HOT AIR BALLOON FLIGHT

By Julia Horowitz • Tuesday, November 2

Good morning. In today's newsletter: Investors are giving China another look after a rocky year. Plus, Hertz rival Avis is soaring, and it pays to be a shipping company right now.

 

US stock futures are struggling to find direction after the Dow, S&P 500 and Nasdaq Composite hit all-time highs on Monday. Markets in Europe were mixed in early trading, while stocks in Asia mostly fell.

 

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MARKET FLASH

China is starting to look less scary to investors

For investors, the appeal of China has always been clear. Despite a long list of political risks, it's the world's second-largest economy — home to a massive pool of consumers and the fastest expansion of the middle class in history.

 

But in the past 12 months, there's been a significant shift.

 

What's happening: One year ago this week, Ant Group halted its highly-anticipated stock market debut following a meeting between billionaire co-founder Jack Ma and Chinese regulators. In the months that followed, Beijing ramped up efforts to curb the power of some of the country's most powerful companies, from online shopping behemoth Alibaba to ride-sharing platform Didi. The campaign has wiped out trillions of dollars in market value.

That crackdown has forced money managers to ask tough questions. Chief among them: Is the market still the blockbuster bet they thought it would be?

 

Apprehension remains about what President Xi Jinping will do next as he pursues a national campaign for "common prosperity." But after a tumultuous year, some of the anxiety is wearing off.

 

"Sentiment is starting to recover ... on signs Beijing is attempting to strike a balance between stabilizing growth and pursuing structural adjustments," Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a note to clients this week. "We believe Chinese equities are close to the bottom now."

 

See here: Last quarter, Chinese stocks suffered their worst three-month period since 2015, plunging over 18%, Haefele noted. But in October, the MSCI China index rose 3%, ending four consecutive months of losses. Alibaba's stock, which has been particularly hard hit, jumped almost 15%.

 

The change in mood is largely attributable to expectations that the Chinese government will moderate efforts to reform private companies to avoid exacerbating an economic pullback.

 

The country's output grew at its slowest pace in a year last quarter, expanding just 4.9%. Compared to the prior quarter, the economy grew only 0.2% in the July-to-September period — one of the weakest quarters since China started publishing such records in 2011.

 

A government survey of manufacturing activity released over the weekend fell for a second straight month. There are also worries that the country's massive property sector could buckle under its huge debt loads.

 

That's boosting expectations that policymakers will act aggressively to inject stimulus into the economy to help it stabilize.

 

But the clouds haven't cleared entirely. Haefele notes that "near-term market volatility may remain high." In Bank of America's most recent survey of global fund managers, the situation in China was identified as the second biggest market risk, behind only inflation.

 

On the radar: An energy crunch hammering China could dictate how the situation unfolds. So could its approach to dealing with the Covid-19 pandemic. 

 

As countries around the world gradually open up, China is still working to eradicate Covid-19 from inside its borders. On Sunday evening, Shanghai Disneyland went into a snap lockdown following a single confirmed case. Tens of thousands of visitors and staff were forced to undergo coronavirus testing before they were allowed to leave the park.

 

VOICES

Pressure grows on Facebook CEO Mark Zuckerberg

"I think it is unlikely the company will change if he remains CEO. I hope that he can see that there's so much good he can do in the world, and maybe it's a chance for somebody else to take the reins."

 

FACEBOOK WHISTLEBLOWER FRANCES HAUGEN (AT WEB SUMMIT)

 

Read more from CNN Business.

EARNINGS MONITOR

Forget Hertz. Shares of rival Avis are soaring

Investors have been rushing to snap up shares of Hertz after the company announced tie-ups with Tesla and Uber. 

 

But rival rental car company Avis Budget's stock is even hotter, my CNN Business colleague Paul R. La Monica reports.

 

The company soared past Wall Street's expectations when it reported results for its most recent quarter after markets closed Monday. Sales nearly doubled from a year ago and Avis' profit skyrocketed 1,400%, easily topping forecasts and hitting a new record.

 

Driving the boom: The return of business and leisure travel as people received Covid-19 vaccinations has given Avis a huge lift. 

 

"We are seeing the benefits of initiatives we began during the early days of the pandemic and look to build on this positive momentum as the travel environment continues to normalize," CEO Joe Ferraro said in a statement.

 

Should demand ease, the company also has a fleet of used cars it can sell to dealers or consumers.

 

Investor insight: Hertz stock, which currently is listed on Nasdaq's over-the-counter bulletin board and hopes to return to the regular Nasdaq through an initial public offering, is up almost 30% since the company emerged from bankruptcy earlier this year and began trading again in July.

 

Shares of Avis Budget, meanwhile, have surged more than 110% since July and are up almost 380% so far in 2021. 

 

That said: Many investors are betting the stock will go down. More than 20% of Avis Budget's shares are being held short, meaning that traders are borrowing and immediately selling them in hopes to buy the stock back at a lower price and profit on the margin.

 

Hertz's shares could also be vulnerable, though. Tesla CEO Elon Musk tweeted Monday that "no contract has been signed yet" to sell 100,000 vehicles to the rental car service, casting doubt on the highly publicized arrangement.

UP NEXT

ConocoPhillips, Corsair Gaming, Ferrari, Marathon Petroleum, Pfizer and Under Armour report results before US markets open. Activision Blizzard, Lyft, Match Group and Zillow follow after the close.

 

Coming tomorrow: The Federal Reserve is expected to start rolling back pandemic-era stimulus measures to keep a lid on inflation.

WHAT WE'RE READING AND WATCHING

▸ EV startup Rivian could be worth as much as Honda in IPO (Reuters)
▸ US regulators want bank-like rules for stablecoins (CNN Business)
▸ BP looks dirtier than Exxon in new data from US oilfield (Bloomberg)
▸ Corporate climate pledges often ignore supply chains (NYT)
▸ Could Dems' spending plans cut taxes for the rich? (CNN Business)
▸ Digital Currency Group wants to be crypto's Standard Oil (WSJ)

FINAL WORD

It pays to be a shipping company right now

Companies around the world have expressed growing frustration with the high cost of shipping, as a wave of consumer demand and supply bottlenecks drive up freight rates.

 

Less upset? The world's largest container shipping firm, which just posted a record-breaking quarter.

 

The latest: Maersk said Tuesday that skyrocketing freight rates propelled its sales to $16.6 billion, while profits tripled over the previous year to $6.9 billion.

 

Maersk said it expects the "exceptional market situation" to continue into at least the first quarter of 2022, with its growth "subject to high uncertainties" related to global shipping congestion.

 

"On the demand side, high household savings in the USA and Europe should support consumer demand, but the composition of spending is likely to rebalance towards services, and sharply rising prices for some goods may lead consumers to adjust their spending plans," the company said.

 

Looking ahead: Maersk also announced that it's bulking up its air freight business. The Danish firm is buying German freight forwarder Senator International, leasing three cargo planes and purchasing two new Boeing aircraft to be deployed by 2024.

 

"Witnessing the chain knock-on effects of the pandemic, with widespread port congestion, production issues, but also other external factors like limitations on inland haulage options, the time to make new moves to help our customers is now," Maersk said in a statement.