Powell’s big speech
Powell is scheduled to speak at the Kansas City Fed’s annual Jackson Hole Symposium at 10 a.m. ET. Stocks have risen in the week leading up to Powell’s remarks, while bond yields have risen on the belief that the Fed is getting closer to tapering its bond purchases.
When bond prices fall, yields rise. On Thursday, the 10-year Treasury yield was 1.35 percent, up from 1.25 percent at the start of the week.
The Fed is purchasing $120 billion in Treasury and mortgage securities each month, and a steady stream of Fed officials has been touting the idea that the central bank should soon begin to reduce its purchases. This is significant for markets because the Fed may begin to consider raising interest rates at the end of the tapering process.
“Powell is going to discuss tapering. “There is no doubt about it,” said Jim Caron, head of global macro strategies at Morgan Stanley Investment Management. “Does he give us enough to believe that it will be announced at the September meeting, or will it be later? I believe the Fed should wait a little longer.”
The great chasm
The market is divided, according to Caron, on when the Fed will announce it will slow its purchases, which were initiated as part of an extraordinary easing effort to combat the pandemic.
“I believe market expectations are slightly skewed toward a later announcement, perhaps in November or December,” he said.
The Fed, according to Caron, could wait a few months because the risks of the Covid-19 delta variant are still unknown. The potential slowing of global economic growth is also an issue, with China potentially slowing its own economy through reforms to internet companies and other businesses.
If Powell suggests that the Fed may announce a plan to end bond purchases after its September 22 meeting, this could be interpreted as “hawkish” and cause a market reaction.
“If he gives a time frame, I suspect it will be soon. “That’s probably a pretty significant move up in yields and a pretty rough day in the equity market,” said Michael Schumacher, director of rates at Wells Fargo. “Most people expect him to simply leave it open in one of his usual comments, without providing any timing. That is most likely regarded as dovish.”
The benchmark 10-year Treasury yield is the most closely watched Treasury yield because it influences mortgage and other lending rates. It is also related to the stock market. If yields rise too quickly, growth and some technology stocks will suffer.
Powell, according to InspereX trader David Petrosinelli, will indicate that tapering could be announced this year, but he will not provide a specific timeline. “I believe the market is anticipating something firmer than no time guidance,” he said. “I believe the market will rally if he provides no guidance at all.”
Petrosinelli predicted that bonds would rise while rates fell because no timeframe would make Powell sound any more dovish than other Fed members who have stated that tapering could be announced soon. If Powell does not provide any additional guidance, Petrosinelli believes it could indicate that he sees the delta variant as a greater threat than Fed officials have stated thus far.
“It’s really going to be the signaling and messaging,” Caron predicted. “If they do have words that we all believe are a signal for a tapering announcement in September, I think what really matters is what Powell says around that….” This is still a developing situation.”
Caron believes the Fed should not rush to taper, and that the program will be phased out later this year. “I understand your points of view. One is that the Fed spends $120 billion per month. I believe it is having a negative impact on a large portion of the liquidity in the Treasury market. They do $120 billion per month, and there is almost no new issuance for people to buy,” he said. “You get artificially low yields, which clearly causes other asset classes to rise.”
Caron believes that if Powell does delay the announcement until September, the market will react in one of two ways. Bond yields could immediately rise, causing a stock market sell-off.
However, yields may begin to fall as some investors consider a Fed taper, as they did earlier this summer when yields were falling. Yields fell then amid concerns that the Fed was moving too quickly, which could harm the economy and limit the central bank’s ability to raise interest rates in the future.
If the chairman makes no mention of timing, he will appear dovish, and yields will initially fall while stocks will rise. “He’s implying a hot economy,” Caron explained.
According to Peter Boockvar, chief investment officer at Bleakley Advisory Group, the market is solely focused on the Fed, and there is a good chance it will move markets on Friday.
He also stated that September may be too soon for the Fed to act, despite his belief that the Fed should be more concerned about inflation and announce the taper later this year.
“I don’t think he’s going to go that far. “From tomorrow until the September meeting, they will collect a lot of information,” Boockvar said. “The schools will reopen. People will be able to return to work after being out of work for an extended period of time. We’ll see where the delta numbers take us. He has the means to wait.”
Market mover and shaker
The market could move regardless of what Powell says, according to Boockvar. In the run-up to Powell’s Jackson Hole speech, Kansas City Fed President Esther George, St. Louis Fed President James Bullard, and Dallas Fed President Rob Kaplan all spoke out in favor of tapering sooner rather than later. The bond program, also known as quantitative easing, is expected to take up to ten months to wind down.
“I think if the theme of what he says tomorrow is along the lines of what we heard today, absolutely,” Boockvar said. “With the exception of Covid and the correction in August 2015 when the Chinese revalued the yuan, every major correction over the last 11 years has revolved around QE, tapering of QE, or a rate hike.”
According to Caron, the bond market is attempting to determine what the Fed’s tapering means for future interest rate hikes. At this point, Fed officials believe that the terminal rate, or the final level of interest rates after they begin raising rates, is 2.5 percent.
However, if the Fed acts prematurely, that level may only reach 2%, for example, because the economy may not be as strong. This would have an impact on yields, and according to his calculations, the 10-year should be around 1.3 percent.
“If the Fed achieves a 2.50 percent terminal policy rate and we assume a 25 basis point rate hike per quarter, the Fed will end their cycle at 2.50 percent by the end of 2025,” Caron wrote in a note. “Based on our estimates, the fair value of the UST 10y yield should be 1.70 percent over the next quarter.”
Cathie Wood’ s best stocks
Shares of Wood’s flagship Ark Innovation are down more than 3% this year after a difficult first half of 2021, owing to a shift away from growth stocks and toward value. Nonetheless, according to FactSet, more than $6 billion will flow into Ark Innovation in 2021. After Ark Innovation returned nearly 150 percent in 2020, Wood made a name for herself.
Wood’s other investments are a mixed bag. Ark Next Generation Internet ETF is up 2% for 2021, while Ark Genomic Revolution ETF is down 10%. Ark Fintech Innovation ETF has increased by 6% this year, while Ark Autonomous Technology & Robotics ETF has increased by more than 8%.
Despite the funds’ relative underperformance in comparison to the major US benchmarks, several names in the Ark funds have outperformed this year.
Take a look at the top-performing stocks in Wood’s Ark funds in 2021 so far.
Intellia Therapeutics is the best-performing stock in Wood’s funds this year, having returned more than 185 percent. In late June, the Massachusetts-based company and its partner Regeneron announced positive findings from a phase one study of a gene-editing treatment for transthyretin amyloidosis.
This year has also been a banner year for LendingClub, Nvidia, Sea, and Bill.com. Deere, Intuit, and Snap are also included on the list.
The companies did not go public in 2021; however, Ark owns several newly public companies. TuSimple, a self-driving truck company, has risen roughly 20% since its initial public offering in April, and Roblox shares have risen since the gaming company’s IPO in March.
Coinbase, the world’s largest cryptocurrency exchange, went public in April, with a share price of $381. Currently, the stock is trading around $250 per share. Its price movements are closely related to those of bitcoin.
Seres Therapeutics tops the list of the worst performers, with a drop of nearly 75% in 2021. Wood’s funds have also been dragged down by Berkeley Lights, Materialise, Pluristem Therapeutics, and Proto Labs.
Take a look at the stocks that have performed the worst in Wood’s Ark funds so far in 2021.
Ark Invest’s future prospects
It is worth noting that some of the worst performers this year are stocks that Wall Street expects to recover in the next 12 months.
While Seres Therapeutics is the biggest underperformer among Wood’s holdings, it is also the top stock that analysts expect to outperform in the coming year. According to FactSet, nearly 80% of analysts covering the stock have a buy rating on the stock. Analysts anticipate a 230 percent gain on average.
The biotech company’s lead microbiome therapy is on the verge of submitting a biologics license application in the third quarter of this year.
“SER-109 had clean safety data in Phase 3 as well as 24-week data demonstrating durable efficacy. Seres has an agreement with Nestle Health Science to jointly commercialize SER-109 worldwide, demonstrating the program’s high interest,” Canaccord Genuity analyst John Newman told clients.
The stocks listed are holdings in one of Ark’s core ETFs. Furthermore, Wall Street expects these stocks to rise more than 60% in the next year, based on analysts’ average 12-month price target.
Finally, the listed stocks have a buy rating from more than half of the analysts, with a minimum of five analysts covering the equity.
Compugen and Niu Technologies are two Ark Invest-owned companies that are well-liked on Wall Street. Analysts unanimously recommend both stocks as a buy. Analysts anticipate a nearly 220 percent increase in Compugen and a more than 65 percent increase in Niu Technologies over the next year.
Surface Oncology’s stock is down more than 35% this year, but the company reported better-than-expected earnings earlier this month. The company is a clinical-stage immuno-oncology company that is developing next-generation immunotherapies that target the tumor microenvironment, and it has reached a significant milestone with its small-cell lung cancer treatment.
Surface Oncology is expected to recover more than 150 percent in the next year, according to analysts.
Zillow is expected to increase by more than 62 percent over the next year. The president of the online housing marketplace said that the company should benefit from increased home listings as Covid’s certainty improves.
Berkeley Lights, 1Life Healthcare, Personalis, Iovance Biotherapeutics, and Skillz were also among Wall Street’s top Ark stocks.
Best European stocks to buy now
The federal election in Germany on September 26 will make headlines not only because it will mark the departure of current Chancellor Angela Merkel after 16 years in office. The election is also highly anticipated because polls have been inconclusive, pointing to a variety of possible coalitions.
According to UBS, the following eight stocks are “positively exposed” to the election:
Infineon is a semiconductor manufacturer.
Knorr-Bremse is a braking system manufacturer.
RWE is an energy company.
Siemens is a manufacturing giant.
Siemens Gamesa is a renewable energy company.
Vestas is a wind turbine manufacturer.
Volkswagen is a car manufacturer.
Wacker Chemie is a chemical company.
The conservative CDU party, led by Merkel until recently, is no longer the clear leader in the polls, and the Green party is expected to garner a much larger share of support this time around. According to a recent poll, the CDU received 24% of the vote, the socialists 20%, and the Greens 18%.
There are six themes.
The investment bank explains its stock picks by highlighting six key themes to watch in the upcoming election, with climate change ranking first.
Germany has stated that it wants to be carbon neutral by 2045, but many measures must be approved quickly in order to meet this goal. This will necessitate substantial public investment.
According to UBS, this investment is the second most important topic. Huefner said that charging stations for electric vehicles, railway improvements, and support for housing renovations to make homes more energy efficient were all likely candidates for investment.
UBS identified the third theme as paying for this investment. According to Huefner, while some political parties want to loosen fiscal rules to allow for more spending, others are skeptical.
According to UBS, the fifth and sixth major themes of Germany’s election are housing and labor markets. There is a growing debate over whether rent increases should be limited and minimum wages raised.
As a result, Huefner stated that capital goods, technology hardware, and utilities are examples of industries that could benefit from the upcoming vote. Airports and airlines, chemicals, defense, and real estate, on the other hand, could suffer as a result of the election, he said.
Materials company Covestro, German property firm Deutsche Wohnen, Switzerland’s largest airport Flughafen Zurich, Chemicals firm Johnson Matthey, airline Lufthansa, defense firm Rheinmetall, and engineering company Sandvik are among the stocks that UBS said were “negatively exposed” to the election.