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Tesla’s S&P 500 debut set to electrify Wall Street

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Tesla’s inclusion in the S&P 500 next month is set to trigger a frenzy of trading, with Wall Street bracing itself for billions of dollars in shares to change hands when the stock enters the index.

The electric carmaker’s debut on the S&P 500 will be the biggest on record, instantly making Elon Musk’s company one of the largest weights on the blue-chip US stock index. A boom in passive investing — in which funds seek to reflect the performance of an index — has magnified the effect the move will have on the broader market, industry participants said.

Passive funds with $4.59tn in assets, such as those run by Vanguard and Fidelity, track the S&P 500, according to data compiled by Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. Tesla’s inclusion on the index would create some $51bn of demand for shares from these investment vehicles, he said.

Another $6.7tn in actively managed funds use the S&P 500 as their benchmark. Strategists with Goldman Sachs estimated that of the 189 large-cap funds they tracked, 157 with $500bn of assets in total did not own Tesla at the start of the fourth quarter. Analysts say these funds will add fervour to the buying of shares as they seek to rebalance their portfolios.

Tesla’s sheer size means the normally pedestrian index rebalancing process has become more complicated. Tesla’s free float, or the market value of shares available for trading, dwarfs Berkshire Hathaway and Facebook when they were added to the index, at $127bn and $90bn respectively, according to S&P Dow Jones Indices.

Line chart of $ showing Tesla shares have surged more than 500% this year

“Tesla is the largest company we have considered for inclusion in the S&P 500,” said Mr Silverblatt.

Trading houses, market makers and fund managers said they were expecting extraordinary volumes on December 18, the last trading day before Tesla formally joins the S&P 500. The date is typically busy for markets even without the Tesla addition since it is one of the last days for making big trades before markets slow down ahead of the winter holidays.

S&P is debating how to add Tesla to the index, given that the stock’s large weighting will also reduce the influence of the other 504 constituents. It may end up adding Tesla in two steps to slow down the process, it has said.

Market makers, which hold inventories of stocks in order to facilitate trading, are also pondering when to add to their holdings of Tesla shares as they balance expectations the stock will be highly volatile against what they see as assured demand. For big trading houses and brokers, it means large trading gains or losses are on the line.

Bar chart of Size of major S&P additions since 1999 showing Tesla exceeds past S&P 500 entrants

“There is a long lag between [the] announcement and December 18,” said Chris Johnson, head of ETF markets at Charles Schwab, referring to S&P’s decision last week to add Tesla to the index. “That’s a long time to try to pre-position on a very volatile stock like this.”

Complicating matters for market makers and passive fund managers is how other investors are getting ahead of the impending inclusion, which has pushed the stock price higher. Tesla is up sixfold this year and traded above $500 a share on Monday. For market makers, hedging the risk of any decline in the carmaker’s price before its inclusion in the S&P 500 next month may prove tricky, traders said.

The composition of major equity benchmarks has become increasingly important in the past decade as investors have ploughed ever greater sums into passive funds. When companies are added or removed from a benchmark, exchange traded funds adjust their holdings in tandem, seeking to mirror the index as closely as possible at the lowest cost possible. They are judged on that basis by a metric known as tracking error, and minimising it is a top priority of passive fund managers. 

“As an index provider we’re surgically focused on tracking error,” said Luke Oliver, head of index investing in the Americas at DWS, adding, “it will be all hands on deck” for “the entire market ecosystem around this”.

Typically when a stock is added to an index like the S&P 500, passive funds seek to buy as many shares as they can at the close of trading on the day before the addition to avoid tracking error. Market makers will often agree to guaranteed end-of-day trades. But Tesla’s size has complicated that plan. Some money managers are now debating buying Tesla stock before the 4pm New York close or on the following trading day, even though it could increase their tracking error.

Greg Sutton, head of equity portfolio trading at Citadel Securities, said the possibility of a two-step addition could “address fears of excess impact in Tesla as well as in some of the underlying S&P constituents”.

ETF providers had until last week to give feedback to S&P on the move, with a decision from the index provider on how to proceed expected by November 30. Whether it was split or done in a single shot, they said they did not expect any hiccups, regardless of what could shape up as a hectic close to the trading day.

“This is the largest trade for the S&P 500, but not the largest trade we have handled as a firm,” said Matthew Bartolini, head of SPDR Americas Research at SSGA.



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US tech stocks fall as government bond sell-off resumes

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A sell-off in US government bonds intensified on Wednesday, sending technology stocks sharply lower for a second straight day.

The yield on the 10-year US Treasury bond, which acts as a benchmark for global borrowing costs, climbed to nearly 1.5 per cent at one point. It later settled around 1.47 per cent, up nearly 0.08 percentage points on the day.

Treasury trading has been particularly volatile for a week now — 10-year yields briefly eclipsed 1.6 per cent last Thursday — but the rise in yields has been picking up pace since the start of the year and the moves have begun weighing heavily on US stocks.

This has been especially true for high-growth technology companies whose valuations have been underpinned by low rates. The tech-focused Nasdaq Composite index was down 2.7 per cent on Wednesday, on top of a 1.7 per cent drop the day before.

The broader S&P 500 fell by 1.3 per cent.

The US Senate has begun considering President Joe Biden’s $1.9tn stimulus package, with analysts predicting that the enormous amount of fiscal spending will boost not only economic growth but also consumer prices. The five-year break-even rate — a measure of investors’ medium-term inflation expectations — hit 2.5 per cent on Wednesday for the first time since 2008.

Inflation makes bonds less attractive by eroding the value of their income payments.

“I would expect US Treasuries to continue selling off,” said Didier Borowski, head of global views at fund manager Amundi. “There is clearly a big stimulus package coming and I expect a further US infrastructure plan to pass Congress by the end of the year.”

Mark Holman, chief executive of TwentyFour Asset Management, said he could see 10-year yields eventually trading around 1.75 per cent as the economic recovery gains traction later this year.

“It will be a very strong second half,” he said.

Line chart of Five-year break-even rate (%) showing US medium-term inflation expectations hit 13-year high

Elsewhere, the yield on 10-year UK gilts rose more than 0.09 percentage points to 0.78 per cent, propelled by expectations of a rise in government borrowing and spending following the UK Budget.

Sovereign bonds also sold off across the eurozone, with the yield on Germany’s equivalent benchmark note rising more than 0.06 percentage points to minus 0.29 per cent. This was an example of “contagion” that was not justified “by the economic fundamentals of the eurozone”, Borowski said, where the rollout of coronavirus vaccines in the eurozone has been slower than in the US and UK.

The tumult in global government bond markets partly reflects bets by some traders that the US Federal Reserve will be pushed into tightening monetary policy sooner than expected, influencing the costs of doing business for companies worldwide, although the world’s most powerful central bank has been vocal that it has no immediate plans to do so.

Lael Brainard, a Fed governor, said on Tuesday evening that the ructions in US government bond markets had “caught my eye”. In comments reported by Bloomberg she said it would take “some time” for the central bank to wind down the $120bn-plus of monthly asset purchases it has carried out since last March.

After a series of record highs for global equities as recently as last month, stocks were “priced for perfection” and “very sensitive” to interest rate expectations that determine how investors value companies’ future cash flows, said Tancredi Cordero, chief executive of investment strategy boutique Kuros Associates.

Europe’s Stoxx 600 equity index closed down 0.1 per cent, after early gains evaporated. The UK’s FTSE 100 rose 0.9 per cent, boosted by economic support measures in the Budget speech.

The mid-cap FTSE 250 index, which is more skewed towards the UK economy than the internationally focused FTSE 100, ended the session 1.2 per cent higher.

Brent crude oil prices gained 2 per cent at $64.04 a barrel.



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City-boosting proposals are not enough to offset lack of EU financial services trade deal



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How Jennifer Granholm will reshape the US Department of Energy

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Two things to start: ExxonMobil appointed two new directors to its board, its latest effort to placate activist shareholders. And Texas’s largest power co-op Brazos Electric went bust yesterday, as the financial damage from the arctic storm continues to mount.

Oh, and after the hiatus caused by the pandemic, energy-related emissions are rising again, according to the International Energy Agency. They were higher in December than a year previously, the agency said.

Welcome to another Energy Source. Our main item today is on Jennifer Granholm, whom the US Senate last week confirmed as the country’s new energy secretary. Myles McCormick reports on her plan to revitalise her department and reorient it towards clean energy.

Thanks for reading. Please get in touch at energy.source@ft.com. You can sign up for the newsletter here. — Derek

Granholm looks to reboot the Department of Energy

From scuppering the Keystone XL pipeline to freezing the allocation of new drilling leases on public lands, Joe Biden’s plans to shake up the American energy system are well under way.

Next on the president’s agenda is an overhaul of the sprawling leviathan that is the US Department of Energy. And the woman that will lead that process is now in situ.

Jennifer Granholm, a former two-term governor of Michigan, took the reins of the $35bn a year government agency five days ago. And already it is clear there will be a shift in its focus — away from promoting fossil fuel exports and towards driving innovation in clean energy and climate technology.

This is what Granholm wrote in a blog post last Thursday, her first day on the job:

“President Biden has tasked the Department, his in-house solutions powerhouse, with delivering a cornerstone of his bold plan: the goal of achieving net-zero carbon emissions by 2050. For DoE, that means developing and deploying the technologies that will deliver a clean energy revolution.”

That will require a shift in priorities at the “in-house solutions powerhouse” — but one that analysts said Granholm was well suited to execute.

“She understands the economic benefits of transforming the agency into the Department of Clean Energy,” said Mitch Bernard, president of the Natural Resources Defense Council.

Jennifer Granholm was sworn in as energy secretary on February 25 © Getty Images

What can the DoE actually do on climate?

American energy policy is divvied up among several government agencies, of which the Department of Energy is just one. Traditionally its primary responsibilities have been the US nuclear weapons programme, environmental clean-ups and scientific research and development through its oversight of the country’s national laboratories.

Despite the department’s name, Granholm’s ability to effect the Biden climate agenda is constrained. She does not have oversight of emissions targets (which fall to the Environmental Protection Agency) or oil and gas drilling licences (the Department of the Interior).

“I do think the DoE’s ability to advance climate goals is fairly limited,” Nader Sobhani, climate policy associate at the Niskanen Center, told ES.

But what it can do is reinvigorate the department’s R&D role.

“I think there will certainly be a shift in the programmatic focus of this DoE as compared to the previous administration, in that there will be a concerted effort to innovate, develop and deploy clean energy technologies that are critical to combating climate change,” said Sobhani.

That means driving forward research on carbon capture and storage, electric vehicle charging infrastructure, energy storage technology and zero-carbon fuels such as green hydrogen.

How will it set about doing this? The department has a few tools in its toolkit:

  • There are the 17 national laboratories, which are hotbeds for tech breakthroughs.

  • There are grant and loan programmes it can use to drive innovation and de-risk new technologies to coax in private sector investment. Granholm has already indicated she will restart a $40bn loan programme that was left untouched by the Trump administration.

  • Plus, it has regulatory authority to encourage energy efficiency in certain appliances and new transmission lines.

But all of this will require funding. While Congress ensured the agency was not financially gutted by the last administration, ramping up its R&D role will require more money. Biden has pledged $400bn over the next ten years for clean energy and innovation.

Granholm’s record on spending big — sometimes without the desired effect — has already sparked criticism from some quarters, with conservatives arguing her selection “should frighten every American taxpayer”.

Jennifer Granholm, former governor of Michigan, speaks during TechCrunch Disrupt 2019 in San Francisco
Jennifer Granholm, former governor of Michigan, speaks during TechCrunch Disrupt 2019 in San Francisco © Bloomberg

New leadership

Just as important as finance will be the shift in tone Granholm will bring.

While money kept flowing under the Trump administration, the agency lacked the strategic drive needed for clean tech innovation, said Emily Reichert, chief executive of Greentown Labs, North America’s biggest start-up incubator.

“When people look back on it, it was an absence of leadership — on innovation, on policy, on decisions, on strategy — that we needed to move forward faster,” she told ES.

The DoE’s role in convening experts from across the US has been central to driving the development of new technology. But as a divided country shifts rapidly towards a new approach to energy, that outreach role will be even more important.

That makes the appointment of Granholm key. A Michigan native, with years of experience dealing with the Detroit auto industry, she will be able to bring the climate change narrative to parts of the country that coastal liberals have often failed to reach.

“I think that Jennifer Granholm coming from a Midwestern perspective is a real game changer in terms of bringing the focus of this activity to the middle of the country, and recognising that the middle of the country can also get engaged in this developing the innovations around climate,” said Reichert.

But most importantly — four years after Donald Trump appointed an energy secretary who thought the department should be scrapped — Granholm’s championing of clean energy should get investors excited to spark the influx of funds needed for the “clean energy revolution” her boss has promised.

“The market signal it sends is that, one, the US is back in the game,” said Reichert. “And two, that climate related technology solutions around decarbonisation are a good place to invest your money, your time, your talents, and to move your assets.”

(Myles McCormick)

Data Drill

The energy transition could lower oil prices in the long term by $10 a barrel — by far the biggest threat to the net present value of oil companies, according to new research from Rystad Energy that assessed the resilience of 25 large operators. The consultancy quantified the risk to NPVs of stranded assets as less than 1 per cent, and that from rising CO2 costs at mostly below 10 per cent.

Oil sands and tight oil companies are most exposed to price risk because of high break-even costs. Oil sands would suffer most from higher CO2 costs. And ExxonMobil’s revenue risk is higher than its supermajor peers’, “primarily because its portfolio includes several large, capital-intensive projects”, including the Permian Basin assets and Guyanese shale.

Bar chart of Impact on net present value (%) showing The energy transition's corporate hit, quantified

Power Points

FT Energy Source Live

The FT Energy Source Live event will be taking place on 24 — 25 May 2021. Join industry CEOs, thought leaders, energy innovators, policymakers, investors and other key influencers to hear the latest thinking and insights on the future of US energy leadership and its global context. Find out more here.

Endnote

IHSMarkit’s CERAWeek, cancelled by the pandemic last year, is back on — and it has a new look.

Keynote speeches and panel discussions have moved from the Hilton’s plush ballrooms in downtown Houston to a slick new web interface. Many have been pre-recorded. Deals that came together in the hotel’s executive suites will have to wait. Journalists are missing the free lunches.

Still, the conference’s agenda boasts a who’s who of the energy industry, and increasingly beyond, as the sector grapples with the low-carbon energy transition — a topic that was scarcely mentioned just a couple years ago.

Andy Jassy, the head of Amazon’s cloud business, who has been picked to succeed Jeff Bezos as the company’s CEO later this year, had some advice that cut to the heart of the dilemma facing oil executives.

“If you want to be a company for a long period of time — which by the way turns out to be really hard to do — you have to be able to reinvent yourself, sometimes several times over,” said Jassy in a session with BP’s Bernard Looney, who pitched his company’s own transition away from oil.

“If something is going to happen, whether it’s good for you or not, if it is good for customers it is going to happen,” added Jassy. “So you have a couple of choices: you can howl at the wind and wish it away as a lot of companies do — big leading companies do — when there are new shifts technology, or you can embrace it.”

Energy Source is a twice-weekly energy newsletter from the Financial Times. It is written and edited by Derek Brower, Myles McCormick, Justin Jacobs and Emily Goldberg.



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