The initial market reaction to Janet Yellen’s comments was to focus on the Fed’s willingness to take events in the rest of the world into account and indications that any rise in US short rates would be very gradual

Asset Management - 4/1/2016

However, the resulting US dollar weakness and a certain volatility in oil prices, albeit limited, then sent indices lower, particularly in Europe and Japan. 

Indications on Japanese corporate earnings were disappointing and we have reduced our positive stance on Japanese equities from positive to neutral. Europe, on the contrary, is giving off more upbeat economic signals and we have accordingly maintained our positive bias on the continent. In the US, we are remaining underweight equities due to pressure on company margins and valuations. 

In fixed income, we remain positive on Eurozone peripheral sovereign debt and cautious on US Treasuries despite Janet Yellen's soothing tone. Elsewhere, we have trimmed our European high yield bond overweight due to impressive performance.



European markets lost ground in the last week of March as the euro strengthened against the US dollar. Financials and energy were the hardest hit sectors. In company news, Metro pleased investors by saying it was to spin off its electronic businesses (Media Markt Saturn) and its food outlets Real and Cash&Carry on the grounds that there were few synergies between them. This will lead to two listed entities, effective in the middle of 2017. The deal will help reduce the conglomerate discount the group has been suffering from for some time.

At its investors' day, Alstom said it had excellent visibility on structural growth markets and that it could grow faster than the sector while boosting margins. Group targets for 2020 are at the higher end of the range. Atos presented its annual results and said the outlook for 2016 was excellent due to a good start to the year. New car registrations in Europe remained upbeat, especially in France which saw a 7.5% jump in March. The Renault/Nissan group confirmed that is was going to step up cooperation with Daimler, notably in electric cars. Both groups are already working together on 13 projects. Air France said it planned to double the size of its low cost airline Transavia and was targeting more than 20 million passengers by 2019.

The deadline for the talks between Orange and Bouygues Telecom has been put back from March 31 to Sunday April 3. The sticking point appears to be the Bouygues Telecom valuation. Bouygues was due to hold a board meeting to discuss the issue over the weekend. Telecom Italia has appointed Flavio Cattaneo as CEO to replace Marco Patuano who resigned last week.



In a strong week on US markets, the S&P 500 rose 1.2%, moving back to its year highs. It even broke through 2,070 intraday, its highest level since December 30. Household spending rose 0.1% in February or generally in line with expectations and level with January which was revised down from 0.5% to 0.1%. Core inflation turned higher, moving to 1.7% YoY compared to 1.3-1.4% at the end of 2015.

The week's big event was an intervention from Janet Yellen which turned out to be much more accommodating than the last FOMC communiqué had led us to believe. The Fed chair is effectively now back in control as far as the bank's communication is concerned. Her message was markedly accommodating and suggested that she preferred to let inflation rise to high levels rather than jeopardise the economic recovery. She also explained what "data dependent" meant. Future rate hikes will depend on market and economic stability outside the US, the level of the US dollar as well as commodity and US property prices.

IBM advanced more than 4%, on its acquisition of Bluwolf. In the consumer sector, Lululemon soared 10% after delivering better-than-expected guidance and, more importantly, announcing a steep fall in inventories. Boeing fell more than 4% on a negative market reaction to news that it was going to speed up its cost-cutting programme and shed an extra 4,000 jobs.  



The TOPIX slipped 0.5% this week. Investors adopted a wait-and-see stance prior to the 2015 fiscal year close and announcements of key economic indicators like the Tankan survey of Japanese companies and US job data. The yen depreciated against the US dollar to 113.6 mid-week but recovered after comments from Fed Chair Janet Yellen.

The Pulp & Paper sector lost 3.8% led by Nippon Paper Industries (-5%). A press report said that its operating profit would fall short of expectations due to a decline in sales caused by weak demand in today's increasingly paperless environment. The Electric Power & Gas sector finally recovered with a 2.2% gain after a sharp fall over the last two weeks. Tokyo Electric Power Company drove sector performance by jumping 6.5%.

Elsewhere, domestic demand-related stocks were relatively firm. Ichibanya, the popular curry restaurant chain, hit an all-time high after climbing 7.3% on a gradual increase in existing-store sales.



Federal Reserve Chair Janet Yellen sparked a rally in emerging market assets by expressing concerns that global headwinds might restrain the US economy, thereby reducing the prospects for higher interest rates. The comment spurred dollar weakness and led to gains in emerging markets equities and currencies. 

Asset sales are accelerating in India: this week alone, GVK has announced that they will divest a 33% stake in Bangalore Airport. Tata Steel wants to sell its UK assets and the highly leveraged conglomerate Jaiprakash has sold its cement assets to rival Ultratech. Over the last 6 months, asset sales have represented roughly USD 6bn. Even if this is not yet enough to recover all doubtful loans, it is still a positive development for Indian banks. If the trend continues, it could mean that India's non-performing loan cycle has peaked.

The South African market responded positively to the constitutional court ruling against president Zuma. He was ordered to repay taxpayer money spent on non-security upgrades at his private residence. Market participants are speculating that a potential impeachment against him following the court decision might pave the way for a more market friendly successor. 

The PMDB party, Brazil's biggest party in congress, decided to quit the Brazilian government. The exit is expected to accelerate the departure of allies from the government's ruling base, increasing the prospects for a successful impeachment of the president.

Taiwan's Hon Hai Group closed a deal to buy a 66% stake in Japan's Sharp for USD 3.5bn, the biggest takeover to date of a Japanese technology company by a foreign firm.



An April rate hike seemed on the cards after the previous week's somewhat hawkish comments from regional FED heads but Janet Yellen reassured investors with a much more cautious tone that suggested policy would remain accommodating. That sent the US dollar sharply lower and certainly helped cap the damage done to commodity prices by two weeks of profit taking. The LME ended the week 0.8% lower. Precious metals benefited from the weaker dollar with gold up 1.4% to USD 1,233/oz.

We remain cautious over short term base metal prices: the supply side has adjusted and production capacity has been reduced by sector players but not enough to warrant a sustained rebound given prevailing market concerns over Chinese demand. Chinese PMI data, out on April 1st, look reassuring but will need confirmation over time if there is to be any positive impact on steel and copper demand beyond the significant restocking which has been taking place since the beginning of 2016. Nevertheless, we are still convinced that Chinese demand could revive due to an increase in infrastructure spending, various stimulus measures and a recovery in residential building.

China's central bank is still buying gold but less than before. It bought 10 tonnes in February, down from 16 tonnes in the previous month, a sign that the bank tends to buy when prices are lower. Buying of physical gold in Asia is now in a low season, mainly because of the end of the Chinese New Year and India's wedding calendar. The gold price is still being underpinned by ETF inflows.

Oil prices were relatively unchanged with Brent crude at USD 39 and WTI at 38.3. Traders continued to focus on rising crude oil inventories in the US, up by 2.3 million barrels over the week to record levels. There was, however, some good news: US refineries have a utilisation rate of more than 90% and continuous destocking of petrol suggests that demand for it is still high. Weekly data showed that US production fell by a further 16,000 b/d: a drop in on-shore output was partially masked by higher production in Alaska. Falling US production is an encouraging trend and we view it as the main factor in any rebalancing of global supply and demand.

In an interview, Mohammed bin Salman, Saudi Arabia's deputy crown price, confirmed that the kingdom would only freeze production if Iran joined in, an unlikely event in our view judging from recent Iranian statements.  Saudi Arabia also intends to launch a USD 2 trillion sovereign wealth fund so as to facilitate a market listing for Aramco in 2017 or 2018. The goal is to replace direct oil revenues with Aramco's assets as the kingdom's primary source of income. The listing is expected to concern less than 5% of Aramco's parent company capital.




Credit markets remained upbeat with high yield, up 17bp over the week, outperforming investment grade bonds (+5bp). On Monday, Janet Yellen reaffirmed her concerns over the global economy in a speech to New York's Economic Club. Her tone was viewed as relatively dovish and reduced market expectations of a rate hike in December 2016 to 54% of consensus views vs. 70% only a day before. China released some encouraging statistics, particularly a strong rise in manufacturing PMI to 50.2, a level last seen in June 2015.

The new issues market was very quiet. The first quarter of 2016 was the slowest start to a year for the high yield segment since 2009 with EUR 7.1bn in issuance (17 companies), down from 27.1bn for the same period in 2015. In the investment grade segment, TDF (BBB-) raised EUR 800m with a 2026 maturity yielding 2.5%.  Akzo Nobel (Baa1/BBB+) issued a EUR 500m bond due 2026. Inflows following the ECB's recent decision to extend QE lost a little steam over the week. EUR 178m flowed into European high yield bonds while the US high yield segment suffered USD 500m in outflows. The Xover tightened by 12bp to 307bp and the Main 3bp to 74.

In company news, Faurecia said its US exhaust pipe subsidiary was facing a class action for alleged anti-competitive practices. Metro said it would be spinning off its food retail and mass market electronics businesses by mid 2017. On Thursday evening, China's Shandong Ruyi said it had signed an exclusive agreement with the US fund KKR to buy a majority stake in the French ready-to-wear company  Sandro, Maje, Claudie Pierlot (SMCP). Moody's downgraded Valeant from B1 to B2 with a negative outlook.



The week was dominated by macro news, especially in Japan, where the Tankan, the BoJ's favourite survey, weakened across the board, particularly on Capex. Other influences were Janet Yellen's dovish comments and the approaching US payroll figures. Japan once again saw no issuance. Europe also had no new issues and the SX5E traded down 1.2%.

Metro (+8.1%) said it was going to create two independent, listed companies through a spin-off by mid-2017. S&P maintained its BBB- rating with a stable outlook. Vendeta (+6.6%) is to buy-back up to USD 200m of the USD 582m principal outstanding in its 2016 5.5% guaranteed convertible. In the US, there were two new issues: Anacor's USD 250m 7-year senior convertible and Gran Tierra Energy's USD 100m 6-year convertible.

Tesla rose 6% premarket after the company unveiled its USD 35,000 Model 3 in a push for mass market sales. The company had already secured about 135,000 reservations on the first day of marketing. Micron reported second quarter revenues of USD 2.93bn - near the low end of guidance- while the gross margin and EPS came in near the high-end due to cost per bit reductions amid a weak DRAM and NAND price environment. SunEdison (-55.3%) came under severe pressure ahead of DoJ and SEC investigations and potential bankruptcy.

Both investigations are looking for information regarding the failed Vivint deal and further details on the company's previous liquidity statements. In addition, Terraform Global, one of two SunEdison YieldCos, said in a regulatory filing that it was at risk from a possible SunEdison bankruptcy. 


Written on 01/04/2016

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