Friday Wrap-Up (October, 9)

Stocks are looking to close out a strong week.

(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 are looking to close out a strong week. Futures are up. Sentiment has been boosted this week by signs that congressional leaders and White House officials are trying to bridge differences over a new batch of spending measures to help airlines, small businesses and households. Stocks boomed ahead of President Trump’s departure from the hospital where he had been recuperating from Covid-19 since Friday night. Battered oil prices also shot up.

Economy:  The U.S. trade deficit ($67.1 billion) grew to its highest level in 14 years. The deficit measures the difference in value between a country’s exports and its imports. If the deficit gets too big, it could hamper economic growth. The U.S. services sector gained for a fourth straight month in September. The sector, which includes jobs in restaurants, real estate, and healthcare, is where most Americans work.

Markets in a Minute


Information Technology (Maria Lomaeva)

Tech stocks experienced some volatility this week in connection to President Trump’s tweets on the stimulus package. Nevertheless, NASDAQ Composite remains 4% higher this week as investors are hopeful about the next fiscal relief from Washington. 

On Tuesday, the House of Representatives released an antitrust report criticising Apple (AAPL), Amazon (AMZN), Facebook (FB) and Google’s parent Alphabet (GOOGL) for competition abuse. The report recommended forcing the Big Tech companies to completely restructure their businesses. As of now, the Republicans have not agreed to support the report as a whole; however, if Joe Biden wins the presidential election, there is a good chance these recommendations will be implemented which, in turn, could have long-lasting effects within the industry. The shares of all four companies declined about 2% in the afterhours trading, but have since regained the losses, as of Friday. 

The shares of the microprocessor manufacturer Advanced Micro Devices (AMD) fell about 4% on Friday amid a rumoured $30bn acquisition of Xilinx (XLNX). Xilinx produces chips that are used in communications, data centre and industrial applications, and its shares spiked as much as 12% after the reported news. AMD’s falling share price reflects investors’ reservations about the purchase; many struggle to see how this will add tangible value for shareholders, with the acquisition being reminiscent of the purchase of Xilinx’s competitor Altera by AMD’s rival Intel (INTC) which did not have any positive effects on the business. In addition, some of Xilinx’s customers, including Huawei, have been blacklisted by US officials
Next week, ASML (ASML)—another company within the semiconductor industry whose customer has been recently blacklisted by the US (SMIC)—will report its quarterly earnings.

Healthcare (Christine Chan)

Overall, healthcare equities did well this week, with the Health Care Select Sector SPDR exchange-traded fund (NYSEARCA:XLV) rising 3.24% over the week to $108.36 on Friday. This is despite the significant dip of 1.39% on Tuesday 6th October, where US equity indices fell as a whole after Trump opposed the Democrats’ $2.2 trillion virus relief proposal.

This week has been a busy one for healthcare. On Monday 5th October, Bristol Myers Squibb (NYSE:BMY) has agreed to buy the Californian biotechnology company MyoKardia (NASDAQ:MYOK) and their portfolio of cardiovascular drugs for $13.1 billion in an all-cash deal. This is an interesting pivot for Bristol Myers Squibb, as their top-selling drugs Revlimid (for cancer) and Eliquis (a blood anticoagulant that makes up 21% of their total sales) will be losing some of their US patent exclusivity in 2022 and 2026 respectively. This acquisition will allow them the rights to mavacamten, a heart drug candidate expected to offer significant growth. They will be paying $225 per MyoKardia share, which corresponds to a premium of 61% compared to Friday’s closing price of $139.60. Meanwhile, Bristol Myers Squibb’s share price increased a healthy 5.55% over the week, suggesting that investors perceive the deal to be a good investment.

In the coronavirus space, the European Medicines Agency (EMA) has decided to accelerate the approval process for Pfizer (NYSE:PFE) and BioNTech’s (NASDAQ:BNTX) joint vaccine, leading to their share prices increasing 0.74% and 17.62% respectively this week. In terms of a treatment for coronavirus, Eli Lilly (NYSE:LLY) has applied for an emergency authorisation of its antibody therapy; if approved, this will make it one of the first treatment options available for patients who are suffering from mild to moderate symptoms. Their share price has gone up 8.14% and ends the week at $156.88.

Consumer Staples and Consumer Discretionary (Jun Wei)

The markets showed a general upward trend for the past week, as fears over Trump’s covid-19 situation were dispelled following his discharge from hospital. Both the S&P 500 Consumer Staples and Consumer Discretionary indices were up slightly. This week, we will take a closer look at the sales figures of McDonald’s and an intriguing expansion strategy by Allbirds. 

McDonald’s (NYSE: MCD) reported that U.S. same-store sales rose nearly 5% as more customers turned to fast food. It also announced that it would be increasing its quarterly cash dividend by 3% to $1.29 per share, at a time when many companies are cutting or suspending dividend payouts. Shares were up nearly 1% in pre-market trading on Friday, 9th October. Sales were thought to be driven by an unorthodox marketing method for fast food chains, as McDonald’s advertised the “Travis Scott meal”. The “Travis Scott meal” consists of the favourite items on the McDonald’s menu of Travis Scott, a popular rapper. The shift to individual celebrity marketing was an unusual move but worked well for McDonald’s, as fast food chains in general bounced back quickly from covid-related lockdowns earlier in the year. Allbirds (the wool shoe brand) recently raised US$100 million, increasing its valuation to $1.7 billion. Allbirds prides itself on using sustainable materials in their production process and has gained popularity even as a direct online retailer. However, it plans to expand its brick-and-mortar store presence further and is due to open its 22nd store in San Francisco by the end of October. At a time when retailers are frantically cutting physical presence, it seems like an unusual move. Allbirds said that they wished to expand its network of stores to “avoid pressures from wholesalers” and have greater control of its distribution as it does not wish to “compromise on standards”. While they do not see themselves as “fast retailers”, I believe they still compete in the same segment as other shoe retailers such as Nike and Adidas due to similar product offerings and therefore it is difficult to see their point of differentiation other than perhaps material quality. Thus, it is difficult to see how this strategy may bear fruit, given that does not really offer a bespoke service where in-person service would be valued.

Communication Services (Katarina Lau)

U.S. telecom stocks have mirrored the broader benchmark index as the Trump administration continues pressure on Chinese telecom firms. Several unresolved issues with the ongoing TikTok negotiations such as data security and Chinese ownership bring uncertainty to the sector. However, with the November elections taking center stage in the U.S., it is unlikely any significant progress will be made in the near-term.

The overall sector continues to be fuelled by healthy infrastructure investments with greater focuses on LTE coverage in rural areas. For example, Verizon Communications has expanded rural coverage in 189 markets in 48 states. Swedish telecoms Ericsson recently extended its long-standing partnership with Bharti Airtel, India’s largest integrated telecoms company, where Ericsson will continue to deploy a radio access network and transport solutions in the operator’s network.  ADTRAN, Inc. collaborated with OptiComm to deploy industry-leading Ten Gigabit per Second Passive (10Gbps) Optical Network technology for improved broadband connectivity in Australia. This is particularly beneficial for all parties, including service providers and customers alike, as society has become ever so dependent on the Internet.   

Belgian networks Orange and Proximus have officially replaced Huawei with Nokia to help build 5G networks in Belgium, sending Nokia (NOK) shares up 3%. The move is significant as the Belgian networks are among the first European commercial operators to drop Huawei amidst U.S. pressure and additionally, Belgium used to be 100% reliant on Chinese vendors for its radio networks. Nordic companies Nokia and Ericsson have benefitted most from Huawei’s struggles, picking up market share through Canada’s Bell Canada and Telus Corp as well as Britain’s BT from Huawei.


Financial Institutions (Jamie Biswas)

This week saw large gains within financial institutions, with the Vanguard Financials ETF (VFH) gaining 4.64%. The gains within the sector can be attributed evenly between banks and insurance firms, with both having a strong week. The financial institutions sector performed slightly better than the S&P 500 this week, which rose around 3%.

News broke this week of an IPO within the fintech space. Lufax, an internet-based lending and wealth management platform, is looking to list within the US. This fact is significant as Lufax, a Chinese company, is trying to list even as the Trump administration pushes ahead with plans to delist companies from China. Lufax is owned by China’s largest insurer Ping An Insurance and was last valued at $39.4 billion during a funding round in 2019. Although uncertain, analysts predict that Lufax will look to raise around $3 billion through the listing, which could go ahead as early as late October. 

Lufax’s IPO will add to a long list activity by Chinese companies within US markets in recent times, despite rising geopolitical tensions between China and the US which have escalated ahead of the US election in November. The Trump administration states that the rationale for the potential delisting of Chinese companies is that they currently do not provide full access to financial information to US regulators. The threat of delisting has been responded to by Chinese companies including and Alibaba, who have both looked to raise billions of dollars outside the US as a hedge to the risk of delisting. The listing has been anticipated since 2017, when Lufax attempted to IPO, only to be stopped by Chinese regulators, who were clamping down on the P2P sector at the time as a result of many online finance scandals.

Industrials (Ed Collins)

The Industrials sector has been up very slightly this week. The Vanguard Industrial Index (VIS) has risen by 3.53%, whilst the S&P 500 Industrials Sector (SPLRCI) is up by 3.2%, since the start of the trading week.

On Tuesday, Boeing (BA) announced its expectations for passenger jet demand over the next decade. The US aircraft manufacturer slashed its expectations by 11%, representing a loss to the industry of an estimated $200bn in potential revenue. The main reasons for this prediction were airlines reducing the size of their fleets as well as accelerating the retirement of older aircraft. Boeing identified wide-body demand as taking the largest impact. Boeing’s forecast is the first significant industry assessment of the longer-term impact on the aerospace sector of the coronavirus pandemic. Boeing’s share price fell 7.71% on the day on Tuesday, following the expectations.

Weir Group (WEIR), the Scottish engineering company, agreed to sell its struggling oil and gas equipment division to Caterpillar (CAT) of the US on Monday. The FTSE 250 group is selling the unit for £314m in cash. CEO John Stanton is looking to focus the manufacturer on mining equipment instead. Weir will continue to manufacture equipment specialising in the extraction of copper, gold and iron ore, as well as lithium and other battery metals. Shares of the Scottish company jumped 16% to £14.80 by late afternoon on Monday, after rising more than 20% at one point.

For Caterpillar, who manufacture heavy equipment, the acquisition represents a bet on the oil and gas sector. Caterpillar’s share price rose by 0.88% on Monday, following news of the acquisition.

Utilities (Katarina Lau)

This week certainly was certainly guided by risk-off sentiments since U.S. President Trump’s COVID-19 diagnosis, in addition to halted negotiations on a second stimulus package until after the November elections. This translated into positive news for utilities stocks, where the Utilities Select Sector SPDR Fund (XLU) rose 4.41% with share prices increasing from $60.80 to $63.48 by the end of the week as investors flocked towards safe haven assets.

However, U.S utilities are bracing up for Hurricane Delta (predicted wind speed of 125mph) which is expected to hit Louisiana over the weekend. Hurricanes usually represent large costs for utilities as electricity poles/wires and natural gas pipelines are easily damaged by storms which lead to disrupted operations and expensive restoration. 

Therefore, utilities in the Gulf Coast region such as CenterPoint Energy and Entergy Corp. are undertaking pre-cautionary measures, and American Electric Power’s business unit Southwestern Electric Power Company (SWEPCO) is requesting 900 additional personnel for power outage response. Hurricane Delta is anticipated induce around $3 billion in losses in Louisiana alone. 

Materials (Ed Collins)

The Materials sector has seen improvement this week. The Vanguard Materials Index (VAW) is up by 2.86%, whilst the S&P 500 Materials Sector exchange (SPLRCM) is also up, by 3.47%.

Chrysaor has agreed a reverse takeover of Premier Oil PLC (PMO). Under the terms of the debt-for-equity agreement laid out on Tuesday, Chrysaor will own at least 77% of the combined group, with creditors in the struggling Premier taking the second-largest share of the company. Premier’s current shareholders will own less than 6% of the firm.

Premier’s market capitalisation was $180m at the end of the trading day on Monday, with gross debt of $2.7bn. Chrysaor is the largest oil and gas producer in the UK North Sea following numerous multibillion-dollar acquisitions in recent years. This included the purchase of the bulk of Shell and ConocoPhillips’ UK assets. Chrysaor is a part of the private equity-backed group Harbour Energy. Their Chief Executive, Linda Cook, will lead the new combined listed company.

The new company, however, will not be following the route as some of its larger competitors, such as BP, which have committed to reducing their oil and gas production over the coming years. Chrysaor’s oil and gas production output was forecast to decline naturally over the next 5 years, but with the new acquisition, this may not be the case.
Ms Cook said that Chrysaor “is not embarrassed to be an oil and gas company,” and that “the world still needs oil and gas, so there is an opening now for a large-scale independent oil and gas company.”

Premier’s shares rose as much as 24% on Tuesday before reducing to a gain of about 5%.

Fixed Income

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Rates (Harrison Knowles)

The heads of both the Federal Reserve and the European Central Bank spoke on Tuesday. ECB President Christine Lagarde warned that while virus containment measures pose a clear risk to recovery, her biggest fear is a sudden end to fiscal support. Whilst Fed Chair Jerome Powell reiterated that the bank has done as much as it can, and the recovery is in the hands of lawmakers. Then just hours later, after Powell’s strongest call yet for greater spending to avoid damaging the economic recovery, U.S. President Donald Trump ended talks with Democratic leaders on a new stimulus package. “I have instructed my representatives to stop negotiating until after the election when, immediately after I win, we will pass a major Stimulus Bill that focuses on hardworking Americans and Small Business.”

Meanwhile, amid the European Central Bank urging for more economic stimulus, investors seem to be betting they’ll get it. A Stoxx 600 gauge of cyclical stocks — those most exposed to an economic recovery — has beaten its defensive peer by more that 3% over the past two weeks, reversing much of September’s underperformance. In comments, Lagarde signalled the need for extra monetary and fiscal stimulus to help the euro-zone sustain its economic recovery. Remarks from German Chancellor Angela Merkel the same day included a vow for government support for the country’s economy. The agreement in principle between central bankers and law makers makes a refreshing change from the stimulus spat across the Atlantic and will help sentiment for Europe’s markets.

Whilst in the U.S, investors are winding up a volatile week with a mild risk-on attitude. With the U.S. president recuperating from Covid-19 in the final stretch of the election campaign, they’re increasingly betting a Joe Biden victory is likely. Speculation is moving now to whether Democrats will sweep Congress too and then enact massive stimulus.

Elsewhere, Indian bonds climbed after the central bank announced a range of measures to help credit flow within the economy, including standing ready to conduct open-market bond operations. Whilst Italy’s 10-year bond yield fell to a record low amid fading domestic political risk and central-bank support.

Credit (Alexander Kaiser)

Following more measures to stop the spread of the coronavirus in the UK, high-yield pub bonds have once more started to fall in value. The 10 pm curfew that started being enforced at the end of September along with the long-standing six-man gathering limit has lowered revenues further and reduced the confidence of investors. The £950m of bonds issued by Stonegate in July is already trading at 92p on the pound, an 8% decline from its original price, reaffirming the scepticism many showed regarding the sale. However, pubs are not the sole victims of the decline in UK leisure activities. Gyms, restaurants and cinemas all had to severely cut down operating expenses through rather extreme methods leading to the debt being traded at prices far below previous norms. For example, Cineworld’s £3.4bn of term loans are trading at roughly 60p per pound, down from a 1:1 ratio at the start of the year, PureGym has over £430m in bonds being traded under 90p per pound, down from a high of 105p per pound. Additionally, the gym operator’s bonds have been downgraded from B to B-, indicating the company is almost at what is considered a significant chance of defaulting. According to a statement from a Senior Portfolio Manager at Neuberger Berman, an employee-owned investment firm, further downgrades will likely occur in the upcoming weeks and months.

Personally, I see this environment as an extremely risky but possibly rewarding opportunity. If the companies can survive the pandemic, their debt would likely rise once more and selling it akin to stocks could yield significant short-term profits. However, considering the probable case of further increases in cases during the winter and uncertainty it seems advisable to wait until the January earnings season to evaluate companies’ ability to remain an ongoing concern, as long as they publish quarterly.

Real Estate

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

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On Tuesday, Boris Johnson announced new measures to help young people afford to buy homes rather than be forced to rent for their whole lives at extortionate rates. The new plans are likely to complement the existing Help-to-Buy scheme (which is ending soon) by increasing the number of 95% mortgages available and providing longer-term fixed rate deals. While measures like this are necessary to help alleviate the rental burden on young people, this does create the potential for systemic financial risks, with fears arising about removing certain affordability criteria put into place after the 2008 Financial Crisis. Further details have yet to follow.

Suntec REIT, a Singaporean REIT focussed on office and retail property, has moved to include the UK into their portfolio. They have done this by buying a 50% stake in Nova Properties, which consists of two office buildings in London, from the Canada Pension Plan Investment Board. The transaction cost £430.6mn. Their share price (SGX: T82U) has fallen 0.68% since this news was announced.

Mailbox REIT, which invests in Mailbox Birmingham (an upmarket shopping and office development), is planning to raise £62.5mn on a new property stock exchange called the International Property Securities Exchange (IPSX). This is the first REIT to list on this exchange and its aim is to allow investors to buy shares in individual buildings using a REIT structure, allowing them to benefit from the tax structure of REITs while allowing investors to choose their own portfolio of underlying real estate assets. Seeing whether this structure proves to be efficient and attractive to investors over time will be interesting, as it could very well challenge the established structure of investing in real estate through mutual funds and ETFs.


Oil & Precious Metals (Oliviero Sacchet)

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This week the oil industry performs: WTI (+2.9%) BRNT (4.6%).

The two candidates for the next US presidential election proposed two different plans that could really change the commodity market. Joe Biden has focused his plan on clean energy with a four years and $2 trillion transition to a carbon-free electricity. Instead, Donald Trump would reach energy independence with a deregulation in order to reduce price and make it more competitive. On the other hand, in order to reach this ‘green plan’, Biden has proposed new drilling permits which will put 1.1 million barrel per day at risk. Regarding the gas industry the two candidates’ plans are similar to the ones they proposed for oil industry, explained before. With the stricter law that Biden would implement the weak US gas industry will suffer and will be more vulnerable. On the other side Trump is planning to open more LNG export facilities. While for the coal industry the two plans are completely different. Trump promised to bring coal jobs back, instead Biden said that he will not build new coal plant.  
As a result of the advance of Hurricane Delta, on October 7, approximately 80% of US Gulf of Mexico oil output was shut down. In other words, the production of US Gulf of Mexico is decreased of 1.49 million barrel per day (crude production) and 1,335 MMcf/d (natural gas production).

Foreign Exchange

G10 & EMFX (Krisztián Sudár)

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The United States Dollar continued its recent decline this week, as the market has been pricing in a Joe Biden win and a turbulent, potentially contested election. The former is seen as a detriment to the Dollar as the Democratic challenger stands on a platform that pushes for increased taxes and other economic measures that will negatively impact the financial sector. The latter could easily lead to an increase in civil unrest, as both parties’ supporters grow increasingly more hostile towards the others, with silent, and not so silent, support from their respective parties’ leaders. The Dollar’s easing for the week resulted in a 0.8% drop.

Following a lengthy public holiday in China, the Yuan had a very strong performance on Friday. The onshore CNY saw its biggest daily increase, at 2.1%, since 2005. The sudden increase stems from the markets pricing in all the news that broke while trading was paused for the holiday, most notably Biden’s continued strengthening in the polls. The Chinese market is one of the biggest possible beneficiaries of a potentially weakened United States market, as its economy is just as, or even more important. Additionally, an increased demand for high yielding Chinese bonds has resulted in heightened demand for the currency.

Asian currencies as a whole largely followed in the Yuan’s footsteps and accumulated relatively good gains on Friday. After news broke that Turkey might be testing a new air defense system that they purchased from Russia, Washington issued a statement saying that they are “deeply concerned”, which sent the Lyra falling 1% against the Dollar, reaching 7.885

As the Dollar is the most important currency in the world, the coming volatility will have a deep impact on the whole financial sector. While a Biden win is being priced in, and he is confidently leading the polls, a “Red Mirage” situation, whereby Trump seemingly wins after the initial tally, but then loses as mail-in ballots get counted, is a very real possibility that is impossible to properly price in ahead of time.

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