There was little to cause markets to fret this week and indices rose further

Asset Management - 4/22/2016

The failure of the Doha oil summit was not a big surprise given the fact that Iran was unwilling to talk about limiting output at such low embargo levels. Oil prices ended the week higher.

​In Europe, the ECB's press conference was dominated by a previous statement from Germany's finance minister questioning the bank's negative rates policy. Mario Draghi responded with a strong reiteration of central bank independence and said the board, including the Bundesbank, was unanimous in defending this principle. But unlike other ECB press conferences, he did not actually say there would probably be more rate cuts and the euro dipped against the US dollar. This week's economic data had little effect on macroeconomic views and investors turned their attention to company results. With only a quarter of US quarterly results in, it is still too early to draw conclusions but the figures are better than expected, if only because expectations had previously been sharply revised down.



Firmer oil prices underpinned the market this week and the ECB's decision to leave interest rates and monetary policy unchanged consequently had no impact on indices. Natural resources, banks and autos all rebounded towards the end of the week.

A number of quarterly results went down particularly well with the market. Schneider's figures brought reassuring news on its Chinese business and the stock jumped 5% while Atos saw like-for-like growth improve to 1.6% thanks to Worldline (+6.7%) and its data/security division. L'Oréal posted better-than-expected like-for-like growth of 8.5% in Latin America and was in line with expectations in Europe and the US. Only Hong Kong suffered in Asia. Essilor grew by a robust 5.7% thanks to its corrective eyeglasses business. Danone's milk products division helped like-for-like growth to come in at 3.5% or better than expected. Rémy Cointreau rose on better cognac sales (80% of earnings) in the Americas and in Asia. Accor's growth picked up speed (+1.9%) after a very mixed last quarter in 2015. The group is upbeat on Europe for the rest of 2016 because of an upturn in French tourism and a trade fair recovery in German. Despite a negative calendar effect, the European autos market remained buoyant. Renault followed on from last week's upbeat figures from rivals and posted 10.2% growth in March. The first quarter was up 7.3% with Europe up an impressive 8.8%. The group's product plan for the next 12 months still looks very attractive. Daimler's results were, as expected, a little soft but the group reiterated its full year guidance. Kering's figures were disappointing due to poor performance at Gucci and Bottega Veneta but Puma continued to rebound. Pernod's Chinese sales fell 10% in the last quarter but the rest of the world was satisfactory and the group reiterated its guidance.

In M&A news, the battle for Darty is not yet over. Conforama has revised its bid up for the fifth time and is now offering 160p a share. Elsewhere, China's Jin Jiang added to its stake in hotels group Accor and now owns 14.98%. Zodiac gained more than 6% over the week on unconfirmed rumours that Safran might be eyeing the company.



US markets pushed higher in a relatively stable climate as all eyes focused on first quarter results. Property data for March were mixed with existing home sales up more than expected but housing starts and building permits both down. Initial jobless claims for the week continued to fall.

Companies in the earnings limelight included tech giants like IBM, Intel, Google and Microsoft. Each company is facing specific challenges but the sector's overall results failed to generate investor enthusiasm. Interestingly, none mentioned the global economic environment as a major problem, a reassuring development given the world recession scenario that was preoccupying some companies less than a quarter ago. In consumer staples, Starbucks released a robust 20% increase in earnings but like-for-like sales growth came in at 6%, slightly below expectations of 6.5%. Coca-Cola's sales dipped 4%, the 12th decline in the last 13 quarters and the stock lost close to 5% over the week. In bank results, Goldman Sachs like its peers suffered from lower trading volumes. But Bank of New York, which is exposed to more traditional end clients, posted better-than-expected results.

Over the last 5 trading sessions, energy, healthcare and materials made significant gains. Utilities, consumer staples and telecoms all ended the week sharply lower.



Despite several M7-class earthquakes in Kumamoto on Kyushu Island, the stock market continued to rise after a wobble. The TOPIX ended 1.6% higher as US and European equity market rallied on rising oil prices. Moreover, speculation over fresh moves from the BoJ after the earthquake also supported the market prior to a monetary policy meeting.

The quake damage is deemed to be limited. There are apparently no major companies directly affected but companies like Toyota (+0.3%) and Sony (+1.3%) have factories in the area. Toyota, which stopped producing cars due to disruption in the supply of key parts from Aishin Seiki (+0.4%), is scheduled to resume operations from April 25.

Over a trying week, Oil & Coal Products gained. Idemitsu Kosan, in particular, jumped 15.4% on expectations of further demand for its organic EL material business. On a negative note, Mitsubishi Motors dived 31.3% on news that fuel efficiency test data for its compact cars had been manipulated.



The Chinese bond market should see spreads widening further as signs of stress become more apparent. Credit defaults have taken place at a seemingly accelerated pace with about 13 cases of credit bond defaults year to date. Moreover, six more issuers are now under review by onshore rating agencies for possible rating downgrades. State-owned enterprise or SOE credit events have weakened the hope for "implicit government support". Since the beginning of April, bond defaults by two central SOEs (a coal mining company and a steel company) and the announcement of RMB16.8bn debt trading suspension by a AA+ rated central SOE (railway materials) have shaken investor confidence in the creditworthiness of central SOEs. The surprising suspension of sizable central SOE debt last week has raised liquidity concerns over corporate credit exposure and holders of corporate debt (mostly fund managers) have begun to make selective cuts to corporate bond positions.

In Brazil, Dilma Rousseff is running out of time and options as her enemies close in on the first impeachment of a Brazilian president in 24 years. After a dramatic defeat in an impeachment vote in the lower house of Congress on Sunday, she may have only a couple of weeks to reverse growing momentum in the Senate for her to stand down. Rousseff's main aides have already said she will fight back during her trial in the upper chamber, and may file legal challenges before the Supreme Court. Others in her ruling coalition suggested she could back calls for new elections. Following Rousseff's defeat in the lower house, investors are now focused on how fast the impeachment process will unfold and what real chances Vice President Michel Temer would have to pull the economy out of its worst recession in decades. Initial euphoria over Temer's plans to downsize government and cut spending has given way to concerns that he may struggle to unite a divided country, and that his party may become embroiled in the two-year corruption scandal that has rocked the Rousseff administration.

The Doha summit of the world's largest oil producing countries ended without an agreement on Sunday, as country leaders failed to strike a deal to freeze output and boost sagging crude prices. Initially, the meeting's outcome was thrown into doubt after Iran made a last minute decision not to attend and Saudi Arabia vowed not to halt or freeze production unless other major producers did the same. After marathon talks, nearly 20 of the world's largest oil exporters could not find enough common ground to hold the line on output.



Unsurprisingly, last weekend's Doha summit between OPEC and non-OPEC members failed to agree on a production freeze. Saudi Arabia and Iran were always clear over their stances. For Riyadh, an agreement was conditional on all OPEC members joining in while Teheran wanted to get back to pre-sanction output levels before signing up. As Iran did not even deign to send a representative, Saudi Arabia refused a minimal agreement. Meanwhile, the list of countries which say they have the scope to increase production keeps on growing. Libya has now joined Russia, Saudi Arabia and Iran. True or false, it says a lot about the tensions within OPEC and could complicate talks in the future. The cartel's next meeting is scheduled for June 2.

Markets were clearly not banking on an agreement judging from the oil price reaction to the Doha failure. Brent crude traded as much as 5% lower on Monday but then rallied and ended the day higher. A Kuwaiti oil workers strike over projected wage cuts hit the emirate's output severely by around 1.7 million b/d out of daily production estimated by the IEA at 2.83 million b/d. Production resumed after 3 days as talks between the Kuwaiti oil minister and workers began.

In such a volatile environment, the market chose to focus on improving fundamentals. Weekly US data showed crude inventories rising less than expected with a drop in distillate stocks, a good indicator of strong demand. US output fell by a further 24,000 b/d over the week to 8.9 million, representing a drop of 249,000 year to date. This should continue to underpin the scenario of excess supply rebalancing by the end of 2016 or by early 2017. The IEA's head sees non-OPEC supply down by 700,000 b/d as early as 2016, the biggest drop in production in the last 25 years. Brent crude prices rose 3% to USD 43 and WTI traded up at USD 42. 

Base metal prices surged this week as the LME jumped 3.8%. Iron ore continued on the rally that kicked off in mid-December, rising 20.9% over the week due to (1) better-than-expected prospects for Chinese steel demand, particularly for infrastructure and construction projects (2) improved producer discipline with avec Rio Tinto (global N° 2) and BHP Billiton (N°3) cutting output guidance for 2017 and 2016 respectively and market leader Vale reducing 2016 production guidance to the bottom end of its initial guidance spreads and (3) a more stable US dollar. This momentum should, however, start to fade as China has almost finished restocking and the market is still in surplus for 2016-17 (Vale also said it might restart production at Samarco as early as end 2016).

Gold remained within its more than 2-month trading range of USD 1,210-1,260. Prices are still riding on investment demand due to very low interest rates and distrust of central bank policies. Physical demand, however, has been hit by seasonal weakness that the year-to-date rise in the gold price has almost certainly made worse. Mario Draghi's stance is good for low rates. In contrast, the chair of the Boston Fed, who currently votes at FOMC meetings, thinks that the US economy is fundamentally sound and that markets are wrong in thinking that the Fed will only raise rates once in 2016.




Markets remained in risk-on mode as oil prices rebounded and the ECB delivered its expected message. Mario Draghi said purchases of investment grade corporate debt would start in June and be extended to insurance companies. Buying will not exceed 70% of a company's total debt on primary markets and the bank will be able to buy maturities up to 30 years. There was an immediate and very positive lift to financial bonds which easily outperformed other segments. Insurance company debt rose 1% on the day of the news.

The Xover lost 16bp over the week to 292bp while the Sub Fin index ended 26bp lower at 179bp. Energy stocks like Petrobras remained strong. Elsewhere, Anglo American, Arcelor Mittal and Glencore were firm as commodity prices rebounded.  

The new issues market saw further interest from opportunistic companies looking for funds at attractive interest rates. Italian cement group Buzzi Unicem (BB+) issued a EUR 500m bond at 2.125% due 2023. Loxam (BB-) raised EUR 250m with a 2023 bond yielding 3.5%. Heineken (BBB+) raised EUR 800m with a 2026 bond at 1%. Unibail-Rodamco (A) raised EUR 1bn in two tranches, with a 1.125% coupon for the 2027 maturity and 2% on the 2036 maturity. Inflows remained positive with +EUR 704m for European high yield funds and +USD 410m for US high yield.  

Promising first quarter earnings reinforced the idea that European company fundamentals were still holding up. Spanish auto parts maker Antolin saw sales rise 58% YoY to EUR 3.5bn after integrating Magna. Leverage was 2.15 times, well below the 4 times in covenants. The company's guidance for 2016 is encouraging with sales expected to rise 40% and an EBITDA margin of around 9%. Maisons du Monde launched preparations for its IPO. Financière Gaillon said it would be selling some of its Kaufman & Broad stake for around EUR 257m through a private institutional placing. The battle between FNAC and Conforama's parent company Steinhoff for Darty continued to rage and the target is now valued at more than EUR 1bn.



This week was marked by three catalysts: oil, the ECB and results in Europe and the US. Oil was particularly in focus after OPEC members failed to agree on a production freeze agreement in Doha over the weekend.

There was zero issuance across the board. In Europe, the Eurostoxx 50 surged 3.1%, driven more by oil prices and results than Thursday's ECB meeting.

Basilea (+9.9%) announced it would be receiving USD 100m from the US Department of Health, with USD 20m during an initial 18 months, for phase 3 trials on Ceftobiporole, a drug that is already approved for sale in the European Union. (+3.1%) reported solid first quarter results; volumes rose 4% and the growth outlook was revised higher. Koninklijke KPN lost 3% following reports that Carlos Slim's America Movil SAB was considering the sale of its minority stake in Dutch phone company Royal KPN NV, less than three years after the Mexican billionaire's failed takeover attempt.

In the US, ServiceNow surged 17.4% after the company raised its 2016 revenue forecast. Citrix reported first quarter revenues of USD 825.7m, far higher than the most optimistic estimate of USD 804m. Illumina was severely hit after issuing weak first quarter revenue guidance; the stock initially lost more than 20% before ending 16.5% lower. The company could still be a bid target. SunEdison finally filed for bankruptcy on Thursday.

In Japan, April's Tankan survey showed sentiment was buoyed by cheap oil. The effects of the earthquake were yet to be fully reflected. Business sentiment in manufacturing improved by four points with a relatively large gain in materials on the back of lower costs due to cheap oil prices and the yen's appreciation.

The yen depreciated against major currencies, breaking back above 110 against the US dollar. The Nikkei outperformed (+4.3%) with strong performance from exporters like Asics (+10.7%) and Suzuki (+7.7%) and also pharmaceuticals like Towa (+7%) and Nichi Iko Pharma (+6.8%).

China's markets were choppy over the week with the HSCEI down 1% and the HSI up 0.7%. China's convertible bond market underperformed sharply. Xiamen lost 3.1% and the 2022 convertible shed 2.5%.


Written on 22/04/2016