Friday Wrap-Up (August, 21) #5

Stocks closed out the week with muted gains.

(Arvind Rajaraman – Head of Investments at 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: Stocks are on track to close out the week with muted gains. Futures are wavering between small gains and losses. Trading volumes have been thin, and investors remain on watch for progress on new stimulus measures. The gap between rising stocks on Wall Street and the economic fallout on Main Street widens…

Politics: The Democrats rolled out their heavy hitters and Joe Biden accepts the nomination during this week’s virtual DNC. Barack Obama, Hillary Clinton, and VP pick Kamala Harris all made the case for Joe Biden while bashing President Trump. Investors know Biden’s economic plan has some tough-on-business policies, including returning the corporate tax rate to 28%, upping capital gains taxes, and eliminating a popular real estate tax break.

Economy: On Wednesday, the Fed released the most closely read minutes of any meeting in the world. The central bank left it pretty vague per usual, confirming that the coronavirus pandemic will “weigh heavily” on the economy in the short term, and posed “considerable risks” in the medium term.

COVID-19 update:  Cases in the U.S. continue to decline following the jump in June and July. Some European countries, however, are reporting alarming increases in infections. And India could be getting close to herd immunity from the coronavirus, a new study suggests.

A crazy stat: it took Apple 42 years to reach a $1 trillion valuation, but only two years after that to break $2 trillion.

Markets in a Minute:

Equities

Information Technology (Maria Lomaeva)

Apple (AAPL +7.0%) and Google (GOOGL + 4.9%) were once again accused of engaging in anti-competitive practices last week as Fortnight’s creator Epic Games filed a lawsuit against them. The reason for the dispute is the hefty 30% fee imposed on third-party developers in Apple’s App Store and Google’s Play store. This action was supported by Facebook (FB +2.4%), Match Group (MTCH -3.7%) and Spotify (SPOT +8.46%), among others. The news, however, did not affect investors’ sentiment, and Apple reached a market value of $2tn this week – the largest in the world for a publicly listed company.   

Chinese e-commerce giants reported their Q2 earnings this week. Alibaba Group (BABA +4.5%) beat predictions and delivered a revenue of $21.76bn in Q2, 34% more YoY. However, its competition is fierce: Pinduoduo (PDD +0.7%) increased its revenue by 67% to $1.73bn YoY and its number of active buyers grew by 41% YoY to 683.2m; JD.com (JD +21.2%) generated $28.5bn in revenue, 33.8% YoY, with annual active customer accounts growing by 30% to 417.4m. 

On Wednesday, American chipmaker, NVIDIA (NVDA +9.9%), reported a record revenue of $3.87bn in Q2’20, up 50% YoY. Despite the pandemic-related disruptions, the company sees plenty of growth opportunities within gaming, AI, cloud computing and autonomous machines. The rumours about NVIDIA’s 5nm chip – the next generation from the current 7nm chip – which is reportedly pre-booked at TSMC (TSM +5.70%) for 2021, would give the company an upper hand on its rival, AMD (AMD +4.8%). In addition, the reported talks on NVIDIA’s acquisition of the UK chip designer Arm with customers such as Apple, Qualcomm (QCOM -1.2%) and Huawei, could give NVIDIA a benefit over Intel (INTC +0.4%) within the data centre sector as well as other chipmakers in terms of licensing. 

To look out for: Airbnb announced its IPO planned later this year which has the potential of being one of the largest this year.

Healthcare (Christine Chan)

Like the past couple of weeks, healthcare equities have continued to trade at quite steady levels. This is reflected by the very small movements in the XLV exchange-traded fund, which despite reaching a new peak of $107.83 on Monday 17th August, has since dropped back down to $106.68 at market close on Friday 21st August.

This week’s most notable moves include Johnson & Johnson’s (JNJ) acquisition of biotechnology company Momenta Pharmaceuticals (MNTA) for an all-cash transaction of $6.5 billion, equating to $52.50 for each share of Momenta. This deal will further enhance Johnson & Johnson’s portfolio of novel treatments for autoimmune diseases, as they gain full global rights to nipocalimab, a monoclonal antibody that has huge potential in helping those with autoimmune conditions such as myasthenia gravis. Over the week, Johnson & Johnson’s share price has enjoyed a healthy rise of 3% from $148.95 to $153.41, demonstrating investors’ support for their all-cash acquisition.

In addition to the above, another notable acquisition announcement this week is Sanofi’s (SNY) plan to buy biotechnology company Principia Biopharma (PRNB) for $3.4 billion, representing a price of $100 per Principia share and at a 10% premium of their closing price last Friday. Upon the announcement on Monday 17th August, Sanofi’s share price jumped 1.8% from $51.27 to $52.17 overnight. I think this is an interesting move from Sanofi’s CEO Paul Hudson; being the company’s second and largest acquisition since his leadership commenced in September 2019, this deal reveals their strategy of delving into the rare diseases market in order to drive new growth. The acquisition entitles Sanofi to Principia’s drugs for multiple sclerosis and other central nervous system disorders, and perhaps acts as a way for them to pivot away from their traditional mass-market therapies. Combined with the potential success of their COVID-19 vaccine partnership with GSK, Sanofi is certainly a company to watch out for in the healthcare space.

Consumer Staples and Consumer Discretionary (Jun Wei)

In the consumer space, we see relatively stable stock prices for the industry for this week. Key earnings reported this week include Walmart, Target and Home Depot, all of which reported quarterly earnings that exceeded expectations. Also, the UK sees its newest unicorn (a startup valued at over US$1 billion) in Gymshark. 

Walmart (NYSE: WMT) reported a year-on-year increase in sales of 9.3% for its U.S. Division, and a whopping 97% increase in e-commerce sales for Q2. With a reported $1.56 EPS this quarter, they comfortably beat consensus estimates of $1.25 EPS. Again, Walmart has seen itself benefit from increased sales due to lockdowns and the provision of stimulus checks by the U.S. government. However, the company has asked investors to temper expectations for the next quarter as stimulus checks are set to be tapered off. 

Target (NYSE: TGT) reported its largest increase in quarterly sales ever, with a year-on-year increase of 24%. Profits were up by an astounding 80.3%, as Target attributed its strong performance to its success in online retail. Shares were up by more than 10% in Wednesday trading, as Target doubled analyst expectations for EPS ($3.38 vs. $1.62). Target’s CEO Brian Cornell is managing expectations, as the company sees weaker back-to-school sales as many students continue to study from home and weaker holiday sales due to the uncertainty surrounding the Covid-19 pandemic.

The strong results for Target and Walmart highlight the widening gap between the strongest retailers and the weakest retailers in the market. Retailers that had a strong presence online did well with the impact of Covid-19, while overleveraged retailers with weaker online operations struggled badly, with companies such as JCPenney filing for bankruptcy. In other news, Gymshark, a popular clothing brand among young gym-goers, raised £200 million from U.S. private equity firm General Atlantic in its first-ever fund raising. It is now valued at over US$1 billion, making it a unicorn after just 9 years of operations. Gymshark, which was started by 28-year-old Ben Francis in his parents’ garage, has seen strong growth throughout its 9-year history and has done well due to its focus on online marketing. Gymshark focuses its marketing efforts on social media, frequently sponsoring fitness YouTubers and Instagram personalities better known as ‘influencers’. Also, Gymshark has proved more agile and nimble than most retailers in this pandemic due to its purely online retailing operations, leaving it relatively unaffected by lockdowns and store closures.

Communication Services (Katarina Lau)

n depth: Huawei's chip dreams in crosshairs of latest US assault ...

U.S – China relations seem to be going only one way – down, after the US announced new sanctions on Huawei. Dubbed by many as a “death sentence” to the Chinese company, sanctions require third-party companies to obtain a licence before selling Huawei any microchip made with US hardware or software, regardless of whether Huawei is the end customer or an intermediary in the supply chain. As a result, several of Asia’s listed chipmakers lost billions in market value, especially those who currently supply technology to Huawei, including Taiwan’s MediaTek (2454.TW) which fell 9.9% and Hong Kong-listed hardware companies Sunny Optical (2382.HK) plunging 11.5% and AAC Technologies (2018.HK) dropping 5.3%. This U.S. move is targeted to cut off Huawei’s supply of generic chips and hinder its progress in developing 5G mobile networks. When Huawei’s equipment inventories run out early 2021, it’s hard to say whether it will retain its head-start in the 5G race or succumb to U.S blows.

Staying on the offensive, the Trump administration is also looking to ban notable Chinese communication apps like TikTok and WeChat from American mobile app marketplaces. This is all under new American ‘Clean Cloud’ initiative, which aims to protect American data and support domestic telecom companies. Meanwhile, Verizon (VZ) rose 0.8% this week after agreeing with The Walt Disney Company to expand its streaming content through its ‘Mix & Match Unlimited plans’. This bundled offering offers more entertainment value to customers and its price remains unchanged.  

Financial Institutions (Jamie Biswas)

This week saw an end to the momentum gained over the last few weeks, with the Vanguard Financials ETF (VFH) dropping 3.58%. Most of the fall within the sector can be attributed to insurance firms with banks performing slightly better in comparison. Financial institutions underperformed relative to the overall market for the second week in a row.

The world’s most famous investor Warren Buffett and his company Berkshire Hathaway released information this week on how their holdings changed during the second quarter of 2020. The company announced this week that it had sold off billions of dollars of bank stocks over the last three months, instead buying up gold. Berkshire Hathaway sold all its stake in Goldman Sachs, representing 0.6% of the investment bank.  They also sold off 85.8 million shares of Wells Fargo stock, dropping their ownership down to 5.8% from 7.8%. Berkshire Hathaway also cut its stake in JP Morgan, VISA and Mastercard. Buffet is slowly selling his shares within financial institutions as the sector has been hit particularly hard by the pandemic, with banks having to set aside massive provisions for loan losses, resulting in reduced profitability. 

News broke this week that Citigroup is suing Brigade Capital after the bank mistakenly wired $176 million to the hedge fund. Brigade Capital were meant to receive just $1.5 million in accrued interest but received over 100 times too much. Brigade Capital has stated it won’t return the money and so Citigroup have open legal proceedings in response. The erroneous transfer to Brigade Capital is just part of the $900 million that has been misallocated to creditors of cosmetics business Revlon. Brigade Capital is a creditor of Revlon, who lent money to the company back in 2016 to fund the acquisition of Elizabeth Arden. However, Revlon has performed very poorly over the last few months and is undergoing a debt restructuring as a result. Brigade Capital was in the process of suing Revlon over the restructuring when the hedge fund received the payment, and is using this as a basis to keep the funds.

Industrials (Ed Collins)

It has been a down weak for the Industrials sector this week. The Vanguard Industrial Index (VIS) has fallen by 1.93% whilst the S&P 500 Industrials Sector (SPLRCI) is also down by about 2%, since the start of the trading week (as of market close on Thursday).

A.P. Moller-Maersk A/S (MAERSKB), the Danish transportation and logistics company, released its Q2 earnings on Wednesday. Maersk reported a fall in revenues to $9bn from $9.6bn in the same period last year, however, EBITDA increased by 25% to $1.7bn in Q2 compared to $1.4bn a year earlier, primarily driven by an improvement in its core ocean sector, Maersk Line.

This was also the first time that Maersk provided earnings guidance since they suspended the practice in March, due to uncertainties caused by the pandemic. The guidance paints a very bright future for the firm, with Soren Skou, Maersk’s CEO, saying he now expects container volumes to be back at 2019 levels by the beginning of next year. Maersk managed to cut operating costs by 16% in the second quarter, which, together with a 4.5% rise in freight rates, more than offset a 16% drop in volumes. Maersk projects that EBITDA in 2020 will be between $6bn and $7bn, despite previously expecting profit by that measure to reach around $5.5bn. On average, analysts had predicted $5.83bn.

The share price soared as much as 7.4% when trading started in Copenhagen on Wednesday. On the trading week, the share price is up 2.07%.

In my opinion, with container volumes now rebounding, Maersk is likely to continue recovering in Q3. Expect to see earnings upgrades in the next earnings report, which will further support the stock price. However, this is all dependent on the pandemic: a second wave of lockdowns would have a devastating impact on demand growth.

Utilities (Katarina Lau)

Energy stocks traded lower as markets closed this Friday with the Energy Select Sector SPDR (XLE) slipping 0.39%.

Renewable chemicals and biofuels company Gevo (GEVO) dropped 23.9% and was down 20% in premarket leading volume on Friday. This was a quick turn of events since the stock had just rallied 232.7% on volume of 991.1 million shares a day earlier on Thursday, owing to Gevo announcing a purchase and sale agreement of renewable hydrocarbons with Trafigura Group Pte Ltd., which adds over $1.5 billion of revenues in long-term contracts to the company’s balance sheet. Essentially what caused today’s loss is Gevo biting of more than they could chew, exploiting the price momentum by announcing a share offering of 38.46 million shares at $1.30 a share – 28.6% below Thursday’s closing price of $1.82.

NRG Energy (NRG) rose more than 2.6% after its proposed acquisition of Centrica PLC-owned Direct Energy was given the green light by Centrica’s shareholders. Already one of the largest electric and gas suppliers in the U.S., the company shows no signs of slowing down. Earlier in March, the company had announced its all-cash purchase of the Centrica’s North American subsidiary for $3.265 billion. The deal builds on both companies’ customer-centric values and will add 3 million retail customers across the U.S and Canada to NRG Energy’s customer base. Other synergies include reducing exposure to price volatility in wholesale energy markets, expanding regional platform and cost savings of about $300 million.

Materials (Ed Collins)

The Materials sector has had a bit of a down week. The Vanguard Materials Index (VAW) is down 1.8% whilst the S&P 500 Materials Sector exchange (SPLRCM) is down by about 1.4%. Following the military coup in Mali, shares in gold miners with operations in the country fell. The coup, along with sanctions that could be imposed against Mali, could disrupt these miners’ operations.

Such companies who suffered include the London-listed Resolute Mining (RSG), whose shares fell by 14% on Wednesday, as well as Hummingbird Resources (HUM), another London-listed company, whose shares fell by 12%.

Last Friday, Warren Buffett’s Berkshire Hathaway Inc. added Barrick Gold Corporation (GOLD) to its portfolio. Berkshire reported on Friday a purchase of 20.9million shares as of the end of Q2, sending Barrick to its highest closing price in more than seven years. On Friday, following the news, shares in Barrick, the world’s second-largest gold miner, jumped by 12%. The effect of Buffett’s bet on gold spread beyond just Barrick’s share price, however: Newmont Corp. (NGT), the world’s largest producer, saw its share price rise on Friday, along with Kinross Gold Corp. (KGC). Despite seeing large price rises on Friday and at the start of the trading week, all miners mentioned here have since had negative trading weeks.

Premier Oil PLC (PMO) released its earnings for H1 on Thursday. The company swung to a loss after tax of $672m, compared to a profit of $121m in 2019. The North Sea-focused firm is also seeking to raise $530m from shareholders as part of a $2.9bn refinancing that the North Sea group hopes will end concerns over its finances. $300m of the funds will be used to reduce Premier’s $2.4bn debt pile. The remainder will be used to fund the proposed acquisition of some of BP’s North Sea assets. Despite this investment in its growth projects, Premier’s share price dropped 24% shortly after markets opened on Thursday, before recovering slightly to a drop of 18% on the day.

Fixed Income

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Rates (Harrison Knowles)

After last weeks Treasury market selloff and climb in real yields, speculators have slashed their net long positions in benchmark Treasury futures by 94% to near neutral levels – according to the latest Commodity Futures Trading Commission data. The move came in a week that saw the 10-year yield climb 15 basis points amid a surge in sovereign debt supply and better than expected economic data. For now, neutral is a good position to have in the global risk-free asset at the moment. While there are a number of reasons for yields to push higher: heavy issuance, rising inflation expectations, optimism about a vaccine – the sword wielded by the Federal Reserve hangs ready to crash down on any rapid spike. Hence a reluctance from many to bet big either way. 

Mid-week, Democrats signalled they might be willing to meet Republicans halfway on a stimulus deal to avert the approaching fiscal cliff, whilst Federal Reserve officials have warned fresh fiscal aid would be critical for the U.S. recovery. A view that was re-iterated the following day when the Fed released minutes of its last meeting.

This seems a good time to check in on the Fed’s balance sheet, since one person’s moral hazard is another’s, well, morale. Also, it came up in the most recent central bank minutes, which gave markets a bit of a fright.

Market watchers don’t tend to get too excited by the minutes these days — by the time they’re out, weeks after the meeting, events tend to have moved on. But this release nudged Treasury yields higher on what was already a rough day, following a weak auction of long-dated government bonds.

The move seems to have been prompted by the lack of a more strongly dovish message — for instance the perception that officials again sounded unenthusiastic about capping Treasury yields. Since they haven’t entirely dismissed the idea — which would involve setting caps at specific points on the curve — and never clearly embraced it, the reaction seemed a bit touchy.

But the fright might have come from the objections raised, which included “the possibility of an excessively rapid expansion of the balance sheet.”

It’s worth noting here that markets may have a somewhat unhealthily co-dependent relationship with the Fed’s balance sheet. In May 2013, the hint of slowing asset purchases after the global financial crisis caused what became known as the “taper tantrum.” There was another ruckus in 2018 when the Fed delivered what was to be its last rate hike in the midst of a portfolio unwind.

Which brings us to now. The Fed’s balance-sheet growth has stalled out around $7 trillion – compared with a peak of $4.5 trillion in 2014 – and even shrunk over the past couple of months. The latest figures show a bump thanks to Treasury and mortgage-backed securities purchases. The broader slide comes from lower usage of dollar swap lines by foreign central banks and repurchase operations that lend short-term funds in exchange for government securities. Its holdings under the other emergency facilities, including the primary credit facilities, have also dwindled.

Credit (Alexander Kaiser)

While there were no sudden or unexpected movements in the corporate bond market this week, the developments from the past month continue and become more ominous as time passes. With investors continuing to be craving yields more akin to pre-pandemic times, the demand for junk bonds is growing, resulting in companies rated from BB to CCC gaining access to cheaper loans. Ball Corporation, a US-based can manufacturer, has made history by securing the cheapest loan for a junk-rated business with a coupon rate of 2.9% on a $1.3bn bond. For comparison, it is common for CCC rated bonds to have yields above 10%, for example, Sea World managed to obtain a $500m bond just last month. For reference, companies with these types of ratings are expected to be unable to pay their debts without significantly favourable conditions, showing how risky these investments truly are.

While the coupon rates of junk-rated bonds have stayed between 9.5% and 14% since 2017 according to a report from the Bank of America, the average yield sky-rocketed to almost 20% at the beginning of March and stayed above average for several months after due to the desire for more secure investments during uncertain times. However, now that the rally has worked so well, people are seeing no returns anymore and are hoping to find them in the form of junk-bonds, emboldened by central banks supporting businesses for the foreseeable future. 

Personally, I find these continued trends almost disturbing. Inflationary pressures are easily ignored at first but cause extreme troubles if left unchecked and with the endless demand for more debt to be financed by the Central Banks it remains to be seen how this problem will be addressed. If it is not, a titanic crash caused by the eventual end of state-backed support will render many bonds worth little more than the paper it was printed on as the companies will fail to pay their debts on by one.

Real Estate

Real Estate Investment Trusts (REIT’s) (Claire Willemse)

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The UK housing market has remained strong, with house prices up 1.7% YoY in July, with deals agreed on adding up to £37bn. It was even considered to be the busiest month in a decade according to Rightmove. This is attributed to pent up demand from during lockdown and is set to be held up further by the government’s measures of cutting the rate of stamp duty. Furthermore, lockdown has been seen to potentially exacerbate wealth inequality, by boosting incomes of well-paid workers who were able to work from home. This same group likely were able to save money from commuting costs and leisure activities, which makes up a larger proportion of higher income workers’ income to begin with. This then pipelines into the housing market as this is a typical group of people who can afford a deposit for a property.

Persimmon, the UK’s largest housebuilder, has reinstated a dividend of 40p per share as a result of this recent increase in sales. This came as they announced H1 pre-tax profits of £292mn, a 43% fall YoY, as a result of the coronavirus pandemic. This sent their share price (LON: PSN) up by 2% on Tuesday.

NetSTREIT (NYSE: NTST), a real estate investment trust based in Dallas, listed at the start of the week, aiming to raise in excess of $200mn. It showed poor performance so far, with the share price dipping below the offer price before stabilising closer to it, closing on Thursday 0.06% higher. This offer price was also placed below the preliminary offering range, as slow demand became evident with the recent poor performance of retail REITs due to the coronavirus pandemic. The high management and other costs that come with its portfolio of properties also led to hesitancy among prospective investors. Further issues with its financials and the track record of its management team, coupled with the odd timing of the IPO have perhaps also contributed to the poor performance.

Commodities

Oil & Precious Metals (Oliviero Sacchet)

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This week the oil prices are respectively BRNT $43.79 (-2.47%) and WTI $41.68 (-2.69%).

During the coronavirus pandemic the oil industry was affected by a huge overproduction. In order to compensate this unusual situation OPEC+ imposed cuts and restrictions. Even though, during these pandemic months, different countries did not follow rules. On 20 August OPEC+ revealed the oil quota that must be compensated. To the present-day, countries that exceed their production will have to cut 2.331 million barrel per day by September. Iraq has the biggest excess of 851,000 barrel per day followed by Nigeria of 315,000 barrel per day.  Russia also was noncompliance for 283,000 barrel per day followed by Kazakhstan of 189,000 barrel per day. The original plan of the OPEC+ was to cut 9.7 million barrel per day but, considering the price stabilization, at $45 per barrel, currently the coalition decided to reduce the cut to 7.7 million barrel per day. 

This week the gold price is $1,937.83 (-2.5%).

Gold is facing a difficult situation. On Wednesday in Mali there was a military coup. Currently Mali is one of the biggest gold producers in the world and the fourth biggest gold producer in Africa. After this coup, two of the most important mines in Mali fell, respectively, by 14% and 8%. The economic problem derives from the Ecowas’ measures. Ecowas is a regional economic union of fifteen countries located in West Africa. Due to this political scenario the organization sanctioned Mali’s mines stopping exports and imports and also closing borders. 

In addition, the gold industry recently faced a ‘roller-coaster’ trend which led to the highest price ever of $2,072 a troy ounce. But, as we already discussed last week, several analysts think that this is the start of a bearish trend for gold. As a consequence of this ‘hot situation’ in Mali this negative performance could increase. 

Foreign Exchange

G10 & EMFX (Krisztián Sudár)

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The Euro has seen steady gains since early July, climbing from 1.12$ to 1.197$ earlier this week. However, a large slowdown in business activity for the past month, has caused the Euro to tumble on Friday, and lose some of its gains over the dollar. HIS Markit’s flash Composite Purchasing Manager’s Index dropped from 54.9, the last reading of July, to 51.6 on Friday. In turn, the dollar index grew 0.71%, and the Euro has fallen to 1.18$. Analysts, based on net-long position for Euro Future’s contracts are predicting that the Euro’s rally is losing some steam, and might not cause more damage to the Dollar. While initially, the rally was fueled by better defensive action against the Covid-19 crisis by Eurozone countries, the economic measures taken by the Fed proved to be much more powerful in recent weeks.

Nonetheless, the Dollar’s future is nothing but uncertain. While it has successfully ended its decline for the time being, the potential political instability that the Presidential Election will bring, coupled with increasing fiscal and monetary unity in the Eurozone, has caused Hedge Funds to become increasingly more bullish on the Euro, with EOY price targets now reaching 1.25$. Emerging Markets were led by Turkey this week, after a couple rather turbulent weeks for the Lyra. First, the Turkish government was able to avoid raising interest rates on Thursday. Then, on Friday, the state announced that it has discovered a substantial natural gas reserve in the Black Sea. While the rumors were of a larger discovery, after Erdogan alluded to “good news”, which caused the Lyra to spike by 3% this week, on Friday, after the actual announcement the lyra did lose 0.7% of that.

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