(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 dipped for the third straight day, during a volatile week. This is due to an increase in jobless claims and chance of a new pandemic relief package are declining, though talks continue. Futures are slightly down, after getting slammed yesterday on a wave of Covid anxiety. European luxury stocks are rising after LVMH reported strong growth at its biggest fashion brands.
Economy: Jobless claims ticked up to 898,000 last week, showing that the labour market remains weak as Covid-19 cases continue to rise across the U.S. and Europe. Treasury Secretary Steve Mnuchin said finalizing a stimulus package ahead of the election “would be difficult,” though he and House Speaker Nancy Pelosi are still playing phone tag.
China: Following better-than-expected recoveries in developed economies and China, the International Monetary Fund bumped its global GDP forecast for 2020 up to -4.4%.
Politics: Some analysts say investors are refraining from making big bets before the election, fearing uncertainty even as polling shows a substantial lead for Joe Biden. Mr Johnson has also announced he is preparing for a “no deal’ Brexit, following a break down in talks.
Markets in a Minute
Information Technology (Maria Lomaeva)
The tech-heavy Nasdaq 100 peaked on Tuesday with gains of 4%, but slipped to 2.0% on Friday as hopes for a US stimulus deal faded and Covid-19 cases increased in the US and Europe, bringing tighter social distancing restrictions.
Two companies within the semiconductor industry have presented their Q3 earnings. The Taiwanese TSMC (TSM) has seen a surge in demand driven by 5G smartphones, applications related to the Internet of Things (IoT), artificial intelligence (AI), and high-performance computing (HPC) and delivered a revenue of NT$356bn (US$1 = NT$29.4), 22% higher YoY, while its net income increased by 36% YoY to US $4.7bn. The positive results outperformed analysts’ and TSMC’s own expectations, and the company upgraded its 2020 revenue forecast to a 30% increase in US dollar terms, aiming to outperform the industry. Notwithstanding the news, TSMC’s share are trading 1.6% lower over the past 5 days, after a three-week-long rally prior to the report which saw the share price increase by 20%.
Another company within the industry, the Dutch semiconductor equipment producer ASML (ASML) which also benefits from 5G, IoT, AI and HPC developments, reported net sales of €4bn, 32.5% higher YoY and a net income of €1.1bn, a 69.4% increase YoY. Although ASML’s earnings exceed expectations, its shares are trading 0.5% lower over the past five days, as of Friday. Investors’ sentiment was negatively affected by ASML’s net sales prediction for Q4 of €3.6-3.8bn, the geopolitical uncertainty due to the US-China tensions and Covid-19. However, the company still expects a low double-digit growth next year and margin expansion from 47.5% to 50% next quarter.
Next week, the tech sector will see more quarterly earnings reports as the earnings season takes off.
Healthcare (Christine Chan)
Despite surpassing the $109 level on Monday 12th October, the Health Care Select Sector SPDR exchange-traded fund (NYSEARCA:XLV) has since dropped back down to end the week at $107.92, corresponding to an overall fall of 0.87%.
It has been a very quiet week for healthcare equities, even though there has been slightly more news when it comes to healthcare scientific research, such as the discovery that the antiviral drug remdesivir doesn’t lower COVID-19 mortality rates. As a result, the share price of Gilead Sciences (NASDAQ:GILD), the largest developer for the World Health Organisation’s remdesivir clinical trial, has fallen 3.17% over this week. This is combined with the criticism that Gilead faces for pricing a five-day course of remdesivir at a hefty $2340.
However, this is not the only pharmaceutical company that has had unfortunate news this week. Eli Lilly (NYSE:LLY) had to pause their clinical trial for their experimental antibody-based COVID-19 drug LY-CoV555 due to some potential safety concerns, which has led to their share price decreasing 6.83%, from $156.83 to $146.12. Similarly, the pharmaceutical giant Johnson & Johnson (NYSE:JNJ) has announced that they will be temporarily pausing their COVID-19 vaccine trial due to an unexplained illness in a trial participant. Their share price has dropped 2.3%, down from $151.60 to $148.10 at market close.
Even though clinical trial pauses are generally regarded as positive events within the scientific community, as they ensure any undesirable (or even harmful) side effects are established before the therapies enter the wider market, they are viewed more negatively by investors as they are likely to indicate a delay in financial returns. Personally, I feel that such pauses should be celebrated more, since the purpose of clinical trials is to guarantee safe and effective outcomes for patients, which should in turn translate to financial gains as any future problems can be prevented at an earlier stage.
Consumer Staples and Consumer Discretionary (Jun Wei)
Share prices were volatile through the week as fears over possible lockdowns in Europe and a lack of optimism regarding fiscal stimulus in the U.S. took its toll on the markets. Both the S&P 500 Consumer Discretionary and Consumer Staples indices were roughly flat this week, exhibiting high volatility much like the broader market. This week, we take a closer look at LVMH’s promising Q3 results and Big Hit Entertainment’s incredible IPO debut in South Korea.
LVMH (EPA: MC) reported some preliminary Q3 results on 15th Oct after market close. While sales fell 7% in the 3rd Quarter, it beat consensus analyst expectations of a 12% fall as its largest division, its fashion and handbag division saw a strong rebound in sales. The division saw an increase of 12% in sales, buoyed by store re-openings in key markets in Asia. Shares in LVMH jumped roughly 7% at market opening on 16th Oct, along with the shares of other luxury goods manufacturers. Moving forward, we should be optimistic about demand from Asia as countries continue to emerge from movement restrictions.
In East Asia, BTS fever has officially hit the South Korean stock market. Big Hit Entertainment (KRX: 352820), the music label of hit boy band BTS, saw its share price open at 270,000 South Korean won on Thursday 15th October, and ended the trading day at 90% above its IPO price of 135,000 won. Investors seem to be incredibly optimistic about Big Hit Entertainment’s future prospects, despite its huge reliance on BTS to generate profits. With the impending enlistment of its oldest group member, there is serious concern that BTS, and Big Hit Entertainment, could lose its popularity as the group may go on a hiatus soon. It is likely that the great optimism over Big Hit Entertainment is not solely due to its perceived prospects, but also driven by broader macroeconomic concerns. With investors spooked by the resurgence of Covid-19 in Europe and the U.S., it is possible that investors are looking towards South Korea, where the virus has been well-managed, as a source of growth for the near future as well as speculation. Recent South Korean IPOs such as SK Biopharmaceuticals and Kakao Games also saw huge jumps in their share price on the first day of trading before sliding slowly downwards. Therefore, we must be wary of speculative thinking surrounding Big Hit Entertainment and temper expectations.
Communication Services (Katarina Lau)
Dutch telecom KPN (KPN) saw shares jumped >7% on Monday after potential takeover interest by European private equity firm EQT. KPN’s shares had lost 15% since the start of the year until this week, where they reached their highest level in three months. Rationale behind the possible M&A is EQT’s ownership of fiberglass supplier Delta Fiber, which has the second-largest fiber footprint in the Netherlands after KPN. While no final decision has been made, it’s important to note any deal could potentially be stopped by the Dutch government, given a new law which allows the Dutch government to block takeovers of Dutch telecom companies if seen as a national security threat.
On a macro level, Japan recently made clear to the United States as of now, they will not partake in the U.S. “Clean Network” plan, which excludes Chinese firms and technology from telecommunications networks. Specifically, Japan has said they cannot join a framework which excludes a specific nation, and will take its own precautions in response to any national security issues. This calculated move stands out, given Japan’s historical alliance with the U.S and the recent string of mainly European nations and companies who have either dropped Chinese telecoms – Huawei or banned them altogether from networks (e.g. U.K).
Financial Institutions (Jamie Biswas)
This week saw little volatility within financial institutions, with the Vanguard Financials ETF (VFH) falling 0.6%. The losses within the sector can be attributed slightly more to banks and less so to insurance firms, although both had a fairly stable week. The financial institutions sector performed slightly worse than the S&P 500 this week, which edged up 0.2% over the course of the week.
Goldman Sachs announced third-quarter earnings on Wednesday that far exceeded Wall Street’s estimates, continuing the strength shown last quarter. A $278 million build-up in loan-loss reserves over the period July-September was offset by the Sales & Trading Division’s outperformance and marked a sharp decline from the prior quarter’s $1.6 billion sum. Profit more than doubled from the year-ago period and easily beat expectations. Revenue for the 3rd quarter came in at $10.78 billion compared to analysts’ estimates of $9.4 billion. Earnings per share was reported at $9.68, far above estimates of $5.53. Lastly, net income of $3.62 billion for period exceeded expectations of $1.97 billion.
Goldman Sachs generates a higher proportion of its revenues from its investment banking arm compared to other Wall Street banks such as Citi or Bank of America who rely more on their retail banking operations. In previous weeks of the Friday Wrap-up this has been discussed as being risky. But this quarter, Goldman’s lack of a significant retail operation really benefitted them, allowing them to report record revenues within their trading division, without profits being harmed by significant loan loss provisions other banks are having to set aside
Utilities (Katarina Lau)
European solar power producer Scatec Solar has agreed to acquire SN Power from Norfund, a Norwegian private equity company for $1.17 billion. The deal involves SN Power’s portfolio consisting of hydropower assets in the Philippines, Laos and Uganda with a total gross capacity of 1.4 GW. The acquisition is one of many in the up-and-coming renewables industry. As hydropower and solar PV (photovoltaic) are complementary technologies, the deal paves way for new innovative solutions in energy/utilities, such as ‘floating solar on hydro reservoirs’. Scatec will finance the acquisition using cash, a $200m vendor note, a $150m term loan and a $700m acquisition financing from Nordea, DNB, BNP Paribas and Swedbank.
Exelon Corp., the largest regulated electric utility in the U.S. is considering a breakup that would involve separating its utility and non-utility businesses to focus on the regulated power market and unlock underlying value. Exelon shares (EXC) rose about 7% to give the company a market cap of $41 billion. Exelon’s non-utility operations include 21 nuclear reactors, and several solar, wind and natural-gas generating assets. Increasingly, power companies are streamlining their utilities segment by unloading unregulated assets, most likely because investors incline towards pure-play businesses. Earlier this year, Dominion Energy sold its natural gas infrastructure to Berkshire Hathaway and DTE Energy is also contemplating selling its non-utilities businesses. However, whether or not Exelon has a buyer is a entire new question, given its nuclear-heavy asset portfolio. The company’s track record shows owning a utility combined with nuclear reactors and other plants is a struggle – something most buyers want to avoid.
For the first time, Californian water futures will be traded! Futures prices will be derived from the Nasdaq Veles California Water index, which tracks the spot price of trading water rights. These rights are: entitlements to divert water from natural sources in the California’s 5 largest water markets. Developers CME Group and Nasdaq insist the contracts will help farmers/big water users hedge their water costs in a similar fashion to oil, as droughts become more frequent with climate change. However, sceptics fear the derivatives may just end up distorting prices of a basic resource for everyone, given the highly localised nature of water pricing and regulation.
Rates (Harrison Knowles)
Treasuries seems more down to post-Covid-19 monetary policy realities than an opportunity to take the other side. Both speculators and institutional accounts now hold modest net long positions in 10-year Treasury futures, according to the latest data from the Commodity Futures Trading Commission, signalling the smallest gap in three years. The convergence likely reflects the understandable expectation the Federal Reserve could at some stage introduce yield curve control, or at least extend the duration of its asset purchases to help contain 10-year yields. There are still big bets being made on the U.S. bond market, it’s just that they are further out the curve. Hedge funds are once again taking the bearish viewpoint and have extended their net short positions in long bond futures to a fresh record for another week.
With the U.S. presidential election coming ever closer, bond and equity traders are seemingly at odds over likely volatility in the aftermath. The Cboe Volatility Index, the equity market’s “fear gauge”, has been relatively rangebound over the past month. But the ICE BofA MOVE Index, the bond market’s equivalent measure, shot higher.
Democratic nominee Joe Biden has vaulted ahead of President Donald Trump in the polls, easing fears of a too-close-to-call election. As a result, fears of a contested result are vanishing away quickly from the equity market. However, bond traders are bracing after letting implied volatility measures languish near record lows for months. The current calculus in markets is that Democrats would turn on the spigots and unleash another round of stimulus should a so-called Blue Wave materialize, thus boosting Treasury yields in the process.
In turn, this presents an opportunity to enter the bond market based on how you think the election will pan out. Notably, PredictIt’s market for betting on a Democratic sweep shows odds of roughly 57%.
Credit (Alexander Kaiser)
Despite the continued decrease in yields across the bond market, a new bond sale from Ligado Networks is proving that there are always exceptions to the rule. The satellite communications company is aiming to sell two sets of three-year bonds worth $1bn and $2.8bn with a 17.5% and 16% coupon rates respectively, though the company is still in negotiations, which would be used to refinance $700m owed to Inmarsat which was due last week and greater investment in 5G technology. While these figures are currently proposed, they have already changed from 16% and 13% discussed last week, showing the firms desperate need for additional capital and willingness to compromise to get it. The firm already had to undergo extensive debt restructuring once in 2015, which resulted in it changing its name from LightSquared. The interest in the firm’s bonds is limited with only portfolio managers who typically deal in distressed debt being truly interested in the riskier portion of the company’s offering, as the high coupon rate combined with the discounted price of 75 cents per dollar would push yields above 20%, clearly a very attractive possibility. While opinions seem to laud this as evidence that there is debt available to highly distressed companies, it seems to me that this is simply a consequence of yield shrinking to such an extent in all other risk-groups that even companies that realistically have no way of paying off their debts on their own are being considered by investors. Regardless, while the potential yields may seem attractive in the negative environment we see in safer assets, I believe that only investors properly equipped with sufficient capital and the ability to evaluate the risks of these bonds should actually consider this opportunity.
Meanwhile, EG group, a UK petrol station and fast-food outlet operator has seen its debt decrease in price by roughly 5% across the board with bonds worth €670m maturing in 2025 being only worth 89 cents per euro. This drop was sparked by Deloitte’s sudden resignation as the company’s auditor following concerns over its corporate governance after its acquisition spree of almost 3000 petrol stations over two years, netting them over €8bn of debt. While an insufficient management network can certainly lead to issues, I do believe the sell-off was somewhat exaggerated and as long as the firm is able to consolidate its larger position, buying their bonds seems to be a good opportunity.
Real Estate Investment Trusts (REIT’s) (Claire Willemse)
British Land, one of the UK’s largest development and investment firms, has decided to restart dividends from February next year. However, they have reduced the frequency of dividends, from quarterly to half-yearly. Whilst rental payments have remained quite strong, with 91% of their rent owed being paid, office occupancy still remains at around 20% of what they were before the pandemic. This perhaps explains the weak outlook, with uncertainty as to whether workers will continue to work from home. Government guidance has shifted between encouraging workers to return to offices and for them to stay at home, at a time when here are large differences in Covid-19 restrictions across the country. This adds to a further delay in the return to the office and may prompt firms to look into longer term solutions, such as reducing the capacity of their remaining offices. Their share price (LON: BLND) has fallen 3.8% in the past week.
Supermarket Income REIT PLC has performed better, receiving 100% of its rental payments in September. This is due to their tenants including 3 of the largest UK supermarket chains, which have performed well throughout lockdown as spending habits turned towards including higher spending on groceries. This comes after it increased the target size of a planned share issue by 4 times to £200mn, due to strong demand, further highlighting its strong positioning through this pandemic. Its share price rebounded soon after the fall in March and has remained relatively stable since, but still fell by (LON:SUPR) 1% in the past week. Elsewhere, China Evergrande, a property developer, fell by (HKG: 3333) 17% as it was unable to raise as much money as it wanted in its latest stock placement, just over half of the target amount of $1bn. This is not indicative of the entire economy though, as it was considered to be relatively poor performing.
Oil & Precious Metals (Oliviero Sacchet)
This week the oil industry registered: WTI (+2.2%) BRNT (+1.45%).
US oil sector is suffering a variety of problems. Actually, US exports fell a 14 month-low over the past week and analysts said that they are expected to remain weak during 2021. In numbers, the exports were 2.135 million barrel per day in the past week, the lowest level since the last week of July. The forecast for 2021 is registering a negative trend especially for the US production. Platts Analytics estimates that total US production is going to be 1.2 million barrel per day lower in 2021, than in 2020 and 2 million barrel per day lower than 2019 average.
In addition, the oil industry is facing many complications due to Hurricane Delta. On October 15 US EIA (Energy Information Administration) showed the 14-month low data in Gulf of Mexico output and exports. According to these data the US commercial crude stock declined 3.82 million barrels in the past week. Obviously, the problem was on the US Gulf, where stocks fell 5.12 million barrels to 256.33 million barrels.
Nigeria is planning to boost the oil sector. The Department of Petroleum Resources said on October 13 that the plan is to increase the oil reserves to 40 million barrels by 2025. The target is realistic, and the government is starting to increase exploration programs, according to DPR Director. The oil reserves of the country were declined in the past years from 38 billion barrel in 2015. The reasons were several from regulations to poor investments. In addition, the government and the state oil company Nigerian National Petroleum Corporation said that they will push on lawmakers to do an oil reform legislation, the PIB. Theoretically, this PIB (Petroleum Industry Bill) will attract the necessary investment in the country.
G10 & EMFX (Krisztián Sudár)
The Forex market continues to be very much dominated by market participants reacting to and anticipating risk, instead of being based on fundamental economic aspects. This week, as the hopes for additional stimulus vaned with Congress and Senate at a deadlock, and COVID-19 cases rose both in Europe and the Midwest. safe-haven currencies strengthened: the United States Dollar and the Japanese Yen gained 0.7% and 0.3% respectively. It is fair to assume that as the election date nears, volatility will continue to increase, especially in the DXY, the Dollar Index, which measures the Dollar’s performance against a basket of its peers.
As Brexit talks have continued, the Sterling remains in a very wide trading range. When talks are going well, the Sterling trends up and vice versa, but because the negotiation process is quite lengthy, moves in both ways can be observed much more frequently than usual. Even though Sterling trended upwards earlier this week, in reaction to the news that talks will continue after the 15th, it erased most of its gains on Friday, as Boris Johnson announced that the country must prepare for a no-deal exit, the ramifications of which will be severe and cannot be accurately foreseen.
New financial regulations from the People’s Bank of China have effectively made shorting the Yuan significantly cheaper, causing the currency to briefly retreat earlier this week. On Friday, however, the Yuan finished a strong onshore trading session, reaching an 18-month high of 6.69823$, as investors prepare for the country’s Q3 GDP figures’ release on Monday – a dataset that is largely anticipated to be positive. The resulting move in the Yuan will most certainly affect other currencies in the region, so I would like to recommend our readers to watch Asian currencies closely next week.