Trading was erratic this week due to oil price volatility, moves in the USD/EUR exchange rate and the shifting message from the Fed and its various representatives

Asset Management - 5/20/2016

The Fed also seems to have stopped giving forward guidance on the provisional rate hike calendar and instead now appears to be linking any moves to US data on jobs, growth and inflation. This risks triggering excessive, negative reactions on markets: any expectation of a rate hike raises concerns over a rise in the US dollar, lower oil prices and deteriorating conditions for emerging countries. We will only escape from this trap if US and European company results continue to come in significantly higher than today's very low expectations.

Against this backdrop, we have more confidence in Europe which means we are focusing our slight equity overweight on the eurozone. In fixed income, we continue to prefer high yield euro bonds and Southern European government debt at the expense of US Treasuries and core eurozone sovereign debt.



Markets edged higher despite the possibility that the Fed would raise rates earlier than expected. But European auto stocks, and Fiat in particular, lost ground: French stocks were hit by talk of the state selling down stakes so as to recapitalise EDF and Areva while Daimler reduced guidance on its HGV division due to a recent drop in US sales. Even so, new car registrations in Europe remained upbeat with a 9.5% jump in April, mainly on double digit growth in Southern Europe. Michelin showcased solid results in Europe, a contrast with weakness in North American markets.

Telecoms were in better shape: Vodafone's top-line growth keeps on improving from one quarter to the next. Iliad's sales rose 7% or slightly more than expected. In contrast, Telecom Italia's sales fell short and the group announced that it would be boosting its cost reduction plan. In luxury, Burberry unveiled a cost-reduction drive at a tricky time for the sector. The same conditions hit Richemont's April sales which plunged 15%. The company sounded very cautious on the outlook for the rest of 2016. Elsewhere, Lanxess raised its EBITDA targets after releasing its first quarter results and Kingfisher said retail sales in France had risen by an upbeat 2% in April).

In M&A, two mega deals were announced. Technip and FMC Technologies in Texas are to merge to create a USD 20bnnoil services company with operating head offices in Paris and Houston. Bayer and Monsanto have admitted being in talks over a tie-up which would create a global pesticide and GMO giant. In an interview, Vincent Bolloré pleased markets by saying Vivendi and Havas might merge in the future.



In this week's upbeat economic data, April's housing starts rose 6% month on month while building permits advanced 3.6% to an annualised 1.1 million. The CPI showed core prices, ex food and energy, rising 2.1% YoY which was slightly lower than the pace seen in the two previous months.

Contrary to market expectations, the latest FOMC minutes seemed to show that most members were in favour of a rate hike as early as the next meeting in June if the economy continued to make progress. This sent the yield on 10-year Treasuries up from 1.7% to 1.85%. The biggest beneficiaries of the reflation theme were financials while longer duration sectors or those offering good yields tended to slip back. Consumer staples, for example, fell 2.9%, utilities 3% and telecoms ended the period more than 3% lower.

In a performance that seemed to validate the group's new strategy, Wal-Mart released encouraging figures with like-for-like sales up 1% while footfall rose 1.5%, one of the biggest rises in 6 years. Cisco's quarterly results beat expectations, the result it would appear of its business model successfully migrating to more software and security and away from hardware. LendingClub (peer to peer loans) fell further on the CEO's resignation and the sudden collapse of partnerships with its main financial sponsors. The Department of Justice is now investigating the group. Target's quarterly EPS missed expectations and the company has revised down its annual guidance.



The Japanese stock market moved within a tight range, as investors took a wait-and-see stance ahead of the G7 summit in Japan. The expectation is that there will be cooperation over a fiscal stimulus package. The TOPIX ended the week 0.1% lower after losing 1.3% on Tuesday. In economic data, Jan-Mar GDP rose 1.7% YoY and 0.4% QoQ, or more than expected, thanks to an increase in private consumption.

The Nonferrous Metals sector was the best performer, up 4.7% thanks to Sumitomo Electric Industries. The electric wire manufacturer jumped 13.6% after giving a positive earnings forecast for FY 2016 and announcing a share buyback for up to JPY 20bn. The stock price was also underpinned by news that the company had signed contract with a Moroccan agency for a photovoltaic power generation plant.

Elsewhere, the Rubber Products sector dropped 4.7%. Toyo Tire & Rubber Company declined 23.4% on a downward earnings revision for FY2016 due to an extraordinary loss and the yen's appreciation.



After the release of rather hawkish FOMC minutes, markets began to raise the likelihood of a rate hike, putting emerging markets under pressure. Commodity stocks were among the biggest losers and emerging country currencies lost ground as the US dollar strengthened.   

In disappointing Chinese macro data for April, retail sales, industrial production and fixed asset investments came in lower than expected, marking a slowdown compared to last month.  In the latest instance of China's global deal making and its ambitions to become a high-end manufacturing powerhouse by targeting technology, Chinese home-appliance maker Midea Group launched a USD 5bn+ bid for German robotics specialist Kuka AG. This was yet another sign of surging Chinese investment in Europe.

In Taiwan, the new President Tsai Ing-wen, backed by a historically anti-China party, has taken office with pledges to seek peace with Beijing.

The Philippines' GDP grew by 6.9% during the first quarter, making it the fastest growing economy in Southeast Asia. Nonetheless, the market sold off afterwards as investors took profits after the rally triggered by the presidential election results.

Russia's state gas giant Gazprom disappointed when it proposed a dividend that was less than half as big as the amount implied in a government order for state companies. Sochi hosted the Russia-ASEAN summit which aims to strengthen relationships between Moscow and the Asia-Pacific zone.

Binali Yildirim, Turkey's transport minister and a close ally of President Erdogan, has emerged as the country's new prime minister after the ruling party formally selected him as leader.



Commodities fell on US dollar strength prompted by the latest FOMC minutes, which raised the possibility of a June rate hike, and a more hawkish tone from some Fed members. Elsewhere, this week's disappointing China data refuelled doubts that the economy was stabilising and that caused concern over demand for commodities. Both factors triggered a moderate drop in base metal prices – the LME slipped 0.7%- and a more pronounced fall in precious metals with gold down 1.2% mainly due to the rising US dollar.

Production stoppages in Nigeria and Canada continued to underpin oil prices and offset the usually negative impact of the higher dollar. Forest fires in the Fort McMurray region rekindled and local producers were forced to evacuate staff as the blaze spread to production zones. The situation is worrying as this is a particularly dry period and it is difficult to assess the impact on production.

Instability in Nigeria continued to weigh on production which, according to the Ministry of Finance, fell to 1.62 million b/d, a 20-year low. Rebel attacks damaged infrastructure belonging to Exxon Mobil, Chevron and Shell at the Qua Iboe terminal which the groups say could take a long time to repair. Chinese production also suffered in April with a 5.6% drop to 16.59m tonnes but oil's fundamentals continued to improve.

All three agencies, the US Energy Information Administration, the International Energy Agency (IEA) and OPEC revised global demand estimates higher, particularly in China and also in India where there is strong demand for petrol. They also further cut estimates for non-OPEC production. US output –ex Alaska- fell by a further 30,000 b/d according to EIA weekly data. The Technip / FMC Technologies merger should optimise and reduce development costs for offshore projects and help producers launch projects which at current price levels are not profitable enough.




High yield (+6bp) outperformed investment grade (-15bp) over the week due to a healthy EUR 150m in new money and the dynamic new issues market.

B-rated bonds (+20bp) outperformed the BB segment (+5bp) and the Xover widened by 5bp to 333bp to trade around the long-term mean for its third quartile.

On the new issues market, Hanesbrands (BB) raised EUR 500m due 2024 at 3.5%. Nexans (BB-) issued a EUR 250m bond due 2021 at 3.25%. In investment grade, Vivendi raised EUR 1.5bn in two tranches, a 2021 maturity yielding 0.75% and a 2026 bond at 1.875%.


In Europe, BP issued a GBP 400m 7-year equity neutral convertible while Bekaert raised EUR 380m with a 5-year zero coupon convertible, enabling it to buy back EUR 284m of its 2018 convertible. Telecom Italia's first quarter EBITDA came in 3.8% below consensus but operating FCF was 4.8% above. Debt fell 0.6% due to a 10% drop in CAPEX while NWC halved YoY.

Grand City reported a 50% YoY increase in rental and operating income and a 50% YoY increase in FFO I to EUR 38m (FFO1 per share after EUR 0.22 in hybrid notes attribution, up 10% YoY) and an expanded portfolio.

Technip shareholders will get two shares in the new company (TechnipFMC) for every Technip share held, while FMC investors will get one share, the statement said. The companies said they would deliver at least USD 400m in annual pre-tax savings in 2019. The deal is expected to deliver at least USD 200m in cost savings in 2018 and another USD 400m in 2019.

In the US, Allegheny issued a USD 250m 4.75% 6-year convertible and Repligen issued a USD 100m 2.125% 5-year convertible. reported strong quarterly billings of USD 1.62b (better than the expected USD 1.45bn) and revenues of USD 1.92bn (USD 1.892bn). Revenue guidance for 2017 was raised.

In Japan, new "BoJ-ready" ETFs, which meet the BoJ's requirements for purchasing ETFs invested in companies that raise wages and capital spending, are about to hit the market. Meanwhile, the BoJ's share of Japan's ETF market rose to a record 59% in April after the central bank spent around JPY 300bn on purchases during the month. In China/HK, Kingsoft reported upbeat first quarter revenues of RMB 1.752b, while gross profits increased 45% YoY to RMB 1.28bn. However, the stock later fell when its Cheetah Mobile division (62% of the company's revenue) reported a drop in QoQ revenue and reduced guidance on operating margins. 

Written on 20/05/2016

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