Friday Wrap-Up (July, 16)

The Russell 2000 had its worst weekly decline since October.

(Katarina Lau-VP at UCLIF)

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 ended lower on Friday, with both the S&P500 index and the NASDAQ index closing -0.8% lower. This was mainly due to concerns surrounding accelerating inflations rates and the sustainability of the economic expansion. Treasury yields fell for a three consecutive week. Energy and material stocks brought the benchmark S&P 500 lower. Small cap stocks performed poorly, with the Russell 2000 having its worst weekly decline since October. The 10-year Treasury note yield also declined for a third consecutive. University of Michigan’s consumer sentiment index came in below expectations at 80.8 (consensus at 86.5).

Covid-19 Update: The UK lifts almost all legal restrictions on social interactions on Monday, despite cases surging and thousands requiring isolation under the test/trace program, including PM Johnson.

Week Ahead: The US data calendar is relatively light with various housing data and PMIs to be released over the week.

Equities

Information Technology (Satya Maulana)

It was a relatively stagnant week for the tech sector, with the NASDAQ Composite finishing just below the green line, -0.11% lower since Monday. Notable tech stocks such as NVDA (-4.4%), AMZN (-2.7%), and Facebook (-0.3%) took a slight dip. The S&P 500 tech index (. SPLRCT) was even down 0.8%. What’s all this, then? J Pow tried to relax investors about the Fed tampering soon, given the high CPI of 5.4% he announced this week. This inflation announcement may indicate that investors are unloading their tech stocks and are moving into defensive stocks such as utilities, consumer staples, and real estate. 

This week the VC space saw significant developments. Revolut, the UK’s digital bank startup, raised approximately $800 M in a funding round, making it the country’s most valuable tech startup of all time (BBG). Who’s leading it? Two of the world’s currently most talked about hedge fund/private equity/venture capital or whatever you’d want to call it, SoftBank and Tiger Global. This funding round puts the company’s value at $33 B, which’s almost six times or 445% more than their last funding round in early 2020, which valued them at $5.5 B. This valuation puts them above NatWest’s (5.03%) $31 B market cap. Revolut wasn’t the only startup SoftBank invested in this week. A Robo-advisory investment platform called M1 Finance raised a $150 M series E at a $1.4 B valuation led by Son’s Vision Fund 2 (TC). This rapid increase in valuations is raising concerns over the bubble in the private tech market, as investors are pouring a seemingly unlimited amount of capital into the VC space this year as they did in the whole of 2020.  

Healthcare (Jasmine Khoo)

Moderna Inc. (MRNA) rallied +8% during extended trading on 15 Jul 2021, after the announcement that it will be added to the S&P 500. The vaccine maker will start trading on the index on July 21. Moderna’s (MRNA) share price has risen 220% year-to-date, lifting its valuation past US$100 billion. Moderna’s COVID-19 vaccine is being delivered to over 60 countries and the company expects to supply 800 million to 1 billion doses in 2021. A key catalyst to Moderna’s stock will likely be the success of its strain-specific booster. The company has not only been testing a third dose of its original vaccine, but also trialling new candidates that target variants from South Africa and Brazil. Moreover, the EU will be finalising a decision on the approval of Moderna’s vaccine for children by the end of next week, followed by the FDA in the US in autumn.

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On 16 Jul 2021, Trinity Biotech (TRIB) rose 8% premarket after releasing its business development update for Q2 2021. The company is at an advanced stage in the development of a SARS-CoV-2 antigen test. The test uses a nasal swab sample and produces results in 12 minutes. Despite growing vaccination rates, demand for antigen tests should remain strong given the rise of variants and the need for swift case identification to control outbreaks.

Consumer Staples and Consumer Discretionary (Jeff Chen)

Over the past week, the Consumer Staples Select Sector Fund (XLP) was up 1.3%, whilst the Consumer Discretionary Select Sector Fund (XLY) posted a loss of 0.8%. The mixed performance could possibly be attributed to the inflation numbers this week, as the US consumer price index (CPI) rose 0.9% in June. With inflation bearing greater volatility for the stock market, investors in the consumer discretionary sector were possibly bearish on the upcoming forecast for inflation (US Treasury Secretary Janet Yellen warned that the US could see “several more months” of high inflation). Considering rising inflation, we could possibly see steady growth in consumer staple stocks, as investors turn towards more defensive plays.

In company news, shares of the US-based stationary bike and treadmill seller Peloton (PTON) fell by 10.2% this past week. The decline could be attributed to Swiss bank UBS’ downgrade of PTON to a “sell” rating due to “inflated expectations” amongst analysts. With the street expecting shares of PTON to triple its current consumer penetration rate, coupled with an annual growth of 42% in revenue, UBS is taking the contrarian view on this. As countries begin to loosen restrictions, we could see an exodus of people heading back to the gyms, leading to a stagnating performance for PTON in line with UBS’ forecast.

Communication Services (Chris Dai)

This week saw a slight loss in the communications sector due to investors’ increasing concerns about rising inflation rate. The US consumer price index jumped 5.4% compared to previous year and hit a 13-year high, with the S&P 500 Communications Services Sector finishing at 1.2% lower since Monday. 

Netflix (NFLX) has just announced its first significant move beyond TV and movies by planning to expand into video games. Mike Verdu, former Electronic Arts and Facebook executive will join Netflix as vice president of game development. This signals the company’s strategic move to deepen audience engagement and likely to increase its pricing power in the long term. In comparison to the 3-day losing streak last week, Netflix shares have made a sharp turn and rose 2.6% to $563.45 in premarket trading on Thursday. 

Verizon (VZ) on the other hand, announced a multi-year, $8.3 billion USD agreement with Ericsson on July 16. The agreement focusses on deploying Ericsson’s industry leading 5G solutions to enhance Verizon’s Wideband coverage and network performance. This marks the next stage of Verizon’s strategic move – expanding the company into cities to take on cable companies which enjoy local monopolies. Verizon has launched the service in six cities by June 2020, and the agreement with Ericsson can be seen as a sign of the long-anticipated, bigger commercial push.

Financial Institutions (Raed Altaf)

This week, the financial sector in the UK remained relatively stable. The Vanguard Financial ETF stayed above last week’s low of $87.70, trading at $90.10 end of Thursday. The US experienced better patterns, as the iShares US Financial ETF started off the week strong at $82.53, currently trading at $82.13.

The underlying factors in the improvement in the US performance continue from earnings season. Goldman Sachs outperformed analyst expectations with a revenue of $15.39 billion, 26.5% greater than analyst expectations. The reasoning behind such strong earnings can be linked to the impressive IPO market in recent months, with Goldman helping firms like Krispy Kreme.

Other reasons include the positive economic outlook in the US from the Fed, prompting JP Morgan to release $2.3 billion set aside for loan losses, which boosted their revenue by 5% at $31.4 billion.

Industrials and Materials (Maksymilian Mucha)

Vanguard Industrials ETF (VIS) and Vanguard Materials ETF (VAW) are down 0.47% and 0.22% this week respectively. 

Volkswagen Group (VOW3) and BMW (BMW) were fined €875m for illegal cooperation on limiting their use of emission cleaning technology. Volkswagen, BMW, and Daimler agreed not to reduce emissions of nitrogen oxide in their diesel engines beyond the minimum EU standard. BMW said it is accepting the fine while VW Group is going to appeal asserting no harm has been done to the customers. As a result, BMW’s stock price fell 2.12%, while VW Group’s stock was down 2.79%. The fine comes amid the EU’s plan to reduce emissions by 55% by 2030 and the open letter of industrialists claiming that European Commission is taking insufficient actions to support transition to clean energy. In the future, these events may encourage European policymakers to take further steps in its environmental plans, simplifying cross-border integration of the use of green energy and reducing carbon emission, which will likely benefit European industrial holdings already active in this sector.

Taiwan Semiconductor Manufacturing Co. (2330) informed recently that it is expecting a 20% sales increase in 2021. TSMC is one of the largest semiconductor manufacturers in the world, with the most notable clients such as Apple Inc., as well as major car producers. Looking ahead, higher semiconductor output forecast may be a relief for a global chip shortage, which lastly caused lower than expected car sales in the UK. However, the company still warns that the shortage may continue in 2022.

Utilities (Jonathan Leng)

This week, the utilities sector continues its upward rising trend, with the S&P 500 Utilities Index up by 1.7% since last Friday, slightly outperforming the S&P 500 Index. Vanguard Utilities ETF (VPU) and Fidelity MSCI Utilities Index ETF (FUTY) both mirrored the positive trend of S&P Utilities Index with each position up 1.9% and 1.5% respectively since the start of the week. As inflation concerns continue to cause market uncertainty, it is understandable why utilities might be favoured by certain investors – largely due to its defensive nature.

Goldman Sachs recently launched its first actively managed ETFFuture Planet Equity ETF (GSFP). Goldman plans to invest in 40 to 60 climate friendly and disruptive technology companies that address issues relating to clean energy, water sustainability and management. Traditionally fund managers and stock-pickers do not like to roll out ETFs as it requires the fund to disclose its holdings which gives away the “bets” they are making. However, the transparently managed ETFs offered by Ark investments that invest in disruptive technology companies, has attracted a net inflow of $16.1bn thus far, further galvanising Goldman to initiate GSFP.  With ETFs being more tax efficient, provides more transparency and ESG investing becoming more imperative, it would be interesting to observe the effect it has on the utilities sector that promotes green energy transition. 

Global Power Synergy Plc (GPSC), a Thailand-based energy company, agreed to acquire a 25% stake in a Taiwanese offshore wind farm from Copenhagen Infrastructure Partners for $500m. The GPSC acquisition will increase its renewable energy capacity by 149 MW to 2,294 MW, or 34% of the company’s total capacity. As Asia stands out as being more exposed to physical climate risk than other parts of the world in the absence of adaptation and mitigation, such acquisitions can be instrumental to position Asia in its transition to renewables

Fixed Income

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Rates (Suraj Suresh)

Obviously, we will be focusing mainly on the US in this week’s Wrap-Up, Jeremy Powell faced Congress on Wednesday where the Federal Reserve Chairperson maintained his firm stance that the current inflation situation is transitory. However, the Fed is ready to intervene if necessary but asks legislators to have faith in the Central Bank. He did, however, reinstate, that there will be discussions on reducing the Federal Reserve’s aggressive bond purchasing in the near future. 

Jeremy Powell’s testimony comes a day after the U.S Bureau of Labour Statistics released June’s CPI which shows an annual increase of 5.4%, the biggest jump since August 2008. Despite this, it does not seem likely that the Fed will put the brakes on monetary stimulus anytime soon and the market agrees as the benchmark US 10-Year Treasury yield fell to 1.3%. 

An interesting analysis I came across this week, shows the occurrence of a bullish flattening of the US yield curve. Bullish flattener refers to the situation where the long end of the yield curve falls faster than the short end, and they begin to converge. 

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The Fed’s hawkish tone on inflation indicating a possible 50bp increase of US interest rates by 2023 has resulted in the decrease in the spread between 2- and 10-Year Treasuries. This could spell trouble for market participants with a portfolio with a below benchmark duration, as investors might need to change their current positions. 

Alternatives

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

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.On 22 Apr 2021 Invesco launched the first ‘green building’ ETF, aiming to fill a gap in portfolios in a world increasingly focused on climate change. The UN Environment Programme had estimated that buildings account for 38% of global carbon emissions. The Invesco MSCI Green Building ETF (GBLD) invests in REITs whose estates boast high energy efficiency, healthier indoor environmental quality and are constructed with environmentally-friendlier construction materials, making it heavily exposed to commercial space. While there exists demand from more ESG-focused investors, it is unlikely the ETF will generate returns in an environment, where working from home may become a permanent option for many workers, reducing demand for space.

According to CBRE, thousands of new warehouses will be needed across the UK and Europe due to the e-commerce boom from the pandemic with goods purchased online requiring around three times the logistic space as physical stores, CBRE estimates that an additional 300 million square feet of warehouse space will be needed in Europe by 2025. The Pacer Benchmark Industrial Real Estate SCTR ETF (INDS), which tracks companies deriving at least 85% of their revenues from industrial real estate, has seen its price increase 58.5% since March 2020 and it is likely to rise further with greater demand for warehouses.

Commodities

Oil & Precious Metals (Anouska Jha)

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As of 16 July 2021, the S&P GSCI has finished at the $527.63 price handle, down 0.3% in the last week. The Dow Jones Commodities Index has finished the week at $891.50, an increase of 0.9% in the last week. 

Beyond the fiscal headlines of a proposed EU carbon border tax lies the more nuanced impacts of its policies on the steel industry. This week, the EU will reveal its plans to reorient the global trade network by placing a fee on carbon-emitting goods being imported from outside the bloc, with the aim to I) incentivize energy companies to align with climate goals, and ii) to protect European industries from overseas competitors who are less constrained by regulation. One commodities sector that has voiced its concerns over such progressive fiscal mechanisms: the aluminum sector. Aluminum requires a process called smelting, which emits 6.7 tons of CO2 per tonne, with the current price of CO2 at $50 per tonne. Hence, organisations such as European Aluminum believes such tax proposals are harmful for smelters and manufacturers, who may turn to carbon leakage to maintain competitive advantages.  For example, steel produced in Chinese and Ukranian mills using blast furnaces will be less competitive in the EU against steel made from carbon efficient mills. 

The European aluminum market is already tight due to increasing costs of Russian supply and high conversion premiums through a balancing of the supply chain. This is a consequence of Russia placing 15% export duties on aluminum ingot and billet. Therefore, this denotes the practical fragilities of long-term climate incentives on market sectors, particularly for metals such as aluminum, whose dynamics extend through a more long-tailed paradigm. Investors within the commodities market must maintain a dual-sided outlook, recognising that whilst stimulus and policies are shifting their narratives towards ESG, manufacturing materials and commodities such as aluminum and Hydrocarbon will inevitably be an intrinsic part of the transition. Company stocks to watch in this regard are Alcoa Corp Vitals (AA), a leading aluminum processor, with a 21.2% increase in its YoY quarterly earnings, and Hydro Extrusions (OTCQX), a Swedish company specialising building extrusion plants to aluminum, with projects beginning in the latter quarter of 2021.  This is likely to bolster the upward trajectory of the company in its latest quarter, which posted first-quarter underlying EBITDA of $ 586 million, up from $431 million in the same quarter last year. 

The oil sector has experienced volatile increases in price over the past weeks, as a result of the OPEC Impasse regarding the baseline production of oil for its members. However, more positive market outlooks come in the form of BP’s (BP) new purchase of private equity company Arclight Capital Partners’ majority stake in Louisville Kentucky-based Thorntons, a gas and food giant. This joint venture is part of BP’s broader aim of involving retail investments as part of its renewable energy strategy, due to the evolving convenience of retail and electric vehicle charging usage. Whilst the financial details of the transaction were not disclosed, BP anticipates a doubling of its earnings to $10bn by 2030, after a 14% decrease in fuel sales in 2020. On 14 July 2021, bp also announced a project with Energie Baden- Wurttemberg AG (EnBW) to build new offshore wind generators on the Irish Sea and will launch a supplier portal for the developments. It is therefore likely that the relatively flat trendline in BP stock price over the last 4 months may see an increase to 2019 highs in the long-term, with focused investors seeing bp’s transition-based strategy as an opportunity to both profit from, and contribute to, the renewables narrative. 

Foreign Exchange

G10 & EMFX (Noah Martle)

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To short or to not short the Rand, that is the question.

Over the course of the week the Dollar has appreciated 3.78% against the Rand from 14.2291 to 14.7676, then pulled back to 14.3820 at the time of writing. The Rand’s current indecisiveness could potentially be quiet before the storm.

South Africa are currently enduring deadly riots following the jailing of the former South African President, Jacob Zuma. These riots have resulted in an estimated £720m of stock being stolen in the KwaZulu-Natal province. The riots are at the point at which armed South African forces are required to escort deliveries of food to supermarkets. Moreover, the US’ inflation rates have risen 5.4% compared to this time last year, exceeding economists’ expectations of 4.9%. Therefore, there is an increased expectation that the Feds will hike interest rates, resulting in hot money outflows from South Africa to the US. In addition to the possible hot money outflows, there has been rising capital outflows from South Africa, casting further doubt over South Africa’s economic future.

Outflows from South Africa's bond and stocks markets have accelerated since June

These facts combined with high unemployment, rising Covid-19 infections could lead to downward pressure on the Rand, which will be interesting to follow over the coming weeks.

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