(Katarina Lau – VP of UCLIF & Lead Editor)
Welcome to the UCLIF Friday Wrap-Up, our weekly newsletter that brings you the most important market events and information during the past week! So what’s moving markets?
Markets: US equities hit record highs again this week as the S&P500 index gained +0.3% and the NASDAQ index climbed +0.4%. There were a number of economic data releases – US weekly jobless claims came in at 375,000, matching estimates and declining for a third straight week. Meanwhile, the Producer Price Index (PPI) rose +0.9% versus a forecast of a +0.5%, whilst consumer sentiment based on the University of Michigan index plunged to the lowest levels since 2011. In Europe, the STOXX 600 index ended +0.1% higher and Europeans stocks recorded a 10th straight winning session overall. In the UK, 2Q GDP met expectations growing +4.8% QoQ.
COVID-19 Update: Australia is officially in its third wave of Covid-19, however the vaccination process has been slow with only one-in-four eligible people fully vaccinated at present. New Zealand’s PM announced the country’s borders will remain closed until at least 2022 under its new Covid plan.
Information Technology (Satya Maulana)
The general tech sector remains dormant, with most indexes such as Nasdaq (+1.15%) and the Dow Jones U.S. Tech Index (+0.21%) merely making microscopic moves lately. This quiet movement shows that it’s now getting difficult to sell veterans in the tech sector, such as Intel and Cisco (both of which no longer perform as well as they did during the dot-com period). A fascinating index that I found not too long ago is the Goldman Sachs index of non-profitable tech sector stocks or the “negative earnings’ company index.” The index itself has risen by about 400% since mid-March, driven by the rise of high-margin, high-growth enterprises that reinvest profits to acquire scale.
We witnessed earnings for said negative earnings’ companies such as DoorDash, Palantir, and Airbnb this week.
DoorDash (+6.56%) posted record orders with sales increasing by 83% to $1.24 B, which beat the average analyst expectations of $1.09 B. DoorDash is now the leading food delivery service in the US is now aiming to compete head-to-head with Amazon on logistics. However, the company still made a net loss of $102 M as expenses have doubled with the company increasing investments to compete against Amazon (BBG). Palantir (+13.96%) posted a 49% increase in Q2 revenues as government agencies rush to their services for analysis of the Covid-19 pandemic. Government sales had a growth rate of 66%, and the company forecasted sales with an optimistic 33% growth for its data software. Palantir has yet to profit as they posted a net loss of $138 M this quarter (BBG). Finally, Airbnb (+2.70%) posted revenues of $1.34 B (four times higher YoY), beating Wall Street expectations of $1.26 B. Total nights and experiences booked were up almost 200%, indicating substantial anticipations for post-vaccine rollouts for the tourism and hospitality industry. Airbnb’s net loss narrowed to $68 M for the quarter, which makes it down 88% from a net loss of $575.6 M a year prior (BBG).
The Big Stories
Washington’s Lina Khan, the chairperson of the FTC, is taking on big tech in a way that could terraform the whole industry (FT). Softbank’s (-2.54%) Masayoshi Son halts the Vision Fund II’s investment in China until the CCP’s scrutiny of the tech sector becomes clear (FT). Email marketing startup Mailchimp is exploring a $10B exit via M&A (BBG). KakaoBank (+70%), South Korea’s first internet-only lender, went public this week, and it is on track to become the country’s largest retail lender by market value (BBG). Reddit, the online forum whose users shook the US stock market earlier this year, had a valuation spike after a $700M fundraising, putting the company’s valuation at $10B (FT). The UK competition regulator calls for Facebook (-0.16%) to sell their online image platform Giphy, which they bought for $400M last year.
Healthcare (Jasmine Khoo)
Monday saw a rally in key vaccine stocks, with shares of BioNTech (BNTX), Moderna (MRNA), Novavax (NVAX) rising +15%, +17% and +12% respectively. This stemmed from a combination of idiosyncratic factors and general concerns about the Delta variant which have weighed on markets over the past weeks. As Covid-19 cases surpass 200 million and ‘breakthrough’ infections continually emerge amongst the vaccinated, the pandemic seems far from over. Dr. Fauci advised on Sunday that the US should accelerate booster jabs to individuals with weakened immune systems.
On Monday 9 Aug 2021, BioNTech reached record share price after releasing quarterly results that significantly exceeded expectations. It reported EPS of US$12.67 and revenues of US$6.2 billion ahead of the consensus US$8.87 and US$3.8 billion respectively. To date, the company has delivered 1 billion doses of Covid-19 vaccine and expects to produce up to 4 billion doses next year. The BioNTech stock could see further upside if the company reports successful trial results for those aged 6 months to 11-year-olds in September. Positive results for its Delta variant-specific shot could also serve as a big catalyst in the fourth quarter.
On the same day, Moderna’s COVID-19 vaccine was granted provisional registration by Australia’s Therapeutic Goods Administration (TGA) for individuals 18 years of age and older. Elsewhere in the world, Swiss regulators approved an indication extension for the vaccine in people aged 12-17 years old. Amidst the global vaccine race, the company aims to tap into all demand by overcoming supply shortages. Extensive investments have been made to expand its manufacturing capacity, and the company reached a tentative agreement with the Canadian government to build a vaccine factory on Tuesday. With its shares up 350% year-to-date, Moderna is poised to surpass a market capitalisation of US$200 billion.
Consumer Staples and Consumer Discretionary (Jeff Chen)
Over the past week, the Consumer Staples Select Sector Fund (XLP) was up 1.2%, whilst the Consumer Discretionary Select Sector Fund (XLY) gave back some of last week’s gains as it fell 0.1%. Consumer staple stocks like PepsiCo (PEP), Coca Cola (KO) and Walmart (WMT) all had strong weeks in the green, providing some indication that investors are still relying on staple stocks to tide over the cyclicality of the sector due to concerns of the new Covid-19 Lambda variant spreading across South America.
In company related news, the American electric vehicle company Fisker (FSR), and its Chinese counterpart NIO (NIO), both had their share prices fall over the past week, with Fisker falling 8.6% on Thursday, and NIO was trading down 2.3%. Fisker’s stock fall was a retraction from a 30% rise on Tuesday, after Morgan Stanley’s analysts gave a bullish endorsement on the stock, stating that Fisker was an ‘architect’ in the EV space. Chinese EV manufacturer NIO reported earnings on Wednesday, with revenue growth of 127% YoY. However, with both NIO and Fisker’s stocks trading down, it could be a sign that investors are taking into account the headwinds facing the EV industry, notably the semiconductor chip shortage. That could possibly be a short to medium term headwind, as EV volumes have grown exponentially over the last 2 years, as more countries pivot towards a more sustainable future.
Communication Services (Chris Dai)
According to the latest update on inflation and uncertainty ahead due to the global spread of Covid variants, the communications sector maintained a turbulent theme with the Communication Services Select Sector (XLC) finished the week up 0.63%. This week, we look at Airbnb’s long-anticipated Q2 earnings, and how the performance of the online accommodation booking platforms is affected by the current environment.
Airbnb (ABNB), the online marketplace for travel and booking information, has reported higher-than-expected revenue growth for the quarter thanks to increased vaccine availability and relaxed restrictions in the April-June period. As Airbnb’s chief executive predicted the “travel rebound of the century” earlier this year, the second-quarter results surely back the point with total nights and experiences booked on the platform reported at 83.1m, up nearly 200% compared to the same period last year, indicating strong growth in future revenue. Earnings wise, the revenue reached $1.34 bn, a number that nearly quadrupled the same period in 2020 and also 10% higher than Q2 2019, beating the analysts’ expectation of $1.26 bn.
However, the company highlighted a potential decline in bookings of the upcoming quarter due to the spread of Delta variants and inconsistent local regulations. As a result, the company’s shares fell as much as 5% in the immediate after-hours trading and finished at $152.76 on Friday, up 2.2% since Monday and hitting a monthly high. The investors also raise similar concerns over Airbnb’s peers, including Bookings (BKNG) and Expedia (EXPE).
Financial Institutions (Raed Altaf)
This week, the financial institution’s industry continued to show steady growth. The iShares Financials ETF rose by 1.1% to $85 per share, while the Vanguard Financials ETF rose by 2.1% to $95.55 per share.
The steady growth may be subject to concerns over the coming weeks based on the availability of liquidity in the market for financial institutions. The Federal Reserve’s recent announcement about considering to pull back on their asset-based support i.e quantitative easing led to concerns about the ability of banks to meet their capital requirements in the case of bank runs in the near future. Although banks throughout the US and UK have passed multiple stress tests to meet their capital requirements, such fears remain fuelled by the woes of the 2008 crisis. Similarly, the 10 year US Treasury Yield fell down to 1.13%, sparking fears within banks about a potential shift of liquidity from banks to equity due to their more alluring nature.
Industry & Materials (Maksymilian Mucha)
Vanguard Industrials ETF (VIS) and Vanguard Materials ETF (VAW) are up 1.48% and 3.77% this week respectively.
On 10 August 2021, the $1 trillion infrastructure bill passed the US Senate in a 69-30 vote with 19 Republicans voting for. The bill includes approximately $550b in new federal spending in the next 5 years in addition to the $450b that would be spent normally. The amount of spending still falls short of the $2.3t that was initially proposed by Joe Biden’s administration.
New funds are to be spent mainly on ‘hard’ infrastructure such as roads, railways, or airports, nonetheless, the new legislation will also support ‘human’ infrastructure proposed by Democratic Party, which improves the access to broadband or clean drinking water. The plan is said to be insufficiently addressing the climate change issues, however, these are likely to be emphasised in a $3.5t budget bill, which Democrats are aiming to pass without the Republicans support.
Looking at the bigger picture, the purpose of the infrastructure bill is to boost the aggregate demand and thus, increase the economy output and decrease the unemployment caused by the COVID-19 pandemic. However, additional federal spending is likely to boost commodities and construction material prices, which have already surged in 2021 adding additional inflationary pressure. If the FED decides to step in and tighten the monetary policy, this might offset the initial plan of boosting the aggregate output.
For the Industrial & Materials sector, the infrastructure bill is naturally good news. Since 10 August, Steel Dynamics (STLD) is up 12.75% (steel production), Jacobs Engineering (J) is up 7.07% (construction), Caterpillar (CAT) is up 4.88% (construction machinery), and Union Pacific (UNP) is up 3.19% (railroad).
Electric vehicle (EV) sales in China increased 164% YoY in July, according to China Association of Automobile Manufacturers, making electric cars a 10% of total automotive sales. However, in China Tesla (TSLA) sold only 8,621 cars in July, which is 69% less MoM and 26% less YoY. The slowdown of Tesla’s sales comes amid a recent scandal in Chinese media, which a few months ago accused the EV manufacturer of being ‘not sincere’ with a customer claiming a brake malfunction caused an accident. Ever since, Tesla’s market leader position in China is being challenged by local manufacturers and start-ups.
Tesla CEO Elon Musk commented on Twitter that “Tesla makes cars for export in first half of quarter & for local market in second half”, winding down investors’ fears. Moreover, two weeks ago, Tesla managed to achieve record quarterly profits despite the setback in China. Therefore, Tesla’s share price rose 2.04% on Thursday.
Utilities (Jonathan Leng)
The S&P 500 Utilities Index was up 0.81% this week to 345.84 basis points. Vanguard Utilities ETF (VPU) and Fidelity MSCI Utilities ETF (FUTY) both mirrored this upward rising trend, growing 0.89% and 1.28% respectively. The utilities market is gaining more traction these few weeks due to inflationary concerns as well as market uncertainties.
World’s largest offshore wind developer – Orsted reported that their full-year EBITDA is likely to be at the lower end of its forecast, at $2.4 billion – $2.5 billion amidst “extremely poor” weather conditions. Without good weather conditions, wind farms tend to be operating at a lower wind speed, generating less energy, affecting the company’s operational efficiencies, thus affecting revenue. Less blustery conditions were reportedly affecting other renewable companies that focus on offshore wind farming as well – SSE in the UK and RWE in Germany. RWE also booked a €42m loss at its onshore wind and solar division, down from a €299m profit the previous year. After Orsted’s announcement of its less positive outlook of earnings, its share price went down 2%, depicting investors’ pessimistic view of the situation. After the report published by the UN’s director-general, categorizing climate change as a “code-red for humanity”, more firms will try to pivot towards the renewable energy space. Whilst this might seem like a good thing, there are also fundamental challenges such as raw material price inflation, increased auction prices for wind farms and a lack of seabed leases for turbine installations being posed to these renewables companies as competition increases. Some might suggest that even the renewable energy space has already experienced climate-related disruptions, proving the urgency and relevance of climate-related agendas.
Rates (Suraj Suresh)
As the debate on whether the Federal Reserve will ease stimulus continues, last week had a monumental impact on that decision. Data from the Labour Department shows payrolls increased by 943 000 in July, which is well above what economists forecasted, and jobless claims fell to 375 000 signaling the labour market is building up momentum. While it is evident that economic recovery is continuing despite the Delta virus uncertainty, payrolls are still 5.7 million short of the pre-pandemic level.
The benchmark US 10-year Treasury note climbed up by 3.2 bp to 1.35% with the 30-year Treasury yield also rising to 2.0%. On top of the positive labour market news, July’s CPI numbers showed a 5.4% increase from a year earlier, matching June’s exorbitant figures.
Normally, a figure like this would have the Fed pushing its Volcker Button, but this data could be an indication that inflation has reached its peak and reassures investors that the Federal Reserve will not feel obligated to rush tapering their bond-buying program soon.
Inflation concerns hit China, as rising consumer prices caused the 10-year government bond yield to climb to 2.87% on Monday. Fresh inflation concerns could cancel out the bond rally caused by the cut in the reserve requirement ratio (RRR) by 50 bp last month. With the overnight repo rate rising to 2.24%, which is normally a move by central banks to control inflation, there is speculation that the rising inflation might not be transient.
Credit (Xuan Boh)
In the primary corporate debt market, companies across the United States took advantage of low benchmark Treasury yields last week to issue corporate bonds. In the first two days of the week, 48 transactions were closed. 11 issuers marketed bonds, while at least 6 tapped on leverage loan sales. In the American secondary market, the S&P/LSTA Leveraged Loan Index had a moderate increment this week (Fig. 1), compared to its flatter performance last week due to fears around the Delta variant spread. Leveraged loans are debt extended to companies who already have high levels of debt through syndication, diversifying the risk of lending for lenders compared to a bilateral loan. The increase in prices on the Index means investor demand for leveraged loans is outpacing supply, which can be attributed to fears of inflation. Since senior loan ETFs hold securities higher up in the capital structure, they tend to exhibit lower volatility. This, along with fiscal stimuli dulling the usual risks from investing leveraged loans, makes them prime investments now.
In the European primary market, the Inter-American Development Bank (IAB) carried out a £100 million tap issue of its existing 0.5% 9/2026 notes. A tap issue allows borrowers to sell more bonds from past issues at their original face value, maturity, and coupon rate but at the current market price.
The primary market for Asian corporate debt is less rosy. Hong Kong-listed property company Great Eagle Holdings and Indonesian Pengelola Aset completed investor calls last week but are yet to sell investors on their USD bond offerings. They attributed it to difficulties in pricing, as investors seek discounts for the risks associated with Asian debt after issues with Evergrande and Huarong shake the region. On the flip side, companies with historically strong credit ratings have issued bonds to lock in financing costs near record lows before imminent inflation raises the price of funding (Fig. 2). For example, Singapore government-owned investment company Temasek, rated Aaa by Moody’s, issued its longest ever bond spanning 50-years and raised $1.5billion at 2.8% yield. Other examples include Unilever Plc and Apple Inc.
Real Estate Investment Trusts (REIT’s) (Soubhik Sengupta)
Residential properties and office space have been the dominant subject of previous Friday wrap-ups, so this week we are delving into a very niche real estate sector, luxury hotels and casinos. Vici Properties Inc (VICI) is a REIT that specialises in hospitality and entertainment properties, including the world-renowned Caesar’s Palace. Last week, it announced that it would acquire rival MGM Growth Properties for $17 billion. Shares of MGM Growth Properties (MGP.N) increased 12% while that of Vici Properties decreased by 1%.
Steady cash flows, taken in by gaming operators, support these specialised property trusts that are designed to avoid corporate tax and pay big dividends (by law, REITs have to pay out 90% of their taxable income in the form of shareholder dividends in order to continue operating). Despite the pandemic, Las Vegas remained resilient by pivoting to sports betting and online gambling. With its latest acquisition, Vici Properties is set to rake in $2.6 billion in annual rental income across 43 properties, and also acquire an investment grade credit rating in order to join the S&P 500. Looking at the prospects of index inclusion, and the existence of rent escalators in typical casino leases, we can expect shares of Vici Properties to increase as crowds and tourism return to Las Vegas in the coming 12 months.
Oil & Precious Metals (Anouska Jha)
As of Friday 13 August 2021:
The S&P GSCI is down 0.1% at $524.87
The Dow Jones Commodities Index is up 0.4% at $893.96
WTI Crude is down 0.7% at $68.40, and Brent Crude is down 0.9% at $70.55 (*coming after the IEA warning of a slowdown in global demand recovery)
With the new US Administration juggling infrastructure spending, tapering debates, inflation, and other fervent political challenges, another task has been added to the list; the sharp rise in oil prices. However, there may be a different narrative to this story that interests investors of commodities and energy stocks. Petrol prices in the region have increased by around 50% in the last year, currently standing at $3.19 per gallon alongside motor fuel demand. The White House has therefore urged OPEC to boost production to stabilize oil prices. This is distinct from the Trump Administration’s strategy previously to urge OPEC to increase prices, to create a competitive advantage for US Shale companies. The repercussions of this can be seen for example in the Texas Eastern Transmission (a pipeline company supplying fuel and electric generation to Texas and the Gulf Coast) lifting its basis price by 46 cents.
Insightful market analysts may view this as more about optics than market trends. Due to the US energy. Agenda, Biden must pass the buck of accountability to the Middle East, instead of urging US shale companies to boost production to push down price. The statement is therefore more a strategic attempt to reposition political and economic aims, making it unlikely that OPEC will increase production beyond its agreed 400,000 barrels per day. Fuel prices in the US are therefore likely to remain high in the short term. In other news, gold prices dropped to a 4-month low on Monday to $1677.90 per ounce. Despite its recovery on Thursday to $1740, analysts remain bearish due to a strong US jobs report and the subsequent purchase of the dollar by the Asian market. Yet, a long-term outlook, with the unraveling of further Delta variant news and central bank stimulus (leading to increased inflation), may lead to higher gold prices that maintain its reputation as a ‘safe-haven asset’.
G10 & EMFX (Noah Martle)
Uncertain Future for the Pound
The UK’s economic outlook is increasingly positive. Reports show that the UK economy expanded 1% in June compared to the expected rate of 0.8% due to the UK’s economic recovery maintaining its momentum into the end of Q2 (Gregory, 2021). Additionally, Ruth Gregory (Senior UK economist at Capital Economics) has said that “GDP will return to its February pre-pandemic size by October and that the economy may yet surprise most forecasters by emerging from the pandemic without much scaring”.
Despite the UK’s improved economic outlook, the Pound depreciated against the Dollar 0.912% from 1.3930 to 1.3803 over the past week. Various macroeconomic factors have driven this depreciation. Firstly, with the Covid-19 Delta variant still rampant, global investor sentiment has been deteriorating. Moreover, according to a researcher from HSBC, the Euro is viewed as a ‘risk off’ and ‘pro cyclical’ currency. Hence the Euro has appreciated against the Pound in these uncertain times. Secondly, US PPI inflation rose 1% in July compared to the expected 0.6%, increasing the number of hawkish comments from Fed officials. These factors combined have triggered the depreciation of the Pound against major currencies over the past week.
Yesterday, Canberra, Australia’s capital city, was plunged into lockdown. Hence on Thursday, the Australian Dollar depreciated 0.542% against the US Dollar from 0.7375 to 0.7335.
Jacinda Ardern (New Zealand’s Prime Minister) has announced that New Zealand will pursue their Covid-19 elimination strategy indefinitely, resulting in a depreciation of the New Zealand Dollar against the US Dollar from 0.7501 to 0.7005 over the past week.