Friday Wrap-Up (November, 6)

Stocks had their best week since April despite the US election uncertainty.

(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 had their best week since April despite the US election uncertainty.

Economy: The U.S. economy added 638,000 jobs in October and the unemployment rate fell to 6.9%. The recovery may be slowing down, but it’s still chugging along.  Good news from the manufacturing sector, which in October expanded at its fastest pace in two years and saw new orders hit their highest level since 2004. 

Markets in a Minute

Equities

Information Technology (Maria Lomaeva)

Last week’s sell off within the tech sector turned into a strong bull run this week, with NASDAQ Composite gaining more than 8% since Monday despite the uncertainty brought by the US election. The reason for investors’ optimism was the fading prospects of a ‘blue wave’ and Democrat control of the Senate. A paralysed legislature could result in less scrutiny of Big Tech firms, which have recently been in policymakers’ sights.  

Alibaba Group (BABA) received less positive news this week regarding the $37bn IPO of its fintech arm Ant Group which was suspended for at least 6 months by the Chinese authorities. This prompted Alibaba shares to fall sharply by 9% overnight, and are trading almost 3% lower since Monday. Otherwise, the company reported a 30% increase in revenue YoY to US$22.8bn, beating expectations. Its cloud computing revenue grew 60% YoY to $2.2bn, which is faster than the revenue growth of the market leaders: Amazon’s AWS and Microsoft’s Azure, although those businesses are much bigger. 

Qualcomm (QCOM), a chip designer, manufacturer and license issuer, saw its shares surge 14% after a very positive quarterly report this week. Its adjusted revenue grew to $6.5, 35% higher YoY, while a net income increased by 76% YoY to $1.6bn. With the company’s investments into 5G technology, the prospect for the current quarter are very bright: the revenue is expected to land between $7.8bn and $8.6bn, 54-70% higher YoY.

More quarterly reports came within the gaming industry. The video and computer game company Electronic Arts (EA) reported a 15% decline in revenue YoY to $1.2bn. The company expects a 5% yearly rise in revenue to $1.7bn for the current quarter and a 2% rise in revenue YoY to $5.6bn for the current fiscal year, but this fell short of analysts’ forecasts. EA shares slipped 10% the day after the announcement. 

Another game company, Take-Two Interactive (TTWO) reported a 2% decline in revenue YoY to $841m and a 38% increase in net income YoY to $99.3m. It forecast $760-$810m in revenue for the current quarter and $3.1-$3.2bn in revenue for the current fiscal year, ahead of Wall Street estimates. Take-Two shares are trading almost 13% higher since Monday. 

Nintendo (7974) announced more positive results having increased its net sales by 73% YoY to ¥769.5bn ($1= ¥108.63), while its ordinary profit more than tripled to ¥297.5bn YoY. The company has also increased its guidance for net sales and ordinary profit to ¥1.4tn (up 17% since the beginning of the fiscal year) and ¥440bn (up 52%), respectively. 

Next week two tech conglomerates Tencent and Cisco will present their earnings results.  

Healthcare (Christine Chan)

This week, the uncertainty of the US presidential election introduced a lot of volatility into the stock market. However, as we neared the end of the week, it appears that stocks are seeing the largest post-election day rally in over a century, with healthcare stocks also doing very well. Despite Biden edging closer to his presidential win, the market gains arise from the prospect of a politically-divided Congress, as this prevents a Democrat administration from tightening regulation on corporates, including those within healthcare and big pharma. As a result, the Health Care Select Sector SPDR exchange-traded fund (NYSEARCA:XLV) has managed to reach a record high of $111.26, comfortably breaching the previously-unattained $110 level. This corresponds to a 6.59% increase over the week, outperforming the 6.50% increase of the S&P500.

This week, there was relatively little news within the healthcare industry. One of the more significant announcements came from Biogen (NASDAQ:BIIB), an American biotechnology company, when the FDA published a positive clinical review on Biogen’s drug candidate aducanumab, citing that there was substantial evidence supporting its efficacy. It is predicted that the drug can be used to treat 5.8 million American patients with Alzheimer’s disease, which would be the first breakthrough since 2003. The drug may be able to slow loss of memory, language, and executive functions in Alzheimer’s patients. According to Bloomberg, Biogen’s shares soared as much as 47% on Wednesday 4th November when the announcement was made, which is the largest gain on record based on data going as far back as 1991, and their highest share price in 2 years. If their drug is approved, it could potentially rake in sales of $4.7 billion in 2025. However, on Friday 6th November, in a turn of events, a panel from the FDA have criticised the decision and 10 of the 11-panel members ruled that there was insufficient evidence to demonstrate that aducanumab really works. Trading of Biogen’s shares have halted and it will be interesting to see how this case proceeds. 

Consumer Staples and Consumer Discretionary (Jun Wei)

Uncertainty surrounding the Presidential Elections in the U.S. have caused great market volatility the past week, with tech stocks notably rallying strongly towards the end of this week. For the consumers space, the S&P 500 Consumer Discretionary Index rose about 6% this week while the Consumer Staples Index rose about 3%. As earnings season continues, we focus on another 2 companies this week, namely Clorox and Nintendo, both of which have done exceedingly well despite the effects of Covid-19. 

Clorox (NYSE: CLX) saw its biggest increase in quarterly sales since 1998 with revenues of $1.92 billion (vs. expected $1.76 billion). Net income also more than doubled to $415 million to reach EPS of $3.22, versus estimates of $2.33. Shares rose around 3% in pre-market trading. Clorox, which says it has been struggling to meet demand for disinfectant from consumers, has now raised its full-year revenue forecast as people continue to buy large amounts of cleaning products for hygiene purposes. We can expect to see good results for the medium term at least, as the increase in demand from Covid-19 is likely to be sustained to a large extent. Checkpoints, airports, customer-facing businesses will all require higher levels of personal and public hygiene standards, and this will lead to a sustained increase in demand for Clorox’s products.  

Nintendo (TYO: 7974) smashed revenue and earnings expectations again as quarterly sales rose more than 73% year-on-year to US$7.4 billion, and operating profit tripled to reach $2.8 billion. This comes as Nintendo sold 12.5 million units of the Nintendo Switch console in the last 3 months, buoyed by people staying at home and the sudden popularity of the Nintendo Switch game, Animal Crossing. While shares jumped about 1% on the news, the share price of Nintendo has now stabilised and is trading flat for the week. Nintendo now projects to sell 24 million units of the Nintendo Switch this fiscal year, up from a previous forecast of 19 million. We can expect clear skies ahead for Nintendo and strong upside, with the highly-anticipated PS5 console released on the 12th of November. With the effects of Covid-19 still going on and with most festive celebrations expected to be spent indoors, Nintendo can capitalise on this to drive sales for the PS5. 

Communication Services (Katarina Lau)

Qualcomm (QCOM) was up 14% after forecasting better-than-expected fiscal Q1 revenue. It predicted sales of 5G smart phones would balloon to more than half a billion units next year, thanks to Apple’s new iPhone 12. Based in San Diego, the company is the biggest supplier of processors for smartphones and this year returned to being a major supplier for Apple. Given that Apple didn’t give a sales forecast, Qualcomm’s chip sales act as a strong indicator of new iPhone sales revenues. Apple (AAPL) rose 0.6% after the announcement of Qualcomm’s results.

Nokia missed out on a lucrative 5G RAN network deal with Swedish telco group Telia. Radio Access Networks (RAN) essentially connect user devices e.g. computers and smartphones to the core part of a network. While Nokia got the core work for all of Telia’s 6 country operations, Ericsson claimed the ultimate prize of being chosen to help the 5G RAN rollout in Sweden, and now Lithuania. This lost opportunity for Nokia goes deeper as the CEO of Telia Lithuania also runs operations in Estonia and Denmark, strongly suggesting the remaining network deals will almost certainly all go to Ericsson, because it would be inconvenient to use different 5G RAN vendors across one territory. This no doubt dampens Nokia’s hopes of being a 5G leader in Europe, let alone the world.

Since merging with Sprint seven months ago, T-Mobile US has certainly reaped the synergies after pushing above the 100 million customer mark for the first time. T-Mobile (TMUS) jumped more than 7% trading at record highs, and is up 50% YTD. Last quarter T-Mobile overtook AT&T to become No.2 in US wireless and is now seen as growth leader in wireless. Its Q3 topline also significantly increased from $11.1 billion last year to $19.3 billion.

Financial Institutions (Jamie Biswas)

This week saw a large rebound within financial institutions, with the Vanguard Financials ETF (VFH) gaining 4.51%. The index rose fairly steadily during the week, but saw some volatility on Wednesday due to the US election. The gains within the sector can be attributed more heavily to banks and less so to insurance firms, although both had a strong week overall. Despite the financial institutions sector having a great week nominally, it was greatly outperformed by the S&P 500, which rose every day to finish 7.32% up.

Société Générale has announced a return to profitability in Q3 of 2020, with its equity derivatives division delivering exceptional profits. Société Générale stated on Thursday that net income rose by around 1% to €862 million in Q3, almost double analysts’ forecasts. And although revenue fell 2.9% to €5.8 billion, it still beat expectations.

This return to profitability contrasts the bank’s Q2 loss of €1.26 billion, its worst since 2008. The CEO, Frédéric Oudéa, has been under immense pressure during the last few months and this positive result will potentially instil confidence in the longest-serving CEO of any large European bank. Large cost cutting initiatives have been underway during the pandemic including restructuring the leadership team in addition to reducing and simplifying the array of structured products it sells to clients.

In the third quarter, the bank saw a sharp rebound in equity trading, with revenues climbing 5.1% compared to the same period last year and almost quadrupling relative to Q2 of 2020. Fixed-income and currencies trading revenues increased 9% over the same period last year, a slightly disappointing result when compared to the 36% increase that rival BNP Paribas reported recently. After the earnings release, the bank traded sideways suggesting results met investors’ expectations.

Industrials (Ed Collins)

The Industrials sector has risen greatly this week, with the Vanguard Industrial Index (VIS) having risen by 6.32% since the start of the week.

Serco (SRP), the British public service provision company, saw its shares fall 12% on Monday after it lost its contract to manage facilities that develop the warheads for Britain’s nuclear-armed submarines. This contract loss is due to the fact that the British Ministry of Defence is renationalising the Atomic Weapons Establishment, which manages Britain’s nuclear stockpile. Serco owned 24.5% of AWE, alongside Jacobs Engineering, who also owned 24.5%, and Lockheed Martin, who owned 51%.

This three-company consortium was given a 25-year contract in 2000 to develop Britain’s nuclear warheads. Last year, AWE paid £82m in dividends however there were many concerns about cost overruns associated with projects to upgrade the facilities. Dividends from AWE will account for about a tenth of Serco’s underlying trading profits this year. No compensation is expected from the nationalisation.

The Ministry of Defence’s nationalisation decision is a big blow for Serco. Its shares fell 12% to 113.3p on Monday. Serco is strong enough to cope with the AWE setback. That might not have been true a few years ago, when AWE was one of its few money-makers, but now Serco has a portfolio of many profitable contracts. Losing the contract now may be a blow, but it will not be the end of Serco. 

Utilities (Katarina Lau)

This election week saw utilities stocks trim gains as it became clear there would be no ‘Blue Wave’. Several industry-leading energy companies saw shares dip, including Duke Energy (DUK) down by 2%, PPL Corp (PPL) down 3.2%, American Electric Power (AEP) down 0.8%, FirstEnergy (FE) down 3.5% and Consolidated Edison (ED) down 2.1%.

In weeks preceding the Nov 3 election, investors were betting on Democrats winning all 3 US branches of government, which would allow them to easily pass their policies of shifting to greener energy, thus giving utilities a bullish sentiment. The rally was evident as the sector (XLU) posted the largest gain on the S&P 500 in October, rising 5% while the benchmark index fell 2.8%. As the prospect of a ‘Divided Government’ becomes increasingly more likely, Biden’s proposed $2T plan to combat climate change would almost certainly be blocked by a Republican Senate.

However, analysts have pointed out if Biden’s proposed increase in the corporate tax rate is achieved, utilities will be better off than other sectors  Despite the stifled environment for renewables, global investment firm KKR announced its $1.4 billion investment in NextEra Energy, the world’s largest producer of wind and solar energy. It will acquire stakes in US wind and solar assets from the renewables company, buying a 50% stake in a 1,000MW portfolio for $300 million. KKR also agreed to a $1.1bn convertible equity portfolio financing agreement with NextEra Energy Partners for an interest in a 1,125 net MW portfolio. This act shows KKR’s open support for the development of clean energy, as the company also signed a preliminary agreement to provide $900m capital for future renewable energy transactions with NextEra.

Materials (Ed Collins)

The Materials sector is up this week: the Vanguard Materials Index (VAW) is up by 6.3% since the start of the week.

Barrick Gold Corp (GOLD), the second biggest gold miner in the world, reported its quarterly earnings for Q3 on Thursday: an almost threefold rise in adjusted Q3 profits on the back of surging gold prices. Mark Bristow, Barrick’s CEO, said after the report that he expects gold to once again surpass the $2000 per ounce mark that it exceeded earlier this year as developed economies continued to print money to stimulate their economies in the face of the pandemic

Shares in Barrick, the world’s second-biggest gold miner, have risen by 48% since the beginning of the year, while shares of Newmont Mining, the biggest gold miner, are up 50%. Barrick reported an adjusted profit of $726m for the third quarter, or 41 cents per share, beating analysts’ expectations of 32 cents a share. Barrick’s share price rose 7.05% on the day on Thursday.

Saudi Aramco (ARAMCO:AB) is sticking to its large dividend plans despite a 45% drop in earnings in Q3. Aramco is planning to pay a bumper third-quarter dividend of $18.8bn. However, in the third quarter the oil company failed to raise enough cash to cover that payment after coronavirus-induced lockdowns and travel bans led to a drop in oil demand and crude prices. The kingdom’s state energy company on Tuesday reported Q3 net income of $11.8bn, down from $21.2bn in the same period last year. However, this beat out the $10.6bn that analysts had forecast.

The quarterly dividend payout is $18.8bn, which exceeds the free cash flow of $12.4bn that Saudi Aramco generated in this period, meaning the group will have to borrow to make up the difference. There have been questions of the sustainability of this: Aramco’s gearing surged from -4.9% in the first quarter to 21.8% currently, far greater than the target of 5 to 15%. Aramco’s shares rose 0.73% after the earnings report on Tuesday. The share price is up 8.43% since the start of the year.

Fixed Income

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Rates (Harrison Knowles)

At the time of writing the outcome of the U.S. election hangs in the balance. Clearly this isn’t the Blue Wave that so many traders were counting on to reward historically large wagers against U.S. government bonds. The big short is in tatters, and the buyers are back in, with the endgame to this 2020 race already producing more interesting moves in Treasuries. Earlier this week, benchmark yields jumped first through 0.9% on a surge of reflation bets before slumping back through 0.8%. The closer yields move to 1%, the more encouragement will grow about when the Federal Reserve will likely step in to push them down again. Treasuries will likely remain under pressure whoever ends up the winner as a stimulus bill is expected to come sooner rather than later. But if 10-year yields move back up toward 1%, it will take a brave bond bear to go toe-to-toe with the Fed.

Whereas as the week went on, the Treasury curve began to flatten with long-end yields dropping while inflation expectations are falling. It makes sense as a correction for prior expectations for a clear-cut Democratic win. But, expectations for another round of stimulus are not exactly dead – they just might take longer. No party wants to see a re-accelerating pandemic wreak economic damage without any fiscal support. Democrats look poised to win the presidency, and hold the House, but the Senate appears set for a narrow Republican majority. What matters to bonds is that another large pandemic relief package is less possible. As the first big battleground state, Florida, fell to Trump, the U.S. 10-year yield tumbled from its highest levels since June, moving almost a quarter point before steadying around 0.75%.

Another reason for Treasury bears to go back into hibernation is the Fed. The central bank kept well out of the political fray this week with a policy statement so bland, the most obvious change from last month was the date at the top. But Chair Jerome Powell told reporters that he and his colleagues “discussed our asset purchases”, which are currently running at a $120 billion monthly pace. He said that the central bank could shift the composition, duration, size or the lifecycle of the program to provide more support to the economy as it struggles with the pandemic.

Whilst in the UK, the Bank of England announced a bigger than expected £150 million ($195 million) round of quantitative easing to help the economy as the U.K. enters further Covid restrictions and the post-Brexit relationship with the EU remains uncertain.

Real Estate

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

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The mortgage market has continued to be buoyant, with residential sales boosted by pent up demand and government measures in some geographies. In the US, mortgage refinancing applications are up by 60% and purchase mortgage applications are up 20% YoY. However, there are growing concerns over it forming a bubble, as future would-be home buyers have likely suffered falls in income and career prospects. This has led to worries within the lending industry, as investors are bleak about their future performance. This has been seen with Caliber Home Loans and AmeriHome both delaying their listings, a surprise move considering reasons stated included market timing. They had combined loan originations of over $100bn and growth rates of around 50% YoY. Caliber was set for a market capitalisation of $1.9bn and AmeriHome was set for $1.3bn at its IPO. 

This mentality has yet to hit other firms within the sector, such as Crest Nicholson (a UK housebuilder), which has decided to reinstate its dividend in the wake of the strong recovery in the UK housing market following the first lockdown in March. While profits are still severely reduced YoY from £103mn last year to an approximated £45mn for this year, this is still a much more positive view compared to its initial forecasts of gloomy house prices and poor sales. This has resulted in a share price (LON: CRST) increase of 17%.

Elsewhere bankruptcies have started to occur in the mall REITs space, with both CBL & Associates and Pennsylvania REIT filing for bankruptcy. Whilst the former would see a dilution for shareholders and is expected to see a large fall in value, the latter would not result in a dilution and has reached an agreement with all but one of their creditors agreeing to a pre-packaged bankruptcy plan which would both speed up the process and reduce administration costs.

Commodities

Oil & Precious Metals (Oliviero Sacchet)

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This week the oil industry registered: WTI (+8.2%) BRNT (4.9%).

The oil and gas prices rose this week despite the actual results of the US elections. Joe Biden proposed a clean energy plan of $2tn in order to reach zero carbon emissions by 2050. However, according to analysts, the Congress would not be fully approved the new energy revolution. Even if Biden will win the Republican will keep the Senate and so the plan will not be approved fully. The two candidates’ energy plans are completely different. On one hand Biden supports a zero emissions policy, on the other hand Donald Trump would follow a deregulation plan to boost fossil fuels. According to the analysts, if Biden’s plan will be approved the losses in the oil production will be by 3 per cent a year.

The world’s weather conditions are changing the food commodity environment. Corn prices are having a recovery and the prices are $4.15 per bushel compared to spring level. This situation is supported by the dry weather conditions in Ukraine that are reducing the supply. Wheat’s prices, also, are increasing thanks to the high demand from Egypt and Morocco due to period of drought. 

Countries, in anticipation of the second wave of COVID-19, are being an active buyer of grains and soybeans and their prices are rising. In particular, soybean’s prices have reached a four-year high.

Foreign Exchange

G10 & EMFX (Krisztián Sudár)

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All eyes were and continue to be on the United States’ Presidential Election this week. Coming into these turbulent weeks, investors, and most people following the polling, were anticipating a so-called “Blue Wave”, in which the Democrats take all three of the major elements at play: the House, the Senate, and of course, the biggest prize of them all, the Presidency. This prediction failed to accurately materialize, as Democrats barely clung on to the House, will most likely not flip the senate, and Biden, as of late Friday afternoon, is narrowly in the lead against the incumbent President. The major financial implication of this is that another comprehensive, large stimulus bill is unlikely to be accepted, as the Republican controlled senate will not allow it, and instead will opt to negotiate for a more conservative package. 

Additionally, what we have seen in the days preceding Election Day, investors moved away from risk assets, and into safe havens: there was a rally in Treasury Bills, and in the United States Dollar. This was caused by the perception that the election will be contested and will quite likely bring civil unrest. While the election is in fact contested, the extent of this phenomenon is much smaller than anticipated, causing investors to return to riskier assets, and move away from havens. All in all, the election did bring forth instability, but it was also followed by a large wave of re-risking, culminating in a very weak 5 days for the greenback, namely a 1.6% drop in the Dollar Index.

Reuters Graphic

The winners of the week were currencies that historically move inversely to the Dollar. While some diplomatic issues with China slowed its rise, the Australian Dollar appreciated by 3% for the week, and the New Zealand Dollar climbed 2.5%, to $0.6781. The Euro rose 0.7%, to $1.18, a two-week high, on a week dollar and the news of an EU budget nearing finalization. The Pound Sterling also appreciated, following a renewed, 150-billion-pound bond purchasing programs’ announcement, and of course, the weaker dollar.

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