Closing Stock Market SummaryThe S&P 500 declined 0.4% on Tuesday, snapping an eight-session winning streak amid profit-taking interest and another decline in Treasury yields. The Nasdaq Composite snapped an 11-session winning streak with a 0.6% decline. The Russell 2000 also fell 0.6% while the Dow Jones Industrial Average fell 0.3%.
Tesla (TSLA 1023.50, -139.44, -12.0%) was the prime recipient of profit taking, as the stock fell 12% today and extended its two-day decline to 16%. Entering the week, the stock was up more than 55% in a month. Accordingly, TSLA dragged the S&P 500 consumer discretionary sector (-1.4%) to the bottom of the sector standings.
The information technology (-0.4%), financials (-0.6%), health care (-0.4%), and communication services (-0.3%) sectors closed modestly lower, while the six other sectors in the S&P 500 provided offsetting support with 0.3-0.4% gains. The utilities sector (+0.4%) eked out the top spot.
PayPal (PYPL 205.42, -24.00, -10.5%) held back the technology sector with a 10.5% decline following its earnings report. Elsewhere, peculiar curve-flattening activity in the Treasury market weighed on the financials sector.
The price action in Treasuries was counter-intuitive because yields settled lower despite the elevated inflation pressures depicted in the Producer Price Index (PPI) report for October and the lukewarm demand in the $39 billion 10-yr Treasury note auction. Total PPI increased 0.6% month-over-month, in-line with the Briefing.com consensus, and held steady at 8.6% year-over-year.
The 2-yr yield fell five basis points to 0.40%, and the 10-yr yield fell seven basis points to 1.43%. The U.S. Dollar Index declined 0.1% to 93.97. WTI crude futures rose 2.7%, or $2.20, to $84.16/bbl.
Presumably, Treasuries were propped up by defensive positioning from investors cautious on equities, by peak inflation expectations, and by an understanding that the Fed isn't in a hurry to hike rates.
Separately, shares of Roblox (RBLX 109.52, +32.52, +42.2%) soared 42% after the company pleased investors with its earnings report. General Electric (GE 111.29, +2.87, +2.7%) rose nearly 3.0% after announcing plans to form three public companies focused on aviation, healthcare, and energy.
Reviewing Tuesday's economic data:
- The Producer Price Index for final demand increased 0.6% month-over-month in October (consensus +0.6%) and the index for final demand, less foods and energy, increased 0.4% (consensus +0.4%).
- The key takeaway from the report is that the year-over-year readings for total PPI and core PPI were unchanged from September, which will contribute to the notion that the inflation experienced by producers is at, or near, peak levels.
- The NFIB Small Business Optimism Index for October decreased to 98.2 from 99.1 in September.
Looking ahead, investors will receive the weekly Claims
- S&P 500 +24.7% YTD
- Nasdaq Composite +23.3% YTD
- Russell 2000 +22.9% YTD
- Dow Jones Industrial Average +18.7% YTD
Element Capital hit with $1bn loss in bond market shake-up
Hedge fund run by Jeffrey Talpins is among highest-profile losers from fixed income ructions
Element Capital sustained a roughly $1bn loss last month, making the New York hedge fund run by Jeffrey Talpins one of the highest-profile victims of the October tumult across bond markets.
Element, which with $15bn in assets is one of the world’s biggest macro hedge funds, lost 6.7 per cent in October, according to people familiar with the fund’s performance. That takes the firm’s loss this year to 9.9 per cent.
The group declined to comment.
The loss comes after a painful month for macro hedge funds, several of which were caught out by the swings in fixed income markets prompted by a reassessment of how swiftly global central banks will act to slow the rapid growth in prices that is affecting many economies.
Among other funds to suffer was Chris Rokos’s $12.5bn-in-assets Rokos Capital, which lost about 18 per cent last month. New York-based Alphadyne also lost money, while London-based Crispin Odey suffered almost 50 percentage points of performance losses from early October to the end of the month.
Many managers who were expecting interest rates to stay low for some time based on what central banks had been saying earlier in the year were surprised by the Bank of England’s hint in late September that it could lift interest rates before the end of the year to try to curb inflation. The more hawkish BoE sentiment, coupled with decisions by policymakers in Australia and Canada to begin reining in stimulus programmes, triggered a slump in short-term government bond prices around the world.
Some funds were wrongfooted by positions they held in short-term bonds. Others lost money as “steepener trades” — bets that long-term yields will rise faster than short-term yields — were hit, forcing some managers to liquidate positions. Yields rise as prices fall.
Element is one the macro hedge fund sector’s best performers over the long term, having generated average annual gains of more than 18 per cent over the 16 years since it was founded. It has been closed to new investors since 2018, and this year the Financial Times reported it was planning to return $2bn of cash to investors in order to focus on performance.
The firm made one of the most prescient bets of the pandemic last autumn, telling clients that the BioNTech/Pfizer vaccine would be 75 to 90 per cent effective, far more than investors were expecting. Two weeks later, the companies announced the vaccine was more than 90 per cent effective, sparking a huge rally in many stocks.
In September the firm, which uses a range of economic research to make bets on moves in bonds, currencies and commodities, hired Gertjan Vlieghe, who until August was a member of the BoE’s rate-setting Monetary Policy Committee.
Property prices fall in upmarket London boroughs
Westminister and Kensington and Chelsea among those hit by pandemic-driven ‘race for space’
Residential property prices in some of London’s most prestigious boroughs shrank sharply during the pandemic, in stark contrast with strong growth across the rest of the country, official data showed.
In the year to March 2021, the median price in Westminster, the City of London and Kensington and Chelsea fell by an annual rate varying from 2.3 per cent to 14 per cent, according to data published by the Office for National Statistics.
Prices dropped among only a dozen of the 332 local authorities and this contrasts with prices across England and Wales rising by 11 per cent over the same period. More than 80 local authorities, mostly outside London, registered double-digit growth.
Brentwood in Essex, the Isle of Wight, and South Hams in Devon all registered growth rates above 15 per cent.
The pandemic has resulted in strong house price growth in much of the UK, as in most other advanced economies, as buyers took advantage of low interest rates and accumulated savings.
However, central London has largely bucked the trend as many people decided to move to less crowded areas following increased homeworking during the restrictions. Less immigration and fewer international buyers also kept a lid on prices.
“On the property front line we’ve seen a fundamental change in what buyers want,” said Jonathan Hopper, chief executive of estate agency Garrington Property Finders. “More space, a garden, and a less urban location consistently top the wishlists of those planning a move,” he added.
The Land Registry publishes monthly house price data up to August, but its figures are based on mean prices, which could be affected by the strength of the high-end market.
In contrast, the ONS reveals that in England and Wales the median price — the middle point for transactions — for detached, semi-detached and terraced houses rose by an annual rate of about 11 per cent in the year to March 2021, with expansion in all regions and in most local authorities.
The median price of flats increased by less than half that over the same period. In some regions and in nearly half of local authorities, median flat prices registered outright contractions, including double-digit falls in the City of London and Westminster.
This official analysis of the housing market captured “the moment the starting gun was fired on the ‘race for space’ — and when flat owners became collateral damage of the pandemic”, said Hopper.
As a result, the median price paid for residential properties in Kensington and Chelsea dropped to £1.27m in the year ending March 2021, down from £1.3m at the same time last year and the lowest since the same period in 2017. In the City of London, median house prices fell to a seven-year low of £768,000.
This is despite prices for the most expensive detached houses in Kensington and Chelsea increasing to a median of £11.5m, the highest on record strongly up from £8.4m before the pandemic.
Richemont: Third Point is in no position to rush Johann Rupert
Founder’s control of group makes criticism from minority shareholders mere rhetoric
Time is a luxury that Richemont, like its customers, can afford. That is thanks to the pricey watches it sells and the control wielded by founder and chair Johann Rupert.
US activist Third Point has reportedly bought shares in the Swiss luxury conglomerate, which owns Cartier, and is seeking improvements. But Rupert has no need to respond to chivvying quickly. A dual-share structure means he controls more than half of voting shares despite an economic interest of just 9 per cent.
That makes any criticism from minorities mere rhetoric, however well-founded. What investors might complain about is the dependence Richemont has on its jewellery businesses, in particular Cartier. These brands plus its specialist watches provide almost three-quarters of revenues and all its profits. Its other businesses are weaker.
This skewed earnings power is a feature of some luxury goods groups. LVMH of France earns most of its coin from its Louis Vuitton leather goods business. It also has a dual-class structure for the controlling Arnault family, though not as extreme as that of Richemont.
The focus on jewellery could explain the longer period Richemont needs to convert inventories and receivables into cash flow. It needs twice as many days as LVMH and Kering, according to S&P Global data. Higher working capital requirements create a drag on cash flow.
All this, and weaker profit margins than peers, may explain why the share price has in past years trailed its peers, though Richemont began to close that gap in 2021.
What shareholders will want to hear about are Richemont’s other ventures. These have burnt up cash. After taking full control of the Yoox Net-a-Porter luxury ecommerce group for about €2.8bn in 2018, the online division has suffered losses equal to a tenth of divisional sales two years running. Talk of restructuring at YNAP has gone on for some time and the chair promised changes at the annual general meeting in September.
A clearer plan could come this Friday when Richemont announces first-half results. Given Rupert’s control of the group, he has a further luxury: to set out a plan to diversify earnings and squeeze out efficiencies at a pace that suits his business rather than impatient activists.
The new paradox in the energy market
Plus, young activists demand that hard action follows the words at COP26
Two things to start:
- European gas prices are on the up again as Russia shows no sign of increasing its exports to the region.
- The SEC charged the United States Oil Fund, the exchange traded product at the centre of last year’s sub-zero oil market meltdown, and its partner United States Commodity Funds, for “misleading statements” made during the crisis. The funds agreed to pay $2.5m to settle the case.
Welcome back to Energy Source. It’s another busy week.
The COP26 climate summit in Glasgow is entering its final stretch.
Last week saw great fanfare over a flurry of big multilateral pacts on deforestation, climate finance, methane and coal. But those hoping for a watershed moment have so far been disappointed.
The first announcement lacked enforcement details. The second remains shy of its $100bn target. The third omitted the biggest culprits. And the failure of the US to sign up to the fourth was a big blow to its credibility.
Another deal in the works to end global vehicle emissions by 2040 has faced pushback from the world’s biggest carmakers.
Still, US climate envoy John Kerry remained upbeat, insisting over the weekend that “genuine progress” was being made.
“I have never in the first few days of any of the COPs I’ve been to counted as many initiatives and as much real money being put on the table,” he said.
Meanwhile, back in Washington, Congress has finally passed the president’s $1.2bn bipartisan infrastructure bill. On the energy and climate front it includes big infusions of cash for the grid, electric vehicles, well-plugging and R&D in areas such as carbon capture and hydrogen.
But the reconciliation bill still being bashed out in Congress will be a much bigger deal for climate — even if it has been significantly diluted from its original iteration. Passage is expected this week — but we are not holding our breath.
We’re also braced for a potential release of oil from the US strategic petroleum reserve this week as the Biden administration scrambles to respond to Americans’ ire over high petrol prices — having been rebuffed in its outreach to Opec.
In our first item today, Derek Brower writes about the new paradox in global energy markets, where the countries that are pledging to burn less of the fossil fuels causing climate change are now doing their utmost to secure new supplies of those same fossil fuels.
Amanda Chu looks at the growing impatience among activists and young people at COP26.
And in a double-bill Data Drill we look at the disparity between rich and poor when it comes to global emissions and break out the latest numbers on soaring EV sales.
Iberdrola calls for ‘national interest’ approvals for green energy projects
Red tape threatens climate targets around the world, says utility chief executive Galán
Governments globally need to fast-track permitting for “green” infrastructure projects of national importance or risk missing decarbonisation targets, the head of one of the world’s biggest utilities has warned.
Ignacio Galán, the longstanding chair and chief executive of Iberdrola, said clean energy projects such as large offshore wind farms are too often slowed down by planning bureaucracy in regions such as Europe, and can take nearly a decade from conception to start generating power.
Galán, in Glasgow for the COP26 climate summit, said it sometimes took seven years to secure the necessary permissions and contracts for offshore wind projects in countries such as the UK, while construction takes less than two years. In the case of solar farms, the construction phase can be as little as six months following lengthy planning processes.
Citing France’s nuclear power plants, which were built under “national interest” programmes, he said policies that speed up permitting should be applied now to renewable energy assets such as solar and wind farms.
“We are passing through too many processes that are not . . . in the national interest,” Galán told the Financial Times, adding that there should be only one process with which energy companies have to engage rather than jumping through various local, regional and national hoops.
Permitting varies by country — and Galán pointed out that there can also be separate regimes within the same nation. “In Spain we have . . . different processes of permitting for those power plants which are below 50MW and over 50MW. Below 50MW it’s a regional approval . . . and it takes those ones . . . less than six months” to secure approval, he said. “When we are over 50MW, between two and four years.”
Permitting is becoming a big issue in the wind industry in particular. Global wind companies including Vestas, Orsted, SSE and Siemens Gamesa warned G20 leaders in July that efforts to meet climate targets were “condemned to fail” unless they urgently stepped up the installation of turbines. They identified “inadequate” permitting regimes as among the greatest barriers to faster deployment.
Galán said fast-track permitting was among his major requests of leaders during the climate summit, alongside reducing the bureaucracy around investment in electricity grids, which will be needed to support the electrification of sectors such as transport.
Leaders including US President Joe Biden and UK Prime Minister Boris Johnson pledged to accelerate the rollout of clean energy technologies during the first week of the COP.
The commitment came against a backdrop of high gas and power prices in many parts of the world, including Europe, caused by factors including demand roaring back after the coronavirus pandemic and lower gas supplies from Russia to western Europe.
Galán expressed optimism that wholesale gas and power prices, which surged to record highs in Europe and the UK in October, “would be normalised” by spring.
Citing expectations that Russia would increase supplies to Europe over the winter and of higher exports from countries such as Norway, Galán said: “Even today, the forward prices of gas for next year are [nearly] half of those that they were already a few months ago.”
In the UK, the wholesale gas contract for delivery in December 2022 is currently trading around £1.22 a therm, compared with £1.97 for the December 2021 contract.