Weekly Wrap

Market Update

Calendar Icon   Friday, 16th July 2021

ASX 200 Index (XJO)

The bar pattern established on 21st June is still prevalent. Either the XJO moves above 7368 or closes below 7216 on a sustained basis to determine the direction of our market for the next few weeks or months. Until then, the sideways trading on low volume continues.

XJO Chart

US Reporting Season

Keep an eye on the US markets as second quarter earnings season kicked off this week. Earnings for the S+P 500 are expected to be up as high as 65% compared to last year, when the US economy was closed down due to the pandemic.

“The second quarter could be as good as it gets for economic growth,” said Callie Bost, senior investment strategist at Ally Invest. “Earnings growth may slow, but analysts still expect S&P profits to grow by double digits in the next two quarters. It’s crucial not to lose faith in the market just because the economy’s strongest growth may be behind us.”

The six largest banks reported this week with JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and Morgan Stanley all beating analysts’ profit expectations by releasing money set aside earlier for loan losses that did not occur, whilst Goldman Sachs beat estimates on the back of strong trading and advisory results.

Market Snapshot

Volatility Index (VIX)

Volatility Index

ASX Sector Movements

ASX Sector Movements

ASX Index Movements

ASX Indices

Buy Now Pay Later

One of the phenomenons of the past 18 months has been the rise of a new lending model called Buy Now Pay Later (BNPL). The concept was started by a company called Afterpay (see chart below) and is a lending model that allows customers to make a purchase and pay it off over 4 repayments. Due to the lock-downs that started in April 2020, Afterpay managed to grab a sizeable chunk of business from people stuck at home shopping online.

The catch with this model is that if you miss a payment, you incur a late fee and after a number of misses, your account is closed. Late fees are how Afterpay makes money and they estimate that 20% of their customers have incurred a late fee, which increases 50% when the customer is under 25 years old. Whilst this sounds like a model that relies on people to overspend, the company has spent a lot of money increasing their presence in America.

Inevitably, this has attracted the attention of a couple of large competitors, notably Apple and PayPal. Both companies have announced a new lending model with the 4 repayment program, although PayPal has scrapped the late fee. Apple is working in conjunction with Goldman Sachs for the funding side of the business and they will announce their program shortly.

This has a direct impact on Afterpay and other companies in the BNPL sector, as the reliance on late fees to fund their business is under threat. Whilst Afterpay has increased revenue over the past 12 months, they still haven’t made a profit.

One of the casualties of the BNPL industry would appear to be the credit card business, which charges an exorbitant amount of interest on purchases. The days of 20% plus on credit may be numbered.

To read more about these developments click here.

APT Chart