Markets bounced back this week

Asset Management - 7/15/2016

Global equity markets bounced sharply while government bond yields tightened both in the US and in Europe.
Commodities Corporate

​Global equity markets bounced sharply while government bond yields tightened both in the US and in Europe. This was due to technical factors, like pre-Brexit hedging strategies being unwound and investors with low risk exposure but also encouraging US job creations and a better-than-expected non-manufacturing ISM, hopes for monetary and fiscal easing in Japan and the UK, the Fed’s suggestion that chances of a rate hike were limited and signs that China's growth rate was stabilising.

Markets will be keeping a close eye on the results of the ECB’s banks stress tests on July 29. The real issue is to assess how healthy Italian banks are and to what extent they need to be recapitalised. The latest news suggests that talks between Italy and the EU over leaving Rome free to pump money into banks are making some progress. However, we do not yet know how much leeway Matteo Renzi’s government has been given. Political uncertainty is still running high.

Worries over the consequences of Brexit seem to have faded even though the timetable now looks closer since Theresa May took over as Prime Minister. Her new cabinet is an accurate reflection of one of her first public statements: “Brexit means Brexit”. The likelihood that Brexit might not occur was never very high but now looks off the cards. It was essential to be clear on the issue but it is still impossible to say how the talks will go before London triggers article 50 and that is not expected before the end of this year. This means that uncertainty over Brexit’s economic impact will last for several months. Also note that the exact date for Italy’s referendum on constitutional change in October has still not been set.

Lastly, Hillary Clinton’s lead over Donald Trump in the opinion polls has fallen.



  European equities

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Markets rebounded with banks and autos leading the charge.

Italy’s banks, led by Monte des Paschi di Siena, surged when Angela Merkel said a quick end to the argument over recapitalising the country’s troubled banks was possible. The eagerly-awaited results of the EBA stress tests will be released during the July 29 weekend. UniCredit announced that it was conducting a strategic review and that it had already sold 10% of its online broker Finecobank and now only had 55%. In autos, Daimler released its operating results ahead of schedule. They were much better than expected but there was no indication on the outlook for 2016. Peugeot's strong first half European sales were offset by reduced momentum in China and South-East Asia and the group expects Brexit concerns to slow car sales in the second half.

The civil aviation business is still doing well judging from the number of new orders won by Airbus at the Farnborough show. The group has raised forecasts on the sector’s growth for the next 20 years but has cut its target for A380 deliveries to 12 per year from 2018, down from 27 in 2015.

Nokia and Samsung this week said they were extending their intellectual property cross licences. Accor unveiled a draft project to sell the control of Hotel Invest which owns hotel buildings so as to reinforce its hotel management business. Eutelsat initiated the process to sell its 33.69% stake in Hispasat, Bayer sweetened its bid on Monsanto and Infineon bought Wolfspeed from Cree for USD 850m or a multiple of 4.9 times sales.



  US equities

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US equity markets surged. Strong job creation data for June were followed by upbeat economic indicators. The NFIB index of SME confidence came in surprisingly high. June’s PPI was also better than expected, especially the ex-energy and food component which rose 1.3% compared to expectations of 1%.

Against this rather reassuring backdrop, JP Morgan surprised markets on two fronts: first, with a strong media buzz announcement that it was raising pay across the board on the grounds that a strategic asset like qualified staff was an increasingly rare quality and had to be secured; second, with strong quarterly results in spite of the low interest rate environment. New loans jumped by close to 10% and the bank still considers that the economy is only half way through the cycle and therefore capable of more growth. Also among the first to report were ad agency Omnicom, Delta Air lines and Yum Brands. Results were generally well-received by the market but it is too early to discern any trend. Upcoming reports from Citigroup, Wells Fargo, Bank of America and IBM will be closely watched.

Over the last 5 trading sessions, materials and financials led gains. Traditionally defensive sectors like utilities and consumer staples only marginally participated in the bounce if at all.




  Japanese equities

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The TOPIX jumped 6.9% as the yen weakened and global markets rallied. After PM Shinzo Abe's ruling coalition won a resounding victory last Sunday in an Upper House election, investor sentiment improved on growing expectations of more than JPY 10 trillion in economic measures and new growth strategies to stimulate the economy.

All 33 sectors ended the week higher. The top sector gainer was Other Products, which surged 25.1%, thanks to Nintendo. Japan’s leading game company soared 69.4% on expectations sales would increase sharply thanks to the worldwide hit of its new Pokemon Go mobile game. After its launch on July 6 in the US, the app stayed at the top of the sales and download charts. This game is also expected to be released in Japan and other countries.

On a negative note, ONO PHARMACEUTICAL CO released its new Opdivo anticancer drug but fell 3.9%. Investors reacted to an item on the Japanese Society of Medical Oncology website that claimed some patients had died of pneumonia after taking the drug.



  Emerging markets

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Emerging markets closed this week in positive territory with stronger economic data from China being the main driver.

China’s economy is stabilising as lending and consumer spending pickup. The data suggests that the economy is responding to increased stimulus measures. GDP rose 6.7% in the second quarter from a year earlier. Industrial output and retail data for June both beat estimates and a central bank report revealed that the broadest measure of new credit beat analysts’ forecasts.

An international arbitration court ruled on Tuesday on China had no historic rights to more than 80% of the South China Sea. Chinese claims have long overlapped with those of Brunei, Malaysia, the Philippines, Taiwan and Vietnam, but tensions have risen lately as China increasingly harassed fishermen, reclaimed land and seized territory.

Indian companies started their quarterly earnings reports. The IT sector delivered mixed results: while margins at TCS might have surprised on the upside, Infosys’s top and bottom line results were both below estimates. Infosys slightly revised down its guidance for financial year 2017. In the finance sector, IndusInd Bank, kicked off the earnings season with results that were in line with investors' expectations.

In Russia, the sale of a 10.9% stake in Alrosa PJSC was the biggest divestment of a state asset since the government reduced its holding in the world’s largest rough-diamond producer almost three years ago. Managed by the nation’s two biggest banks, both of them state-run, shares were priced at a 3.8% discount to Alrosa’s closing price on Friday.

Positive flow momentum continued, with dedicated Emerging Market equity funds recording net  inflows.




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Oil recovered slightly after hitting a 2-month low last week at USD 44.3 (Brent crude). However, this technical rebound was contained by the US Department of Energy’s weekly inventory report. Crude stockpiles fell but increasing petrol inventories continued to cause concern especially as we are in the driving season when high demand generally means destocking. Drilling showed further signs of recovery with another 10 rigs back in service over the week. 35 rigs have now been added since the end of May, a rise which raises the question of how this fits in with the slowdown in US on-shore production. US output was up 57,000 b/d over the week due to Alaska (down last week) and amid further declines in on-shore and Gulf of Mexico production.

Elsewhere, the IEA struck a somewhat positive note over the impact Brexit might have on demand. It has revised up its forecasts for global demand in 2016 from 1.3 million to 1.4 million b/d thanks to “remarkable resilience from OECD demand, particularly in Europe”. OPEC increased production in June by 0.4 million b/d to 33.2 million- an 8-year high- but this should be offset by expectations of a 0.9 million b/d drop in non-OPEC output. The agency is nonetheless worried about OECD inventories.

Last week’s US jobs figures triggered a sharp rebound in base metal prices over the week. Investor sentiment revived thanks to the weaker US dollar and expectations of accommodating monetary policies. Iron ore jumped 6% on hopes of stimulus measures in China. We are rather wary of this rally as it is not warranted by improving fundamentals: supply is still abundant, inventories in China’s ports are still at record levels and steel production is anaemic. Nickel prices also gained on environmental policy in the Philippines which has just said two mines are to close.

Gold suffered a slight setback, edging USD 40 lower to USD 1,330/oz due to a revival of investor risk appetite.



  Corporate debt

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Europe’s credit markets remained upbeat with the Main tightening by 75bp to 71bp and the Xover also moving from 334 to 320bp.  

Markets cheered Theresa May becoming UK Prime Minister earlier than expected. The Bank of England left its interest rates unchanged at 0.5% and maintained its asset purchasing programme at GBP 375bn.

Financials bounced in tune with improving sentiment on Italy’s banks. Monte dei Paschi is reportedly going for a EUR 4bn increase of capital along with plans to dispose of non-performing loans. And UniCredit’s new CEO unveiled EUR 1.1bn in asset sales and confirmed that an increase of capital would be essential.

In high yield, Italian betting company Sisal successfully raised EUR 725m in two tranches (a FRN at E+6.625% and EUR 400m in a 7 year maturity NC3 at 7%). The proceeds will be used to fund its acquisition by CVC.


Equities rallied as positive news fuelled this week’s gains (Eurostoxx +4.01%, Nikkei +9.21% to Friday). Asia performed strongly driven by Shinzo Abe’s election win in Japan. His government and its coalition partners won the Upper House election with a two-thirds “super” majority. Abe has already pledged to take “broad, bold” measures and the next stimulus package is believed to be on route (Helicopter Money as discussed with Bernanke?). This clears the way for BoJ action on July 28-29.

The tone was also positive in the US where the Beige Book said “economic activity continues to expand at a modest pace” and bellwether companies including Alcoa and JP Morgan started the Q2 earnings season strongly.

Cautious after the Brexit vote, the BoE kept the interest rate unchanged at historic lows with Carney saying that “some monetary policy easing will likely be required over the summer”.

Oil prices struggled to break the USD 47 level owing to high inventory levels in the US. Nevertheless, oil-related CBs performed strongly, particularly the new Tullow 21 (now above 111). On the back of index re-balancing, some benchmark names were well-supported (e.g. Airbus Dassault).

On the primary market, Kunlun Energy raised RMB 3.35bn via a 3Y convertible bond with a 1.625% coupon and 15% premium (lower size & premium and higher coupon than expected). Despite the fact this is A rated paper (rare in AsiaEx), the currency-linked structure to CNH is an impediment. Part of the deal will be used for the acquisition of PetroChina’s stake in Kunlun Gas for RMB 14.8 billion.

Elsewhere, Steinhoff agreed to buy UK discounter Poundland with a GBP 600m all-cash offer, as it seeks to expand its UK discount market presence. We will closely monitor US activist Elliot Capital’s increasing stake (now 13.2%) in Poundland.  European issuers announcing Q2 results included Casino which reported better-than-expected sales, up +3.8% like-for like to EUR 9.97 billion, supported by improved numbers in Latin America in both food and non-food products. 

Written on 15/07/2016

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