The Weekly Wrap October 22nd 2021

by | Oct 25, 2021 | Weekly Wrap | 0 comments

The S&P 500 edged lower a day after the benchmark closed at a record. The broad market index fell 0.02% while the Dow Jones Industrial Average added 86 points, or 0.2%, helped by a 4% rise in shares of American Express, which reported strong quarterly earnings Thursday. Meanwhile, the Nasdaq Composite shed 1% after poor results from two technology companies. All three major averages are on track to close the week higher for three straight weeks of gains. The S&P 500 hit both a fresh intraday high and new record close Thursday. The Dow touched an intraday record earlier in the week. On the month, the S&P and Dow are up 5% while the Nasdaq is up 4%. 2

Thanks to the rollout of coronavirus vaccines, the global economy continues to emerge from the pandemic.  But Covid-19 has left one very destructive economic issue in its wake: the disruption to global supply chains. As lockdowns have lifted, overall consumer demand has rebounded. Unfortunately, supply chains that previously were disrupted by the worldwide health crisis are still facing significant challenges, and most, if not all, are struggling to bounce back. This has led to more chaos for manufacturers who still cannot produce or supply as much as they did before the pandemic. Adding to this challenge, there are different reasons why global supply chains remain disrupted, and it depends on where they are located. For instance, power shortages in China have affected production in recent months, while in the U.K., Brexit has been a significant factor around a shortage of truck drivers. The U.S. is also battling a shortage of truckers, as is Germany, with the U.S., as highlighted in the news lately, also experiencing large backlogs at its ports. The frustrating part of all this for both manufacturers and consumers is that the current supply chain issues will likely get worse before they get better. We understand this is not the best news for our last-minute holiday shoppers, but you have been warned!

Weekly Market Commentary

  1. Federal Reserve Chairman Jerome Powell indicated he is now somewhat more concerned about higher inflation and said that the central bank would watch carefully for signs that households and businesses were expecting sustained price pressures to continue. “Supply-side constraints have gotten worse,” Mr. Powell said Friday at a virtual conference. “The risks are clearly now to longer and more-persistent bottlenecks, and thus to higher inflation.” While the Fed has anticipated that price pressures would abate as the pandemic subsides, Mr. Powell said it would be important for the central bank to stay flexible in the months ahead. The central bank will “need to make sure that our policy is positioned for a range of possible outcomes.” Powell and his colleagues have signaled strongly that the Fed would formally announce a gradual reduction, or tapering, of its monthly purchases of $120 billion in Treasury and mortgage debt at its Nov. 2-3 meeting. Officials are likely to reduce those purchases by $15 billion a month, allowing them to conclude the bond-buying program by next June. 5
  2. Responding to a growing controversy over investing practices, the Federal Reserve announced Thursday a wide-ranging ban on officials owning individual stocks and bonds and limits on other activities as well. The ban includes top policymakers such as those who sit on the Federal Open Market Committee, along with senior staff. Future investments will have to be confined to diversified assets such as mutual funds. Fed officials can no longer have holdings in shares of particular companies, nor can they invest in individual bonds, hold agency securities or derivative contracts. The new rules replace existing regulations that, while somewhat restrictive, still allowed officials such as regional presidents to buy and sell stocks. “These tough new rules raise the bar high in order to assure the public we serve that all of our senior officials maintain a single-minded focus on the public mission of the Federal Reserve,” Fed Chairman Jerome Powell said in a statement. 2
  3. China Evergrande Group(HKSE:3333.HK) made an overdue interest payment to international bondholders, the state-owned Securities Times reported Friday, an unexpected move that allows the property company to stave off a default. A default on those bonds would likely have spiraled into the biggest corporate default in Asia, by enabling creditors to declare defaults on some of Evergrande’s other debts. The company is one of China’s biggest developers, and its most indebted. It had the equivalent of more than $300 billion in total liabilities, including some $89 billion in interest-bearing debt, as of the end of June. “The most important takeaway from Evergrande making the offshore interest payment is that the company is treating its onshore and offshore bond creditors the same for the time being,” he said. 5
  4. Champagne sales are surging back to near what they were before the Covid pandemic hampered sales and kept people away from celebrations. The gradual reopening of global bubbly markets is expected to drive sales to an estimated 305 million bottles worldwide in 2021, according to the General Syndicate of Champagne Winegrowers. In 2020, the region suffered an 18% drop compared to the year prior, bringing in $4.8 billion and exporting 244 million bottles, according to data compiled by the Comite Champagne, a trade association representing the growers and houses of Champagne. The full picture for Champagne sales this year won’t emerge until after the holidays, starting with Thanksgiving and winding up with New Year’s Eve, Pavlatos said. But, she added, that the Champagne Bureau is hearing that producers are tracking sales that are well above last year’s levels.
  5. S. industrial production fell 1.3% in September, much more than expected as the lingering effects of Hurricane Ida continue to stymie activity. The Federal Reserve reported Monday that nearly half, or 0.6%, of the overall decline in total industrial production was attributable to the hurricane. It was the worst showing since February’s 3.1% decline, when severe winter storms hammered much of the country, disrupting a wide swath of manufacturing activities from autos to chemical plants. Industrial production covers manufacturing, utilities and mining. The government said manufacturing output fell 0.7%, dragged down by a 7.2% decline in motor vehicles and parts as shortages of semiconductors continued to thwart the industry. Outside of the auto industry, factory output declined 0.3% the government said. 2
  6. Rising interest rates will result in a sharp drop in refinance demand in 2022, meaning a lot less business for mortgage bankers, according to the Mortgage Bankers Association’s just-released annual forecast. It predicts total origination volume will drop 33% to $2.59 trillion. The average rate on the popular 30-year fixed loan will rise to 4%, a full percentage point higher than it is now, MBA economists say. That will result in a 62% drop in refinance originations to just $860 billion. It deepens the anticipated 14% decline in 2021 to $2.26 trillion. Many lenders will rely more heavily on their servicing business to achieve financial goals,” said Marina Walsh, vice president of industry analysis at the MBA. “The servicing outlook is more complicated today, with the expiration of many COVID-19-related forbearances and the need to place borrowers into post-forbearance workouts.” 2
  7. European stocks closed higher on Friday as fears over the Chinese property market cooled, while investors monitored corporate earnings and key economic data. The pan-European Stoxx 600 provisionally ended 0.5% higher, with tech stocks adding 1.5% to lead gains while oil and gas stocks dipped 0.5%. Friday marked another big day of corporate earnings in Europe, with Renault (TLO:RENA-U.TI), Banco Sabadell (MCE:SAB.MC), the London Stock Exchange and InterContinental among those reporting before the bell. At the top of the Stoxx 600, Swedish sport equipment maker Thule (SWEDEN:THULE) climbed more than 9% after strong third-quarter earnings. Meanwhile, French mall owner Klepierre (Paris:LI.PA) rose over 8% after hiking its full-year guidance, as retailer sales and rent collection neared their pre-pandemic levels in the third quarter. L’Oreal (OR.PA) shares jumped 5% after the French cosmetics giant announced better-than-expected third-quarter growth. 2
  8. Natural-gas prices have shed 16% since hitting a 13-year high earlier this month, reversing some of a run-up that has prompted fears of exorbitant heating bills and higher manufacturing costs at a time of already high prices. A warm start to autumn is behind the decline. With most of the country yet to turn the heat on, gas has accumulated in storage facilities faster than expected and shrunk a deficit that prompted worries over winter price surges and even potential shortages. The forecasts that steer commodity traders call for temperatures to remain unseasonably high into November. Meanwhile, federal weather scientists said Thursday that their climate models predict a second straight winter of above-average temperatures, particularly in the South and East. Natural-gas futures ended Friday at $5.28 per million British thermal units. That is down from $6.312 on Oct. 5, which was the highest closing price since late 2008, before frackers flooded the market with shale gas. 5
  9. Oil prices resumed their climb on Friday on continued tightness in U.S. supply, but were headed for a flat finish on the week as coal and gas prices eased, curbing fuel-switching which had stoked demand for oil products for power. S. West Texas Intermediate (WTI) crude futures settled $1.26, or 1.5%, higher at $83.76 per barrel. U.S. crude was headed for a 0.5% rise for the week, holding not far off a seven-year high hit earlier in the week as investors eye low crude stocks at the major Cushing storage location in Oklahoma. “Some investors are also trimming risk across various energies, with the rationale being that energy crisis euphoria has peaked,” RBC analyst Michael Tran said in a note, adding “these are not necessarily our views.” 

 

 

Financial Markets

  1. Johnson & Johnson (NYSE:JNJ) said it sold $502 million of its Covid-19 vaccine in the third quarter, in its earnings report Tuesday that beat Wall Street’s profit expectations. J&J increased its full-year earnings guidance to between $9.77 per share and $9.82 per share, from its previous estimates of $9.60 to $9.70 per share. It expects sales to range from $94.1 billion to $94.6 billion, up from previous guidance of $93.8 billion to $94.6 billion. At the same time, the company maintained its Covid vaccine sales outlook for the year at $2.5 billion. The company’s better-than-expected profit was bolstered by higher sales in its consumer health, pharmaceutical and medical devices units. J&J’s pharmaceutical business, which developed the single-shot Covid vaccine, generated $12.9 billion in revenue, a 13.8% year-over-year increase. 2
  2. 2. Alibaba stock (NYSE:BABA) continued to march higher on Wednesday, a day after the Chinese e-commerce giant unveiled its own server chip, as its co-founder Jack Ma reportedly flew to Europe. The company’s Hong Kong-listed shares surged nearly 7% on Wednesday, after its American depositary receipts (ADRs) closed 6% higher on Tuesday. The U.S.-listed shares were set to keep rising, trading close to 3% higher in premarket trading Wednesday. This follows news that Ma is in Europe for a series of meetings, his first overseas trip in more than a year, the South China Morning Post reported. Ma is currently in Spain for an agriculture and technology tour related to environmental issues, the SCMP report added, citing a person familiar with his itinerary. The Chinese internet giant launched a new chip Tuesday to boost its cloud computing services as it looks to keep challenging Amazon (AMZN), Microsoft (MSFT) and Google (GOOGL) in what is a fast-growing market. 7
  3. IBM (NYSE:IBM) shares fell as much as 5% in extended trading on Wednesday after the company issued third-quarter results, including lower revenue than analysts had expected. The enterprise hardware maker and consulting provider’s revenue increased slightly from a year earlier, according to a statement. Revenue grew 3% in the prior quarter. Net income declined 33% as the company’s gross margin narrowed to 46.4% from 48% in the previous quarter. The results “fell short of our expectations,” IBM CEO Arvind Krishna told analysts on a conference call. “With a competitive labor market, this is putting some pressure on our labor costs, including higher acquisition and retention costs, which is not yet reflected in our current pricing,” said Jim Kavanaugh, IBM’s finance chief. “We expect to capture this value in future engagements, but it will take time to appear in our margin profile.” 2
  4. Communications Inc. (NYSE:VZ) topped earnings estimates for its latest quarter but came up a bit short on revenue as the company continued to see low customer churn. The telecommunications company posted third-quarter net income of $6.5 billion, or $1.55 a share, up from $4.5 billion, or $1.05 a share, in the year-earlier quarter. On an adjusted basis, Verizon earned $1.41 a share, up from $1.25 a share in the year-prior period and ahead of the FactSet consensus, which called for $1.37 a share. Verizon’s earnings per share included a $706 million net pre-tax gain related to the sale of its media business to Apollo as well as a net pre-tax charge of about $247 million related to severance payments and mark-to-market adjustments on pension liabilities. “Our disciplined strategy execution demonstrated growth in 5G adoption, broadband subscribers and business applications,” Chief Executive Hans Vestberg said in a release. 7
  5. Shares of WeWork (NYSE:WE) closed up 13.49% on Thursday after the company went public through a special purpose acquisition company more than two years after its failed IPO. The office-leasing company scrapped plans for an IPO in 2019 after investors raised concerns over its business model and corporate governance and its founder and then-CEO Adam Neumann. The valuation is a sharp drop from 2019, when WeWork was initially valued at a steep $47 billion by SoftBank Group. Its valuation slowly lowered as news of the company’s finances unraveled and investor demand wained. 2
  6. (NASDAQ:TSLA) reported third-quarter earnings after the bell Wednesday, and it’s a beat on both the top and bottom lines. The company reported $1.62 billion in (GAAP) net income for the quarter, the second time it has surpassed $1 billion. In the year-ago quarter, net income was $331 million. The record results were driven by improved gross margins of 30.5% on its automotive business and 26.6% overall, both of which are records for at least the last five quarters. Tesla also generated $806 million in revenue from its energy business, which combines solar and energy storage products, and $894 million in services and other revenue, which includes vehicle maintenance and repairs, auto insurance and sales of Tesla-branded merchandise among other things, Tesla has disclosed in past financial filings. 2
  7. Netflix (NASDAQ:NFLX) shares dipped about 1% after-the-bell Tuesday after the company posted third quarter results, showing investors the streamer can continue to attract new subscribers. The quarter’s subscriber growth of 4.4 million was a solid beat over the expected 3.84 million. Analysts had expected users to flock to the streamer as it began to roll out a slew of content that was delayed to the back half of the year due to the pandemic. The company said it expects to add 8.5 million subscribers in the fourth quarter. “We’re in uncharted territory,” Netflix co-CEO Reed Hastings said on the company’s post-earnings video interview. “We have so much content coming in Q4 like we’ve never had, so we’ll have to feel our way through and it rolls into a great next year also.” 2
  8. Shares of Beyond Meat (NASDAQ:BYND) hit a 52-week low in trading Friday after the company warned it expects to report lower revenue for the third quarter than previously forecast. Beyond said it expects net sales of $106 million, below its prior outlook of $120 million to $140 million. Wall Street analysts surveyed by Refinitiv were anticipating revenue of $133.1 million for the quarter. The company did not release an outlook for its quarterly earnings, but analysts were expecting a loss of 29 cents per share ahead of Friday’s announcement. The company said multiple factors caused the lag in sales, including the impact of the Covid-19 delta variant. “In our view, BYND has yet to fully grasp the underlying issues impacting its results, particularly as it relates to differentiating Covid-related issues vs. the impact of rising plant-based meat competition and/or weak consumer demand due to either high price, disappointing taste, or health concerns,” CFRA analyst Arun Sundaram wrote in a note on Friday. 2

 

Sources:

  1. CNBC
  2. Bloomberg.com
  3. TheHill.com
  4. Reuters
  5. WSJ
  6. Marketwatch
  7. Dow Jones Newswire
  8. AP News
  9. BLS.gov
  10. Barrons
  11. Business Insider
  12. CBS News

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