank Sink over 20% as NYCB’s Losses Spook Investors Elsewhere. link
• Tencent, Nexon Soar After Surprise Approval for Marquee Game. link
• Red Sea Attacks Prompt Firms to Test Ambitious New Land Routes. link
• U.K.’s Carbon Price Falls to Record Low; Concerns Abound Over Greenwashing. link
• Responding to Overturned Roe v. Wade, France Moves to Enshrine Abortion Rights in Constitution. link
• House Passes $78 Billion Tax Bill that Includes PAB Adjustment. link
• Trump Says ‘Wouldn’t’ Rename Powell as Fed Chair. link
• Gilts Set for ‘Full Rally’ After Paring Record Bad Start to Year. link

MARKET LEVELS

MORNING INSIGHT

Good morning!

This week’s gauntlet shows that equity markets are getting stronger, handling bad news with resilience. Earnings visibility is strengthening as 43% companies post >10% EPS growth.

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TECHNICAL

AAPL support at $180 has importance for investors.

AAPL’s post earnings move, as of 5:30 pm EST on Thursday, lacked the firepower that stocks like META -1.38%  and AMZN 0.15%  showed after hours (each of the latter trading higher by more than 8% following Thursday’s market close, while AAPL 0.46%  was lower by $1).

As shown, its recent pullback got close to, but did not undercut, serious support near $180 that looks important for AAPL 0.46%  structurally. $180 lines up near prior January 2024 lows, along with intersecting a lengthy uptrend line for AAPL since early last year.

While AAPL has underperformed its peers in recent months and has largely gone nowhere, its technical pattern hasn’t turned that bearish. This is due to lack of meaningful deterioration in its trend. The ability to hold near its 52-week highs and churn sideways, technically speaking, can be thought of as minor consolidation that normally is resolved by a push higher.

Overall, we view AAPL as an attractive risk/reward at current levels. Strong support lies at $180, while gains appear likely in February above last week’s $196.38 peak, which would lead back above $200 in the weeks to come. $180 is a particularly important support level given AAPL’s concentration within SPX and QQQ -0.03% . Any break of $180 could metastasize to the broader US equity market, given AAPL 0.46% ’s size. 

Thus, most investors should pay attention in the weeks and/or months ahead for any evidence of AAPL breaking $180, which is its technical line in the sand. Until/unless that happens, it’s right to not think too negatively of AAPL despite some consolidation and underperformance since last summer.   

^{Source: Market Smith}

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CRYPTO

Key Takeaways

• Despite the QRA showing an uptick in relative coupon issuance, the market’s response to this QRA release was rather tame. This reflects a market that had effectively priced in this data ahead of time.
• Overall, the Fed’s latest communication has tempered expectations for rate cuts in the first quarter, likely resulting in a short-term increase in rates. However, the overall shift in the burden of proof from the doves to the hawks is a positive signal for potential rate cuts in the first half of the year.
• Despite limited risks currently affecting only a couple of banks, if wider contagion arises from commercial real estate credit issues, bitcoin stands out as the best asset to be allocated to, in our view.
• Flows continue to be constructive, with spot BTC ETFs posting four consecutive days of net inflows.
• The aggregate stablecoin market cap also continues to expand, reflecting an environment conducive for altcoin, should BTC hold its current range.
• Core Strategy – Our outlook on Q1 headwinds materialized somewhat faster than anticipated, but in our view, it is a passing storm. Maintaining majority exposure to BTC in our Core Strategy will provide the opportunity to rotate into altcoins once the turbulence subsides. We continue to believe that ETH, L2s, and STX present compelling idiosyncratic upside due to their respective near-term catalysts, and SOL should benefit from continued momentum post-Jupiter airdrop.

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FIRST NEWS

Everything’s big in Texas, which is why the following story on Texas munis monopolizes today’s First News section. 

Texas Sez: Hold ‘Em Anti-Gun-’n-Oil Boys At Arm’s Length. For years, small investment banks have steadily retreated from the business of underwriting municipal bonds, increasingly leaving the job of raising money for the needs of U.S. state and local governments to large Wall Street firms. Now, there are concerns that the big banks may start dropping away, too – and just at a time when January issuance is up year-over-year, as positive market momentum from yearend, tighter credit spreads, planning for increasingly scarce federal stimulus dollars, and growing capital needs prompt issuers to come to market.

As part of a broader retrenchment from this niche, Citigroup will wind down its muni trading and origination business, once the envy of rivals, by the end of Q1. One of the most dramatic pushes yet by CEO Jane Fraser to reshape the firm in the service of reaching profit goals comes as Citi has tumbled in the rankings for underwriting state and local debt. Maintaining the division, seen as a drag on growth, is deemed “no longer viable given our commitment to increase the firm’s overall returns”. As the move sows fear of a Wall Street retreat, debt issuers are giving as good as they get – in more ways than one.

Skittish issuers began to drop Citi from big muni deals well ahead of the unit’s shuttering. Jefferson County, Alabama, which had filed for bankruptcy in 2011, initially chose Citigroup to serve as lead manager on an upcoming debt sale, as it announced plans to return to the municipal bond market in January 2024 with a $2.5 billion sale of tax-exempt revenue warrants for its sewer system. The bank floated the idea of shuttering its public-finance division back in early November 2023. Jefferson County commissioners later held a work session during which they considered a resolution authorizing the sale of the bonds. Originally set to lead the underwriting group, Citigroup was no longer mentioned as an underwriter in that resolution.

The pendulum swings toward anti-ESG-et-al, scythe-like

Entire states are becoming more and more comfortable writing underwriters out of the picture if they don’t like their politics. In the case of Texas, it helps if you and your capital needs are country-sized. As far back as March 2022, a state lawmaker in Texas warned Citigroup he reckoned he’d have no choice but to introduce legislation to ban the bank from underwriting municipal bond sales in the state if Citi continued with its practice of setting aside funds for employees to travel outside the state to receive abortions. This past Tuesday, Barclays PLC became at least the third bank to be enjoined from underwriting municipal debt for the state over net-zero policies, raising concerns over less competition in the industry, hence higher debt-service costs for borrowers. 

There’s a bit of a witch hunt happening, targeting what are termed ‘fossil fuel boycotters’, and Barclays has been caught up in the wide sweep of Texas AG Ken Paxton’s ostensibly pro-business broom. A January 26 press release from Paxton’s office raised questions about Barclay’s participation in the Net Zero Banking Alliance (NZBA), a UN-convened initiative to decarbonize banking by 2050, as per the Paris Agreement on climate change (which the U.S., of which Texas is ostensibly a part of, is a signatory to).

Although Barclays was the seventh-largest investor in fossil fuels globally between 2016 and 2022, the bank is, to put it starkly, a bit player in the Lone Star state’s booming muni market. In 2023, its market share was 3%, accounting for ~$2 billion of some $60 billion issued in municipal bonds. Still, as the state bars more and more underwriters, the impact adds up – to higher costs. A 2022 report estimates that municipalities and other public entities in Texas would pay between $303 million and $532 million more in interest on the $32 billion they borrowed over the first eight months after Texas passed two laws prohibiting ESG investment criteria. Further shrinkage in the number of big banks could also hurt commercial paper issuance that relies on their letters of credit. 

On Monday, twelve state agricultural commissioners requested information from 6 leading U.S. banks about their participation in NZBA and the initiative’s impact on food availability, credit for farmers, agricultural product prices and “overall negative economic consequences.” Over the past three years, leaders in certain Republican-leaning states have spearheaded a campaign against corporate ESG-related policies seen as harmful to their economies. The problem is that this approach can affect local towns more so than large Wall Street firms. A pullback could be costly for issuers; in one election at the end of October, Texas voters were deciding on $26.17 billion of bonds for schools, hospitals, roads, and other local projects.

A similar oil and gas industry boycott law enacted in Oklahoma last year landed Bank of America, JP Morgan, and Wells Fargo on that state’s boycotter list, resulting in Wells Fargo’s resignation in May as lead manager for a $500 million Oklahoma Turnpike Authority revenue bond sale. Oklahoma revised its list of financial firms determined to be boycotting the fossil fuel industry, shrinking the number to six from 13, with three large municipal investment banks remaining on it. As with Texas’ law, Oklahoma’s statute is aimed primarily at divestment, while prohibiting state and local government contracts valued at $100,000 or more with companies that boycott. Seeing that this may be a bridge too far, there is now support in the Oklahoma House for removing local governments from the law, as such prohibitions weren’t the intention of the legislation.

Wells Fargo, which escaped a ban this summer after a review by the attorney general’s office couldn’t determine that the bank had a policy or practice discriminating against firearm businesses, headed a $1 billion Texas Water Development Board revenue bond sale that closed just days before the bank was placed on the net-zero review list.

The AG review comes with the Texas Comptroller’s Office already managing a list of boycotters it assembled last year for divestment purposes. UBS was the only muni investment bank to be included on that list, and therefore was barred from deals. Paxton’s office ousted Citigroup in January 2023 due to its commercial firearms policy. As a result, both were dropped from a $3.52 billion Texas Natural Gas Securitization Finance Corporation taxable bond sale that priced in March 2023. Unsurprisingly, in October, UBS revealed plans to drop negotiated muni underwriting.

Houston Controller Chris Brown said the Texas AG’s review could result in fewer big banks being eligible to underwrite municipal bonds in the state, boosting issuance costs due to decreased competition. With UBS and Citigroup already barred from muni business with state and local government issuers for flunking the state’s litmus tests on fossil fuel and gun policies, respectively, more major investment banks are being banned from Texas deals precisely when Houston is gearing up to sell $2.55 billion of new money bonds for its George Bush Intercontinental Airport. With that deal on the horizon, Controller Brown is concerned about bringing the debt to the market in the wake of a crackdown by AG Paxton, requiring compliance with state laws prohibiting governmental contracts with companies, including investment banks, that ‘boycott’ or ‘discriminate’ against the fossil fuel or firearm industries.

Dead serious

Notices from Paxton’s office over the last three weeks called on Texas municipal bond issuers to make sure underwriters involved in their bond sales are not skirting the laws as his office launched a compliance review involving several big banks’ involvement with NZBA. Municipal bond underwriters being scrutinized include Bank of America, Barclays, JP Morgan Chase, Morgan Stanley, RBC Capital Markets, and Wells Fargo. (The firearm industry, which has objected to Bank of America’s and Wells Fargo’s participation in Texas bond deals, cheered Paxton’s efforts.) In 2023, all were ranked in the top 20 for underwriters in Texas, with deals collectively totaling over $13 billion, per Refinitiv data.

Past participation is no guarantee of being grandfathered in; when Houston sold $756 million of bonds for the airport last summer, two co-managers on the six-member syndicate were banks now either being threatened or already barred by the attorney general. As with any good witch hunt, those eager to avoid trouble are coming through with unequivocal pledges of allegiance. Quite at odds with the fad among major corporations, circa mere months ago, of signaling their green-energy-transition cred in splashy, expensive ad and social-media campaigns, JP Morgan Chase has been reiterating how it is among the world’s largest financiers of fossil fuels, as well as cleaner energy sources. “JPMorgan Chase makes independent business decisions consistent with the law and based on what will advance the long-term interests of the people we serve – nota political agenda,” said Lauren Blair Bianchi, a bank spokesperson. “These misguided policies seek to achieve the opposite at the expense of taxpayers.” Other big banks under review by Paxton’s office declined to comment, but RBC Capital Markets, which has been a lead underwriter on Texas muni debt before, pointed to its standing letter on file, certifying its compliance with the law. 

In the end, municipal officials in Texas, who are the deciders on such matters, are likely to follow the path of least resistance (i.e. the elimination, among other things, of a lot of due diligence) and simply choose a bank that openly pledges loyalty to the pro-fossil-fuel cause. Controller Brown, concerned that the AG’s review of big banks with a jaundiced eye could further shrink the ranks of muni underwriters, says, “what that potentially does is increase issuance costs as a result of decreased competition and it also potentially increases our risk.” Brown also pointed to the need for banks with substantial excess net capital to handle multi-billion-dollar muni deals and, in the case of taxable debt, to command sufficient reputation and reach to sell it to prospective overseas buyers. He also sees the irony of the fossil-fuel-boycott law possibly harming Houston. “We’re the energy capital of the world. We support investing in energy.” Bloomberg, S&P, The Bond Buyer, Bloomberg