Week Ended October 22, 2021
What this week lacked in market-moving economic news was more than offset by a combination of earnings, the launch of the first Bitcoin ETF, and two notable SPAC transactions. Around this, we had a relatively good week as far as equities, at least in the US where the S&P 500 closed at a record high on Thursday (4,549.78), surpassing the last record achieved on September 2nd. At the same time, bond investors continued to get hammered, with yields on the 2-year and 10-year US Treasuries increasing to 0.48% (+7bps w-o-w) and 1.66% (+7bps w-o-w), respectively.
Let me start with a few noteworthy events from this past week. I will be brief and have provided links should you wish to dig deeper.
78 of the S&P 500 companies released earnings this past week as the scope of reporting companies broadened beyond the large US banks that dominated earnings news the week before. Very few companies that have reported 3Q results so far have disappointed, so it looks like we might be in for another round of better-than-consensus top-line growth and earnings. Better than expected early results have re-energised the equity markets after a poor September (-4.8%) for the S&P 500. The benchmark index closed at a record high on Thursday and is up 5.5% MtD, more than recovering its September losses. Of the companies reporting this past week, three of the most watched included #TSLA (beat), #NFLX (beat) and #SNAP (missed). You can find the earnings releases for these companies here: Tesla (3Q 2021 Update), Netflix (3Q 2021 Letter to Shareholders) and Snap Inc (3Q 2021 press release). Keep in mind that in addition to performance vis-à-vis consensus, investors pay a lot of attention to guidance, particularly in light of challenges in hiring and on-going supply-chain disruptions. For an overall update on earnings of S&P 500 companies for this round, see Refinitiv’s “The Week in Earnings 21Q3 | Oct. 22” which you can find here.
The week also saw the launch of the first Bitcoin ETF. Yes indeed, it has arrived, and you can find the details of the ProShares Bitcoin Strategy ETF (NYSE ARCA: BITO) here. This is the first of many Bitcoin (or derivative) ETFs I suspect that will be launched, and it is logical that ETFs on other single cryptocurrencies or group of cryptocurrencies, or their derivatives, might follow. Now if you are wondering why I used the word “derivatives” a couple of times already, this is because the underlying assets in the ETF are not Bitcoin, but rather near-term Bitcoin futures contracts. Should you care? I suppose not so long as you can live with the added risk in the futures market during periods of heightened market volatility. In any event, this launch gave Bitcoin some further momentum because it offers investors a way to participate in the cryptocurrency market without having to buy a digital currency directly. Bitcoin reached a record intraday high on Wednesday of nearly $67,000 on the euphoria of the first BTC ETF, before settling at $60.714 near the end of the week (-0.9% W-o-W).
There hasn’t been a lot of news recently on SPACs, but there were two this week that were certainly noteworthy. Firstly, WeWork finally went public (NYSE: WE) via a reverse merger into a SPAC named BowX Acquisition Corp (link to SPAC prospectus is on Bow Capital website, should you really want to read it). During the lead up to WeWork’s failed IPO in 2019, the value of the company was being talked up to as much as $47 billion, which ultimately proved to be fantasy. WeWork started trading on the NYSE on Thursday at a slightly-more-modest value of around $9 billion. The shares closed the week at $13.02/sh, a nice 30%+ improvement over the original $10/share price of the SPAC. The second SPAC that made news this past week is bizarre to say the least, although you can’t quibble with its performance. Former-President Donald Trump’s “concept” for a new media company – The Trump Media & Technology Group (or “TRUTH Social”) – announced on Wednesday that it would merge with SPAC Digital World Acquisition Corp. (DWAC IPO prospectus here) to “create a rival to the ‘liberal media consortium’ and fight back against Big Tech”. Keep in mind that the Trump’s media company is simply a concept at this point with no business, no revenues and no (media) assets. If you want to see for yourself, check out the investor presentation on Trump’s website TMTG here. The presentation is – to say the least – a bit flimsy as far as financial disclosure and the like, normally a core requirement to value a company. Even so, the fact that the company – like flying taxis – has no business scarcely mattered as the shares of DWAC skyrocketed after the announcement, closing the week at $94.20/share, a nice 900% gain in only two days! This performance clearly demonstrates the power of Mr Trump and his brand to his diehard followers. Any other time this price run-up might seem bizarre, but in today’s world when company fundamentals matter little in determining value, it’s just another data point. It looks, smells and feels to me like yet another meme stock, perhaps the first meme SPAC! Matt Levine (Bloomberg Opinion) wrote an excellent article summarising the transaction and the attributes that make it both interesting and rather ridiculous at the same time. If you are a Bloomberg subscriber or can otherwise access Bloomberg Opinion articles, you should definitely check out Matt’s article here.
The Federal Reserve released a statement on Thursday that it had adopted new restrictions on trading by its senior staff, not surprising given that two of its former governors (Eric Rosengren and Robert Kaplan, see here) were “forced” to resign in September over questionable trading practices during the pandemic. The press release, with its full title, can be found here: “Federal Reserve Board announces a broad set of new rules that will prohibit the purchase of individual securities, restrict active trading, and increase the timeliness of reporting and public disclosure by Federal Reserve policymakers and senior staff.” So the question now is: when will Congress do something similar, since questionable trading practices in the legislative branch are equally if not more troubling than at the Fed?
Looking forward, negotiation over the Biden fiscal plan is continuing. It is also a huge earnings week with another 165 S&P 500 companies reporting earnings this week as a (so far) benign October draws to a close.
Let’s take a quick look at how markets performed this past week.
Global equities were mixed. US equities outperformed, whilst the Nikkei 225 (Japan) was the weakest performer for the week. The FTSE 100 also lost ground.
In the US, all of the indices I track were positive for the week, with the diversified S&P 500 leading the pack. On Friday, the DJIA increased whilst the more interest-rate sensitive NASDAQ and Russell 2000 both sold off as markets reacted to Chairman Powell’s comments about inflation perhaps being more persistent that originally thought. The miss by SNAP Thursday after the market closed also did not help technology shares on Friday.
As far as the US Treasury market, yields rose again across the curve, reflecting a combination of growing inflation concerns and a benign to positive economic outlook. Until Friday, following Chairman Powell’s comments, the equity markets were showing little concern with rising rates, but then inflation suddenly came back into focus. I wrote about the Fed losing control of the short end of the yield curve this week in an article you can find here: “Is the bond market doing the Fed’s dirty work?”
In the UK and Eurozone, government bond yields also have increased. The 10-year German bund yield – believe it or not – is approaching 0% after being negative for many years, so this is worth keeping an eye on. The culprit in the Eurozone and UK government bond markets, similar to the US, is inflation.
In spite of increasing underlying US Treasury yields, the corporate bond market has performed well recently. There was some yield increases in September, but all seems to have now been forgotten. Investment grade credit, more sensitive to moves in underlying UST yields, has flatlined, an admirable performance given the backdrop (of increasing underlying UST yields). Meanwhile, high yield credit has improved as spreads have tightened even further. Although on the surface this might seem illogical as benchmark yields are under pressure, the fact is that the correlation between equities and high yield is strong, such that the combination of better performing equities this month and a tilt back towards a more benign economic outlook benefit high yield companies.
As far as safe havens, there was little movement this week that really mattered.
The focus continues to be on the price of oil and Bitcoin, the former as a very influential factor as far as global economic activity and the latter rather entertaining to watch. I covered Bitcoin earlier, but it is continuing to hover in the $60,000+ range even though its performance was erratic this week. Oil prices continue to steadily march higher, and most investment banks are suggesting that the price will continue to rise. Somewhat similar to rising UST yields, higher oil prices are being digested by investors and no longer seems to be as disruptive to collateral markets, at least not at the moment.