S&P Futures Jump To Five Month High, Dollar Spikes In Bullish Start To New MonthTyler DurdenMon, 08/03/2020 - 08:19
World stocks rose and US futures jumped to the highest level since late February even as U.S. lawmakers struggled to agree on the next round of coronavirus aid while Covid cases around the globe continued to rise, while a squeeze on crowded short positions left the dollar clinging to a tentative bounce.
S&P 500 futures turned higher, reversing earlier losses with Microsoft rising in pre-market trading as it tried to salvage a deal for the U.S. operations of TikTok. Marathon Petroleum jumped after agreeing to sell its gasoline-station business for $21 billion. Still, investors remained jittery amid the lack of a progress on the stimulus package and White House Chief of Staff Mark Meadows not optimistic about a deal.
"Three months to go until the U.S. Presidential election! Surely Congress will want to get something over the line regarding new stimulus in the U.S. driven more by politics than necessarily economics," said Chris Bailey, European strategist at Raymond James.
On Friday, Fitch Ratings cut the outlook on the United States’ triple-A credit rating to negative from stable and said the direction of fiscal policy depends in part on the November election and the resulting makeup of Congress, cautioning that policy gridlock could continue. However, as Reuters notes, those concerns have hardly hit the U.S. technology sector, evident in Friday’s record highs, with Apple overtaking Saudi Aramco to become the world’s most valuable company.
In Europe, stocks were up over 1% with all but four sector indexes advancing, with gains led by automakers, technology and chemicals sub- indexes, which are all up at least 1.7%. Travel and leisure stocks are the worst performers. Technology stocks rallied on positive read-across from peers on the other side of the Atlantic, while automobile shares jumped after the euro area recorded its first manufacturing expansion in one-and-a-half years when the final Eurozone mfg PMI printed at 51.8, above the 51.1 expected.
Spanish stocks, meanwhile, declined on Monday as the country saw the biggest jump in coronavirus cases since a national lockdown was lifted in June, while data showed international tourist arrivals to the country fell 98% year on year in June. “Second wave virus concerns are building in Australia, Europe etc. but no huge risk-aversion move,” said Bailey.
European gains were also limited by a selloff in big banks’ shares, with index heavyweight HSBC falling 5% to a fresh 11 year low after it warned that its bad debt charges could surge to as much as $13 billion, and France’s Societe Generale reported a 1.26 billion euro ($1.48 billion) second-quarter loss.
Earlier in the session, Asian stocks also gained, led by communications and health care, after falling in the last session. Most markets in the region were down, with Jakarta Composite dropping 2.8% and Singapore's Straits Times Index falling 1.9%, while Japan's Topix Index gained 1.8%. The Topix gained 1.8%, with ISB and ITmedia rising the most. The Shanghai Composite Index rose 1.8%, with Raytron Technology and Piesat Information Technology Co Ltd posting the biggest advances as investor margin debt resumed its climb.
Factory activity data from China showed the fastest pace of expansion in nearly a decade.
That helped China's blue chips rally 1.6%, offsetting worries about U.S.-China relations. Japan's Nikkei meanwhile added 2.2%, courtesy of a pullback in the yen.
"There is going to be a recovery -- we shouldn’t lose track of that as we go through this period,” Anne Anderson, head of fixed income at UBS Asset Management Australia, said on Bloomberg TV. “But returning to where we were before we started is going to be a real challenge and is going to require ongoing monetary and fiscal support. It’s a long way out of here."
Meanwhile, tension between the U.S. and China emerged as another threat to risk appetite. The Trump administration will announce measures shortly against “a broad array” of Chinese-owned software deemed to pose national-security risks, U.S. Secretary of State Michael Pompeo said. Even so, shares advanced in Japan and China, where mainland-listed technology stocks surged on expectations of support from Beijing in response to U.S. moves against Chinese-owned software companies.
In FX, Dollar bears also took some profits as short positions hit an 11 year high, with the Bloomberg Dollar Spot Index heading for its biggest two-day gain in seven weeks, with the greenback rising against all Group-of-10 peers except the Swedish krona and the yen.
but any further gains were capped by the slowing U.S. economic recovery from COVID-19 and real rates breaking below -1% for the first time.
The real 10Y rate hit a record low amid a marked flattening of the yield curve as investors wager on more accommodation from the Federal Reserve.
The euro and the pound were down only slightly with the dollar at $1.1755 per euro and $1.3065 per pound. Both the currencies recorded their best monthly gain in nearly a decade in July.
“Amid improvements in business sentiment, signals are emerging that the initial boost from pent-up demand is fading and consumer confidence is slipping lower,” economists at Barclays wrote in a note. "Together with concerns about labour market and virus developments, this clouds the outlook and could be exacerbated if U.S. fiscal support is not renewed in time."
In rates, 10-year Treasury yields were higher at 0.5576% after touching the lowest level since March last week. German government bond yields rose slightly to -0.527%. Treasuries bear steepened as month-end support came out of the market and investors looked ahead to Wednesday’s supply announcement where record sales of notes and bonds are expected. Yields higher by up to 3bp across long-end of the curve with front-end broadly anchored, steepening 2s10s, 5s30s by ~1.5bp each; 10-year yields around 0.545%, cheaper by 1.5bp vs. Friday close while bunds, gilts outperform by ~2bp each. Yields on 30-year U.S. Treasuries are set for the biggest daily increase since June 30 as U.S. equity futures advance and the bond curve bear-steepens. As Bloomberg adds, a busy week of IG corporate issuance also expected, adding to downside pressure on Treasuries along with delta hedging large option package.
The recent decline in the dollar combined with super-low real bond yields has been a boon for gold, which hit $1,984 an ounce on Monday and seemed on track to take out $2,000 soon.
In other commodities, oil prices eased on concerns about oversupply as OPEC and its allies are due to pull back from production cuts in August while an increase in COVID-19 cases raised fears of slower pick-up in fuel demand. Brent crude futures dipped 46 cents to $43.06 a barrel, while U.S. crude eased 51 cents to $39.76.
On today's calendar, economic data include ISM and Markit manufacturing data. Ferrari is among today’s scheduled earnings.
S&P 500 futures down 0.1% to 3,260.50
STOXX Europe 600 up 0.4% to 357.57
MXAP up 0.3% to 165.11
MXAPJ down 0.4% to 549.24
Nikkei up 2.2% to 22,195.38
Topix up 1.8% to 1,522.64
Hang Seng Index down 0.6% to 24,458.13
Shanghai Composite up 1.8% to 3,367.97
Sensex down 1.7% to 36,967.20
Australia S&P/ASX 200 down 0.03% to 5,926.09
Kospi up 0.07% to 2,251.04
Brent Futures down 0.6% to $43.24/bbl
Gold spot down 0.2% to $1,972.89
U.S. Dollar Index up 0.1% to 93.44
German 10Y yield rose 0.4 bps to -0.52%
Euro down 0.03% to $1.1775
Brent Futures down 0.6% to $43.24/bbl
Italian 10Y yield rose 4.2 bps to 0.887%
Spanish 10Y yield rose 0.2 bps to 0.342%
Top Overnight News from Bloomberg
Factories across the euro area saw a stronger return to growth in July than initially reported, marking the region’s first manufacturing expansion in one-and-a-half years while economies from Germany to Italy beat expectations. In the U.K., although numbers were slightly below flash estimates, manufacturing grew at the fastest pace in almost three years as the nation’s lockdown eased
Gold’s spot and futures prices opened the week by hitting records, with the metal for immediate delivery closing in on $2,000 an ounce as the search for haven assets continues amid the coronavirus pandemic
Microsoft chief executive Satya Nadella attempted to salvage a deal for the U.S. operations of TikTok by speaking with President Donald Trump by phone
Oil edged below $40 a barrel in New York as OPEC and allied producers started to unwind output cuts even as many countries are still struggling to contain the virus
Asian equity markets began the new trading month mixed after last Friday’s positive close on Wall St where the tech sector rallied following earnings from the industry giants including Apple which rose to a fresh record high, but with upside in the region restricted ahead of this week’s risk events and after continued stalemate in US coronavirus relief discussions. ASX 200 (flat) was subdued as gains in commodity related sectors were offset by underperformance in the top weighted financials and with trade hampered by reduced liquidity due to bank holiday in New South Wales, while risk appetite was also weighed by a state of disaster declaration in Victoria with the state capital of Melbourne to be subjected to tougher restrictions including a curfew through to at least September 13th. Nikkei 225 (+2.2%) was the stellar performer as it coat-tailed on recent favourable currency flows and after Q1 Final GDP topped estimates, although there were some notable losses seen in Shinsei Bank and Mazda post earnings, as well as Seven & I on news it is to acquire Speedway convenience stores from Marathon Petroleum in a deal valued around USD 18.9bln. Hang Seng (-0.6%) and Shanghai Comp. (+1.8%) were mixed after PBoC inaction resulted to a CNY 100bln liquidity drain and as participants digested a more than 50% drop in HSBC HY profits, as well as the highest Chinese Caixin Manufacturing PMI reading since 2011. There was also plenty of focus around tech after reports that President Trump is to allow 45 days for ByteDance to negotiate the sale of TikTok to Microsoft and will reportedly take action on Chinese software companies that threaten national security in the approaching days. Finally, 10yr JGBs were lower amid a surge in Japanese stocks and with the BoJ present in the market for JPY 450bln of JGBs predominantly focused on 1yr-3yr maturities, while the central bank recently announced its buying intentions for August in which it maintained the current pace of purchases for all maturities.
Top Asian News
Why Investors Keep Losing Money Betting Against the Hong Kong Dollar Peg
Goldman, BofA Left Off Ant IPO for Work With Alibaba Rivals
SoftBank, Naver to Start Joint Tender Offer for Line on Aug. 4
Mixed trade in the European equity sphere (Euro Stoxx 50 +0.6%) after a similar lead from APAC markets, as participants remain on standby for this week’s key risk events - including US ISM and labour market report alongside any updates on fiscal stimulus talks. Core EU bourses saw some upside in the run-up to the Final Manufacturing PMIs, potentially on optimism for higher revisions, but indices have since remained contained. UK’s FTSE 100 lags the core markets on currency dynamics, and with the Financial sector hit on the back of dismal earnings from HSBC (-5.1%) where Q2 profit slumped and loan loss provisions rose almost seven-fold. Furthermore, SocGen (-3.1%) adds to the woes in the sector after posting a surprise loss due to pandemic impact on equity trading. Energy names have also lost steam amid price action in the complex, but overall European sectors remain mixed with no clear risk tone to be derived. The sectoral breakdown sees Travel and Leisure at the bottom as second wave fears materialise in the sector. Elsewhere of note, AI company Shanghai Zhizhen Network Technology is suing Apple for around USD 1.4bln over virtual assistant patent violations, WSJ reported.
Top European News
U.K. Manufacturing Grows as Sector Starts Long Road to Recovery
Euro-Area Factories Returned to Growth Amid Severe Jobs Cuts
Real Estate Stocks Fall on Lockdown Concerns, Negative Sentiment
In FX, mixed macro impulses for the Franc as Swiss CPI was considerably firmer than forecast, but the manufacturing PMI fell short of expectations and the key 50.0 mark to leave Usd/Chf eyeing 0.9200 and Eur/Chf even closer to 1.0800 following yet another rise in weekly bank sight deposits. Moreover, the cross has rebounded amidst Eurozone manufacturing PMIs that beat consensus and underpinned EU stocks alongside economic recovery hopes. Conversely, the COVID-19 escalation in Melbourne, Victoria has prompted a state of disaster amidst tougher restrictions and a curfew in the capital until September 13, at the earliest, on the eve of the RBA policy meeting – full preview of the event available on the headline feed – to the detriment of the Aussie that is holding just above 0.7100 vs the Greenback compared to last Friday’s 0.7200+ new ytd peak.
USD - The Dollar has handed back some of its pre-month end gains after the DXY rebounded further from fresh 2020 lows (92.546) to 93.708 and is now pivoting 93.500, with additional support coming via M&A flows due to deals amounting to Usd 16.4 bn and Usd 21 bn for US companies from German and Japanese rivals respectively. Ahead, the final Markit manufacturing PMI, ISM equivalent and construction spending before a duo of Fed speakers (Bullard and Evans).
JPY/GBP/NZD - All intiailly firmer against the Buck, or off worst levels to be more precise, as the Yen regains composure following its aggressive reversal from the low 104.00 area to 106.40+, while Sterling revisited 1.3100 from not far off 1.3050 even though the final UK manufacturing PMI was revised down a tad and the coronavirus outbreak in Northern England has reached ‘major incident’ proportions in Greater Manchester. Elsewhere, the Kiwi is benefiting from the aforementioned Aussie travails to an extent given Aud/Nzd pulling back below 1.0750 to keep Nzd/Usd more buoyant on the 0.6600 handle despite reports that hedge funds are implementing bearish positions ahead of the RNBZ later in August.
EUR/CAD/SEK/NOK - Some traction for the Euro within 1.1796-42 parameters vs the Greenback in wake of the better than prelim/anticipated Eurozone manufacturing PMIs, but no confirmed breach of resistance in the form of the 100 HMA (1.1779), while the Loonie is sub-1.3400 amidst another downturn in crude prices that is also hampering the Norwegian Krona relative to its Swedish counterpart after the manufacturing PMI reclaimed 50.0+ status and retail sales picked up pace. Indeed, Eur/Nok is hovering around 10.7500 in contrast to Eur/Sek testing 10.3100 vs highs of 10.7860 and 10.3515 respectively.
EM - The Yuan is keeping its head above 7.0000 on the back of China’s Caixin manufacturing PMI exceeding forecast at 52.8 for the strongest print since January 2011 and the Rouble is consolidating off recent lows circa 74.0000 awaiting the latest CBR MPR, but the Rand is lagging near 17.3000 after a steep decline in SA tax receipts for the fy through end July.
In commodities, WTI and Brent front-month futures remain subdued in early European trade with little by way of fresh fundamental catalysts, but with that being said, OPEC+ are poised to ease the magnitude of the agreed-upon cuts this month which will see an additional 1.9mln BPD of supply entering the market – this was reflected by the Russian oil and gas condensate output for the first half of August. It is also worth bearing in mind that the extra supply comes against the backdrop of rising second-wave fears which have prompted some cities to re-enter lockdown, whilst others deferred their reopening plans. Elsewhere, spot gold remains uneventful after testing support at USD 1970/oz (vs. fresh high 1987.94), with the yellow metal decoupled from Dollar dynamics (for now) as prices remain near record highs. Spot silver sees similar lacklustre action sub 24.50/oz. Turning to base metals, Dalian iron ore futures rose in excess of 4% to hit 12-month highs on a firm demand outlook. Conversely, copper touched a three-week low despite the strong Chinese factory data, with some citing second wave fears.
US Event Calendar
9:45am: Markit US Manufacturing PMI, est. 51.3, prior 51.3
10am: ISM Manufacturing, est. 53.5, prior 52.6
10am: Construction Spending MoM, est. 1.0%, prior -2.1%
Wards Total Vehicle Sales, est. 14m, prior 13.1m
DB's Jim Reid concludes the overnight wrap
A happy August to you all. This morning’s EMR is brought to you by the powers of paracetamol and ibuprofen as I played my one and only game of cricket this season over the weekend. It was President’s Day and I’m the President of my club so I couldn’t really avoid coming out of semi-retirement for a game I played pretty much every summer weekend from around 1983 to 2011. Running, diving, throwing, bowling, eating a big tea all took a big toll out of me.
My performance certainly wasn’t as good as markets were in July, unless the dollar was my benchmark. Craig (who is still in a state of shock after Arsenal won the FA Cup final on Saturday) has already published July’s performance review this morning (link here) where the highlights were a bumper month for Silver and Gold and a poor month for the dollar. Silver (c.+35%) had its best month since December 1979 and the dollar the worse for a decade. US equities had a good month in spite of rising virus caseloads due to a strong earnings season relative to expectations, especially in tech towards the end of the month. YTD Silver, Gold and the NASDAQ have been the three best performers while at the bottom of the leaderboard Brent, WTI and European Banks are all down at least 30%.
In terms of how August is faring so far, it’s been a mixed start in Asia with the Nikkei (+1.95%) and Shanghai Comp (+1.08%) both posting decent gains, the Hang Seng (-0.95%) down and the Kospi and ASX little changed. Meanwhile, yields on 10yr USTs are up +1.3bps and futures on the S&P 500 are down -0.08%. In terms of data releases, China’s June Caixin manufacturing PMI came in at 52.8 (vs. 51.1 expected) which was the highest reading since Jan 2011 while Japan’s final manufacturing PMI reading was confirmed at 45.2 (vs. 42.6 in preliminary read). We also got Japan’s final annualized 1Q GDP print this morning, printing at -2.2% qoq (vs. -2.8% qoq expected).
In terms of weekend news, US Secretary of State Michael Pompeo has said that the White House will announce measures against “a broad array” of Chinese-owned software deemed to pose national-security risks. This follows President Trump saying on Friday that he intends to ban music-video app TikTok from the US. Meanwhile, on the fiscal stimulus negotiations in the US, there are reports that Democrats and Republicans continue to remain far apart on the plan to restore a $600-per-week jobless benefit that expired last week. Negotiations will continue today.
Looking at coronavirus numbers for the weekend, growth rates for new cases slowed in the US to an average of 1.13% per day (vs. average growth of 1.70% over last 5 weekends). The same was true for the most populous states like Texas, Florida, California and Arizona. The fatalities growth rate also slowed in Texas (1.35% vs. 1.89%) and Arizona (0.96% vs. 2.45%) but continues to remain high in Florida (1.75% vs. 1.34%) and California (1.13% vs. 0.73%). Meanwhile, the White House coronavirus task force head Deborah Birx said the pandemic is in a “new phase” as it spreads across U.S. rural and urban areas. In Asia, Australia’s Victoria state declared a state of disaster and has ordered Melbourne’s residents to stay home except for work, medical care, provisions or exercise. The city is now under curfew between 8 p.m. and 5 a.m and the new restrictions will be in force for six weeks. The state reported 671 new cases in the past 24 hours. Please see the regular case and fatalities table in the PDF for more. Finally, the latest on a possible vaccine is that the Serum Institute of India received approval for conducting phase two and three clinical trials of the Covid-19 vaccine candidate developed by the University of Oxford and AstraZeneca in the country.
Looking ahead to this week now, the release of PMIs from around the world (today and Wednesday mostly) will set the tone, before the July US jobs report on Friday rounds out the week. On the central bank front, we will hear the monetary policy decision from the Bank of England and Governor Bailey’s ensuing press conference on Thursday. The market also enters the second half of Q2 earnings season, which has already seen a record number of beats in the S&P 500.
Going through in more detail now, the majority of manufacturing PMIs are out on today, before services and composite PMIs come out on Wednesday for the most part. There’ll also be the ISM manufacturing index from the US (today). The key here will be to see how differentiated PMIs are given that some governments around the world are cautiously easing restrictions with others needing to tighten. For the countries where we already have a flash PMI reading, they generally showed that the recovery has more momentum in Europe than in the US. Many of the flash European levels were the strongest in at least two years, while both manufacturing and services PMIs in the US failed to meet expectations. As ever caution is required as these are diffusion indices which simply monitor whether activity is better or worse than the previous month. Remember that the US was never as shutdown as Europe so momentum was always likely to be more in the latter’s favour regardless of the recent rise in cases.
In terms of payrolls on Friday, markets are generally expecting a third straight month of gains, though likely at a slower rate than we saw in June. DB are looking for a further +900k gain in the headline, below consensus estimates at +1.578m. This follows last month’s blowout +4.8m increase. Our economists also see the unemployment rate falling to 10.5% from 11.1%, in line with the median estimate. This data will give some insight into how the renewed spread of the coronavirus through the US, especially in the South and West have affected the US economy. The rest of the key data can be found in the day by day week ahead guide at the end.
On the central bank front, one highlight will be the Bank of England meeting and Governor Bailey’s ensuing press conference on Thursday. While our DB economists are not expecting any change to the policy rate this meeting, there is a chance for a dovish surprise on the overall commentary and tone. Focus will be on the central bank’s economic projections, the ongoing review of the effective lower bound, and the path of QE. See their preview here .
Elsewhere in central banks, India and Brazil are also releasing their policy decisions on Wednesday and Thursday, respectively. The two countries have the highest confirmed coronavirus caseloads outside the US, and are expected to lower interest rates in light of the continued economic impact of the pandemic. Following the FOMC last week and the lifting of the blackout period, we will hear from the Fed's Bullard, Evans, Mester and Kaplan.
Earnings will continue to be in focus, with 133 companies reporting from the S&P 500 and a further 95 from the STOXX 600. Among the releases include HSBC, Heineken, Siemens, Berkshire Hathaway, and Ferrari today. Then tomorrow markets will hear from Bayer, Diageo, Fidelity, BP, Walt Disney and Activision Blizzard. Wednesday will see Deutsche Post, Allianz, Humana, Bayerische Motoren, Regeneron Pharmaceuticals, CVS Health, MetLife and Fiserv release earnings. Following that, Thursday includes Merck, AXA, Siemens, adidas, Bristol-Myers Squibb, Novo Nordisk, Becton Dickinson & Co, Zoetis, T-Mobile, Illumina. Finally on Friday, Standard Life Aberdeen, Norwegian Cruise Line, Royal Caribbean Cruises and Ventas. So another busy week.
To review last week now, global equity markets were bifurcated with US stocks outperforming after beating low earning expectations, particularly in tech. The S&P 500 rose +1.73% (+0.77% Friday) led primarily by the mega cap tech stocks which reported towards the end of last week. With Apple, Facebook, and Amazon in particular surprising on earnings, the tech-focused Nasdaq outperformed this week as the index rose +3.69% (+1.49% Friday). Over 60% of the S&P have now reported and the index has seen a record of just under 85% of companies beat EPS estimates. Remember that the issue with this earnings season was that analysts didn’t increase their estimates in June as macro surprises beat. This left a great set up for earnings versus expectations.
Risk assets in Europe did not fare as well with European equities down -2.98% (-0.89%) over the 5 days, pushing the index down -1.11% for July. It was the first monthly loss since March as cyclical sectors led the declines following more concerns on the economic outlook and small rises in cases across the continent.
Even as US equities rose, core sovereign bonds fell with US 10yr Treasury yields falling -6.1bps (-1.8bps Friday) to a record closing low of 0.528%. Similarly, UK 10yr gilts rose +1.6bps on Friday to be just off Thursday’s all-time closing lows to fall -4.0bps overall on the week to 0.10%. German bunds fell -7.6bps to -0.52%, while a souring risk appetite saw wider peripheral spreads to bunds in Italy (+9.2bps), Spain (+6.3bps), Portugal (+7.1bps) and Greece (+9.7bps). The dollar fell over -1.0% on the week for the second week in a row, and has not seen a weekly rise since mid-June when economic data and US cases started getting worse again. With yields and the greenback falling, gold continued its breakneck rally. The metal rose +3.88% (+0.98% Friday) to another all-time record of $1975.86/oz.
On Friday, we received Q2 GDP data from the majority of Europe. This came following Thursday’s data out of the US, Germany and China. We learned that Euro Area quarterly GDP fell by -12.1%, right in-line with estimates and the largest decline on record. France GDP shrank -13.8% (vs. -15.2% expected), with the construction sector seeming to be hit the hardest after falling about -24% in the second quarter. Italy similarly showed a slightly ‘better’ GDP print than expected, coming in at -12.4% (vs. -15.5%). Unlike France and Italy, Spain’s data came in under projections with the economy contracting -18.5% (vs. -16.6% expected). In other data, German retail sales fell -1.6% MoM, better than the expected -3.3% drop, but somewhat expected given the +12.7% rise last month. In the US, July MNI Chicago PMI surprised by rising into expansionary territory at 51.9 vs 36.6 last month and well above the 44.0 estimate. Finally, the preliminary July University of Michigan survey showed sentiment fall -0.7pts to 72.5, just below estimates of 72.9. The slight drop in sentiment was driven by a -2.7pt move lower in current conditions even in light of a slight rise in expectations.
The Netflix share price rallied by nearly 10% (9.6%) this week after co-CEO Ted Sarandos confirmed the film and television streaming market leader is to introduce a new ad-supported, cheaper subscription. The company also announced it is to lay off another 300 employees, around 4% of its global workforce, in addition to the 150 redundancies last month.
Netflix has been forced into a period of belt-tightening after announcing a 200,000 subscriber-strong net loss over the first quarter of 2022. The U.S. tech giant also ominously forecast expectations for the loss of a further 2 million subscribers over the current quarter that will conclude at the end of this month.
The company has faced increasing sector competition with Paramount+ its latest new rival, joining Amazon Prime, Disney+, HBO Max and a handful of other new streaming platforms jostling for market share. A more competitive environment has combined with a hangover from the subscriber boom Netflix benefitted from over the Covid-19 pandemic and spiralling cost of living crisis.
Despite the strong gains of the past week, Netflix’s share price is still down over 68% for 2022 and 64% in the last 12 months. Stock markets have generally suffered this year with investors switching into risk-off mode in the face of spiralling inflation, rising interest rates, fears of a recession and the geopolitical crisis triggered by Russia’s invasion of Ukraine.
Growth stocks like Netflix whose high valuations were heavily reliant on the value of future revenues have been hit hardest. No recognised member of Wall Street’s Big Tech cabal has escaped punishment this year with even the hugely profitable Apple, Microsoft, Alphabet and Amazon all seeing their valuations slide by between around 20% and 30%.
But all of those other tech companies have diversified revenue streams, bank profits which dwarf those of Netflix and are sitting on huge cash piles. The more narrowly focused Meta Platforms (Facebook, WhatsApp and Instagram) which still relies exclusively on ad revenue generated from online advertising on its social media platforms, has also been hit harder, losing half of its value this year.
But among Wall Street’s established, profitable Big Tech stocks, Netflix has suffered the steepest fall in its valuation. But it is still profitable, even if it has taken on significant debt investing in its original content catalogue. And it is still the international market leader by a distance in a growing content streaming market.
Even if the competition is hotting up, Netflix still offers subscribers by far the biggest and most diversified catalogue of film and television content available on the market. And the overall value of the video content streaming market is also expected to keep growing strongly for the next several years. Even if annual growth is forecast to drop into the high single figures in future years.
In that context, there are numerous analysts to have been left with the feeling that while the Netflix share price may well have been over-inflated during the pandemic and due a correction, it has been over-sold. Which could make the stock attractive at its current price of $190.85, compared to the record high of $690.31 reached as recently as October last year.
What’s next for the Netflix share price?
As a company, Netflix is faced with a transition period over the next few years. For the past decade, it has been a high growth company with investors focused on subscriber numbers. The recent dip notwithstanding, it has done exceedingly well on that score, attracting around 220 million paying customers globally.
Netflix established its market-leading position by investing heavily in its content catalogue, first by buying up the rights to popular television shows and films and then pouring hundreds of millions into exclusive content. That investment was necessary to establish a market leading position against its historical rivals Amazon Prime, which benefits from the deeper pockets of its parent company, and Hulu in the USA.
Netflix’s investment in its own exclusive content catalogue also helped compensate for the loss of popular shows like The Office, The Simpsons and Friends. When deals for the rights to these shows and many hit films have ended over the past few years their owners have chosen not to resell them to Netflix. Mainly because they planned or had already launched rival streaming services like Disney+ (The Simpsons) and HBO Max (The Office and Friends).
Netflix will continue to show third party content it acquires the rights to. But with the bulk of the most popular legacy television and film shows now available exclusively on competitor platforms launched by or otherwise associated with rights holders, it will rely ever more heavily on its own exclusive content.
That means continued investment, the expected budget for this year is $17 billion, which will put a strain on profitability. But most analysts expect the company to continue to be a major player in the video streaming sector.
Its strategy to invest in localised content produced specifically for international markets has proven a good one. It has strengthened its offering on big international markets like Japan, South Korea, India and Brazil compared to rivals that exclusively offer English-language content produced with an American audience in mind.
The approach has also produced some of Netflix’s biggest hits across international audiences, like the South Korean dystopian thriller Squid Games and the film Parasite, another Korean production that won the 2020 Academy Award for best picture – the first ever ‘made for streaming’ movie to do so.
Netflix is also, like many of its streaming platform rivals, making a push into sport. It has just lost out to Disney-owned ESPN, the current rights holder, in a bid to acquire the F1 rights for the USA. But having made one big move for prestigious sports rights, even if it ultimately failed, it signals a shift in strategy for a company that hasn’t previously shown an interest in competing for sports audiences.
Over the next year or so, Netflix’s share price is likely to be most influenced by the success of its launch of the planned lower-cost ad-supported subscription. It’s a big call that reverses the trend of the last decade away from linear television programming supported by ad revenue in its pursuit of new growth.
It will take Netflix at least a year or two to roll out a new ad-supported platform globally and in the meanwhile, especially if its forecast of losing another 2 million subscribers this quarter turns out to be accurate, the share price could potentially face further pain. But there is also a suspicion that the stock has generally been oversold and will eventually reclaim some of the huge losses of the past several months.
How much of that loss of share price is reclaimed will most probably rely on take-up of the new ad-supported cheaper membership tier. There is huge potential there with the company estimating around 100 million viewers have been accessing the platform via shared passwords. That’s been clamped down on recently and will continue to be because Netflix is determined to monetise those 100 million viewers contributing nothing to its revenues.
If a big enough chunk of them opt for continued access at the cost of watching ads, the company’s revenue growth could quickly return to healthy levels again. And that could see some strong upside for the Netflix share price in the context of its currently deflated level.
The RBA delivered a speech this week indicating faster monetary policy tightening is to come in the near-term with the aim of curbing the rate of inflation.
Inflation and Monetary Policy 1,2
This week, RBA Governor Philip Lowe spoke about the department’s monetary policy intervention to tackle inflation in the evolving economic environment. Over the last six months, similar factors have continued to put pressure on food and energy prices – namely the war in Ukraine, foods on the East coast, and Covid lockdowns in China. The ongoing lockdowns in China are causing disruptions in manufacturing and production and supply chains coupled with strong global demand that is unable to be met. These pressures have forced households and businesses to absorb the rising cost of living.
To demonstrate the rise, the RBA reporting this week on Business Conditions and Sentiments saw:
Almost a third of all businesses (31 per cent) have difficulty finding suitable staff;
Nearly half (46 per cent) of all businesses have experienced increased operating expenses; and
More than two in five businesses (41 per cent) face supply chain disruptions, which has remained steady since it peaked in January 2022 (47 per cent).
* The Survey of Business Conditions and Sentiments was not conducted between July 2021 to December 2021 (inclusive)
Inflation is being experienced globally, although Australia remains below that of most other advanced economies sitting at 5.1 per cent. The share of items in the CPI basket with annualised price increases of more than 3 per cent is at the highest level since 1990 as displayed in the graph below.
With additional information on leading indicators now on hand, the RBA has pushed their inflation forecast up from 6 to 7 per cent for the December quarter, due to persistently high petrol and energy prices. After this period, the RBA expects inflation will begin to decline.
We are beginning to see pandemic-related supply side issues resolve, with delivery times shortening slightly and businesses finding alternative solutions for global production and logistic networks. Whilst there is still a way to go in normalising the flow in the supply side and the possibility that further disruptions and setbacks could occur, the global production system is adapting accordingly, which should help alleviate some of the inflationary pressures.
The RBA’s goal is to ensure inflation returns to a 2-3 per cent target range over time, with the view that high inflation causes damage to the economy, reduces people’s purchasing power and devalues people’s savings.
Household Wealth 3
Growth of 1.2 per cent in household wealth, equivalent to $173 billion, was reported in the March quarter. The rise was a result of an increase in housing prices in the March quarter. Prices have started reversing since that read.
Demand for credit also boomed, with a record total demand for credit of $218.8 billion for the March quarter. The rise was driven by private non-financial corporations demanding $153.2 billion, while households and government borrowed $41.9 billion and $17.5 billion respectively.
We will likely see a significant shift in household wealth and credit demand in next quarter’s report given the rising interest rate environment, depressed household valuations and elevated pricing pressures.
Portfolio Management Commentary
A lag in leading economic indicators has shifted the RBA’s outlook, with an increase in the expected level of inflation to peak at 7 per cent and rate rises to come harder and faster in the near term. From a portfolio standpoint we are not seeing any degradation in our underlying portfolio and open dialogue with our lenders has us confident in their borrowing base. We are maintaining a close eye on the economic environment to ensure we maintain the performance of our Fund and ensure our lenders are in a position to maintain performance and strive to capitalise off the back of economic shifts.
Researchers at the University of Sussex and their partners in Nigeria used open-source designs and 3D printing to reduce personal protective equipment (PPE) shortages for a community in Nigeria during the Covid-19 pandemic – tells a recently published academic paper.
Credit: Please credit Royhaan Folarin, TReND
Researchers at the University of Sussex and their partners in Nigeria used open-source designs and 3D printing to reduce personal protective equipment (PPE) shortages for a community in Nigeria during the Covid-19 pandemic – tells a recently published academic paper.
In their paper in PLOS Biology, Dr Andre Maia Chagas from the University of Sussex, and Dr. Royhaan Folarin from the Olabisi Onabanjo University (Nigeria), explain how their collaboration led to the production of over 400 pieces of PPE for the local hospital and surrounding community, including those providing essential and frontline services. This included face masks and face shields, at a time when a global shortage meant it was impossible for these to be sourced by traditional companies.
In their collaboration, they leveraged existing open-source designs detailing how to manufacture approved PPE. This allowed Nigerian researchers to source, build and use a 3D printer and begin producing and distributing protective equipment for the local community to use. Plus, it was affordable.
One 3D printer operator and one assembler produced on average one face shield in 1 hour 30 minutes, costing 1,200 Naira (£2.38) and one mask in 3 hours 3 minutes costing 2,000 Naira (£3.97). In comparison, at the time of the project, commercially available face shields cost at least 5,000 Naira (£9.92) and reusable masks cost 10,000 Naira (£19.84).
Dr Maia Chagas, Research Bioengineer at the University of Sussex, said: “Through knowledge sharing, collaboration and technology, we were able to help support a community through a global health crisis.
“I’m really proud of the tangible difference we made at a critical time for this community. As PPE was in such high demand and stocks were low, prices for surgical masks, respirators and surgical gowns hiked, with issues arising around exports and international distribution.
“We quickly realized that alternative means of producing and distributing PPE were required. Free and open-source hardware (FOSH) and 3D printing quickly became a viable option.
“We hope that our international collaboration during the pandemic will inspire other innovators to use technology and share knowledge to help address societal problems, which were typically reliant on funding or support from government or large research institutions.
“With open source designs, knowledge sharing and 3D printing, there is a real opportunity for us to start addressing problems from the ground up, and empower local communities and researchers.”
Dr. Royhaan Folarin, a Neuroscientist and lecturer of anatomical sciences at Olabisi Onabanjo University in Nigeria, said:
“During the pandemic, we saw the successful printing and donation of PPE in the Czech Republic by Prusa Research and it became a goal for me to use the training I had received in previous TReND in Africa workshops to help impact my immediate community in Nigeria.”
The international collaboration came about as a result of the TReND in Africa network, a charity hosted within Sussex which supports scientific capacity building across Africa.
After initial use, testers provided feedback commending the innovativeness, usefulness and aesthetics of the PPE and, while the team’s 3D printer was not built for large-scale serial manufacturing, they identified the possibilities for several 3D printers to run in parallel, to reduce relative production time. During the pandemic, this was successfully demonstrated by the company Prusa Research, which produced and shipped 200,000 CE certified face shields.