Friday Wrap-Up (28 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. So what's moving markets?

Markets

In the US equities, S&P 500 rose 3.70% while DJIA was up 5.37%. The indices continued their upward trend this week despite disappointing results of tech giants. However, the US GDP grew 2.6% QoQ in Q3 (0.2 p.p. above expectation) after contracting -0.6% in Q2. Also, Case-Shiller Index cooled to -1.3% MoM in September vs. -0.5% expected, making the largest MoM decline since 2011. Nonetheless, new house sales went above 585,000 expectation at 603,000. US 10y Treasury yield fell -21bp to 4.02% this week. Next week, all eyes will be on the FED and BoE Rates decisions, as well as the US Unemployment and NFP.

In Europe, the FTSE 100 increased 1.12% and EURO STOXX 600 was up 3.09%. Rishi Sunak became the new UK Prime Minister, which brought much stability to Gilts markets and pound sterling. In the Eurozone, the ECB raised the main refinancing rate by 75bp, in line with market expectations. The Dutch TTF Natural Gas Futures stabilised ~€100/Mwh, despite Russia’s threats to use the dirty bomb in Ukraine and Putin halting the grain export deal. UK 10y Gilts yield fell -58 bp to 3.47%, while German 10y Bunds yield was down -32bp this week to 2.10%. Next week, the whole set of Eurozone economic indicators, including CPI, GDP and Unemployment, will be released.

In Asia, the Nikkei 225 was down -0.47%, the SSE Composite decreased by -3.92% and the Hang Seng plunged -6.49%, with the Hong Kong index dropping to the lowest levels since 2009 after the 20th Chinese Communist party congress. President Xi Jinping secured his 3rd constructive term, which was interpreted as the reinforcement of his power and continuation of the zero-Covid policy in China.

Equities

Technology?(Hyunjun Park)

Information Technology (“IT”) sector ended higher this week, with the S&P Global 1200 IT Index up 4.28% and Nasdaq Composite up 2.17%. Semiconductor and hardware-related technology stocks like Impinj Inc (PI) were the strongest performers this week. They were lifted by Meta’s plan to boost investment in the metaverse. Microsoft (MSFT), Amazon (AMZN), Meta (META) Texas Instrument (TXN), and Alphabet (GOOGL) led a brief selloff in technology markets after disappointing earnings, but Apple (APPL) helped reverse this trend on Friday after reporting higher profits. Historically speaking, technology markets always recovered around 1.5 quarters faster than the broader market.

The strongest performer this week was UserTesting Inc (USER). The stock was up 109% after Thoma Bravo and Sunstone Partners agreed to acquire the firm. This is a continuing trend by private equity firms to acquire undervalued software stocks in the market, as limited partners continue to see an increase in the rate of re-ups. As technology stocks that went on the market last year during the market boom declined below their listed prices like ForgeRock and UserTesting, private equity firms will continue to take them private.

Healthcare?(Aaryan Gulia)

The S&P 500 Health Care Sector Index gained by 5.00% over the last 5 days, leading ahead of the overall S&P index’s gain of 3.70% and all the other major indices.

McKesson Corporation (MCK), AmerisourceBergen Corporation (ABC) and Cardinal Health (CAH) are some of the best performing healthcare stocks in the S&P500. The pre-earning rally reflects the multibillion-dollar settlement of numerous opioid-related law-suites the companies had been fighting for years.

Dialysis company DaVita Healthcare Partners (DVA) stock price fell by 27.09% on Friday, its worst day in 22 years. The company released Q3 earnings that massively missed expectations and cited declining treatments and rising labour costs while slashing full-year guidance. The company reported net income that fell to $105.4 million, or $1.13 a share, from $259.8 million, or $2.36 a share, in the same period a year ago.

Merck (MRK) gained 4.48% over the 5-day trading period after releasing adjusted earnings per share and quarterly sales that topped analysts' estimates. The negative impact of the companies COVID-19 pill was offset by the exceptional performance of Keytruda – a humanised antibody (from rats) used in cancer immunotherapy to treat a variety of common cancer types. Analysts expect annual earnings of $7.34 per share on revenues of $58.51 billion for the year.

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?1.78%.?Similarly, a?6.13%?gain was witnessed in the?Consumer Staples Select Sector Fund (XLP)?from last week. Markets are feeling better all of a sudden. The S&P 500 is up?10%?from its lows of two weeks ago, and?5%?above where it closed last Thursday.

In company news, the American hotel and casino entertainment company Caesars Entertainment, Inc. (CZR)?shares were up?11.33%?in the past week. The company is scheduled to report third-quarter 2022 results on Nov 1, 2022. Wall Street estimates for third-quarter earnings are pegged at $0.16 per share, indicating an improvement of?113.9%?from a loss of?$1.08?reported in the year-ago quarter. Revenues are expected to be?$2.83 billion, up?5.5%?from the year-ago quarter.

Caesars Entertainment’s third-quarter performance is likely to have benefited from solid Las Vegas performance, backed by improvements in occupancy levels and higher gaming and food and beverage volumes. In addition, the company revealed that occupancy in Las Vegas reached?97%?during the previous quarter’s earnings call. Furthermore, it reported a solid group revenue pace backed by pent-up demand (for group travel) and strong booking trends. With international consumers returning and conventional demand accelerating, the momentum is likely to have continued in the third quarter.?

Emphasis on digital business, sports betting expansion and property developments is likely to have driven the third-quarter top line. This and the focus on product enhancements such as cash-out speed, customer service, parlay and alternative line offerings are likely to have aided the company’s performance in the to-be-reported quarter.

Financial Institutions?(Gauri Varma)

With Rishi Sunak becoming the new PM this week, fiscal policy looks set to change under Sunak’s promise of fiscal discipline and balancing the books, with Jeremy Hunt as his chancellor. Corporation tax is set to increase from 19 to 25% from April, but the level of bank surcharge is yet to be decided and so the tax effect of the new government on banks is not yet clear.

This week the iShares US Financials ETF (IYF) rose by around 4%. It tracks key financial institutions such as JPMorgan (JPM) and Bank of America (BAC). This rise may signal expectations starting to bounce back following a disastrous few weeks for banks, and the large hits to investment banking revenues reported for Q3. Vanguard Financials Index Fund (VFH) has similarly risen by around 5% this week.

Despite the rises in these ETF funds, many large banks are facing tough times. In the spotlight this week was Credit Suisse (CS). On Thursday morning Credit Suisse unveiled a new radical strategy to cut costs by 15% and shrink the workforce from 52,000 to 43,000. They are set to raise billions in capital during their effort to completely restructure and move on from their scandals and Q3 losses. Their investment banking unit is being restructured to simplify Credit Suisse. Credit Suisse shares fell 19% by the end of Thursday. They have given 10% of holdings to Saudi National Bank to help fund their expensive restructuring, a move which has not been received well by Credit Suisse shareholders, whose earnings per share will be diluted by around 25%. Deutsche Bank’s (DBK) deal making unit fell by 85% during Q3 due to losses on leveraged loans and their equity underwriting divisions.

This week the M&A market has seen Elon Musk close his $44bn deal to buy Twitter (TWTR). He promises to cut jobs and costs and boost product innovation. The deal was agreed earlier this year, and a group of banks led by Morgan Stanley (MS) committed $13bn in financing for the deal, while the debt markets were relatively stable. Due to the market volatility, banks are now unable to sell the debt to fund the deal and have been forced to fund it themselves and keep the debt on their balance sheets.

Utilities?(Tancrede Guyader)

The S&P 500 Utilities Index has displayed an upward trend this week, rising from 325.60 points on Monday to 342.43 points on Friday. Utilities ETFs such?as Vanguard Utilities ETF (VPU), Utilities Select Sector SPDR Fund (XLU), and Fidelity MSCI Utilities index (FUTY) have displayed similar behaviours.

New UK Prime Minister, Rishi Sunak, is looking at replacing Truss’ recently approved revenue cap on electricity generators with a 25% windfall tax and a generous investment allowance. This measure would both enable electricity generators to reduce their tax bills and help mitigate the impact of Truss’ ￡300 bn mini budget on the government’s finances. Furthermore, Centrica, a major electric and gas supplier, announced that it would reopen UK’s biggest gas storage site. Although this will not solve security supply concerns, the facility will reduce households’ energy bills by further strengthening the UK’s energy resilience. The operation is likely to be very profitable for Centrica, with the potential to earn the company ￡5mn a day by buying gas at current lower prices and re-selling it in January when prices are forecast to be higher. Since the announcement on Friday, the company’s share price has risen by 6.85%.

Due to the increased competition brought by Asian competitors and rising costs of key materials, European wind turbine manufacturers are leading a push into east Asia’s offshore wind market in an attempt to maintain their leadership position. Indeed, while western turbine makers still enjoy a technological advantage over Asian companies, gaining a foothold in Asia, where global offshore wind capacity is expected to outstrip Europe by 2030, would ensure a bright future.?

Fixed Income

Rates & Credit?(Eugene Chan)

Canada Issues Bond in Support of Ukraine?

Canada is officially the first country outside of Ukraine to issue a bond with the purpose of supporting a country in war. At a strong rating of AAA, equivalent to Canada’s top-rated bonds, the proceeds from “Ukraine Sovereignty Bond” will be lent to the Ukrainian government for 5 years at the same interest rate. Ukraine will be able to use this money to fund basic services like pension payment.?

Korea Scrambles to Avoid Credit Crisis?

With yields on investment grade debt in Korea rising 157 bps in the past 3 months, this is one of the fastest selloffs in Korea’s bond market. The catalyst for the event was a missed payment by the property developer of Korea’s Legoland. Additionally, the developer’s largest shareholder is Gangwon, a province in South Korea. This led investors to have low trust in government backed borrowers.?

The construction and real estate industry all over the world is weighing down on countries like Korea, due to rising rates and risk of loans attached to construction projects. $16.6 bn worth of instruments are set to mature by 2022 in Korea, which could send the credit market into further turmoil.?

In order to relieve the credit market, the government is sending $34.7 bn support package, providing liquidity for corporate bonds and other markets. Additionally, the Bank of Korea is “expanding the range of bonds it will accept as collateral”. Additionally, a $1.1 bn bond stabilisation fund has been established to buy debt related to real estate projects among others.?

Commodities

Oil, Gas & Precious Metals?(Joshua Boreham)

Crude Oil:

Crude oil futures recovered on Wednesday, rallying nearly 3%, as U.S. crude exports hit a record of 5.129M bbl/d, all whilst U.S. refineries operated at 89% capacity, a higher-than-usual level for this time of year. Limiting this rally were worries about Chinese demand as the economy of the world's biggest crude oil importer has been beset by a zero-COVID policy, a property crisis and falling market confidence. On the geopolitical side, Western officials are finalising plans to impose a cap on Russian oil prices – one person familiar with the process said the cap will be determined in line with the historical average of $63-64 a barrel. The actual price will be set in the coming weeks ahead of the planned Dec. 5 launch of a European embargo on Russian oil. Russia has said it will not trade with countries participating in the price cap. Overall on the week, Brent crude futures settled 3% up, to $96.31 a barrel whilst U.S. West Texas Intermediate (WTI) crude rose 3.35%, to $87.90.

Natural Gas:

Natural gas futures linked to Dutch TTF traded below €100/MWh this week, reaching a trough of €93/MWh. Whilst prices have since recovered from this level, the price movement remains indicative of the short-term demand destruction of Natural gas in Europe. Notably, on Monday, the wholesale spot price of the European benchmark went negative, where, for just an hour, suppliers were willing to pay almost €16/MWh. Such prices have been caused by unusually warm weather - reducing consumption, high flows of LNG and strong storage levels. At the same time, gas flows from Russia via Ukraine have been stable but those via the Nord Stream 1 remained at zero as Russia has since accused the UK as being responsible for the recent pipeline sabotage. On the week, prices have dropped 1.17%, to €112.24/MWh.

Alternatives

Digital?(Marco Fontanesi)

The metaverse is an extremely controversial and misused concept, often thought to be in large part a combination of advertising story and fiction. Meta’s efforts —and its recent terrifying losses — reflect the challenges in making something new and attractive at the same time. But the core idea that virtual worlds will remain big business in the future remains a sensible bet. JPMorgan’s strategic investment in Tilia, the payments platform from Second Life creators Linden Labs, is indicative of the financial services sector’s opportunities in the space. The platform was built for Second Life itself, which first launched in 2003, as a way to convert tokens used in the game into fiat currency. Tilia is also licensed to transfer money in the US.?

The current functioning of metaverses typically consists in pricing in-game items in cryptocurrencies — the values of which crashed earlier this year. However, in the longer term, it is reasonable to imagine some form of stablecoin being developed for virtual worlds, though this remains far in the distance. The subject of stablecoin and CBDC has become increasingly relevant for fintech, with work continuing around the world (the Bank of England is currently looking for companies to carry out a proof of concept around offline payments). If CBDCs are to become mainstream, big questions are yet to be answered, especially about how privacy can be preserved. The ideals of financial inclusion will be hard to achieve if users distrust the next iteration of cash.