Closing Stock Market SummaryThe S&P 500 eked out a 0.1% gain on Friday to close out a strong week for equities. The Russell 2000 outperformed with a 1.6% gain, as a better-than-feared July employment report contributed to the outperformance of small-caps and value-oriented stocks.
The Dow Jones Industrial Average increased 0.2%, while the Nasdaq Composite fell 0.9% amid relative weakness in the mega-cap stocks.
According to the Bureau of Labor Statistics, nonfarm payrolls increased by 1.763 million (Briefing.com consensus 2.000 million), private-sector payrolls increased by 1.462 million, and the unemployment rate improved to 10.1% (Briefing.com consensus 10.5%) from 11.1% in June.
Optimism surrounding the data fueled the gains in the S&P 500 financials (+2.2%), industrials (+1.7%), utilities (+1.8%), and real estate (+1.4%) sectors, which are four of the five sectors down this year. The top-weighted information technology sector pulled back 1.6% today.
Notably, the market didn't show too much concern over the lack of a coronavirus relief bill or President Trump signing executive orders banning U.S. citizens from using TikTok and WeChat 45 days from yesterday, unless they are sold to other companies beforehand.
Individual standouts included T-Mobile US (TMUS 115.09, +6.99, +6.5%) after claiming it's now the second-largest wireless provider in the U.S., UPS (UPS 156.88, +11.41, +7.8%) after saying it plans to add holiday shipping fees to high-volume customers, and Biogen (BIIB 305.71, +28.05, +10.1%) after it had its Alzheimer's drug application fast-tracked by the FDA.
U.S. Treasuries finished with modest losses. The 2-yr yield increased two basis points to 0.13%, and the 10-yr yield increased three basis points to 0.56%. The U.S. Dollar Index advanced 0.7% to 93.41. WTI crude futures fell 1.9%, or $0.78, to $41.17/bbl.
Reviewing Friday's economic data:
- The Employment Situation Report for July can fairly be labeled better than feared given the surprisingly weak ADP Employment Change Report seen earlier in the week. The government's official report indicated that private-sector payrolls increased by 1.462 million in July. The nonfarm payrolls number was even larger at 1.763 million.
- The key takeaway from the report is that the labor market is recovering from the shock of the COVID-induced seizure, but still has a long way to go, evidenced by the 10.2% unemployment rate and a 55.1% employment-population ratio that is far below the 60.7% level seen a year ago.
- Wholesale inventories decreased 1.4% in June (consensus -2.0%) following an unrevised 1.2% decline in May.
Looking ahead, investors will receive the JOLTS - Job Opening report for June on Monday.
- Nasdaq Composite +22.7% YTD
- S&P 500 +3.7% YTD
- Dow Jones Industrial Average -3.9% YTD
- Russell 2000 -6.0% YTD
Early premarket gappers
- Gapping up:
- CNDT +71.2%, GRPN +30.8%, STMP +19.2%, ZG +13.2%, CHRS +13.1%, AAOI +13%, VXRT +11.8%, SAIL +11.2%, TDC +10.2%, TLND +8.7%, UPLD +8.1%, SWCH +7.9%, LGF.A +7.6%, RKT +6.9%, PRDO +6.7%, PRAA +6.4%, AL +6.1%, PFSI +5.7%, UNVR +5.7%, DIOD +5.1%, AMN +5%, OTEX +4.9%, MTW +4.8%, YELP +4.8%, TMUS +4.6%, HTA +4.5%, DXC +4.3%, TTD +4%, SPAQ +3.9%, BKNG +3.9%, NLOK +3.3%, MHK +3.3%, CWH +3.2%, NKTR +3.2%, G +3.1%, ZIOP +3.1%, RPD +2.8%, MGA +2.8%, NVAX +2.7%, VVNT +2.7%, DISH +2.6%, RSG +2.4%, ATEC +2.3%, FSLR +2.3%, FSLR +2.3%, ROLL +2.2%, RMD +2%, NFG +1.9%, TAK +1.8%, TRIP +1.6%, CENX +1.5%, OSUR +1.5%
- Gapping down:
- AYX -19.7%, AEE -13.3%, ILMN -13%, OLED -9.5%, GWPH -9.2%, DDOG -8.9%, DVAX -8.7%, PDFS -8.7%, CYRX -8.5%, NH -8.2%, REAL -7.8%, AAXN -7.7%, NWSA -7.2%, SSRM -6.8%, IRTC -6.7%, PETQ -6.6%, DBX -6.5%, QTRX -6.1%, BL -6.1%, GKOS -6%, AQUA -5.7%, FTNT -5.7%, GPRO -5.6%, CUTR -5.3%, LYFT -5.2%, HL -5%, GH -4.8%, EPIX -4.1%, UBER -4.1%, SVMK -4%, PBA -3.6%, CUK -3.4%, JETS -3.2%, AINV -3.1%, MT -3%, BECN -3%, TWLO -2.9%, AG -2.9%, SWX -2.8%, CVNA -2.7%, SLV -2.5%, CCL -2.5%, CARG -2.5%, EVBG -2.3%, RGNX -2.3%, QSR -2.2%, AAL -2.1%, UAL -1.7%, NCLH -1.7%, EOG -1.7%, NXTC -1.6%, KGC -1.6%, FXI -1.6%, RIO -1.5%, OPRT -1.4%, BHP -1.4%, JBLU -1.4%, GOLD -1.2%, LUV -1.2%, SAVE -1.2%, RCL -1.2%, AA -1%, DAL -1%, LTHM -1%, EDIT -1%
Third Point Re to combine with Sweden’s Sirius in $3.3bn deal
Move by Daniel Loeb comes as reinsurance sector set to face huge claims due to pandemic
Third Point Re, the reinsurer founded by billionaire hedge fund manager Daniel Loeb, has agreed to combine with Swedish rival Sirius in a $3.3bn deal that seeks to mitigate capital risks amid a potential wave of claims due to the fallout of the coronavirus pandemic.
As part of the cash-and-stock transaction, Mr Loeb, who is Third Point Re’s largest individual shareholder, has agreed to buy $50m worth of shares in the combined entity when the deal closes.
“This transaction fulfils our vision to move Third Point Re up the quality curve by adding diversified insurance lines to our existing business,” Mr Loeb said. He added that the deal would help boost returns on capital and would help create “critical mass to support both internal growth and future acquisitions”.
The tie-up could be the first of many in the sector, as insurance executives and dealmakers expect coronavirus to further expedite dealmaking plans to sell non-core business units or buy assets to gain scale.
“The pandemic is intensifying the spotlight on the same structural weaknesses in the insurance sector that have driven consolidation and other M&A activity in recent years,” said David Lambert, who heads EY’s global insurance transactions unit.
Third Point Re will use a combination of cash, equity and debt, if necessary, to finance the transaction. Siddhartha Sankaran, who has recently been named as non-executive chairman to Third Point Re’s board, will lead the new group, which will be renamed SiriusPoint.
Mr Sankaran was previously the chief financial officer and chief risk officer at the US insurance company AIG. Kip Oberting, Sirius’s chief executive, will step down from his role.
Shareholders in Sirius will have several options they can exercise, including the ability to receive $9.50 per share or 0.743 of Third Point Re shares and a contingent value right which in two years will guarantee them equity and cash at a minimum of $13.73 per share.
China Minsheng Investment Group, which is Sirius’s majority shareholder, has opted for a third option. The Shanghai-based investment group will receive $100m in cash and approximately 58m Third Point Re shares as well as a portion of series A preference shares, warrants and other securities.
As part of the agreement, Third Point Re shareholders will be protected from up to $100m of net incremental Covid-19 related losses at Sirius that are incurred, in certain cases, for up to three years following the closing of the deal.
Property fund investors face six-month notice periods
FCA proposals are designed to cure longstanding liquidity mismatch
Investors in open-ended property funds could have to wait up to six months to sell down their investments, under regulatory proposals to tackle the “liquidity mismatch”.
This weeks’ proposals from the UK’s Financial Conduct Authority are the latest attempt to solve a problem property investors have been grappling with for years — reconciling the daily trading requirements of open-ended funds with illiquid property assets that are hard to sell quickly.
Currently, more than £12.5bn of investors’ cash is trapped inside property funds that were forced to suspend trading at the start of the pandemic in order to deal with mass redemptions. However, investors continue to be charged high fees on their frozen investments.
Experts said the consultation was long overdue, but feared the changes would only serve to drive investors further away from the sector.
What do these changes mean?
FCA rules already require property fund managers to consider suspending funds during times of extreme market volatility to avoid risking a “fire sale” of illiquid assets. From September, funds will also be required to stop trading if the value of more than 20 per cent of their portfolio cannot be assessed accurately.
Fund suspensions are intended to protect investors, but have become a fixture of economic downturns. The rush to withdraw has intensified as investors anticipate their funds will gate, and rush to access cash before the door swings shut. Furthermore, funds need to hold a lot of cash to meet redemptions, which eats into investment returns.
The FCA is now consulting on proposals including considering a requirement for investors in certain property funds to give notice of up to 180 days when they want to cash out. The consultation will run until November, with the new rules expected to apply from 2021.
In theory, notice periods would help manage investor expectations, giving fund managers plenty of time to sell property if they needed to, as well as allowing them to invest more of that spare cash. However, advisers fear the new rules risk putting investors off even further.
“If these rule changes are made then a lot of financial advisers will just stop recommending open-ended property funds to their private clients,” said Charles Incledon, client director at Bowmore Asset Management. “That will make it harder for those investors to diversify their portfolios.”
“Six months is a long time for any investment, and the price you get 180 days later could be materially different from the one you expected,” said Adrian Lowcock, head of personal investing at Willis Owen. On the other hand, he said, a six-month notice period would discourage short-term investors and potentially make the asset class less susceptible to sell-offs.
Notice periods are not a new concept. In Germany, property funds have a one-year notice period, and the sector is “flourishing”, said Ian Sayers, chief executive of the Association of Investment Companies, who said the UK should consider following Germany’s lead.
Should I even own property funds?
Advisers say commercial property has a place in the average investors’ portfolio, though it should be a small one. Many investment managers will recommend allocating no more than 5 per cent to property as an alternative investment, and stress that investors must be aware that property is a highly cyclical investment.
Introducing six-month notice periods may feel somewhat academic for investors’ whose cash has been trapped since April. In order for the gates to be lifted, property fund managers will need to see a return to normal activity — yet no one seems certain when that could be.
“Property funds have been really unpopular with investors for a while now,” said Laura Suter, personal finance analyst at AJ Bell, noting that investors were factoring in the likely impact of Brexit on rents and property values, not to mention the huge shift towards online shopping under the pandemic, which has weighed on retail property.
One of the biggest problems affecting the sector is how to value assets in a falling market. At the start of lockdown, physical property valuations were suspended due to social-distancing measures. These are now possible, but it is much harder to judge the long-term impact of trends like working from home on the value of city centre offices, or the effect of so many insolvencies in the retail and restaurant sector.
Investors keen on property will have to be selective in their fund choices, says Ms Suter. Compared with a fund holding retail and City offices, “a fund that held a lot of supermarket stores, DIY stores and distribution centres for online businesses would have performed much better during the current pandemic,” she said.
How else can investors gain property exposure?
In a separate report on Thursday, the Bank of England said that even with the implementation of redemption periods, “other structures, such as closed-ended funds, may be more appropriate” for investing in illiquid assets such as property.
It also announced its intention to address the “distortions” that discourage investors from buying closed-ended funds, noting these do not receive the same promotion as open-ended funds by asset managers or advisers.
“We question what investors have to gain by sacrificing daily liquidity, given that there is a good structure for investing in illiquid assets already in place — investment trusts,” said Dzmitry Lipski, head of funds research at Interactive Investor.
Real estate investment trusts (Reits) have a closed-ended structure, and their shares are traded on the stock market. Since April, although investors have been able to trade, share prices have plunged with many Reits trading at large discounts to net asset value.
Mr Lipski added, “No structure is perfect . . . we still prefer the closed-ended structure when it comes to less liquid assets.”
>>> Up
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* Jenoptik Raised to Buy at LBBW; PT 27 euros
* Legal & General Raised to Equal-Weight at Morgan Stanley
* Rheinmetall Raised to Buy at Oddo BHF; PT 101 euros
* Siemens PT Raised to 148 euros from 129 euros at Commerzbank
* Spirent Raised to Buy at Stifel; PT 305 pence
>>> Down
* Allianz Cut to Hold at Nord/LB; PT 192 euros
* Danone Cut to Hold at Deutsche Bank; PT 64 euros
* Glencore Cut to Hold at Renaissance Capital; PT 187.02 pence
* Subsea 7 Cut to Hold at HSBC; PT 70 kroner
* TechnipFMC Cut to Hold at HSBC; PT $9.20
* Troax Cut to Hold at Handelsbanken; PT 175 kronor
* Vonovia Cut to Hold at Hauck & Aufhaeuser; PT 61 euros
* Wartsila Cut to Underperform at RBC; PT 6.50 euros
>>> Initiation
* Hyloris Pharmaceuticals Rated New Buy at KBC Securities
* LXI REIT Rated New Buy at Jefferies; PT 124 pence
* Science Group Rated New Buy at Liberum; PT 290 pence
>>> Call
* Danone Cut at Deutsche Bank; Cheap Valuation Not Enough to Buy
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* Kuehne + Nagel Valuation Upside Still Limited for Now: Berenberg
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* TP Icap Has Upside Despite Broker’s Cautious Outlook: Peel Hunt
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DAX:
- Deutsche Telekom (DTE TH) +1.4%
- Wirecard (WDI TH) -3.2%
- Singapore Charges Director in Its First Wirecard-Linked Case
MDAX:
- Telefonica Deutschland (O2D TH) +1.5%
- Freenet (FNTN TH) +1.3%
- Commerzbank (CBK TH) +1.1%
- Fraport (FRA TH) +0.7%
- Fraport Says 17 Construction Workers Tested Positive on Covid-19
- Varta (VAR1 TH) -0.7%
- Airbus (AIR TH) -0.7%
SDAX:
- Tele Columbus (TC1 TH) +2.9%
- Salzgitter (SZG TH) +1.4%
- Corestate (CCAP TH) +1.1%
- Deutsche PBB (PBB TH) +1%
- Nordex (NDX1 TH) +0.8%
- Nordex Group Receives Revolving Syndicated Loan of EU350 Million
- Scor (SDRC TH) +1.8%
- Deutsche Telekom (DTE TH) +1.5%
- Symrise (SY1 TH) +1.3%
- Telefonica (TNE5 TH) +1.3%
- Freenet (FNTN TH) +0.9%
- Rheinmetall (RHM TH) +0.9%
-
Danone (BSN TH) +0.8%
- Danone Cut to Hold at Deutsche Bank; PT 64 euros
- Carnival Plc (POH1 TH) -0.9%
- Carrefour (CAR TH) -1.1%
- TUI (TUI1 TH) -1.6%
- Prosus (1TY TH) -2.8%
- Trump Widens China Tech Attack, Banning Tencent’s WeChat, TikTok