Friday Wrap-Up 27th January

(Noah Martle - Vice President of UCLIF)

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 rose 2.41% since Monday. Additionally, the 10Y US Treasury yield rose 2bp throughout the trading week to 3.51%. A significant proportion of the gains are due to the US commerce department announcing that the US economy grew 2.9% YoY in the final quarter of 2022, which comfortably beat economists' forecasts of 2.6%. Moreover, the US labour department released figures showing the claims for first-time jobless benefits fell by 3.13% week on week. These positive figures relaxed recessionary fears whilst also not indicating that there would be a resurgence of high inflation.

In Europe, the FTSE 100 fell 0.12%, and EURO STOXX 600 was up 0.67% throughout the trading week. UK 10y Gilts yield fell by 4bp to 3.33%, while German 10y Bunds yield rose 8bp this week to 2.25%.

In Asia, the Nikkei 225 rose 1.92%, and the Hang Seng climbed 1.35%. Pakistan has finally relinquished control of its exchange rate in the hope that this will increase the possibility of an IMF bailout.?

Equities

Financial Institutions (Gauri Varma & Joshua Sim)

With Investment Banks facing up to economic headwinds by cutting staff bonuses and jobs, not even their top brass has been spared. Headlining the news are pay cuts to Goldman Ceo David Solomon and Morgan Stanley CEO Gorman. Solomon took home $30 million in 2022, 30% less than in 2021. The executive level still has faced a less significant pay cut in comparison to the Partner level, where salaries have been cut by around 40%. Gorman has faced a far milder pay cut, where his salary has fallen from 35 million to 31 million. Gorman’s milder pay cut is likely due to the strong performance in Morgan Stanley’s asset management business, which has helped to weather the storm faced in its signature investment banking division.

In asset management news, fund management giants Blackrock and Vanguard were both hit hard by market sell-offs in 2022. Total Assets Under Management for Vanguard fell by 1.2 trillion to 7.2 trillion, while Blackrock’s declined by 10 trillion to 8 trillion. Net investor inflows fell almost 50% for Vanguard. Similarly, Blackrock’s top line faced pressure as well, with revenue declining 15% from 4.3 billion year on year. Within the exchange-traded fund business where both firms share a duopoly and well-known passive funds which track major indexes, Vanguard has suffered more greatly in terms of ETF outflows, with a 39.7% year on-year decline, compared with Blackrock, who comparatively suffered a lesser decline of 28.3%, from a record 308 billion in 2021 to 222 billion in 2021. This is likely due to Blackrock’s edge over Vanguard from it offering a wider range of funds, which is appealing to investors looking for more niche exposures. Another potential reason for Blackrock’s edge could come from its client base. While Vanguard has greater popularity among retail investors, Blackrock’s iShares products are preferred by institutional investors.

In Private Equity, the surge in redemption requests Blackstone experienced in December last year in its Blackstone Real Estate Income Trust (BREIT) fund was followed by a similar uptick of redemption requests in its Blackstone Property Partners (BPP) fund, which is an investment vehicle for institutions and pension funds to invest in real estate. Redemption requests have hit 5 billion, amounting to around 7 percent of the 73 billion fund. Even though this is significantly more than the redemption requests of its BRET fund, where withdrawal requests exceeded the limit of 2% of assets in a single month, Blackstone has not needed to limit withdrawals, given the different ways that the funds are structured. In order for a redemption request in BPP to be successful, it requires that new money inflows have to come in to replace those outflows. The alternative asset giant believes that the challenges it is facing are manageable. Redemptions in its BREIT fund were made up by a large injection of 4 Billion from the University of California. Blackstone also managed to attract 43 billion worth of investment last quarter, bringing assets under management to a record 975 billion.

The challenging environment that is currently faced by the Private Equity sector is also reflected in Asia, where deal-making activity has fallen to a 5-year low, with 208 transactions valued at 35.4 billion. Activity peaked in 2021 with 347 deals valued at 74 billion, which is slightly double over current levels. This has been attributed to a fall in investment driven by choppy Chinese Markets in 2022.? An interesting aspect of this slowdown of Private Equity deals in Asia is that this is occurring amidst what is otherwise a strong year for Mergers and Acquisitions. While M&A transactions have risen from $179 Billion to $204 Billion, those involving private equity fell from 12.7% of total transaction value in 2021 to a meagre 2.7% in 2021.

Technology (Shagun Bhansali)

Amid speculation of smaller Fed reserve hikes, as inflation shows signs of easing, the tech-heavy Nasdaq 100 Index recorded its best week since November and marked its fourth straight weekly advance, rising 4.71% by the end of the week. The S&P Global 1200 Index also saw an increase of 2.16%.

Tesla recorded its strongest week since May 2013, ending with a 33% gain. The company reported better-than-expected earnings and production predictions. It is on track to expand production to $1.5 million, indicating a 60% growth despite supply chain crisis. However, CEO Elon Musk faces an SEC probe over his role in a misguided claim about Tesla’s autopilot system.?

Microsoft reported earnings beat analysts’ estimates, due to the strength of its Azure clouding service business even though demand slumped for computer software, resulting in increased share prices.

Intel stocks plummeted after the company forecasted one of the worst quarters in history, with a revenue of $11.5 billion, significantly lower than analysts’ estimate of $14 billion. Additionally, it anticipates a loss this quarter, contrary to analysts’ prediction of profits. The severe downturn in demand for Intel’s PC chips impacted the company’s performance.?

Texas Instruments, one of the world’s largest chipmakers, experienced a decline in sales for the first time since 2020 and provided a cautious outlook for the current quarter, declining its share price.?

The share price of Salesforce drove upward as Hedge Fund “Elliott Investment Management” decided to take a multibillion-dollar stake in the company even after layoff announcements and a deep stock swoon. Additionally, the company appointed three new directors amid pressure from activists.?

The US Justice Department and eight states sued Google, calling for the break-up of its ad tech business over alleged illegal monopolisation of assets, resulting in negative market sentiments.

The space company Rocket Lab stocks went up by 11% after it launched its first rocket from US soil. The market corrected later in the week, ending with a gain of 1.2%.?

IBM announced a 1.5% cut in workforce, sliding down the share prices, even after projecting a free cash flow of $10.5 billion, which exceeded analysts' predictions.

Looking into the next week, investors are awaiting the announcement of interest rates by the Fed. Moreover, Apple, Amazon and Meta will release their quarterly figures.

Industrials and Materials (Oliver Andrews)

In the past week, the US Materials sector has increased by 1.4%. The Morningstar US Basic Materials Index had a strong performance during Q4 2022, outperforming the broader market by a significant margin. However, Sherwin-Williams (SHW) saw its stock decline Thursday after the company, known for its coatings, reported slightly higher than expected earnings but provided a weak forecast for full-year profits. The company reported Q4 earnings per share of $1.89, while analysts had predicted $1.86. For the full year of 2023, the company expects net income to be between $6.79 and $7.59 per share, compared to Olianalysts' projected $10.12. The CEO, John Morikis, stated in a press release that while the company is optimistic and has a clear mission, the challenges faced in the housing market would make 2023 a difficult year. The stock dropped 8.2% to $226.78 and was the lowest-performing stock in the S&P 500 on Thursday.?

The Industrials sector has had weekly gains of 2.2% and analysts are bullish on the growth prospects of the airline industry. US airlines are optimistic about continued strong travel demand in 2023, following record fourth-quarter revenues in 2022. American Airlines (AAL) and its competitors recently forecasted better-than-expected full-year earnings. The industry has been a rare bright spot in the current economic climate, as consumers have been buying tickets following a decrease in travel during the pandemic. AAL reported that bookings have surged post-holidays and have been able to raise fares due to limited capacity. Having said that, JetBlue has warned of cost pressures from higher rents and landing fees, as well as expenses related to pilot pay and training. Despite the positive outlook, some analysts are warning that the pace of growth may slow as the impact of the Fed’s interest rate hikes take hold.

Overall, the Industrials and Materials sector is known to be cyclical where stocks tend to follow the trend of global economic growth. Despite the uncertainty of a global recession in 2023, it is worth noting that the sector has historically performed well during economic recoveries.

Fixed Income

Rates (Eugene Chan)

With the current interest rate range at 4.25-4.5%, traders are pricing in a 25 bps hike from the Federal Reserve, largely owing to recent cooling inflation data. The recent job report which showed 185,000 new jobs as opposed to 223,000 may be a sign of a cooling labour market; however, the unemployment rate is still near a 50-year low of 3.5%. Markets have been pricing in easier financial conditions, with equity indexes such as the S&P 500 being up 5.64% and the NASDAQ up 10.22% year-to-date, and this may be a reason for the Fed to continue hiking at a pace of 50 bps, since inflation numbers remain above target.?

As for other areas in the world, the ECB and Bank of England are set to continue raising rates by 50 bps. The direction of Eurozone inflation seems to be gradually slowing down, with inflation for January at 9.0% YoY, as compared to 9.2% in December. Additionally, inflation results were mixed within the eurozone countries, with inflation in Germany and France continuing to accelerate, while prices in Italy and Spain are slowing down. Regardless, Christine Lagarde maintained her position that inflation is still “way too high”.?

Credit (Albert Moreno)

January has been an interesting month for credit. With interest rate cuts on 2-year or longer bonds (i.e, the capital market), companies have been taking advantage of the opportunity to borrow money at a lower cost. This month alone, the market is on track for an almost record $150bn of Investment Grade debt issuance, close to the all-time high of $174bn recorded in January 2017. It's worth noting however, that debt issuance was low in December. Investors believe that corporations are reducing their capital expenditure and building up their cash reserves for a potential recession.

Additionally, the credit market is facing an increase in delinquency and default rates, with the trend now shifting but still at lower than pre-pandemic levels. This is a significant development that should not be ignored. On a positive note, the banking sector has shown strong balance sheets, with the largest lenders generating almost $60bn in interest income just in the last quarter of 2022. However, banks may find it challenging to maintain this growth in net interest income as the Federal Reserve moves to raise interest rates at a slower pace.

In conclusion, the credit market in January has been a mix of both positive and negative developments. While corporations are taking advantage of lower interest rates, the increase in delinquency and default rates, and the potential slowdown in the banking sector's net interest income, are important factors to keep an eye on.

Alternatives

Commodities (Joshua Boreham)

Crude Oil:

WTI and Brent Crude Oil futures experienced fluctuations near $80/bbl and $86/bbl this week, as market participants analysed various factors affecting the oil market. The recent actions taken by the Chinese government to increase consumption and imports have boosted optimism for crude oil demand from the world's largest importer. Furthermore, tensions in the Middle East continue with Israel's drone strike against Iran causing concerns over potential supply disruptions. However, on Friday, both benchmarks saw a decline of over 1% as indications of strong Russian oil supply persist, despite Western sanctions. As it stands, oil loadings from Russia's Baltic ports are set to rise by 50% this month from December as sellers try to meet strong demand in Asia and benefit from rising global energy prices. OPEC is currently expected to maintain current oil production levels when they meet later next week, keeping global supplies tight.

US Natural Gas:

US Natural gas futures extended losses this week, falling below $3/MMBtu, the lowest since May 2021. This has largely been due to milder weather reducing heating demand, alongside strong production. Production in the Lower 48 states rose 8.4% YoY (7.4 Bcf/d) and based on data from the U.S Energy Information Administration (EIA) total US natural gas production is projected to have increased by 4.3 Bcf/d in 2022. Freeport LNG plant's delayed restart until March or later will further increase the gas supply and put downward pressure on prices. Despite repairs being completed, the facility still needs regulatory approval to restart. Overall, US Natural Gas prices have fallen 70% from their 14-year high of $10/MMBtu in August, with the recent losses marking the worst two-month decline since 2008.

Digital (Margo Fontanesi)

Let’s have a look at the highlights of this week regarding digital assets.

On the one side, Moody’s has chimed in on the prognosis for both centralised and decentralised crypto platforms. The credit rating agency stated that in the long run, the war against centralised platforms may be won by decentralised finance products in its assessment for the year for crypto organisations. Investors may eventually favour alternate channels if centralised finance does not become more transparent, it said in the aftermath of recent scams and bankruptcy.

On the other side, Coinbase’s difficult moment does not seem close to the end. In fact, on Coinbase's official blog, it has been announced in recent days that the American exchange will close its operating unit in Japan. The reasons are explained by the difficult market conditions, and the low trading volumes generated in Japan in the past year. This step is part of Coinbase's conservative strategy of closing all business lines that are not indispensable, in order to prepare for unfavourable market conditions that may last longer than expected.