Wall Street Breakfast: What Moved Markets

The S&P 500 (SP500) on Friday ended the week 2.1% lower amid renewed fears of the economy sinking into a recession next year as major central banks may not ease up on rate hikes just yet. The benchmark index posted losses in three out of five sessions, with hopes of a Santa rally this year quickly fading. The major indexes posted a second consecutive week of losses with the Dow down 1.7% and the Nasdaq off 2.7%. The week featured the Federal Reserve, European Central Bank and Bank of England all turn more hawkish as inflation remains stubbornly high. Of note, San Francisco Fed President Mary Daly said the Fed still has a “long way to go” to get inflation down to 2%. Trading was especially volatile on Friday with $2.6T worth of options expiring as part of triple witching day. See a preview of the major events next week that could jolt share prices in Seeking Alpha’s Catalyst Watch.

M&A spree

Looking for a new drug pipeline and some blockbuster treatments, Amgen (AMGN) on Monday agreed to acquire Horizon Therapeutics (HZNP) for $116.50 per share in cash. That’ll value the Ireland-based company at nearly $27.8B on a fully diluted basis, and nearly $28.3B including debt. Horizon is a rare autoimmune and inflammatory disease-focused biotech, with revenue generators like Tepezza, Krystexxa and Uplizna that added $2B in sales for the firm in the first nine months of the year.

Backdrop: Amgen was the last of three suitors standing in an auction for Horizon that included Johnson & Johnson (JNJ) and Sanofi (SNY). All of the drugmakers are looking to replenish their pipelines, but no one is getting as aggressive as Amgen. It is facing one of the biggest portfolios of patent expirations in the industry, prompting a serious shopping spree over the past two years.

In the summer, Amgen inked a $3.7B buyout of ChemoCentryx to boost its inflammatory disease presence. Last year, the company scooped up oncology player Five Prime Therapeutics for $1.9B and antibody drug specialist Teneobio for nearly $1B, as well as smaller purchases like tissue regeneration expert Rodeo Therapeutics for $55M.

Market movements: Shares of Horizon Therapeutics soared 14% on the news, while Amgen’s stock fur 3%. The latter expects to use cash in hand and debt to finance the deal, which is expected to close in the first half of 2023 and become accretive to revenue and non-GAAP earnings per share from 2024. However, Amgen did not update 2022 or 2030 guidance as a result of the transaction. (20 comments)

fusion revolution

Investors on Tuesday watched an announcement from the US Department of Energy that could shake up how we power our world. A major milestone has been achieved at the Lawrence Livermore Laboratory in California, which is based on fusion technology. That’s the same process that powers the sun and stars, and could eventually lead to an unlimited source of cheap clean energy.

snapshot: The breakthrough, known as a net energy gain (or target gain), means that more energy was produced from a fusion reaction than it consumed. Scientists produced the effect with the world’s largest laser under an approach known as magnetic confinement fusion. A tiny amount of hydrogen plasma, held in place by powerful magnets, was heated to extreme temperatures – resulting in the fusing of atomic nuclei and 20% more energy than was used in the lasers.

“If this is confirmed, we are witnessing a moment of history,” said plasma physicist Dr. Arthur Turrell. “Scientists have struggled to show that fusion can release more energy than is put in since the 1950s, and the researchers at Lawrence Livermore seem to have finally and absolutely smashed this decades-old goal.”

Outlook: While things are still in the early stages, the trick will be to make the process self-sustaining, harness enough energy to power infrastructure, and to do so continuously. Fusion also doesn’t have all the radioactive waste associated with current reactors that utilize fission, and has the potential to easily outpace other clean energy sources like solar and wind in terms of output. Fusion backers say the technology could be commercialized in a decade or more, but many are more skeptical about such a timeline, saying there’s too much hype from companies looking for government subsidies and private investment. (151 comments)

A long way to go

As widely expected, the Federal Open Market Committee increased its policy rate by 50 basis points to 4.25%-4.50% on Wednesday, as it downshifted from the 75 bps hikes of its previous four meetings. While that would appear to be a win for investors, the so-called “dot plot” was more of a concern. The Fed policymakers’ median projection now sees the federal funds target range rising to 5.1% next year – a level last seen in 2007 – compared with 4.6% in the central bank’s September projection.

Quote: “We need to be honest with ourselves that there’s inflation. 12-month core inflation is 6% CPI. That’s three times our 2% target. Now it’s good to see progress, but let’s just understand we have a long ways to go to get back to price stability,” Fed Chair Jerome Powell said during a press conference. “I don’t think anyone knows whether we’re going to have a recession or not, and, if we do, whether it’s going to be a deep one or not. It’s just – it’s not knowable… The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”

All three major US stock indices retreated following the announcement, erasing gains from earlier in the session. The selloff accelerated on Thursday, as the ECB and BoE raised rates, and whispers of a recession turned into screams. Rate hikes are tricky in the sense that monetary policymakers may not know for another year if they have tightened too much or not enough (economists call those effects long and variable lags).

Comments: “The Federal Reserve’s decision to reduce the pace of rate hikes to 50 bps marks the beginning of the end of this rate hike cycle,” said SA contributor Ahan Vashi. “However, a reduction in pace of rate hikes is not a pivot, and the Fed’s quantitative tightening program is likely to continue for the foreseeable future. With the Fed tightening into a deeply inverted treasury yield curve, the near-term environment should be risk -off. Hence, equity markets could see increased volatility in upcoming weeks.” (256 comments)

Famous to infamous

Sam Bankman-Fried’s fall from grace could end with some jail time. The founder and former CEO of FTX was arrested in the Bahamas this week after the US filed criminal charges against the once-superstar of the crypto world (and requested his extradition). The charges include wire fraud, wire fraud conspiracy, commodities fraud, securities fraud, securities fraud conspiracy, money laundering and violations of campaign finance laws.

Interesting timing: Just before his arrest, SBF was scheduled to testify before the House Financial Services Committee about the downfall of FTX, which was once worth some $32B before its implosion. More information is still needed, but all the clues point to sour bets made by SBF’s hedge fund, Alameda Research, which used FTX customer deposits for high-risk trades. Massive withdrawals from FTX ensued as reports surfaced about its financial health, though to date, SBF has denied any prior knowledge of the situation or lending out FTX customer deposits to fund Alameda’s activities.

Some details were later disclosed by John J. Ray III, the new CEO of FTX, during testimony on Capitol Hill. “We are continuing our painstaking forensic efforts to account for all of the assets,” said Ray, who has more than 40 years of legal and restructuring experience, including overseeing Enron’s high-profile bankruptcy in 2001. “The FTX Group’s collapse appears to stem from the absolute concentration of control in the hands of a very small group of grossly inexperienced and unsophisticated individuals who failed to implement virtually any of the systems or controls that are necessary for a company that is entrusted with other people’s money or assets.”

Civil action: Besides criminal allegations, SBF is facing separate charges from the Securities and Exchange Commission for violations of securities laws. Other civil action was brought by the Commodity Futures Trading Commission, and state banking regulators may also get involved. “I had thought of myself as a model CEO, who wouldn’t become lazy or disconnected. Which made it that much more destructive when I did,” SBF wrote in his last tweet before his arrest. “I’m sorry. Hopefully people can learn from the difference between who I was and who I could have been.” (276 comments)

Economics of the World Cup

The 2022 World Cup in Qatar has proved to be the most controversial to date, but many parties are cashing in on the benefits the competition has to offer. There has been a series of upsets in the tournament this year, making for even bigger exposure when it comes to viewing numbers, and France will face off against Argentina in the final match on Sunday. Based on historical growth trends, around 1.5B people are expected to watch the championship game across the globe, representing nearly a fifth of all humans living on Earth.

bottom line: That’s a big platform to get out your message. In terms of hard cash, host countries don’t turn a profit from the games, though it does boost their standing on the world stage and projects soft power as a good place to do business. Advertisers, on the other hand, hope to ring the register on their marketing efforts, with commercials, jerseys and stadium banners all being watched by billions of eyeballs. This year’s affiliate sponsors include Adidas (OTCQX:ADDYY), Budweiser (BUD), Coca-Cola (KO), Hyundai (OTCPK:HYMPY), McDonald’s (MCD) and Visa (V).

“If they genuinely felt strong about the matter, then they could pull out of those markets,” said Kieran Maguire of the University of Liverpool, when asked about commercial deals despite controversies surrounding Qatar’s treatment of migrant workers and the LGBT community, restriction of political expression, and claims of bribery to host the tournament. “We had the 2018 World Cup in Russia, and remember, Russia had invaded and annexed Crimea in 2014 but that didn’t stop any of the sponsors from getting involved.”

Bit of a stretch? Some claim that the country of the World Cup champion can see percentage points of GDP growth following the event due to greater international visibility. However, the connections to exports and trade are difficult to assess, and can also be impacted by external factors or trends in the global economy.

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