Friday Wrap Up (July, 23)

(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?

Equities

Healthcare (Jasmine Khoo)

The Healthcare Select Sector SPDR (XLV) fell along with the broader market on 19 Jul 2021 due to signs of peaking economic growth and concerns about the spread of the Covid-19 Delta variant. Overall, the defensive healthcare sector fared relatively better, with the XLV gaining a modest +2% in the past week while the S&P 500 (SPX) remained relatively flat at +0.73%.

On 20 Jul 2021, NeuroMetrix, Inc. (NURO) announced that its Quell® device has received Breakthrough Designation from the U.S. Food and Drug Administration (FDA) for treating fibromyalgia in adults. NURO stock gained over +208% on 20 Jul and rose a further +107% on 21 Jul 2021. Fibromyalgia is a common chronic pain disorder affecting up to 15 million people in the US. The Quell is a wearable device that aims to treat the disorder through nerve stimulation. In the latest trials, 56% of test subjects displayed clinically meaningful improvement in health-related quality of life. The company plans to launch Quell commercially by 2022. On 22 Jul 2021, NeuroMetrix posted Q2 earning results indicating a 63% YoY revenue growth, sending the stock up another +19%. 

However, with a short ratio of 0.18 (as of 29 Jun 2021) and rising interest on Reddit, NURO could increasingly be at risk of a short squeeze. According to data from Quiver Quantitative, citation of NeuroMetrix on Reddit’s r/WallStreetBets rose 58.8% in the 24 hours ending 7.50 AM EST on 22 Jul 2021.

Consumer Staples and Consumer Discretionary (Jeff Chen)

In the past week, the Consumer Staples Select Sector Fund (XLP) was down 0.7%, giving back some of the gains of the previous week, whilst the Consumer Discretionary Select Sector Fund (XLY) was up 0.4%. It was an exciting week for the consumer goods sector, as company earnings for large consumer staples stocks were released, including household food and beverage brands PepsiCo (PEP), Domino’s (DPZ) and Chipotle (CMG). Considering increased earnings that beat expectations, the improved earnings could probably have been priced in in some of the stocks’ increases in the consumer staples sector, leading to some investors selling for profit. 

With the start of the Tokyo Olympic Games this week, analysts are expecting stocks of stay-home food and delivery companies in Japan to gain traction, as viewers are constrained to cheering on athletes from the confines of their homes. Boosted by deliveries during the pandemic, shares of KFC Holdings Japan (TYO: 9873) have risen more than 3% over the past month, and is expected to benefit from increased deliveries from the barring of live audiences of the Games. However, given the controversial nature of the Games being held amidst rising Covid 19 cases in Japan, shares of advertising company Dentsu Group (TYO: 4324) fell 5.1% over the last week, as main sponsor Toyota withdraws from Games TV commercials due to a ‘lack of support’. Having such a large company pulling out from the Games at the last minute, it could potentially force other sponsor companies to re-consider advertising their products, given the divisive nature of holding the Games at this current stage of the pandemic, and possibly incur greater losses due to there being fewer spectators at the Games this year.

Communication Services (Chris Dai)

As the earnings season kicks off, the Communications sector saw a huge gain this week with the S&P 500 Communications Service Index increasing 4.9% by Friday to reach an all-time high. This week social media giants contributed significantly to the growth thanks to the better-than-expected quarterly results from notable companies such as Snap (SNAP) and Twitter (TWTR), which subsequently made an impact on their peers.

On Thursday, Twitter (TWTR) announced second-quarter earnings with solid growth in revenue, advertising sales and user numbers. The company reported a revenue of $1.19bn, 74% YoY higher, beating the analysts’ expectation of $1.06bn; advertising revenue rose to $1.05bn with an 87% YoY growth, surpassing the estimate of $927.2m. The shares rose as much as 5.4% in the after-hours trading amid the release of Q2 results and finished the week at $71.69, 8.59% higher since Monday. On the earnings call, the company forecasts further growth in revenue in the third-quarter between $1.22bn and $1.3bn, higher than the consensus estimates of $1.17bn. The strong anticipation is backed by Twitter’s belief that reopenings and the return of live events will drive the brand-ad spending across industries in the second half of the year.

Likewise, Twitter’s social media peer Snap (SNAP) reported bumper quarterly results that are well ahead of analysts’ expectations. The company reported a revenue of $982.1m, more than doubled compared to the previous year ($454.2m) and well above the $846.9m average analysts’ estimate. The blowout earnings resulted in a surge in Snap’s share up as much as 23%, the company’s biggest single-day percentage gain since October 2020.

The results from Twitter and Snap also made an impact on the shares of their larger rivals – Facebook (FB) and Google parent Alphabet (GOOGL), with Facebook shares up as much as 5.3% to $369.79 in Friday afternoon while Alphabet jumped 3.6% to its own record $2660.36. Despite the earnings of the two tech giants not being available until next week, both companies are also strong players in the digital advertising business such that decent growth levels in revenue are expected.

Financial Institutions (Raed Altaf)

This week – we’re focusing on asset management firms. Both Blackrock and Blackstone released their earnings this week, beating analyst expectations once again. Blackrock increased their asset under management (AUM) to $9.5 trillion – a 30% increase, while Blackstone’s AUM increased by 21%. The cause? The rise in the popularity of ETF after the pandemic. With more and more low-cost index funds outperforming high-cost actively managed funds, coupled with the risk-averse attitude of people to avoid volatility in their finances, ETFs became the safe haven for individuals interested in investing. Unsurprisingly – Blackrock now commands 35% of the market share of the global ETF market. 

Another major reason behind increased earnings stems from the change in strategy AM firms have adopted in recent months, with an emphasis being placed on high-growth areas – especially PE and real estate. The proof for this can be seen by Schroders seeing its rating improve according to RBC Capital to a ‘sector perform’.

Industry & Materials (Maksymilian Mucha)

Vanguard Industrials ETF (VIS) and Vanguard Materials ETF (VAW) are down 0.14% and 1.75% this week respectively. 

Alcoa Corp. (AA), the largest aluminium producer in the US, released its Q2 results at the end of the previous week. The company EBITDA was $618m, ahead of $600m of the market’s expectations and up from $167m last year. Alcoa also raised its shipment guidance for the rest of 2021, which can translate into higher than expected profit at the end of the year. Alcoa’s share  price after the day of announcement (Fri 16 July) was down 4.66%, however, it is up 16.38% since Monday.

Looking at the bigger picture, the earnings release comes amid a bullish commodities market this year, with aluminium price up 27% since the beginning of 2021. This is clearly a result of increased industrial activity stemming from the economic recovery and the company’s optimistic forecast is a good sign about the shape of the economy for the next year. On the other hand, the company’s profitability in 2021 and 2022 will depend on how it copes with rapidly inflating commodity prices. 

On 22 July, Cleveland-Cliffs Inc. (CLF) reported its Q2 2021 earnings. The company’s earnings per share (EPS) in 6M 2021 was $1.48, which was slightly below the expected. Nonetheless, it is a large increase from last year’s $0.51 loss per share. Cleveland-Cliffs’ stock was down 0.61% on the day of the announcement.

Cleveland-Cliffs was going through the transition of its business in 2020, when it acquired AK Steel and Arcelor Mittal’s USA business and became the largest flat-rolled steel producer in North America. Therefore, the company’s revenue increased over 500% YoY (as of 6M 2021) and its share price rose over 250% in 2021. However, lower-than-consensus earnings indicate that it might take some time to unlock the full potential of the acquisitions.

Utilities (Jonathan Leng)

This week, the S&P 500 Utilities Index did not continue last week’s upward rising trend, instead it slid 2.12% and closed at 329.79 points today. According to Reuters, the 11 other S&P sectors also fell, dropping between 2.5% to 4.4%. This can be largely due to the instability induced by the surge of new Covid cases across different countries such as the US, UK and many parts of Asia caused by the Delta variant. The performance of the technology heavy Nasdaq index outperformed the broader market with speculation of investors flocking to growth-linked technology stocks. However, the defensive nature of the utilities sector would still be advantageous for risk-averse investors amidst the market uncertainty. 

British Gas, the UK’s biggest energy supplier has announced its profits of £172m for the first 6 months of the year, accounting for an approximately a 120% increment compared to the same period last year. This is an impressive milestone because their profits rose despite losing out on 114,000 home energy customers since the end of last year. The doubling of British Gas’ profits can be narrowed down into 2 factors: 1) The unusually cold weather to the start of 2021, prompting customers who are working from home to turn on their heater, increasing energy consumption; 2) A hike in the energy regulator’s price cap, which rose by an average of £96 a year for 11m homes using a standard dual-fuel energy tariff. This means each household is paying more for the service. The remarkable profit gains of British Gas were imperative toCentrica; its owner offset losses in service due to trade union strikes. This is obvious when looking at Centrica’s performance in the stock market – high volatility. 

For recent M&A news, GLIL Infrastructure, a real estate company, completed a £150m investment in Flexion Energy, the modern utility company and energy storage infrastructure specialist. The need for energy storage is at the core of fulfilling the UK’s commitment to the 10-point green plan as well as the transition to a low carbon economy. 

Fixed Income

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Rates (Suraj Suresh)

The worldwide increase in coronavirus cases caused by the Delta variant drove investors to dump risky assets in favour of the safe haven of government bonds. This pushed the benchmark US 10 Year Treasury note down 12.2 bp to 1.18% its lowest level since February 11th. However, US treasury yields rose and settled at 1.29% on Wednesday at 2:15 p.m. ET as investors reassessed their concerns on global growth

The fall in the 10 Year Treasury in July means reflation trades are beginning to struggle. A similar scenario of slower growth and higher prices caused the ‘stagflation’ experienced in the 1970s, as analysts are now worried that history could be repeating itself. According to the latest BofA Fund Manager survey, respondents seem to believe that the Fed will not allow the current inflation spiral to persist and this coincides with the reduction in those expecting a steeper yield curve. 
Over in Europe, the ECB’s policy meeting on Thursday established that they will keep in place their bond-buying Pandemic Emergency Purchase Programme(PEPP) at 1.85 trillion euros. The ECB also vows to keep interest rates at record lows until inflation target of 2% is achieved. As a result of the meeting,  the yield of the 10-year German bund slid to -0.41% as well as the 30-year bund dropping to 0.074%. It will be interesting to observe how long the recent drop in yields in the US and Europe will last.

Credit (Xuan Boh)

China’s second largest and most indebted property developer, the Evergrande Group, has been the largest issuer of junk bonds so far. On Monday, its 8.75% bond due 2025 fell to 62.6 cents on the dollar, according to Bloomberg-compiled prices (Fig. 1). A 5.9% onshore bond due 2023 issued by its onshore subsidiary Hengda Real Estate Group dropped 3.7%. Adding to its credit woes, a court in Jiangsu province has already ordered a 132 million RMB bank deposit held by Hengda at the request of China Guangfa Bank Co. However, the government has already taken steps to ensure that the debt issue does not become a systemic one. Last Friday, it was announced that Chinese regulators now want property developers to disclose details of commercial paper issued in their monthly reports. With greater transparency and consistent monitoring, there is a lower chance of unexpected defaults. Zooming out, it is worth remembering that China already had the highest ever number of corporate bond defaults of 62.59 billion RMB in 1H2021 (Fig. 2), with state-owned enterprises contributing to more than half of this. Likewise, Evergrande was urged by regulators to find a solution to its growing debt pile – reflecting Beijing’s commitment to unwinding government guarantees. In the long run, this might be a necessary purge, leaving only companies with strong management and balance sheets standing after the pandemic dust has settled.

Fig. 1 EVERRE 8.750% 28 Jun 2025 Corp (USD) YTD, Business Insider
Fig. 2

Real Estate

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

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This week, data from the US Census Bureau showed housing starts had increased 6.3% MoM in June, beating forecasts by 345 bps. Homebuilding remains underpinned by the dearth of homes available for sale and demand being driven by low mortgage rates and a desire for more spacious accommodations during the pandemic. On the surface, one would expect multi-family residential REITs to underperform as more people purchase single-family homes in the suburbs, and rental income to these REITs to decline.

However, probing deeper, the US Department of Commerce revealed that building permits issued (a leading indicator of homebuilding) decreased unexpectedly by 5.1%, caused by hesitancy among builders due to increasing cost of homebuilding and shortages of labour and land. With building permits lagging housing starts, homebuilding is expected to slow down in the coming months. Together with builders looking to pass on the increasing cost of homebuilding to buyers, this would increase home prices even further (the median home price has already seen 24%  growth in one year). Less people can afford home purchases with sharply rising home prices, preferring to rent instead. With increasing signs the exodus to suburbs is gradually fading (vaccinations allowing companies to recall workers back to offices in city centres), we can expect multi-family residential REITs to grow in the long-term as REIT rental income increases.

Commodities

Oil & Precious Metals (Anouska Jha)

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Unseen Opportunities May Be Open to Keen Investors.

For the last few weekly sessions, and especially this week, oil prices and markets have represented the intersectional nature between geopolitics, macroeconomics, and volatility to traders and analysts. The agreement made on the weekend by OPEC+ to increase its output by 400,000 barrels per day for each member had, on Monday, brought prices down. WTI Futures decreased to $70 per barrel, and Brent Crude prices decreased to US$68.62 per barrel. However, at the time of writing (Friday 23 July 2021), oil prices extended gains made in previous sessions, with Brent Crude up 2.2% at US$73.79, and WTI gained 4.6% on Wednesday, currently sitting at US$71.85 per barrel. 

Such changes reflect the momentum of oil price fluctuation in a space where short-term demand is being questioned due to the rise in the Delta variant, and questions about whether non-OPEC member output of Iran will be affected by a lifting of US sanctions. Moreover, Monday’s drop witnessed a tangential decrease of 4.5% on the S&P 500 Energy sector, with the worst hit companies being Occidental (OXY) and Diamondback Energy (FANG). However again, the energy sector is back to currently trading at the US$368 handle, reflecting how the uncertainty of energy and petroleum prices may be a buying opportunity for investors. It is vital to keep an eye on how investors interpret the demand-issue alongside other factors such as the tension between regional allies about tackling climate change, an increasing demand for jet fuel following a jump in US Airlines passenger volumes, and fears of the market tipping into a surplus.

In other news, Gold ETFs are on the rise in Asia, with China, India, and Hong-Kong as the main recipient of the inflows. A total net outflow of US$12.1 billion was recorded from the US and Europe, suggesting that investors are looking to Asian Gold ETFs as a hedge against widespread inflation, economic recovery, and recent history of a weakening US dollar. It is interesting that despite risks of holding metals ETFs, such as counterparty risks and lack of exposure to the commodity itself, investors across the world are seeing this as a strong strategic asset.  Will this shift in investor mindset remain?

Foreign Exchange

G10 & EMFX (Noah Martle)

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ECB (European Central Bank) Maintain their Negative Interest Rates

On Thursday, the ECB announced that they are committed to keeping their deposit rate at -0.5% and hitting their target of €1.85tn bond purchases. This decision has been made in light of the ECB’s new strategy to target 2% inflation compared to their previous inflation target of “below, but close to, 2%”. This points towards the ultra-loose monetary policy remaining in place for the foreseeable future to enable to Eurozone to hit their target of 2%, despite kickback from a host of German and Belgium bank heads who sit on the governing council.

This has led to increased hot money outflows out of the Eurozone, resulting in an increase in the supply of Euros to the foreign exchange market. As a result, the Euro depreciated 0.423% against the Dollar from 1.181 to 1.176 over the course of the week.

FT, 2021

General News

Following on from last week, the Rand continued to depreciate 2.594% against the Dollar from 0.0694 to 0.0679 due to the continuing political unrest in South Africa.

In addition, the Pound fell to a new 6-month low of 1.35 as investors are worried that the UK are lifting Covid-19 restrictions too soon, especially whilst despite the Delta variant is still rampant.

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