Friday Wrap Up (September, 10)

(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?


US equities ended lower this week, where the S&P500 index and the NASDAQ index slid -0.5% and -0.3%, respectively. Last week’s weaker-than-expected August non-farm payrolls seemed to linger and aggravate investor worries about the delta variant hindering the economic rebound. European indices also fell amid uncertainty concerning the pandemic’s continuing effects on the economy and the new central bank policy. The STOXX Europe 600 Index dropped 1.19%. In its latest policy meeting, the ECB decided to move to a “moderately lower pace” of bond purchases under its Pandemic Emergency Purchases Programme for the rest of the year, due to a rebound in European growth and inflation. ECB President Lagarde was clear to point out that this did not mean that the ECB was tapering its stimulus. In the UK, Prime Minister Johnson secured parliamentary approval for GBP 12 billion in tax increases to fund changes to social care and the National Health Service (NHS). This will lead to some investors facing higher levies on dividends, and increased levels of national insurance contributions from the public.

COVID-19 Update: 

On Thursday, President Biden announced that all employers of large businesses with 100 or more employees must require workers to either be vaccinated or submit to weekly testing. Meanwhile, vaccination for federal workers and contractors would be compulsory.


Information Technology (Satya Maulana)

Buy Now Pay Later (BNPL) platforms have taken the fintech industry by storm this summer. As the name suggests, BNPL is a point-of-sale financing service that provides small unsecured loans to consumers for most retail purchases. The increase of BNPL’s popularity is attributed to the coronavirus pandemic-driven boom in e-commerce spending and a broader trend for more flexible financing among traditional lenders such as credit cards. Here’s a brief article about the BNPL industry

At first, the Swedish-made platform Klarna received a $45.6B valuation after a SoftBank (+14.74) led fundraising round. Afterward, Jack Dorsey’s Square (-6.99%) acquired the Australian-made platform Afterpay for $29B. FinAccel, the parent company of Indonesia’s BNPL platform Kredivo, agreed to merge with VPC Impact Holdings in a $2.5B deal. This week it’s PayPal’s (-0.30%) turn as they agreed to acquire the Japanese BNPL platform, Paidy, in a $2.7B deal. All of these deals occurred within the last three months, showing how investors are jumping onto the BNPL bandwagon.

However, it was also reported that Klarna’s losses soared as their credit defaults doubled. BNPL remains an unregulated industry, and this fact raises the question of whether credit agencies can mark these products correctly or how it can affect a person’s credit scores

The Big Stories

Nividia (+0.73%) faces new opposition in the EU regarding their acquisition of Arm (FT). Samsung (-1.95%) localizes its chip equipment and material suppliers inside South Korea to insulate itself against the trade war (Nikkei Asia). The SEC warned Coinbase (-8.71%) against launching a product that would allow consumers to earn interest on their crypto holdings via lending (FT). Hedge funds are moving to Silicon Valley to jump in on high-growth private companies (FT). Tencent (-11%) and NetEase (-8.5%) took a hit once again as Beijing ordered Chinese tech companies to pivot from focusing on profits in online gaming (FT).

Healthcare (Jasmine Khoo)

The Health Care Select Sector SPDR Fund (XLV) recorded its worst weekly performance (-2.7%) since November last year, following the Biden administration’s plan to control drug prices. The Department of Health and Human Services announced on Thursday that it will be capping out-of-pocket costs in Medicare and limiting price-hikes on existing drugs. While these policy changes benefit patients, they will hurt the bottom lines of pharmaceutical companies, particularly those with large R&D outlays.

Another headline of the week was Sanofi’s (NASDAQ:SNY) acquisition offer for Kadmon Holdings (NASDAQ:KDMN). The US$1.9 billion all-cash deal represents a 79% premium to the KDMN’s previous close. The markets reacted positively post-announcement with KDMN rising 71% on Wednesday. The deal will add Kadmon’s FDA-approved Rezurock to Sanofi’s Transplant portfolio. Wall Street forecasts that the chronic graft-versus-host disease treatment will reach peak sales of US$500 million in the next decade. Given Sanofi’s global network and track record, Rezurock will likely benefit from faster commercialisation and international accessibility.

Consumer Staples and Consumer Discretionary (Jeff Chen)

In the last week, the consumer discretionary and staples market both fell, with the Consumer Discretionary Select Sector Fund (XLY) facing losses of 0.1%, while the Consumer Staples Select Sector Fund (XLP) fell by 74 basis points more at around 0.8%. Following on from the report last week on the increasing shorting of consumer stocks due to the ending of stimulus checks and the rapid spread of the Delta variant, the fall in consumer stock prices have possibly been attributed to investors shorting these stocks. 

One company that has benefited greatly from the Covid-19 pandemic is Lululemon Athletica (LULU), which rose 5.5% over the past week on the back of higher-than-expected earnings. Q2 revenue grew 61% YoY, which comfortably beat Wall Street expectations of 47%. At this rate, the company expects to surpass its long-term revenue target 2 years ahead of schedule. This comes on the back of company-operated stores’ revenue of US$695 million, with an increasing brick and mortar retail presence through the opening of 11 new stores in the past quarter. The surge in demand could be attributed to consumers seeking out comfortable athleisure wear as they work from home, or even return to the office. The advent of a hybrid working system could be the catalyst for athleisure brands such as Lululemon and Nike to gain footfall in their retail stores, leading to greater revenue. 

Communication Services (Chris Dai)

This week, the communications sector saw a dip with the S&P 500 Communication Services Index (S5TELS) falling 1.6%, whilst the iShares S&P 500 Communication Sector UCITS ETF (IUCM) dropped 0.4%, representing one of their worst performances since mid-June. Similar to the previous week, both indices mirrored the trend of the S&P 500 Index – gained significantly since opening on Monday before gradually falling towards the end of the week. The main cause of the slip stems from the latest update from the European Central Bank, suggesting the withdrawal of its pandemic crisis monetary stimulus. We look at one of the biggest market movers Alphabet (GOOGL), with a focus on Google Play’s payment surrounded regulations following the news covered for their biggest rival App Store last week.

Continuing from App Store’s settlement with Japan Fair Trade Commission which was covered in the market wrap-up last week, Apple (AAPL) is under fire yet again due to Epic Games’ complaint about Apple’s 15-30% commission on app sales and in-app purchases that forms an illegal monopoly. Whilst the lawsuit against Google is still pending, on Friday, a US judge issued an injunction such that Apple can no longer force developers to use in-app purchasing. This caused a major blow on Apple’s stock, which subsequently resulted in a crackdown in Google’s parent Alphabet stock which dropped up to 2% on trading Friday. It is reported that both the EU and India are inquiring closely into the app sales issue, which might lead to a further drop in the sales of the giant business with an estimated gross sales of $64bn in 2020.

Financial Institutions (Raed Altaf)

The financial institutions market continued to take a dip this week. The Vanguard Financial ETF decreased by 0.7%, while the iShares US Financial ETF fell by 0.8%. The dip may be explained by the recent development in the taxation sphere in the UK, as the government announced an increase in taxes on shareholder dividends. Recently reinstated by the Bank of England, a taxation on shareholder dividends reduces the interest the market has in the shares of financial institutions, leading to an increasing supply in the market.

While the tech industry remains cautious of continuing business in China due to government regulations, asset manager BlackRock announced that they have raised $1billion for its first mutual fund in China. This expansion from one of the biggest asset managers in the world stems from the attractive savings market in China, which saw a major boost throughout the course of the pandemic.

Industry & Materials (Maksymilian Mucha)

Vanguard Industrials ETF (VIS) and Vanguard Materials ETF (VAW) are down 2.11% and 1.24% this week respectively. 

Azelis, the Belgium-based food ingredients and speciality chemicals distributor, announced its intention of going public on the Euronext Brussels stock exchange market. The company targets to raise €880m, giving it a valuation of over €5bn, with proceeds to be used for €1.6bn debt repayment and acquisition strategy. The company has been highly active in the M&A market having completed 21 deals since January 2018 and its acquisition strategy will enable it to enter Asia and Latin America markets. In addition to distribution, the company owns a network of
food-testing laboratories, for which it predicts an increased demand because of the animal protection regulations. 

Looking forward, the IPO will enable Azelis to deleverage its operations and can potentially lead to a consolidation of a highly fragmented chemical market. However, with only 2% market share, the company will need to sustain its profits growth (EBIT +10% YoY in 2020) in order to meet the investor’s expectations.

Ford Motor Company (F) informed that it is ending production in India after having accumulated over $2bn of losses in the past 10 years. Despite having invested $2bn in India, Ford managed to achieve barely 1.7% market share, with the biggest players in the market including Suzuki and Hyundai. 4,000 Ford’s employees will be dismissed following the decision. Ford’s share price is down 1.50% following the announcement.

Utilities (Jonathan Leng)

This week, the S&P 500 utilities index slid approximately 2.5% to 345.86 basis points. This could be largely due to the rhetoric around the FED’s potential taper as well as the anticipation of the  European Central Bank’s winding back on its €1.85tn emergency programme. Once the taper is executed, interest rates will rise as well. This will impact utilities more than other sectors because they can make bonds more attractive to conservative investors seeking the dividend yield. The high capital debt levels of operating a utility also increase borrowing costs with rising interest rates eating deeper into earnings. Hence, the outlook for utilities seems slightly uncertain. 

Natural gas prices continue to soar around the world, hitting an all-time high. This is driven by maintenance disruptions during the pandemic as well as a previous long cold winter in Europe and Asia that increased the use of gas to keep households warm.

In the UK, for example, natural gas production is down almost 28% year-to-date, according to consultancy Wood Mackenzie. Supplies from Norway and Algeria have also disappointed. Russia, the biggest gas producer has also reduced its export volume due to production problems. This coming winter, we might be able to observe many utility companies cutting costs in other operations to support the rising gas prices to keep their customers warm. Those who cannot keep up with the hike in price might end up losing customers or shutting down its operations. With gas prices soaring, it is also interesting to see how other commodities inflation might affect utility companies in the long run – Uranium prices increased 33% in the past month and copper prices increased 41% Year-To-Date. 

Fixed Income

Rates (Suraj Suresh)

European government bond prices rally this week after European Central Bank president Christine Lagarde said the ECB will slow the pace of its pandemic emergency purchase programme (PEPP) in the final quarter of 2021. However, Christine Lagarde assured bond investors that “the lady is not tapering”, but this signals a sign of confidence in the eurozone’s economic recovery

The 10-year German Bunds reacted to the announcement by falling 4 bps to -0.36%. I am curious to see how the ECB will slowly withdraw its post-Covid monetary stimulus as Lagarde’s open-ended statement leaves the Council with flexibility in this regard.

The Vanguard Intermediate-Term Treasury Index Fund ETF Shares (VGIT) was up 0.1%, and the Vanguard Long-Term Treasury Index Fund ETF Shares (VGLT) rose 1.1%. This was due to the Labour Department’s report that jobless claims drop to lowest level since the onset of the pandemic with initial jobless claims dropping by 35,000 to 310 000. 

Real Estate

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

According to property site, Ireland had just 2,455 homes available to rent at the start of August, the lowest on record and an extraordinarily low figure for a country of Ireland’s size. Rents have more than doubled in Dublin in the past decade. Ireland’s housing problems are rooted in the high cost of construction, which has driven up sale and rental prices, and are compounded by a lack of supply and a growing population. In an effort to tackle the country’s chronic housing crisis, its government has unveiled plans to spend a record €4 billion annually on building more than 33,000 new homes a year by the end of the decade. The Housing for All plan also aims to eradicate homelessness over the same period.

Irish Residential Properties REIT plc (IRES) focuses on residential properties in Ireland. Since the unveiling of the Housing for All plan on 3rd September, IRES has seen its share price fall 3.8%. With the additional supply of residential properties, housing rents will decrease over the decade and lead to lower rental income for IRES and lower dividends to shareholders. Going forward, we can expect IRES’ share price to fall even further as the Irish housing reforms take shape.


Oil & Precious Metals (Anouska Jha)

A Rollercoaster for Oil Prices, and how the Green Transition is Shaping Metals Mining.

Oil has seen volatile movement this week, especially looking at Thursday’s intra-day chart. This came after news of China announcing it will sell oil from its state reserves to control prices amid inflationary pressures and a 13-year high PPI dataset released this week. This led to an initial two week low in oil prices, where Brent futures fell 1.6%, to settle at $71.45 a barrel. U.S. West Texas Intermediate (WTI) crude fell 1.7%, to $68.14. 

However, prices today (Friday 10 September) have pivoted from yesterday’s fall. Brent crude is up 1.7% at $72.65, and WTI Crude is up 1.5% at $69.19. There are several factors to mention here; I) Oil prices have risen due to supply tightness after Hurricane Ida, and US data depicting that its crude inventories are at their lowest since September 2019. II) The political context of the Biden-Xi calls to pacify US-China relations has possibly boosted investor’s sentiment to oil and equities; two sectors which are often dependent on international diplomacy. It is evident that the oil market is vulnerable to both benign (economic supply/demand, especially regarding the US, Asia and OPEC) and malign (exogenous political affairs, as well as significant ESG initiatives) and investors of this asset class should be aware of this. 

In other news, BHP Group Ltd (BHP, up 1.41% today) has launched an initiative with a Bill-Gates funded AI company KoBold Metals, to locate new mineral and metal deposits needed for batteries and renewable energy. Metals such as lithium, copper nickel are growing in demand, in correlation with demand for electric vehicles, renewable wind turbine blades, and other green technologies. The partnership will focus on a 193,000 square mile region in Western Australia, with KoBold  estimating a 20-fold boost in discovery rates. Stock-listed companies such as Rio Tinto Ltd (RIO) have also engaged in machine and data processing to unearth such metals and is up 0.7% today. A long-term bullish outlook is certainly possible for the metals and minerals commodity stock.

Foreign Exchange

G10 & EMFX (Noah Martle)

Is the Ultra-loose Monetary Policy Coming to an End?

For the past few months, investors have had their ears to the ground carefully analysing every comment that comes out of the central banks. Investors are eager to gauge when major central banks will ease their ultra-loose monetary policy, as it will significantly impact their financial decisions. 

Last Wednesday, Robert Kaplan (Dallas Fed President) said that “he’d be advocating that we should announce a plan for adjusting these purchases in the September meeting, and begin shortly thereafter, maybe in October”.

Similarly, the ECB announced on the 9th of September “Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council judges that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases”. Investor sentiment shows that Kaplan’s hawkish comment has outweighed the ECB’s. Thus, over the past week, the Euro depreciated 0.514% against the greenback from 1.1874 to 1.1813.

Additionally, Andrew Bailey, the Governor of the Bank of England, stated that BOE policymakers were split evenly as to whether the minimum conditions for an interest rate hike had been met. Therefore, major central banks are starting to emerge from their ultra-loose monetary policy cocoon and considering raising interest rates.

Weekly Updates

Canadian Employment Increases 

Canadian employment figures have risen for three successive months. Therefore, Canadian unemployment hit 7.1%, beating expectations of 7.3%. Thus, triggering a brief bull run during the week in the CAD/USD market.

The Rand Recovers

The South African Rand has benefitted from the commodity price recovery having taken a beating due to their political woes. Hence, the ZAR has appreciated 1.59% against the USD from 0.0692 to 0.0703 over the past week. 

Leave a Reply

Your email address will not be published. Required fields are marked *