Friday Wrap Up (September, 24)

(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?


At the end of the week, US indices ended modestly higher after overcoming a major sell-off earlier in the week. The S&P500 and NASDAQ gained +1.2% and +1.0%, respectively. The sell-off was largely attributed to fears concerning Evergrande, China’s second-largest property developer, getting ever closer to a possible default. The company is also the world’s most heavily indebted property developer with deeply embedded links within China’s infrastructure, therefore global investors were worried that Evergrande’s collapse might set off a global financial “contagion” similar to the aftermath of the collapse of Lehman Brothers during the Global Financial Crisis (GFC). However, stocks mostly rebounded on Wednesday, after Evergrande announced a new restructuring plan, with indications of a capital injection into the Chinese banking system. European stocks were up as well, as a continuing economic expansion offset concerns about central banks withdrawing their support early. The STOXX Europe 600 Index ended 0.31% higher. Though, gains were curbed as Evergrande’s risk of default dampened investor enthusiasm globally. Norway became the first G10 country to materialise a hawkish stance with the central bank tightening its monetary policy. Norway’s key short-term lending rate rose from 0.00% to 0.25%, with a strong chance of another rate increase in December. The Bank of England (BoE) has kept its key rate unchanged at 0.10%, although there has been growing movement towards ending the quantitative easing program early.


Information Technology (Satya Maulana)

The global semiconductor shortage is causing a series of supply chain horrors this week. Fake chips are roaming around Asia’s electronic industry and, to some extent, North America and Europe (Nikkei). Japanese manufacturers turned to Alibaba (-4.37%) for supply channels as an alternative, however, chips failed to turn on when they arrived. Taiwan Semiconductor Manufacturing Co (-0.83%), the world’s leading semiconductor maker, stated that the chip shortage will continue to 2023. In addition, the Biden administration is pressing semiconductor companies for more supply chain transparency to mitigate the impact of the global chip crisis. Semiconductor indexes such as SOX (+3.37%), DJUSSC (+3.27%), and SPSISC (+1.30%) performed well this week with ETFs such as SMH (+0.51%) and SOXX (+0.81%), making minor movements.

The Big Stories

China expands its crackdown on cryptocurrency by declaring all crypto activities illegal (FT), causing hysteria for fintech companies providing crypto services (COIN: -2.39%; HOOD: -2.24%). Facebook (-1.81) CTO Mike Schroepfer steps down as the social network battles its most prominent public relations crisis since the Cambridge Analytica scandal (BBG). Shares of money-transfer fintech Remitly (-17.03%) slid down by the end of the week after it was valued at $7.8B and made a strong market debut (RT). Zoom’s (-3.79%) $14.9B deal for Five9 receives US scrutiny over foreign ties (FT). Restaurant software company Toast (-10.08%) made its IPO debut this week, reaching a market valuation of $31B (BBG).

Healthcare (Jasmine Khoo)

The Health Care Select Sector SPDR Fund (XLV) suffered a third consecutive weekly loss, sinking 0.4% against a broader market gain of 0.5%.

One of the top gainers this week was Matinas BioPharma (NYSE:MTNB). Matinas is working with Gilead Sciences (NASDAQ:GILD) to produce an oral form of the anti-viral COVID-19 treatment remdesivir. Matinas’ Lipid Nanocrystal (LNC) platform improves treatment delivery by ensuring molecular stability and efficient cellular uptake of the medication. On Wednesday 22 September, data showed that the remdesivir reduces hospitalisations by 87% and medical visits by 81%, and no deaths were recorded in these trials. MTNB has rallied 24.8% since the announcement. 

Consumer Staples and Consumer Discretionary (Jeff Chen)

Over the past week, both the Consumer Discretionary and Staples sectors faced losses yet again, with the Consumer Discretionary Select Sector Fund (XLY) falling 0.2%, whilst the Consumer Staples Select Sector Fund (XLP) fell 1.4%. The fall in price for consumer indices could be attributed to the Fed’s calls for tapering to begin, as per the Central Bank’s officials. Furthermore, given the negative sentiment revolving around the Evergrande saga in China, it could be possible that losses this week were exacerbated by these two major events. 

In company news, shares of Nike (NKE) were up 1.0% over the past week on the back of strong earnings. Revenue was up 16% from a year ago at US$12.2 billion, with digital sales improving by 29% to aid in top line growth. Despite the rise in selling, general & administrative costs due to increased marketing campaigns, notably in digital marketing, CEO John Danahoe assured investors that Nike would still be able to generate solid profit growth from direct sales and reduce the use of intermediaries. Given the current trend towards athleisure, a market that could reach US$257 billion by 2026, Nike could ride on industry tailwinds to generate greater revenue.  

Communication Services (Chris Dai)

The communications sector has faced a mixed-performing week with the S&P 500 Communications Service Index (S5TELS) finishing at 0.7% lower than Monday. This week, we look at notable losses from Facebook due to a change in leadership followed by recent allegations, as well as Netflix’s largest content deal to date for over £500m.

On Wednesday, Facebook’s Chief Technology Officer since 2013, Mike Schroepfer, announced his departure after 13 years at the company. The resignation was followed by a series of reports published by The Wall Street Journal last week accusing the group of withholding information on allowing certain users to break its rules, which potentially causes harm including the impact on the mental health of teenage users. Schroepfer will be replaced as CTO by Andrew Bosworth, the current head of Facebook’s hardware division in 2022. As a result, the group’s share prices fell as much as 4.0% in extended trading on Wednesday to $343.21, the lowest in two months. 

Netflix (NFLX) announced their acquisition of Roald Dahl Story Company (RDSC) on Tuesday, which manages the rights to the beloved British novelist’s catalogue including “Charlie and the Chocolate Factory” and “Matilda”. Whilst the financial terms were not disclosed, the transaction size was reported to be over £500m, marking one of the biggest content grabs in Netflix’s history. Followed by the news, Netflix’s shares went up to 3.8% to $594.82.

Industry & Materials (Maksymilian Mucha)

Vanguard Industrials ETF (VIS) and Vanguard Materials ETF (VAW) are up 2.55% and 2.77% this week respectively. 

On 21 September, FedEx Corporation (FDX) released its quarterly report for the quarter ended on 31 August. FedEx adjusted operating income slid to $1.49bn compared to $1.64bn the previous year (-9.15%) despite the 14% revenue growth resulting from high demand. The reason for lower profitability is poor labour availability caused by the COVID-19 pandemic disruptions, which brought about a 13% rise in the cost of salaries. FedEx share price is down 9.19% following the announcement.

This news suggests that FedEx is facing capacity constraints linked to the dynamic raise of e-commerce order volume. Therefore, the company is likely to raise prices, which have already been planned to increase on average by 5.9% in FedEx Home Delivery services, along with increases ranging from 5.9% to 7.9% in FedEx Freight. Due to the macroeconomic circumstances, it will probably be followed by FedEx’s competitors which in turn might contribute to the higher transportation prices and inflationary pressure.

Source: FedEx Annual and Quarterly reports

On 19 September, the United States administration announced that from early November, it will exempt fully vaccinated Schengen Area (i.e. most of the EU countries), as well as the UK, India, China, South Africa, and Brazil  citizens from the travel ban lasting for over a year. It is expected that the US will recognise all of the vaccines approved by the European Medicines Agency (EMA), which include Pfizer, Moderna, AstraZeneca, and J&J. In addition, travellers will need to show a negative COVID-19 test result taken no sooner than 72 hours prior to arrival.

Fixed Income

Rates (Suraj Suresh)

The yield on the 10-year Treasury Note rose 12 basis points to 1.42% this week, its highest level since mid-July. The drop in bond prices comes after nine officials from the Federal Open Market Committee (FOMC) anticipate the increase in borrowing costs by late next year compared to 2023. The Fed’s tighter monetary policy is a signal to investors about the outlook and health of the economy. 

However, traders are betting that the Bank of England (BOE) will raise interest rates before the Fed and are expecting a 15 basis point hike in February. This has been bolstered by the BOE’s forecast that inflation will exceed 4% by the end of the year. As a result, the 2-year UK government bond yields about 16 basis points higher than the US 2-year Treasury note. 

With German elections coming up this weekend, the bond market seems to be pointing to a political change in the region. This, combined with the inflationary situation in Germany, has led to a sell-off that has driven the 10-year German Bund to as high as -0.22%.

Credit (Xuan Boh)

The biggest story in debt markets for the past two weeks has been the dangers associated with the potential default of property behemoth China Evergrande Group

What happened this week?

On Monday, Evergrande missed interest payments due to at least two of its largest bank creditors.

On Wednesday, Hengda Real Estate Group Co Ltd (Evergrande’s main unit) announced in a Shenzhen exchange filing that it had negotiated a deal with bondholders of its 5.80% September 2025 onshore yuan-denominated bond to settle interest payments due Thursday.

At 5am (BST) on Friday, a USD 83.5 million coupon payment due on Evergrande’s 8.25% March 2022 dollar-denominated bonds was not paid. Evergrande now has a 30-day grace period before a default can be declared on the bonds. This can go both ways: companies like Shandong Ruyi Technology Group have used this grace period to eke out interest payments in the past, but companies like Peking University Founder Group failed to do so and entered a court-led debt restructuring.  Already, this news caused the Hang Seng index to fall 1.3% and the China Enterprises index (HSCE) to fall 1.47% on Friday.

How did it happen?

Evergrande relied on aggressive leveraging to expand its operations, like many of its property counterparts. However, in 2020, policymakers in Beijing implemented “three red lines”, a metric that property developers had to meet in order to borrow. The three requirements for developers to raise debt by a maximum of 15% annually are that i) the developer had to have a 70% ceiling on liabilities to assets, excluding advance proceeds from projects sold on contract; ii) a 100% cap on net debt to equity; and iii) they must have a cash to short-term borrowing ratio of at least 1. 

Based on their 2019 finances, Evergrande and Guangzhou R&F Properties were already singled out early on as the two players that fell short of such metrics among major developers, resulting in the need for them to cut borrowing

Is this going to be systemic?

The general concern with Evergrande’s potential default is that it would trigger a slowdown in China’s economy and create social turmoil among homeowners who may never receive their homes. Already, Evergrande’s customers and investors are taking matters into their own hands. According to current information, Evergrande’s default is unlikely to be systemic. Its lenders do not appear to have the same exposure as lenders to Lehman Brothers in the 2008 crisis did. Zheshang Bank Co., one of Evergrande’s biggest lenders, announced that it was owed USD 588 million, but had sufficient collateral.Shanghai Pudong Development Bank assured that their lending was small and tied to individual projects, secured by claims to land. Ultimately, Evergrande’s total borrowing amounts to just 0.22% of total system loans. More importantly, Chinese banks are heavily controlled by the government – unlike banks in America in the wake of the Lehman bankruptcy. As one pundit put it, “commercial bankruptcy is a state choice”.

Real Estate

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

After initially cutting rates in response to the pandemic, the Chinese government has also added limits on mortgage lending and caps on rents in big cities in efforts to ward off the risk of an asset bubble. Last year, the government had implemented a strict ‘three red lines’ policy aimed at reducing leverage in the property market. The Chinese residential property market is slowing, as the number of new home sales fell 24% compared with August 2020, and land sales fell 53% in volume terms. Supply far outstrips demand such that there is enough empty property in China to house over 90 million people.

Evergrande (HKG: 3333), the world’s most indebted real estate firm, has seen its share price fall 83.3% year-to-date. Just last month, it warned of the risk of default as its monthly sales had almost halved from CN¥ 71.6 billion to CN¥38.1 billion from June to August. On Monday, the country’s housing ministry announced a three-year inspection campaign to tighten regulation of the property sector. With the Chinese government’s relentless crackdown on the residential property market, home sales in the market are expected to decline together with Evergrande’s share price.


Oil & Precious Metals (Anouska Jha)

Impact of natural gas shortage on food in Britain, and a prospective future for mining via an M&A.

The shocks to the food-grade CO2 supply in the UK, following the closure of a CF Industries (CF) plant Teesside and Cheshire last week, demonstrate how market prices can materialize into a tangible crisis. CF Industries is responsible for producing approximately 60% of the UK’s CO2, mainly used for the food sector. The plant closed due to the surge in natural gas and ammonia prices, which has increased by 250% since January 2021, and from which food-grade CO2 is a by-product and essential for sectors such as beer, food packaging and meat.  1.

There are multiple Reasons for the rise in natural gas prices:

  • Depleted stocks after the winter of 2020
  • Russian gas supply concerns via Gazprom
  • Challenges from Brexit and the COVID-19 pandemic, which has led to spikes in gas demand from Asia, as well as national labor and logistics issues.

Thus, inflation in food prices is already on the horizon, as for example, CO2 is responsible for over 80% of meat and poultry processing. Although CF is gaining financial support from the government whilst the global market adjusts, and is working to find alternative CO2 sources, organisations such as the British Meat Processors Association claim that this is unlikely to relieve high CO2 and natural gas prices in the long term, making any fixtures temporary. However, the CF stock price has currently increased by 2.6% and stands at $54.89, after plans to restart its ammonia plant.In company news, the Australian mining company Sandfire Resources (SFR) announced on Thursday 23 September 2021, that it will acquire Minas De Aquas (MATSA), a Spanish mining company, for US$ 1.87 billion. This is one example of many M&As where companies such as SFR are looking to nearly triple their copper and base metals output. Copper prices have surged this year (fluctuating around the US$ 10000 mark, despite recent volatility regarding Chinese restrictions on industrial activity), with increasing demand during the green transition. This specific transaction between SFR and MATSA will immediately transform SFR into Australia’s largest copper producer from 2022, especially due to MATSA’s highly prospective Iberian Pyrite Belt (housing a large concentration of copper and zinc), making it a highly profitable asset.

Foreign Exchange

G10 & EMFX (Noah Martle)

Worries over Evergrande 

The China Evergrande Group recently missed £83.5m interest payments on their corporate bonds. Recently, Evergrande had also reached an alternative payment solution for another $35.9m interest payment. This has cast serious doubts over Evergrande’s ability to pay off their remaining $300bn worth of debt. To add fuel to the fire, Xi Jinping’s administration has remained silent over any potential intervention – suggesting he may prove wrong the adage ‘it’s too big to fail’.  Consequently, this front-page news has sparked economic uncertainty as investors worry that Xi Jinping will let large firms fail. As a result, the Chinese Renminbi has depreciated 0.13% from 0.1548 to 0.1546 over the past week.

Refinitiv, 2021

The economic uncertainty in China has had a negative spillover effect onto iron ore prices. Iron ore is one of Australia’s significant exports, and China is Australia’s main trade partner. Thus, the Australian Dollar has depreciated a further 1.10% against the US Dollar from 0.7339 to 0.7258 over the past week. 

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