Friday Wrap-Up (21 October)

(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. Due to the ongoing maintenance of our website, this week's edition will be posted entirely on LinkedIn. So what's moving markets?

Markets

In the US equities, S&P 500 rose 4.74% while DJIA was up 4.89%. The stocks edged higher this week as quarterly reports of banks were above expectations, showing that the impact of rate hikes had not been as detrimental as analysts expected. On Thursday, the initial jobless claims came at a surprising 214k, below the previous reading of 226k and the expectation of 230k. This led to the market sell-off, which was however followed by a strong rebound on Friday. US 10y Treasury yield was up 21bp to 4.23% this week. Looking forward, the most important releases next week include real estate data and Q3 GDP on Thursday.

In Europe, the FTSE 100 increased 1.62% and EURO STOXX 600 was up 1.15%. Great Britain was again in the spotlight after Liz Truss resigned as a Prime Minister after only 45 days in office. The markets reacted positively to that information, same as to Jeremy Hunt overturning most of the mini-budget on Monday. The UK inflation returned to record 10.1% YoY up from 9.9% in August, however, this came only 0.1 p.p. over the expected. UK 10y Gilts yield fell -34bp to 4.05%, while German 10y Bunds yield was up 7bp this week to 2.42%. Next week, all eyes will be on the ECB Rates decision on Thursday.

In Asia, the Nikkei 225 was up 0.39%, the SSE Composite decreased -0.71% and the Hang Seng sold-off -1.63% after China indefinitely delayed the release of Q3 GDP data scheduled for last Tuesday. The Bank of Japan launched ￥250bn ($1.7bn) emergency bond buying programme to pin 10y yields below 0.25% under its yield curve control policy, which led to USD/JPY hitting three decades low of 151.

Equities

Technology (Hyunjun Park)

Information Technology (“IT”) sector inched higher this week, with the S&P Global 1200 IT Index up 6.49% and Nasdaq Composite up 5.22%. The S&P North American Technology Software Index ended the week higher by 7.46%. Semiconductors and hardware continue to be low performers with low- digit returns.

US export control rules on China specified that American citizens, including Green Card holders, cannot support advanced Chinese chip design. WSJ found that 43 top executives from 16 public Chinese semiconductors companies are American citizens. Despite this setback, the highest performers this week were Chinese semiconductor equipment companies, including Naura Technology Group Co Ltd (SHE:002371), Kingsemi Co Ltd (SHA: 688037) and AMEC (SHA: 688012). They were both up above around 19%.

Swedish telecom equipment maker Ericsson (STO: ERIC-B) was down 12.71% after missing estimates. The company experienced cost increases, which dented margins. South Korean internet giant Kakao Corp. (KRX: 035720) experienced a sell-off after experiencing a widespread outage. The company will face antitrust scrutiny as its apps play a large role in the day-to-day life of many Koreans.

Healthcare (Aaryan Gulia)

The S&P 500 Health Care Sector Index gained by 2.29% over the last 5 days, closely following the overall S&P index’s gain of 2.37%.

Stocks of Pfizer (PFE), BioNTech (BNTX), Moderna (MRNA), and other COVID-19 vaccine makers rallied on Friday after Pfizer announced it would quadruple Covid shot price to between $110 - $130. Wallstreet expects Moderna to follow the same in order to keep up with revenue expectations for 2023 and the following years. While the price boost will help bridge the slowing demand slightly, Pfizer’s vaccine revenues are still expected to fall by 49% as fewer people are getting vaccinated. Despite the short rally, vaccine stocks continue to remain under pressure as they’ve tended downwards since July.

Cannabis stocks went back in the red after optimism around rescheduling pot – from its status of schedule 1 substance – faded as realization of the long time-frames were identified.

Shares of HCA Healthcare (HCA) fell 8.58% in the week after announcing its earnings. While the hospital operator reported third quarter profits that topped expectations, net income fell to $1.34 billion from $2.27 billion in the year-ago period. The company also had lower revenues as admissions declined. On the other hand, UnitedHealth (UNH), an American counterpart, rallied 1.81% from a positive earnings release on the week before 1.

Consumer Staples and Consumer Discretionary?(Jinesh Bothra)

The Consumer Discretionary sector and Consumer Staples both rose over the past week. The?Consumer Discretionary Select Sector Fund (XLY)?posted a gain of?5.27%.?Similarly, a?2.02%?gain was witnessed in the?Consumer Staples Select Sector Fund (XLP)?from last week. The pound rose against the dollar?hitting $1.13, and government borrowing costs dipped as the markets reacted to?Prime Minister Liz Truss's resignation?after being in office for just?44 days.

In company news, the American cruise line company?Norwegian Cruise Line (NCHL)?were up?14.25%?in the past week. The gains came after UBS upgraded Norwegian Cruise Line Holdings to a?Buy?rating after having the cruise line stock set at?Neutral. The company told investors last week that occupancy levels would be around?82%?in the third quarter, up from?65%?in the second quarter. It also flagged strong booking trends and said pricing is significantly higher than in 2019. Their outlook calls for bookings growth in 2023 on top of a?20% increase?in capacity. Moreover, pricing remains above pre-pandemic levels, which is a good sign for top and bottom-line growth.

In addition, the firm's risk profile is also better than its competitors. Since it is a U.S.-centric cruise line, Norwegian is not as vulnerable to the negative impact on its financial results from a strengthening U.S. dollar. The management likes serving a U.S. customer base because it tends to book earlier, which provides greater sales and pricing visibility.

Financial Institutions (Gauri Varma)

As more financial institutions release their Q3 earnings, we continue to see the impact of the collapse in the UK debt market, the market volatility and falling IBD revenues on their profits. Blackstone has had their profits hit by rising interest rates. Their shares have fallen by more than 30% this year amid concerns related to the falling equity market. The effects have been severe for their asset management profits due to slowing asset sales they have been able to make. In their 3Q results release on Thursday, they sold only $15bn in assets, half the amount they sold in the previous quarter, cutting into their earnings. Their distributable earnings fell by 16% from this time a year ago. Falling markets are always bad for asset managers, they suffer a drop in income due to less fees levied as a percentage of portfolio values.?

The UK pension fund crisis continues this week. UK pension funds have been heavily invested in gilts and derivatives. The sharp surge in gilt yields following the mini budget triggered margin calls on derivatives for pension funds, which they met by selling government bonds into an already falling market. Pension funds’ liability driven investing is based on the idea of borrowing money to buy assets, mainly government debt. Paul Marshall, co-founder of investment firm Marshall Wace, calls the UK LDI industry the “first casualty of the end of the ‘money for nothing’ era” and attributes this to central banks artificially holding interest rates low for years. JP Morgan estimates losses from LDIs deployed by pension schemes to have grown to ￡150 billion since early August. Marshall claims that next in line could be European sovereign bond markets.

Meanwhile, this week the M&A environment continues to be challenging. The rising cost of debt has made deals more expensive. Relative valuation multiples and valuations have been contracting, deterring firms from selling This has translated into lower IB M&A revenues for banks.

Utilities (Tancrede Guyader)

The market for utilities has been relatively calm this week, as can be seen from the stable performance of the S&P 500 Utilities index and utilities ETFs. The Italian utility Enel has been performing poorly lately; falling revenues due to the 5 million Italians not paying their utility bills and rising net debt due to higher energy prices signal that dividend cuts could arrive soon. To solve its problems and reassure the market, Enel could dispose of its smaller businesses, mainly in Latin America, an operation that could yield up to €25bn according to Goldman Sachs.?

After long discussions aimed at mitigating the energy crisis during yesterday’s summit in Brussels, Germany finally agreed to support the EU gas price caps. German chancellor Olaf Scholz had hitherto been reluctant to support EU-wide price caps as he claimed that they would risk diverting gas to other countries that offered a higher price, thus undermining European efforts to top up supplies. Details of the measures within the price caps include a mechanism to limit the price of gas used for electricity generation and an agreement between member states to pursue joint purchasing of gas and escalate efforts to cut gas demand. Although the measures taken by the EU should secure sufficient gas for power and heating this winter, Qatar’s energy minister has warned that the tougher challenge would come in 2023 as reserves will be depleted and supply shortages could last until 2025 if the war between Ukraine and Russia dragged on.?

Fixed Income

Rates & Credit (Eugene Chan)

Gilt Yields Following Liz Truss’s Resignation

Following Liz Truss’s resignation, U.K. 30 year gilt yields dropped to around 3.87%. The significant move showed an optimistic reaction from the market to her leave. With the BoE slowly backing out of the market in order to contain inflation, bond traders are becoming increasingly confident in their ability to influence politics, as they did with Liz Truss. The markets may be happy to see a person like Rishi Sunak step into the role of PM, given his background in banking and finance. Hopefully, Liz Truss’s run will remind future candidates to be extremely careful with their spending plans.

Furthermore, after the bond turmoil that happened with pension funds last week, pension schemes are beginning to offload their risk to insurers in order to hedge themselves against further market turmoil. Due to rising yields, pension funds’ liabilities, which move inversely to the interest rate, will be easier for insurers to take on. Consequently, deal volume in this market may increase. John Whitworth, a partner at Oliver Wyman, sees “￡100 billion per year in pension fund demand over the next decade”.

Fed Aggression is Weighing on the Economy

Meanwhile in the US, the 10-year yields were up 23 bps to 4.25% on Friday for the 12th week in a row. As 75 bps is the new normal for a fed rate hike, traders are pricing in the Fed’s policy rate to top 5% before mid-2023. The Fed’s aggressive strategy is affecting economies around the world, with the three-year Australian debt surging 15 bps to a 10-year high of 3.78%.

Commodities

Oil, Gas & Precious Metals (Joshua Boreham)

Crude Oil:

Oil markets this week, whilst busy pricing in several events, have been set to close near flat, with WTI Crude futures up just 0.5% and Brent Crude futures exhibiting a modest 2% gain. Markets reached such a balance as hopes of higher Chinese demand alongside the output cuts by OPEC+ offset the lingering fears surrounding a potential global recession-driven demand downturn – China, as the top importer of crude oil, being instrumental to market pricing. However, speculation has been growing amidst an increasingly unstable geopolitical climate that the oil cartel may further intervene in markets to shore up prices. A weaker dollar has also played a role in supporting these greenback-priced commodities. WTI Crude futures ended the week trading in the $85 per barrel range while Brent Crude futures were trading at $93 per barrel.

European Natural Gas:

Natural gas futures linked to the European benchmark Dutch TTF suffered a decline of 20% over the past week, closing the session trading around the €115 per megawatt-hour mark. Previously, the last time benchmark prices traded around this level was in early June. With prices already under pressure amid easing demand, the European Union’s fresh package of emergency measures dealt a substantial blow to prices. This package, announced on Tuesday, outlined the implementation of a price cap on key gas trading hubs if prices spike alongside solidarity agreements – aimed at ensuring all EU member states are supplied with adequate supplies of natural gas next year. European Commission President, Ursula Von De Leyen, stating that – “On this basis, we can now take further steps towards a real energy union”. Putting a floor under prices was lower than expected gas output from Norway (The third largest exporter of Natural Gas), which immediately sparked concerns about tighter supplies.

Alternatives

Real Estate (Krystal Yu)

UK mortgage rates hit the highest in 14 years.?

The UK's average two-year and five-year fixed rates rose to 6.65% and 6.51%, respectively, as borrowing costs remained high despite ongoing economic uncertainties. It comes as the Bank of England is widely anticipated to hike interest rates again in November in an effort to keep inflation under control. Consumer prices increased by 10.1% in the year to September, returning to a 40-year high due to increases in food, energy, and transportation expenses. However, the Bank's deputy governor questioned whether the "dramatic" interest rate increases were required despite evidence that global inflation may be beginning to stabilize.?

After mortgage rates rise, the housing market in the UK is slowing down.?

Mortgage rates have been climbing for months as central banks across the globe have attempted to combat inflation. However, interest rates in the United Kingdom jumped substantially when financial markets responded negatively to the government's mini-budget last month, which promised billions of pounds in unfunded tax cuts.?

Lenders have halted the sale of hundreds of mortgage packages due to uncertainties over how to price these long-term loans.?

According to Moneyfacts, the number of offers available in the UK has somewhat recovered to 3,128 - down from 3,961 on the morning of then-Chancellor Kwasi Kwarteng's remark.?According to the report, the number had reduced to 2,258 by the beginning of October.

Create Stability again

At least 100,000 mortgage holders every month are nearing the end of their fixed-rate terms and are facing significant increases in their monthly payments. Brokers report that there is still demand for mortgages, but lenders are apprehensive of being inundated with applications as long as economic uncertainty persists.

Digital (Marco Fontanesi)

The passage of Ethereum network’s to a proof-of-stake (PoS) consensus mechanism ended the need to mine the cryptocurrency Ether (ETH) using powerful graphic processors. Investors can now stake their ETH to facilitate transactions and keep the blockchain safe. Therefore, Ethereum, which in its “version” Proof-of-Stake (PoW) created a globally distributed mining industry that generated nearly $ 19 billion in 2021, is becoming less profitable for miners. For this and other reasons, the disproportionate demand for graphics processing units (GPU) seen in recent years has quickly deflated. Now, it is also easier to get electronic devices, since the supply is adjusting to the decrease in the demand, with manufacturers' warehouses that have seen doubling their inventory of video cards. Nvidia (NVDA) posted a $1.32 billion inventory charge, but CEO Jensen Huang blamed it not on cryptocurrencies, but on the collapse of PC sales. Similar to Nvidia, AMD (AMD) also announced the decline in demand for GPUs and that PC and video game sales would likely suffer a setback due to weak demand. On the contrary, experts suspect that Nvidia and AMD have downplayed the impact of cryptocurrencies on their sales: the analyst Jeff Sag has asserted that “cryptocurrencies have such insatiable demand for GPUs, that the entire channel evaporates almost instantly”. Many miners are shifting their interest towards crypto alternatives that can be mined with GPU: if the mining of one of these "altcoins" were to become profitable then there could be a new growth in GPU demand.?