Data releases pointed to an improvement in advanced indicators in emerging countries and the US and stabilisation in Europe. However, the Fed minutes showed that most FOMC members were worried about the impact financial market turbulence and doubts over global growth might have on US growth.
The IMF also expressed concerns over the consequences of geopolitical risk on global growth. Against this backdrop, the yen strengthened further against the US dollar and sent the Nikkei sharply lower. Currency movements also hit equity market performance elsewhere: the Eurozone lost ground due to the euro sticking at the top of its 12-month trading range. Oil prices, caught between uncertainty over a possible agreement between producer countries and a fall in US weekly inventories, only added to equity market volatility.
Bond markets also demonstrated high risk aversion. Peripheral country spreads widened as interest rates rose there and fell in Germany. Meanwhile, US Treasuries lost further ground, moving close to levels seen in February.
We continue to focus on Eurozone equities and corporate debt while remaining fully aware of volatility risk in coming weeks. In today's uncertain political environment, the US dollar could act as a useful hedge against election risks.
Markets lost further ground this week as the oil price fell. Cyclicals took the brunt of the selling.
Banks were hit as problems over recapitalising Italy's banks weighed across the continent. Barclays added to the gloom with a warning on performance in its corporate and investment banking division.
Autos also came under attack even if new car registrations remained upbeat, rising 5.3% in Europe in March and taking the YTD tally to +8.1%. Daimler said first quarter sales were good and Michelin plans to open a factory in Mexico to produce 5 million tyres a year. In contrast, Fiat laid off 1,300 people and eliminated a second shift in Detroit while Peugeot's "Push to pass" strategic plan disappointed the market. The plan is targeting operating margins of 4% in the autos division in 2016-18 and a 15% increase in revenue by 2021. In air transport, Air France said March passenger traffic had increased by 4.6% but the stock fell when the CEO, Alexandre de Juniac, unexpectedly announced that he was stepping down at the end of July and leaving to head up IATA.
In M&A news, the late-stage collapse in tie-up talks between Orange and Bouygues Telecom was bad news for the sector and inevitably hit French telecom stocks. Accor Hôtels has reinforced its top of the range offer by buying Onefinestay (luxury residence rentals in Europe and the US). As expected, Vivendi is to acquire Mediaset Premium through a share swap.
US equity markets edged lower overall. In a week with no major economic data, the US dollar was relatively stable against the euro. Industrial orders fell 1.7% in February, or in line with expectations. Company news was dominated by government hostility to the Allergan-Pfizer and Baker Hughes-Halliburton mergers. In the first case, the problem is fiscal optimisation while the second raises concerns over the post-merger competitive environment. In the run up to elections, the government's inflexible stance is not a huge surprise. The first quarter earnings season is scheduled to kick off next week but Bed Bath & Beyond (home retail) and Darden Restaurants went ahead and posted results that pointed to healthy consumer spending in the US.
Over the last 5 trading sessions, healthcare stood out despite Allergan's decline with a strong rebound in a listless market. Consumer staples were the next best performing sector. All other sector ended the week lower, led by financials after the Fed released its beige book.
Japanese equity markets succumbed to strong selling pressure from foreign investors as global markets extended losses. The TOPIX lost 5.5% on anxieties over the earnings outlook for FY2016 due to the yen's appreciation. The average dollar-yen assumed exchange rate of major Japanese electronics makers was set at 117.46 but on forex markets, the yen soared to 107.67 against the US dollar and 122.64 against the euro.
This week's top gainer was Rakuten. Japan's leading e-commerce company jumped 9% after its financial subsidiary said it would be launching a new wrap account service using a robo-adviser.
On a negative note, exporters, especially in the transportation equipment sector, struggled with stronger yen. Heavy selling took auto makers Mazda and Fuji Heavy down as much as 16.2% and 14.5% respectively.
This week saw some profit taking in emerging market equities after the previous week's strong rally. Brazil and South Africa led declines.
India's central bank cut its repo rate by 25bp as expected. In its press release, the bank linked this reduction in the policy rate to excess capacity in the economy and it now expects further disinflation towards the inflation target of 4% +/-2 points by the March quarter of 2018. The decline in one-year ahead inflation from around 4.8% in the June quarter of 2017 to 4.2% in the March quarter of 2018 implied by the RBI's inflation projection suggests room for one or two more rate cuts over the next 12 months.
In China, banks remained under pressure amid talks about a national debt to asset swap programme where banks would swap bad loans for an equity stake to reduce corporate China's debt burden. This would, however, leave banks owning equity in companies which might have weak fundamentals.
The South African Rand weakened as the central bank warned that risks to the country's ratings were rising ahead of a Standard & Poor's conference on the nation's credit outlook. South African lawmakers voted 233-143 against impeaching President Zuma for refusing to repay state funds used to upgrade his private residence. Samsung Electronics released preliminary earnings for the first quarter that exceeded market expectations. They were probably lifted by encouraging initial sales of the Galaxy S7, their new flagship phone.
The FOMC minutes confirmed that committee member were cautious due to worries over global growth. This is a favourable climate for gold. Central banks are still buying but have reduced the pace due to lower foreign exchange reserves. China's central bank bought 9 tonnes in March (compared to 16 in January and 10 in February). This is the lowest amount since the bank started to release monthly data in July 2015 but it also reflects that rally in the gold price over the last 2 months. This takes first quarter buying to 35 tonnes in all. Russia's central banks acquired 32 tonnes over the same period. By way of comparison, ETF inflows amounted to 363 tonnes, the second best quarter after the first quarter of 2009 (465tonnes).
One week before the April 17 meeting between OPEC and non-OPEC producers in Doha, the situation is still unchanged. But the days before this meeting will see lots of news that could have an influence on the discussions. The IEA (International Energy Agency), the EIA (Energy Information Administration) and OPEC itself will be publishing monthly reports on supply and demand. We should pay close attention to (i) shifting data on demand growth (currently expected to be +1.2 million b/d, or a rise of 1.3%), (ii) declines in non-OPEC output (expected to be down 0.7 million b/d by both the IEA and OPEC but merely 0.36 million b/d lower according to the EIA) and (iii) increases in OPEC production, notably in Iran and Iraq. The EIA will also be releasing its Drilling Productivity Report on US production which currently means detailing cuts to output. In the meantime, recent data suggest demand is still rising in the US due to longer journeys and better SUV sales both of which have resulted in higher petrol consumption. Add in US production, which fell further last week (down 20,000 b/d) and the result was a 4.9 million barrel drop in weekly inventories, the first drop since February. Oil prices rebounded on the news.
Equity and credit markets went their separate ways this week. Equities lost 1.7% while credit markets rose. The QE extension continued to bear fruit and fund flows remained positive. Cash outperformed the Xover which widened to 332bp (+29bp) The Bund is now back to its April 2015 level and yielding less than 0.1%. The FOMC minutes reaffirmed the Fed's determination to proceed with gradual rate hikes due to global economic risks. Oil bounced 4.7% to USD 38.5 a barrel thanks to rumours that a production freeze might be decided at the April 17 meeting in Doha and an encouraging drop in weekly crude inventories in the US.
The new issues market was busy, especially in high yield where new deals were easily oversubscribed. Numéricable-SFR (B1/B+) sold USD 5.2bn in a 10-year maturity yielding 7.375%. The issue was initially meant to raise around USD 2.25bn but a revival in investor risk appetite and more clarity on the telecoms market after the collapse of the Bouygues Telecom-Orange tie-up plans, encouraged the group to increase the deal size. LKQ (Ba1/BB) raised EUR 500m over 8 years with a 3.875% coupon. Peugeot (Ba1/BB) raised EUR 500m due 2023 with a 2.375% coupon. Inflows continued with High Yield registering EUR 400m in new money and Investment Grade EUR 1.4bn.
In company news, ArcelorMittal and Vallourec successfully completed their increases of capital (USD 3bn and EUR 1bn respectively). Alexandre de Juniac said he was stepping down as CEO at Air France-KLM. Glencore (BBB-) confirmed that it was selling a 40% stake in its agricultural subsidiary Glencore Agri to a Canadian pension fund for USD 2.5bn. Vale (Ba3/BBB-) confirmed that it wanted to sell core assets so as to reduce gearing by EUR 10bn in 2016.
The week was dominated by weak macro news, higher oil prices and failed mergers. Oil was a big trigger this week: WTI rallied 4.7% to USD 38.5 after the DOE Crude Oil Total Inventory Data decreased for the first time since December. In Europe, disappointing macro data, especially France and German PMI readings, fuelled a big sell-off on Tuesday (-2.4%) before the index stabilised around the 2880-3000 levels. A 7% drop in German car production (30% of European output) triggered a 5.4% sell-off in the autos sector. The telecoms space was also in the limelight after Orange (-8.5%) and Bouygues (-15.8%) failed to reach an agreement over Bouygues Telecom. Air France CEO Alexandre de Juniac said he would be leaving the company on August 1st for the International Air Transport Association but the negative impact was countered the following day by positive news on March passenger traffic.
In Japan, the disappointing Tankan survey continued to add pressure to the NKY (-2.1%) and even more to the yen which traded around 109. Since central bank governor Haruhiko Kuroda opted for negative rates, the yen has strengthened by almost 11% vs. the USD with the S&P index up 5.5% compared to a 12% slide in the Nikkei.
In China, plans for banks to convert bad loans into borrowing company equity might soon be approved, with swaps of up to RMB 1 trillion (USD 155bn) in the works. This would substantially impact China's big state banks which own about 50% of China's loan market. ICBC fell 5.3%, China Construction 1.4% and Bank of China 4.4%.
In the US, the biotech and specialist pharma sectors outperformed strongly after Allergan (-10.1%) and Pfizer (+9.1%) officially walked away from their USD 160bn merger. After failing to buy AstraZeneca, this leaves Pfizer thwarted for the second time in two years in its pursuit of a transformative, tax-powered deal to position the group for long-term growth.
Anacor (ANAC US) soared 21.4%, taking gains to 30% since it issued a 7-year convertible last week. Meanwhile, SunEdison (-6.6%) remained weak after last week's news.
We only saw one global issue this week, a EUR 400m zero-coupon 6-year convertible from ENI, which was revised downwards in size and price from a rather pushy EUR 500m initially.
Written on 08/04/2016