Friday Wrap-Up (10 February)

(Maksymilian Mucha - Investment Director of UCLIF & Lead Editor)

Welcome to the Friday Wrap-Up, our weekly summary of events from the financial world that have had the greatest impact across asset classes. So what's moving markets?

Markets

In the US equities,?S&P 500?declined?-1.11%?while?DJIA?was down?-0.17%. The declines were driven by worries of more aggressive rate hikes in the US after the NFP report last Friday, which were suggested by several FED officials, including Jerome Powell. The Initial Jobless Claims came slightly higher than expected (190,000) at 196,000 vs. 183,000 last week, easing the concerns.?US 10y Treasury?yield added 22bp?to?3.74%?this week. On Tuesday, markets attention will be focused on the US January CPI data, which is expected to come at 6.2%.

In Europe, the?FTSE 100?sold off?-0.24%?and?EURO STOXX 600?declined?-0.63%. UK GDP in Q4 remained unchanged QoQ, which was the same as expected and contrasts with -0.2% decline in Q3. The inflation rate in Germany rose slightly by 0.1 p.p. to 8.7% YoY in January, which is to be attributed to the end of government energy-bill support. Nevertheless, the figure was 0.2 p.p. lower than expected. UK 10y Gilts yield?rose?35bp?to?3.40%, while?German 10y Bunds yield?added?18bp to?2.37%.

In Asia, the?Nikkei 225?increased?0.59% while the?Hang Seng?decreased?-2.17%. The American-Chinese tensions continue after last week’s spy-balloon incident, with a high-altitude object being shot-down off the coast of Alaska and US adding 6 Chinese companies to the trade blacklist. Meanwhile, Kazuo Ueda is expected to become a new head of the Bank of Japan.

Equities

Healthcare?(Aaryan Gulia)

The S&P 500 Health Care Sector Index fell by 0.20% over the last 5 days, maintaining its defensive strength against the overall S&P index’s loss of 1.11%.

The Federal Trade Commission is preparing a possible antitrust lawsuit against Amazon.com (AMZN) that could be filed as soon as this spring. Shares of 1Life Healthcare (ONEM) moved lower following the Wall Street Journal’s report as Amazon’s acquisition of 1Life is a potential target of the lawsuit.?

Vertex Pharmaceuticals (VRTX) announced their earnings on Tuesday and lost 2% in post market trading as the company indicated sharp slowdown on full-year top-line growth. Vertex detailed pipeline highlights including plans to complete the biologics licensing application (BLA) for gene editing candidate exa-cel for sickle cell disease and transfusion-dependent beta thalassemia in Q1 2023. Seeking Alpha analyst expects US and EU approval for exa-cel in H2 2023.

On February 10th, Pfizer (PFE) and BioNTech (BNTX) announced the initiation of phase 1/2 study of the first mRNA-based Shingles vaccine. Without vaccination, about half of the people who live to age 85 are expected to develop shingles – a painful and localized rash.

Fixed Income

Credit (Albert Moreno Gonzalez)

This week, the market has realised that the Federal Reserve (FED) rate will remain high for a long time, with Neel Kashkari, the President of the Federal Reserve Bank of Minneapolis, stating that these high rates could remain for two years before they are ready to lower rates. As a result, we have seen rate increases across the money market and the capital market.?

The next FOMC meeting is scheduled for March 23rd, where the Federal Open Market Committee will announce their decisions regarding interest rates. Analysts have calculated that there is a 91% chance that the next rate hike will be 25 bps and a 9% chance that it will be 50 bps.?

Furthermore, analysts have predicted that by June 14th, the federal interest rate will be either 5.25% with a 48.4% probability or 5.50% with a 38.4% probability. This is known as the terminal rate, which is the highest rate the Federal Reserve will set for the foreseeable future.?

Regarding the OAS (option-adjusted spreads), which measures the difference between the yields of US Treasury bonds and other fixed-income securities, the investment-grade yield has remained stable, while high yield has been increasing by several bps. This indicates that there may be higher risks associated with high yield bonds, as they offer higher returns but also carry a higher risk of default.

Additionally, the fixed-rate mortgage in the US stands at 6.12%, which has increased by 3 bps this week. This can have implications on the housing market, as higher mortgage rates can make it more difficult for individuals to purchase homes.

Although there has been recent strength in US economic data, which indicates less risk of an imminent recession, high-quality corporate bonds are not more attractive, especially relative to cash . It is not clear why corporate bonds are trading at such a narrow spread over Treasuries, even though steady economic growth should help company fundamentals. For example, a 1 yr US treasury bond offers 4.89% while a 1-3 yr investment grade bond offers 5.22%, only 31 bps more.?

In conclusion, this week has brought about several important developments in the market, particularly in regards to the Federal Reserve's interest rates and the performance of investment-grade and high-yield bonds. Overall, the market is showing signs of continued uncertainty, and it is essential for investors to stay informed and vigilant.

Alternatives

Digital?(Marco Fontanesi)

The first highlight of this week regards the ongoing discussion at the Bank of England on whether it intends to introduce a digital pound. In any case, if a national digital currency is introduced, Britons might only be allowed to possess roughly ￡10,000 of it. Officials have also taken great pains to emphasise that it is not a cryptocurrency asset and allay concerns that a CBDC could compromise privacy. In fact, the BoE declared that it does not intend to introduce programmable features and that any digital pound will provide the same level of anonymity as a traditional bank account. Politicians with doubts have warned that adoption will suffer if there isn't public confidence. A three-month consultation has already started, and a final decision on a CBDC is expected to be made in 2025.

The second highlight is about NFTs, and in particular the fact that they are selling at over 1 million again. Recently, a CryptoPunk and a Bored Ape both sold for over $1 million, suggesting that a harsh decline in prices for blue-chip collections may soon be finished. But it could still be too early to pop the cork on the champagne. A return to the frothy excesses of the bull market is far from assured, and many NFTs are still trading at significantly lower levels than the stratospheric values they reached in 2021.