(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: The high-flying Nasdaq had its worst week since March, and the S&P and Dow didn’t do so hot either. Investors are watching to see whether the recent shakeout in tech stocks is the beginning of a protracted drop or merely a healthy correction. The euro is extending its climb against the dollar after the ECB on Thursday sounded an optimistic note on the eurozone’s economy.
Economy: Senate Democrats in the US torpedoed a $500 billion GOP bill they said was too small to make a difference. Chances of Congress passing another emergency aid bill before the election are dwindling. Jobless claims remain stable but at a very elevated level. Nearly 30 million people were on unemployment benefits last month.
Brexit: The U.K. and European Union appear to be headed for a chaotic split with no trade deal in place, the two sides pushed further apart by the U.K. government’s plan to rewrite the withdrawal accord already in place.
US: Historic wildfires continue to rip across the Western U.S. More than 10% of Oregon’s population has been ordered to evacuate their homes, and Portland and Seattle now have the worst air quality in the world.
COVID-19 update: The signs are not good. Western Europe surpassed the U.S. in its new daily Covid-19 infections, re-emerging as a global hotspot for the virus having seemingly brought it under control before the summer.
Markets in a Minute
Information Technology (Maria Lomaeva)
Another Chinese tech company and the country’s top semiconductor manufacturer, Semiconductor Manufacturing International Corporation (SMIC; 0981), found itself under a potential threat of US sanctions due to its reported military links. In practice, this would mean that supplying SMIC with American-based tech will be constrained without special permission. SMIC shares dropped over 20% amid the news, but since have recovered some of the losses. This, however, does not come as a complete shock as SMIC has already set an aggressive goal to develop homegrown and non-American chip production in the upcoming years.
Slack (WORK) is another company that saw its shares slide this week after a disappointing Q2 earnings report. Despite providing a business communication platform, Slack has not enjoyed the WFH stock rally. Now it has also reported a slower revenue growth from 49% YoY in Q2 to estimated 32-33% in Q3 due to a loss of customers in the economic downturn. The shares plunged -14% before bouncing back somewhat.
Oracle (ORCL) has also reported its quarterly results announcing a 2% increase in total revenues YoY, ahead of expectations. Its shares grew almost 8%, although most of the gains have since been lost. Oracle emphasised its cloud services continuous rapid revenue growth and growth associated with one of its customers, Zoom, that has benefitted greatly during the pandemic. Oracle expects positive results in the current quarter as well, with EPS estimated between $0.98-1.02 compared to $0.93 in the past quarter.
To look out for next week: two tech IPOs, Snowflake on NYSE under the ticker ‘SNOW’ and Sumo Logic on NASDAQ under ‘SUMO’. Sumo Logic is looking to raise $310.8m which would value the company at over $2.07bn, while Snowflake plans to raise $2.4bn targeting an impressive $23.7bn valuation.
Healthcare (Christine Chan)
The streak of weekly new peaks has come to an end for the Health Care Select Sector SPDR exchange-traded fund (NYSEARCA:XLV). Despite the slight rise from Tuesday 8th September to Wednesday 9th September, the fund ends the week on $104.75. This is comparable to pre-pandemic and mid-June levels, and any gains from the past three months have been reversed.
Most headlines within the healthcare space this week are focused on the progression of the coronavirus pandemic, with the most noteworthy one being AstraZeneca (NYSE/LSE:AZN) and the University of Oxford voluntarily pausing their joint COVID-19 vaccine trials after a participant is suspected to have suffered from a severe adverse reaction. The incident will be investigated before the trials resume, which will likely lead to delays in trial results. As a result of this announcement, the US stock listing of AstraZeneca plummeted 2.3% overnight on Tuesday 8th September, from $54.71 down to $53.47. Interestingly, the complete opposite happened for their London stock listing, where the share price increased 2.1% from £8220 to £8390 over a similar period of time. I think that this is potentially a reflection on investors’ differing sentiments across geographies; perhaps American investors view this as a devastating event that may wreck profits, whereas British investors see it as a multinational pharmaceutical company “doing the right thing” by catching unfortunate situations before the vaccine reaches the mass market, thereby avoiding further complications and ensuring their vaccine’s success.
Consumer Staples and Consumer Discretionary (Jun Wei)
The rollercoaster week for the markets last week continues into this week as stocks continue to exhibit great volatility in prices, particularly for tech stocks. However, consumer stocks were also volatile and saw little gains this week. This week, Primark predicts good results for the rest of the year and Yum China’s secondary listing in Hong Kong flops.
Primark enjoyed better-than-expected sales for the back to school season, and its expected full year operating profit before exceptional charges is close to £350 million. They are also expected to reduce the size of their inventory write-downs. In response to this, shares in Primark’s parent company, Associated British Foods (LON: ABF) jumped 3.5% in early Monday trading before stabilising to gain slightly (~1%) for the week. Primark is surprisingly bucking the trend of declining sales for retail stores. It does not have an online presence and thus one would have thought it would have done badly during the lockdown in the UK as it would have zero sales. Therefore, its sales and predicted profit figures are laudable indeed. Yum China (HKG: 9987) had a secondary listing on the Hong Kong Stock Exchange, and fell by as much as 6.5% on its debut on Thursday, 10th September. Investors were not keen on Yum China even though it was selling at a 5% discount to its price on the NYSE, over concerns about its growth prospects. Yum China operates various fast food restaurants in China including KFC and Pizza Hut, and its fortunes on the HKEX are in stark contrast to Nongfu Spring (HKG: 9633) whose shares jumped by an eye-popping 80% on its debut before stabilising.
Communication Services (Katarina Lau)
Samsung Electronics sealed a $6.6 billion deal with Verizon, where it will help build 5G networks in the US. Company shares (KRX: 005930) rose 2.1% as Samsung announced it will supply wireless equipment to Verizon’s 5G telecoms services until 2025. Samsung’s huge gain comes after Trump’s repeated sanctions on China’s Huawei. Its current market share in telecoms equipment at 3% is minuscule compared to Huawei’s 28%, Nokia’s 16% and Ericsson’s 14%, however, investors are now bullish this number will grow long-term.
The company’s ongoing cooperation with Japan’s NTT DoCoMo and KDDI to develop 5G business models further add to the positive sentiment. This is not the first time Samsung has supplied 4G/5G network equipment to US operators, after previously supplying major US telecoms companies including AT&T and Sprint. Meanwhile, Huawei is ramping up developments of its own operating system Harmony OS, in a pivotal move to transition from Google’s widely-used Android platform. This is part of Huawei’s struggle for survival amidst US targeting, which includes blocked access to US-origin technology. Huawei’s mobile app ecosystem is steadily growing with 1.8 million app developers, 490 million active users and 96,000 apps, however many are unconvinced that Harmony OS – which will evidently not include US-apps such as Google, Facebook, YouTube etc. will be able to attract consumers outside of Asia.
Financial Institutions (Jamie Biswas)
This week saw a fairly poor week for financial institutions, with the Vanguard Financials ETF (VFH) falling 3.19%. The losses within the sector can be evenly attributed to banks and insurance firms. The financial institutions sector underperformed relative to the S&P 500 which also had a poor week.
This week a merger was announced between CaixaBank and Bankia. Poor historical performance of Spanish banks has resulted in Bankia being bailed out in the past by the government. As a result, the Spanish Government owns more than 60% of Bankia, the remnants of seven regional banks rescued by taxpayers in 2012. It is now in talks to merge with its much larger rival CaixaBank in an all-share deal worth more than €4bn, valuing Bankia at a third of Caixa’s €12.4bn market capitalisation.
Bankia’s share price jumped 26% on Friday. Caixa (CABK) soared too, seeing a 12% rise as a result of the announcement. One reason is scale: the new “CaixaBankia”, would become the top domestic bank by deposits, loans and assets, with almost a quarter of the market, leapfrogging current leaders Santander and BBVA. Further rationale for the merger is the potential to reduce overheads. About 80 per cent of Bankia’s branches sit within a kilometre of a Caixa outlet. Consolidation of headquarters space and IT spending would bring further benefits.
Of course, closing branches and firing workers is neither simple, nor cost-free. Restructuring charges will hit profits and the new bank’s capital base. Neither bank’s share price has performed well relative to their European peers over the past year, so signs of capital weakness will matter. The most important outcome of a merger would be that Spanish taxpayers would no longer own a weak bank. Instead, they would hold a smaller percentage stake in a stronger lender. Spain is making an effort to bolster its banking sector through consolidation.
Industrials (Ed Collins)
The Industrials sector has been positive this week. The Vanguard Industrial Index (VIS) has risen by 1.02% whilst the S&P 500 Industrials Sector (SPLRCI) is up by 1.09%, since the start of the trading week.
MAN SE (MAN) announced on Friday this week that it plans to cull up to one in four jobs globally. 9,500 jobs will likely be cut as part of an overhaul of the business, designed to achieve a return on sales of 8% by 2023, whilst generating about €1.8bn of cost savings. MAN is one of the main brands of Volkswagen’s truck-making subsidiary, Traton (8TRA). Traton was spun out of Volkswagen last year, when a 10% stake in the truck maker was sold to external investors on the Stockholm and Frankfurt stock markets. MAN generated €12.7bn in sales last year, however suffers from frail profitability. This was impacted even more by the pandemic, which drastically reduced demand for industrial logistics
In August, MAN reported a 34% drop in half-year sales and posted a €423m operating loss, compared with a €248m profit for the same period in 2019. MAN approximates that the restructuring processes could incur costs “within a medium to upper three-digit million euro range”. The group is overhauling its operations at a time of fragile recovery for Germany’s significant industrial base, a powerhouse of the eurozone economy.
Traton’s share price is down 2% since the start of the week and is down 25.2% since the start of the week. On top of this, it is down 31.7% since its initial public offering last year, when shares traded at €27.
Utilities (Katarina Lau)
General Motors acquires a 11% stake in electric truck company Nikola. The equity stake worth $2 billion, entails GM helping to supply Nikola with batteries and manufacture the Badger truck (one of Nikola’s models) in addition to access of GM-approved components in exchange. Nikola will issue $2 billion in new shares and has a generous market cap of $13 billion, despite having yet to make a single sale. Nikola (NASDAQ: NKLA) soared 37%, while GM (NYSE: GM) jumped 8%. The deal comes with numerous synergies, including $5 billion in cost-savings for Nikola and a boost in GM battery sales, who’s most notable buyer is Honda.
Poland has planned to invest 150bn zlotys ($39.7 billion) in nuclear energy with the first unit opening in 2033. The Polish government is aiming to reduce its reliance on fossil fuel – mainly coal, which makes up a whopping 74% of electricity generation, one of the highest in the EU. Shares in state-owned energy companies PGE (WSE: PGE) and Tauron (WSE: TPE), which rely heavily on coal, fell during a broader market sell-off. Recently, the nation has been gravitating towards greener power sources with previous offshore wind investments worth 130 billion zlotys.
Materials (Ed Collins)
In a week that has not been kind to markets, The Materials sector seen some improvement. The Vanguard Materials Index (VAW) is up 2.46% whilst the S&P 500 Materials Sector exchange (SPLRCM) is up by about 2.84%.
Jean-Sébastien Jacques, chief executive of the world’s second-largest mining and metals corporation, Rio Tinto Limited (RIO), has announced that he will step down from his position by the end of March following criticism of the destruction of Aboriginal heritage sites in Australia. The FTSE 100 boss has recently faced severe scrutiny over Rio’s decision to destroy a cave system in the Juukan Gorge in western Australia, despite opposition from Aboriginal traditional owners. The site was 46,000 years old, however, Rio’s flagship iron ore operation, which generates more than 90% of the company’s earnings is based in the area.
In August, Jacques had his bonus reduced by £2.7m, but this week’s move comes after investor pressure to give executives additional penalties for their role in the incident. The miner said the heads of its iron ore and corporate responsibility divisions will also step down. Rio Tinto’s Sydney-traded shares fell as much as 1.5% following the announcement but recovered some ground close 0.6% down.
Tullow Oil plc (TLW) warned on Wednesday that it risked defaulting on a debt facility if it does not resolve a potential liquidity shortfall. The Africa-focused oil and gas exploration company slumped to a $1.4bn pre-tax loss for the first half of the year. The company said it is exploring “various refinancing alternatives”. Tullow’s net debt pile also increased to $3bn in the first half, up from $2.9bn at the same point last year, whilst its free cash flow was negative. The biggest hit to the results came from a $941m write-down of its assets in Uganda and Kenya. Over the trading week, Tullow’s share price fell by 18%.
Rates (Harrison Knowles)
While the Brexit negotiations dominate the news, central banks have provided more food-for-thought ahead of the European Central Bank meeting this week, where the virus-bruised economy and the recent strength of the euro was be front and centre. Central banks globally are taking different approaches. Canada’s is dialling back willingness to take more aggressive action as the Bank of Canada reassured investors that rates are set to be on hold for some time to come as it announced its latest policy decision this week, while New Zealand is looking to Sweden as an example as it move towards negative rates. How the ECB intends to tackle the euro’s strength and whether it should be following the lead of the Federal Reserve in rethinking policymakers’ approach, despite doubts about whether the ECB has comparable weapons at its disposal, will be in focus.
The day after the European Central Bank’s latest policy decision, as ever, was filled with conflicting views over the bank’s strategy. The bank left its asset purchases and interest rates unchanged, but the main area of interest was the strength of the euro, which President Christine Lagarde said the bank is keeping an eye on but sees no immediate need to intervene. Her comments provided the single currency license to resume its bounce against the dollar. Some ECB officials are also said to have wanted Lagarde to provide a more optimistic view of the economy. We got the latest jobs report last week, and the most important thing is to acknowledge the good news. The U.S. unemployment rate, once again, fell by more than expected at 8.4%, as of the end of August. It’s worth noting that at the June meeting, the Fed saw the unemployment rate only getting back down to 9.3% at the end of 2020, so this is already substantially better than forecast, and there’s still four months to go. Amid the next Federal Reserve meeting on the 15th September, for a market craving new information, the Fed can only really offer more variations on what it’s already made clear – rates are staying low for a long time. If there’s any catalyst for a possible Treasury selloff, it could come from the other updates in the summary of economic projections, given that committee members will probably have ratcheted up their estimates for growth from the last time around, in June, and lowered the path of the unemployment rate. It’s already fallen almost a full percentage point below the fourth-quarter average rate published in June.
Credit (Alexander Kaiser)
As the US election creeps closer, firms are now more than ever encouraged by advisors of all sorts to borrow more. The simple argument, in this case, is that the period after the election will be rather turbulent and uncertain which may affect the conditions under which further debt is raised. For example, back in 2016 after the election yields started to rise dramatically due to compounding factors, resulting in higher costs of borrowing. Meanwhile, current conditions are better than ever before with continuously falling interest rates due to continued high demand from investors and guarantees from the Federal Reserve. Consequently, the historically slow month of August has yielded a total of $210bn of debt raised, a staggering $60bn increase from the previous record.
Additionally, an examination of the maturity of the bonds issued since the start of the pandemic revealed that companies have begun issuing bonds with maturity further in the future than before. With around $260bn of bonds issued in the US this year serving primarily to refinance existing debt and $870bn stating refinancing as one use, companies are taking advantage by issuing bonds that mature in several decades. To illustrate, the value of bonds with a maturity of 20-30 years has doubled, while the value of bonds issued with a maturity of 40 years is more than five times higher. While before this was inefficient due to interest being paid over longer periods result in higher total cost, the current conditions resulted in long term bonds likely being cheaper than refinancing the debt with shorter-term bonds.
Given these findings, it is somewhat worrying to consider that bond investors may be stuck with these extremely low yields bonds for a significant amount of time due to companies potentially pulling back the amount of debt they would have issued in the future. If that is the case, it is reasonable to expect a reduction in the supply of bonds and thus even higher prices for existing products in the near future.
Real Estate Investment Trusts (REIT’s) (Claire Willemse)
While the residential real estate market has remained strong in the UK, the gaps are starting to become more evident with higher value property and property outside of London benefitting more from the recovery since the lockdown. Furthermore, as lending has increased to customers, certain banks have had to tighten their lending criteria. Barclays has had to do this after coming close to the lending limit set by the Prudential Regulation Authority. In the US, concern is also starting to build up on loans secured on commercial property as they continue to become less profitable. In ten banks alone, criticised loans (those where there is scepticism about the borrowers’ ability to pay) have increased by 62% in Q2, with a 144% in criticised commercial real estate loans.
In other news, a €1.3bn takeover deal of Idealista by EQT Partners has been agreed upon. Idealista is a Spanish property classifieds site. This has led to a five-fold increase in the valuation of the firm since 2015, when it was bought by its current owner, Apax. This valuation is 25 times 2019 earnings, which, although high is arguably justified, as it is believed to have the potential to move online and centralise many offline listings in Spain, Portugal and Italy. EQT Partners (STO: EQT) has seen a 2.07% increase in share price since the announcement. The chief executive, Chris Grigg, of British Land is moving on from his position since joining it in the midst of the 2008 financial crisis. After having made some very integral decisions and aiding the commercial landlord group’s recovery from the crash, British Land has struggled through the pandemic, with the majority of its property concentrated in London. Retail real estate has made up about a third of this, thereby suffering quite badly from the effects of lockdown and by the continued slow return of office workers. The share price (LON: BLND) has remained low since the start of lockdown, falling a further 3.25% since the news.
Oil & Precious Metals (Oliviero Sacchet)
This week the oil industry registered: WTI -4.2% ($37.41) and BRNT -4.7% ($40.03).
Iraq is facing problems in order to comply with OPEC+ supply accord. In August Iraq’s oil output was 3.578 million barrel per day, but it was supposed to be 3.404 million barrel per day. Nevertheless, this overproduction cannot be attributed to Iraq itself. According to SOMO the national output was 3.122 million barrel per day. In addition, the Iraqi government achieved a 102% compliance with OPEC+ quota. In this case, the problem is due to the semi-autonomous Kurdistan region(KRG). The KRG is actually producing 456,000 barrel per day, that summed to the Iraqi’s production, passes the OPEC+ quota. The KRG’s minister of state, also said that the region could only partially comply with the deal, due to the financial crisis.
On the other hand, Singapore and Japan signed a ‘reciprocal green lane’ in order to support a recovery in jet fuel demand that has dramatically decreased due to the coronavirus pandemic. The resumption of business travel could support jet fuel prices. In August the jet fuel shipments fell as a result of a resurgence of the coronavirus pandemic in Japan. Explaining this in numbers, Japanese refiners shipped 2.12 million barrels of jet fuel in August, down 12.7% from July.
In Brazil steel prices are reaching peaks thanks to an imbalance between demand and supply. During the pandemic, steel consumption was very low, and several mills were shut down. But fortunately, the steel industry is having a strong recovery and the demand is too high for the actual supply. Several economists attribute this fast recovery to the quick reactivation of four sectors in Brazil: construction, wind and solar energy, white goods, road and agricultural equipment.
G10 & EMFX (Krisztián Sudár)
Following the ECB-s statement that it will keep interest rates steady at -0.5%, the euro appreciated by 0.8%, reaching 1.19$. Christine Lagard, in her statement on Thursday, struck a rather optimistic tone, and that could have easily influenced the market’s reaction. Today, however, several high-ranking ECB officials noted that the strengthening of the euro (it has risen 10% against the dollar since March), could cause inflation to dampen. According to them, the ECB needs to keep a close eye on the euro’s exchange rate as too much appreciation could lead to a slowdown of growth, and most importantly, recovery.
The week has been uneventful, after many weeks of near slaughter, and a slight recovery last week. While consumer pricing data was released for the last month, it failed to move the needle either way. The DXY held firm around the 93 area as the week ended.
The UK government, on the other hand, did have a fairly eventful week. They admitted to breaking international law over the Brexit treaty, and talks have largely stalled. While they did come to a trade agreement with Japan, the weight of the latter can barely hold a candle to the recent impasse over Brexit talks. This led to the Sterling’s worst week since March, dropping to 1.2761$ on Friday.Turkey’s Lyra slipped on Friday after the EU threatened sanctions against the country due to the territorial dispute that is being waged against the EU member Greece. Finishing up this week, the Lyra added 0.2% to its losses against the dollar, reaching a tally of 20% total this year.