Friday Wrap Up (September, 3)

(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?

Equities

Information Technology (Satya Maulana)

This week significant developments occurred regarding the Chinese government’s crackdown on tech companies. The Chinese government announced a ban for Chinese children to have more than 3 hours of online gaming a week. Tencent, the largest video game publisher globally by revenues, started hedging and increased its investments in overseas start-ups more than seven fold this year following the many new regulations imposed on Chinese internet companies.  

Tencent’s hedging strategy has received a positive sentiment from investors as their stock increased by 5.13% this week after it took a hit (-3.99%) on the day the new gaming regulation was announced. Ignoring the dangerous government risks Chinese equities inherently have, Alibaba and Tencent are sitting at staggeringly low levels.

The Big Stories 

Zoom (-12.70%) posted a bullish earnings forecast for the entire year, with the company also announcing a $14.7 B acquisition of cloud contact-center software manufacturer Five9 this quarter (CNBC). Russian internet company Yandex has agreed to buy out Uber (-0.64%) for $3B from food, groceries, logistics, and autonomous driving (FT). Google (-0.46%) faces regulatory pressure from South Korea and the U.S. Department of Justice over monopolistic abuse. AI-focused data startup Databricks secured a $1.6 B funding round at a $38 B valuation led by Counterpoint Global, a Morgan Stanley fund (TC). WhatsApp was fined €225M for breaking the EU’s data privacy law on sharing their data with Facebook (+1.01%) (BBG).

Healthcare (Jasmine Khoo)

Following a slight dip last week, the S&P Healthcare Sector Index (XLV) rallied 1.65% for the 5-day period ending Friday 3 September and outperformed the S&P 500 index (+0.6%). XLV was up 0.70% on Thursday, representing the largest single-day gain in over a fortnight.

One of the biggest market movers was Innate Pharma (IPHA). The stock rallied 74.2% over the past week after the announcement that the company will be involved in the upcoming ESMO 2021 Virtual Congress from 17 to 18 September. It is expected that Innate Pharma will present on Phase 2 trials of its monalizumab combination therapy for non-small cell lung cancer. Positive data on monalizumab could be a potential catalyst for the stock, following a turbulent year as shares declined 13.9% YTD to 28 August.

One of Innate’s strengths lies in its collaborations with top pharmaceutical companies such as Sanofi, Bristol Myers Squibb and AstraZeneca. The latter has full rights to monalizumab and will pay double-digit percentage royalties on net sales post-commercialisation. Innate Pharma’s strong ability to collaborate with other players would enable it to gain expertise, secure funding and bring its products to the market more quickly.

Consumer Staples and Consumer Discretionary (Jeff Chen)

Over the past week, the consumer discretionary and staples market both rose, with the Consumer Discretionary Select Sector Fund (XLY) gaining 0.3%, whilst the Consumer Staples Select Sector Fund (XLP) also rose by 1.1%. Given that there is an increasing trend towards making greater short bets in the consumer discretionary sector, plus the disappointment surrounding worse than expected jobs numbers, we could possibly see a significant reversal in the share prices of consumer related stocks, especially in the consumer discretionary sector, as the effects of stimulus programs fade. 

In terms of company news, shares of Dick’s Sporting Goods (DKS) rose 2.5% on the back of strong profits in Q2 2021. CEO Lauren Hobart has mentioned that Dick’s has managed to find a strategy that will enable them to drive up profits even as customers shop online, relying more on cost cutting through cross-training of different workers for different roles, thereby reducing labor costs. In the long run, we could see many other retailers rely on the stickiness of the e-commerce boom to tap on economies of scale as they grow both their brick-and-mortar footfall and sales from online platforms.

Financial Institutions (Raed Altaf)

This week, the financial sector saw a slight dip in its performance. The iShares US Financial ETF fell by 0.7% while the Vanguard Financial Index Fund fell by 1.5% over the week. The reason behind this dip can be pointed to the Federal Reserve’s decision to cut the issuance of Treasury Bills (US government bonds that reach maturity in a year or less) this month. This had led to interest rates falling to zero, and the supply of bonds becoming scarce, leading to issues in trading in money market funds in major financial institutions. 
Apart from money markets, the Federal Reserve’s recent decisions have led to after-effects in the corporate debt markets. US banks have predicted a corporate debt issuance spree over the next month, with fears sparking over higher inflation leading to high borrowing costs, which corporate institutions want to avoid. Credit strategists at Bank of America and Deutsche Bank have predicted bond issuances ranging from $47bn-$60bn to hit the market by the end of September.

Industry & Materials (Maksymilian Mucha)

Vanguard Industrials ETF (VIS) and Vanguard Materials ETF (VAW) are both up 0.93% this week respectively. 

Melrose Industries (MRO) shares rose 6.84% on Thursday after it said it is trading ahead of expectations in the half-year results announcement. The London-based company specialises in acquiring underperforming manufacturers, restructuring them and selling them on. In the last 6 months, Melrose reported £223m of adjusted EBIT, compared with £11m loss from the previous year. The result can be largely attributed to its portfolio company, car parts manufacturer GKN, which improved its results thanks to the higher demand for automotives brought about by the reopening  of the economy. Negative effects of the semiconductor shortage on GKN was offset by higher activity in the electric vehicles (EV) sector.

Rivian, the EV manufacturer founded in 2009, which is considered as a Tesla challenger, announced on 27 August that it is heading for an IPO. The company is seeking a valuation of more than $70b and the offering will be led by Goldman Sachs, though it has not disclosed the timeline. Since 2019, the company has raised more than $10b in financing rounds, with major investors including Amazon (AMZN) and Ford (F). The former company also ordered 100,000 electric delivery vans from Rivian in 2019. Following the announcement, Amazon’s shares went up 0.49%, while Ford shares were up 3.18%.

Utilities (Jonathan Leng)

Fixed Income

Rates (Suraj Suresh)

All eyes were on the Jackson Hole symposium this week as Jeremy Powell signalled that the Fed will consider reducing bond purchases this year if the economy performs as expected. This resulted in a bond rally with the yield on the benchmark 10-year Treasury note falling to 1.29%, reversing the sell-off seen the previous week. Experts believe that tapering could be announced around December and will actually take place in January 2022. Investors will now wait for Friday’s job reports to gauge the impact of the Delta variant on the economic recovery. 

Market participants are beginning to believe that buying US government debt is a losing bet and are being pushed into higher yielding emerging market government bonds. 

According to Bloomberg, fixed-income securities from South Africa, India, Indonesia and Turkey were among the biggest gainers, returning at least 1.2% last month, while Treasuries fell 0.2%. This comes against the backdrop of many heavyweight bond investors taking big losses on their bearish bets on Treasuries.

Commodities

Oil & Precious Metals (Anouska Jha)

Is the Sky the Limit for Aluminium Prices? And How a Mining Company May Break its Recent Drop.

Aluminum prices have rallied significantly this week, attaining a 10-year high on Thursday due to production-squeeze concerns in China. Benchmark Aluminum on the London Metals Exchange reached $2734.50, exceeding its May 2011 highs of $2726.50. This elevation in aluminum prices is also shown by the upward climb on premiums across regions- for example, the US Platts Aluminum Premium reached $34.75 per pound in August 2021, $13.8 higher than January 2021. 

As mentioned, one big factor is China. Over 6% of China’s aluminum production capacity has been shut down this year, with further talks of cutbacks in the Guangxi province due to decarbonization goals by the government. Analysts have predicted a further reduction in annual operating capacity by 475,000 tons. There are some attempts by commodities buyers in China to decrease prices by releasing stockpiles of metals, however, this is largely offset by the more prominent policy and market forces mentioned that are dictating aluminum prices. 

In addition, a lack of aluminum imports in the US, exacerbated by an increase in global premiums, means that US stocks have dwindled to a point where the US has 6 months of the metal’s supply versus its typical 8-10 months. Moreover, investors’ fear of backwardation on forward-curves due to the Biden administration’s removal of tariffs on aluminum and lack of labor due to ongoing COVID unemployment benefits, has spooked the market into anticipating a rapid price decrease. 

Analysts at Reuters have termed this the ‘aluminum decarbonization paradox’. There is a conflict between supply tensions and speculation in China, and aluminum is needed for the green transition, but is a huge contributor to greenhouse gases. Placed alongside the policy effects of the US government, and the emergence of low carbon premiums in Europe, means that Goldman Sachs’ forecast of the 12-month price target of the metal reaching $3200/ton (concluded on Monday 30 August 2021) remains credible.In company news, the Anglo-Russian precious metals mining company Polymetal (POLY), experienced a 2.3% decrease in its share price this last week, currently standing at £1441.00. This comes after reports that the company expects its capital expenditure to increase 25% this year due to inflation, alongside already high costs for labour and production. However, Polymetal has also secured a project pipeline, projecting a 12% forecast growth for 2025. Investors are also impressed by its ESG credentials, in which the company has announced an $850 Million program to cut emissions by 35% by 2030. This microfocus reveals the complexities of the commodities market, which is constantly battling long and short-term forces to sustain itself. Investors must use this anecdote to be pragmatic in their trades and forecasts for companies and indexes in this sector.

Foreign Exchange

G10 & EMFX (Noah Martle)

US Nonfarm Payroll Disappoints 

“Nonfarm payrolls (NFP) is the measure of the number of workers in the U.S. excluding farm workers and workers in a handful of other job classifications” (Investopedia, 2021). Experts predicted the NFP to rise by 750k jobs last month. However, the statistics show the NFP only rose an underwhelming 235k jobs.  Additionally, Seema Shah, chief strategist at Principal Global Investors, commented that “Rate hikes should come in late 2023, but we don’t think that the Fed is in that much of a rush to start normalising policy rates. Therefore, through a combination of a disappointing NFP report and the Fed’s increasingly cautious approach to hiking the policy rate, the US Dollar to Pound Sterling depreciated 1.19% from 0.7298 to 0.7211 since last Saturday.

Refinitiv, 2021

Weekly News

Bank of Canada

Following a lower than forecasted Q2 GDP report, the BOC is expected to continue its ultra-loose monetary policy.

AUD/USD

The Australian Dollar appreciated 3.03% against the US Dollar from 0.746 to 0.724. The factors triggering the appreciation of the AUD is twofold. Firstly, the Australian economy is recovering after New South Wales (the most populous state) went into lockdown in the last week of June. Secondly, the Q2 GDP data beat forecasts by 0.3%.

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