Friday Wrap-Up (September, 4) #7

Big drops in Apple, Tesla and other tech names drag down the market.

(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: Big Tech dragged down the major U.S. indexes to their steepest drops in months yesterday. Many analysts say this was a healthy pullback from weeks of ludicrous gains.

Economy: The U.S. economy added 1.4 million jobs in August and the unemployment rate fell to 8.4% from 10.2% in July. Employers are hiring back workers they recently let go at a steady clip, however many job losses are becoming permanent. The U.S. trade deficit (difference between imports and exports) grew to its highest level since 2008 in July. 

Markets in a Minute


Information Technology (Maria Lomaeva)

This week, two tech companies that have strongly benefited in the WFH environment reported their Q2 earnings. DocuSign (DOCU), that allows its users to remotely manage electronic agreements, saw its shares surge by 180% in 2020. It reported a 45% increase in its revenue YoY to $342.2m with EPS of $0.17, ahead of Wall Street expectations. 

CrowdStrike (CRWD), an American cybersecurity company the shares of which grew by more than 140% in 2020, announced a revenue of $199m in Q2, an 84% increase YoY. Although the company does not yet make profit, it currently estimates to become profitable in 2021 fiscal year that ends on January 31, 2021. 

As the pandemic carries on and the number of cases remain too high to return to offices in full capacity, these companies have good prospects to continue growing, at least short term. In the longer perspective, it remains to be seen whether the Covid-19 outbreak has brought long-lasting effects into the corporate world. 

Nevertheless, the share price gains amid the positive earnings news were quickly erased as tech stocks slipped in a dramatic sell-off that started on Thursday. The tech-heavy NASDAQ 100 dominated by Apple (AAPL) and other tech-giants went down -10%, although it has recovered some of the losses. The drop comes after a strong rally which coincided with an increase in purchases of call options on popular tech stocks, which might in part explain the boost. SoftBank (9984) was reportedly identified as a major call option buyer

More volatility is expected within the tech sector as NASDAQ 100 Volatility Index (VIX) has been rising prior to the sell-off. Interestingly, VIX normally falls as stock prices go up, and some investors see this unusual behaviour as a worrying sign.

Healthcare (Christine Chan)

Like the past few weeks, the XLV exchange-traded fund has again risen to a new peak this week, at $109.56 on Wednesday 2nd September. It has since dropped back down, ending the week at $105.21 and giving a fall of 2.4% this week, which generally corresponds with the overall US equities slump towards the end of the week (although the slump is mostly driven by the selling of technology stocks).

One of the more exciting pieces of news this week is the agreement for Nestlé Health Science, the healthcare subsidiary of consumer goods giant Nestlé (SWX:NESN), to buy Aimmune Therapeutics (NASDAQ:AIMT) for $2.6 billion. Aimmune Therapeutics is a biopharmaceutical company that focuses on treating food allergies, and through the deal, Nestlé will be acquiring Palforzia, the first and only FDA-approved treatment that reduces the frequency and severity of allergic reactions to peanuts in children. This deal continues Nestlé’s strategy of growing its stake in the allergy prevention and treatment market, as an increasingly health-oriented population has captured the consumer goods giant’s attention to expand its healthcare portfolio. At an acquisition price of $34.50 per Aimmune share, Nestlé will be paying a 174% premium compared to the closing price of $12.61 on Friday 28th August.

In other news, Johnson & Johnson’s (NYSE:JNJ) coronavirus vaccine candidate was found to prevent hamsters from severe illness on Thursday 3rd September, and vaccinated hamsters had lower coronavirus levels in their lungs and organs when compared to unvaccinated hamsters. Furthermore, their Phase III human clinical trials are planned to commence in the second half of September. However, the joint effort between Pfizer (NYSE:PFE) and BioNTech (NASDAQ:BNTX) is slightly ahead of the game; they have already begun their late-stage trials and predict that they can deliver results by the end of October.

Consumer Staples and Consumer Discretionary (Jun Wei)

Consumer stocks did well this week, with the S&P Consumer Staples Index gaining about 3% and the S&P Consumer Discretionary Index increasing slightly. This week, we shall take a closer look at Eurozone retail sales in July, Macy’s Q2 results and the impending IPO of Big Hit Entertainment, the parent company of hit boy band BTS. 

Eurozone retail sales fell by 1.3% in July compared to the previous month as pent-up demand from lockdowns earlier in the 2nd quarter eased. Also, there seems to be a widening North-South divide in the Eurozone as retail sales remained strong in countries such as Germany and France, while retail sales continue to decline in Greece and Italy. With Southern Europe already experiencing anaemic growth before the onset of Covid-19, governments face the gargantuan task of getting the economy back on track after countries such as Italy not only suffered from Covid-19, but also face economic ruin as their tourism-reliant economy struggles to rebound. 

Macy’s (NYSE: M) rose almost 10% in Thursday morning trading on hopes that improved digital sales and its improved cash position will allow it to survive the Covid-19 crisis, despite earlier concerns that Macy’s high debt burden may lead to it filing for bankruptcy. Macy’s suffered a loss of -$0.81 per share, much lower than analyst estimates of -$1.77 per share. Its revenues for Q2 also beat estimates, while digital sales increased 53% year-on-year in Q2, a pleasant surprise for the company previously criticised for being slow to adapt to the proliferation of e-commerce. 

However, despite its improved liquidity position, Macy’s remains a company that is heavily burdened by debt and interest payments. Also, department stores remain a sunset industry in a highly competitive retail sector, and Macy’s struggles are not unique. Other department store chains such as Nordstrom also facing an existential threat due to e-commerce and Covid-19, while chains such as Neiman Marcus have filed for bankruptcy already. Trading Macy’s certainly isn’t for the faint of heart. 

Finally, Korean music agency Big Hit Entertainment announced plans to file an IPO in Seoul, to raise as much as $812 million. Big Hit has done exceedingly well in recent years due to the resounding success of boy band BTS. BTS recently became the first South Korean act to top the Billboard Hot 100 with their song Dynamite and has gained a loyal fanbase across Asia and the U.S. Big Hit’s flotation values the company at around $4 billion, or 41x forward EV/EBITDA. This appears to be expensive compared to competitor companies such as SM Entertainment and JYP Entertainment, which trade at below 20x EV/EBITDA. Investors expect high growth, and not without cause given that BTS was the highest-grossing music act in the world. 

There should, however, be some caution advised given that Covid-19 has led to cancelled tours, which would adversely affect profits in the short term as concert tours are Big Hit’s main source of revenue. Also, BTS’s oldest member is due to start compulsory military service in end-2021, which would affect promotional activities and new song releases for BTS in the medium term. Big Hit’s long-term success would depend on the ability to generate additional sources of revenue and improve the pipeline of new musical talent.

Communication Services (Katarina Lau)

American telecoms networking equipment supplier Ciena Corporation (CIEN) crashed 24% due to weak guidance. CEO Gary Smith gave investors a very honest outlook on Ciena suffering “a broad-based … slowdown in orders” in Q3, and even suggested total growth in equipment spending will at best be in the “low single digits” if not “flat”. Consequently, Ciena’s Q4 forecasts are between $800-$840 million, deeply short of analyst estimates of almost $1 billion. There was a ripple effect on fellow networking equipment companies Infinera (INFN), Lumentum Holdings (LITE), and II-VI Incorporated (IIVI), were all down 16.3%, 11%, and 9.1%. This must be one of the rare times a listed-company CEO reveals to shareholders the whole truth, even if it’s a stark underperformance.

mazon, Verizon may invest over $4 billion in Vodafone Idea, stock

Vodafone Idea Ltd (IDEA) rallied 13% after speculation that Amazon and Verizon may invest over $4 billion in the Indian telecom company. The struggling company is debt-laden, on top of owing Rs 50,000 crore ($6.8 billion) to the Indian government in telecoms dues. Perhaps its precarious position is what makes for an attractive takeover, however Amazon and Verizon should hope it’s not a sinking ship.

Financial Institutions (Jamie Biswas)

This week saw a fairly stable week for financial institutions, with the Vanguard Financials ETF (VFH) rising just 0.178%. Most of the gains within the sector can be attributed to banks, with insurance firms performing slightly worse in comparison. Despite only rising slightly, financial institutions actually outperformed the wider market, as a sharp drop in tech stocks caused financial markets to slump this week.

Citigroup has become the first US bank to receive a fund custody licence in China, allowing it to provide a core service to global asset managers as they rush to participate in the opening up of the country’s financial sector. For years China has imposed restrictions on foreign companies, making it so that they have to invest in China via a joint venture with a Chinese company. Now reforms have come into place relaxing these restrictions and many financial service companies are trying to enter the market, hoping to take advantage of the world’s most populous country. 

It was confirmed last week that JPMorgan Asset Management, the funds arm of the biggest US banking group by assets, would need to pay $1bn to buy out the remaining 49 per cent of China International Fund Management, which it jointly owns with Shanghai International Trust, a subsidiary of a state-owned bank. 

On Wednesday Citi stated that the licence, which allows it to act as a custodian bank and hold securities on behalf of mutual and private funds in China, had been approved by the China Securities Regulatory Commission. Citi will be able to provide custodian services such as income processing, record-keeping and trade settlement.

Industrials (Ed Collins)

In a down week across the sectors, Industrials also fell, led by falls in Capital Goods companies. The Vanguard Industrial Index (VIS) has fallen by 1.03% whilst the S&P 500 Industrials Sector (SPLRCI) is down by 1.27%, since the start of the trading week (as of market close on Thursday).

Smith & Wesson Brands Inc (SWBI) released its quarterly earnings for the quarter that ended in July. The manufacturer’s quarterly firearm revenues more than doubled, reflective of the civil unrest that plagues the US currently. The firearms unit registered $230m in gross sales for the quarter; up 141% compared with the same period a year ago, it said on Thursday. Overall net sales were $278m, up from $123.7m a year earlier. Analysts forecast $195m. Historically, gun sales have risen during American election years, and this has continued into this year. Demand for guns has risen in response to the racism-fuelled civil unrest that has been seen in many major US cities this summer.
Background checks for weapons, processed by the FBI, are used as a gauge of US gun sales. They are on pace to surpass the record high of 28.4m set last year, with 3.1m checks in August, bringing the annual tally to 25.9m for 2020 so far.

Shares in the firearms manufacturer jumped more than 3% in after-hours trading on Thursday. Smith & Wesson’s share price is now up 167% since the start of the year.

Utilities (Katarina Lau)

This week, equities in both the U.S. and Europe rallied, however this time it was mainly fuelled by utilities and financial stocks, each up by 1.4%, instead of the typically bullish tech sector which underperformed. 

After downbeat jobs data released on Wednesday pushed Treasury yields toward a fourth-straight decline, the SPDR Utilities Select Sector ETF (XLU) surged 3%, making it the strongest of the SPDR ETFs tracking the 11 key sectors in the S&P 500. The positive momentum was led by shares of Exelon Corp. (XLC) up 4.6%, NiSource Inc. (NI) up 4.2% and NextEra Energy Inc. (NEE) up 4%. Other big names which saw pretty significant gains include First Energy Corp. (FE) gaining 3.1%, PPL Corp. (PPL) rising 3.9% and AES Corp. (AES) slightly up by 1%. These results further attest to how utilities are often seen as an alternative to bonds, thanks to its stable earnings and yield. 

Lithuania’s leading utility Ignitis Group is launching a rare stock market listing in Europe. It plans to raise €500 million in an IPO, valuing the company at €1.5-€2 billion. The government-owned electricity and gas distribution network hopes to raise funds for renewable energy investment as well as become energy-independent from Russia, which has become a common goal amongst Baltic states (Estonia, Latvia and Lithuania). 

Materials (Ed Collins)

The Materials sector seen slight improvement this week. The Vanguard Materials Index (VAW) is up 0.67% whilst the S&P 500 Materials Sector exchange (SPLRCM) is up by about 1.08%.

Ignitis Group, the state-owned group, which is Lithuania’s leading utility company, is launching a rare stock market listing in Europe. The aim is to list in Vilnius in the coming weeks, with a secondary listing in London soon. In recent years, Lithuania has been looking to gain energy independence from Russia. Vilnius has been leading a campaign to persuade other Baltic nations not to buy power from the Ostrovets nuclear plant under construction by Russia in Belarus. Analysts are predicting the IPO could raise about €500m, with the shares representing between a quarter and a third of its capital, thus valuing the company between €1.5bn-€2bn. The listing is an effort to raise funds to invest in renewable energy, continuing the trend to move away from Putin. The Lithuanian government will retain a stake of at least two-thirds in the utility company, which runs the country’s domestic electricity and gas distribution network, and has considerable renewable energy assets throughout the Baltics and Poland.

Siemens Energy, a spin-off energy business of Siemens AG (SIE), is due to debut on the German stock market at the end of September. This week, the incoming chief of Siemens Energy defended its continued reliance on coal and gas contracts, in a move that insists fossil fuels have a part to play in the transition to cleaner power. Siemens Energy is involved in generating one-sixth of the world’s energy, but its renewables business, which involves building and maintaining wind farms, accounts for just one-third of its revenues. The new company will be under pressure to improve its profit margins, which lagged behind some competitors when it was a fully integrated part of Siemens.

Fixed Income

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Rates (Harrison Knowles)

After last week’s Federal Reserve announcements, it is worthy to reflect after being able to take considerations over the past week and gather further insights from others. While many people say that the problem for the Fed is that inflation has consistently come in beneath its 2% target, it seems the real issue is that it has consistently underestimated how strong the labour market could get, without triggering inflation. In the wake of the Great Financial Crisis, the Fed’s first hike came at the end of 2015 when the unemployment rate was still at 5%. Over the next few years, the unemployment rate just kept falling without triggering sustained inflation, indicating that there was far more “slack” left in the labour market than they had appreciated back in 2015 when they first raised rates.

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Instead of hiking rates when the models say you should anticipate inflation just because the unemployment rate has fallen below some number, the Fed actually wants to see the inflation first. This is the basic idea. So how does the Fed avoid repeating this? This is what the new framework sets out to do. The hope is that by formalising an Average Inflation Target, such that the Fed will let inflation overshoot at times to make up for the periods of undershooting, that they don’t repeat past mistakes. 

In fact, there’s been a lot of talk and articles on whether “they can they hit it?” Will the Fed’s new approach allow it to get inflation back up to 2% on a sustained basis? Does the central bank have what it takes in terms of tools to get inflation up? But all these questions miss the point. Missing the inflation target is not actually a problem. And it’s not even one that the Fed’s really trying to solve. the point of the new Average Inflation Targeting approach is mistake avoidance. Specifically, the goal is to avoid the mistake of throttling a labour market recovery due to misplaced fears that inflation is about to take off. In other words, there’s really nothing wrong with having sub-target inflation, so long as you’re not doing anything to slow the labour market. The key thing to remember is that the Fed operates with the premise that there’s a tension between labour market strength and inflation. If inflation is low, it might be a signal that the labour market has been cooled unnecessarily. But if the labour market is hot and inflation is low that’s a wonderful thing.

Whilst Euro-area inflation statistics this week showed a tepid rate of just 0.2% in August, while the unemployment rate in July ticked up to 8%. Inflation stats from several countries, out yesterday, showed prices are sliding in the wake of the coronavirus lockdowns, with Germany, Italy and Spain all reporting negative inflation rates in August.

The negative stock/bond correlation slowed Thursday as the Nasdaq dragster hit a long-anticipated wall. The tech stock index slumped as far as 6%, after rocketing to a record above 12,000 a day earlier. Treasuries found enough momentum to drive long-end yields down to their 50-day moving averages. And if Thursday’s dynamic is anything to go by, stocks could well return as the strongest drivers of the Treasury market between now and the Sept. 15-16 meeting of the Federal Reserve.

Credit (Alexander Kaiser)

The US corporate bond market is continuing to break records this year with the total value of corporate debt issued reaching $1.919tn which was last reached in 2017. However, we are currently not closing in on the end of the 4th quarter but instead the 3rd making you wonder how much further companies will abuse the cheap debt available to them. Furthermore, the availability of said debt may not dwindle as quickly as expected either. The Federal Reserve has recently tightened their daily corporate bond purchases to a value of $26m, a sharp contrast to the $300m it started with but due to the sudden sell-off of technology stocks, the situation may reverse itself once more according to analysts from Citigroup. If the Fed continues to chase after continuous recovery the situation is likely to mimic what happened in June, where a 7% decrease in stock prices led to an increase of $40m in daily spending for a few weeks. Since the situation is somewhat more extreme with the 5 largest tech companies (Microsoft, Apple, Alphabet, Facebook, and Amazon) losing $270bn total in value, daily purchases may surpass $100m once more, increasing already worrying inflationary pressures further.

Additionally, with the US election on the horizon, there may be another uptick in borrowing coming as firms hope to secure debt before market volatility increases again and the situation perhaps turning less favourable. On that note, yields continue to plummet with average returns of bonds with up to seven years to mature being negative, something never seen before and at this point, there does not seem to be any indication of yields starting to even out. As talked about last week, investors are only becoming more desperate for any yield, accepting unsecured hybrid bonds happily. It will certainly be interesting to see how much lower yields can go before investors and central banks alike are no longer willing to support such a market.

Real Estate

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

United Kingdom

UK house prices have increased by 2% (nominal) in August, leading to average prices increasing 3.7% YoY. This marked the fastest house price increase in over a decade and resulted in a new record high. Barratt Developments has reported its full year results on this backdrop; however, they have been all but impressive. Profits were down about 50% YoY and houses completed had dropped by 30%. However, the share price (LON: BDEV) jumped by 7.1% on this news, as they reported expected growth to be high for the year ahead; albeit still below their pre-Covid-19 figures.Global X, an ETF provider under Mirae Asset Global Investments, has launched the Global X Logistics J-Reit ETF (TSERLF, has so far fallen 1.77% since inception) along with the Global X MSCI SuperDividend Japan ETF on the Tokyo Stock Exchange. These were introduced to benefit from the growth in logistics facilities in Japan, as the immediate and more permanent effects of Covid-19 become apparent, and as preference for income increases in the current economic climate. This will soon be followed by Nikko Asset Management’s ESG REIT on the 7th of September.

Tritax Big Box REIT, a FTSE 250 REIT, announced the sale of its Chesterfield asset to Warehouse REIT, an AIM listed REIT. At a price of £57.3m, this results in an internal rate of return of 18.5% per annum. This has so far affected its share price (LON: BBOX) only marginally, a 0.3% increase on Thursday. Elsewhere, CTO Realty Growth Inc. (NYSE: CTO) has approved a plan to submit a change in their tax structure, in order for them to be considered a REIT for U.S. federal income tax purposes. This would allow it to concentrate on commercial real estate and would involve a one-time special distribution of retained profits to fit the criteria of a REIT. This resulted in an increase in share price of 4%.


Oil & Precious Metals (Oliviero Sacchet)

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This week oil industry registered the following prices: WTI 41.62 (-2.7%) and BRNT 44.30 (-3.8%).

On September 3 the United States sanctioned a variety of firms accused of facilitating sales of Iranian oil products. The Trump administration sanctioned Zagros Petrochemical (Iran based), Petrotech (UAE based), Trio Energy and Jingho Technology. The reason behind this is that the Iranian regime is continuing to finance terrorism using revenue from petrochemical sales. The hope for the US is that China will stop buying illegally from Iran. Always regarding the oil industry Russia is facing a problem for its Nord Stream 2 gas pipeline. The project was launched in 2018 and was expected to be completed by mid-2020. But as a consequence of the new scandal regarding Alexei Navalny brought Angela Merkel to put a stop to the project

Now we can see the effects that Hurricane Laura has caused. Last week we analyzed the number of refineries that were shut down in order to prevent damage. Today, thanks to an S&P Global analysis, we can notice that: US Gulf of Mexico offshore output returning, Texas and Louisiana refineries ramping up, chemical producers seeing limited damage, US LNG cargo expecting cancellation, grain prices rallying on poor crop quality. The most invasive effect is regarding LNG. Costumers cancelled 45 cargoes that were loaded on July 1. Without any doubt, few loadings and feedgas produced negative effects that impact pipeline, tanker owners and shale drillers. All of them were still suffering due to the coronavirus lockdown.

In Africa, Total, one of the greatest French oil company, is facing a problematic situation. In the last period the port in Mocimboa de Praia is becoming a dangerous place due to Isis. The French oil company is now helping the Mozambique government in order to protect one of his biggest offshore gas field that could help the economy of the African country. 

Foreign Exchange

G10 & EMFX (Krisztián Sudár)

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The Euro has seen a general halt to its rally at the end of this week, after briefly hitting a two-year high, above 1.2$. Data released on Tuesday indicated that the Eurozone has entered a period of deflation, with Consumer Price Inflation decreasing by 0.2 per cent in August. According to the ECB, sustained deflation, and appreciation of the currency without a rise in demand could severely hinder the Eurozone’s economic recovery. Also, after a period of strong demand induced by a pause in consumer spending, July’s retail sales figures fell by 1.3 per cent. These factors all contributed to the flat week that the Euro had, finishing at 1.1845$ on Friday.

This week capped the best week of the dollar since May. A substantial drop in equity prices on Friday was followed by a return to safer assets, such as the dollar. The resulting weekly 0.6% appreciation has resulted in the dollar index reaching 92.774 in early Friday trading. However, the future of the dollar is still quite uncertain. According to a Reuters poll conducted on Friday, majority of Foreign Exchange strategists forecast a sustained downtrend for at least 3 months. It still seems quite unlikely for a major devaluation to happen unless the dollar loses its reserve status, or its central position in the international monetary and payment system.In Emerging Markets this week, the Turkish Lyra continued its weakening, eventually reaching an all-time low of 7.4541, due to extremely high inflation levels. The Hungarian Forint has seen a staunch drop this week, to now have lost 20% this year. This was caused by industrial output for the last month dropping 8.1% year on year.

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