(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: The major indexes were mixed for the week with the S&P500 index and the NASDAQ index closing +0.4% and +0.1% higher respectively. Large-cap benchmarks and the tech-focused NASDAQ index recorded highs before backing down to end the week with modest losses. After recent underperformance, Utilities shares finally reversed course and was among the best performers in the S&P 500 Index, along with materials and real estate stocks. A fall in Amazon shares weighed on the consumer discretionary sector after the online retailer missed consensus Q2 revenue expectations.
Corporate Earnings: It was the busiest week of the earnings season with 177 of the S&P 500 companies expected to report Q2 results.
COVID-19 Update: The Delta variant has reached almost half China’s regions, pressuring Beijing’s zero-tolerance tactics. In the US, the F.D.A. could grant full approval to Pfizer’s vaccine by early September.
Information Technology (Satya Maulana)
With the whole week being full of earnings and IPO buzz, the tech space has been exhilarating this week, without further ado, let’s get onto the news!
Tesla (+6.18%) exceeded both top and bottom-line projections, achieving $1 B ($1.14 B) in quarterly net income for the first time (CNBC). This might be their most essential and cleanest earnings yet. There were no Bitcoin sales to help the bottom line (the company reported a $23 M impairment for Bitcoin). Their primary catalyst is the boasted record of automotive gross margins over a period with rising raw material costs and widespread supply chain disruption. Tesla also quadrupled their YoY revenues ($12 B) with help from a decline in R&D (-13.51%) and interest rate cost (among many other things).
Apple’s (-1.82%) approach of selling pricey new hardware versions while providing high-margin service resulted in a growth for every single one of their product lines at least 12% YoY, resulting in a stellar earnings report that blew away expectations. Spotify’s (-6.14%) podcast ad revenue increased by 627% YoY, but shares fell to lower than expected monthly active user growth. Amazon (-9.00%) posted its third consecutive $100 B revenue quarter; however, they fell short on revenue projections and “weak” Q3 guidance (CNBC). Here are a few other breakdowns of tech earnings this week (Apple, Alphabet, and Microsoft) (PayPal) (Facebook).
What else happened this week? Didi (+43.59%) considers going private to appease China’s tech-hunt (BBG), perhaps following the council of Masa Son (FT). Because of the tensions in the East, the SEC was forced to halt all Chinese companies planning to go public until regulators provide a clear framework (RT). Robinhood (+8.00%), the most important financial story of 2021 and scandal, went public this week and had mixed feelings from investors.
Japanese sneaker platform SODA raised a $56.4 M Series C led by SoftBank (TC). Turkish e-commerce startup Trendyol talks to raise a $1.5 B round at a $16.5 B valuation from General Atlantic and SoftBank (BBG). And Uber’s freight unit is buying a tech-focused logistics services provider Transplace in a deal worth $2.25 B that will extend the ride-hailing giant’s reach into the US domestic shipper sector (WSJ).
Consumer Staples and Consumer Discretionary (Jeff Chen)
In the past week, the Consumer Staples Select Sector Fund (XLP) was up 1.2%, retracting some of the losses of the previous week, and the Consumer Discretionary Select Sector Fund (XLY) also rose by 1.1%. The better performance in both consumer sectors could possibly reflect greater optimism as highlighted by falling US jobless claims by 24,000 to 400,000, which is half that of the peak number of nearly 900,000. As economies start recovering from the brunt of the Covid 19 pandemic, we could possibly see the cyclical consumer discretionary sector bounce back to pre-pandemic levels.
In company news, Canadian e-commerce giant Shopify (SHOP) fell 2.4% over the past week, despite a better-than-expected Q2 revenue earnings. The company posted revenues of US$1.2 billion for the quarter, which was higher than analysts’ expectations of US$1.05 billion, with a YoY growth rate of 57%. This was on the back of the continuing trend towards online retail, as fears of new waves of Covid-19 infections and a possible ‘stickiness’ in consumer behaviour to still continue online shopping. However, Shopify insisted that it expects revenue growth to slow in FY21, as more vaccinations are rolled out globally and physical stores start re-opening. As we see more re-opening measures in place, it is possible that there will be a shift towards a more hybrid model of consumption, one in which consumers will continue ordering online from the comforts of their home, but also where lockdown fatigue comes into play, and we see greater footfall in physical retail stores.
Communication Services (Chris Dai)
As the earnings season continues, the communications sector has faced a turbulent week with the S&P 500 Communications Service Index finishing at 1.66% lower than Monday. Notably, the major losses come from tech giant Facebook (FB) due to investors’ rising concerns on whether the revenue growth is sustainable amid the recovery from the global pandemic, which subsequently impacted its peers’ performance within the sector.
Facebook (FB) announced its Q2 earnings result on Wednesday, surpassing the estimations in various fields. The revenue grew 56% YoY to $29.1bn, beating analysts’ expectation of $27.9bn with an attributed 47% growth in the prices of advertising services. Additionally, the company reported a 101% YoY growth in net income to $10.3 bn, well ahead of the consensus estimates of $8.7bn. However, the company warns of a significant slowdown in revenue growth amid the pandemic recovery and uncertain demand from brands. As a result, the share prices fell as much as 5.0% in extended trading on Wednesday and finished the week at $356.3, down 4.6% since the release of Q2 results.
Similarly, Google’s parent Alphabet (GOOGL) reported blowout Q2 results on Tuesday, indicating a continuous soar in the demand for digital services and gadgets. The company saw a 62% YoY growth in its revenue, reaching $61.9bn, well surpasses the consensus estimates of $56.1bn. Notably, YouTube revenue skyrocketed to over $7bn, a surge of 83% from last year which is close to Netflix’s quarterly revenue; total Google ad revenue reached $50.4bn, with a 69% YoY growth compared to the year-ago quarter. The company’s share prices surged almost 4.6% in the after-hours trading on Tuesday, reaching a historical high at $2721.9 before the graduate fall-back and closing the week at $2694.53, 0.5% higher than Monday.
Despite tech giants obtaining triumph results for the first half of this year, it is still questionable whether the surge in digital services represents a permanent shift. As the consequences of the pandemic begin to fade, it is almost certain to expect a post-pandemic adjustment, especially on the big players in the Communications sector.
Financial Institutions (Raed Altaf)
This week, the Vanguard Financials ETF and iShares Financials ETF have been in consistent uptrends, reaching highs of $91.18 and $82.65 respectively. The strong performance can be attributed to the consistent beating of analyst expectations by financial institutions throughout this month, with Barclays quadrupling their profits from 2021 Q1 to £5bn in Q2.
The consistency in the financial sector’s uptick can be explained by a few major developments. Firstly, banks were able to release billions of dollars set aside for loan losses during the pandemic, to ensure a repeat of the defaults during the financial crisis does not occur. This opportunity to release stems from borrowers holding up to their loan repayments better than initially expected during the pandemic, as seen by Fitch Ratings lowering their loan default forecast to 1.5%. Secondly, the Bank of England’s decision to allow share buybacks and dividend payments from June increased positive investor sentiments and allowed financial institutions to reduce the supply of their shares on the market. Lastly, with the availability of near-zero interest rates and cheap credit, the space for Mergers & Acquisitions flourished as observed by the high deal flow in the private equity space i.e 124 deals completed in the UK alone valued at £41.5bn.
Industry & Materials (Maksymilian Mucha)
Vanguard Industrials ETF (VIS) and Vanguard Materials ETF (VAW) are up 0.15% and 2.73% this week respectively.
United Parcel Service (UPS) released on 27 July its Q2 2021 results. The company’s revenue was $23.42b, ahead of the $23.24b estimate, and EPS grew by 44% YoY to $3.06 in Q2 2021. However, after the announcement, UPS’s share price fell by 7.03%. This was a result of the 2.8% decline in US Domestic Segment shipping volume, which has led to investors’ fears about robustness of UPS’s business amid the reopening of the economy. Revenue of UPS in this quarter was mainly driven by international and specialist deliveries.
Looking forward, UPS’s results may be a sign of weakening e-commerce industry with brick-and-mortar retailers reopening, which contributed to UPS’s peer FedEx Corp. (FDX) share price to drop 5.45% on 27 July. However, the company in its strategy foresees new COVID-19 variants fuelling e-commerce shipping in the winter period.
Tesla Inc. (TSLA) on 26 July announced its Q2 2021 earnings. The revenue has reached $11.96b, 97% growth YoY, and the EPS was $1.45, 48% ahead of expectations. The company achieved record earnings despite semiconductor shortage and the setback of its business in China. Tesla’s shares were up 5.59% this week.
During the earnings call, Tesla’s CEO Elon Musk emphasised the difficulty of achieving large-scale manufacturing and profitability, which may indicate further rapid increase in Tesla’s earnings as the production continues to increase. On the other hand, Intel’s CEO Pat Gelsinger recently warned about semiconductor shortage deteriorating in the second half of 2021 and not improving until 2023, which may be especially detrimental to the car manufacturer.
Utilities (Jonathan Leng)
This week the S&P 500 Utilities Index rose 1.2%, narrowly outperformed the broader S&P 500 index. This positive outlook was also mirrored by 3 of the largest utilities ETFs by total AUM – Utilities Select Sector SPDR Fund (XLU), Vanguard Utilities ETF (VPU), iShares Global Infrastructure ETF (IGF), with each position up 1.3%, 0.9% and 0.8% respectively, since the start of the week. With unprecedented low yields and high inflation figures signalling slower economic growth and potentially higher inflation in the coming months, a rotation of allocations into commodities and quality defensives – utilities and staples might warrant a sense of security for investors.
BHP Group Ltd announced today (30/7/2021) that it would build two solar farms and a battery storage system in partnership with Canada’s TransAlta Renewables Inc at its nickel project site in Western Australia. The building of the solar farms was in line with the company’s goal to reduce carbon emissions by 12% compared with 2020 levels at its Mt Keith and Leinster operations, where power is currently being generated through diesel and gas turbines. These proposed solar farms would also be producing sustainable low-carbon nickel used in electric-vehicle batteries, for which the company signed a supply agreement with Tesla Inc last week. This will add potential revenue streams to the company subjecting to the government’s final approval. Upon the announcement. As the electric vehicle market continues to grow, the demand for low-carbon nickel would signal a market opportunity that is yet to be explored.
On Wednesday, the US bipartisan group of Senators voted to advance the infrastructure bill proposed by president Joe Biden, which includes $550 billion in new spending for infrastructure projects such as roads, bridges, passenger rails, drinking water and wastewater systems, as well as expanding high-speed internet and climate-related infrastructure. This gives rise to confidence in industrials, materials and utilities stocks as these industries are highly impacted by infrastructure related spending. The Global X U.S. Infrastructure Development ETF (PAVE), whose stocks include Deere and Union Pacific, rose more than 1% on Thursday upon the announcement.
Rates (Suraj Suresh)
Following the FOMC meeting held on the 27-28th July, the yield of the US 10 Year Treasury, which moves inversely to bond prices, slid again to 1.23%.
Over the last few months, consumer prices have seen a substantial spike especially in sectors most affected by the pandemic such as air travel and used cars. CPI data in June showed an increase of 5.4%, the highest monthly inflation in 13 years. Powell is still firm that the inflationary environment is temporary and warns that tightening monetary policy too soon could stump economic growth.
The Fed seemed to be more hawkish but established that timing is key and ‘tapering’ will not begin until there is strong data on unemployment and economic growth. Powell also dismissed that MBS purchases of $40bn will be trimmed before the $80bn purchases in Treasuries. This comes after data on the sales of new single family homes fell by 6.6% below May’s rate, signalling the end of the housing boom.
As Jeremy Powell fails to provide investors with a definite reason for the bond rally, it will be interesting to see how market participants position themselves in the coming months.
President Xi Jinping’s announcement on policy changes on education companies caused the yield on benchmark 10-year government bonds to rise as high as 2.93% as investors feared that a swathe of industries might be affected by regulators. The POBC responded with a seven-day reverse repurchase agreement to inject liquidity (US$4.64 billion) into the markets. This saw the 10-year yield drop for the first time in three days.
Real Estate Investment Trusts (REIT’s) (Soubhik Sengupta)
In industrial real estate, almost 100 million square feet of space was absorbed in Q1 2021, the third highest amount ever, and a record 376 million square feet is under construction. Rents rose 7.1% compared to Q1 2020, to an all-time high of $8.44 per square foot. The accelerating shift to e-commerce and the ever-shortening of delivery times by online retailers were the main drivers of industrial space demand prior to the pandemic. And the pandemic has further accelerated the demand for warehouses, as consumers were stuck at home and ordering more goods online with high-street retailers being shuttered.
Duke Realty Corporation (DRE), a REIT that owns and operates 159 million square feet of industrial properties, has seen its share price increase 27.95% year-to-date, beating the S&P 500 by 900 basis points. Going forward, we can expect industrial REIT shares to appreciate even further. This is because the pandemic has underlined the importance of supply chain and logistics real estate, especially highlighted by the severe PPE shortage faced by several countries. The onshoring and re-shoring of manufacturing (especially for critical industries like medical devices and pharmaceuticals) will fuel greater demand for factories and warehouses , leading to greater demand for industrial space as manufacturers begin stockpiling components that they had previously procured on a just-in-time basis.
Oil & Precious Metals (Anouska Jha)
Strong Commodities Outlook Following US Policy, and Weather Disruptions on Brazilian Coffee Prices
Following weeks of intense partisan debate and the challenges of delivering welfare provisions amid economic uncertainty, the Biden Administration Senate has confirmed to pass the $1trn Infrastructure bill. The Bill mandates spending $110bn on roads and bridges, $73bn for electric grids, $65bn for broadband networks, and funding for electric vehicles. What does this mean for commodities?
Naturally, organizations such as American Iron and Steel Institute (a US Federal political committee), view the policy as a ‘key development’ in making US infrastructure more climate-resilient and encouraging more economic competition. Indeed, the Dow Jones US Aluminum Index has risen 3%, currently at $134.49. For investors, key commodities regarding this news may be the metals, with companies such as Rio Tinto (RIO) and Anglo American (AAL) looking to substantiate the increasing demand for important metals such as copper and nickel, despite their recent drop in share price. These metals will be vital in the construction of electrical grids and EVs, with some analysts seeing additional refined copper demand increasing by 500,000 tons in the next 5 years. However, investors must also maintain a philosophy of long-term stock and ETF holdings, as the mining-production and operation of such metals requires significant time and implementation. The wider context of reflation forecasts and recent natural disasters affecting Californian hydropower generation further marks the need for calculated skepticism on when and how successfully US companies and the government can commit to its new agenda.
In other news, Brazilian frost has led to record prices for coffee beans, after many of the country’s coffee plants in key regions such as Paraná, Sao Paulo and Minas Gerais became weakened by the drought. With Brazil producing over 40% of the world’s coffee, the Arabica Coffee Futures price rallying 14% to $2.15 per pound. Traders are potentially encouraged to cover short bets in the face of price movement, as top producers in Brazil projected a weak outlook for next year’s crop.
G10 & EMFX (Noah Martle)
The Turkish Lira
Turkey’s business conditions have been far from ideal over the past year. In June 2021, Turkey’s inflation rate reached a two-year high of 17.53% despite the Central Bank of the Republic of Turkey targeting a 5% inflation. The Central Bank’s attempts to curb inflation has hit various roadblocks, including the decision of Turkey’s President Tayyip Erdohan to fire three senior central bank officers including the Governor. Moreover, Erdogan holds the unconventional viewpoint that by cutting interest rates, inflation will fall. The Central Bank’s lack of autonomy has led to a fall in investor confidence. As a result, foreign investors have reduced the percentage of Ankara’s local currency debt they hold. The percentage has fallen from just over 20% in 2018 to a diminutive 3% by the end of 2020. These factors combined have led to the Lira depreciating 20.66% against the Dollar from 6.97 to 8.41 over the past year.
However, since the current Governor has kept interest rates at 19% for the fourth month in a row, the value of the Lira has seen some respite during the previous month.
The Bank of England (BOE) will have its monetary policy meeting next week in which they shall review their interest rates. June’s inflation rate was 2.5%, despite the BOE targeting inflation of 2%. Therefore, I shall be monitoring the outcomes of the meeting closely, as a change in UK interest rates will undoubtedly have a significant knock-on effect for the value of the Pound.