Weekly market update : SoftBank's role in the rise of tech stocks

09/07/2020 | 09:19am
Monday
September  7
Weekly market update
intro While the beginning of last week was conducive to new records on Wall Street, thanks to improved activity in China and the United States, the trend was abruptly reversed on Thursday, as operators made heavy clearances in the US technology segment. Wall-Street thus posted its worst week since the end of June, despite a better-than-expected monthly employment report.
Indexes

In Asia, the Nikkei gained 1.4% over the past week while the Hang Seng lost 2.8% and the Shanghai Composite 1.4%.

In Europe, indices moved in a jagged pattern. The CAC40 lost 1%, the Dax 1.8% and the Footsie declined by 2.7%. For the peripheral countries of the euro zone, red dominates. Portugal cedes 2.1%, Italy 2.4%, as does Spain.

For once, it is the Nasdaq100 that signs the worst weekly performance (-5.5%), nevertheless preserving its underlying trend (see graph). The S&P500 lost 3.9% and the Dow Jones 3%.

Bullish trend tested for the Nasdaq100

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Commodities

Volatility is finally rising a notch on oil markets, which ended last week moderately down. While U.S. production continues to slow, particularly because of the disruptions caused by Hurricane Laura, investors were more interested in the state of demand, which is uncertain given the resurgence of cases of coronavirus contamination. Brent is trading at USD 43, compared to USD 40 for WTI.

The strengthening of the greenback weighs on the precious metals compartment. The ounce of gold thus moves away from the USD 2000 bar to trade around USD 1935. Silver did not escape this downward momentum and traded at USD 26.5.

The good performance of Chinese economic statistics invigorates base metal prices. The price of nickel has thus exceeded its level at the beginning of the year and retraces its fall of last year to USD 15100 per metric ton. On the other hand, the rise in copper prices is tending to run out of steam as it is returning to close to USD 6,600.
Equities markets

The company's slogan M3 (Changing the world of medicine through the Internet) remains evocative of its ambitions.

The company offers a range of online services in the medical field such as the possibility to search for information, exchange opinions between practitioners, marketing services and surveys. With Sony Corp as main shareholder (34%), M3 is the leader of the Nikkei 225 variations, with a symbolic performance of +100% over the year. The share therefore outperforms by far its benchmark index, which is barely balanced.

Valued at more than 36 billion euros on the Tokyo Stock Exchange, the share is paying 153x its earnings in 2021, more than double its historical PER of 64.4x. Nevertheless, its revenues grew at an average annual rate of 27.3% between 2010 and 2019. The company has recently benefited from the craze for techno/health values and the growth of teleconsultation.

Exponential path of M3

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Bond market

Bond markets on both sides of the Atlantic managed to recoup some of the price losses they suffered following Powell's speech in Jackson Hole, without any real fireworks.
In Europe yields fell in a harmonized manner, with little change in spreads. The German Bund returned to a yield close to -0.49%, while the French OAT also plunged into negative territory at -0.19%. Italy took advantage of this movement and saw its debt rate fall below 1%, as did Spain, with a benchmark of 0.32%.

Weekly activity on the government bond markets was clearly marked by issues by Germany, which placed a 10-year Green Bund bond, building up an order book of around 33 billion euros. Still in Europe, the Swiss ten-year rate fell to -0.51% while the Greek debt now pays only 1.1%.

In the United States, the yield on the bond is duplicating the same trajectory, with a return to 0.64%.

US interest rate curve, in basis points

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Forex market

The major parity dominated trading last week in the currency market. Indeed, traders initially pushed the single currency to symbolic levels of USD 1.20, a June 2018 high. The rally was driven by the FED's announcement to keep rates low and a less pessimistic German growth forecast. Nevertheless, the 1.20 wall was used as a block, generating a sharp fall of the EUR/USD to 1.18 USD helped by the ECB, traditionally at odds with comments on the euro, which deems the appreciation of the single currency too fast.

Volatility on safe-haven currencies also intensified. The recent correction in risky assets is causing positions to be carried over to the yen and Swiss franc after a phase when traders were more favoring high beta currencies. The greenback traded above JPY 106 against the Japanese currency and stabilized against the Swiss currency at CHF 0.91. The Swiss franc is now trading above the JPY 106 level.

At the same time, the pound appreciated, with the support of the BoE, which intends to support the British economy with its multiple monetary tools. The British currency is the big beneficiary of the week, confirming its recovery against the dollar (1.3410), its highest valuation in 2020. Against the Swiss franc, the pound rose to 1.2080 and to 0.89 against the euro, its best level in three months.
Economic data

Chinese macroeconomic data has reassured investors last week, with Caixin PMI indices confirming the acceleration of activity. The manufacturing index returned to a level not seen since the beginning of 2011, at 53.1, while the PMI services index remained at 54.

In the euro zone, these same indexes came out at 51.7 and 50.5 respectively, confirming the recovery in activity. The CPI index fell by 0.2% (consensus +0.2%) while the PPI index was better than expected at +0.6%. Retail sales were also disappointing, falling by 1.3% while the market was expecting +1.3%. The unemployment rate decreased slightly to 7.9%.
For Germany, statistics generally missed the consensus: manufacturing PMI index at 52.2, retail sales down 0.9% and industrial orders at +2.8% (+5.1% expected).

On the other side of the Atlantic, the data was also mixed. Apart from the manufacturing ISM (56), weekly unemployment registrations (881K) and oil inventories (-9.4M), all other statistics were disappointing. Construction spending rose by only 0.1%, the trade balance widened to -63.6B and the ISM services index stood at 56.9 compared to 58 last month. The highlight of the week was the monthly employment report. The unemployment rate fell to 8.4% (consensus 9.8% and 10.2% last month), with 1371K jobs created and hourly wages up 0.4%. The ADP survey also reported that only 428K jobs were created in the private sector on Wednesday (consensus 1250K).

The German industrial production was presented earlier today: it progressed but significantly less than expected. Last night, China announced a higher than expected trade surplus, thanks to a 9.5% growth in dollar exports.
SoftBank's role in the rise of tech stocks

We are probably at a pivotal moment of the year for equity markets, with the revelations of the Financial Times on the incredible montage made by SoftBank, which has obviously boosted technology stocks this summer.

We wrote it recently in this section, the back-to-school period will be complex. The hectic
sessions in New York prove that investors can change course and take profits at any time after the historic rally in technology stocks. Complexity can be seen on all fronts.

The exceptional divergence in sector performance makes arbitrage difficult. Should investors keep high growth stocks or take profits to be more exposed to "value" stocks? This is the question that will have to be answered at the end of this summer.
Patrick Rejaunier
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