Markets ended the week slightly higher

Asset Management - 8/5/2016

Markets ended the week slightly higher after an initial pullback that was largely down to relatively disappointing European bank stress tests and further declines in the oil price. But on Thursday, the BoE provided support by cutting its benchmark rate to a record low of 0.25% and reinforcing its buying of sovereign and corporate bonds, measures that investors hope will limit Brexit's impact on the UK economy.
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At the same time, a drop in US petrol inventories and surprisingly good results from companies like Lafarge Holcim, Arcelor and Total, triggered a rebound in oil prices and equity markets. In fixed income, the most remarkable feature was the resilience shown by corporate bonds which managed to shrug off equity market volatility and previous falls in the oil price. We remain overweight eurozone equities and corporate bonds.



  European equities

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After two sharply down sessions, European markets ended the period slightly lower. Investors were sceptical about the ECB’s stress tests and Monte dei Paschi's equity raising plan which triggered fears that even banks which had successfully passed the tests might have to decide on further increases of capital. Financials naturally struggled despite encouraging results from ING, HSBC and Société Générale. ING reported underlying profits 34% higher than expectations, its best quarter in years; HSBC said it would maintain its dividend and Société Générale posted better-than-expected solvency levels with 1.1% in CET 1.

Only Commerzbank and Allianz reported disappointing figures due to weaker personal and commercial banking -which racked up significant losses- and fresh redemptions in asset management; after 4 up quarters, net outflows from funds amounted to EUR 18bn in the second quarter.

The other, largely expected, event was the Bank of England’s decision to cut its benchmark rate by 25bp to 0.25%. It also extended its asset purchases programme from GBP 375 to 435bn. This sent sterling lower, helping to boost UK blue chips.

Elsewhere, Nokia’s second quarter results were deemed weak - network revenues were 3% lower than expected- but the group said gains from synergies had risen from EUR 900m to 1.2bn. Infineon’s third quarter was more or less in line but guidance for the fourth quarter disappointed investors.

In the same vein, Novo Nordisk’s second quarter sales fell slightly short despite like-for-like growth of roughly 6%. Levemir sales fell 1%, its first drop ever (after jumping 11% in the first quarter) due to pricing pressures and cannibalisation from Tresiba. This led the group to cut sales growth guidance for 2016 from +5/9% to +5/7%.



  US equities

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Markets edged higher over the week in light summer trading. There were no major surprises in data releases: ADP said 179,000 jobs had been created in the private sector, slightly better than expected, but in line with the trend so far this year. Non-manufacturing ISM hit a robust 55.5 albeit slightly less than the 55.9 expected. More than 70% of companies have now reported and results have been generally higher than expected. That said, expectations had been slashed following worries over China at the beginning of the year and then Brexit. Excluding energy, sales and earnings were slightly higher. But there was disappointment and cautious guidance from restaurant stocks like McDonald’s, Starbucks and Texas Roadhouse which all referred to the impact the political environment was having on demand. Along with year-to-date retail sales, this is at odds with a vigorous job market but it shows that US consumers are still being careful more than 6 years after the economy started to emerge from the crisis. But we think jobs and retail data will help US economic growth to remain on track.

Over the last 5 trading sessions, only technology and consumer staples ended the period in positive territory. Consumer discretionary and industrials led declines.




  Japanese equities

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The Nikkei 225 dipped below 16,000 for the first time since July 12 and the TOPIX sagged 1.8% as the yen rose 3.1% against the US dollar and 2.8% against the euro. The stronger yen hit export stocks on worries over a possible deterioration in upcoming earnings reports for Apr-Jun. On July 27, the government unveiled a large JPY 28 trillion economic stimulus package and the BoJ announced additional monetary easing by doubling its ETF purchase target to JPY 6 trillion a year. However, these moves failed to boost the equity market.

Top gaining sectors included Banks (+3.9%) and Insurance (+3.1%), whereas Foods and Real Estate lost more than 6%. Dai-ichi Life Insurance Company and T&D Holdings soared 13.6% and 10.3% respectively after the BoJ’s decision to maintain the current pace of JGB buying and keep sub-zero rates on hold. On a negative note, Asahi Group Holdings, Japan’s leading brewery, declined 9.4% on a disappointing earnings forecast for FY2016. Investors were worried about weaker-than- expected net profit projections despite the operating income forecast for FY2016 being raised.



  Emerging markets

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Emerging markets continued to see inflows with USD 2.24bn registered over the week.

There was good news out of Asia. India’s parliament adopted the principle of a Goods and Services tax, a sort of inter-state VAT which will make it easier to trade between federal states and help turn India into one single market. But there are still a number of hurdles to clear before its effective implementation: it needs to be ratified by at least 15 out of the 29 states and the rate still has to be decided. It could be a single rate or two rates depending on the type of goods and services.

Indonesia’s GDP came in at 5.2% or higher than the 5% expected. 7.5% like-for-like growth in Mitral Adiperkasa’s stores showed that domestic consumption was healthy. In Thailand, Sunday August 7 will see a referendum on constitutional changes. The latest polls show 62% of the population has yet to make its mind up. Brazil’s central bank left interest rates unchanged saying it wanted to see if there were signs of fiscal stabilisation. Embraer’s recurring operating profits fell 29% or more than expected. In a tricky macroeconomic situation, Itau’s results fell 7%. True, provisions for non-performing loans only rose by a reassuring 10bp over the quarter but provisions were down 19% overall which raises doubts over the future. Cielo (Payment solutions) posted a 14% rise in results. Note that the Real has jumped by close to 30% against the US dollar since its September 2015 lows.

We are upbeat on emerging markets thanks to India’s reform programme, Indonesia’s strong economy and Brazil’s fiscal efforts.




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This week’s big news was the sharp rebound in oil prices after US petrol inventories were released. Elsewhere, gold gained USD 10 to 1,360/oz on the Bank of England’s new measures.

After flirting with USD 40, Brent crude bounced when the Department of Energy announced weekly data. Petrol stocks, a key market concern, saw their biggest fall in 5 years amid persistently strong demand (+2.2% on average over the last 4 weeks). With oil shorts at their highest since February, traders rushed to cover positions on the news, sending the oil price higher. OPEC’s production rose further in July, hitting 33.41 million b/d due to Saudi Arabia, Iraq (4.6 million b/d, its highest level since January), and higher Nigerian exports despite the country’s difficult domestic situation. The head of Libya’s state oil company, Mustafa Sanalla, said that exports could increase from today’s 350,000 to 900,000 b/d by the end of 2016, but observers are now wondering if this will be possible given the state of the country’s infrastructures.

Iron ore remained on an uptick although volatility increased over the week. The rise was due to reduced Chinese steel capacity and flooding in the country which has disrupted iron ore shipments and forced some steel works to stop production. Note that Europe and India have stepped up anti-dumping measures. Chinese PMI data are rather mixed and differences between the government’s 49.9 (down from 50 in June) and Caixin's 50.6 (48.6) are of no real help in determining whether the economy has turned higher and if demand for base materials will therefore improve.



  Corporate debt

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The week started with European bank stress test results and ended with action from the Bank of England. The stress tests will now allow the ECB to proceed with capital requirements for 2017 with a new framework which will split Pillar 2. As for the BoE, it surprised markets by unveiling a larger-than-expected series of measures. The bank not only cut its benchmark rate but raised its asset purchase ceiling from GBP 375 to 435bn along with corporate debt buying for a maximum of GBP 10bn. This dovish decision quite logically took UK rates lower and triggered tighter credit risk premiums: bank bonds outperformed, led by UK institutions, peripheral CoCos gained 1 point on average and core CoCos ended 0.25-0.5 points higher.

Investment grade tightened by between 2bp and 4bp and high yield between 8-15bp. The summer holiday lull has not yet stated and the new issues market remained busy. In USD-denominated investment grade, Microsoft sold a USD 20bn bond to fund its acquisition of LinkedIn. In the ongoing results seasons, results continued to come in higher than expected for most banks, apart from RBS which was forced to increase provisions for litigation. According to Bloomberg, FCA (Ba3/BB) is in advanced talks with Samsung to sell its Magneti Marelli auto components subsidiary or some of its businesses like lighting, telematics boxes or on-board entertainment systems. SFR has signed an agreement with two majority unions to lay off 5,000 people by 2019. The move is expected to cost EUR 600-800m but generate around EUR 400m in savings from 2017.


Primary Jumbo deals are back in the convertibles universe. Dish Network (US broadcast satellite TV) issued a USD 3bn 10Y convertible bond to be used for “strategic transactions which may include wireless and spectrum-related strategic transactions”. In the meantime, the company was cut to B+ from BB- by S&P given that adjusted leverage is likely to remain well above 5 times. In the ongoing earnings season, Deutsche Post posted higher-than-expected EBIT but revenues were actually in line with consensus; the group still expects electronic commerce's growth momentum to continue in Q3, offsetting expected weakness in postal volumes. Buzzi Unicem H1 sales were in line with the consensus at EUR 1.26bn with favourable momentum in all markets (especially the US) except Russia which saw sales fall by about 20%.

Adidas’ results were in line with last week’s pre-announcement with sales mostly driven by strong numbers in Western Europe, North America and Asia. Note that the stock is up 59.88% YTD whereas the Stoxx 600 Personal & Household Goods index has only edged 1.39% higher. Russia’s Severstal was upgraded one notch to Investment grade (BBB-) on strong operating results and very healthy credit metrics. In the US, Tesla reported USD 1.3bn in total revenues, a 10% increase QoQ but which fell short of estimates. Net losses were USD 293m but auto deliveries came to 14,402, not that far of the 17,000 objective.

MercadoLibre beat Q2 revenue expectations with a 29.4% YoY increase to USD 199.6m. As in the previous quarter, margins contracted due to higher wages, license fees and value added services. Pago, its payment solutions branch, enjoyed 76% growth YoY. Super Typhoon Nida hit Hong Kong in the first half of the week so the CB market was very calm in Asia. However, some CBs like Taiwanese tech companies stood out: ASE gained 4% and its CB traded 1-2pts higher than the week before. Japanese CBs felt a bit heavy due to some profit taking, risk reduction in the market, and some disappointing Q1 results; furthermore, analysts are not convinced that Prime Minister Shinzo ABE and the BoJ will be able to work together on what is a disappointing fiscal stimulus measure. Suzuki Motors posted very solid results with a 20% YoY rise in Q1 net income and a 7% increase in operating profit which beat estimates.

Written on 05/08/2016

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