Friday Wrap Up (October, 1)

(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:

Major US indices recorded their biggest weekly drops since February due to inflation and interest rate fears. Growth stocks underperformed value shares, which was also mirrored in the underperformance of the NASDAQ index. News surrounding the US debt ceiling and stimulus weighed in on investor uncertainty. While most agree that the US actually defaulting on their debt is very unlikely, Treasury Secretary Janet Yellen did warn repeatedly that the limit has to be suspended or raised by October 18 for the Treasury to meet its obligations. European shares dropped sharply as the STOXX Europe 600 Index fell 2.24% amid concerns the economy might be entering into a slump period of low growth and high inflation. ECB President Christine Lagarde acknowledged Eurozone inflation could exceed the central bank’s forecasts, which have already been raised twice this year, however remained firm that an increase in inflation would be temporary. Meanwhile in Asia, Fumio Kishida will be sworn in as Japan’s next Prime Minister on October 4th, having won the internal Liberal Democratic Party (LDP) contest for its leadership.  In terms of policies, Kishida is expected to echo Abenomics. Indebted Chinese property developer Evergrande Group also boosted investor sentiment after selling roughly 20% of its stake in Shengjing Bank Co. to a state-owned enterprise for USD 1.5 billion to help reduce its debt burden. The asset sale comes after Beijing’s push for government-owned companies and state-backed property developers to buy some of Evergrande’s assets.

COVID-19 Update: 

Leading epidemiologists warn the worst of Covid-19 may not yet be over for the UK, as the country heads into winter with a worryingly high number of Covid-19 cases and a seemingly stalled vaccination programme. As the weather gets colder, transmissions are likely to rise as more people socialise indoors.

Equities

Information Technology (Satya Maulana)

US tech indexes of the Dow, Nasdaq, and S&P had their worst month since March 2020, which can be accredited to rising yieldssupply chain nightmares, the Chinese Evergrande fiasco, and inflation news. Technology stocks are susceptible to changes in interest rate expectations, as their valuations are tied to their growth prospects in future years. When inflation and interest rates increase, investors will likely mark down their views of how valuable their future growth will be. However, big tech companies with the likes of Apple (-2.91%), Microsoft (-3.42%), Alphabet (-4.33%), Amazon (-4.15%), and Facebook (-2.82%) are having difficulties in recovering from the spasm that passed through Wall Street this week.

The Big Stories

Indian social commerce startup Meesho raised a $570M Series F at a $4.9B valuation led by Prosus Ventures, Softbank (-1.88%), and Facebook (-2.28%) (TC). Andela, a fully remote company that helps tech companies build remote engineering teams, is currently valued at $1.5B following a $200M Series E round led by Softbank’s Vision Fund 2 (TC). University endowments mint billions in the golden era of venture capital (WSJ). Goldman Sachs (-2.78%) and Ozy Media’s $40M disastrous conference call (NYT). UK software company Blue Prism agrees $1.5B sale to private equity firm Vista (FT). Zoom (-1.78%) abandons $14.7B takeover of cloud company Five9 (FT).

Healthcare (Jasmine Khoo)

Following optimistic news on COVID-19 antiviral treatment remdesivir last week, Merck &  Co (NYSE:MRK) unveiled on Friday that its drug molnupiravir halves the chances of hospitalisation and death from COVID-19. 

Prior to the news, Merck’s shares were down 4% year-to-date, during which the company discontinued its COVID-19 vaccine program due to lacklustre data. On Friday, MRK.N rallied 12.3% and reached a new peak since February last year. There could be further upside to the stock following more data and FDA’s response in the coming weeks. If successfully launched, molnupiravir will be the first antiviral COVID-19 drug that can be taken orally at home instead of intravenously in clinics. At USD 700 per course, it is more affordable than Regeneron’s and GSK’s treatments. 

COVID-19 vaccines may be forced to take a back seat given that there is a simple and effective medicine at the public’s disposal. Shares of Moderna (NASDAQ:MRNA) and BioNTech SE (NASDAQ:BNTX) fell 13% and 11% on Friday respectively. Pfizer shares (NYSE:PFE) received a softer blow of -1.3% as the company is reportedly also developing an antiviral pill.

Consumer Staples and Consumer Discretionary (Jeff Chen)

Over the past week, both the Consumer Discretionary and Staples sectors were rattled by news from China, along with increasing fears of inflation and possible Fed tapering, with the Consumer Discretionary Select Sector Fund (XLY) falling 2.0%, whilst the Consumer Staples Select Sector Fund (XLP) fell 2.3%. The consumer sector was particularly hard hit, on the back of weak consumer sentiment and rising bond yields, especially with stocks in the consumer discretionary sector benefiting from a low interest rate environment during the pandemic. As interest rates possibly rise, we could see a shift in investor sentiment towards more defensive consumer stocks in the staples sector, and away from discretionary stocks.

One company to look at this week would be Boohoo (BOO), as the company’s stock price fell 19.6% over the past week on the back of disappointing 1H 2021 results. Adjusted profit before tax fell by 20% as the company faced headwinds resulting from ‘short-term’ factors resulting from the pandemic. Given the supply chain crunch and increasing wages for its warehouse workers, it is not surprising that the fashion retailer has been struggling to cover their costs and reduce their operating leverage. With other retailers such as Nike (NKE) announcing disruptions to their supply chain due to the insurgence of Covid-19 in their manufacturing countries, it is possible that other retailers are also feeling the brunt on their income statements due to higher costs. 

Communication Services (Chris Dai)

This week the S&P 500 Communications Service Index slid 1.7% to 277.51 points, with notable stocks Twitter (TWTR) and Google’s parent Alphabet (GOOGL) falling 7.8% and 4.3% respectively over the week. The tech-heavy sector as a whole has been hugely impacted by the latest update on the benchmark 10-year Treasury yield, which hit a high of 1.6% on Tuesday. Rising bond yields essentially lower the expectation of the relative value of future earnings, and subsequently resulting in a drop in growth stocks such as the big players in the communications sector. 

Following a series of antitrust investigations against Big Tech companies in both Europe and Asia, on Tuesday, a report was published by the Australian Competition and Consumer Commission claiming that over 90% of the country’s $2.8bn internet advertisements involved at least one Google service in 2020. Following the report, Google claimed that it would consider a change of policy in ad recommendation, highlighting that the ad arm supported 15,000 Australian jobs and contributed $2.45 billion revenue to Australia’s economy annually. Although regulators added that existing competition laws were “not well suited” to the situation, it is worth highlighting that the same inquiry from earlier this year has prompted Google to threaten to withdraw its search engine function from Australia.

Industry & Materials (Maksymilian Mucha)

Vanguard Industrials ETF (VIS) and Vanguard Materials ETF (VAW) are down 2.75% and 2.14% this week respectively. 

AutoStore, Norwegian automated warehouse equipment manufacturer, announced that it is planning an IPO on the Oslo Stock Exchange aiming to raise $315m, which would give it a valuation of over $10bn. Founded in 1996, the Norwegian company sells robots used in the storing and retrieval of goods in warehouses. The company has reported $182m revenue in the last year, which it expects to rise to $300m in 2021 and $500m in 2022. So far, the major shareholders of the company include SoftBank, Thomas H. Lee Partners, and EQT. Proceeds from the IPO will be used for debt repayments and increasing operational efficiency.

Looking forward, the company has a high potential of growth given the rapid expansion of e-commerce accelerated by the pandemic. Moreover, currently only 15% of warehouses are automated, which gives high potential for growth.

Micron Technology Inc. (MU), the largest US memory chips manufacturer, warned investors about lower than expected revenue and profit. The revenue forecast for the quarter ending in November is $7.65bn, 10.74% lower than the consensus according to Bloomberg. The slowdown in Micron’s sales results from PC manufacturers is from ordering less memory chips due to the reduced capacity resulting from the shortages of other computer parts. Micron share price is down 2.88% following the announcement.
Micron’s announcement comes as a surprise given record demand for chips and car manufacturers struggling to keep up with the orders, which translated into a 17.61% increase of the iShares Semiconductor ETF (SOXX) this year. This arguably may be a sign of misallocation of resources in the semiconductor industry causing the chip shortage. Therefore, the mobility of assets in this sector will likely determine how soon the crisis will come to an end.

Source: Google Finance

Utilities (Jonathan Leng)

This week the S&P 500 Utilities Index continued to display a downward trend, reducing 2.2% on a W-O-W basis to 324.46 basis points. Many major utility companies mirrored this trend with NextEra Energy (NEE) sliding 2.5%, Dominion Energy (D) dropping 2.8%, SSE (SSE.L) falling 3.3% respectively over the past week. This can be largely due to the turbulent market conditions where there is a greater supply and demand gap for gas and commodities. 

The French government announced that they will block rises to gas and electricity prices until April 2022, as it seeks to relieve the pressure of a global gas crunch and soaring energy costs across Europe. This will help reduce the hike in energy prices to 4% from the expected 12%. In addition to introducing a price cap, the French government also announced an exceptional energy subsidy of €100 for the 5.8m poorest households in the country, which accounted for €580m in government spending to alleviate poverty and help the poor household through the increasingly colder weather. As the gas crunch crisis develops, it will be interesting to observe utilities development in the European market. It can be expected that many energy and utility stocks will continue to fluctuate due to global uncertainty. 

The UK government is working on a deal to get China General Nuclear Power Group (GCN) to sell its 20% stake in the Sizewell C nuclear plant in Suffolk. Relations between London and Beijing have become increasingly tense in recent years over issues including China’s clampdown on dissent in Hong Kong. Hence, whilst the gas crunch crisis accelerates the development of more sustainable energy like nuclear, China’s involvement becomes more and more blurred out. We can expect fewer Chinese investments in the UK due to increased strained relations.

Fixed Income

Rates (Suraj Suresh)

The Vanguard Long-Term Government Bond ETF (NASDAQ: VGLT) stock gained $0.19 on Tuesday and the yield on the 10-year U.S. Treasury note rose to 1.57% after Jeremy Powell hinted at during a Congressional hearing that the current inflationary environment could last longer than initially expected. As the most powerful indicator of global growth and inflation, this news suggests that investors may now be more sceptical about the transitory nature of inflation, especially as energy shortages in countries have pushed up energy prices.

On Wednesday, Japan’s Government Pension Investment Fund (JGPIF), the world’s largest fund manager with $1.729 trillion in assets under management, said it will no longer invest in Chinese government bonds due to settlement and liquidity issues. This comes at a time when investors are becoming increasingly wary of Chinese debt securities due to the Evergrande crisis. Expectations of a bank collapse due to the collapse of the real estate sector have deterred investors from purchasing Chinese debt.

Commodities

Oil & Precious Metals (Anouska Jha)

The knock-on effect of the natural gas crunch on oil, and a new deal for a take-off in the SAF industry.

The last week has seen unprecedented rallies in natural gas prices due to inventory bottlenecks, factory shutdowns, and inflation. But how does this impact the oil market?  Prices of oil reflect a natural sentiment that once the demand for natural gas cannot be fulfilled,  customers turn to oil, driving prices sharply higher. On Tuesday 28 September, Brent Crude rose to $80 per barrel ( a 3-year high). This feedback into oil price rallies, further exacerbated by decreasing US oil inventories, has led to Morgan Stanley and Goldman Sachs forecasting oil prices to increase to $80-90 per barrel by the end of the year, creating a ‘demand destruction’ (where increased prices = increased inflation, thus a threat to demand),  at a time of the year when energy is most needed for heating purposes. However, OPEC’s recent data showing a boosting of output in September to 420,000 barrels per day and their unwinding of production curbs, along with increases in US Shale inventories, suggests a partial relief. Moreover, the Friday 1 October announcement by Britain’s National Grid that the British-Norwegian North Sea Link power cable has begun its operations, means that the cable will reach 1.4 gigawatts of energy supply in 3 months to soften the fuel crisis in the UK. This slow release of pressure suggests prices may stabilise by the end of the year, but one must keep in mind the renewable energy initiative alongside this; it is a delicate game of balance between short-term efficiency and a long-term agenda.

In company news, US Delta Airlines (DAL) signed a $1 billion 10-year deal (beginning in 2024) with Aemetis (AMTX), to purchase 250 million gallons of sustainable aviation fuel. The fuel will consist of cellulosic hydrogen from waste forests, and orchard wood, to lower the carbon intensity of its production. This falls in line with the Biden Administration’s goal of a 20% decrease in aviation emissions by 2030, and the proposal on September 9, to incur a $1.50-$2.00 tax credit for SAF. Aemetis stocks have increased by 23.7%  from Monday 27 October this week ( currently priced at $18.89), sparking a bullish outlook for further innovation in the aviation and renewable fuels industry.

Foreign Exchange

G10 & EMFX (Noah Martle)

Petrol Crisis Hinders GBP/USD

26% of petrol stations are empty due to a shortage of fuel tank drivers, who left the UK post-Brexit. Policing minister Kit Malthouse claims that the recent crisis is ‘stabilising’, despite contradictory comments from the executive director of the Petrol Retailers Association. This crisis has once again reminded investors that Britain is still suffering the consequences of Brexit and that similar issues will continue to crop up over the foreseeable future. 

Additionally, the US ISM Manufacturing Purchasing Managers’ Index reached 61.1 in September, beating expectations of 59.6. Elsewhere in the American economy, all eyes are closely focussed on the release of August’s inflation rates, with 0.2% the expected increase. If the experts’ forecasts are correct, the YoY inflation rate will hit 3.6%, thus pressuring the Fed to taper its asset purchases and hike interest rates.

These factors have led to a 1.22% depreciation of the Pound Sterling against the greenback over the past week.

Refinitiv, 2021

CZK/USD

The Czech National Bank hiked interest rates by 75 bp, following a spike in inflation. This is the Czech National Bank’s largest interest hike since 1997. Thus, the CZK/USD has appreciated 0.09% today

Canada’s GDP Shrinks

Reports show that Canada’s GDP shrunk 0.1%, which beats forecasts of a 0.2% shrinkage.

Danmarks Nationalbank (DN) Cut Interest Rates

The DN have cut its deposit rate and repo rate by 10bp.

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