Friday Wrap Up (August, 20)

(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 suffered their first weekly loss in weeks due to continued fears over coronavirus resurgence and the latest FOMC minutes strongly signalling that the Fed will indeed start tapering its bond purchasing soon than expected. On Friday, however, investors ‘bought the dip’ – scooping up shares in technology and the week’s worst performing sector including energy and financials, which helped indices broadly recover. The S&P500 index ended +0.8% higher, while the NASDAQ index added +1.2%, but the rally wasn’t enough to cover overall weekly losses. Markets are awaiting the Jackson Hole symposium for clues on the Fed’s timeline for tapering, taking place virtually next Thursday and Friday. European indices ended lower amid worries about the spread of the delta, the Taliban takeover in Afghanistan, and economic slowdown in China. The STOXX Europe 600 Index ended the week 1.48% lower.

COVID-19 Update:  The FDA has approved of Pfizer’s COVID-19 shot, making it the first vaccine to receive ‘full’ approval in the U.S. Concurrently, the UK announced their order of 35 million more doses of Pfizer vaccine as the country prepares for booster shots.

Equities

Information Technology (Satya Maulana)

This week major tech players have taken a massive blow from regulators. Two weeks ago, we discussed the impact of Beijing increasing its regulation over the Chinese tech industry across all sub-sectors (ride hailing, Fin-tech, and Edu-tech), which caused the SEC to halt all Chinese IPOs until further notice. This week the tech sell-off continues as Beijing approved a new strict data privacy law that sent the Hang Seng Index (the city’s main equities barometer) into a bear market after it fell more than 20% since the February peak. These draconian sanctions have wiped more than $1 trillion of market value in Chinese shares listed globally. The shares of China’s tech beacon, Alibaba, and Tencent were rapidly decreasing. This week Alibaba (HKSE:9988; NYSE: BABA) fell -13.8% to a record low in the HKSE and -14.62% in the NYSE. Tencent has even fallen by -40.38% over the last six months. 

Last year the US FTC and 46 states brought an antitrust lawsuit against Facebook over monopolistic practices and privacy violations related to the Cambridge Analytica scandal. However, US judges dismissed the lawsuits quoting that it was “legally insufficient.” This week FTC announced round two as they refiled for a suit for the same case with a different angle. Facebook’s shares only fell by -0.97% this week, and it is even up +38.04% over the last six months, showing perhaps how futile the FTC is towards truly damaging US tech companies. 

The Big Stories

Amazon (-2.53%) plans to expand brick-and-mortar retail as they prepare to open large physical stores in the US that will operate as department stores (RT). Databricks, a cloud data analysis provider, had its valuations jumped to $38B after Morgan Stanley announced that it would inject at least $1.5B (BBG). SoftBank is offering to sell its $2.2B stakes in DoorDash (-2.20%) brokered by Goldman Sachs (BBG). Watch-app Chrono24 secures a $1.3B valuation from LVMH-led funding round (Forbes).

Healthcare (Jasmine Khoo)

Over the past week, Health Care Select Sector SPDR Fund (XLV) outperformed the S&P 500 (+3.35%), reflecting the market’s defensive stance as the Delta variant continues to wreak havoc around the world. The fund has gained 18.64% year-to-date and reached a 52-week high of $136.81 a share on Tuesday 17 August. However, the sector was not immune to the broader market decline on Wednesday, as the July Fed meeting minutes indicated tapering  plans by the end of the year. 

In stark contrast, Virpax Pharmaceuticals Inc (NASDAQ: VRPX) surged 445% on Tuesday and Wednesday after the firm announced that it has obtained a pre-investigational new drug response from the US Food and Drug Administration for its anti-viral barrier product called MMS019. Market optimism seems to be warranted, as the high-density molecular masking spray has been found to inhibit viral replication of SARS-CoV-2 and influenza at higher rates than the natural immune response. However, MMS019 is still in its preclinical stages and Virpax Pharmaceuticals has no record of successful drug launches. As part of the US$1.9 trillion stimulus bill launched in March 2021, US$500 million has been provided to the FDA for quick evaluations of Covid-19-related therapeutics, and subsequent approval processes could be expedited as a result.

Consumer Staples and Consumer Discretionary (Jeff Chen)

Over the past week, fears of US tapering and rising interest rates led to falling US stocks, especially the Consumer Discretionary Select Sector Fund (XLY), which fell 3.5%. Investors retreated to defensive stocks, benefitting the Consumer Staples Select Sector Fund (XLP) as it rose 1.0%. The US Federal Reserve’s July policy meeting indicated that most policyholders were prepared to begin easing stimulus programs on the back of higher vaccination rates and the gradual re-opening of the economy, leading to investors seeking refuge in safer assets and ETFs. 

In terms of recent company news, retailer Bath & Body Works’ (BBWI) shares rose 4.7% this past week, boosted by a significant improvement to their top line revenue, which was 43% higher YoY. It is important to take note that as with other retailers, BBWI has based revenues off of a lower base last year, as the Covid 19 pandemic forced brick-and-mortar retail locations to close, leading to lower sales. BBWI’s sales came mainly from hand sanitizers and body lotions, which has seen heightened demand during the pandemic. However, given that US retail sales numbers reflected a 1.1% decrease in July, BBWI and other retailers could see short term earnings fall as consumers take into account rising inflation and the spread of the Delta variant. Still, BBWI could be well positioned to perform in the short to medium term due to strong domestic supply chains and modest pricing power. 

Communication Services (Chris Dai)

This week has been turbulent for the communications sector with the iShares Core S&P 500 ETF (IVV) mirroring the trend of the S&P 500 Index, slumping since Monday, and regaining its loss in the second half of the week. Both indices finished slightly lower than the beginning of the week, with the IVV finished at $445.31, 0.8% lower since Monday. We look at T-Mobile’s recent data breach scandal, as well as ViacomCBS and Comcast’s next move in streaming service.

ViacomCBS (VIAC) shares jumped on Wednesday following Wells Fargo Securities’ upgrade on the stock from “equal weight” to “overweight”. Announced on Wednesday, the company is said to join forces with Comcast (CMCSA) to launch a new streaming service in Europe called SkyShowtime. The service includes programming from both companies’ channels, including big names such as Paramount+ and Peacock. The partnership indicates a huge step forward for both companies in terms of pushing industry consolidation, following the announcement of the merger of their peers, Discover Inc. and AT&T Inc.’s WarnerMedia earlier this year. As a result, VIAC shares rose as much as 5.3% in the immediate after-hours trading and finished at $39.71 on Friday, up 3.1% since Monday.

On the other hand, T-Mobile (TMUS) acknowledged a recent data breach that resulted in about 7.8 million customers’ personal information being exposed, including access to social security numbers and driver’s license information. Although the company claimed that “no sensitive information is compromised” such as any financial information or password, the stock tumbled to a three-month low in premarket action, down 2.9% since last Friday.

Financial Institutions (Raed Altaf)

This week, the financial institute sector saw a dip in value. The iShares Financial ETF and Vanguard Financial ETF both saw a 2% decline in their values to 83.27 and 92.87 respectively. This dip can be explained by the Federal Reserves near agreement to ending their asset buyback programme by the mid of 2022, signalling the end of the liquidity most banks enjoyed during the pandemic as a contingency measure to ensure lending practices remained headstrong. As a result, the ETF market observed an inflow of cash into defensive ETFs related to healthcare and tech, with the resulting outflow coming from the financial ETF sector. 

With this expectation of future volatility in equity and bond prices, Goldman Sachs made the move to expanding its asset and wealth management practices by acquiring NN Investment Partners’ investment management division for €1.6bn this week. NN joins Goldman Sachs with assets under management worth $355bn, signalling Goldman’s intent of strengthening its position in Europe. 

Industry & Materials (Maksymilian Mucha)

Vanguard Industrials ETF (VIS) and Vanguard Materials ETF (VAW) are down 2.01% and 2.91% this week respectively. 

On Wednesday of 18 August, UK Business Secretary Kwasi Kwarteng opened a formal investigation into the potential acquisition of British defence group  Ultra (ULE) by its rival Cobham, which is controlled by the US private equity firm Advent International. On Monday, the Ultra’s Board agreed for the deal under which the shareholders would receive £35 per share, as well as an interim dividend of 16.2p, valuing the company at £2.57b.

The deal sparked public opinion concerns and calls for government’s intervention for two reasons. First of all, Ultra is a producer of water sensors, torpedo systems and other warfare technology, making it a key enterprise in terms of national security. Secondly, despite the fact Cobham announced it is planning to protect employment and adhere to the rules set out by the government, after the group was acquired by Advent International the year before, it sold all of its UK manufacturing sites. Ultra’s stock closed 1.52% down on Thursday.

The Sherwin-Williams Company (SHW), the US-based paint and coating manufacturer, announced on Friday of 20 August that it has signed an agreement to acquire the coating business of German Sika AG (SIKA). The deal is a part of Sherwin-Williams’ strategy to acquire complementary business and expand into Europe. Sika’s coating business generated $82m of revenue in 2020, however, the value of the acquisition has not been disclosed yet. On Friday, the share price of Sherwin-Williams was up 1.38%, while Sika’s increased 0.98%.

Fixed Income

Rates (Suraj Suresh)

The Vanguard Intermediate-Term Treasury Index Fund ETF Shares (VGIT) increased 0.2% and the Vanguard Long-Term Treasury Index Fund ETF Shares (VGLT) advanced 1.3%. US Treasuries fell with the benchmark 10-year note declining to 1.24% after reaching a high of 1.37% earlier in the week. Yields move inversely to prices. 

The bond rally can be attributed to the damning result on the consumer sentiment index released by the University of Michigan, which saw a 13% decrease from the July reading to 70.2. The drop in consumer confidence could be due to the Delta variant and the lower growth outlook on the economy. 

This coupled with the release of the July 27-28 FOMC gathering on Wednesday that shows Fed officials feel that they will be able to achieve employment benchmarks by the end of the year led to a fall in bond yields. This is an indication that the Fed will reduce their emergency monthly purchase of $120 billion on Treasury notes and mortgages backed securities later in the year however, it could take a while before we see a hike in the overnight interest rate. 

Investors will now be anticipating the upcoming three-day Jackson Hole Economic Symposium to gauge the Fed’s position on tapering.

Credit (Xuan Boh)

Last week, we saw a record pace of debt issuances in American primary credit markets. This week, it was reported by S&P Global Ratings that sales of speculative-grade debt have already reached $650 billion this year, suggesting possible record levels of borrowing by the end of the year. There is a sense of concern towards how easily less creditworthy companies are gaining access to financing on loose lending terms.

In Europe, the Main and Europe Crossover (two indices that are part of the iTraxx family of credit default swap index products), widened on Wednesday due to hawkish plans revealed in July U.S Federal Reserve minutes. They indicated a willingness to start reducing asset purchases before the end of the year. The Main widened by 2 bp to 48 bp and the Europe Crossover widened by 5bp to 240bp. Up until now, interventionist moves like the European Central Bank’s (ECB) corporate sector purchase programme (CSPP) has steadied the Main from volatility. Looking forward, the end of the €1.85 trillion Pandemic Emergency Purchase Programme in March 2022 might widen the indices more.In China, Huarong Asset Management is getting bailed out by the government. Huarong is one of the four biggest state-backed asset managers in China, created by the Ministry of Finance in 1999 to purchase and dispose of non-performing loans after the 1997 Asian financial crisis. This bailout reflects the systemic importance of this SOE. In contrast, China Evergrande Group continues to face debt woes, facing regulator rebuke and even reportedly seeking to sell a 65% stake of its electric vehicle unit to Xiaomi

Real Estate

Real Estate Investment Trusts (REIT’s) (Soubhik Sengupta)

While coronavirus cases have surged and fallen back over the past 18 months, rent arrears owed by the retail, hospitality and leisure sectors have grown thanks to the government-mandated restrictions imposed to curb the spread of the pandemic. According to Remit Consulting, the total unpaid rent over the past 18 months, stands at £6.4 billion.

Over the past week, Hammerson plc (HMSO), a REIT that generates revenue mainly from leasing its shopping centre and retail outlet properties to retail tenants, saw its share price fall by 10.7%. Despite maintaining an average occupancy rate of 92.5% in its properties in the UK, analysts at Liberum remain bearish on the property firm and retained their ‘sell’ rating.

A government ban on evictions from commercial properties has protected tenants since March 2020 and will remain in place until at least March 2022. Adding to this, retailers are also battling the huge shift to online shopping, which has seen booming consumer traffic at the expense of physical retailers. We can expect shares of retail REITs, like Hammerson plc, to continue decreasing as retail tenants remain protected by the government and face an uphill battle against e-commerce.

Commodities

Oil & Precious Metals (Anouska Jha)

A declining trend in the commodities market as a whole this  week.

Commodities markets have sustained their downward trajectory which has persisted throughout the week.  

The Dow Jones Commodities Index has fallen 3.6% in the last 5 days, currently at $862.94.

The S&P GSCI has fallen 5% in the last 5 days, currently at $500.86.

WTI Crude Front Month prices have fallen from $68.20 on Monday 16 August to $63.41 on Friday 20 August.

There are numerous factors to consider, ranging from the pressure of the Delta variant and subsequent policy surrounding supply and trade, and weakening demand from China as a consumer of raw materials. Beijing’s decarbonization initiative has also led to iron ore prices falling 26% to $160 per ton in the last month. China’s weak metal imports come due to strict enforcement of production curbs, which has led to this fall in steel and metals prices, suggesting an intensifying weaker demand in the coming months. The energy conscience in the market implies that the downward trend, particularly in oil and gas prices, is unlikely to pick up a sharp pace in the long term. 

Investors may wish to remain aware of the relation between commodities and forex markets; with the rally of the US Dollar and elevated bond yields, any further breakout in the currency could impart further downward pressure not only on crude prices, but also gold, which is down 14% since August 2020. Geopolitical factors such as the report of increased uranium enrichment in Iran, further suggests that both a nuclear deal and lifting of oil sanctions may be delayed in the short term, further weighing on oil prices. This week has certainly shown investors that the harmony between all these factors is difficult to keep in balance; progress in the renewables agenda is met with the uncertainty of Asian/ Middle Eastern diplomacy, and world leaders must combine their policies for economic growth, inflation, and climate change in a pragmatic way.

In other news, the BHP Group (BHP.AX) and Australian oil and gas company Woodside Petroleum (WPL.AX), had announced a merger with BHP’s petroleum business. Combined with BHP’s 6% drop on Wednesday after its decision to end its UK dual listing, and Woodside’s 4% drop due to concerns about expansion, has raised concerns about acquiring gas assets with decommissioning costs. However, a longer-term outlook suggests a possible higher valuation multiple due to the shift away from gas, and both companies’ international diversification. 

Foreign Exchange

G10 & EMFX (Noah Martle)

O Canada!

Statistics released today (20/08/21) indicate that Canadian retail sales have risen 4.2% in Q2 against a 4.4% expectation and that core retail sales have increased 4.7% against a 4.5% expectation. These rising statistics can be attributed to Canada reopening its non-essential businesses. However, despite this supposedly positive economic news, the Canadian Dollar has been the ‘worst performing major currency’ for two days in a row. It has depreciated 1.13% against the US Dollar from 0.7879 to 0.7790 over the past week.

Refinitiv, 2021

Minutes from the Fed’s most recent monthly meeting showed that an increasing number of committee members were in favour of “tapering” its quantitative easing program. Thus, it is a possibility that alongside a tapering of the Fed’s QE program, there will be a hike in the Federal Reserve’s bank rate. Hence, these minutes have triggered hot money outflows from Canada and into the US. Additionally, in times of global economic uncertainty, investors flock to the US Dollar. Therefore, the new research that indicated that fully vaccinated individuals can still pass on the Delta variant has hurt the Canadian Dollar’s progress against the US Dollar.

Other News

AUS/USD

Australia is the world’s top iron ore exporter. Therefore, the news that shipping costs of iron ore have risen to a new 10-year high, resulted in the Australian Dollar depreciating 0.14% throughout the week.

NZD/USD
New Zealand plunged into a three-day nationwide lockdown after a New Zealand national tested positive for Covid-19. As a result, the NZD depreciated 0.22% against the USD over the past week.

Leave a Reply

Your email address will not be published. Required fields are marked *