(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 gained as the Pfizer COVID-19 vaccine was granted full FDA approval, supporting positive sentiment towards economic recovery. The approval is likely to convince more employers to mandate use of the vaccine, which boosted investor optimism this week. However, on Thursday stocks took a dip after the twin explosions near Kabul airport in Afghanistan, which resulted in multiple casualties. The attacks are allegedly terrorist attacks by ISIS-K. The Fed’s annual Jackson Hole symposium turned out to be anticlimactic, making little impact on markets as Friday’s speech by Fed Chair Powell did not signal any deviation from the central bank’s previous economic outlook nor any signs on when exactly the central bank would begin its eventual tapering. European stocks ended higher with the STOXX Europe 600 up 0.75% off the back of the ECB’s accommodative policies and hopes that higher vaccination rates will reduce future economic impacts of the coronavirus.
COVID-19 Update: China’s daily coronavirus cases has dropped to single-digit levels after weeks of strict social distancing measures. Nanjing, the first city where the delta variant outbreak began, restored commercial flights on Thursday after its airport was closed for a month.
Information Technology (Satya Maulana)
This week, following a White House conference on Wednesday, several tech giants made a multibillion-dollar commitment to shore up the US’ frail cybersecurity defenses. Microsoft (-1.30%) has pledged a $20B investment on cybersecurity measures over the next five years, whereas Google (+4.35%) will commit 10B. Amazon (+4.29%) and Apple (+0.17) also stated that they would continue to support and enhance government IT infrastructure in an undisclosed manner. This conference was held on the many cyberattacks this year, including the Microsoft software leak, the US Republican National Committee contractor hack, and the SolarWind breach.
The Big Stories
Nvidia (+7.53%) continues to face hurdles as their planned $54B takeovers of British chip designer Arm is under investigation (FT). London-based money transfer startup WorldRemit seeks pre-IPO funding round at a $5B valuation (BBG). Gaming-focused chat platform Discord is looking for an exit strategy. So far, they have rejected a $12B takeover bid from Microsoft. It is reported that pre-IPO fundraising is underway at a $15B valuation (FT). Lastly, the world’s largest semiconductors company, Taiwan Semiconductor Manufacturing (+7.72%), is raising prices by 20% (WSJ)
Healthcare (Jasmine Khoo)
The markets displayed greater risk-on sentiment this week with positive US vaccination news and the Fed’s dovish stance at the Jackson Hole Symposium. The S&P 500 hit record highs (SPX: +1.47%), while defensive sectors like consumer staples, utilities and healthcare lagged the broader market (XLV: -0.85%).
Cassava Sciences (NASDAQ:SAVA) is a clinical-stage biotechnology company that is testing an anti-Alzheimer’s drug called simufilam. Investor interest in the Alzheimer’s treatments have grown significantly following the FDA’s approval of Biogen Inc’s Aduhelm, contributing to SAVA’s 1086% rally year-to-date. However, SAVA shares slid 31% on Tuesday 25 August after a citizen petition was lodged to investigate the integrity of simufilam trials. The company swiftly refuted these claims but were unable to quell investors’ fears. Short bets against SAVA currently amount to US$598 million (14% of shares outstanding).
Although approximately 90% of petitions are rejected by the FDA, investors are likely to remain cautious until an official decision has been made. Cassava does not have any marketable product yet and is highly reliant on the success of simufilam.
Consumer Staples and Consumer Discretionary (Jeff Chen)
Over the past week, the consumer discretionary and staples market underwent some reversals, as investors looked to invest more in discretionary stocks. The Consumer Discretionary Select Sector Fund (XLY) rose 2.3% this week, reversing some of the losses of the prior week. On the other hand, the Consumer Staples Select Sector Fund (XLP) fell 1.5% over the past week. All eyes are on Friday’s Jackson Hole summit, as investors look to Fed chair Jerome Powell to see if there is a possible timeline for tapering, albeit unlikely. Until a more concrete outlook on interest rate hikes is established, the markets could possibly continue to remain volatile, as shown in the consumer discretionary and staples space.
Looking at Asia Pacific markets this week, Chinese liquor companies have been adversely impacted by China’s ongoing regulatory crackdown. Shares of market leading Chinese baijiu liquor company Kweichow Moutai (SHA: 600519) fell 4% on Thursday, while other competitors such as Wuliangye (SHA: 000858) and Luzhou Laojiao (SHA: 000568) also fell on a similar percentage point basis. This came on the back of a meeting between market regulators and members of leading baijiu liquor companies, in which there were talks of cooling down an overheated market. Baijiu liquor accounts for 96% of alcohol sales in China, and generated over USD130bn in revenue in 2019. Despite regulatory concerns, it is possible that this will be a temporary blip in the industry, with strong tailwinds in the form of increasing demand and foreign investments in the space.
Financial Institutions (Raed Altaf)
Financial institutions improved their performance this week as they recovered from their dip in the previous few days. The iShares US Financials ETF increased 2% to $85.10, while the Vanguard Financials Index Fund increased by 3% to $95.67. Despite the news of the Federal Reserve taper being officially announced, market predictions about this policy change meant that the market had already reacted to the potential increase in interest rates in the previous weeks. Measures such as the rise in job openings in the US over the past few weeks were a clear indicator that the Federal Reserve no longer needed to pump money to boost the US economy.
JP Morgan claimed headlines this week amongst the financial institutions with their leading role in helping investment analytics firm Aumni raise their Series B funding round of approximately $50bn. The role played by the investment bank signals the interest banks are increasingly showing in incorporating artificial intelligence in areas like wealth management and advisory over the next few years.
Industry & Materials (Maksymilian Mucha)
Vanguard Industrials ETF (VIS) and Vanguard Materials ETF (VAW) are up 2.02% and 2.59% this week respectively.
This week, there were 3 pieces of news which were a good sign for Boeing (BA) development. The company’s share price is up 3.02% this week.
Boeing will become a stakeholder in Virgin Orbit, which will go public through a $3b merger with a blank-cheque company. Virgin Orbit is a satellite launch company which uses a modified 474 aircraft to fly to the stratosphere and serve as a mobile launcher for the space rocket. The company was chosen by the British government to launch UK’s satellites in 2022. As the technology does not require special facilities on the ground, Boeing’s stake might give the company an advantage in space industry expansion to countries which have been so far inactive in that area.
Spice Jet (SPICEJET), India’s second-largest airline, announced on Thursday that it is returning its fleet of 13 Boeing 474 MAXs to service. The aircraft was grounded in March 2019 after two fatal accidents caused death of 346 people, which led to Boeing’s financial problems then exacerbated by the pandemic (in March 2020, Boeing’s shares were down almost 80% from March 2019 peak).
Finally, Boeing won a 5-year $487m contract to provide engineering services and maintenance for Apache AH-64 Helicopter. With over 1,200 aircrafts in operation, it is one of the most widely used in the US and NATO arm forces thanks to its multifunctionality and advanced technology of the latest model. With growing demand for defence equipment due to recent events in the world, the contract is good news for the company’s defence unit.
Utilities (Jonathan Leng)
This week the S&P 500 Utilities Index slid 1.16% to 346.49 basis points, with prominent utility stocks NextEra Energy and Duke Energy both recording a 2.42% and 1.98% loss respectively over the week. With the S&P 500 trading at an all-time high, speculations suggest that some investors are still pondering over growth stocks amidst these uncertain times.
On Friday 28th of August, Rivian, the California-based Electric Vehicle Company, has filed confidentially for an IPO that seeks to value the company at a little over $70 billion. Rivian was once seen as a contemporary challenger to Tesla, especially with its plans to produce sport utility vehicles and pick-up trucks. However, its innovative efforts might continue to be challenged by the pandemic with semiconductors supply shortages, facility construction issues, etc. However, the company has plans to ramp up its production capacity by opening another manufacturing facility in the US and potentially having an engineering office in the UK that focuses on “advanced-concepts” development. Following the announcement, Rivian’s investors – Ford and Amazon’s share price rose marginally. With the development of EVs increasingly gaining traction, it would be interesting to observe if there will be potential cost-push inflation on the components and compartments needed to assemble an EV.
KKR, US’ private equity group has recently struck a $3.72bn deal to acquire Australian energy investor Spark Infrastructure. The rising interest in Australia’s infrastructure asset is said to be driven by ultra-low interest rates, an increasing number of opportunities including wind farms and renewables, as well as the government’s decision to address chronic underinvestment in this space. Following KKR’s acquisition, more investments are said to flow towards Australia’s infrastructure private market, galvanising a wave of infrastructure development.
Rates (Suraj Suresh)
The benchmark US 10-year Treasury note slipped slightly to 1.33% on Friday but is still higher week on week as we approach the virtually held Jackson Hole symposium.
Investors, particularly hedge fund managers who have been gambling on bearish bets on Treasuries, are holding out that Jeremy Powell will give a much clearer indication of the Feds plan to taper their $120 million bond purchase program this Friday.
Trading conditions in the US government bond market, however, have deteriorated as liquidity is drying up. As we approach the symposium, Goldman Sachs’ liquidity index for both the 5-year and 10-year notes has fallen below their 21-day average. Experts believe it is investor’s risk-averse behaviour that is causing the widening of the bid-ask spread.
In other news, the UK joins the sovereign green bond club after Britain’s debt office announces its first green gilt with a maturity date set on July 31, 2033. This comes as Britain looks to reinstate its commitment to the Paris Climate Accord brokered in 2015.
Real Estate Investment Trusts (REIT’s) (Soubhik Sengupta)
Data from Deloitte shows that the volume of new construction of London office space in 2021 has exceeded that of in 2020, where construction slumped as the pandemic hit.
According to property agency CBRE, investors are looking to pour £45 billion into the London office market as pandemic restrictions have fallen away. Adding to the vaccine-driven recovery is an unexpected driver of the London’s property market, Brexit. The 2016 Brexit vote slowed down office building, keeping a lid on new supply coming into the pandemic (volume of new construction was muted after Q1 2016, only picking up in Q1 2020). Without this, vacancy rates might have been even higher and UK prime office yields would not have crept up compared to that of in Western Europe.
However, there are considerable risks beneath the surface. According to Remit Consulting, London offices were at 11.5% of capacity on average in the week ending August 6. The number of people coming to work each day has hardly changed since the government lifted coronavirus restrictions on July 19. We can expect to see a clear bifurcation in London’s office space market: anything that is flexible, modern and has access to open air will be high in demand and rents will be resilient, while enclosed offices will either empty out or have to be refitted or repurposed to continue generating income for investors.
Oil & Precious Metals (Anouska Jha)
Golden Days Ahead?
Monday started off with a sharp rally in commodities stocks, after the US’ approval of the BioNTech Pfizer vaccine, leading to a 0.9% rise in the S&P500 and a 1.6% rise in the Nasdaq Composite. The UK FTSE 100 also rose 0.3%. Commodities that shone in this regard were metals prices, with nickel prices rising 1.6%, and copper rising 2.3%, against an initial 0.6% weakening of the US dollar. Crude oil futures also rose at the market open on Friday 27 August, with the ICE Brent Futures contract up 1.1% from the previous close of $71.87, and WTI Crude up. 1.66% at $68.54 at the trade opening this morning.
However, as the week progressed, the dollar increased from its 1-week lows, leading to gold prices retreating 1% on Wednesday. This came in the wake of the Jackson Hole decision which is scheduled for today (Friday 27 August 2021), with investors awaiting tapering economic support regarding the US Federal Reserve’s asset purchases. Yet, on Thursday 26 August, gold prices began to stabilize, with spot gold rising 0.1% to $1792.01, and US gold futures up 0.2% at $1795.20. On the one hand, investors may be shaken by such volatility; a decrease in gold prices due to the expectation of higher interest rates and bond incomes initially hampered gold’s attractiveness, but in only a day, markets have undermined JP Morgan’s claim that there is a ‘continued bearish directional outlook’ for gold in the long-term.
Gold price technical chart- Weekly
A closer analysis suggests that gold ETFs will remain a risk averse trade, due to its high liquidity and proven store of value. Moreover, a historical look at the 1970s inflation suggests that governments may maintain inflation to counter an era of asset purchases during the pandemic. This, in addition to oil supply tensions with OPEC, and diplomatic conflict with Afghanistan and China, implies that growing risk appetite for the dollar should not defer investors from gold and metals commodities. Whilst a Fed interest rate hike may dull gold’s appeal in the short term, real interest rates will likely remain negative due to these economic uncertainties.
G10 & EMFX (Noah Martle)
Political Unrest in Brazil
Brazil’s President, Jair Bolsonaro, has threatened to cancel the 2022 presidential election as he believes Brazil’s electronic voting system (the system that voted him into power) is rigged. Therefore, he is insistent upon allowing voters to register their votes on paper ballots and claims that “an election outside those parameters is not an election”. Additionally, Bolsonaro gave a passionate speech in Florianopolis in which he called his loyal supporters to be ready to “fight with all the weapons”. These rallying speeches and unfounded accusations have started to worry senior opposition politicians and lawmakers as they are concerned that Bolsonaro will use these fictitious claims to make his presidential power permanent.
Moreover, to boost Bolsonaro’s popularity for the upcoming elections, he has pledged to boost welfare payments. Hence, investors are concerned that Bolsonaro won’t respect Brazil’s constitutionally mandated spending cap. Thus, inflation and Brazil’s public debt to GDP ratio of 0.84 could continue to rise. These factors have triggered a 5.36% depreciation of the Brazilian Real against the US Dollar between June 25th and August 27th.
There is increasing pressure on central banks to announce their own digital currencies. China has been designing their digital currency for the past seven years, and the ECB plan to release their digital currency into the market by 2025. However, the BOE and Federal Reserve are keeping their cards close to their chest, but experts suggest it is only a matter of time before they too join the digital currency train.