Friday Wrap Up (September, 17)

(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:

Major US indices ended lower this week as investors remained worried about supply chain bottlenecks linked to the coronavirus and concerns over how equities would respond to an eventual tightening in monetary policy. The S&P 500 index dipped -0.16%, however, energy stocks within the index recorded solid gains due to rising oil prices. Europe equities also fell as delta variant pessimism on the global economy ultimately outweighed the news of continuing ECB support. The STOXX Europe 600 Index dropped 0.97%. UK inflation in August spiked to 3.2%, well above the BoE’s target and its highest level in more than nine years. The increase is largely attributed to a substantial drop in restaurant and café prices last year and significant increases this year. Asian stocks fell sharply as investor sentiment stayed low after numerous events include weak August economic data, a new coronavirus outbreak in Fujian province, property developer China Evergrande Group’s debt crisis and tighter gaming regulations in Macau.

COVID-19 Update: 

UK PM Johnson unveiled a plan to prevent the National Health Service (NHS) from becoming overwhelmed by the coronavirus this winter. His plan includes vaccinations for children 12-15 years old and booster jabs for 50+ year olds by Christmas. However, if the NHS comes under “unsustainable pressure,” vaccine passports for large events and face masks would become compulsory.

Equities

Information Technology (Satya Maulana)

US video game company Epic Games had a high-profile antitrust case against Apple over App Store fees (FT). The case itself was rooted in the belief that Apple is a monopoly for making in-app purchases only available by using Apple Pay. They receive a 30% cut of all transactions (approx. $18.5B in revenues for FY20). Apple won 9 out of 10 counts, with the court concluding that Apple is not a monopolist either under federal or state antitrust laws. However, the court ruled that Apple was engaging in anti-competitive conduct, forcing the company to change its App Store policies to open in-app purchases to competition. Epic Games is also taking this feud to South Korea. Apple’s stock dropped 3.98% despite the announcement of new devices on Tuesday

The Big Stories

Beijing is set to break up Chinese payments giant Alipay, knocking down the walls at a pace that regulators and politicians in the US can only dream of (FT). Teddy Sagi’s Kape (+20.50%) is acquiring ExpressVPN from its founders for $936M in cash (FT). Chat app Discord raised $500M in a fundraising round at a $15B valuation led by Dragoneer Investment Group (BBG). Microsoft plans to buy back up to $60B in stock (BBG). U.S.-Israeli fintech Pagaya to go public via $8.5 bln SPAC deal (RT). Design platform Canva raised $200M in a fundraising round at a $40B valuation (TC).

Healthcare (Jasmine Khoo)

Healthcare was the sole gainer of all S&P 500 sectors on Friday, as the broader index closed below its 50-day moving average and recorded the biggest 2 week fall since February. The market jitters largely stemmed from concerns about tax hikes, Fed asset tapering and weak US consumer sentiment data.

On Friday 17 September, the Center of Disease Control and Prevention released data showing that the Pfizer-BioNTech vaccine’s protection against hospitalisations dropped substantially four months after inoculation. However, just hours later, scientific advisors to the US Food and Drug Administration voted 16-2 against offering Pfizer booster shots to individuals aged above 16. Instead, they voted for the third shot to be granted solely for at-risk individuals and elderly over the age of 65. Unsurprisingly, shares of vaccine manufacturers slipped on Friday, with Pfizer Inc. (NYSE:PFE), BioNTech SE (NASDAQ:BNTX) and Moderna Inc. (NASDAQ:MRNA) down 1.3%, 3.6% and 2.4% respectively.

The decision is a blow to the Biden administration’s plan to roll out booster shots to the public as early as next week. At this point, it is difficult to ascertain if these proposed policies will materialise, as the scientific committee’s decision is non-binding. There may be clarity next week after the CDC’s meeting on booster shot distribution plans.

Consumer Staples and Consumer Discretionary (Jeff Chen)

In the last week, stocks in the Consumer Discretionary and Staples sectors both fell, with the Consumer Discretionary Select Sector Fund (XLY) falling 0.1%, whilst the Consumer Staples Select Sector Fund (XLP) fell by around 0.8%. The fall in Consumer stocks again this week, which has been on the decline for the last 3 weeks, could possibly be attributed to investors reacting negatively to strong US retail sales, by taking it as an indication of potential reining in of stimulus measures. Furthermore, it could be possible that market sentiment in the US stock markets in the consumer sector are adversely affected by the fallout from the increasing regulations by the Chinese government, resulting in uncertainty amongst investors. 

One stock that has been heavily hit by the Chinese government’s new regulations on the casinos and gaming sub-sectors is Sands China (HKG: 1928), which fell by 41% over the past week. The Macau-based casino group’s stock were sold off due to the impending tougher scrutiny on capital management and daily operations in casinos by Beijing, as the Chinese government looks to tighten the rebidding process for casino licenses. With this in mind, Chinese stocks in the consumer discretionary sector could also face further drops, given the uncertainty shrouding the Chinese government’s policies moving forward. 

Financial Institutions (Raed Altaf)

The financial institutions remained relatively stable this week. The Vanguard Financial ETF and iShares US ETF slightly increased in value from market close last week, going up by 0.5%. This change in pace compared to the previous weeks can be explained by increased investor caution for multiple reasons. Firstly, September has been historically known to show changing investing patterns as investors seek to cash out their portfolios at the end of summer, making the market more volatile. Secondly, many mutual funds experience their year end in September, prompting them to sell their positions to avoid tax losses. Lastly, the recent fears of increasing inflation has left investors cautious in any moves made in the market. 

JPMorgan recently announced that they will be opening their first overseas branch of their retail bank, Chase, in the United Kingdom. The firm will initially start their operations in the UK, offering current account services with reward programmes, before slowly expanding both geographically and service offerings wise.

Industry & Materials (Maksymilian Mucha)

Vanguard Industrials ETF (VIS) and Vanguard Materials ETF (VAW) are down 2.11% and 3.95% this week respectively. 

On 15 September 2021, the United States, United Kingdom, and Australia announced a new AUKUS security alliance laying foundations for the new geopolitical order in the Indo-Pacific region. The main part of the pact is cancelling Australia’s $36bn contract for 12 French diesel-powered submarines and instead developing at least 8 nuclear-powered submarines using the technology of the US and the UK. The decision resulted in the fallout in relations with France, which recalled its ambassadors from Australia and the US. The pact was commented by French foreign affairs minister Jean-Yves Le Drian as a ‘stab in the back’, as France was arguably left out, since the country is present in the Indo-Pacific region with overseas territories and over 7,000 soldiers.

The main purpose of the AUKUS pact was to counteract the rising power of China in the region. Looking forward, this may further exacerbate Australia’s trade relations with its largest partner, China, with which Australia has been maintaining a trade surplus over the past few years. Furthermore, if the strain in diplomatic relations between France and the members of the AUKUS pact will not be resolved promptly, there might be a negative effect on future trade agreements between these countries. Australian S&P/ASX 200 main stock exchange index is down 2.40% since Wednesday.

Source: Australian Government, Department of Foreign Affairs and Trade, 2020. Fact sheets for countries, economies and regions. Available at: https://www.dfat.gov.au/trade/resources/trade-and-economic-fact-sheets-for-countries-economies-and-regions#t 

Utilities (Jonathan Leng)

This week the S&P 500 Utilities Index continued its downward trend, sliding approximately 3.0% to 335.11 basis points. Other major ETFs also followed this trend with Vanguard Utilities ETF down 0.7%, Fidelity MSCI Utilities index down 4.7% and Utilities Select Sector SPDR Fund down 3.1% over the past week.  This further reflects the urgency and magnitude of FED’s potential decision to taper and how the utilities market will perform given the interest rate hike. 

The US congressional Democrats recently unveiled that the latest clean development and infrastructure plan that is set to spur growth in the renewables and green utilities sector has certain “requirements” and “legislations” the beneficiaries have to meet to obtain new green tax credits. In order to take full advantage of the proposed tax breaks,  renewable developers would have to meet certain requirements on “prevailing wages” and hiring of apprentices. In certain cases, these companies would also have to source at least 55 per cent of their raw materials and equipment domestically. Although these “requirements” are put in place to encourage more employment in the sector as well as deviate the reliance on international supply chains, this puts a lot of cost pressure towards the firm in the short term. A spokesperson from Xodus Group, an energy consultancy mentioned that the US does not possess the supply network needed to meet Biden’s goal of 30,000 megawatts of offshore wind capacity by 2030 so this makes developers more dependent on manufacturers in Europe’s more mature offshore wind sector. Hence, renewable companies are pushing for governments to be more aware of this short transition window, although the heart is in the right place, such “legislations” would suppress margins, discouraging efforts in green transitions. 

Fixed Income

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Rates (Suraj Suresh)

The market value of one share of the Vanguard U.K. Gilt UCITS ETF was down to £24.58 after the Office of National Statistics said the UK had its largest ever recorded increase in consumer prices as inflation rose to 3.2% from the 2% reported in July. With the Bank of England (BoE) forecasting inflation will reach 4% by the end of this year, there is strong speculation that the BoE will be in a hawkish mood and raise base rates to 0.5% by the end of 2022. 

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Price analysis of U.K. Gilt UCITS ETF (VGOV)

In the U.S., the benchmark 10-year Treasury note fell 4.7 basis points to 1.28% after the consumer price index (CPI) showed a 5.3% year-over-year increase, below market expectation of 5.4%. The yield on the 10-year treasury rebounded to 1.33% after the Census Bureau reported an unexpected increase in retail sales in August by 0.7% versus the Dow Jones estimate of -0.8%. The market’s reaction is being fueled by the importance of the labour market recovery and inflation data to the Federal Reserve’s decision to taper their aggressive $120 trillion bond buying program. Given the positive data, all eyes will be on the Fed when they meet next week. 

Commodities

Oil & Precious Metals (Anouska Jha)

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A cold winter ahead? European natural gas supply concerns. 

And a possibly bright future for long-term lithium investors.

As of Friday 17 August: 

The S&P GSCI Index Spot stands at US$ 542.54, marking a 3% increase in the last week.

The Dow Jones Commodities Index stands at US$ 910.63, marking a 1.1% increase in the last week.

Fears over a natural gas crunch in Europe have been slightly alleviated after Russia’s completion of the Nord Stream 2 Pipeline, bringing Russian gas to Europe via Ukraine. This slightly relieves Europe of the quadrupling in gas prices since the beginning of 2021 and is preferential in the context of the US Gulf of Mexico hurricanes, which saw crude oil output waning by 28% in the region on Thursday 16 September. Yet diplomatic concerns about Gazprom, the Russian company in charge of the constriction of the pipeline, brings an alternative view; why is gas storage in Europe running below seasonal levels, and what does this suggest about the near future of gas supply, which is largely in Russia’s hands?  A tightening gas market, and tension over how Russia plans to balance its domestic storage with supply to Europe via re-routes and additional volume delivery, will likely affect the volatility of gas prices this coming winter. 

Regarding equity-based commodities, ioneer Ltd (INR) announced a Joint Venture with the South African goldmining company Sibanye Stillwater Ltd (SBSW), to develop a Rhyolite Ridge Lithium-Boron Project located in Nevada, USA. Sibanye Stillwater will buy the mining project for US$490 million, with both companies maintaining 50% interest and ioneer Ltd maintaining operatorship. Shares in Sibanye Stillwater has fallen 19% this year and experienced a 0.5% dip in the open in Johannesburg on Thursday. However, investors may view this as a sign of its undervalued price; among a surge in demand for green battery metals (among with lithium carbonate is a key component), and the need to relieve the high price surge in lithium carbonate this year (which has, for example, risen 189% in China this year), the demand for the commodity is certainly not in lack.

Foreign Exchange

G10 & EMFX (Noah Martle)

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Credit Suisse is long on GPB/AUD

Credit Suisse’s Foreign Exchange Specialists have reiterated their expectation that the Pound will continue to appreciate against the Australian Dollar. The analysts’ comments come after research revealed that the Reserve Bank of Australia (RBA) are likely to keep their basic interest rate at 0.10% for a significantly longer period when compared to the Bank of England. The comments of the RBA Governor (Philip Lowe) further support the experts’ opinion when he commented that he “finds it difficult to understand why rate rises are being priced in next year or early 2023”.

Additionally, experts are betting that the UK economy will remain open despite the increasing threat of the Delta variant. On the other hand, Australia’s government will immediately plunge the entire nation into lockdown by the mere possibility that coronavirus has breached their defences. As a result, the British pound has appreciated 0.458% against the Australian Dollar from 1.8777 to 18863 over the past week.

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Refinitiv, 2021

Other FOREX News

New Zealand

New Zealand’s August purchasing managers’ index came in at a disappointingly low 40.1 compared to July’s PMI of 62.6. A lockdown-ridden August can explain new Zealand’s sizeable PMI fall.

European Central Bank 

Gabriel Makhlouf, a governing council member of the ECB, has stated that he believes that the fears surrounding excessive inflation in the euro area are overemphasised. He is confident in the ECB’s powers should the need to fight inflation arises.

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