Wall Street Breakfast

Author: bmotrader   |   Latest post: Fri, 10 Sep 2021, 7:54 AM


Wall Street Breakfast: Brexit Tensions Resurface

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The Brexit drama is far from over, with the U.K. and EU on a collision course over the rules for Northern Ireland. It was only seven months ago that the two sides came to an agreement on a Brexit deal, but Britain now wants to overhaul the trading system for the territory. The special arrangement was previously inked to avoid a hard border on the island of Ireland and prevent a backdoor for smuggling into the bloc, but the protocol has subsequently resulted in a fractious relationship.

Why is it still an issue? Northern Ireland's status is somewhat of a hybrid as it is still part of the United Kingdom, as well as the European Single Market. That means checks need to be done on goods that are traveling from Great Britain to Northern Ireland to block items from leaking into the EU. Most of the checks are carried out on the Irish sea border, which has caused tensions among the pro-U.K. unionist community in Northern Ireland, which doesn't like the idea of a barrier with the mainland.

U.K. Brexit Minister David Frost now sees the situation as untenable and has proposed a plan to substantially rewrite the Northern Ireland protocol. The deal would largely be based on a light-touch regime and the honesty of traders, whereby businesses would register their transactions and agree to inspections of their supply chains. Meanwhile, a deadline is looming at the end of September, when a series of so-called grace periods come to an end and the full weight of checks are supposed to be applied across Irish sea traffic.

Going further: Frost wants to extend the waiver periods indefinitely, and if the EU doesn't put the current arrangements on hold, he's holding back the option of overriding the entire treaty unilaterally. If that would happen, the EU would likely retaliate with tariffs and sanctions, while the relationship would deteriorate even further. European Commission President Ursula von der Leyen said the EU will be "creative and flexible," but has ruled out renegotiation.

Stocks - Rally goes on

A three-day winning streak on Wall Street - that followed a sharp selloff on Monday - is showing no signs of slowing down as futures continued to climb in overnight trading. At the time of writing, contracts linked to the Dow and S&P 500 were up 0.5%, while the Nasdaq tacked on a gain of 0.6%. Tech strength is continuing to power the latter index as shares of Snap (SNAP) and Twitter (TWTR) soared on stronger-than-expected Q2 numbers.

By the numbers: All three of the major averages are on track to close the week solidly in the green. That would mark the fourth positive week in five and a rebound from last week’s losses.

"The earnings results have continued to be strong and guidance is showing that the Delta variant isn't impacting the recovery, so far at least," said Esty Dwek, head of global market strategy at Natixis Investment Managers. "That is giving confidence to the market that the recovery can continue."

Signs from the bond bazaar: "People are comforted by 10-year bond rates, it's a sign of the recovery play," added Peter Tuz, president of Chase Investment Counsel. "There's flight away from safety today."

Earnings - Chip niche

Shares of Intel (INTC) fell back 2% in AH trading on Thursday after reporting Q2 results that beat analyst expectations on continuing PC strength and a data center recovery. Revenue for the quarter was up 2% on the year to $18.5B, about $700M higher than analyst expectations, while adjusted earnings of $1.28 per share topped consensus by $0.19. The semiconductor giant even raised its full-year forecast to $73.5B in revenue (from $72.1B), with adjusted EPS of $4.80 (from $4.60).

What gives? Intel guided to non-GAAP gross margins of 55% in Q3, a notable drop from 59.2% in Q2. The decreased margin was due to supply constraints, as well as costs related to building chips via a new process technology. Some investors could also be nervous about ramping up production to hefty levels in the face of the global semiconductor shortage. In 2018, high chip demand quickly turned into a supply glut after customers overbought silicon as prices rose and chipmakers kept on rolling out product.

"Chip shortages will likely bottom out in the second half of the year," according to CEO Pat Gelsinger, but "it will take another one to two years before the industry is able to completely catch up with demand. We have a long way to go yet. It just takes a long time to build capacity."

Outlook: Intel has committed to spend $20B to improve its manufacturing capabilities, including two new facilities in Arizona. Reports also suggest the company could shell out around $30B for GlobalFoundries, but on a conference call, Gelsinger said he couldn't comment on the rumors. "Our view is that industry consolidation is very likely. The intense R&D, the need to move to modern and leading-edge nodes, the massive capital investments required, we just simply view that smaller players simply won’t be able to keep up and foundries without leading-edge capabilities will be left behind."

Financials - Next big trade

Nasdaq (NDAQ) is teaming up with a consortium of giant banks, including SVB Financial Group (SIVB), Citigroup (C), Goldman Sachs (GS) and Morgan Stanley (MS), for a new project that might be the next big thing: The go-to platform for buying and selling stock in private companies. While there's competition in the space (think EquityZen, Carta, ClearList and Forge Global), no one venue has yet dominated the asset class.

Bigger picture: Nasdaq is banking on a dynamic it knows well - traders will drift to the platform with the best liquidity and greatest client book. It also wants to make sure the future trading system will stay within the confines of Wall Street, rather than Silicon Valley. Trading in pre-IPO shares has heated up in the last few years among accredited investors - people who meet certain wealth criteria (like a net worth of more than $1M or an annual income above $200,000) - and some are even looking to bring the capability to the retail crowd. Robinhood (HOOD) recently jumped in the game by unveiling a new program called IPO Access.

"The banks that we're working with will bring a massive amount of distribution," commented Nelson Griggs, an executive vice president at Nasdaq.

How will it work? Nasdaq will spin out Nasdaq Private Market into a separate, standalone company that will receive strategic investments from SVB, Citi, Goldman, and Morgan Stanley. Nasdaq had acquired the platform - then called SecondMarket Solutions - back in 2015 after feeling competition to its Private Market initiative. According to a press release, the new venture will create an "institutional-grade, centralized secondary trading venue for issuers, brokers, shareholders and prospective investors of private company stock."


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