Risk assets enjoyed a sharp rebound over the week with equities leading the field

Asset Management - 4/15/2016

Earnings estimates had been revised lower at the start of 2016 but are now bouncing back as analysts realise the global economy has not collapsed and oil prices are rebounding.

​As the US earnings season got under way, JP Morgan's stronger-than-expected figures assuaged some concerns over banking sector momentum although the market as a whole is still very wary of the sector. But there were also two other significant factors behind this revival in investor confidence: first, China seems to be recovering; significantly, the IMF has been cutting growth forecasts everywhere else but has raised them in China. Second, the Fed really seems to have shifted its position towards a more market-sensitive stance. Obviously, an upturn in China is more than welcome. The rebound in its exports points to both domestic and international momentum. But the sharp increase in lending is potentially problematic. Beijing's objective was to organise a gradual slowdown in lending to the economy because of excessive gearing. To revive economic growth, which has been lagging, the government may have chosen to sacrifice long term strategy to short term expediency. We will be keeping a close eye on the situation in coming weeks.

As for the Fed, the change of mood is striking. Now that financial conditions, the global economy and US inflation have started to normalise, it now seems more worried and cautious than it was in January when market turbulence was raging. For investors, a more dovish Fed is the best way to stabilise commodity prices and curb upward pressure on the US dollar which is dangerous for emerging countries as well as the US economy. Comments from various Fed members reflect their fundamental disagreements even if the doves seem to be gaining ground. Some want a rate hike in the near future while others argue that the bank should take its time and properly weigh the impact of global problems, notably in China. In the last month, Janet Yellen has clearly moved from the first camp to the second. The chair of the Atlanta Fed followed suit this week. The Fed may have changed its policy reaction function but has yet to come up with another one. How long will it wait and what factors will trigger a move? What is certain is that weaker-than-expected US data on economic activity and inflation will not provide clarity.

With that in mind, the environment looks rather upbeat for coming weeks as the abovementioned risks will only weigh in over the medium to long term. We are sticking with our asset allocation choices and are still overweight eurozone equities.



The market rallied thanks to an oil price rebound, a weaker euro and reassuring figures out of China. Quite logically, all energy-related stocks benefited. Banks also rebounded amid moves to create a rescue fund for Italian banks. The 5.7% increase in car sales in March represented the 31st up month in a row. That sent all sector stocks higher, including Volkswagen even if the group posted disappointing market share for March.

In the luxury sector, LVMH's first quarter figures initially looked lacklustre due to its dominant fashion and leather goods business (53% of EBIT) but all other divisions were on form. The disappointment was primarily due to two US brands and lower customer footfall in Paris. Management nevertheless sounded reassuring and portfolio diversification helped the group post 3% in like-for-like growth. Burberry had less luck. It is less exposed to the most dynamic zones and first quarter sales fell 5%. Carrefour's quarterly sales rose 3.8% overall. France was stable despite an unfavourable base effect while Latin America, Spain and Italy all performed well. China remained tricky and sales came in 8.4% lower.

In M&A news, Vivendi is teaming up with Mediaset by buying 100% of Mediaset Premium. The alliance will be via a share swap and cover content and video on demand. In hotels, Starwood and Marriott are to merge after China's Angbang withdrew its counterbid on Starwood. But Chinese investors are back on the acquisitions trail in Europe: Jin Jiang, which owns 11.7% of Accor, is reportedly interested in increasing its stake to 20%. With so much speculation in the sector, Accor's share price naturally benefited.



The S&P rose 2%, hitting year-to-date highs. The reflation theme resurfaced amid perceptions that the macroeconomic environment was improving and due to higher oil prices ahead of the Doha summit. This triggered some portfolio rotation and a 5% surge in financials and commodities, two sectors which offer almost perfect exposure to economic reflation. 

As usual, aluminium giant Alcoa kicked off the earnings results season. The group reported a resounding 92% plunge in its operating profits due to severe pressure in the aerospace segment which has been hit by falling orders for Boeing. Universal banking models, JP Morgan and Wells Fargo were next. JP Morgan posted excellent figures, primarily because of strong performance in retail banking. US banks were also told by the Fed that their contingency plans for dealing with bankruptcy were inadequate.



The TOPIX finally bounced back, jumping 7.8% when the yen stopped rising and global stock markets rallied on positive news out of China. Finance minister Taro Aso's comment that Japan was ready to take all necessary steps against excessive currency moves improved investor sentiment and eased anxieties over export company earnings.

33 sectors enjoyed gains. Steel soared 16% on stronger-than-expected Chinese exports in March whereas Fishery, Agriculture & Forestry lost 2.8%.

China-related shares posted steep rises. Japan's top three steel makers, Nippon Steel & Sumitomo Metal, JFE and Kobe Steel surged 17.6%, 21.5% and 22.9% respectively on expectations recurring profit projections would be revised higher.

On a negative note, Fast Retailing hit a year-low on Tuesday after a disappointing earnings announcement. Japan's leading fast fashion company said it was revising down its net profit forecast for the year ending August 2016 on poor sales because of the warmer winter.



Good news from China, where the government reported stronger-than-expected export data in the middle of the week. Exports surged 18.7% in RMB in March compared to the same month last year. This followed declines in both January and February. Imports also stabilised, dropping just 1.7% compared with an 8% in February.

These upbeat export figures helped subdue concern over growth in the world's second-largest economy. Stock markets welcomed the news and metal prices and mining stocks especially continued to march higher. Oil and gas shares also rallied.

Overall, the Chinese economy grew at an annual rate of 6.7% in the first quarter of the year, another sign of the slowing trend. It is China's slowest pace of quarterly growth in seven years, but in line with expectations and Beijing's own growth targets. In the final quarter of last year, the economy expanded by 6.8%.

The World Bank downgraded its global growth forecasts for 2016 from 2.9% to 2.5%.  The IMF has also been sounding bearish on the global economy. Earlier this week, it cut its 2016 growth forecast by to 3.2%, down from 3.4%.

After Brazil's Supreme Court rejected a government injunction aimed at preventing an impeachment vote against President Dilma Rousseff, Brazil's full Chamber of Deputies is scheduled to vote Sunday April 17 on whether to move the process forward to the Senate. If two-thirds of MPs vote for impeachment, the motion will go through.



Commodity markets reacted strongly to this week's Chinese data and speculation over OPEC announcing some good news at the Doha meeting. The LME index gained 3.7% after falling over 3 weeks in a row and Brent crude bounced further mid week to a 4-month high of USD 44.

The big issue remained the April 17 meeting in Doha between OPEC and non-OPEC producers, especially Russia, the main item on the agenda being a price freeze at last January's levels. Although this is all very estimable and good for sentiment, there could well be only minor consequences on global supply and demand.

1. January's production was high and only Saudi Arabia has the means to increase output.

2. Iran is not expected to comply with the freeze before hitting its pre-sanctions output levels of between 4 and 4.5 million b/d.

3. Monitoring and compliance will also be tricky as some countries have failed to stick to their commitments in the past.

All this means that, failing some extraordinary progress, we are expecting the summit result to be slightly disappointing and that could entail a fall back in prices next week. 

Even so oil market fundamentals have continued to improve. US weekly inventories remained volatile -they rose by 6.6 million barrels- but US output saw its 6th down week in a row (minus 31,000 b/d). This show that US output is genuinely adjusting. The US energy department's Drilling Productivity Report supports this view and sees the fall in production picking up speed in April (-100,000) and May (-114,000). That would represent the biggest monthly fall since 2007. The Eagle Ford and Bakken basins would be the worst hit. 

In a data-rich week, there were also monthly reports from the Department of Energy (DOE), the International Energy Agency (IEA) and OPEC. All three seem to have found some consensus on the increase in global demand in 2016: the DOE has revised its forecast up to 1.16 million b/d while OPEC and the IEA are going for 1.2 million b/d. As for supply, the DOE has revised down its forecast for non-OPEC production, especially in the US. OPEC and the IEA are more cautious and are waiting for the Doha summit results before changing their forecasts.

This week's Chinese data in areas like cement production, electricity consumption and industrial production suggested the economy was in recovery. The subsequent GDP figure confirmed that the economy was stabilising. This budding optimism over a possible lift to Chinese demand was particularly good news for base materials, and especially iron ore which jumped 10% over the week. Steel inventories have fallen in the last 5 weeks, a sign that construction demand is on the mend. But these encouraging figures benefit from significant base effects and so they need to be confirmed in April to reinforce our view that Chinese demand really is improving. Elsewhere, gold fell 0.8% to USD 1,230/oz as the US dollar rose and ETF flows stabilised.




Mario Draghi's measures continued to drive bond markets higher. Risk-on sentiment accentuated in the middle of the week on upbeat Chinese data, particularly March exports which jumped 11.5% after plunging 25.4% in February. The news galvanised commodity prices and helped mining stocks outperform. Oil rose 4.7% to USD 41.6 on hopes that the April 17 summit in Doha might agree on a production freeze. Financials also performed well after an agreement on a EUR 5bn guarantee fund for ailing Italian banks was reached. The fund will help recapitalise struggling banks and acquire doubtful loans. 

The new issues market was very busy. InterXion (B1/BB-) issued a EUR 150m tap at104.5% with a 2020 maturity and a 6% coupon. Arrow Global (B1/B+) raised EUR 230M with a 2023 maturity at Euribor +475bp. Merlin Properties (BBB) sold a EUR 850m bond due 2023 yielding 2.225%. The Xover tightened by 20bp to 317 and the Main by 8bp to 74bp. Inflows into European corporate debt continued apace with EUR 450m for the high yield segment and 530m for investment grade funds.

In company news, Vivendi bought a 15% stake in Groupe FNAC as a strategic partnership in the cultural field. Steinhoff officially launched its all-cash bid on Conforama at GBP 1.25 a share. It also issued EUR 1bn in convertible bonds. Casino's first quarter sales came in higher than expected at EUR 9.70bn, a like-for-like rise of 1.5%. The group's bonds all reacted positively, rising between 1 and 3 points. Bombardier is reportedly about to sign a contract to sell 75 C Series planes to Delta Air Lines.



As the first quarter earnings season got under way, markets were driven by both macro and micro news, possible further easing in Japan and additional rumours about agreements on an oil production freeze at the Doha meeting.

In Japan, markets rose on hope for rate cuts in late April. Haruhiko Kuroda's intervention at the NYU confirmed market sentiment about possible QE expansion. The remaining question is about timing (April or July?) and what sort of additional measures might be introduced. The market seems inclined towards an April move but the governor has always managed to surprise the market.

The Nikkei ended up 6.5%, on Yen depreciation to trade above 109.35. This boosted highly Yen-sensitive stocks such as Asics (+8.9%) and its 2019 convertible rose 2.7% to return to110%.

China's import/export data came better than expected: +11.5%/-7.6% (compared to expectations of +10%/-10.2%). Exports grew at their fastest monthly pace in more than a year. HSCEI ended up 5.9% for the week and China Railway Construction rose 7.5% with the 2021 convertible now trading above 118% (+3.4%).

In Europe, the Steinhoff upsized EUR 1.1bn plain-vanilla 1.25% 7.5y convertible was the only new issue. It came as a surprise as we were more expecting a straight bond issue. The proceeds might be used for a potential battle with FNAC over Darty. Casino (+4%) released slightly better-than-expected first quarter sales (EUR 9.7bn, 2% above consensus), highlighted by an acceleration in the recovery at the Géant (Hypermarkets) and Leader Price (Discount) banners.

Rocket Internet was also in focus this week. The stock traded up 17.9% to above 29 after Alibaba announced it was willing to pay $1bn for full control of the Lazed e-commerce site, but it fell back on news of a loss of USD 222m in 2015 and ended the  week 6.3% higher. LVMH (+4.3%) reported no growth in its Fashion & Leather division but Chinese economic data drove the stock higher.

In the US, higher oil prices drove the SPX 1.7% higher. Energy stocks enjoyed a good week with the sector (S5ENRS Index) up 3.3%. Chesapeake Energy (+60%) achieved debt relief after the company announced on Monday that lenders had reaffirmed its borrowing base at USD 4bn and that the next scheduled re-determination had been postponed until June of next year. Jazz (+6%) surged as much as 9% after the company got a favourable ruling for its Xyrem patent. Finally, Horizon shares tumbled 24.7% after the company revealed lower net sales and adjusted EBITDA expectations for Q1 and Q2. Market overreaction to lower guidance or lower results has been a recent trend. LinkedIn and IDTI are good examples. 


Written on 15/04/2016