Weekly Economic Review Dec 2 nd 2018

Transcription

1 Weekly Economic Review Dec 2 nd 2018

2 Markets reacted sharply to reassuring comments from Federal Reserve Chairman Powell as well as possible signals about lessening trade tensions. The positive tones to the commentary were good news, nudging investors back toward a more optimistic outlook, more in line with our expectations that the economy continues to grow modestly. { Weekly Hot Take

3 Market Overview US stocks rose sharply this week, making the greatest weekly gain in Thanks to strong consumer spending on Black Friday and Cyber Monday, markets got off to a strong start. Internet sales grew 36.4% from Wednesday before Thanksgiving through Black Friday, compared to the same period in 2017; store sales declined between 5-9%, which is less than expected. The S&P 500 made its greatest weekly gain since December Large-cap indexes and the Nasdaq Composite Index grew more than smaller-cap benchmarks, while higher-valuation growth shares grew faster than slow-growing value stocks. Healthcare and technology shares were the highest performers in the S&P 500 Index, while materials shares fared worst. Due to lower long-term interest rates, the large financials sector struggled. As domestic oil prices fell below $50 per barrel for the first time in 2018, energy shares lagged. In Europe, the Stoxx Europe 600 Index grew slightly after a week of European political tensions due to confusion over Brexit and the upcoming G-20 Meeting. In Japan, the Nikkei 225 Stock Average had 5 days of consecutive gains over the past week for a total of 3.3%; while the broad-based TOPIX index and and TOPIX Small index made gains, they remain at negative growth for 2018 overall. Mainland Chinese markets had slight increases; the Shanghai Composite index grew.3% for the week. Beijing is rolling out stimulus measures to cushion the economy from slowing growth and potential decreases in U.S. trade, so the G-20 summit should not have as significant of an impact on Chinese markets.

4 Macroeconomic Overview Last week, Federal Reserve Chairman Powell stated that interest rates are close to neutral. Short term rates have been increasing for three years, which prompts worries about slower credit growth if the Fed raises interest rates by too much. However, interest rates that are too low will lead to inflation and a potential financial bubble, as in the 2008 recession. Because he said that interest rates are just below the neutral rate, stock prices and investor confidence rose; projections for the long-term interest rate also decreased. The Fed s efforts to keep the interest rate near neutral % - are beneficial for both stock prices and economic growth, but various factors could potentially lead to volatility in interest rates. For example, trade tensions with China and higher tariffs under the current administration have been linked to market volatility. Also, Chairman Powell expressed that slowing global growth rates, particularly in Europe and Japan, are potential risks that may affect interest rate increases moving forward.

5 Fixed Income Overview Treasury yields fell Friday while bond prices rose, most likely in anticipation of President Trump s upcoming meeting with Xi Jinping. The 10-year treasury note yield fell two basis points to 3.015% for a decline of 3.1 basis points over the week; this is the largest move for the 10-year treasury note yield since August Meanwhile, the 2-year treasury note yield was mostly flat last week but declined by 6.4 basis points in November overall. The 30-year bond yield fell to 3.31% with a weeklong increase by.5 basis points. These changes in bond yields reflect investor concerns about further tariffs between the United States and China and potential instability in stocks, as well as less aggressive interest rates hikes by the Fed.

6 v Industry Focus: Fast Fashion Fast fashion is a new term used by fashion industry analysts to express that designs move from fashion shows quickly to storefronts to capture current fashion trends. Fast fashion clothing collections are based on the most recent fashion trends presented at Fashion Week in both the spring and the autumn of every year, and often follow micro trends that emerge throughout the year from various social media influencers. The Emphasis is on optimizing certain aspects of the supply chain for these trends to be designed and manufactured quickly and inexpensively to allow consumers to buy current clothing styles at a lower price. This philosophy of quick manufacturing at an affordable price is used by large retailers like H&M, Zara, and Forever 21. Fast Fashion developed from a product-driven concept based on a manufacturing model referred to as "quick response" that was developed in the U.S. in the 1980s and moved to a market-based model of "fast fashion" in the late 1990s and first part of the 21st century. Zara has been at the forefront of this fashion retail revolution and their brand has almost become synonymous with the term. The goal of fast fashion is to produce a product in a quick, cost-efficient manner to respond to fast-changing consumer tastes in near real time. This is achieved through understanding of the target market's wants: a high fashion-looking garment at a price at the lower end of the clothing sector. Marketing to millennials and urban professionals is the key driver of the industry. Marketing creates the desire for consumption of new designs as close as possible to the point of creation, creating artificial scarcity and a sense of urgency. This is achieved by promoting fashion consumption as something fast, low price and disposable. The continuous release of new products essentially makes the garments a highly cost-effective marketing tool that drives consumer visits, increases brand awareness, and results in higher rates of consumer purchases. Fast fashion companies have also enjoyed higher profit margins due to less discounting and higher inventory turnover rates. The fast fashion business model is based on reducing the time cycles from production to consumption so that consumers visit stores and make purchases more often. For example, the traditional fashion seasons followed the annual cycle of summer, autumn, winter and spring. Fast Fashion has seen product cycles as short as 4 weeks. In the long run, it remains to be seen how sustainable this disruption industry will be, and if mainstream retail adapts to combat these fast-flying companies.

7 Transaction Highlights United Makes Inroad s to Latin America United Continental Holdings. Inc. has sealed a deal to partner with Avianca Holdings SA, one of the largest Latin American carriers, by agreeing to an unusual arrangement to pay off debt owed to a hedge fund. United will lend $456 million to a company that owns more than half of Avianca, according to a securities filing. The funds would be used to repay a loan from Elliott Management Corp. Avianca shares will be put up as collateral for the loan, and as part of the deal, the airlines will form a three-way joint-business agreement with Panama-based Copa Holdings SA to share revenues, integrate service and coordinate pricing and schedules between the U.S. and Latin America, excluding Brazil. The third largest U.S. carrier by traffic, United has had an eye on a partnership with Avianca for more than two years as it seeks to extend its global reach. Moderna IPO On Path to Be Largest Offering Of Venture-Backed Biotech Moderna Therapeutics (MRNA) is set to become the largest initial public offering of a venture capital-backed biotech company, setting IPO terms that could raise $521 million. The company develops drugs for the treatment of infectious diseases, genetic disorders, cancer and cardiovascular diseases, by using messenger RNA technology to convey genetic information within cells. The Moderna IPO plans to offer 21.7 million shares priced in the range of $22 to $24. That gives it a market valuation near $8 billion. At the high end of that range, Moderna would raise $521 million. The company has received about $1.6 billion in venture funding, including $125 million in May from the venture capital unit of Merck (MRK). In addition to Merck, Moderna has strategic alliances with AstraZeneca (AZN) and Vertex Pharmaceuticals (VRTX). Moderna plans to list on the Nasdaq under the ticker MRNA and start trading the first week in December. The lead underwriters for the IPO are Morgan Stanley, Goldman Sachs and JPMorgan. Large shareholders in Moderna include Flagship Pioneering and AstraZeneca. Venture capital backers include Sequoia Capital and ArrowMark Partners.

8 Contributors Joyce Li is a sophomore in the College of Arts and Sciences from San Diego, CA. She is studying Economics and English. She is also a member of the General Ledger, HR, and IS committees on the SFCU. Edward Yisheng Jiang is a sophomore in the College from Sydney, Australia. In addition to Investments, Edward is a Member Services Representative in the Operations Committee. In his spare time, he enjoys kick-boxing, riding his scooter around campus, and writing in the third person. Joshua