Friday Wrap-Up (October, 30)

With earnings season hitting its apex, stocks bounced back from their worst one-day drop since June on Wednesday.

(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: Futures are sharply lower. Markets have grown more volatile in recent sessions, ahead of Election Day and as concerns have grown that increases in Covid-19 cases will prompt fresh lockdowns. With earnings season hitting its apex, stocks bounced back from Wednesday (S&P’s worst one-day drop since June). Positive economic data reports (record GDP growth, lower jobless claims) helped. 

Energy: Oil prices dipped to their lowest level in nearly five months. Hopes for a spike in demand are drying up as people start to hunker down for this tough pandemic winter.

Economy: US Q3 GDP grew at a record annualised rate of 33.1% from July–August.

Markets in a Minute

Equities

Information Technology (Maria Lomaeva)

This week was difficult for the markets, with the tech sector being no exception: NASDAQ Composite declined 6% over the past five days despite some positive quarterly earnings. 

Firstly, Big Tech reported strong results given the pandemic. Apple (AAPL) beat expectations and delivered $64.7bn of revenue (1% up YoY) and $13.7bn in net income (8% up YoY), despite the delayed launch of iPhone 12. 

A recent boycott from some advertisers and scrutiny over political content did not impede Facebook (FB) from increasing its revenue by 11% YoY to $18.7bn and almost doubling its net income to $5.2bn. 

Google’s parent company, Alphabet (GOOG, GOOGL) exceeded expectations in its recovery from the advertising decline reported in July, generating $46.2bn in revenue, 14% higher yearly, and a net income of $11.2bn, up 59% YoY. 

Amazon (AMZN), that strongly benefitted from the lockdowns worldwide, reported $96.1bn in revenue, 37% higher YoY, and almost tripled its net income to $6.3bn, beating estimates. 

Cloud computing services, video gaming and PC purchases drove Microsoft’s (MSFT) revenue 12% higher YoY to $37.2bn, while its net income grew 30% to $13.9bn, again, beating expectations. 

Notwithstanding such strong results, Alphabet shares have gone down 0.4% over the past week, while the rest is trading about 6-8% lower.

A video game company, Activision Blizzard (ATVI), exceeded its own estimations by delivering $2.0bn in revenue, 52% higher YoY, and almost tripled its income to $604m. Its shares are trading 7% lower since Monday. 

Canadian e-commerce company, Shopify (SHOP) almost doubled its revenue to $767.4m YoY, and generated $191.1m in net income, compared to a net loss of $72.8m in Q3’19. Despite exceeding expectations, its shares went down 10% since Monday.  

Chipmaker AMD (AMD) announced a record revenue of $2.80bn, up 56% YoY, and more than tripled its net income to $390m YoY. Its shares sunk 11% since Monday. 

Next week will see earnings reports from Qualcomm and Electronic Arts, among others.

Healthcare (Christine Chan)

As global equities suffer the worst trading week since March, healthcare equities have also faced losses this week. Although levels stayed relatively constant on Monday 26th October and Tuesday, the majority of the drop came after Tuesday, as investors seek to unwind positions, with the Health Care Select Sector SPDR exchange-traded fund (NYSEARCA:XLV) decreasing 4.91% over the week, from $106.91 to $101.66. 

This week has been a particularly busy yet disappointing week, with many pharmaceutical corporates releasing their 2020 third quarter results. In Europe, GlaxoSmithKline’s (LSE:GSK) share price fell 4.9% since their Q3’20 financial results were released on Wednesday 28th October, showing an 8% decrease in sales year-on-year. However, GSK reassures investors that they are now back on track to meet their profit forecasts for 2020, as patients begin to take up standard vaccinations for other diseases again. 

Despite Novartis (SWX:NOVN) 1% increase in net sales compared to Q3’19, their net income fell 5%, leading to a 7.28% decrease in their share price since they released their quarterly results on Tuesday 27th October. Especially disappointing are the drops in the share price of both GSK and Novartis over the past year, with them falling 26.64% and 17.30% respectively. Likewise, the share price of the French giant Sanofi (EPA:SAN) declined 5.99% over the week, even though it reported a 10.2% growth in its net income attributable to equity holders, and a 1.0% increase in business net income.

Over in the US, Eli Lilly’s (NYSE:LLY) share price dropped 8.06% over the week, despite their 5% rise in revenues in Q3’20, as well as their $375 million deal with the US government to supply 300k doses of their experimental antibody COVID-19 drug. This is mostly due to their move to grant discounts and lower drug prices by an average of 5% in order to maintain market share, and also their $125 million in marketing expenses for their new antibody treatment, all of which could have disappointed investors. 

On coronavirus, Regeneron (NASDAQ:REGN) halted their clinical trials for their antibody COVID-19 treatment, after an independent committee warned that the risks of the treatment may outweigh the benefits; their share price fell 5.41% this week. On the other hand, Moderna (NASDAQ:MRNA) announced on Thursday 29th October that they have received $1.1 billion in deposits from governments for their COVID-19 vaccine candidate. Their share price rose as much as 11.94% from this announcement but has since gone back down.

Consumer Staples and Consumer Discretionary (Jun Wei)

Markets saw red this week as the resurgence of Covid-19 in Europe spooked markets, with France and Germany imposing new lockdowns. The S&P 500 Consumer Discretionary Index dropped nearly 5% this week, and the S&P 500 Consumer Staples Index was down nearly 3%. As we are in the thick of Q3 earnings season, we look at the earnings results of Starbucks, Restaurant Brands International and Under Armour. 

Starbucks (NASDAQ: SBUX) beat earnings expectations as sales in the U.S. and China rebounded more quickly than expected. While same-store sales are still down 9% year-on-year, Starbucks reported revenues of $6.2 billion (vs. expected $6.06 billion) and EPS of $0.51 (vs. expected $0.31), comfortably beating analyst expectations. The market initially responded positively to the news, going up by about 1% after earnings, but its share price has declined again. Starbucks mentioned that while foot traffic is down, customers are spending more or more expensive menu items. Starbucks also maintained a dividend of $0.45 per share, at a time when many companies are cutting dividends or suspending dividends. Moving forward, the recovery of in-store sales heavily depends on whether office workers will be returning to offices in the new year. With the Covid-19 situation still uncertain and ever-changing, it is incredibly difficult to forecast the outlook of Starbucks moving into next quarter and into the new year. 

Under Armour (NYSE: UA) exceeded all expectations due to strong demand in North America. Under Armour reported a quarterly revenue of $1.43 billion (vs. expected $1.16 billion) and EPS of $0.09 (vs. expected $0.06). Shares of Under Armour were up 7% premarket following the announcement, and has continued going up as the market opens. Analysts had been bearish on Under Armour’s prospects even before the pandemic, due to strong competition from Nike, Adidas and so on. However, there is room for optimism for Under Armour as it reduces its bloated balance sheet and streamlines its e-commerce offerings, with the sale of MyFitnessPal for $345 million to a private equity firm. 
Restaurant Brands International (TSE: QSR) reported a fall in quarterly revenues by 8% as sales at Tim Hortons, its subsidiary coffee chain, struggle to gain traction. However, it did beat analyst expectations in EPS ($0.68 vs. $0.63 expected) and matched analyst expectations for revenue at $1.34 billion. Tim Hortons saw sales decline by 12.5% and Burger King by 7%, as the lack of commuters hurt sales. The share price of Restaurant Brands International took a beating this week, declining about 6%. Moving forward, Restaurant Brands International is pressing ahead with a bold expansion strategy, aiming to open more stores in the new year. It has also continued to invest in its restaurants, improving its drive-thru experience, investing in digital menu boards and investing in contactless payment systems. This move could give Restaurant Brands International an edge over its competitors as it aims to emerge from Covid-19 stronger and more efficient in restaurant operations.

Communication Services (Katarina Lau)

As we head into Q3 earnings report season, it has been positive news for some of Europe’s largest telecoms groups. BT Group (BT.A) rose as much as 8% on Thursday as it upped its profit guidance and announced it will resume dividend payments to shareholders next year profits. Interestingly, the upward movement all happened in the backdrop of BT reporting a 20% drop in profits due to coronavirus. This was a far cry from when BT shares fell to a 10-year lows this year and a much-needed win since the group upset investors by suspending its annual dividend for the first time in 36 years earlier this May. Following this bounce back, French group Orange, which cut dividends this year as well, reported better-than-expected Q3 results and restored its dividend. In spite of an ongoing national price war, Swisscom chose to maintain its dividend, a solid sign of strength. However, only major Spanish company Telefónica (TEF) fell 5% to €2.72 — the lowest level since 1990 — after it reported a worrying total net debt of €43 billion and booked a €800m writedown on the value of its Argentine network.  

Despite a 7% fall in sales due to poor services performance, Nokia doubled quarterly profits with a €193 million net profit, up from €82 million from Q3 last year. This quarter, Nokia passed the milestone of 100 5G deals and while still behind competitors, made a huge pledge to beat rivals Ericsson and Huawei in the 5G race. Restrictions on Chinese-made telecoms equipment in the West have evidently aided Nokia in snapping up market share from Huawei. Given how the US-China trade war shows no signs of slowing down, Nokia’s bid to be market leader in 5G is foreseeable – even though the group lost almost 20% market share during its transition from 4G to 5G previously. 

Financial Institutions (Jamie Biswas)

This week saw huge losses within financial institutions, with the Vanguard Financials ETF (VFH) falling 6.03%. The losses within the sector can be attributed more heavily to banks and less so to insurance firms, although both had a very poor week. Significant losses with the sector include Wells Fargo (WFC) tumbling 9.66% over the week, Bank of America Corp (BAC) falling 6.02% and JP Morgan Chase (JPM) dropping 6.72%. Unexpectedly, pure investment banks Goldman Sachs (GS) and Morgan Stanley (MS) proved to be just as fragile, falling 7.36% and 8.10% respectively. The financial institutions sector performed slightly worse than the S&P 500 this week, which saw losses of 5.66%.

This week Deutsche Bank released their results for the third quarter. Deutsche bank reported a return to profitability for the first time since early 2019, facilitated by a combination of increased revenues and decreased costs. Deutsche Bank’s fixed-income trading revenues surged 47% in the third quarter, exceeding the 26% average rise recorded by its five largest Wall Street rivals. Revenue at Deutsche’s investment bank increased 43% compared to the same quarter last year, to €2.4 billion. Deutsche bank reported net income for the quarter of €182 million, a significant improvement on last years loss of €942 million. This far exceeded analysts’ estimates of a loss of €26 million. In the third quarter, Deutsche created a provision for bad debts worth €273 million compared with the €761 million it recorded in the second quarter of this year. The figure was 20% lower than analysts expected, as coronavirus-related headwinds decreased quicker than anticipated over the summer, reflecting similar trends at other European lenders such as HSBC and Santander.

Industrials (Ed Collins)

The Industrials sector has fallen severely this week, with the Vanguard Industrial Index (VIS) having fallen by 5.2%.

Boeing (BA) reported its fourth straight quarter of losses on releasing its earnings report on Wednesday. Boeing reported a net loss of $466m for Q3 of 2020 compared with a profit of $1.2bn for the same period last year. Revenue fell 29% to $14bn. More worryingly, it burnt through $4.8bn in cash during the quarter and free cash flow came in at negative $5.1bn. Not only has Boeing been dealing with the impact of the coronavirus pandemic, but it has also been dealing with the crisis over its grounded 737 Max jet for 19months now. Boeing reported 983 orders this year in which the customer either cancelled or may have lacked the financial soundness to complete the sale. Almost all were Max jets.

Boeing’s chief financial officer Greg Smith said the company’s cash flow may not turn positive until 2022, although it continues to aim for late 2021. All of this has been incredibly worrying for investors: Boeing’s share price has fallen 12.9% since the start of the week. For all its commercial aircraft sector worries, Boeing does have its military business to fall back on, which is a large recipient of the US’ $700bn+ defence budget.
At Boeing, the defence unit is now the group’s biggest in terms of sales and profits. While losses at its commercial aircraft business swelled to $1.4bn during the third quarter, defence managed to make $625m in profit on $6.8bn of revenue.

Boeing shares have risen more than 50% from their March lows, but are still approximately two-thirds lower than March 2019 levels. This should provide reassurance to investors. Boeing is still geopolitically important in Washington for defence reasons; it is not just a commercial airline manufacturer. For such military reasons, the US government will not let it fail.

Utilities (Katarina Lau)

In this quarter’s earnings season, utility stocks are expected to decline 3.7% Y-o-Y on 2% lower revenues as utilities experienced a sector-wide decrease in demand due to fewer commercial/ industrial activities this year. At present, the sector is down -16.86% YTD. However, increased utilities demand as a result of stay-at-home measures does have some potential to offset the reduced demand.

In terms of costs, the large number of tropical storms that hit the U.S just this quarter e.g. Hurricane Laura, will no doubt raise quarterly operating costs for utilities in affected regions. Nonetheless, the sustained low-interest rate environment has helped utilities repay outstanding debt, increase infrastructural development and execute cost-cutting initiatives which have prevented the sector from incurring huge losses this Q3.

Altagas Ltd. (TSX:ALA) rose 3.5% after a strong Q3 earnings report with EBITDA rising 23% Y-o-Y. Overly low expectations are part of the reason for the momentum. Altagas successfully carried out its transformation plan to de-risk its business, by increasing utilities exposure and further diversifying its operations. FirstEnergy Corp. fired CEO Chuck Jones shortly after two men pleaded guilty in the $61 million Larry Householder bribery investigation. FirstEnergy (FE) shares fell 5.6% on Friday. Earlier in July, Federal agents arrested former Ohio House Speaker Householder and 4 other FirstEnergy lobbyists for funnelling $61 million to Householder, in exchange for pushing a $1.3 billion nuclear energy bailout bill into law – which would clearly benefit the company. While FirstEnergy’s underlying businesses remain solid, it is suspicious how the firings happened the same day that 2/5 people charged made a plea deal.

Materials (Ed Collins)

The Materials sector is down this week: the Vanguard Materials Index (VAW) is down by 2.9% since the start of the week.

There were many earnings reports released this week from the oil majors. First up was BP (BP), who on Tuesday announced that they had returned to a profit in the third quarter, beating analysts’ expectations of a loss. BP’s underlying profit on a replacement cost basis was $86m in the three months to September 30, beating analysts’ forecasts of a loss of $120m but still being 96% lower than the $2.3bn in the same period last year.
On releasing the earnings report, BP said: “The ongoing impacts of the Covid-19 pandemic continue to create a volatile and challenging trading environment… The shape and pace of the recovery is uncertain, as it depends on the further spread of the pandemic.” BP’s share price closed down 4.56% on Tuesday.

Royal Dutch Shell (RDSA) raised their dividend on Thursday, insisting it could afford higher payouts even as the they navigate the both the challenge of the pandemic as well as the shift towards cleaner energy. This comes just months after the oil group made the first cut to its payout since the Second World War. Since the dividend cut was announced in April, Shell’s stock fell to a 25-year low. On Thursday, Shell said it would increase its dividend by 4% to 16.65 cents in Q3, and raise it each year from now. The April cut slashed the payout by 66% to 16 cents. For the third quarter, net income adjusted for cost of supply, Shell’s preferred profit measure, dropped to $955m, surpassing analysts’ estimates of $146m. Shell’s share price rose 3.93% on Thursday, following this announcement.

Finally, ExxonMobil (XOM) announced its third consecutive quarterly loss on Friday. The oil supermajor posted a net loss of $680m in the three months to September, down from a profit of $3.2bn in the same period last year. Exxon announced it will be cutting capital expenditure planned for next year by up to a third. The supermajor also warned that assets with values of up to $30bn were at risk of writedowns. The company on Thursday announced plans to reduce its workforce by more than 14,000 jobs by the end of 2020. Exxon’s share price was down 1.2% in early morning trading on Friday.

Fixed Income

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Rates (Harrison Knowles)

Three major central bank decisions arrived this week as the Euro-area, Canada and Japan all signalled renewed levels of anxiety about the persistence of Covid-19 and the lingering impact on the global economy. The ECB reassured investors that it stands ready to act in December. President Christine Lagarde said there is “little doubt” that the bank will agree on a new set of stimulus measures as rising Covid-19 infections and renewed lockdowns threaten another major hit to Europe’s economy. A few policymakers are set to speak this weekend and, as far away as December may be, that will be pored over for hints on what action the ECB will take. Whilst, the Federal Reserve and Bank of England are up next week. Hanging over this is a renewed push, driven by the pandemic, to weaken the world’s fixation with GDP as a measure of economic welfare. For investors, it is likely a long and difficult road ahead, particularly those banking on a vaccine fixing the global economy’s problems, as questions remain about how effective that will be, how easy it will be to distribute and how many people will be willing to take it.

Notably the next Federal Reserve meeting is almost immediately after the U.S presidential election. If the much-discussed “Blue Wave” should materialise, there’ll be more focus on the long end and how best to keep those borrowing costs in check. So far, the overriding message from the Fed is that it’s not eager to swing to the rescue again. Policy makers have spent the past several weeks repeating with various degrees of exasperation that it’s the government’s turn. However, we can’t be too sure that the Fed will sit on its hands after the election. Breakeven rates — which are market-implied expectations of the path of consumer-price inflation — are headed lower again. The 10-year rate is hovering around 1.7%, as much as 10 basis points from its 2020 peak last month. That’s well shy of the 2% inflation target for the decade to come, suggesting that investors need more evidence of the Fed’s ability to put its words into action. Interestingly, Jefferies thinks the Fed is most likely to skew its asset purchases to longer-dated bonds. Alternatively, Chair Jerome Powell could signal it’s buying more corporate bonds.

Real Estate

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

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The global pandemic has continued to affect the real estate market across different geographies with a flurry of lockdowns now coming into place across Europe and in certain parts of Asia even. However, REITs and other real estate investments have continued to show strong growth and promise. In the UK residential market, this has been seen by the high mortgage approval rates (hitting record highs since 2007) and banks having to raise interest rates in an attempt to curb the increase in demand.

In the Czech Republic for example, Jet Investment (a private equity firm focussed on industry in central Europe) is launching a new fund, the Jet Industrial Lease Fund, with subscription starting on November 1. It will only be open to private investors, from whom an expected CZK1 billion (equivalent to about £33mn) is to be raised in the first year, rising to CZK14 billion by the 5th year. The money will be used to purchase property off creditworthy industrial companies who may find it beneficial to utilise the cash and pass on the property management services to an external provider.

In the UAE, Al Mal Capital’s (a Dubai-based investment manager) has also received approval to list its own REIT, with a subscription period from the 8th to 19th of November. It has a target offer of 500mn dirhams (about £105mn) and is the first IPO in three years for the Dubai Bourse. It will focus on real estate in the education, healthcare and industrials sector and include both UAE and foreign properties.

In Europe, Cromwell Property Group, a real estate manager, has secured three leases in Denmark, Poland and France for its REIT, Cromwell European REIT. This results in a total of 25, 000 sqm of office and logistics space leased out, benefitting from the strong logistics growth in parts of Europe during the pandemic. Their share price (ASX: CMW) has however, fallen 1.1% since this news, however, considering the size and international presence of the group, it is likely unrelated.

Commodities

Oil & Precious Metals (Oliviero Sacchet)

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The oil industry this week registered: WTI (-4.12%) BRNT (-7.11%).

This week the oil industry has faced the worst period since May. Oil price fell below $37 on Thursday. The lockdowns in Europe are bringing the oil sector in a dark period, but analysts said that the impact will be less than in Spring. However, several firms are reducing their workforce, which will be 15 per cent lower in 2022 compared to 2019 level. The estimation on the oil output could be at least 1 million barrels a day in the next month. 

US coal production is collapsing. This week the total US coal production was 10.2 million st and it is decreased of 4.1% from the previous week. Overall, this year the coal industry saw a massive decrease compared to the previous year, of about 20%.

Soybean prices are decreasing due to a reduction of exports in China. During the pandemic China brought a bullish effect on US soybean. However, its actual lull is causing negative pressure on prices. According to S&P Global soybean price rises by 43% from April to October

The Asian country is also a big buyer of the Brazilian’s soybean production. However, in this period, Brazil is suffering a dry period. China already bought the Brazilian production for February, but these weather conditions could cause delays.

Foreign Exchange

G10 & EMFX (Krisztián Sudár)

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The United States Dollar, arguably the most influential currency of the world, has been appreciating for a few weeks now, seemingly without any change to underlying macroeconomic fundamentals. If we look deeper into what has been causing the move up in the Dollar index, illustrated below, we can safely conclude that most likely the upward movement can be explained by a general deleveraging across asset classes. Investors moved away from equities, bonds, and commodities equally ahead of the presidential election, which is poised to bring forth increased uncertainty and volatility. The sell-off across assets increased demand for dollars (which most assets are denominated in), elevating price. This week in particular, the dollar, acting as a safe haven once again, strengthened by 0.5%.

As COVID-19 cases rise across Europe, more and more countries are entering lockdowns yet again. This is overall bearish for the Euro, which after having a strong couple months over the summer, has been declining lately. This week, the ECB’s Lagarde announced that more easing is to come before year’s end, which will de facto devalue the single currency. While equity markets reacted positively to the news, the currency sold off, dropping to its lowest value in a month of 1.683$.

I mentioned last week that the Turkish Lyra edged around the symbolic level of 8 against the US Dollar but did not reach it. That changed this week, after the Turkish Central Bank defended its monetary policies, and maintained its position against hiking interest rates, leading the currency to reach a historic low of 8.3211 to the Dollar on Wednesday.

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