The S&P 500 was 14% higher and had yet to enter a bear market. The war in Ukraine and inflation concerns had pushed investors to sell, but sentiment had not subsided. And Tesla, the electric car maker that is Musk’s main source of wealth, was about to announce record profits. In this climate, Musk’s offer to pay $ 44 billion for Twitter, raising shares he doesn’t have for $ 54.20 a piece, seems too high, and now, unsurprisingly, he wants to leave.
“The market has changed drastically since April,” Daniel Ives, a strategist at Wedbush Securities, told me.
Musk took action Friday afternoon to terminate his deal to buy Twitter, alleging the company is “materially violating several provisions” of the original deal.
For weeks, Musk has expressed concern, without any apparent evidence, that there are more robots and spam accounts on the platform than Twitter has publicly said. Analysts speculated that the fight was an attempt to create a pretext to get out of a deal that now seemed too expensive.
Musk’s bid represented a 54% premium on the price of Twitter before Musk began to increase its stake in late January, and a 38% premium before its holdings were revealed in April.
In early July, Twitter shares were trading at just $ 38.23, nearly 12% lower since the beginning of the year and nearly 30% below Musk’s bid price.
On the radar: Twitter shares would probably get worse if Musk hadn’t made his move. Investors have abandoned fast-growing technology stocks, which are less attractive when interest rates rise, and social media companies have been hit hard.
Facebook’s goal has been to see its shares fall nearly 50% since the year. Snapchat is 68% lower.
Then there are the shares of Tesla (TSLA), which Musk had planned to rely in part to fund the deal. It has also fallen sharply, by 30% since early April.
“The Twitter fiasco had a big overflow from Tesla shares and this is Musk’s golden son,” Ives said.
Musk does not call the remorse of his buyer fickle. But Ives believes it is clear it was an important factor.
What happens next: the stage is set for a long and dramatic legal battle. Twitter has said it intends to force Musk to close the sale, and it’s not hard to see why. Twitter shares have fallen more than 5% in pre-market trading on Monday. With the acquisition tied to the courts, Ives believes it could go down 30% more to $ 25.
Covid’s fears and new technological repression affected Chinese actions
Chinese stocks fell on Monday as the threat of new Covid restrictions and a renewed regulatory offensive against large technology companies dampened investor confidence.
The latest: Macau’s gambling center casinos were ordered to close for the first time since February 2020 due to a Covid outbreak, and caused the actions of their operating companies sink, according to my CNN Business colleague Laura He. Fears of new blockades in Shanghai also undermined the wider Chinese market.
Added to the unpleasant mood, China’s technological actions fell after the country’s antitrust regulator imposed new fines on a batch of List A companies, arousing fears that Beijing does not plan to be easier with the conflicting Internet giants of the country.
Senior government officials had recently pointed to a relief from President Xi Jinping’s blunt technological repression and pledged support to the Internet sector. The change in rhetoric fueled hopes that Beijing would support private companies as it tries to bolster the country’s economy.
But on Sunday, the State Administration for Market Regulation said it had issued fines to technology companies such as Tencent, Alibaba and Lenovo, alleging that they had not properly reported the merger and acquisition activity.
Alibaba shares plunged 6% in Hong Kong on Monday. Tencent fell 3%. The Hang Seng technology index fell 4%.
My thought bubble: Last month there was a resurgence of enthusiasm for Chinese equities as investors bet that Covid’s worst restrictions had passed and tried to take advantage of attractive prices.
The International Finance Institute reported in June revenue of $ 9.1 billion in Chinese equities. Emerging markets, with the exception of China, experienced outflows of $ 19.6 billion as anxiety over the recession dominated.
But to assume that Xi’s policy of eliminating Covid’s transmission was always over would be a risky gamble. It was also to predict that the government’s icy relationship with the private sector had thawed.
Will a crucial Russian gas pipeline go online again?
Since the West hit Russia with heavy sanctions after its invasion of Ukraine, a terrifying question has been posed: what if Russia shuts down gas in Europe, a nightmare scenario that would put great pressure on the economy of the region?
This possibility is very big, as on Monday the maintenance of the Nord Stream 1 pipeline from Russia to Germany begins. Market officials and observers have expressed concern about whether gas flows will resume once the 10-day repair period is over.
“While this was a routine procedure that hardly caught the eye, it is feared that this time Russia will not resume gas shipments later,” Commerzbank analysts said in a note to clients.
Recall: Last month, Germany, Europe’s largest economy, said it was “in a gas crisis” after Gazprom, Russia’s state-owned gas company, reduced North pipeline flows by 60% Stream 1. Gazprom blamed the move on the West’s decision to retain vital turbines due to sanctions, but European politicians saw it as a shot in the bow.
“Anything can happen. It could be that the gas is flowing again, even more than before. Nothing could come,” German Economy Minister Robert Habeck said on Sunday. “Honestly, we always have to prepare for the worst and work a little for the best.”
Europe is escaping Russian energy, but reducing gas dependence is especially difficult. The region received 45% of its natural gas imports from Russia last year and is currently rushing to fill storage facilities before winter.
Natural gas reference prices in Europe rose to their highest level since March last week. They could continue to increase in the coming days, intensifying pressure on governments to develop contingency plans.
“Concerns are likely to drive up the price of gas even further until it becomes clear what will happen to the gas supply once the maintenance work is completed,” Commerzbank said.
Until next time
New York Federal Reserve Chairman John Williams speaks at a conference on the Libor transition at 2 p.m. ET.
Tomorrow: PepsiCo (PEP) reports earnings ahead of a series of banking results later this week.