Directionless markets

Asset Management - 03/02/2017

Markets were generally directionless over the week. Economic data and surveys, like the rebound in January’s ISM to 56, showed that the global economic recovery was still in place.

Eurozone inflation also rebounded to 1.8%. However, as Mario Draghi pointed out, inflation is currently proving harder to read due to the base effects of last year’s erratic oil price trends. The ECB chairman recommended focusing on core inflationary trends which are more reliable and now running at a stable 0.9% year on year.

Meanwhile, the Fed left both rates and its assessment of the US economy unchanged. It simply said it was now more convinced that inflation would return to 2%.

The mood in the ongoing fourth quarter results season is upbeat even if US companies have, unfortunately, been reticent over providing guidance for the future. Overall, we are still in a reflationary phase with central banks determined to remain accommodating. On bond markets, French government bonds continued to underperform their German counterparts due to domestic political events in France.

  European equities

Despite eurozone GDP rising 0.5% in the fourth quarter and unemployment falling below 10%, European markets trended lower amid political uncertainties at home and in the US.

A crop of company results offered a contrasting picture between stocks and sectors. Technology rose thanks to Apple’s results. Nokia’s fourth quarter sales missed but the company offered reassuring news on margins. Dassault Systèmes saw an acceleration in the quarter and struck a confident note for 2017 and beyond. And once again, STMicroelectronics posted solid results. All three stocks gained more than 5% over the week.

Healthcare underperformed due to Novo Nordisk’s disappointing results and its gloomy outlook for 2017. Autos were hit after Daimler missed expectations but Michelin gained on news that it was to raise prices in North America and Europe by 8% to offset commodity price inflation in 2017.

In the luxury sector, Salvatore Ferragamo enjoyed robust growth in sales across all geographical zones but Swatch’s annual sales fell well short of expectations. Metro’s first quarter sales also missed due to pricing pressure in Russia and disappointing cash & carry sales. In banks, ING reported strong figures and now offers a yield of 4.9% whereas Deutsche Bank missed expectations due to disappointing investment bank figures.

In M&A, Reckitt confirmed it was bidding USD 90 a share for Mead Johnson, a 29% premium. The target had long been eyed for its powdered milk business, the second largest in the world with 14% in market share. 

  US equities

The S&P500 shed 0.7% and the NASDAQ slipped 0.3%.

Macroeconomic data remained encouraging with December's household spending up 0.5% and manufacturing ISM coming in at 56, or higher than expected. Despite higher mortgage rates, pending home sales rebounded over the month, rising by a more-than-expected 1.6% (vs. expectations of +1% and a 2.5% drop in the previous month).

Apple’s fourth quarter results beat expectations mainly because of iPhone sales which hit 78 million and record Apple Watch revenues. But the apparel sector had a poor week with disappointing results from Under Armour and Limited Brands and the news that Ralph Lauren CEO Stefan Larsson had resigned.

In food, Mead Johnson jumped 16% on confirmation that bid talks with Reckitt were in advanced stages. The acquisition will reinforce Reckitt’s baby food portfolio.

Defensives advanced with healthcare up 2.6% and utilities 0.8% higher. Cyclicals suffered sharp falls -energy lost 3% and industrials 2.3%- while financials ended the period 2.2% lower. 

  Japanese equities

Japanese stocks followed US markets lower. Moves were moderate up to January 27 but then the indices fell after US President Donald Trump, speaking at US pharmaceutical industry meeting, criticised Tokyo for aiming at a weaker yen. The TOPIX fell 2.2% as the yen extended gains against the US dollar, encouraging investors to turn cautious.

Over the week, 31 of 33 sectors posted negative returns. The best-performing sector was Air Transportation (+ 0.43%) while Marine Transportation lost 5.5%.

All Nippon Airways (ANA) climbed 2.6% after announcing upbeat results for its Oct-Dec quarter. Net income rose 13% compared to the previous year. Several brokers raised their target price.

Line, creator of the fast- growing social messaging app “Line”, lost 3.5% to hit a low since its listing. Investors reacted negatively to 2016 earnings which were hit by higher spending on marketing.  

  Emerging markets

It was another good week for emerging markets despite a flurry of announcements from Donald Trump in his “America First” vein. 

The rise in domestic currencies versus the US dollar helped markets rally. The Turkish lira gained 3% over the week but was still 6% lower year to date, making the rebound look fragile. The Mexican peso made more convincing moves, rising 3% over the same period and moving into positive territory year to date. The Brazilian real and Argentinean peso also continued to recover. Commodity prices over the week provided additional support and should fuel good growth in first quarter earnings expectations across emerging markets.  

India rose more than 1% over the week on solid budget news. The focus on low-cost housing sector and rural areas, with a significant 40% in increase social housing loans, is good news for consumer spending and investment. A commitment towards a gradual reduction of the fiscal deficit from 3.5% for the fiscal year ending in March to 3.2% next year and 3% in fiscal 2019 was also seen as positive. And, from an investment point of view, the decision not to change capital-gains allowances for those holding positions for more than a year also helped. Finally, further upbeat results from banks like ICICI Bank and discretionary consumption plays like Eicher Motors cemented India’s recent upward trend.

Taiwan reopened on Thursday after the Chinese New Year, but failed to rise on Apple’s strong results and positive guidance. Stocks in Apple’s supply chain lagged their client’s strong performance. This was primarily due to comments from Apple during the result briefing which said FX volatility and slower first-quarter growth  would be positively offset, at the profit level, by further cost cutting. That can only mean further margin pressure on its component makers and assemblers.

Argentina performed well again this week after the government said electricity prices would rise by between 60% and 150% by the end of March. The aim is to stick to its commitment to getting the fiscal deficit under control. The next positive catalyst for the utility sector will be gas transportation tariffs with a review expected to be announced by April 2017. In the meantime, we expect some improvement in the regulatory framework to be unveiled, giving the sector attractive visibility. 

  Commodities

After three down weeks in a row, Brent crude rebounded back above USD 56.

Initial OPEC reports indicated 82% compliance with production cuts according to Reuters. After Iran test-fired a ballistic missile, tension between Washington and Teheran rekindled fears of fresh sanctions. Iran has been increasing production since sanctions were lifted. Output came to 3.7 million b/d in December compared to an OPEC agreement ceiling of 3.8 million.

There was confirmation of a production rebound in the US in the EIA-914 report which said output had increased by 105,000 b/d in November to 8.9 million b/d (but with an annualised drop of 400,000 b/d). Demand was a solid 19.7 million b/d in November, an increase of 0.5 million b/d over a year. US weekly data showed drilling activity was still on the up: 15 oil rigs were added this week, taking the count to 566, a 14% increase over a year. Activity remained concentrated in the Permian basin. Oil majors have started reporting quarterly figures and Exxon, unlike Chevron and Shell, has increased investment. But for the industry as a whole, capex is expected to fall in 2017.

It was a good week for metals thanks to the softer US dollar and upbeat PMI data in China. Amid market concerns over the actual impact of the Trump administration's measures, the gold ounce ended the week above USD 1,200 thanks to its safe haven status.

Nickel jumped more than 10% following confirmation from the Philippine government that it was to close mines which had been idle since October 2016. The Philippines is the world’s biggest nickel producer and the measure concerns half of its exports or 8% of domestic production. There are increasing risks of copper supplies being interrupted by a possible strike at Escondida, the largest mine in the world (1.1 million tonnes a year or 5-6% of global output). Iron ore fell back this week as China’s national bank tightened liquidity on open market trading in an attempt to bring asset prices under control. 

  Corporate debt

 

Credit

Debt markets ended January on a positive note and continued higher into February. There was little news of note apart from the Fed meeting, the first since Donald Trump’s election, which left rates unchanged. Attention focused instead on sector and company news. France’s new car and light goods vehicle registrations rose 10.5% to 183,975 in January 2017 but by 0.5% on a like-for like basis: this year there were 22 business days compared to only 20 in 2016.

Lavendon finally succumbed to Loxam’s bid for close to EUR 720m after TVH withdrew from the contest. Cellnex signed an agreement with Bouygues Telecom to build 3,000 sites in France. Constellium said it intended to repay Wise Metals’ secured USD 650m bond due 2018 at 8.75%. To do so, Constellium intends to raise USD 625 with an unsecured 8-year 2025 NC 3-year maturity. Marcolin said LVMH (A+) was to buy 10% of its equity through a reserved EUR 21.9m increase of capital. It added that a joint venture 51% held by LVMH would be formed in 2018.  

In Finland, a fire broke out at the Pori titanium dioxide plant run by Huntsman (Ba3/BB-).

In financial debt, UniCredit said it would be launching its increase of capital on February 6 or before its results are released on February 9. Banco Popular lost a net EUR 3.49bn in 2016 after increasing provisions for non-performing loans. 

Convertibles 

A raft of earnings data stirred the convertibles markets this week. In Europe, Outokumpu reported fourth quarter EBIT of EUR 45m, its first positive figure since 2007. The company made significant progress on net working capital release and proposed a dividend of EUR 0.1 per share. The stock jumped 11% on the news. Siemens raised its earnings outlook for 2017 by 7% and its profit margin guidance by 50bp but remained cautious on sustainable order growth from China and margins in its Power & Gas division.

In Japan, Sony made a JPY 112bn charge on its film business and cut its operating forecast for the year to 270bn. But its semiconductor division enjoyed a strong recovery, thanks in part to iPhone sales, and its VR and PS4 gaming businesses remained strong. Shares were up 5% in Tokyo following the release.

In the US, fourth quarter revenues at semiconductor giant Advanced Micro Devices came in 3% higher than expected at USD 1.10bn. The company also confirmed that it would be releasing a new processor and a graphics card, an area investors are now focusing on, and the shares shot up 18% on the news. Weatherford published rather underwhelming fourth quarter earnings but managed to calm concerns on its cash position by reporting slightly positive free cash flow and a small decline in net debt. The stock subsequently gained over 11%.

In new issues, The Greenbrier Companies (transportation manufacturing), raised USD 175m with a convertible yielding 2.875%. Elsewhere, Immofinanz sold half of its stake in Buwog, raising EUR 97.4m. 


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