Paralysis ahead of Janet Yellen's speech

Asset Management - 29.08.2016

Global economic news mixed the good with the less good: Germany’s IFO to end August was a disappointing 106.2, down from 108.3 in July, July’s durable goods orders in the US rose, the UK saw GDP rise by 0.6% in the second quarter, a good figure driven by healthy consumption and a recent rise in household confidence levels, the oil price traded close to USD 50 amid rumours of a possible agreement between producer countries. (English version)
Commodities Corporate

But markets have been paralysed in recent days ahead of Janet Yellen’s speech at the central bank meeting in Jackson Hole even if few investors expect to see sensational developments. In spite of possible short term turbulence, we remain upbeat on markets up to the end of 2016 and on eurozone equities and high yield bonds in particular.



  European equities

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It was another mixed week as investors waited for Janet Yellen’s keynote speech at Jackson Hole amid the ongoing possibility of a rate hike in the short term. European markets rose for 2 sessions after satisfactory eurozone PMI reports but then fell on Germany's disappointing IFO survey at the end of the week. Energy and auto stocks suffered as the oil price rally petered out.

In company results, WPP released excellent figures with improving margins. Like-for-like growth for the first half reached 3.8%, a sign of strong trading throughout the world (+6% for continental Europe, and +4% in North America and in emerging countries). Brexit’s negative impact was more than offset by sterling weakness and the group maintained its guidance for 2016. CRH’s half-yearly results were good with strong momentum in North America although growth was less vigorous elsewhere. The company also reiterated its annual guidance. Vivendi’s first half fell short of expectations: the music division was in line but Canal + performed poorly. The group intends to make drastic cost cuts of around EUR 300m at Canal + up to 2018.

In M&A, Pfizer beat Sanofi to acquire Medivation for USD 14bn. Sanofi will not be counter bidding and the stock suffered as a result. Astrazeneca has sold some of its antibiotic business to Pfizer. Svenska Cellulosa plans to spin off its hygiene business (86% of sales) and forestry division (14%). The deal will have to be approved at the 2017 AGM. The stock bounced sharply on the news.



  US equities

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Trading was relatively quiet on US equity markets as investors waited for Fed Chair Janet Yellen to address the Jackson Hole symposium. New home sales, which were expected to slip 2%, actually rose sharply to 654,000, a 12.4% increase on the previous month. Durable goods orders rose 4.4% or more than the 3.4% expected, with a slight downward revision in the previous figures.

In company news, trading in pharma stocks was choppy following Presidential candidate Hillary Clinton’s strong criticism of some examples of price gouging. Mylan came under particular fire because of sharp increases in its EpiPen autoinjector prices. Home builder Toll Brothers and Best Buy (consumer electronics) posted robust results which sent their stocks up 8% and 17% respectively. Both give a rather encouraging view of US consumer health.

Over the last 5 trading sessions, materials, financials and technology managed to end the period higher despite the index’s fall. Healthcare led declines.




  Japanese equities

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Japan’s equity market went into a summer lull like other markets ahead of an expected speech by Federal Reserve Chair Janet Yellen in Jackson Hole on Friday, August 26. The TOPIX ended the week 1% higher trading within a 1% spread for 5 days and total trading volume in the 1st section of the Tokyo Stock Exchange was light. In this section, 89 stocks, especially consumer-related, such as railway and electricity companies came under selling pressure due to relatively high P/E and P/B ratios.

Electric Power & Gas and Air Transportation gained 4.4% and 3.9% respectively, while Fishery, Agriculture & Forestry declined 6.7%. Chubu Electric Power Company (+5.4%) and Kansai Electric Power Company (+3.5%) rebounded after hitting a year-low.

Aeon, Asia’s largest retailer, enjoyed a 6.3% gain after investors reacted negatively to overvalued P/E and P/B ratios elsewhere.

Nippon Suisan Kaisha, the fishing and marine product company, tumbled 17.3% after announcing it would be offering new shares through a public offering.



  Emerging markets

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Emerging markets fell 1.49% on more hawkish statements from two FED members. The main highlight was the wrap-up of second quarter results, which were generally stronger and better than expected.

In China, 50% of the MSCI in market cap terms have reported results. Earnings accelerated to 8.4% YoY in the first half vs. 2.2% in 2015. In India, 80% of Indian companies have already reported with earnings beating expectations with an average 9% increase YoY. Positive surprises came mainly from cyclicals and mining. In Latin America, results were weak, but also better than expected and an improvement on the first quarter. In Brazil, for instance, most of the EPS improvement came from the mining, oil and industrial sectors. Industrial companies have been reducing costs to face the economic slowdown. As a result, operating margins have expanded significantly as the economy improves. There is a lot of slack in the economy. Moreover, companies have been benefiting from higher commodity prices (oil, iron ore and steel prices) and stronger currencies which led to financial gains. In Mexico, results were generally in line with expectations, as the economy has been recovering for a while.

On the macro side, the Indian government has appointed Urij Patel as the RBI’s governor. We view this as a positive as India’s central bank will continue to pursue a disciplined approach and seek to control inflation. Brazil should finalise the vote over Dilma Rousseff’s impeachment process by Monday. The Senate approved the DRU reform, a mechanism which will help the government manage resources more freely. This is an important step for the government in its efforts to improve fiscal results.




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Commodity prices were hit by the rise in the US dollar and rather hawkish statements from FED vice -chair Stanley Fischer. Investors preferred to hedge positions ahead of any indication on future US monetary policy from Janet Yellen at Jackson Hole. Gold traded at USD 1,325/oz in spite of aggressive selling of futures for an estimated USD 1.5bn which sent the FTSE Gold Mines index 9% lower over the week.

We remain upbeat on gold: (1) We think a September rate hike unlikely while there is a 50% chance of a move in December; (2) Year-to-date gold ETF purchases are now at a very high 654 tonnes. Buying has slowed slightly this month but there is nothing to suggest a trend reversal; (3) Retail demand for physical gold has stayed weak particularly in India due to currency factors while a new tax on jewellery has encouraged illegal imports and almost certainly limited official import figures. We think this weakness will be fleeting and expect demand to recover by the end of 2016 - China imported 126 tonnes in July (+20% YoY) which is a good sign; (4) as for central bank demand, the PBoC has slightly reduced buying in recent months and Venezuela continues to sell but the trend is still towards buying (5) Uncertainties over the US elections and Brexit’s impact should continue to underpin the gold price and drive demand for safe haven assets.

After hitting USD 50 (Brent), oil slipped back to USD 48.5. There were various reasons for this slight correction: US crude inventories are still a cause of worry. Iraq also said it wanted to increase exports by 150,000 b/d after production resumed in 3 Kirkuk fields. In Nigeria, the self-proclaimed Niger Delta Avengers seem to be on the verge of a ceasefire and willing to start talks with the government. That could mean Nigeria’s output returning to normal.

At the same time, Saudi Arabia continues to blow hot and cold over joining a move for collective intervention in September and has said a production freeze was not necessary.



  Corporate debt

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Bond markets were in wait-and-see mode ahead of statements from the Fed chair. In only one week, the implicit probability of a US rate hike in September rose from 20% to 32% by last Friday.

Investment grade yields and spreads were flat over the week. High yield bonds, in contrast, rose 30bp taking the Xover to 310bp primarily due to the universe's cyclical and leveraged plays. Fund flows improved by a marginal EUR 112m. With the earnings season coming to an end, Ineox (chemicals) and Ardagh (packaging) posted results in line with expectations.

In headline news, there were further signs of concentration in the agribusiness sector as talks resumed over Bayer’s bid to acquire the US agrochemicals giant Monsanto. Any tie-up would result in a group with a market cap of USD 120bn. Subordinated financials gained 50bp over the week. Barclays raised USD 1.5bn with an AT1 aimed at Asia and Europe. The deal was 10 ten times oversubscribed with the order book hitting USD 15bn. Italy’s UniCredit appears to be in talks to sell its stake in a Polish affiliate. Any proceeds would help reinforce the bank’s core Tier 1 equity.


The primary market was quiet this week, a contrast with the beginning of August. However, we expect activity to pick up in September.

In Asia, Khazanah Nasional Bhd (the national sovereign fund) is said to be considering issuing USD 500m in exchangeable Sukuk. It had already done so with Tenaga Nasional Bhd, the country’s biggest power company in 2014, and IHH Healthcare, Asia’s biggest hospital operator, in 2013.

Elsewhere, Micron has suggested it might issue USD 400m in convertible bonds to partially finance its acquisition of Inotera.

In Europe, we saw some speculation regarding a secret agreement between Vivendi and Orange for the latter to acquire up to 20% of Canal Plus and to buy the Telecom Italia Shares owned by Vivendi (the stock shot up 2% in an instant). The news was quickly refuted by Orange in a press report. Playtech (an online and mobile gaming application) released its H1-2016 results with total revenue increasing 18%, driven mainly by the strong contribution of its core casino product.

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