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Week Ahead: Macro and Prices

The market has much to digest. The Bank of England’s new purchases of Gilts coincided with a reassessment of the trajectory of Fed policy. After the hawkish…

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The market has much to digest. The Bank of England's new purchases of Gilts coincided with a reassessment of the trajectory of Fed policy. After the hawkish FOMC decision and forecasts, the market briefly thought the terminal rate could be 5.25-5.50% in the middle of next year. However, by the end of last week, it had returned to around 4.5% at the end of Q1 23. Italy has a right-wing government, and what it means for the country's debt and relationship with the EU are being debated. The cabinet will begin taking shape, and it could help shape investors' expectations. Italy's premium had jumped 30-40 since a little before the election.  

The rapid referendums in eastern Ukraine and Russia's annexation of the territories, after taking Crimea in 2014 point to a new phase in the conflict. Some observers are linking Russia's mobilization and rush for a referendum--even by its trumped-up standards, to the meeting with China's Xi rather than the setback of Russian forces at the hands of the Ukrainians armed to the teeth with US weapons and intelligence.  

Sometimes the narrative is about macro developments, but recently the price action itself has been the narrative. Central banks from several emerging markets are believed to have intervened to support their currencies, and Japan became the first G10 central bank to materially protest what the market was doing with the yen (still to be sorted out if it was about a level--less likely--than the one-way market--more likely). It looks like the initial estimates of a record JPY3.0 trillion (~$21 bln) was fairly close. BOJ figures suggest it was closer to the JPY2.85 trillion, which seems like a lot for a few nights of sound sleep. Still, the pullback in US yields helps protect the JPY145 level.  

Sterling's collapsed the new government's mini-budget spurred the Bank of England to comment. It was monitoring developments and would take the necessary measures to bring inflation down, and review both fiscal policy and sterling at its November 3 meeting. However, seeming to rule out an emergency meeting, which did not validate the sense of urgency seen by investors and businesses weighed on sterling. Yet, when systemic risks arose, the BOE stepped in. It announced a bond-buying program distinct from QE and it seemed to stop the panic. The Gilt market stabilized and sterling recovered to almost where it was before the government's fiscal initiative. The swaps market has a 150 bp hike at the next BOE meeting nearly fully discounted.

The price action in the debt markets is also the narrative.   The US 2-year yield has risen from almost 3.5% at the end of August to nearly 4.35%  in late September. It looks poised to re-test 4.0%. In early August, the US benchmark 10-year yield tested 2.50%. It poked above 4.0% last week before falling back below 3.70% before the weekend. The 10-year breakeven (the difference between the yield of the inflation-protected and conventional security) slipped below 2.10% before the weekend, its lowest since February 2021. The two-year breakeven slipped below 2% at the end of last week for the first time since late 2020.

The two-month rally in US equities indices has fully unwound. Europe's Stoxx 600 and the MSCI Asia Pacific Index also fell to new lows for the year last week. The general re-pricing of assets from a zero-interest rate environment to higher rates is a difficult process and it has become a moving target.  

Oil prices rallied almost 60% in the first half of the year and since mid-June, WTI has tumbled by nearly more than 35%, leaving it up less than 7% for the year. The US retail price for gasoline has risen over the last few days but did slip a little in September, its third consecutive monthly decline. At an average of around $3.80 a gallon, it has risen by slightly more than 15% since the end of last year. A broader measure of commodity prices, the CRB Index, has also pulled back since the mid-June peak. It has fallen by nearly 20%.  

There are a few data points next week that do stand out. First, is the US jobs report. The median forecast in Bloomberg's survey is for a 250k increase in non-farm payrolls, which includes an estimated 13k net loss of government jobs. The numbers have been so distorted by the shutdown and re-opening and shifting preferences that it may be difficult to know what is a normal number. In the four-year before the pandemic, the US averaged less than 200k additions a month. That means that the 250k median forecast (Bloomberg's survey), which would be the least since December 2020 will likely be seen as a robust figure by Fed officials.  

Of course, there are other dimensions that will be watched. These include the unemployment rate (which rose to 3.7% from 3.5%), the participation rate (increased to 62.4% from 62.1%, to match the highest since March 2020), and the average hourly earnings ( a 0.3% month-over-month increase will slow the year-over-year pace to 5.0% or slightly below). The JOLTS report on job openings appears seems to be attracting diminishing interest, even though Chair Powell still referred to it. Canada also reports September employment figures. It has lost full-time jobs for the three months through August.  

We would make the case for US auto sales being notable too. They are expected to have edged higher, and at 13.5 mln (SAAR) it would be the most since April. Although, through August auto sales are off about 15% year-over-year, a 13.5 mln unit pace September would be the second consecutive month of year-over-year improvement. In the current strong dollar environment trade figures are interesting, though the advanced goods balance report steals most of its thunder. Still, part of the issue is that the Fed does not meet until November 2, and the key for policy is not the real sector, provided the jobs report is broadly in line with expectations, is CPI (October 13).  

Japan's Tankan Survey (October 3) rarely moves the market, and this may be doubly true now as large business sentiment is better than for small businesses. Corporate profits are the highest in more than 50 years as the foreign earnings translate into more yen. Given the policy divergence, and the intervention to support the yen, Tokyo's September CPI will be watched as a good indicator of the national figures. Headline CPI may hold below 3%. The core rate (excludes fresh food) may have edged up from 2.6% in August. This could be the near-term peak, as the supplemental budget will offer new protection from energy and wheat prices and energy prices fall faster than the yen.  

The Reserve Bank of Australia and New Zealand meet. The market is slightly more confident that New Zealand's central bank will hike by 50 bp than Australia's. The RBA has hiked at every meeting since May for a total of 225 bp, bringing the target rate to 2.35%. It is clear that it is not done but it has signaled that after four half-point moves it could slow. Since it last met, the Australian dollar has fallen nearly 4.5% to two-and-a-half year lows near $0.6435. The RBNZ began its tightening cycle last October and has lifted the target rate by 275 bp to 3.0%. The swaps market has Australia's terminal rate between 4.25% and 4.50% in Q3 23. The terminal rate for the RBNZ is seen closer to 5.0%

Let's turn now to the foreign exchange price action. 

Dollar Index:  On September 20, the Dollar Index posted an outside up day by trading on both sides of the previous day's range and settling above its high. The rally that it signaled was completed in the middle of last week as DXY made new 20-year highs and then reversed lower and settled below the previous session's low. This key reversal saw follow-through selling to a new five-day low ahead of the weekend slightly above 111.55. That nearly met the (62.8%) retracement of the advance from September 20 (~111.45). Initial resistance is now near 112.80 and then 113.20. The MACD and Slow Stochastic are rolling over in over-extended territory. The 20-day moving average, the middle of the Bollinger Band is near 110.80.  

Euro:  The euro's recovery off the 20-year low set in the middle of last week (~$0.9535) stalled ahead of the weekend about three cents higher. Like the Dollar Index, it met the (61.8%) retracement objective of the move since September 20. It also stopped shy of the 20-day moving average (~$0.9890). Initial support is seen near $0.9700, and a break of $0.9650 would signal a return to the lows. The MACD firmed slightly last week but it has not established an uptrend. The Slow Stochastic has turned higher and it is still oversold. Parity is a key cap now. 

Japanese Yen:  The BOJ's intervention has helped steady the dollar-yen exchange rate. The market has been reluctant to push the dollar back above JPY145.00.   Since the middle of the week, the greenback has largely held above JPY144.00. The sideways movement has seen the MACD trend lower. The Slow Stochastic has also been trending lower but steadied last week. The pullback in US rates may be a contributing factor to the stability of the exchange rate. After briefly pushing above 4% in the middle of the week the 10-year US Treasury traded below 3.70% before the weekend. The two-year US yield reached almost 4.35% at the start of last week and finished below 4.18%.  

British Pound:  Sterling traded in a wide range last week. It began by extending the route after the new government's fiscal message and falling to its lowest level since the end of Bretton Woods, reaching $1.0350. The BOE's measures to address the threat to systemic stability helped spur a short-covering rally in sterling that lifted to a high at the end of the week of about $1.1235. Recall that it finished the previous week (September 23 near $1.0860 and traded almost to $1.1275 before the mini budget. The pre-weekend high met a technical retracement objective (~61.8% of the leg lower that began on September 13 from almost $1.1740). The momentum indicators have turned higher from oversold territory, and, of note, the Slow Stochastic is leaving a bullish divergence in its wake. While we think the market's response to the fiscal measures, which were largely what Prime Minister Truss had advocated during her campaign was exaggerated, the blow to sentiment was serious. Sterling needs to overcome resistance in the $1.1275-$1.1300 area to signal a deeper recovery, a loss of $1.09 could see $1.0750-$1.0800.  

Canadian Dollar:  Weak US stocks and an aggressive Federal Reserve kept the Canadian dollar on the defense last week. The greenback made a new two-and-a-half-year high near CAD1.3835 in the middle of the week. There was no follow-through USD selling after the key reversal on Wednesday. Support was found near CAD1.3600. The MACD is still rising but is stretched. The Slow Stochastic turned lower. The US dollar rose for its third consecutive week and seven of the nine weeks since the end of July. The Canadian dollar is no longer the best G10 performer this year against the US dollar. It lost top billing to the Swiss franc, which is almost 7% compared to the Loonie's 8% decline. More than half of this year's decline in the Canadian dollar took place in September (~-4.35%).  

Australian Dollar: As we saw with the Canadian dollar, so too with the Australian dollar:  The seemingly favorable price action in the middle of last week did not see follow-through action. Instead, weak consolidation was seen in the last two sessions. The Aussie slumped to a new two-year low near $0.6365 on September 28 and recovered to close a little bit above $0.6520. Before the weekend it traded to almost $0.6450. The MACD is at its lowest level since mid-May, and although it has not turned, it looks poised to do so in the coming days. The Slow Stochastic has curled up and from slightly above the low set earlier in September. Overcoming the $0.6575-$0.6600 area now would lift the tone. The futures market leans (~60%) in favor a of 50 bp hike by the RBA on October 4, essentially unchanged last week. A half-point move would lift the target rate to 2.85%. The terminal rate is seen a little over 4% near mid-2023. The RBNZ meets on October 5. The market is more confident that it hikes 50 bp and again in November, its last meeting year. That would put the target rate at 4%. The terminal rate is seen closer to 5.25% in early Q3 23.  

Mexican Peso:  As part of its broad rally, the US dollar pushed to MXN20.58 on September 28, its highest level in nearly two months. It reversed dramatically low and close that day near MXN20.1255. After the key reversal, there was no immediate follow-through selling, but ahead of the weekend, the greenback fell to new lows for the week around MXN20.09. The MACD is not clear, though the Slow Stochastic is curling lower. Last week, a few central European currencies gained against the dollar (Czech, Bulgaria, and Romania, but not Russia or Hungary), and after them was the peso. The peso's gain of about 0.5%  was enough to ensure a gain for the month, albeit small (less than 0.2%). We suspect there is potential now toward the lower end of the recent range (~MXN19.80).  

Chinese Yuan:  Before the weeklong holiday in China during the first week of October, officials drew the line in the sand. Reports suggested that it put banks on notice that they should be prepared for intervention. How do the banks prepare? Apparently, they cut their long dollar exposure. The dollar fell from CNY7.25 in the middle of last week to almost CNY7.0835 before the weekend. The greenback gapped lower last Thursday and Friday and both times the gap was quickly closed. The dollar settled near CNY7.1150, while against the offshore yuan the dollar finished a little below CNH7.1300. Given the sensitivity and official scrutiny, look for the dollar to trade within recent ranges against the offshore yuan during next week's holiday.  


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Four burning questions about the future of the $16.5B Novo-Catalent deal

To build or to buy? That’s a classic question for pharma boardrooms, and Novo Nordisk is going with both.
Beyond spending billions of dollars to expand…

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To build or to buy? That’s a classic question for pharma boardrooms, and Novo Nordisk is going with both.

Beyond spending billions of dollars to expand its own production capacity for its weight loss drugs, the Danish drugmaker said Monday it will pay $11 billion to acquire three manufacturing plants from Catalent. It’s part of a broader $16.5 billion deal with Novo Holdings, the investment arm of the pharma’s parent group, which agreed to acquire the contract manufacturer and take it private.

It’s a big deal for all parties, with potential ripple effects across the biotech ecosystem. Here’s a look at some of the most pressing questions to watch after Monday’s announcement.

Why did Novo do this?

Novo Holdings isn’t the most obvious buyer for Catalent, particularly after last year’s on-and-off M&A interest from the serial acquirer Danaher. But the deal could benefit both Novo Holdings and Novo Nordisk.

Novo Nordisk’s biggest challenge has been simply making enough of the weight loss drug Wegovy and diabetes therapy Ozempic. On last week’s earnings call, Novo Nordisk CEO Lars Fruergaard Jørgensen said the company isn’t constrained by capital in its efforts to boost manufacturing. Rather, the main challenge is the limited amount of capabilities out there, he said.

“Most pharmaceutical companies in the world would be shopping among the same manufacturers,” he said. “There’s not an unlimited amount of machinery and people to build it.”

While Novo was already one of Catalent’s major customers, the manufacturer has been hamstrung by its own balance sheet. With roughly $5 billion in debt on its books, it’s had to juggle paying down debt with sufficiently investing in its facilities. That’s been particularly challenging in keeping pace with soaring demand for GLP-1 drugs.

Novo, on the other hand, has the balance sheet to funnel as much money as needed into the plants in Italy, Belgium, and Indiana. It’s also struggled to make enough of its popular GLP-1 drugs to meet their soaring demand, with documented shortages of both Ozempic and Wegovy.

The impact won’t be immediate. The parties expect the deal to close near the end of 2024. Novo Nordisk said it expects the three new sites to “gradually increase Novo Nordisk’s filling capacity from 2026 and onwards.”

As for the rest of Catalent — nearly 50 other sites employing thousands of workers — Novo Holdings will take control. The group previously acquired Altasciences in 2021 and Ritedose in 2022, so the Catalent deal builds on a core investing interest in biopharma services, Novo Holdings CEO Kasim Kutay told Endpoints News.

Kasim Kutay

When asked about possible site closures or layoffs, Kutay said the team hasn’t thought about that.

“That’s not our track record. Our track record is to invest in quality businesses and help them grow,” he said. “There’s always stuff to do with any asset you own, but we haven’t bought this company to do some of the stuff you’re talking about.”

What does it mean for Catalent’s customers? 

Until the deal closes, Catalent will operate as a standalone business. After it closes, Novo Nordisk said it will honor its customer obligations at the three sites, a spokesperson said. But they didn’t answer a question about what happens when those contracts expire.

The wrinkle is the long-term future of the three plants that Novo Nordisk is paying for. Those sites don’t exclusively pump out Wegovy, but that could be the logical long-term aim for the Danish drugmaker.

The ideal scenario is that pricing and timelines remain the same for customers, said Nicole Paulk, CEO of the gene therapy startup Siren Biotechnology.

Nicole Paulk

“The name of the group that you’re going to send your check to is now going to be Novo Holdings instead of Catalent, but otherwise everything remains the same,” Paulk told Endpoints. “That’s the best-case scenario.”

In a worst case, Paulk said she feared the new owners could wind up closing sites or laying off Catalent groups. That could create some uncertainty for customers looking for a long-term manufacturing partner.

Are shareholders and regulators happy? 

The pandemic was a wild ride for Catalent’s stock, with shares surging from about $40 to $140 and then crashing back to earth. The $63.50 share price for the takeover is a happy ending depending on the investor.

On that point, the investing giant Elliott Investment Management is satisfied. Marc Steinberg, a partner at Elliott, called the agreement “an outstanding outcome” that “clearly maximizes value for Catalent stockholders” in a statement.

Elliott helped kick off a strategic review last August that culminated in the sale agreement. Compared to Catalent’s stock price before that review started, the deal pays a nearly 40% premium.

Alessandro Maselli

But this is hardly a victory lap for CEO Alessandro Maselli, who took over in July 2022 when Catalent’s stock price was north of $100. Novo’s takeover is a tacit acknowledgment that Maselli could never fully right the ship, as operational problems plagued the company throughout 2023 while it was limited by its debt.

Additional regulatory filings in the next few weeks could give insight into just how competitive the sale process was. William Blair analysts said they don’t expect a competing bidder “given the organic investments already being pursued at other leading CDMOs and the breadth and scale of Catalent’s operations.”

The Blair analysts also noted the companies likely “expect to spend some time educating relevant government agencies” about the deal, given the lengthy closing timeline. Given Novo Nordisk’s ascent — it’s now one of Europe’s most valuable companies — paired with the limited number of large contract manufacturers, antitrust regulators could be interested in taking a close look.

Are Catalent’s problems finally a thing of the past?

Catalent ran into a mix of financial and operational problems over the past year that played no small part in attracting the interest of an activist like Elliott.

Now with a deal in place, how quickly can Novo rectify those problems? Some of the challenges were driven by the demands of being a publicly traded company, like failing to meet investors’ revenue expectations or even filing earnings reports on time.

But Catalent also struggled with its business at times, with a range of manufacturing delays, inspection reports and occasionally writing down acquisitions that didn’t pan out. Novo’s deep pockets will go a long way to a turnaround, but only the future will tell if all these issues are fixed.

Kutay said his team is excited by the opportunity and was satisfied with the due diligence it did on the company.

“We believe we’re buying a strong company with a good management team and good prospects,” Kutay said. “If that wasn’t the case, I don’t think we’d be here.”

Amber Tong and Reynald Castañeda contributed reporting.

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Petrina Kamya, Ph.D., Head of AI Platforms at Insilico Medicine, presents at BIO CEO & Investor Conference

Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb….

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Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb. 26-27 at the New York Marriott Marquis in New York City. Dr. Kamya will speak as part of the panel “AI within Biopharma: Separating Value from Hype,” on Feb. 27, 1pm ET along with Michael Nally, CEO of Generate: Biomedicines and Liz Schwarzbach, PhD, CBO of BigHat Biosciences.

Credit: Insilico Medicine

Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb. 26-27 at the New York Marriott Marquis in New York City. Dr. Kamya will speak as part of the panel “AI within Biopharma: Separating Value from Hype,” on Feb. 27, 1pm ET along with Michael Nally, CEO of Generate: Biomedicines and Liz Schwarzbach, PhD, CBO of BigHat Biosciences.

The session will look at how the latest artificial intelligence (AI) tools – including generative AI and large language models – are currently being used to advance the discovery and design of new drugs, and which technologies are still in development. 

The BIO CEO & Investor Conference brings together over 1,000 attendees and more than 700 companies across industry and institutional investment to discuss the future investment landscape of biotechnology. Sessions focus on topics such as therapeutic advancements, market outlook, and policy priorities.

Insilico Medicine is a leading, clinical stage AI-driven drug discovery company that has raised over $400m in investments since it was founded in 2014. Dr. Kamya leads the development of the Company’s end-to-end generative AI platform, Pharma.AI from Insilico’s AI R&D Center in Montreal. Using modern machine learning techniques in the context of chemistry and biology, the platform has driven the discovery and design of 30+ new therapies, with five in clinical stages – for cancer, fibrosis, inflammatory bowel disease (IBD), and COVID-19. The Company’s lead drug, for the chronic, rare lung condition idiopathic pulmonary fibrosis, is the first AI-designed drug for an AI-discovered target to reach Phase II clinical trials with patients. Nine of the top 20 pharmaceutical companies have used Insilico’s AI platform to advance their programs, and the Company has a number of major strategic licensing deals around its AI-designed therapeutic assets, including with Sanofi, Exelixis and Menarini. 

 

About Insilico Medicine

Insilico Medicine, a global clinical stage biotechnology company powered by generative AI, is connecting biology, chemistry, and clinical trials analysis using next-generation AI systems. The company has developed AI platforms that utilize deep generative models, reinforcement learning, transformers, and other modern machine learning techniques for novel target discovery and the generation of novel molecular structures with desired properties. Insilico Medicine is developing breakthrough solutions to discover and develop innovative drugs for cancer, fibrosis, immunity, central nervous system diseases, infectious diseases, autoimmune diseases, and aging-related diseases. www.insilico.com 


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Another country is getting ready to launch a visa for digital nomads

Early reports are saying Japan will soon have a digital nomad visa for high-earning foreigners.

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Over the last decade, the explosion of remote work that came as a result of improved technology and the pandemic has allowed an increasing number of people to become digital nomads. 

When looked at more broadly as anyone not required to come into a fixed office but instead moves between different locations such as the home and the coffee shop, the latest estimate shows that there were more than 35 million such workers in the world by the end of 2023 while over half of those come from the United States.

Related: There is a new list of cities that are best for digital nomads

While remote work has also allowed many to move to cheaper places and travel around the world while still bringing in income, working outside of one's home country requires either dual citizenship or work authorization — the global shift toward remote work has pushed many countries to launch specific digital nomad visas to boost their economies and bring in new residents.

Japan is a very popular destination for U.S. tourists. 

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This popular vacation destination will soon have a nomad visa

Spain, Portugal, Indonesia, Malaysia, Costa Rica, Brazil, Latvia and Malta are some of the countries currently offering specific visas for foreigners who want to live there while bringing in income from abroad.

More Travel:

With the exception of a few, Asian countries generally have stricter immigration laws and were much slower to launch these types of visas that some of the countries with weaker economies had as far back as 2015. As first reported by the Japan Times, the country's Immigration Services Agency ended up making the leap toward a visa for those who can earn more than ¥10 million ($68,300 USD) with income from another country.

The Japanese government has not yet worked out the specifics of how long the visa will be valid for or how much it will cost — public comment on the proposal is being accepted throughout next week. 

That said, early reports say the visa will be shorter than the typical digital nomad option that allows foreigners to live in a country for several years. The visa will reportedly be valid for six months or slightly longer but still no more than a year — along with the ability to work, this allows some to stay beyond the 90-day tourist period typically afforded to those from countries with visa-free agreements.

'Not be given a residence card of residence certificate'

While one will be able to reapply for the visa after the time runs out, this can only be done by exiting the country and being away for six months before coming back again — becoming a permanent resident on the pathway to citizenship is an entirely different process with much more strict requirements.

"Those living in Japan with the digital nomad visa will not be given a residence card or a residence certificate, which provide access to certain government benefits," reports the news outlet. "The visa cannot be renewed and must be reapplied for, with this only possible six months after leaving the countr

The visa will reportedly start in March and also allow holders to bring their spouses and families with them. To start using the visa, holders will also need to purchase private health insurance from their home country while taxes on any money one earns will also need to be paid through one's home country.

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