Friday Wrap-Up (September, 18)

Global stocks are looking to end the week with muted moves. More dovish announcements from global central banks.

(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: Global stocks are looking to end the week with muted moves. Futures are up. Investors are bracing for volatility on a so-called quadruple witching—when both futures and options linked to individual stocks and to stock indexes expire on the same day.

Economy: The White House threw its weight behind a $1.5 trillion stimulus measure—much pricier than leading Republicans have been willing to spend. US jobless claims last week came in marginally better than forecasts, but at 860,000, the number remains way above pre-pandemic levels. US retail sales, a closely watched indicator of the economic recovery, increased 0.6% in August. It’s the fourth straight month of growth but lower than projections.

Energy: A few ominous signs in the world of oil. OPEC slashed its projections for oil demand this year and next, while BP said demand for crude will peak in the early 2020s.

Fed: The central bank held rock-bottom interest rates steady and members forecasted they wouldn’t budge before 2023. Chair Jerome Powell said the Fed’s “accommodative” monetary policy would help the U.S. economy recover from this steep pandemic-spawned recession. 

Bank of England: Sterling dropped and UK government bond prices pushed higher this week after traders spotted signs that the Bank of England might be seriously considering cutting interest rates below zero — a reaction that has taken the central bank itself by surprise.

Markets in a Minute


Information Technology (Maria Lomaeva)

The tech industry has seen the most eventful week in months.

First of all, the TikTok saga almost reached a happy ending when Oracle (ORCL) announced on Monday to become TikTok’s “trusted technology provider” which boosted Oracle’s shares by 6.3%. However, President Trump was not impressed by this agreement as TikTok’s owner ByteDance would still be the majority shareholder in a new US-headquartered company. TikTok and another Chinese app WeChat are due to be removed from US app stores on Sunday. 

Another American tech company, Nvidia (NVDA) confirmed the rumours about the acquisition of the UK’s Arm from SoftBank for hefty $40bn. This will strengthen Nvidia’s position within the data centre industry – unfortunately for the rivals Intel (INTC) and AMD (AMD). It will also place Nvidia in the midst of the US-China tech war as Arm has been a neutral global provider of chip blueprints. The deal will face heavy scrutiny from regulators in the US, UK, Europe and China. Nvidia’s shares jumped 9.3% after the announcement, however, these gains have since been lost.

Adobe (ADBE) reported record quarterly earnings achieving a revenue of $3.23bn, 14% higher YoY with EPS of $2.57, higher than expected. The positive news did not affect its share price as investors’ sentiment fell after the Fed’s most recent press conference on tackling the economic downturn.

Last but not least, it was also a record week for software IPOs. Snowflake (SNOW), JFrog (FROG), Sumo Logic (SUMO) and Unity Software (U) have had successful listings with Snowflake almost doubling its initial share pricing as of Friday.  

Next week, another hot software company, Palantir, that specialises in big data analytics will be listed on NYSE under the ticker ‘PLTR’.

Healthcare (Christine Chan)

Losses continue for the Health Care Select Sector SPDR exchange-traded fund (NYSEARCA:XLV) this week, as it rounds off at $104.87 despite reaching the $107 level earlier in the week.

After AstraZeneca’s (LSE/NYSE:AZN) stumble last week where a coronavirus vaccine trial participant suffered from a severe adverse reaction, they have picked themselves back up again and rapidly announced on Sunday 13th September that their trials are to resume, following a review by regulators. With further positive news that the participant’s illness was likely not linked to AstraZeneca’s vaccine, their London and New York stock listings have recovered by increasing 3.8% and 4.8% respectively over this week, from £8429 to £8746, and from $53.73 to $56.30.

A few other things have happened this week, including Moderna’s (NASDAQ:MRNA) announcement on Friday 18th September that they are to produce 20 million doses of their coronavirus vaccine by the end of the year. On Thursday, their CEO Stephane Bancel also said that they will be able to assess the effectiveness of their vaccine by November, using data from their late-stage clinical trials. Their stock has performed spectacularly this week, having gone up 17% from $59.34 to $69.42.

Meanwhile, Eli Lilly (NYSE:LLY) reports that their monoclonal antibody treatment, LY-CoV555, appears to reduce hospitalisation rates for coronavirus patients. Their share price went from $147.93 to $154.05, gaining 4.1%. 

Outside of coronavirus, Gilead Sciences (NASDAQ:GILD) published in a press release on Sunday 13th September that they will be acquiring Immunomedics (NASDAQ:IMMU) for $21 billion in cash, equating to $88 per Immunomedics share. This demonstrates Gilead’s desire in building their oncology portfolio, as their deal will provide them with Trodelvy, a drug awaiting approval for metastatic breast cancer. This agreement sees Immunomedics’ share price more than double, soaring 102% from $42.30 to $85.53 since last weekend.

Consumer Staples and Consumer Discretionary (Jun Wei)

This week, headlines were dominated by Jerome Powell’s prediction that the Fed will keep interest rates until 2023, and Snowflake’s IPO. On the consumers side, stocks remained relatively flat throughout the week with both the S&P 500 Consumer Discretionary and Consumer Staples Index trading sideways. This week, we look at Kraft Heinz’s efforts to reduce debt and streamline operations and H&M’s optimistic profits forecast after years of underperformance. 

Kraft Heinz (NASDAQ: KHC) announced the sale of parts of its cheese business to Lactalis, the world’s largest cheese producer in an all-cash deal for $3.2 billion, as part of its efforts to reduce its gargantuan $26 billion debt pile and cut costs. Response to this news was lukewarm with shares inching up 0.3% upon the announcement before falling back down.  Despite improved demand due to lockdowns in place earlier this year, Kraft Heinz still took a $1.65 billion loss in the 2nd quarter of this year due to a series of writedowns for some of its brands. Kraft Heinz has struggled to keep up with competitors as its brands have lost popularity amidst changing consumer preferences. Cutting costs is a necessary yet insufficient move if Kraft Heinz wishes to stay relevant in the highly competitive consumer staples industry. 

Due to the uncertainty surrounding the Covid-19 pandemic, many companies have chosen not to issue earnings guidance for the rest of the year. Not H&M, however. H&M (STO: HM-B) forecast Q3 operating profit to be at 2 billion Swedish kroner (~US$230 million) for Q3 2020, far above consensus analyst estimates of 350 million Swedish kroner. H&M cited improved cost controls, reduced discounts and increased online sales for its incredibly optimistic profits forecast, as it is an indication that its gross profit margins are way better than expected. Shares in H&M jumped 12% on Tuesday morning to 160 Swedish kroner (15th of September), before trading slightly down at around 158.45 on Friday morning. H&M’s share price has declined substantially from its highs in 2015 as overexpansion and a poor online presence hurt its margins and led to a loss of competitiveness in the unforgiving fashion retail industry. Just 2 years ago, H&M reported that it had $4.3 billion in unsold inventory, a sign of a bloated and unhealthy balance sheet. Looking forward, we should be slightly optimistic about H&M’s prospects as it has taken positive steps to rapidly expand its online presence and come out of the coronavirus crisis “stronger” in the words of its CEO, Helena Helmersson.  

Communication Services (Katarina Lau)

Swedish telecoms company Ericsson will acquire U.S. wireless networking company Cradlepoint for $1.1 billion, as part its 5G expansion geared towards creating products for enterprise customers. The deal will enable Ericsson to better connect devices using the IoT (Internet of Things) instead of a typical 4/5G network. Cradlepoint will continue to sell subscription-based wireless networking services as a subsidiary of Ericsson.

In its recent asset disposal, SoftBank agreed to sell the last of its telecoms asset – US mobile phone distributor Brightstar. The disposal is noteworthy as it cements the Japanese conglomerate’s transition from a significant telecoms operator into a global investor/asset manager. SoftBank shares 9984 (TYO) fell 1.1%. Previous telecoms assets recently sold, include UK chip designer Arm for about $40 billion, its stakes in T-Mobile US and its own domestic telecoms business. CEO Masayoshi Son hopes to use the newly acquired cash for more aggressive betting on tech stocks and the potential delisting of SoftBank’s own shares. 

In Japan, newly-elected PM Yoshihide Suga will consider lowering cell phone charges, as one of his long-time policy focus. This caused Japanese telecoms stock to dip with NTT Docomo 9437 (TYO) and KDDI 9433 (TYO) falling 2.8% and 4.1% respectively.

Financial Institutions (Jamie Biswas)

This week saw a fairly quiet week for financial institutions, with the Vanguard Financials ETF (VFH) falling 0.2%. The losses within the sector can be attributed more heavily to banks and less so to insurance firms, although both had a poor week. The financial institution sector slightly outperformed the S&P 500 this week.

Following on from last weeks’ news, there have been significant developments to the ongoing CaixaBank Bankia merger. CaixaBank is set to become Spain’s largest lender after agreeing to pay a 20% premium to take over smaller rival Bankia. The two groups stated on Friday they had agreed on terms to create a bank with a combined market capitalisation of almost €17bn and more than €650bn in assets. A combined group, which would continue to operate under the CaixaBank name, would become Spain’s largest lender by market share in domestic loans and deposits, although it would not have the extensive overseas operations of BBVA and Santander. The two banks said they expected to make at least €770m in annual cost savings by 2023, and hoped to add about €290m in annual revenues, largely by extending CaixaBank’s existing insurance business to Bankia’s customer base. 

Bankia played a prominent role in Spain’s financial crisis, coming close to collapse only two years after it was formed through a disastrous merger of seven regional savings banks. The Spanish government was forced to seek EU aid to help fund a €22.4bn bailout in 2012. CaixaBank agreed to exchange 0.6845 newly issued shares for each share in the state-controlled bank. The deal would reduce the Spanish government’s stake from 62% to 16%. The La Caixa Foundation, one of Europe’s biggest charities, will remain CaixaBank’s largest shareholder with 30% of the group compared with its current 40% stake. My opinion is that the merger will have a positive outcome. Coronavirus has pushed down interest rates to record lows, meaning banks have smaller spreads, reducing the profitability of loans. Merging will allow the combined entity to realise significant cost-cutting synergies, which could provide vital over the next few years.

Industrials (Ed Collins)

The Industrials sector has been positive this week. The Vanguard Industrial Index (VIS) has risen by 1.76% whilst the S&P 500 Industrials Sector (SPLRCI) is up by 2.09%, since the start of the trading week.

A report was released on Wednesday by the US House of Representatives transport committee, scathing Boeing (BA) for its “culture of concealement”.
The report, which was investigating why two of the aircraft crashed within months of each other last year, killing 346 people, concluded that Boeing hid design flaws in its 737 Max jet from both pilots and regulators in order to have the aeroplane certified as fit to fly as soon as possible.

It was determined that the aircraft manufacturer cut corners and pressured regulators to overlook aspects during the design process, in order for Boeing to catch up with its European rival, Airbus.

The House’s report also blamed the Federal Aviation Administration, the US aviation regulator, of being too concerned with pleasing Boeing to carry out proper oversight.

Following the report, the company said: “The revised design of the Max has received intensive internal and regulatory review… Once the FAA and other regulators have determined the Max can safely return to service, it will be one of the most thoroughly-scrutinised aircraft in history.”

On Wednesday, despite the report being released, Boeing’s share price rose 3.4%. This may be due to the fact that the report did not really confirm anything new: the 737 Max is still grounded and most changes occurring as a result of the report are happening within the FAA, not Boeing.

It also does not change the fact that Boeing has had a dismal year already; its share price is down 50.86% since the start of the year.

Utilities (Katarina Lau)

NextEra Energy Inc. (NEE) stock fell 4.2% after the electric company announced an equity offering, where it will sell $2 billion worth of equity units for $50 each. This comes just a day a day after it announced a 4-for-1 stock split and raised 2021 adjusted earnings per share expectations, causing shares to rally 4.9%. Nonetheless, the clean energy company is a good future investment having rallied 22.1% YTD, while the SPDR Utilities Select Sector ETF (XLU) has lost 6.9%.

Duke Energy Corp. (DUK) announced that Duke University will buy 101 megawatts (MW) its solar capacity. The deal is a win-win outcome for both parties who aim to achieve significant carbon neutrality. Duke University will partner with Pine Gate Renewables to build solar projects for 2022. Several US Utilities are enhancing their renewable portfolio in rapid shift toward clean energy, including Xcel Energy (XEL) that aims to achieve an 80% carbon reduction by 2030 and 100% carbon-free electricity by 2050 and Electric Power (AEP) which hopes to reduce CO2 emissions by 80% by 2050.

Following on from an alleged $60 million corruption scandal, the U.S. Securities and Exchange Commission launched an investigation into FirstEnergy Corp. The scandal involved the company channelling millions to former Ohio House Speaker Larry Householder and his allies in exchange for a >$1 billion bailout for two of its failing nuclear power plants.

Materials (Ed Collins)

The Materials sector seen some improvement this week. The Vanguard Materials Index (VAW) is up 1%, whilst the S&P 500 Materials Sector exchange (SPLRCM) is also up by 1%.

On Monday this week, UK energy major BP (BP) published its annual energy outlook. In it, they modelled three scenarios for the world’s transition to cleaner fuels, all of which see oil demand falling over the next 30 years.
Firstly, the “business as usual” case. This assumes government policies, technologies and societal preferences evolve as they have done in the recent past, with oil demand rebounding from the Covid-19 slump, then plateauing in the early 2020s. 

The other two scenarios model more aggressive climate change policies, where oil demand never fully recovers, implying that the 2019 levels of 100m barrels a day will be the peak for consumption. This marks a dramatic change from BP’s stance last year, when they expected consumption to continue to grow, reaching a peak in the 2030s. The whole of the oil industry is attempting to assess and predict how much of this year’s slump in oil demand, triggered by government lockdowns and travel bans, will become permanent as work and travel patterns shift in the new normal.

Bernard Looney, BP’s CEO, admitted that it was possible that demand had hit its peak level. This possibility has the potential to transform an industry that has enjoyed sustained growth for more than 100 years. While oil demand is not expected to collapse, a plateau or decline in consumption in any way would fundamentally alter investment in the industry and the willingness of shareholders to keep funding new fossil fuel projects.

Whatever happens, in my opinion, hydrocarbons will continue to have a large role in the future decades, even if peak demand has been and gone. The new battle will be which of the many firms that inhabit this industry will make the transition the best.

BP’s investors apparently did not enjoy BP’s report: the share price fell 3.29% on Monday, and continued to fall throughout the week, finishing down 7.54% on the week.

Fixed Income

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Rates (Harrison Knowles)

The Federal Open Market Committee was all but certain to keep its benchmark rate unchanged when it announced its monetary policy decision on Wednesday, the last before November’s election. The interest rates held near zero were accompanied by signals they would stay there for at least three years, vowing to delay tightening until the U.S. gets back to maximum employment and 2% inflation. The Fed also improved its outlook for this year’s gross domestic product contraction to 3.7%, compared with its June estimate of a 6.5% contraction. Chairman Jerome Powell said that the U.S.’s recovery has been faster than feared, but “the path ahead remains highly uncertain,” with the pace of activity likely to slow down – an idea mirrored by that of the BoE.

On Friday, Bank of England policy makers had the opportunity to signal to investors and economists whether they’re right to predict more monetary stimulus this year. They warned that the rising rate of coronavirus infections and a lack of clarity over the UK’s future trade relationship with the EU could threaten the economic recovery. It said much of output lost during lockdown had been recovered but the outlook remained “unusually uncertain”. Citing the uncertainty, the Bank held interest rates at 0.1%, a historic low, whilst leaving the door wide open for negative rates in the future. Market expectations are that quantitative easing will be expanded again in November, and rates could be cut to zero or lower next year. The U.K.’s initial economic rebound from coronavirus lockdowns was strong, but it’s now showing signs of fading. New social restrictions have been imposed to stem a surge in infections, just as the government prepares to end its wage-support programs.

While there was plenty of other central bank action to keep an eye on. The Bank of Japan held interest rates and asset purchase policy unchanged, while upgrading its domestic growth forecast. Whilst the central banks of Indonesia and Taiwan also held rates unchanged in decisions earlier. The European Central Bank offered more capital relief to commercial banks to help maintain the flow of credit to the virus-struck economy. 

Credit (Alexander Kaiser)

This week another disturbing trend has appeared in the corporate bond market. High-yield bonds are starting to become off-limits to smaller investors and institutions due to drastic increases in privately placed securities. These securities, also known as 144As after a rule change of the same name in the SEC with the same name that relaxed restrictions on the trades of such bonds, are only available to those meeting a list of requirements, one being a total of at least $100m of securities under management. Clearly small-time investors would not get anywhere near these bonds and until now this was not a particularly large issue, since private placements were a relatively small portion of debt issued, however, in 2020 it has made up 48% of the total and is expected to continue rising. To explain this shift, it is important to know that private placements do have several advantages for the issuer. Due to them being less regulated they are faster and the amount of scrutiny from regulators is much lower due to investors considered more vulnerable to complicated buying structures being excluded making it perfect for companies seeking to lock in debt during these favourable market conditions quickly. However, this has led to the most attractive bonds in terms of security and yield to be out of reach for normal investors.

Meanwhile, what debt is used for is also somewhat questionable. Private Equity firms Apax Partners and TPG have taken the low-debt environment as an opportunity to give themselves significant dividends in the form of dividend recapitalisations. Essentially, they have companies they own increase their leverage simply to pay stakeholders in the equity firms significant amounts in the form of one-time payments. In September, $6bn representing 24% of all issued debt has been used to pay these extravagant dividends, up from an average of 4% in the last two years. While this is clearly good for the owners, it leaves the question of whether the companies that will now have to pay significantly more in interest will survive if the market returns to less favourable conditions.

Real Estate

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

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Whilst house prices are a slightly lagged metric in determining demand and supply in the residential property market, transaction activity and rent provide a more up to date image of the current situation. London’s rental index fell by 2.7% YoY in July, with a further fall expected by the end of the year, as a significant proportion of office workers continue to work from home and travel remains muted. This stems from two main scenarios, in that there is an increase in supply of residential property to let, due to them no longer being able to profit from short stay rentals such as Airbnb ones and corporate lets for business travellers. 

The commercial property sector has continued to struggle as a result of the various lockdowns in place, with Unibail-Rodamco-Westfield having now committed to a €9bn plan to improve its balance sheet. It is the biggest mall owner in Europe, and after having bought Westfield in 2018, has a significant €24bn in debt. This move signifies the stresses that commercial landlords have felt in terms of lost income as their tenants struggled or refused to pay rent. This plan, pending shareholder approval, involves a €3.5bn capital raise which could dilute shares, as well as a fall in capital expenditures and cash dividends. Their share price (AMS: URW) took a hit of 23% since the news. Elsewhere, Sebi (the markets regulator Securities and Exchange Board of India) has now allowed certain REITs and InvITs (similar to REITs but focused on infrastructure) to list on India’s stock exchanges. The listing requirements and conditions are to be formed by eligible bourses in due course. This is a step towards opening up the real estate market in these emerging markets.


Oil & Precious Metals (Oliviero Sacchet)

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This week the oil industry registered: BRNT +8% ($43.07) and WTI +9% (41.02)

On Friday Gen. Khalifa Haftar announced that he will lift the eight-month blocked of oil output. This decision seems to be the result of an agreement between Haftar and Ahmed Maiteeg (a member of GNA). Nevertheless, the mercenaries of Wagner are actually controlling Libyan’s oilfields and so the GNA said that they will not remove force majeure while they remain present. This situation is leading to increasing an unstable period in the oil sector. The possibility of a resumption in the Libyan’s oil exports has lowered Brent oil prices of -1.3 percent ($42.98 a barrel). This new scenario will lead back to the normal oil production of 1.2 million barrel per day, compared to the actual one of 100,000 barrel per day. 

The US are also facing a difficult situation due to Hurricane Sally. On September 16 the Hurricane made landfall. In order to prevent possible damage more than 30% of US Gulf of Mexico offshore oil and 25 % of natural gas output are actually offline. In other words, the US production is facing an approximate loss of more than 565,000 barrel per day. Fortunately, there wasn’t relevant refinery damage from Sally.

The soybean industry is registering a positive trend reaching its highest-level prices in two years. On Friday their futures prices reach $10.35 (+0.7%). This positive trend it’s thanks to China that from the start of September has imported more than 17.4 million metric tons. With no doubt, this is due to the China-US trade agreement signed in January. According to analysts, China would purchase approximately $200 billion more of US goods in 2020 and 2021.

Foreign Exchange

G10 & EMFX (Krisztián Sudár)

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This week the United States Dollar severely underperformed. The global reserve currency and basis of the modern monetary system depreciated for 5 days in a row, as the markets reacted to growing uncertainty and the release of fresh economic data in the United States. The data that was released showed that while the housing market continues its rise, the labour market is generally stalling. The reason for the market’s negative perception of this data is that it is widely accepted that the performance of the labour market is strongly correlated with that of the overall economy. One of the strongest correlations held true once again, as weak economic data was compounded by general uncertainty about the economic recovery of the States, including doubts over WHEN potential vaccine could come into production: Investors flocked into other safe-haven assets, namely, the Japanese Yen. On Friday, the greenback saw its 5th straight day of decline against the Yen, reaching a 2-month low of 104.38.

Meanwhile, potentially the current biggest opponent of the US, China, has seen a tremendous week in terms of its currency. While other indicators have been steadily becoming more and more positive, up until now consumer spending in the world’s most populous country post-COVID19 has been lagging. Data released on Tuesday indicated a growth of 0.5% year-on-year, sending the renminbi on an uptrend it held throughout the week. Culminating on Friday, the 1.2% rise this week was its biggest weekly rise since late 2019.

Sterling had a tough week. First, a very cautious and pessimistic Bank of England statement basically said that a resurgence in cases is quite likely, and with it a repeated economic downturn is unavoidable. On the same day, Thursday, the BoE also noted that negative interest rates are a possibility that they have started exploring, scaring investors even more. Lastly, as a third strike, on Friday worrying COVID-19 data was released by the island state’s government, resulting in the Pound first reaching a low of 1.2866$, then stabilizing out to 1.2956$.

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