Friday Wrap Up (October, 8)

(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:

On Friday, US equity markets staged a rebound, recovering the previous week’s losses on news that the US Congress is nearing a deal to extend the debt ceiling for a few months. The S&P 500 gained +0.83%, while the NASDAQ index increased +1.05%. Earlier in the week, investor sentiment was low due to a host of reasons including Facebook-related web services going offline for more than 6 hours, hawkish comments citing inflation risks from St. Louis Federal Reserve President Jim Bullard and rising tensions between China and Taiwan. This week European stocks also outperformed with the EuroStoxx 50 gaining +2.14% despite a volatile backdrop where gas prices surged to record levels amid global fuel shortages. September’s US non-farm payrolls were released, falling way below expectations at +194,000 vs. +500,000 expected and a revised +366,000 in August. This demonstrates US employers unexpectedly hired at a slower pace this month due to supply shortages and virus-related impacts on the labour market. Even after nine consecutive months of growth, total employment has yet to return to pre-pandemic levels.

COVID-19 Update: 

From 13 October, Singapore will allow quarantine-free travel for UK and other nations. Prime Minister Lee Hsien Loong announced it was time to press on with the “strategy of living with Covid-19”.

Equities

Information Technology (Satya Maulana)

The race for control over the global 5G network is imminent. This week Apple’s (+0.92%) iPhone supplier is partnering with Microsoft (+2.69%) to push into 5G private networks, joining a large and growing number of tech companies looking into challenging telecom infrastructure players such as Huawei Technologies and Ericsson (+3.94%) (Nikkei). However, global chip and energy storage is significantly slowing the progress of new devices (FT). The NASDAQ telecoms index (IXTC) fell 2.15% this week following the news. 

The Big Stories

Google (+2.81%) confirms a $1B investment in Africa, including internet, subsea cable, and early-stage startups (TC). China’s central bank governor vows to continue fintech crackdown (BBG). Amazon’s (+0.28%) Twitch hack reveals how much revenue the platform’s biggest streamers make (WSJ). Qualcomm (-1.84%) and SSW Partners agreed to buy automotive-technology company Veoneer for $4.5B (BBG). Singaporean ride-hailing company Grab raises its stake in E-wallet Ovo to 90%, buying it out from Tokopedia (BBG). Samsung (-3.10%) reports the highest profit in 3 years on global chip storage (FT).

Healthcare (Jasmine Khoo)

Moderna’s shares (NASDAQ:MRNA) have fallen 33.5% in the trailing two weeks to US$302.42 on Wednesday 6 October, significantly underperforming the S&P500 (SPY) which slid 1.9% in the same period. As highlighted in last week’s edition, vaccine stocks have taken a hit from the positive developments in COVID-19 antiviral treatments such as molnupiravir from Merck & Co. Inc. (NYSE:MRK). There are idiosyncratic factors at play as well – Finland, Denmark and Sweden have limited the use of Moderna’s COVID-19 vaccine due to reports of heart inflammation side effects.  The authorities have recommended the Pfizer-BioNTech vaccines instead. The Scandinavian countries made these announcements consecutively in a short span of 3 days, and it remains to be seen if other nations will follow suit. 

Conversely, a positive news this week was Moderna’s plan to build a new facility in Africa that is expected to produce close to 500 million vaccine doses annually. This announcement came amid mounting pressure on drugmakers to waive intellectual property rights to give developing countries greater access to vaccines. Moderna’s shares rebounded slightly on Thursday 7 October (+2.3%).

Consumer Staples and Consumer Discretionary (Jeff Chen)

Over the past week, both the Consumer Discretionary and Staples sectors bounced back from consecutive weeks of losses, with the Consumer Discretionary Select Sector Fund (XLY) gaining 1.7%, whilst the Consumer Staples Select Sector Fund (XLP) also rose 1.5%. The recovery in consumer stocks could be attributed to US lawmakers reaching a deal in the Senate that would raise the debt ceiling in the short term, avoiding an unprecedented debt default in the US for now. This has led to markets reacting positively to this piece of news, despite rising bond yields and ongoing supply chain disruptions in the economy. 

One company to watch this week would be spirits and alcohol company Constellation Brands (STZ), which announced mixed results this week. The company is up 2.3% this week, with revenue exceeding projections. However, earnings per share was below Wall Street expectations of $2.77 per share at $2.38 per share, due to a US$66 million obsolescence charge related to excess hard seltzer inventory. CEO Bill Newlands remained positive on the growth prospects of his company, raising guidance for the next fiscal year due to strong performances by Modelo (revenue grew 16%) and other wine brands under Constellation. Given the popularity of household alcohol beverage names, we could possibly see higher growth in this sector ​​despite the ongoing Covid 19 pandemic. 

​​Communication Services (Chris Dai)

The communications sector had the strongest performing week since early September with the S&P 500 Communications Service Index (S5TELS) and iShares S&P 500 Communication Sector UCITS ETF (IUCM) rising 2.0% and 2.4% respectively over the week. This week, we look at Facebook’s longest outage in 13 years, as well as the biggest fallout from the company following the Senate hearing on Tuesday.

Already suffering from the recent whistleblower’s allegations of spreading disinformation on the platform, Facebook (FB) encountered its worst service outage since 2008 with the company’s main apps shut down for more than 6 hours on Monday. The outage was allegedly caused by “configuration changes on the backbone routers”, as explained by Facebook’s VP of infrastructure Santosh Janardhan in a blog post without explaining in detail. 

Following the step-down of Facebook’s long-time CTO covered in previous wrap-ups, the public hearing on Tuesday attended by the whistleblower and former product manager Frances Haugen has deepened the company’s sense of crisis. During the hearing, Haugen provided further evidence on Facebook maximizing its online engagement instead of harm to its users, as it struggled to retain young users with the rising popularity of its rivals such as TikTok. As a result, the company’s shares dropped nearly 5% on Monday following the incident as well as the whistleblower interview. 

Industry & Materials (Maksymilian Mucha)

Vanguard Industrials ETF (VIS) and Vanguard Materials ETF (VAW) are up 1.62% and 1.48% this week respectively.

Recent announcements of materials companies suggest that they are able to pass raising commodities and energy prices on to its consumers. French construction products group Saint-Gobain (SGO +1.58%informed it will raise its average prices by 8% after €1.5bn YoY materials and energy prices inflation, while Swiss chemicals group Sika (SIKA -0.65%) also intends to pass higher costs on customers, planning to drive its EBIT margin to 15-18% compared to 14.4% this year.

Looking forward, this is good news for materials stock investors, which because of the pro-cyclical nature of the Materials sector benefited from the rebound of the economy in 2021, however, they recently have been challenged by a steep rise in inflation. On the other hand, this might threaten the profitability of European real-estate developers taking upfront payments, since higher materials cost will challenge the housing construction industry.

Source: Eurostat, 2021

Volvo, Swedish automotive company, announced it is heading towards an IPO on the Stockholm Stock Exchange which would value the company at approximately $30bn. The $2.9bn proceeds from the public listing are to spent on company’s EV plans, with its target of half of sales to be electric in 2025 and all of it in 2035. Volvo is forecasting its sales to raise 56% to 1.2 million vehicles  until 2025, with operating margin between 8 and 10%. Geely (0175 +0.68%) will remain the major owner of Volvo.

Fixed Income

Rates (Suraj Suresh)

This week the market saw a sell-off in bonds as yields on the 10-year US Treasury bond and the UK two-year gilt was up to 0.52% and 1.57% respectively. This is due to the current energy crisis, which has led the Bank of England to fear that rising energy bills will push inflation above 4% this winter. 

The 10-year breakeven rate rose to 4.08% as UK inflation expectations hit a 13-year high. The breakeven rate is the difference between the nominal government bond yield and the real yield, which is the risk premium for inflation uncertainty. The bond market’s reaction was also due to investors’ assumption that the Federal Reserve would scale back its post-pandemic stimulus. The recent rise in bond yields shows that market participants are now wary of the possibility of ‘stagflation’, especially after non-farm payrolls rose by 194,000 in September instead of the Dow Jones estimate of 500 000, suggesting slower economic growth.

Credit (Xuan Boh)

Investment-grade bonds

The week ending October 6 saw the biggest weekly outflow from U.S. investment grade (IG) bonds funds of US$2.537 billion, marking the biggest withdrawal since April 2020. Prior to this, IG funds posted 8 consecutive weeks of inflows amounting US$23 billion. 

High-yield bonds

U.S. high-yield bond funds saw outflows of US$294 million in the week ending October 6. 

Chinese high-yield bonds also took a hit this week, as prices of U.S. dollar bonds of several Chinese property companies dipped by approximately 5 basis points. This can be attributed to fears of financial contagion, anchored by Evergrande’s looming default and exacerbated by Fantasia Holdings Group Co.’s missed payment on a $206 million bond – as property developers dominate the Asian junk bond market. 

Distressed debt

This week, distressed debt funds have flocked to buy bonds issued by Evergrande, the Chinese property developer that many believe is on the brink of a collapse, based on the expectation of an intervention from Beijing.

 In Europe, eliminating levels of non-performing loans (NPLs) from banks remains a key concern. On October 6, the ECB published supervisory banking statistics for Q2 2021, showing that aggregate NPL ratio fell from 2.54% in Q1 to 2.32%, representing a dip of €33 billion between quarters.  

Source: ECB

Real Estate

Real Estate Investment Trusts (REIT’s) (Soubhik Sengupta)

Fundraising activity among UK-based REITs exploded to a four-year high in Q3 of 2021, as a return in transactional activity and the appetite of yield-hungry investors translated into a string of large share placings. Data compiled by the Association of Investment Companies (AIC) found that UK REITs raised £683 million in Q3, a sharp rise from the £35 million-worth of shares sold in Q2 of 2021 and the highest figure since Q3 2017. 

JLL found that 63% of REITs exceeded consensus estimates for funds from operations in Q2, outperforming the S&P 500 by 1100 basis points. This surge in secondary fundraising and IPOs comes amid growing investor interest in assets offering inflation-protected income growth and continued aversion to weak bond returns.

Looking forward, Q4 of 2021 is also expected to be a busy quarter for REIT fundraising with a £100 million raise by Supermarket Income (SUPR) and the proposed initial public offering of Responsible Housing, for which plans have been announced to raise up to £250 million to acquire a portfolio with a focus on homes for adults and young people with disabilities and mental health issues.

Commodities

Oil & Precious Metals (Anouska Jha)

Global Gas Consensus and BHP’s Copper Innovation Project.

As of Friday 8 October:

The S&P GSCI has increased 0.6% standing at US$577.06

The Dow Jones has increased 0.5% standing at US$941.76

The Bloomberg Commodities Index has increased 0.6%  standing at  US$102.91

A market-based global consensus has certainly taken off in the wake of the European energy crisis, after Putin’s comment on Wednesday to increase gas supplies through Gazprom’s (the Russian pipeline monopoly) storage facilities. As a result, UK gas contracts decreased from £4.00 to £2.71 on Wednesday, and Brent Crude declined from $83.47 to $81.08. The London FTSE also declined 1.1%, due to BP and Royal Dutch Shell stocks both losing share price values of 2.5%. However, there is still skepticism of Russia’s market manipulation; Gazprom is responsible for over 35% of European supply, and EU Parliamentarians are concerned whether or not the Russian company will adhere to the spot market, rather than waiting for long-term deals (as Putin clearly advocates). As such, traders may wish to remain neutral for the time being on ad hoc bids on the gas market, as there is room for maneuver on whether Russia’s claims will be fulfilled.

A similar situation is occurring in China, where 72 miners in the Inner Mongolia region aim to expand coal capacity by 100 million tonnes, in order to counter the gas crunch and maintain food supplies. As a result, the CSI Coal Index fell by 5.5% on Friday 8 October.
In other news, with copper prices having risen over 15% in 2021 and further incentives for green technology such as EVs and solar products over the next decade, BHP (BHP) is looking to expand its mining operation in developing countries to increase its pipeline of new projects. It has already taken a stake in a London-listed company’s development project in Ecuador and is looking to expand its practices in the Democratic Republic of Congo. BHPs shares are up 1.4% at the time of writing at £1920.40. However, mining practices in these developing countries often damage biodiversity rainforests, and processing plants often run off coal-fired power. Hence, CEO Mike Henry’s recent claim that BHP must take on ‘tough jurisdiction’ to promote the green transition must be equally matched with the company’s maintainability of its corporate social responsibility.

Foreign Exchange

G10 & EMFX (Noah Martle)

The Sterling Bounces Back

On September the 29th, the GBP/EUR spot rate fell to 1.342 – a six month low. The Pound’s depreciation was driven by a shortage of truck drivers and led to a national fuel crisis. However, since then, the UK seems to have solved its fuel problem, but now the BOE “expects inflation will raise above 4% this winter, the highest level in a decade”. Thus many experts believe that Andrew Bailey (the Governor of the BOE) will push to raise interest rates in an attempt to dampen the high levels of inflation. As a result of this viewpoint gaining supporters, the GBP appreciated 1.64% against the Euro from 1.342 to 1.364 since September the 29th.

Refinitiv, 2021

Uncertainty for the Lira

The Lira is facing an uncertain future after three confidential sources close to the Turkish President (Recep Tayyip Erdogan) claimed that Erdogan wants to fire Sahap Kacvioglu, the central bank governor. The sources attest that Erdogan was irritated by the fact that the interest rate cut was delayed until September. On the back of this news, the Turkish Lira hit a new six month low of 0.1115 against the US dollar. Senior officials were quick to dismiss these claims; however, this announcement did little to ameliorate the depreciating Lira. Many believe the Lira will continue to tumble as low-interest rates will trigger higher levels of inflation, above the current rates of 19.25%. In turn, the high levels of inflation will decrease business confidence in Turkey and could trigger a vicious cycle of high inflation and confidence in Turkey’s economy could spiral.

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