Closing Stock Market SummaryThe Nasdaq Composite (+0.1%) eked out intraday and closing record highs on Tuesday, while the S&P 500 (-0.3%), Dow Jones Industrial Average (-0.8%), and Russell 2000 (-0.7%) closed lower, as investors leaned defensively into the mega-cap stocks.
The broader market struggled to attract buying interest, as investors digested reduced Q4 and 2021 GDP forecasts out of Goldman Sachs, the expiration of enhanced unemployment benefits, analyst downgrades to three health care Dow components, and a sell-off in cryptocurrencies that reminded some people about reducing risk.
Declining issues outpaced advancing issues by a 2:1 margin at the NYSE, the Invesco S&P 500 Equal Weight ETF (RSP 155.57, -1.31, -0.8%) declined 0.8%, and eight of the 11 S&P 500 sectors closed in negative territory. The industrials (-1.8%), utilities (-1.4%), and real estate (-1.1%) sectors lost more than 1.0%.
In the health care space, Johnson & Johnson (JNJ 172.32, -2.72, -1.6%), Merck (MRK 75.98, -1.28, -1.7%), and Amgen (AMGN 221.34, -5.03, -2.2%) were downgraded to Equal-Weight from Overweight at Morgan Stanley.
The decline in the S&P 500, however, was mitigated by the continued strength in the mega-caps. Apple (AAPL 156.69, +2.39, +1.6%) and Netflix (NFLX 606.71, +16.18, +2.7%) both set record highs, with NFLX receiving a Street-high, price-target increase ($780) at Atlantic Equities. The Vanguard Mega Cap Growth ETF (MGK 250.40, +0.72) advanced 0.3%.
The mega-caps lifted the S&P 500 information technology (+0.03%), consumer discretionary (+0.4%), and communication services (+0.5%) sectors into positive territory.
Interestingly, better-than-expected import and export data out of China for August was drowned out by the negative-sounding headlines and negative price action. Prices for oil ($68.40/bbl, -0.84, -1.2%) and copper ($4.28, -0.06, -1.3%) both declined more than 1.0%.
Longer-dated Treasury yields did rise, but the advance was attributed to speculation that the European Central Bank could announce a reduction to its asset purchases on Thursday when it concludes its policy meeting.
The 10-yr yield increased five basis points to 1.37% while the 2-yr yield increased one basis point to 0.21%. The U.S. Dollar Index advanced 0.6%, which was another example of the defensive mindset in the market.
Investors did not receive any economic data on Tuesday. Looking ahead, investors will receive Consumer Credit for July, the Fed's Beige Book for September, the JOLTs report for July, and the weekly MBA Mortgage Applications Index on Wednesday.
- S&P 500 +20.3% YTD
- Nasdaq Composite +19.3% YTD
- Russell 2000 +15.2% YTD
- Dow Jones Industrial Average +14.7% YTD
China’s Sinopharm seeks to develop its own mRNA Covid vaccine
Biotech’s jab could give the technology a boost amid concerns over efficacy of conventional shots
Sinopharm is developing a homegrown mRNA inoculation for Covid-19, becoming one of the first big Chinese pharmaceutical groups to pursue the technology to combat the disease.
The state-owned pharma group’s move comes as concerns grow over the efficacy of conventional inactivated virus vaccines, which have dominated the rollout in China. Certain studies have shown the jabs produce fewer antibodies compared with mRNA shots.
Inactivated vaccines, such as Sinopharm’s existing Covid vaccine, use dead viral particles to produce an immune response, while mRNA jabs contain genetic instructions that tell cells to make viral proteins that prime the immune system.
Sinopharm is not the only Chinese company developing its own mRNA jab. Smaller producer Walvax Biotechnology is already conducting trials.
But the entry of a larger player such as Sinopharm into the mRNA market could give the technology a significant boost in China.
“They are trying to develop these . . . next-generation vaccines because with the first-generation vaccine, a booster injection must be done and might have to be done regularly,” said Jin Dong-yan, a virologist at the University of Hong Kong. “The mRNA vaccine is much more efficacious than the inactivated vaccine.”
BioNTech, the German drugmaker that is collaborating with distribution partners Pfizer and China’s Fosun Pharma to offer its mRNA vaccine, is also targeting the Chinese market and is awaiting formal approval from Beijing for the jab.
Zhu Jingjin, the Chinese Communist party secretary of China National Biotec Group, a unit of Sinopharm, said it was developing an mRNA vaccine as well as a broad-spectrum recombinant protein vaccine that was in clinical trials. Recombinant protein shots target the spike protein that the virus uses to enter and infect human cells.
“We have developed vaccines against [the] Delta and Beta variants,” Zhu told Chinese state media at the China International Fair for Trade in Services in Beijing. The phase 1 and phase 2 clinical trials had been completed for the recombinant protein shot, he added.
China has administered more than 2bn doses, most of them inactivated vaccines developed by Sinopharm and privately owned Sinovac, another biotech group.
The shots, which can be stored at higher temperatures than mRNA vaccines, have received World Health Organization approval for emergency use and have been shipped to more than 100 countries.
But a number of countries are studying whether protection against serious infection can be increased by combining inactivated virus vaccines with a dose of another shot with a higher efficacy rate, such as those using mRNA technology.
Phase 3 trials of Sinopharm’s vaccine showed an efficacy rate of 79 per cent against symptomatic Covid infection if the shots were administered three weeks apart. The BioNTech shot had an efficacy rate of 95 per cent.
Cambodia said it would offer frontline workers who had received either the Sinopharm or Sinovac shot a third dose of AstraZeneca’s vaccine, which is an adenovirus vector vaccine.
Walvax said last week in a stock exchange filing that it had obtained approval from the governments of Mexico and Indonesia to conduct phase 3 trials for its mRNA candidate. The shot is being jointly developed with China’s Suzhou Abogen Biosciences and the country’s Academy of Military Sciences.
Mercedes-Benz throws down the EV gauntlet at IAA Mobility
Mercedes-Benz introduced a slew of electric vehicles ahead of the IAA Mobility show in Germany, including its first AMG-branded high-performance EV, a sedan and a G-Class SUV concept — all part of the company’s bid to become an electric-only automaker by the end of the decade.
Mercedes has already started producing the all-electric EQS, a high-forward and sleek flagship that’s meant to be an electric counterpart to the S-Class. At IAA Mobility, Mercedes aims to showcase its next big EV’s moves.
Earlier this year, the automaker laid out its €40 billion ($47 billion) electric-only plan, a target that will push the company to become more vertically integrated, train its workforce and secure the batteries needed to power its products. This plan actually piggybacks on previous goals to build and sell more EVs. Back in 2017, Mercedes said it would electrify — which means gas-hybrid, plug-in hybrid or battery electric — its entire lineup by 2022. The German automaker said in July that by next year it will offer battery-electric vehicles in every segment that it serves.
Mercedes aims to launch three electric-only architectures in 2025 that will form the basis of all of its new vehicles. Its so-called MB.EA platform will be used for its medium to large passenger cars, while AMG.EA will underpin its performance Mercedes-AMG cars and the VAN.EA will be dedicated architecture for electric passenger minivans and light commercial vehicles. The company has already announced its “electric first” compact car architecture, known as MMA, which will launch in vehicles by 2024.
“The EV shift is picking up speed, especially in the luxury segment where Mercedes belongs,” said Ola Källenius, head of Mercedes Benz, as he announced the particulars of the new EQE. “That’s why were accelerating from ‘EV-first’ to ‘EV-only.’ Next year we will have battery electric options in every segment we serve, and by 2025 we’ll have at least one electric alternative for every model we make.”
Källenius said the automaker aims to sell one EV for every two Mercedes cars on its path to all-electric, where market conditions allow, by 2030.
The crossover, which Mercedes revealed earlier this year, showed up at the automaker’s event. And this time, they shared a few more details, including that it is bound for the United States some time in 2022. It will launch in Europe and China at the end of this year.
The EQB will be the first electrically powered production vehicle from the Kecskemét plant in Hungary. Vehicles for the Chinese market are being produced in Beijing. When the EQB arrives in the U.S., it will come in two variants. The compact SUV will first launch as the EQB 300 4MATIC with 168 kW or 255 hp and then as the EQB 350 4MATIC with 215 kW or 288 hp. In the former variant, it’ll have 390 pound-feet of torque. In both cases, the range will be about 419 kilometers, or 260 miles, which is a bit less than the others revealed on Sunday. The automaker says a long-range version will follow, as well as a front-wheel drive model.
The electric powertrain is a compact, integrated unit comprising of electric motor, a fixed-ratio transmission with differential, a cooling system and power electronics. An asynchronous motor is used at the front axle.
The compact EQB comes standard with five seats, but can convert into a seven-seater if you’ve got a big family and need extra space.
The EQE sedan is the automaker’s answer for anyone who wanted the flagship EQS but couldn’t afford it. The sedan will have a single electric motor that will produce 288 horsepower and 391 pound-feet of torque. For those keeping track, that is a skosh 41 hp less than the EQS. The 90 kWh battery has got around 660 kilometers, or 410 miles, or range, and can top up an additional 250 kilometers, or 155 miles, within 15 minutes of fast charging. At market launch, a second model with different variations will also be released, but Mercedes has not announced further details.
Many of the features in the EQS make an appearance in its little brother, such as an advanced driver assistance system, front doors that open automatically and rear axle steering. The MBUX Hyperscreen mulit-screen connected entertainment system is available as an option. Despite its slightly smaller body, the EQE also has a roomy interior, with 27mm more front seat shoulder room, 65 mm higher seating position and 80mm greater overall cabin length than the current E-Class.
The EQE is the automaker’s fourth EQ car to be unveiled this year, and it will soon be followed by SUV versions of the EQS and the EQE, according Källenius. Production will be in Bremen for the world market and Beijing for the Chinese market, and a staggered global launch will start in mid-2022.
Get ready for power and performance. The AMG EQS is the first battery electric AMG production model based on the EQ architecture. Made in Affalterbach, it’s meant to embody the perfect combination of a zero-emissions vehicle that still has power, body and luxury. To enhance that feel, the car is built with special hardware in and out of the car with a sound system so the car can croon as it drives, giving those inside and outside of the car that authentic AMG feeling.
The AMG EQS has two AMG electric motors offering a total system output of 484 kW or 658 hp. Kicking it up to “race start” will provide 560 kW or 761 hp, as well as 1020 nm of torque, getting you from 0 to 100 kilometers in 3.4 seconds and a top speed of 250 kilometers per hour, or 155 miles per hour.
A recuperative braking system sends energy back into the battery, which has a total 108 kWh of storage capacity, providing 580 kilometers, or 360 miles, or range. The car is also equipped for fast DC charging with over 200 kW.
The AMG EQS is being produced at the carbon-neutral “Factory 56” at the Mercedes-Benz plant in Sindelfinge outside of Stuttgart. Mercedes is planning to launch this vehicle to market at the end of 2021.
Hooray for the “mighty G!” The EQG is a G-class electric off-roader concept vehicle, complete with the strong character of the 4×4 G with the progressive luxury of the EQ models. The automaker didn’t provide too many details of the EQG because it still has a way to go before production, but here’s what we do know: It comes with four electric motors that have “lots of power” and are positioned close to the wheels so they can be individually controlled. There’s also a new rear axle and a two-speed gearbox for on and off-road driving.
That off-road driving will be put to the test at Mercedes’s test track on the 1,445-meter high Schöckl mountain in Graz at the end of its development into a series model.
This SUV concept vehicle will be the first all-electric Maybach in the rather traditional vehicle’s long history. The Maybach EQS has the classic features of the old school models, like a two-tone paint finish, with the progressive drive technology of the EQ lineup. It’s also swanky as hell. The white piano lacquer interior looks plush and sleek, something the other half in the film Elysium might drive in to reach their paradise in the sky. It’s made to be a comfortable place to work or rest, particularly if you go for “executive seats” and the “chauffeur package.”
The SUV should hit the markets in 2023, but Mercedes said it would introduce the platform for upcoming SUVs as early as next year, and it’ll have an expected range of around 600 kilometers, or 373 miles.
New Taxes on China’s Rich Would Be Bad News for Luxury, But How Bad?
Luca Solca gauges the risk to the luxury goods sector of brewing Chinese government plans to redistribute wealth.
Two weeks ago, Chinese President Xi Jinping said he planned to curb “unreasonable incomes” as part of a “third redistribution of wealth” aimed at expanding the country’s middle class. The same day, shares in luxury goods giant LVMH fell by more than 5 percent. At face value, President Xi’s comments sounded like encouragement for Chinese billionaires and profitable Chinese corporations to commit more to charitable donations. But economists writing in Chinese media have recently argued for the gradual introduction of real estate and inheritance tax — starting first with a single province to test its effects — with the goal of curbing inequality and building “an olive shaped society.”
Incremental taxation for the rich is bad news for the luxury goods sector. New taxation would make the wealthy feel poorer and cause them to rein in discretionary spending, damaging growth in luxury sales at least in the short-term.
Data from the US shows that higher tax on the rich causes a lull in luxury spending growth. That’s because discretionary spending is tightly linked to the consumer feel good factor. No matter how rich you are, losing money — whether because of a stock market drop, a bad deal or higher tax — makes you feel poorer, reducing your willingness to spend, at least temporarily. This is particularly concerning for the luxury goods sector where the top 1 percent of spenders account for more than 20 percent of luxury sales. And, let’s not forget, for most personal luxury goods product categories, the top 1 percent of Chinese consumers is between 100,000 and 1,000,000 people.
Not all products and companies would be hit equally, however. Some companies (Swiss watches, Hermès) are more exposed to the Chinese. And some product categories are simply more expensive and therefore more relevant to the richest consumers, who could be hit by new taxation. These include haute couture, high jewellery, collector’s watches and accessories in exotic skins. The third point is that some brands (again like Hermès) can offset a pause in demand growth in one market by opening up the tap a bit in other geographies.
As for how new taxation may be introduced, highly disruptive action from the Chinese authorities seems unlikely. Rather, there are at least two reasons that a smooth and gradual shift is more likely. First, abruptly introducing higher taxation on rich Chinese wouldn’t just hit personal luxury goods, but a much wider set of product and service categories across the consumer discretionary realm. This would set the Chinese leadership back on its goal of steering the economy from capital expenditure to consumption. And second, China has long pushed for the repatriation of luxury spending because it brings higher tax revenue to the Chinese Exchequer. Covid-19 has delivered this on a silver platter, and it would be odd for the Chinese government to torpedo these gains just now.
The markets have already priced in the risk of higher taxation on China’s wealthy, at least in its milder form. But it remains to be seen how the issue plays out for margins and multiples as a function of top line growth. A base case scenario (integrating modest Covid-19 disruption and no Chinese tax risk) suggests 18 percent top line growth next year, down from 33 percent this year. In the case of a softening Chinese market as a result of tax policy, we could see that fall to 0 percent top line growth, whereas worse scenarios could see -5 percent or even -10 percent growth. The market is now close to pricing in 0 percent growth. If higher taxes don’t materialise, the sector is likely to reflate.
EY under scrutiny after second-largest bankruptcy in Swiss history
Zeromax bought jewellery and made irregular offshore transfers while the Big Four firm gave it clean audits
EY auditors failed to raise the alarm over multimillion-dollar jewellery purchases and approved huge payments to opaque offshore companies in the years before one of Switzerland’s biggest ever corporate collapses.
Zeromax, a conglomerate based in the Swiss canton of Zug, had a business empire in Uzbekistan with interests ranging from textile processing to natural gas extraction that made it the Asian country’s largest employer, accounting for as much as 10 per cent of GDP.
It collapsed in 2010 amid a political power struggle in Tashkent, leaving debts, it has only recently been discovered, of more than SFr5.6bn ($6.1bn). This makes it the second-largest ever bankruptcy in Switzerland, after Swissair in 2001. At least SFr2.5bn of its assets are still missing, according to creditors.
Thanks to Switzerland’s notoriously opaque legal system and corporate disclosure regime, details of the group’s complex structure and labyrinthine network of offshore holding companies are only now coming to light as frustrated creditors push to recover lost assets.
Dozens of documents seen by the Financial Times, including police reports, corporate bank statements, internal emails and receipts, as well as claims made in ongoing litigation, raise particular questions about the work of EY’s Swiss partnership, which gave Zeromax a clean bill of financial health for 2005, 2006 and 2007.
The firm continued to be employed as Zeromax’s auditor for a further three years until the company collapsed but did not publish any further audit opinions on its annual accounts.
EY Switzerland is now being sued in Zug for $1bn in damages by US hedge fund Lion Point Capital, which acquired a tranche of outstanding Zeromax debt from the bankruptcy estate in 2019, lawyers familiar with the case told the FT. Lion Point declined to comment.
Meanwhile, hundreds of European creditors — including many small businesses in Germany and central Europe — are still owed billions in aggregate by Zeromax.
EY declined to answer detailed questions from the FT about its role auditing Zeromax’s accounts.
The firm said: “Court decisions in Uzbekistan in 2010 caused a de facto expropriation of Zeromax assets and its bankruptcy. This matter is subject to ongoing litigation and EY Switzerland will vigorously defend its position to vexatious claims. We cannot comment further.”
The jewellery in the safe deposit box
Zeromax was at one time closely associated with Gulnara Karimova, a daughter of former Uzbek president Islam Karimov. Karimova — a flamboyant socialite once known as the “princess” of Uzbekistan — denies any connection to the company. She has been imprisoned in Tashkent since 2015, after falling from favour with the new Uzbek regime.
Zeromax was incorporated in Delaware in 1999 and redomiciled to Switzerland in 2005, with the stated purpose of channelling investment into a range of Uzbek industrial sectors.
Investors took succour from the company’s Swiss domicile and the fact it was audited by one of the world’s biggest accounting firms.
Yet, accounts show that in the four years before its collapse, many of the funds that passed through the company went into a sprawling network of opaque offshore entities. Many of these funnelled money to Uzbekistan, but many did not.
Some transactions seem particularly hard to explain as business expenses.
In 2006 and 2007, for example, Zeromax spent more than $13m on luxury jewellery, including $2m in the Christian Dior store in Geneva alone. The following two years, it spent a further $25m on jewellery, including $6m at British jeweller Graff Diamonds.
At least some of the jewellery acquired was used by Karimova. In 2016, Swiss Federal Police obtained a warrant to search safety deposit boxes rented by her at Lombard Odier in Geneva. Inside they found luxury jewellery — including a diamond ring from Boucheron worth $2.5m — that had been paid for by Zeromax. The owner of one Geneva jewellery shop told the police, according to police documents seen by the Financial Times, that Karimova had personally bought the jewellery and had the money wired to the business from a bank account controlled by Zeromax.
Irregular offshore transfers
EY also failed to raise the alarm when money had been moved to opaque, offshore companies, sometimes with business pretexts that look perfunctory, such as generic contracts for “consulting services”. Between 2004 and 2007, the company transferred at least $288m to offshore companies.
In at least one instance, transfers involved sending millions that ultimately went to an entity alleged to have been involved in criminal activity. Between mid 2006 and 2007, Zeromax transferred $180m to a wholly owned subsidiary, BVI-based company Galat Enterprises.
Galat in turn transferred at least $5m to the Gibraltar-based company Takilant, controlled by Karimova. Takilant was found in judgments in US and Swedish criminal cases to have been the central corporate conduit in a massive bribery scheme through which telecoms companies paid Karimova in exchange for lucrative Uzbek government contracts.
Zeromax also transferred at least $2m to offshore companies Merkony and Belphil Capital, which between them sent $33m to Takilant, according to Swedish court files.
On at least one occasion, EY was aware of the irregular nature of a Zeromax offshore transfer.
An email sent by a senior EY executive to Zeromax management in 2008 noted the lack of documentation for $5.5m being sent from Zeromax to a company called Ystral. The email highlighted the need for a “business reason” for the transfer, to satisfy Swiss tax authorities.
“We are aware that some of our questions may touch ‘sensitive matters’. In case you wanna discuss the above listed points with us (personally or by phone), please let us know and we will set up a meeting/call,” the EY executive wrote.
Zeromax’s management responded that the business reason was “self explanatory”.
Funding for football
In instances where other irregular transactions were questioned by EY and reversed as a result, they did not result in any wider questions being asked about the operations of the company or the trustworthiness of its executives.
A discovery by EY that in 2007, $250,000 had been spent at the ultra-exclusive Montreux sanatorium Clinique La Prairie by the wife of the chief executive was not subject to any further inquiry, after the CEO promised to reimburse Zeromax. “We are not trying to hide anything, maybe just [sic] it was not done properly,” he wrote to EY.
In 2008, a year when EY did not issue an audit opinion on Zeromax but was still its auditor, the financial irregularities increased.
The company spent $29m on a penthouse residential apartment in Hong Kong, for example, which it declared was for use as office space. Four months later it sold the apartment for $14m to Karimova’s then boyfriend, Rustam Madumarov.
It also spent $27m on football in 2008 and 2009, paying to hire some of the sport’s best known names to work for Uzbek club, FK Bunyodkor. This included a $15m 18-month contract with Luiz Felipe Scolari that made him the highest paid football manager in the world. Zeromax also paid $12m to hire the Brazilian player Rivaldo.
Since its collapse, creditors have faced an arduous battle to reclaim assets and understand Zeromax’s structure. Karimova’s own complicated financial and political situation has proved a major impediment.
Karimova’s Geneva lawyer, Grégoire Mangeat, told the FT that his client “has always strongly denied any implication in the company Zeromax”, and pointed out that Swiss prosecutors rejected a case in 2017 that sought to connect her to it.
At least one US official has taken a different view. According to correspondence that was made public as part of the WikiLeaks trove, state department diplomats regarded Karimova as a “robber baron”. A January 2010 cable from Richard Norland, the US ambassador to Tashkent, sent to Washington just months before Zeromax’s collapse, described the company as Karimova’s “personal entity”.
“The embassy’s message to those proposing to enter into business arrangements with Zeromax or its affiliates,” he wrote, “. . . is to carry out full due diligence.”