Gapping down
In reaction to earnings/guidance:
- ACCD -4.8%, IMOS -3.9% (Q3 revs) OSK -3.9% (lowers guidance) DS -2.2% (guides Q3 revs slightly below dual analyst estimate), ASX -1.7% (Sep revs)
Other news:
- ALLO -35.5% (FDA places hold on the company's AlloCAR T clinical trials)
- DXPE -3.1% (will require restatement to correct for the impact of aged un-vouchered purchase orders included in trade accounts payable and other immaterial prior-period items)
- RKLY -1.5% (stock offering)
Analyst comments:
- FAST -2.4% (downgraded to Underweight from Equal Weight at Wells Fargo)
- CAG -1.5% (downgraded to Neutral from Overweight at JP Morgan)
- CHTR -1.4% (downgraded to Underweight from Overweight at Wells Fargo)
Gapping up
In reaction to earnings/guidance:
- QDEL +6.8% (issues Q3 guidance well above consensus estimate)
Other news:
- CCXI +63.1% (FDA approves TAVNEOS)
- EFTR +24.1% (presents new positive data for zotatifin in animal models of triple-negative breast cancer)
- RPTX +10% (issues statement regarding inadvertent issuance of abstract)
- VXRT +8.6% (oral COVID-19 vaccine candidate shown to reduce airborne transmission of SARS-CoV-2 in an animal model)
- HGEN +3.6% (enters contract with Clinigen for Lenzilumab Managed Access Program in Europe)
- BW +2.8% (awarded ~$10 mln contract to install ash-handling equipment)
- NXTC +1.6% (reports preclinical data for NC410)
- THO +1.2% (increases dividend)
- TAK +1.2% (receives unanimous recommendation for use of Maribavir from FDA)
- TRNO +1.1% (provides operating update for Q3)
- CI +1.1% (Cigna to divest its Life, Accident And Supplemental Benefits businesses in seven countries to Chubb (CB) for $5.75 bln)
- MOH +1% (to acquire the Medicaid Managed Long Term Care business of AgeWell New York for $110 mln)
Analyst comments:
- UNP +1% (upgraded to Overweight from Neutral at JP Morgan)
Early premarket gappers
- Gapping up:
- EFTR +25.7%, RPTX +10%, VXRT +8.2%, QDEL +6.5%, HGEN +5.3%, BW +2.8%, NXTC +1.6%, MOH +1%, COIN +0.9%, VMW +0.9%, TAK +0.9%, SNY +0.8%, AERI +0.8%, DS +0.7%, WSM +0.5%
- Gapping down:
- ALLO -36.5%, ACCD -7.9%, CB -3.4%, TMC -2.5%, ASX -1.7%, RKLY -1.5%, BGNE -0.8%
US special forces secretly train Taiwan’s military
American troops have been helping country prepare for possible attack by China
The Pentagon has been sending special operations forces to Taiwan for several years to help the country prepare for a possible Chinese attack.
People familiar with the deployments, which involve rotating special forces for short periods, said the US was training Taiwanese forces partly in connection with the island’s purchase of American arms, such as F-16 fighters.
One person said the rotations had been occurring for at least a decade, and included US marines, army special forces and navy seals. A second person said the move was part of the US effort to help Taiwan bolster its defences as the threat from China increased.
The disclosure, which was first reported by The Wall Street Journal, comes amid mounting tensions over Taiwan. China has flown record numbers of warplanes into Taiwan’s “air defence identification zone”.
The Pentagon declined to comment on the deployments, but said US support for Taiwan was commensurate with the threat from China. American administrations are required under the Taiwan Relations Act to help the island defend itself.
“The PRC has stepped up efforts to intimidate and pressure Taiwan and other allies and partners, including increasing military activities conducted in the vicinity of Taiwan, East China Sea and South China Sea,” said John Supple, a Pentagon spokesperson.
On Friday, China’s foreign ministry said that when Washington established diplomatic relations with Beijing in 1979, it agreed to have only “cultural, business and other non-official relations with Taiwan”.
“The US should know clearly the high sensitivity of the Taiwan issue . . . and cut military [links] with Taiwan,” a ministry spokesperson said.
Heino Klinck, a Taiwan and China expert who served as a senior Pentagon Asia official during the Trump administration, said the deployments were “routine and not at all out of the ordinary”.
“The US and Taiwan have a robust and longstanding unofficial military-to-military relationship that includes troops training together, usually under the auspices of a foreign military sales arrangement,” said Klinck.
The Biden administration has repeatedly told Beijing that US relations with Taipei were “rock solid” to warn China of the risks of taking military action against Taiwan. US concerns have mounted as Chinese air and naval military activity has grown increasingly assertive in the region.
Taiwan’s defence minister this week said China would be fully capable of invading the country by 2025, in the first public warning about the possibility of war.
“For decades, Beijing has claimed to be pursuing a peaceful path to resolving the Taiwan question. Clearly, China has not followed through on this pledge,” said Ivan Kanapathy, a China expert at CSIS, a think-tank, who served as a White House Asia official in the Trump administration.
Bonnie Glaser, a China expert at the German Marshall Fund, said the deployments were not a surprise because a social media post showing US special forces training Taiwanese troops had emerged during the Trump era. But she said the disclosure could raise tensions.
“Making this public will compel the Chinese to react, and they will likely do so by stepping up pressure on Taiwan,” said Glaser.
“Given how much they have ratcheted up pressure in the past week, we should worry that they will want to send a stronger signal, and therefore do something more destabilising than simply increase the number of sorties around Taiwan.”
Europe’s electricity generation from wind blown off course
Drop in wind speeds linked to ‘global stilling’ and climate change, scientists say
The strength of the wind blowing across northern Europe has fallen by as much as 15 per cent on average in places this year, according to data compiled by Vortex, an independent weather modelling group.
The cause of the decrease is uncertain, say scientists, but one possible explanation is a phenomenon called global stilling. This is a decrease in average surface wind speed owing to climate change.
“Near-surface wind speed trends across the globe found that winds have generally weakened over land over the past few decades,” said Paul Williams, Professor of Atmospheric Science at the University of Reading. “This suggests that the phenomenon is part of a genuine long-term trend, rather than cyclic variability.”
One explanation for this could be that “human-related climate change is warming the poles faster than the tropics in the lower atmosphere,” Williams noted. “This would have the effect of weakening the mid-latitude north-south temperature difference and consequently reducing the thermal wind at low altitudes.”
Projections from the UN’s Intergovernmental Panel on Climate Change support this trend. Wind speeds over western, central and northern Europe are predicted to drop by as much as 10 per cent in the summer months by 2100, based on 1.5C warming above pre-industrial levels.
Less wind has a direct impact on the amount of electricity that can be generated by the many wind farms across Europe.
In March this year, Britain experienced its longest spell of low wind output in more than a decade.
The power output as a percentage of total installed capacity averaged just 11 per cent between February 26 and March 8, according to Drax, the power generation company. This accounted for less than a quarter of the average for the rest of the two months either side of this period.
Again, on September 6 in the UK, wind provided only 2.5 per cent of electricity generation compared with an average of 18 per cent over the past year. This led to two units at West Burton A, one of the UK’s last remaining coal-fired power plants, being switched on to help with the shortfall.
The trend threatens the UK’s pledge for electricity generation to be carbon neutral by 2035, as it relies on fossil fuels to supplement its energy needs.
Gas accounts for about 40 per cent of the UK’s total electricity generation presently. Record gas prices reached last week made this an expensive alternative to renewable energy sources, as a surge in demand from economies recovering from the pandemic coincided with lower than usual European gas stockpiles.
In spite of the drop in wind power, analysis by the independent Centre for Research on Energy and Clean Air found that power generation from zero-carbon sources still avoided a gas bill of €33 billion across the EU as the gas price rose from July to September.
>>> Up
* Amadeus Raised to Buy at JB Capital Markets; PT 67.10 euros (+)
* Ascential Raised to Overweight at Barclays; PT 500 pence (+)
* Avio Raised to Add at Intesa Sanpaolo; PT 13.70 euros (+)
* EnQuest Raised to Buy at Jefferies; PT 30 pence
* Handelsbanken Raised to Outperform at KBW; PT 120 kronor
* Intl Petroleum Raised to Overweight at Barclays; PT 70 kronor (+)
* Marks & Spencer Raised to Add at Peel Hunt; PT 190 pence
* Marks & Spencer Raised to Add at Peel Hunt; PT 190 pence
* Oatly Group ADRs Raised to Overweight at JPMorgan; PT $21
* Pennon Raised to Hold at HSBC; PT 1,180 pence
* Stroeer Raised to Overweight at Barclays; PT 82.50 euros (+)
* Swedbank Raised to Outperform at KBW; PT 205 kronor
* Tullow Raised to Buy at Jefferies; PT 70 pence
* United Internet Raised to Buy at LBBW; PT 38 euros
* Vivendi Raised to Buy at Citi
* Warner Music PT Raised to $53 from $46 at Morgan Stanley
>>> Down
>>> Down
* Aker BP Cut to Equal-Weight at Barclays; PT 340 kroner (+)
* Cellectis ADRs Cut to Neutral at Baird; PT $10
* Danske Bank Cut to Underweight at Barclays; PT 95 kroner (+)
* DEFAMA AG Cut to Accumulate at SRC Research; PT 27 euros
* DEFAMA AG Cut to Accumulate at SRC Research; PT 27 euros
* Illimity Cut to Neutral at Banca Akros (ESN) (+)
* Nagarro Cut to Hold at Jefferies; PT 151 euros
* Nordea Bank Cut to Market Perform at KBW; PT 115 kronor
* SEB Cut to Market Perform at KBW; PT 130 kronor
* Zur Rose Cut to Hold at Berenberg; PT 400 Swiss francs
>>> Initiation
>>> Initiation
* Acciona Energia Rated New Buy at HSBC; PT 35 euros
* Cewe Stiftung Rated New Buy at Hauck & Aufhaeuser; PT 164 euros (+)
* EDP Renovaveis Reinstated Buy at HSBC; PT 26 euros
* Enel Rated New Outperform at RBC
* Grupo Ecoener Rated New Hold at HSBC; PT 6 euros
* J. Martins Reinstated Accumulate at Erste Group; PT 15.85 euros
* J. Martins Reinstated Accumulate at Erste Group; PT 15.85 euros
* Kape Technologies Rated New Hold at Berenberg; PT 380 pence
* Premier Miton Group PLC Rated New Buy at Investec; PT 240 pence (+)
* UMG Rated New Overweight at Morgan Stanley; PT 30 euros
* UMG Rated New Neutral at Citi; PT 24 euros
>>> Call
>>> Call
* Adler Stock Rating Suspended at JPMorgan (+)
* Vivendi Lifted at Citi on Extraordinary Valuation Post UMG (+)
* Weir Cyberattack Unlikely to Hit 2022 Forecasts, Jefferies Says
* Weir Cyberattack Unlikely to Hit 2022 Forecasts, Jefferies Says
China orders coal miners to boost output to counter energy crunch
Xi Jinping risks undermining his own climate promises to keep factories running
China has ordered coal miners to boost production urgently as the energy crisis threatens factories across the world’s second-biggest economy and forces Xi Jinping’s administration to backtrack on climate change promises.
Energy officials in Inner Mongolia, one of China’s largest coal producing regions, instructed 72 local miners to expand capacity by 100m tonnes, according to a report by Securities Times, a state-controlled national financial newspaper.
The latest effort by Chinese authorities to combat acute power shortages comes after high-tech manufacturing factories were forced to halt or reduce operations, power cuts affected homes in parts of north-east China and there were warnings that critical industries such as food production could also be hit.
Tight gas supplies and volatile commodity prices have also strained energy markets in Europe, the UK and India, drawing interventions from Russian president Vladimir Putin and Jennifer Granholm, the US energy secretary.
Gavin Thompson, an Asia-Pacific commodities expert at Wood Mackenzie, a research consultancy, said that China, like other energy markets facing shortages, “must perform a balancing act” of using coal to keep the lights on while also showing commitment to decarbonisation targets.
“This looks uncomfortable as China prepares for [international climate conference] COP26 and comes just weeks after President Xi announced that China will no longer build coal plants overseas. But the short-term reality is that China and many others have little choice but to increase coal consumption to meet power demand,” Thompson said in a research note.
The impact of China’s decision to boost supply was felt immediately in Chinese markets as they reopened from a week-long national holiday. Thermal coal futures traded in Zhengzhou opened almost 3 per cent higher on Friday but quickly swung lower to be down about 11 per cent. The CSI Coal index of listed Chinese miners fell as much as 5.5 per cent.
The decision to expand coal production rapidly at scores of mines in Inner Mongolia was made as China was forced to backtrack on its own trade bans on Australian coal, underscoring the intensity of the power crunch.
The Financial Times reported this week that Australian coal cargoes had been quietly unloaded at several Chinese ports, undermining bans on Chinese state-owned groups importing coal from Australia amid broader political and security tensions simmering between Canberra and Beijing.
Chenjun Pan, a China agricultural sector expert at Rabobank, expected China’s food logistics networks, such as cold chain storage facilities, to also feel “some impact” given their intense electricity use.
However, she added that while coal shortages and energy price increases might appear to be a “short-term, cyclical” problem in China, the episode highlighted the long-term structural challenges in transitioning to cleaner energy systems.
“All sectors need to consider [this] seriously,” she said.
The power shortages have been blamed on a combination of weaker coal output and regulated electricity prices. The energy crunch has piled pressure on China’s economic planners already grappling with the crisis at Evergrande, China’s highly indebted property group.
Société Générale said it had revised down its third-quarter gross domestic product forecast for China to 5 per cent from 5.5 per cent.
“There is simply too much downward pressure on China’s economy at the moment . . . Judging from the latest high-frequency data, the power crunch has already caused notable damage to industrial activity,” the bank’s analysts said. “As a result, we expect industrial production growth to decelerate notably in September.”
Li Shou, a Beijing-based campaigner at Greenpeace, said the power crisis had exposed the problems with China’s overreliance on coal, which accounts for more than half of the country’s energy consumption.
China’s domestic coal production reached 3.9bn tonnes last year. Xi has won international praise for promising that China would hit peak carbon emissions before 2030 and reach carbon neutrality by 2060.
Chinese Property Bonds Tumble Again
Investors, fearing more defaults and price declines, sell out of many developers’ U.S. dollar bonds
Asia’s junk-bond market suffered through another wave of selling Thursday, pushing prices of many Chinese developers’ bonds further into distressed territory.
Prices of U.S. dollar bonds of many Chinese property companies gapped lower by around five points, according to several market participants. Some tumbled even more, as fears of more defaults and further price declines led many investors to sell their holdings.
An ICE BofA index of high-yield dollar bonds from Chinese companies showed a yield of more than 19.8% Thursday, its highest in nearly a decade.
Among the worst hit were bonds of Kaisa Group Holdings Ltd. 1638 +0.54% , a residential developer that previously defaulted on its international debt in 2015. The company’s Hong Kong-listed shares dropped 7.5% on Thursday despite a broader stock-market rally in the city.
A Kaisa bond with a 9.375% coupon that matures in 2024 was bid at 55 cents on the dollar on Thursday in Asia and has dropped around 20 points this week.
A 7.95% bond from Sunac China Holdings Ltd. 1918 -2.09% , another developer investors have recently fretted about, was bid at 72.5 cents on the dollar Thursday after also falling sharply in recent days.
Junk-bond investors in Asia were jolted earlier in the week by an unexpected dollar bond default by Fantasia Holdings Group Co., a luxury developer that had earlier indicated it would pay off $206 million in debt that matured Oct. 4.
September sales numbers from several developers also showed significant drops from August, as demand from Chinese home buyers waned.
“The risk-off sentiment is exacerbated by the default of Fantasia on Monday,” said Cheong Yin Chin, a senior analyst covering Chinese corporates at debt-research firm CreditSights. Missed dollar bond payments from industry giant China Evergrande Group, EGRNF 5.53% which has stayed mum on the issue for weeks, have also contributed to pessimism.
The selling could continue, Ms. Cheong said, adding that the extreme market reaction is likely due to “a mix of investors’ fear of not knowing how China will handle Evergrande and more developers which might default.”
Some market participants said bond prices were falling sharply on thin trading volumes, while mainland China is in the midst of a weeklong public holiday that started on Oct. 1.
“The liquidity is quite low with China out on holiday, and the government hasn’t stepped in. They’re standing aside and letting things unwind,” said Andrew Dewar, an investment manager with a focus on Asian credit at GAM Investments.
He added that “the brokers are trying to find a floor, dropping the price down till someone takes a nibble.”
Uday Patnaik, head of emerging market fixed income at Legal & General Investment Management, said he has sold nearly all high-yield Chinese real-estate bonds from his firm’s absolute return funds.
“I currently don’t think the Chinese have a handle on this situation,” he said. “It started with the Evergrande issue which wasn’t properly ringfenced. Now it is a sectorwide problem,” he added.
Mr. Patnaik said the real-estate sector distress will continue to affect consumer confidence in China and other parts of the economy, unless Beijing steps in to arrest the declines.
Switch to value stocks to prepare for inflation
While the UK government will raise taxes it will also use inflation to cut the weight of its huge debt
The list of jobs I am pretty sure I would never volunteer for is long — though HGV driver is not as far down the list as it once was.
But close to the top is chancellor of the exchequer — now more than ever. Rishi Sunak has a horrible job. He needs to get the UK’s mad borrowing and spending levels under control.
But he also needs to find a way to finance our relentless demands — from net zero and healthcare to pothole-free roads — while making sure his hints of tax cuts to come are vaguely convincing.
So far none of this is going madly well. But it’s not quite as bad as it looks. As George Bull of RSM, an accountancy firm, points out, gross domestic product has rebounded smartly from last year — it was a mere 2.1 per cent below its pre-pandemic levels by the end of July.
Tax revenues will follow. That said, not quite as bad is not the same as not bad. It is bad. The UK’s debt-to-GDP ratio is 106 per cent. A 2013 study from the World Bank suggests that once government debt goes over 77 per cent of GDP every additional percentage point reduces real annual GDP growth by 0.017 percentage points. At 106 per cent that adds up — its effect on living standard might be why Sunak said at his party’s conference this week that he considers the ongoing piling up of debt to be “immoral”.
All this suggests more taxation. But what sort? We already know that national insurance is to rise, supposedly to pay for social care. On top of that there are suggestions that council tax will have to increase even to keep essential services on the go. The Institute for Fiscal Studies reckons on a 5 per cent rise by 2024/5. There are also expectations that the chancellor will soon set out views on reform (for which read increase) of capital gains tax (CGT). Meanwhile, the idea that the UK’s well-off should pay another wealth tax (CGT, inheritance tax and stamp duty are all wealth taxes) is not going away.
There are also probable new taxes on employment ahead. Lord Wolfson, chief executive of Next, suggested a simple solution to our labour shortage this week: business should be able to sponsor as many work visas as it likes — but pay a 7 per cent tax on wages for the right to do so. That idea makes some sense.
More subtle is the promised rise in the minimum wage. The UK state currently subsidises the wages of the low paid via the universal credit system — in July this year 5.9m people were claiming benefits this way. Put up the minimum wage and you effectively transfer the cost of much of that subsidy to companies. That’s not a bad thing, as the state subsidising wages is odd. But the effect is the same as if, say, employers’ national insurance was raised (again).
There are various other tax changes that could help Sunak out a little: think pensions — put in what you can while you can.
But in the end political reality will mean that really big new taxes aren’t possible — the UK tax burden is already set to hit a 70-year high.
This means that the government is likely to end up relying on the oldest tax of all to erode the value of our debt relative to GDP — inflation. There is a lot of this about — and it looks less transitory by the day: a third of businesses in the UK say they are seeing the prices of materials, goods and services rise. We’ve moved from the explanation for this being the base effect (the oil price moving from around zero in March 2021 to $75 a barrel today for example) to it being all about short-term supply crunches.
Both are perfectly reasonable explanations: after all, once we have been through a period of adjustment it makes sense for things that were plentiful two years ago to be plentiful again. But what if there is another inflation wave to come on top of these two? Wages could keep rising perhaps — pay demands are contagious.
But there is also a demand boom hiding in plain sight. The quantitative easing that followed the Global Financial Crisis didn’t lead to consumer inflation for the simple reason that it was mostly offset by banks repairing their balance sheets, so they weren’t lending much.
But this time around we have seen record-breaking surges in broad money supply: worldwide bank deposits rose 11.9 per cent in 2020. As caution recedes, that money will probably be spent — and prices will rise. That may of course be a transitory effect as well — but too many transitory effects in a row and we will have to change the definition of the word transitory.
The inflation tax is one of the toughest for investors to deal with. It enhances the wealth tax elements of IHT and CGT — even if you make no real gains, you are still taxed on your nominal gains, something that obviously reduces real wealth. You should use your Isas and Sipps as much as you can.
But it also hits bond markets hard — a huge worry for older people who have been “lifestyled” into seemingly low-risk bonds funds. UK gilt yields are at their highest since mid-2019 and 10-year Treasury yields are up too (prices go down when yields go up).
Worse for the complacent, it could have a nasty effect on the growth stocks that have been driving global markets — note that the US Nasdaq tech stock index is down about 6 per cent in the last four weeks.
That’s a problem given that most equity investors seem to prefer growth stocks to anything hinting at value.
This week the eToro trading group reported that nine of the 10 the top stocks held on its platform are growth stocks — Tesla and Nio being the top two. Meanwhile, funds network group Calastone said that September was the second worst month on record for UK equity funds in terms of flows, after June 2020 — when everything was being sold down.
While pretty much every other geographical region saw money flowing in, the UK saw a net £567m leave. If inflation gets to and sticks at, say, 4 per cent, the prices of growth stocks will surely tank — you will want a 4 per cent earnings yield to compensate for the inflation, something that suggests you won’t want to pay a price/earnings ratio of much more than 20-25 times for any equities. The p/e of the S&P 500 is currently 30 times. That of the FTSE 100 is more like 15 times.
That rather suggests that if you want to avoid the worst of the inflation effect it’s time to shift from growth to value, something the clever private equity industry is already doing. There’s a reason buyout groups have paid an average premium of 47 per cent over the prevailing share price for UK companies this year.