All eyes on central banks

Asset Management - 26.09.2016

The week had begun with the BIS reiterating concerns over financial markets and the gap between equity price and bond yield levels on the one hand and a surge in Chinese lending on the other. But investors preferred to focus on the almost simultaneous meetings of the Bank of Japan and the US Fed. The biggest market moves occurred on September 21 and 22. (English version)
Commodities Corporate

The BoJ reaffirmed its commitment to its QE programme while reinforcing its qualitative aspect. It introduced a yield curve control target to keep yields on 10-year bonds at zero as long as inflation remained under 2%. Policy remained just as expansionist but is now more focused on helping banks, with no further cuts in 10-year yields. Markets welcomed the news and the Nikkei bounced by around 2% while the Yen fell 1%. The US Fed chose not to take markets by surprise and opted for a “it’s much better to wait" stance. Despite recognising that the US economy is no longer a source of worry, the Fed will wait a little longer, almost certainly until December before staging its next rate hike.

Markets surged on the news that they had a few extra weeks of rock-bottom rates and shrugged off increasing dissensions within the FOMC. Both equity and fixed income markets performed well, especially European equities due to their higher beta and the fact that they had been lagging year to date. Note that although all sectors gained, natural resources were the real driving force. On bond markets, long maturities performed well, wiping out the curve steepening process seen in previous weeks.

As a result of this rise, we have reduced our positions in favour of European yield curve flattening. On equity markets, we took advantage of strong rises to reshuffle our hedging strategies. Generally speaking, we remain upbeat on equities and especially European equities; they are still significantly lagging in performance and will benefit from improving microeconomic fundamentals as interest rates look set to stay low for some time.


  European equities

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Markets started to climb again at the end of the week after the Fed left its rates unchanged. Oil prices advanced and long term European bond yields fell sharply, triggering sharp rises in stocks in the energy, base products, construction and autos sectors. Telecoms also rebounded on fresh expectations for European consolidation.

In company news, Total held its investors day and announced cuts in operational and investment spending of around USD 4bn a year up to 2018. Coface itemised 4 objectives in its 2019 strategic plan, namely ROCE, ratios, solvency ratios and payout targets. EDF revised nuclear electricity output targets lower as well as operating results due to prolonged stoppages in certain plants. Sanofi continued to struggle as United Health announced that it would no longer cover the reimbursement of the French company’s anti-diabetic drug Lantus. Air France said reservations had fallen 5% over the summer and that it expected the trend to worsen by the end of 2016. There was, however, good news for aerospace companies like Dassault Aviation, Thales and Safran which all rose when India made its acquisition of 36 Rafale fighter planes official.

Elsewhere, the Caisse des Dépôts sold around 4% of Veolia in a placing and now owns 4.6% of the equity (8.4% of the voting rights). Eurazeo sold 6% of Moncler, taking its stake down to around 10%.


  US equities

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US equity markets advanced over the week. The Fed adopted a more specific bias towards a rate hike at its December meeting and suggested further moves in 2017 would be very gradual so as to avoid unsettling markets. Equity markets rallied on the news. This week’s property sector indicators were rather disappointing. August housing starts came in at an annualised 1.14m units, a 6% drop on July due to unfavourable seasonable effects, and lower than the 1.19m expected. Similarly, building permits dipped 0.4% when they were seen rising by 1.8%. And home sales edged 0.9% lower when they were expected to rise 1.1%.

Allergan’s decision to acquire biotech companies Tobira Therapeutics (for USD 700m) and Akarna Therapeutics rekindled hopes for more mergers and acquisitions in the US healthcare sector. Elsewhere, Fedex reported good quarterly figures on strong growth in global e-commerce and the successful integration of the giant European logistics company TNT. Results at Oracle and Adobe were in line with expectations.

Over the last five trading sessions, utilities, property and healthcare led advances. Energy and financials bucked the upward trend on markets.


  Japanese equities

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Japanese equity markets climbed. The TOPIX rose 4% and the Nikkei 225 2.5% as investors reacted positively to changes in the BoJ’s monetary policy mix. The changes related to: 1) yield curve control and 2) strengthening of forward guidance. The BoJ maintained its policy rate at minus 0.1%, but also unveiled a plan to control 10-year JGB yields at the current 0% level through its asset purchasing programme. It also made a commitment to continue expanding its monetary base until YoY CPI exceeded and stayed above 2%. This move will underpin targeted inflation rates. The pace of ETF and REIT purchasing was left unchanged.

All 33 sectors posted positive returns. Banks, this week’s top performing sector, jumped 10.4%, led by Resona (+12%) and Sumitomo Mitsui Trust (+11.9%) on expectations that the BoJ’s decision would moderate downward pressure on bank profitability. The insurance sector was similarly buoyant (+6.6%).

On a negative note, Fast Retailing, the largest weighting in the Nikkei, lost 3.3% due to expectations that the BoJ would increase its focus on Topix stocks.


  Emerging markets

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A dovish US Federal Reserve message gave emerging markets renewed stimulus, pushing the MSCI Emerging Markets equity index to two-week highs while currencies firmed. Fed policymakers did not raise rates on Wednesday and reduced their forecasts of annual rate increases in their policy statement. This could trigger strong inflows into emerging markets.

In Korea, a senior official at Samsung Electronics was arrested for trying to steal core chip-making technology. The news comes amid enhanced courting from China which has been making aggressive efforts to strengthen its domestic semiconductor industry.

In India, the current account deficit continued to shrink. Reserve Bank of India data showed that India posted a current account deficit of USD 300m, or 0.1% of its gross domestic product.

Philippines President Rodrigo Duterte announced an increase in spending on infrastructure and social programmes to bolster growth to as much as 7% this year and 7.5% in 2017. The Philippines central bank left its benchmark overnight reverse repurchase rate (RRP) unchanged at 3%. The Bank of Indonesia cut its interest rates by 25bp. We upped our exposure to Astra International.

Russia issued a 10-year Euro bond for USD 1.25bn, a deal which was more than six times oversubscribed. It was placed at USD 106.75 (3.9% yield), 85 basis points tighter than a placement earlier this year in May. It is worth pointing out that 53% of the issue was taken up by US investors.

Turkey’s central bank cut its interest rate by 25bp and hinted that more could be on the way. So far this year, the Bank has cut its upper end by 250bp. This month alone, the rate has been slashed from 10.75% to 8.25%.

In Brazil, the inflation print for the first 15 days of September came in lower than expected due to lower food prices. We believe lower interest rates and reform approvals will be the Brazilian market’s main performance drivers.



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Oil prices edged higher this week but still traded around USD 45, remaining trapped in the USD 40-50 trading range. Rather surprisingly, US oil inventories fell further, taking the drop in inventories to 22 million barrels over 3 weeks. This would suggest weekly inventory data have been over-estimated. More worryingly, a tanker left the Libyan port of Ras Lanouf, the first since 2014 and a sign that exports have really resumed. It is the same story in Nigeria although we will have to wait to see if this resumption in exports in both countries is lasting. Elsewhere, production in Russia, Saudi Arabia, Iraq and Iran hit new highs, a development that will delay price normalisation on oil markets.

Next week’s talks on September 26-28 between OPEC countries will be decisive for short term oil price trends. Any failure to suggest concrete measures would send the price back down to the USD 40 level. We think any announcement of an immediate oil output freeze unlikely but ministers present could unveil a working framework for an agreement when they next meet in November.

The US Fed’s decision to leave rates unchanged was largely expected but still led to a drop in the US dollar. Both factors helped the gold price bounce by more than 2% over the week to USD 1,337/oz. Markets are still expecting a rate hike in December but, in our view, gold prices should continue to benefit in 2017 from a relatively accommodating US monetary stance and only very gradual upward shifts in interest rates. Moreover, the thorny Brexit issue will certainly resurface next year and drive demand for protective assets like gold. Of note were comments from Mario Draghi and the Bank of England’s governor reminding investors of the uncertainties stemming from the UK's referendum and the threat Europe’s financial stability and growth.


  Corporate debt

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Credit markets were heavily focused this week on news from the Bank of Japan and US Fed. The BoJ’s unexpected move to introduce “yield curve controls” and the Fed's decision to leave rates unchanged reassured investors and helped all corporate bond markets rally. Long duration assets outperformed last Thursday as rates fell and credit spreads narrowed. The Main and Xover were unchanged over the week at 71bp and 327bp respectively.

All bond market segments saw active issuance. FNAC raised EUR 650m over 7 years to fund its acquisition of Darty, on-line travel agent eDreams (Opodo) raised EUR 435m with a secured 8.5% bond due 2021 and car rental company Avis issued a 7-year maturity to refinance its existing debt.

Casino launched a mandatory buy-in of its August 2019, January 2023 and August 2026 maturities. Eurofins raised its guidance for 2016 and is initially targeting EUR 2.9bn in sales in 2017.

In M&A, a Bloomberg reports said the Apollo fund was once again interested in the Danish phone carrier TDC despite the rejection of its first approach in the middle of 2015. And Telia is reportedly mulling a bid on TDC if Apollo's move were to convince management to sell. In a new episode in the Monte de Paschi saga, press reports suggested that Italy’s troubled bank could request State aid. The government has denied the rumour. But if an aid programme were to materialise, the banks subordinated debt would be concerned by a bail-in.


Ubisoft was the only new issue this week as the market was on hold ahead of announcements from both the BoJ and the FOMC. The French video game developer and publisher successfully placed EUR 400m of 5-year Oceane zero coupon convertible bonds which then traded up 2.5 points from the issue price. While the company suggested this issuance was purely opportunistic, one could not deny that it might be a strategic move (a poison pill?) one week before an AGM when it looks set to battle with Vivendi to remain independent. In the meantime, the proceeds will be used for general corporate purposes, share buybacks, refinancing of existing debt or possible acquisitions.

In the US, Clovis Oncology (a biotech company which recently had a new drug application accepted for its ovarian cancer drug “rucaparib”) rose more than 20% during the week on growing speculation it might be a buyout target. Elsewhere, ON Semiconductor successfully completed its acquisition of Fairchild Semiconductor, sending its stock 7% up on the week. In Asia, the Chinese train manufacturing company, CRRC Corporation, signed a commercial and industrial partnership with Thales in order to “explore new markets” in Europe.

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