Wall Street Breakfast: What Moved Markets

U.S. stocks rallied on Friday and major indexes snapped a three-week losing streak as investors continue to factor in the expectation for higher interest rates just around the corner. The benchmark index rose in three of the four sessions this week as investors appeared to be bargain-hunting following recent weakness in the market triggered by the Federal Reserve’s increasingly hawkish remarks. All 11 sectors in the S&P 500 closed in the green for the week, with the consumer discretionary sector standing out as the top gainer. The Dow finished the holiday-shortened week up 2.7%, while the S&P 500 Index rose 3.7% and the Nasdaq shot up 4.1%. The 10-year U.S. Treasury tacked on 12 basis points during the week to end with a yield of 3.32%. Read a preview of some of next week’s key events in Seeking Alpha’s Catalyst Watch.

Truss takes over

British Foreign Secretary Liz Truss was named leader of the governing Conservative Party on Monday, making her the next U.K. prime minister after the scandal-plagued resignation of Boris Johnson. Truss edged out Rishi Sunak, who raised taxes following the pandemic and was seen as an instrumental force in bringing down Johnson’s government by resigning as Chancellor of the Exchequer back in July. The new U.K. leadership will have to contend with a serious cost of living crisis and skyrocketing inflation that’s running at a 40-year high of over 10%.

Platform: Truss has previously pledged to set “a clear direction of travel” for monetary policy, as well as a review of the Bank of England’s mandate that lead to greater oversight by members of parliament. She also wants to reverse corporate tax increases, and help low-income households and small businesses deal with spiraling energy costs. A preliminary plan was announced that would see the average U.K. household “pay no more than £2,500 ($2,880) per year for each of the next two years,” resulting in “a £1,000 saving per year,” while providing a similar guarantee to businesses over the next six months.

The stance has prompted investors to worry about more government debt at a time when borrowing costs are surging. Weakness in the pound has also been compounded and just hit the lowest level versus the U.S. dollar since 1985. Uncertainty over economic policies and the ability to control inflation, as well as a pledge to review the remit of the BoE and relentless rally in the greenback have all been factors in the descent of sterling, and some think the pound could even fall to parity with the dollar in 2023.

Worst-case scenario: “The economic challenges facing the U.K. economy are probably of a magnitude as great as anything we’ve seen in living memory,” said Mark Dowding, chief investment officer of BlueBay Asset Management. “There’s a really bleak path in which you end up with the U.K. almost needing to go back to the IMF for a bailout as a quasi-emerging market crisis.” Elsewhere, the country dealt with the passing of Queen Elizabeth II this week, who was Britain’s longest-reigning monarch and died at the age of 96. (30 comments)

Healthcare juggernaut

CVS Health (CVS) agreed to acquire Signify Health (SGFY) for $30.50/share in cash, for a total value of about $8B, beating out other potential buyers including Amazon (AMZN) and UnitedHealth (UNH). Private equity funds affiliated with New Mountain Capital, which owns 60% of Signify Health (SGFY) shares, have also agreed to vote the shares they own in favor of the deal.

Bigger picture: The transaction will add 10,000 contracted doctors and clinicians and give CVS (CVS) a hand in coordinating medical care for millions of Americans. Signify’s in-home model is part of a broad analytics-and-technology platform, which sees providers go into homes equipped with connected tablets to assess patient needs and follow-up services. The clinicians “operate much like Uber drivers,” explained CEO Kyle Armbrester. “We’re in a gig economy and this is a flexible model.”

Many companies (even outside the sector) have recently been pivoting to healthcare services. CVS has acquired insurer Aetna and pharmacy benefits manager Caremark, while in July, Amazon announced it would scoop up primary-care provider One Medical for $3.9B. Don’t forget Walgreens’ (WBA) deal for CareCentrix, UnitedHealth’s $5.4B buyout of LHC Group, and Humana (HUM) taking full control of Kindred at Home.

Statement: “We expect the acquisition to be meaningfully accretive to earnings and, as a result, are increasingly confident we can achieve our long-term adjusted EPS goals as outlined at our Investor Day in December 2021,” declared Shawn Guertin, CFO at CVS Health. (55 comments)

Meet the new iFamily

Apple (AAPL) unveiled updates to its iPhone, AirPods and Apple Watch product lines on Wednesday, including the new Apple Watch Series 8 and iPhone 14 with satellite connectivity. Chief Executive Tim Cook kicked off the event, noting that all three products are “essential in our lives,” and work seamlessly together. “This type of integration is something only Apple can do and we’re going to make these products and experiences even better,” he related in a pre-recorded video.

The biggest surprise? No price hikes. The new iPhone 14 and iPhone 14 Plus start at $799 and $899, respectively, while the iPhone 14 Pro and iPhone 14 Pro Max start at $999 and $1,099. While the fresh iPhone lineup looks similar to existing models, it adds features like Globalstar (GSAT) satellite messaging for emergency use. Most of the upgrades were on the new high-end models, including 48MP camera sensors, and a pill-like space at the top of the screen – known as the Dynamic Island – that changes based on the type of notification or action that is occurring, like charging or playing music.

“They did enough to keep iPhone growth going,” said Gene Munster, managing partner with Loup Ventures. “Maintaining pricing is the new price cut, and that should be good for demand.”

Far Out: The new Apple Watch Series 8 ($399 for GPS and $499 for cellular) comes with a new temperature sensor and additional cycle tracking features for women’s health, along with new accelerometers that can detect if a person has been in a car crash and call for help. Apple also took the wraps off of the widely anticipated Apple Watch Ultra ($799 for GPS and cellular), geared towards extreme fitness and sports enthusiasts. New versions of the tech giant’s wireless earphones, the AirPods Pro 2 (costs $249), have a new H2 chip inside, giving users new audio experiences, including better sound quality, a custom amplifier and spatial audio. (227 comments)

Role of the ECB

As the energy situation in Europe grows dimmer, ECB officials are preparing to double down on their aggressive monetary stance, loading up the policy rifle with more gunpowder. The central bank delivered a monster 75 basis point increase on Thursday, which was the largest hike in the institution’s 24-year history. The cost of energy was the biggest factor in sending the eurozone inflation rate to 9.1% in August, which the central bank is trying to put a lid on lest it spirals out of control.

Transcript: “We want all economic actors to understand that the ECB is serious. We expect to raise interest rates further, because inflation remains far too high and is likely to stay above our target for an extended period,” ECB President Christine Lagarde declared. “We think it will take several meetings… How many is several? It’s probably more than two, including this one, but it’s probably also going to be less than five,” meaning rate hikes could continue into early 2023.

“I cannot reduce the price of energy,” continued Lagarde. “I cannot convince the big players of this world to reduce gas prices. I cannot reform the electricity market… monetary policy is not going to reduce the price of energy.” The messaging leaves many to wonder about the role and strategy of the ECB, especially if it cannot fight structural energy issues and the supply-side problems. Rising borrowing costs will only increase the risk the eurozone slides into recession, and the central bank has even sharply reduced growth projections for next year. What is going on?

Economic communicator: Ultimately, government interventions are needed to shield energy users from some of the pain, but “the ECB has to see to it that these price pressures do not get embedded,” said Holger Schmieding, chief economist at Berenberg Bank. “They have to signal for workers and companies that the environment will be tough and that this is not a backdrop for huge wage increases, which in turn would add to inflation. The central bank wants to make sure that inflation expectations – after the current surge in energy prices has run through the system – stay modest by sending the signal of [front-loading rate hikes].” (7 comments)

Energy shocks

European energy ministers also convened in Brussels on Friday as a deepening energy crisis confounds the bloc. Set to be discussed were a series of emergency intervention measures to stave off runaway prices, or more painful cuts that could result in de-industrialization and even social unrest. While ministers debated the effectiveness of the actions, and their related consequences, a bigger part of the equation will be to maintain a consensus and preserve the unity of the European Union. Here’s what was on the table:

Government support: Looking to prevent ballooning collateral requirements, emergency credit lines would be offered to energy market participants that are facing high margin calls.

Rationing: Proposals range from setting mandatory targets on reducing electricity consumption during peak hours to cutbacks in electricity utilization.

Price caps: The most controversial of the measures is putting a price ceiling on gas imported from Russia, and how the caps would impact different regions and countries.

Trading suspensions: Caps may also be imposed on the margin limits that energy exchanges can ask for, or other temporary suspensions of European power market derivatives.

Windfall revenues: Levies would be imposed on European electricity producers by setting a threshold at less than the current market rate and using the cash to help reduce households’ soaring energy bills.

Clock is ticking: The Czech Republic, which holds the EU’s rotating presidency, called the extraordinary meeting, with Industry Minister Jozef Sikela outlining the current timetable. “I already see points where I’m pretty sure we will align. There’s no time to lose,” he declared, saying that direction must be agreed to by the end of Friday and a legislative proposal sent to the European Commission by the end of the month. (14 comments)

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