(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: Global stocks are posting mild gains to close out the week. Futures are up. Thursday night’s final presidential debate has done little to shift investors’ moods, and hopes for fresh stimulus remain a key focus.
Economy: “It’s close. It’s close,” House Speaker Nancy Pelosi said yesterday about a new coronavirus relief package. Senate Republicans did not appear to agree. The Fed’s survey of regional economies painted a more optimistic picture than the one from September.
COVID-19 update: Argentina hit 1 million confirmed cases. Ireland is implementing its strictest coronavirus restrictions for six weeks. Boston’s school district is going remote. And U.S. hospitalisations are at their highest level in five months.
Markets in a Minute:
Information Technology (Maria Lomaeva)
The tech-heavy NASDAQ Composite lost gains from earlier this week and is trading at -0.4% as of Friday, after Intel (INTC) reported disappointing results in Q3 on Thursday, weighing down the index.
In July, Intel announced a delay in their 7nm chip production, which disappointed investors and saw its share price slip 16% the following day. On Thursday, Intel reported more bad news: a 22% decline in operating income in Q3 YoY (from $6.4 to $5.1bn); a 5.7 ppt decrease in gross margin YoY (from 53.1% to 58.9%); and a 4% decline in revenue from $19.2bn to $18.3bn YoY. This drove its shares down 11% on Friday. Intel’s largest source of revenue (53%) comes from PC-centric products, which grew by 1% YoY, while the remaining 47% (coming from data-centric products) declined by 10% YoY in the past quarter. The drop in Intel share price reflects investors’ cautious outlook for the company amid growing competition from players such as Nvidia, AMD and TSMC.
IBM (IBM) saw its shares dip 6% after posting its Q3 earnings this week. Although the results were in line with expectations, investors were put off by a third consecutive decline in quarterly revenue, falling by 2.5% YoY to $17.6bn. IBM’s business has struggled in recent years as customers’ IT spending changed towards cloud based services rather than in-house IT technology that traditionally served as a big source of revenue for IBM. Recently, IBM announced a separation of its managed infrastructure services unit from the main business, which was welcomed by investors as it has been dragging down IBM’s growth.
More positive news came from Alibaba’s (BABA) fintech company, Ant. Ant’s dual Hong-Kong and Shanghai listing – which could be the world’s largest IPO of $35bn – has received a final approval from Beijing. The IPO is expected in the coming weeks.
Healthcare (Christine Chan)
Continuing the trend from last week, we are seeing some small fluctuations in the Health Care Select Sector SPDR exchange-traded fund (NYSEARCA:XLV) this week. It traded weaker compared to the previous week due to an overall decline in healthcare stocks, finishing at $107.82 with a 0.38% loss.
Following last week’s discovery regarding the antiviral drug remdesivir’s lack of benefit to COVID-19 mortality rates, the US Food and Drug Administration (FDA) approved its use in hospitalised COVID-19 patients on Thursday 22nd October, making it the first and only approved COVID-19 treatment in the US. Although it does little to affect survival, clinical trials have shown that it can speed up recovery by an average of 5 days when compared to placebo. As a result, the share price of Gilead Sciences (NASDAQ:GILD), the pharmaceutical company that developed the drug, rose 4.47% overnight to $63.38 the next morning, although it has since dropped back down to the $61 level. Based on the current situation, it is predicted that remdesivir could generate over $1 billion in sales in the second half of the year alone.
Staying on the theme of COVID-19, data from pre-clinical animal studies has shown that the vaccine candidate of German biotechnology company CureVac (NASDAQ:CVAC) was able to trigger an immune response, as it activated T-cells and produced neutralising antibodies in mice and hamsters. They also reported that the vaccine protected the lungs of hamsters and lowered replicating virus levels in their upper respiratory tracts after being exposed to live viruses. This is a win for CureVac and their share price went up 5.7% overnight. Despite this, it is important to bear in mind that their competitors who are also using the mRNA vaccine method, namely Pfizer/BioNTech and Moderna, are still ahead of the game as they have already started their large-scale clinical trials in humans a while ago.
Consumer Staples and Consumer Discretionary (Jun Wei)
The markets showed a downward trend this week as lawmakers in the U.S. are unable to agree on a new stimulus deal to pass through Congress. Despite Nancy Pelosi saying that progress is ‘being made’, the bill is said to be far from being passed into law. Both the S&P 500 Consumer Discretionary and Consumer Staples Index were down ~2% this week despite multiple companies showing signs of recovery. This week, we take a closer look at the Q3 earnings for Coca-Cola and sales projections of Unilever, as well as Allbirds’ expansion into apparel.
Coca-Cola (NYSE: KO) beat both earnings and revenue expectations despite seeing a 9% in Q3 revenue. EPS was at 55 cents compared to consensus estimates of 46 cents, and revenue was at $8.65 billion compared to consensus estimates of $8.36 billion. Shares in Coca-Cola jumped 2% in Thursday morning trading on the positive news. With many entertainment venues such as cinemas, restaurants and bars still facing low demand or even operating restrictions around the world, demand for its drinks remains depressed. Meanwhile, Unilever (LON: ULVR) reported sales of €12.9 billion for Q3 compared to analyst estimates of €12.7 billion as its revenue was boosted by high sales in cleaning and sanitising products. Sales of its Lifebuoy soap and sanitising products went up 65% this year. Again, we see the massive disruption that Covid-19 has brought to the markets with it radically shifting consumer demand. Unilever is a beneficiary for its cleaning products while Coca-Cola is set to continue facing a tough time with many countries in Europe seeing closures of entertainment venues again.
Allbirds, the wool shoe startup that recently became a unicorn with its latest fundraising round, is expanding into apparel in direct competition with other premium brands such as Everlane and Lululemon Athletica. Their apparel line starts from £45 for a T-shirt to £250 for a cropped puffer jacket and consists of sustainable raw materials just like its wool shoes. After committing to a strategy of opening more physical stores, expanding into apparel at this time is an interesting strategy as well. Allbirds will need to be able to differentiate its products in the highly competitive retail market and create other selling points other than simplicity and sustainability.
Communication Services (Katarina Lau)
In the ongoing U.S-China trade war, of which a large part encompasses telecoms, the U.S. most recently took the offensive against Huawei by offering financing options to Brazil in exchange for them dropping Huawei altogether. The U.S. cited national security threats in persuading Brazil start purchasing 5G telecoms equipment from Huawei’s rivals. Offering financial help e.g. loans to developing countries, who are most likely in dire need at this time, with the condition of boycotting Huawei is just new move in the U.S.-China playbook. To some countries, it may be an easy favour, however for others such as those with close ties to China through its infrastructure ‘Belt and Road’ initiative may run into conflicts of interest.
On a similar note, several leading U.S. telecom carriers have turned to Indian handset manufacturers to reduce dependence on China. Verizon, T-Mobile and AT&T are in talks with Indian smartphone makers Micromax and Lava, to procure unbranded low-cost handsets for future sales in the U.S. Clearly, the U.S. wasting no time in shifting its manufacturing base away from China. Meanwhile, in a fashion that mirrors the plight of Huawei, several U.S. agencies are now examining whether China Unicom (world’s fourth-largest mobile service provider) poses any national security risks.
In the past week, out of all the telecoms companies, Motorola (MSI) performed best, up 2.1%, while Arista declined most, down 6.4%. Ericsson (ERIC) reported decent Q3 2020 results, with quarterly net sales up 0.6% Y-o-Y thanks to new 5G deals in North-East Asia and North America, where the company has picked up where Huawei left off. Juniper Networks will acquire 128 Technology a AI-networking startup for $450 million. The network products and services provider hopes to achieve more advanced AI-driven enterprise solutions. Customers will get a more unified platform for optimal client-cloud user experiences.
Financial Institutions (Jamie Biswas)
There were some losses at the start of the week within financial institutions but the sector finished out strong, with the Vanguard Financials ETF (VFH) rising 1.19% overall. This week’s gains within the sector can be attributed more heavily to banks and less so to insurance firms, although both rose during the last 7 days. The financial institutions sector performed more strongly than the S&P 500 this week, which fell 92 basis points during the week to the 23rd of October.
Morgan Stanley has reported its profits for the third quarter of this year. The bank posted net income of $2.7 billion for Q3, exceeding the $2 billion expected by analysts. Revenues of $11.7 billion were up around 16% year on year and surpassed the $10.6 billion expected by analysts. The Sales & Trading division was the standout performer for the third quarter and helped Morgan Stanley to achieve its second-highest quarterly revenue in history, emulating results from Goldman Sachs, which almost doubled its third-quarter earnings, (for more information see last week’s Friday Wrap Up).
At Morgan Stanley, fixed-income trading revenues were up 35% year on year, to $1.9 billion, the second highest year-on-year increase on Wall Street, trailing only Goldman Sachs. Morgan Stanley’s equities trading revenues rose 14% to $2.3 billion, while investment banking revenues were up 11% to $1.7 billion. This was driven by an almost 120% rise in fees for underwriting initial public offerings, helping to offset a 35% year-on-year fall in advisory revenues.
These great results are helping to justify Morgan Stanley’s request to be able to resume share buybacks, in order to distribute capital to shareholders. The Federal Reserve put a hold on banks buying their own shares until the end of the year to ensure banks are financially robust and stable.
Industrials (Ed Collins)
The Industrials sector has fallen this week, with the Vanguard Industrial Index (VIS) having fallen by 0.73%. Airbus SE (AIR) is planning on upping the production of the world’s most popular passenger jet: the single-aisle A320neo. The manufacturer is aiming to boost production by close to 18% from the second half of 2021. Airbus has asked supplier to be ready to increase production from 40 to 47 planes a month from July next year.
It also comes barely six months after Airbus slashed production of the jet by a third, from 60 a month to 40, in order to ensure the company’s survival amid a pandemic-induced collapse in demand from airlines. Airbus’ aim to lift production indicates that there are encouraging signs for the aviation industry. Narrow-bodied aircraft, such as the A320neo, are used for domestic and regional flights, which are forecasted to recover much more quickly than long-haul flights, post-pandemic. Some are wary of Airbus’ bullishness, as the European aircraft manufacturer’s supply chain will now have to produce hundreds of millions of dollars of extra inventory to meet the new rate, which has not been finalised by Airbus as certain conditions have to be met first.
Following the announcement, Airbus’ share price rose 1.9% on Friday. Airbus’ share price is down 49% since the start of the year, so it is safe to say that a lot of recovery is yet to be done by the European manufacturer.
Utilities (Katarina Lau)
S&P 500 utilities stocks have rebounded from one of the market’s worst-performing sectors this year to top sector this past October. The utilities group is now approaching the golden cross – a key bullish technical when the 50-day MA crosses the 200-day MA. Regardless of whether traders act on it, the positive trading signal is no doubt a gauge of strength for the sector. The Utilities Select Sector SPDR Fund (XLU) traded 1% higher this week. Utilities even outperformed technology last month, perhaps signifying a market rotation into defensives whereby tech stocks may not be as robust as before this coming Q4 2020.
However, while utilities are trading well on paper (or machines nowadays), real-life utilities in the U.S. are at great risk being shut off as state-level protections against electricity, water, and gas disconnections are quickly expiring across the U.S. Financially and physically, this will only lead to a bleak situation as temperatures drop in the Northern Hemisphere, unemployment remains high, and the possibility of new government stimulus still uncertain. If there is to be any progress on deciding the stimulus, it is likely to be after the November elections as neither Democrats nor Republicans want to hand the other side a ‘win’ beforehand. Already, protections have expired or don’t exist in 33 states and the remaining are set to expire by mid-November or the end of the year depending on the state. Soon, 82 million households won’t have shutoff protections – almost 1/3 of the American population. An overlooked reason behind this looming crisis is that many American think utilities are government-provided, when in fact they are privately-owned.
Materials (Ed Collins)
The Materials sector is down slightly this week: the Vanguard Materials Index (VAW) is down by 0.69% since the start of the week. Concho Resources (CXO) is being acquired by ConocoPhillips (COP) in a deal worth $9.7bn. This is a sign of Conoco, one of the world’s largest independent oil producers, betting on a post-pandemic recovery in the US shale sector.
Conoco, which has assets worldwide, will now have a substantial position in the Permian basin, the world’s most prolific oilfield. Ryan Lance, Conoco’s chief executive, talked about the “unmatched scale and quality” the combined firm will have “across the important value drivers in our business.” Under the all-share transaction, Concho investors will receive 1.46 shares of Conoco stock for each of their own, representing a 15 per cent premium to closing share prices on October 13. Concho’s market capitalisation has fallen from a high of more than $30bn in late 2018 to about $8bn before reports of Conoco’s bid surfaced in recent weeks.
US Oil prices have hovered around $40 a barrel for several weeks. Conoco said the new combined company will have an average supply cost of less than $30 a barrel, and Mr Lance is bullish that oil prices will soon turn: “We do see some recovery in prices as we go into 2021,” he told analysts recently. Analysts said that Conoco’s acquisition, which follows Chevron’s $13bn acquisition of Noble Energy in July and Devon Energy’s takeover of WPX for $12bn last month, suggests that the long-anticipated consolidation of the US shale sector is now underway, as firms take advantage of the depressed share prices to scale up production and reduce production costs.
Expect to see more deals in this space in the next few months.
Rates (Harrison Knowles)
This week’s initial progress on a stimulus package helped push the yield on U.S. 10-year Treasuries to the highest level in four months, with the spread between the five- and 30-year bond reaching the widest in four years. Many investors expect that a Democratic sweep of the Presidency and both houses of Congress would pave the way for more spending, moving yields higher and steepening the curve.
One thing that investors in bonds are not pricing is a major a volatility event, with options wagers betting against significant moves in the weeks after the vote. Though the slow pace of talks on a stimulus package and the rapidly approaching election mean that the chance of getting a deal passed by Congress ahead of Nov. 3 now seems increasingly distant.
Bubbling optimism about a energised U.S. economic recovery and the inflation that might accompany it sparked a sell-off in long bonds, pushing the 5-year, 30-year yield curve to its steepest level since December 2016. But as benchmark rates breached 0.85% on Thursday, options market activity suggests that bond traders are drawing a line in the sand at 1%. And given how mightily ultra-low rates have helped interest rate-sensitive sectors of the economy bounce back, a material rise above that level could push the Fed to explicitly announce yield targets.
Credit (Alexander Kaiser)
Following the trend of private equity companies continuing to test investors’ willingness to take risks, Apollo Global Management and Platinum Equity are each looking to raise $500m for one of their companies, namely Aspen Insurance Holdings and Multi-Color Corporation respectively. The crux of this offering however is that the bonds will be of the so-called payment-in-kind (PIK) toggle variety with a 5-year maturity.
A normal PIK bond is characterised by being paid in additional debt, i.e. coupon payments are not made in cash but instead additional debt that has the same maturity as the already existing debt. These bonds are generally only issued by extremely distressed companies that would struggle to bear any additional interest payments immediately. The toggle half of the offering means that the company can switch between making monetary and additional debt payments as it wishes with different coupon rates depending on what is chosen, 7.63% for monetary and 8% for additional debt in this deal.
As expected, this type of bond is essentially at the bottom of the capital structure, meaning if the company goes bankrupt, this debt is some of the first to be wiped out. According to the International Organisation for Securities Commission, PIK issuance has remained, on average, below $5bn per annum between 2009 and 2015 and even lower since making this proposal by the private equity firms quite unusual.
Even more bizarre, and in my opinion somewhat incredulous, is that Apollo intends to use $238m of the newly raised debt to continue its streak of dividend-recapitalisations. PIK bonds have historically been used to generate money for payouts, however, utilising that during economically strained times and to an extent that increases the debt-to-EBITDA ratio to almost 8x makes it seem as if the Equity firm has already half given up on the firm growing and is simply looking for the Federal Reserve to continue propping it up or making some money before the ship sinks.
Real Estate Investment Trusts (REIT’s) (Claire Willemse)
Sweden has taken a different approach to the Covid-19 pandemic since it first reached Europe earlier in the year. It has enforced less stringent measures to contain the outbreak and therefore, attempted to keep the economy functioning closer to pre-pandemic levels. However, it has still suffered from a fall in GDP by 8.3% in Q2 2020, faring worse than some of its Scandinavian peers who did implement lockdowns. Its housing market has also fared differently, in terms of it remaining generally buoyant throughout Q2 and Q3, with average house prices increasing by 2.7% from Q1 and 6% YoY in the Greater Stockholm Area. The number of transactions was also up by 4.6%, however, the number of new builds had fallen by about 20% and Q2 already saw a fall in new build reservations due to a mixture of tighter credit for housing developers and uncertainty for would-be house buyers. With unemployment having risen further and economic recovery looking to be slow, there is some worry that this increase in house prices is unsustainable and will perhaps be followed by a corresponding fall.
Bellway Homes has also seen a surge in new home sales, in the summer months, leading to a reinstatement of its dividend. This has allowed it not to break its record of paying a dividend every year since it listed. This resulted in a share price (LON:BWY) rise of 2.7%. The number of houses built and revenues have still seen a fall compared to 2019.
Moorfield Group ( a UK-focused real estate fund manager) and Stor-Age (a self-storage REIT) have together launched a £100m self-storage joint venture in the UK. It is set to be focused on London and the South East and will provide an alternative to office and retail real estate to investors. This subsector has performed much better throughout the lockdown and has grown at 6.5% a year since 2005. Stor-Age (JSE: SSS) has seen a share price increase of 1.3% since the announcement.
Oil & Precious Metals (Oliviero Sacchet)
The oil industry this week perform: WTI (+0.3%) and BRNT (+0.5%).
Iraq still has problems with the Kurdistan Regional Government (KRG) that failed to contribute its share of the cuts. In the past months the KRG increased its oil exports- in September +5.6%. The problem is that Iraq and KRG should have split their oil outputs in order to comply with OPEC+ guidelines. However, Iraq completely reached its cuts quota (102%), but KRG reached just 79% compliance with its quota.
These cuts are in contrast with Iraq’s oil project. The country- the second OPEC oil producer- is planning to boost its oil production from 5 million barrel per day to 7 million barrel per day. Obviously, they considered the coronavirus situation and according to their forecasts in 2023 the oil demand will increase of 3% per year.
In Europe the Nord Stream 2 situation should be fixed. On October 17 the foreign minister of German Heiko Maas said that the project will be completed, but, even if the declaration was just a personal opinion, fears are dimmed. However, on October 20 the US government said that will extend the range influence of sanctions against the Nord Stream 2 intimating companies to shut down their activities within 30 days.
The nationwide protests that are spreading in Nigeria are affecting the national oil production. during this difficult internal situation, Lagos domestic oil demand is decreasing for around 40%. After the lock down gasoline demand was recovering in Nigeria. Unfortunately, these protests are affecting the Africa’s largest economy that use 1/1.25 million mt of gasoline a month.
G10 & EMFX (Krisztián Sudár)
The United States’ Financial Markets continue being dominated by very cyclical phenomena. Earlier this year, and in 2019, much of the movements in the equity markets and the Dollar index could be attributed to the Trade War between the world’s two leading superpowers. Afterwards, and to this day, COVID-19, and perhaps even more importantly, Stimulus Talks were the key drivers of markets.
On Wednesday, as the two parties inched closer to an agreement about the next stimulus package, the greenback retraced 0.5%, to its lowest level since early September. It continued its decline on Friday as investors are pricing in the potential effects of a Democrat victory, rounding out its weekly loss to 1%. The Euro gained in response, despite lackluster business survey results from Germany and France.
The British Pound saw a strong appreciation on Wednesday, after a significant concession was made from the European side of the Brexit negotiations, and the BoE announced that right now was not “the right time” for the Central Bank to instate negative interest rates. These events resulted in the currency moving higher by 1.7% against the dollar, its biggest increase since March, and 1.2% against the Euro.
Turkey’s central bank’s unorthodox policies yet again led to a substantial decline of the Lyra. Instead of raising central interest rates, as many investors have suggested, the regulator chose to employ an obscure emergency facility, namely increasing the late liquidity window’s rate. This created a sell-off, and the Lyra almost reached the symbolic 8 level against the United States Dollar on Thursday and hovered around record lows on Friday.