Risk assets consolidated across all geographical zones

Asset Management - 14/10/2016

Risk assets consolidated across all geographical zones, and especially emerging countries, due to a rise in the US dollar. This followed the release of the latest FOMC minutes which reinforced expectations of a rate hike in December. Most committee members said that views were evenly divided over a September hike but the camp in favour of a move in December now looked stronger. (English version)

Risk assets consolidated across all geographical zones, and especially emerging countries, due to a rise in the US dollar. This followed the release of the latest FOMC minutes which reinforced expectations of a rate hike in December. Most committee members said that views were evenly divided over a September hike but the camp in favour of a move in December now looked stronger.

China’s export data weighed on sentiment but inflation figures were unexpectedly good. Economic data released over the week were generally encouraging with better industrial production figures for Europe in August. Germany’s ZEW investor confidence index improved sharply both as concerned the current situation as well as expectations. And in the final inflation figures for eurozone inflation in September, France was up 0.4% and Germany up 0.7%, providing confirmation of a return to levels seen in May 2015.

Oil price moves also influenced markets following contradictory messages from Moscow. Last Tuesday, the energy minister talked about a possible production freeze rather than the cut Vladimir Putin had referred to the day before. The oil price promptly reversed course and dipped briefly below USD 50, dragging down oil and commodity stocks. Both sectors were also hit by Alcoa’s poor results which kicked off the third quarter earnings season.

Earnings expectations as a whole had been broadly revised down and analysts are now looking for close to zero growth for US and European companies over the next 12 months. However, expectations have stabilised since the summer, especially in Europe. This adds weight to our decision to remain invested in eurozone risk assets.

In fixed income, we have maintained positions after last week’s move to increase duration slightly in eurozone government debt. We believe worries that the ECB will reduce its asset purchasing programme have been overdone. We expect rates to stay low and the ECB to remain active.

  European equities

European equity markets recovered at the end of the period after being hit by a mixed start to the US quarterly earnings season (Alcoa) and China’s disappointing export data.

LVMH released reassuring results which confirmed that its brand portfolio was of high quality and wellbalanced. Results looked robust compared to rivals. Sales at Louis Vuitton rose 7% in the third quarter despite a difficult trading environment and Sephora continued to enjoy strong growth. Cognac and champagne both advanced.

Elsewhere, Unilever's figures were slightly better than expected but of questionable quality. A 3.6% price increase effect managed to offset lower volumes for most of its product categories. The group eventually reached an agreement with Tesco in the UK after a public stand-off over pricing. Tesco was threatening not to stock Unilever products after the Anglo-Dutch group said it wanted to increase prices by 10% to compensate for the drop in sterling.

In less positive news, telecommunications equipment maker Ericsson issued a profit warning, hitting its rival Nokia and also pulling down the semiconductor sector. Ericsson said demand was soft in Europe and in emerging countries like Brazil and Russia but the recent departure of its CEO is no doubt partly responsible for the situation. Casino’s results were a contrast between strong international performance, with Brazil up 6% like for like, and sluggish trading in France, especially at Leader Price and Monoprix. Even so, the group is sticking with its annual targets. Edenred also released upbeat figures for Latin America, where like-for-like growth accelerated to 14% in the third quarter, but the company also enjoyed robust sales in France.

In this week’s capital transactions, Italy’s UniCredit sold 20% of Fineco, taking its stake down from 55% to 35% and improving its solvency ratio by 12bp. Shareholders of Russian auto manufacturer Avtovaz are expected to approve the increase of capital. Renault will also subscribe, reinforcing its position as the largest shareholder with 72% of the equity. Vincent Bolloré has increased his stake in Vivendi and now holds over 20% and around 29% of the voting rights.

  US equities

US markets fell with the S&P down 1% and the Dow Jones 0.8% lower. There was little macroeconomic news but the earnings season kicked off with Alcoa following the trend established by negative preannouncements from Dover and Honeywell. The other factor behind profit taking came from China which saw exports fall 10% in September, the biggest drop in 7 months.

US 10-year Treasury yields rose further to 1.76% compared to 1.55% on September 30. The move was prompted by the FOMC minutes which confirmed that a rate hike was coming. Markets now see a 66% probability of the Fed making a move in December.

However, bond proxy and long duration sectors like utilities, property and telecoms all ended the period in positive territory while financials and commodities lost ground.

  Japanese equities

The Japanese stock market edged lower with the TOPIX down 0.9% as global stocks stumbled. While the yen stayed within an established range against the US dollar around 103, weighing Japan’s export stocks, it fell to 114 against the euro.

This week’s top gaining sector was Mining (+3.2%). Fishery, Agriculture & Forestry also enjoyed a 2.5% advance while Iron & Steel dropped over 5%.

Japan’s leading auto makers Toyota and Suzuki announced a strategic partnership. Toyota ended the week 1% lower, while Suzuki gained 0.6%. Surviving and establishing competitive edge in the automotive industry appears to be driving major changes.

Murata Manufacturing, a company which provides Apple with electric components, rose 6.4% after some Samsung Galaxy Note 7 phones caught fire.

On a negative note, Seven & I Holdings, which operates superstores and convenience stores, plunged 9% on concerns over limited industry growth after a rival convenience store company reported a decline in sales.

  Emerging markets

Emerging market stocks fell to their lowest level in a month and currencies weakened after data showed a decline in Chinese exports and speculation grew over an imminent increase in US interest rates.

In Thailand, the Royal Palace announced that King Bhumibol Adulyadej, the world’s longest reigning monarch, had died aged 88. Crown Prince Maha Vajiralongkorn, 64, is the heir apparent. The death of the king has profound implications for Thailand’s political and economic stability but so far the situation remains peaceful.

After keeping its base rate unchanged at 1.25% the Bank of Korea warned that Samsung's smartphone crisis could hamper economic growth. The Suwonbased company disclosed on Friday a negative impact of approximately USD 3bn on operating profit through March 2017, on top of an already announced USD 2.3bn cut for the preceding period. This will have a limited impact of 5% and 3% on 2016 and 2017 earnings, respectively.

In Brazil, the PT party lost 60% of its municipalities, confirming the weakening of the Government’s opposition party. This news was viewed positively as it increases the probability of reform measure being approved. Brazil’s lower House of Congress followed on from this good news and approved a proposed constitutional amendment to limit government spending, a key economic reform put forward by President Michel Temer. The amendment must still clear several more legislative hurdles, including the Senate. Brazil made positive returns this week.

Mexico’s market also benefited from its stronger currency thanks to impressions that Donald Trump’s Presidential campaign had lost some steam.


Oil stabilised above USD 50 although it dipped below that level after US weekly crude inventories rose for the first time in six weeks. The increase was, however, normal for the season. Newsflow on oil remained heavy. The IEA's monthly report revised demand in 2015 sharply higher and trimmed growth in demand for 2016. At the same time, it noted that growth had decelerated in the US and China but was still upbeat in Europe and India. Non-OPEC supply was left unchanged but the agency nevertheless highlighted a further rise in OPEC production in September to 33.64 million b/d. This was due to Iraq's Kirkuk site restarting and a resumption in Libyan exports. The rise puts more pressure on OPEC countries to cement their unofficial agreement to trim output. Some OPEC members, along with Russia and Mexico, had another meeting in Istanbul this week. No concrete details emerged apart from Russia’s willingness to join in the general effort although Moscow is waiting for OPEC to make some tangible moves. The next meetings will take place in Vienna at the end of October.

Elsewhere, China’s export data for September were generally seen as disappointing. But the data contained good news for commodities as oil imports rose by 18% YoY to 33.1 million tonnes, or 1% MoM. China is now the biggest oil importer ahead of the US. China is facing a cut in production but has increased storage capacity. Iron ore imports rose 8% YoY to 93 million tonnes and 6% MoM. Only copper imports remained weak; they fell 26% YoY and 4% MoM, taking them to a 19-month low and triggering a price correction. The coal market remained very busy, and especially metallurgical coal which traded at USD 220/t FOB Australia compared to USD 90 at the beginning of June.

Peabody Energy and Nippon Steel have just agreed on USD 200 a tonne for fourth quarter contracts. This could serve as a benchmark but discussions between other main sector players are still ongoing.

After its sharp fall in October 4, gold stabilised at USD 1250-60 and failed to react to the FOMC minutes which confirmed the probability

  Corporate debt


Trading was calm on credit markets due to religious and bank holidays. There were few data releases. Corporate bonds outperformed other asset classes. Credit indices were stable with the Main ending the period at 73bp and the Xover at 332bp.

CNP Assurances unveiled a new EUR 1bn subordinated Tier 3 issue, a new instrument on the European market. The deal was 7 times oversubscribed.

The new issues market was very busy. RCS & RDS raised EUR 350m with a 2023 maturity to refinance existing bond debt. Warner Music Group issued a double euro and US dollar-denominated bond. Verallia abandoned plans to place its EUR 500m PIK bond. Volf Dber Holding launched the James-AB Corp spin off, a deal that attracted a good deal of investor interest. Altice bought back 5.21% of its French subsidiary SFR in an off-market transaction and now holds 82.9%. According to sources cited by Reuters, Anglo American is expected soon to announce the sale for at least USD 1bn of its Australian coal assets to a consortium led by Apollo.


The convertible bond primary market had a small pause for breath just before the third quarter earnings season kicked off with reports from Alcoa and LVMH.

The only significant new issue was Haitong’s HKD 3.88bn zero coupon 2021 convertible. The IG-rated, Hong-Kong listed broker is well known in the market as it had already issued two convertibles.

In Asia, apart from Chinese data and the sell-off of technology stocks after Samsung’s Galaxy Note 7 disaster, the focus was on Thailand. King Bhumibol’s death saw the market plunge 10.5% over a couple of days (with CP Food/CP All and Bangkok Dusit Medical CBs all impacted). However, it stabilised late in the week, supported by local fiscal stimulus which should keep consumption healthy for the foreseeable future.

Elsewhere, Steinhoff continued its acquisition spree by buying Australian-listed furniture retailer and manufacturer, Fantastic Holdings, for AUD 361m. In the US, eBay reduced its stake in Mercadolibre to about 6% from roughly 18% and will use the proceeds “in a manner consistent with [its] capital allocation strategy”. MercadoLibre shares were down 8.4% following the news.

In Europe, Vivendi’s COO announced that the group was not planning to launch a hostile takeover bid for Ubisoft.

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