A week of central bank meetings

Analisi di mercato - 03/11/2017

It was a week of central bank meetings, the lead-up to new Fed chair’s appointment and details on tax reform.

The Bank of England raised rates (by 0.5%) for the first time in 10 years but the Fed stayed put. The Fed's statement focused on the upbeat economy and the fleeting effect of recent hurricanes so expectations for a fresh rate hike in December were raised. But the impact on the market was almost zero as investors were more concerned about who might replace Janet Yellen. In the event, Jerome Powell will assume the role next year. We view this as reassuring as he is close to Janet Yellen’s positions and should maintain continuity in monetary policy with only gradual rate rises. On Thursday, the tax reform package was presented to the House of Representatives. Corporation tax is to be cut from 35% to 20%, individual tax brackets will be reduced from 7 to 4 and low incomes will pay less although the high tranche was maintained.

In economic data news, US manufacturing ISM slipped compared to October but remained at a high 58.7 with an encouraging 63.4 for the new orders component. Manufacturing PMI rose in most European countries. The first estimate of eurozone GDP came in at an annualised 2.5% or slightly above expectations but inflation in October remained soft at 1.4%.

Equity markets were little changed. We have already reduced equity exposure and are maintaining our preference for the eurozone and Japan. In government bonds, spreads between peripheral countries and Germany tightened. Madrid took control of Catalonia’s affairs but there was no violence and Italy benefited from an S&P upgrade. We remain cautious on government bonds, notably the Bund and US Treasuries.

  European equities

European equities ended the period higher on good quality quarterly figures, especially in the industrial, technology and luxury sectors.

Madrid rebounded after confirmation that regional elections in Catalonia would be held on December 21. Spain’s bond yields eased sharply along with peripheral country spreads.

The eurozone’s GDP grew at an annualised 2.5% and manufacturing PMI remained buoyant with 58.5 for the eurozone and 56.1 in France. Italy surprised the most with 57.8. The Bank of England raised its rates for the first time in 10 years but said it would probably only increase them twice in 2018. As a result, sterling fell and US equities rose.

Oil prices remained above $60 after confident comments from Saudi Arabia which sent oil and oil services companies higher, with Technip leading the field.

Auto stocks caught up due to strong sales in France in October. Volkswagen was one of the best performers and the VW brand’s higher sales and margins helped the group raise annual guidance. The French government sold the stake in Renault it had acquired during the debate over double voting rights. Tech stocks were strong and expectations that iPhone X sales would be good lifted Apple suppliers like Dialog Semiconductor and Infineon.

Airbus reassured investors over 2017 and said orders were doing well. France’s banks underperformed after mixed quarterly results. Deutsche Telekom fell sharply on doubts that the T-Mobile merger with Sprint (Softbank) would go ahead.

Healthcare underperformed. Sanofi’s third quarter figures were rather weak and the group revised down expectations over its diabetes treatment. Merck plunged more than 5% after its Keytruda product was withdrawn in Europe. Siemens unveiled further cost economies amid active preparations to list its healthcare division in Frankfurt. Structurally challenged sectors like distribution and media continued to underperform.

  US equities

US equity markets advanced over the week. In headline events, tax reform measures were unveiled, Jerome Powell was appointed to replace Janet Yellen as Fed chair and there were more third quarter results from companies.

The first two items will not have any serious impact over the short term: on the one hand, reforming the tax code will be a long and complicated process and the current administration has already struggled over tax questions; on the other, Powell is said to be pragmatic and is not expected to depart to any significant degree from Yellen’s policies.

In economic data, ADP released excellent figures on private sector job creations (235,000) and manufacturing ISM came in at 58.7 so it is still at lofty levels. Far from running out of steam, the US recovery is actually gaining traction.

So far, third quarter results have been strong with positive surprises running at around 80% and profits up 7% on last year. There was a sigh of relief when Apple released figures that were in line with expectations. Mondelez, Facebook and Allergan all beat estimations.

Over the last 5 trading sessions, tech led gains (thanks to GAFA stocks) and property and energy were also among the week’s best performers. Telecoms and healthcare lost ground.

  Japanese equities

Over the week, the TOPIX gained 1.3%, ending higher for the second week in a row. The market rebounded sharply last Wednesday after weakness at the end of the previous week and advanced for two sessions. The Nikkei 225 hit a 21-year high on robust corporate earnings. Export electronic maker stocks gained on strong earnings projections as well as Wall Street’s buoyant performance and brisk US economic readings. Buying incentive was also supported by Yen weakness against the US dollar and the resounding election win of Prime Minister Shinzo Abe’s ruling coalition.

By sector, the best performers for the week were Marine Transportation (+5.97%), Mining (+4.74%) and Pulp & Paper (+4.71%). Electronic maker Sony soared 18.11% after saying it was on line to register the highest group operating profits in 20 years. In semiconductors, Tokyo Electron jumped 15.59% after an upward revision in its earnings forecast.

In contrast, Securities & Commodity Futures (-1.26%), Banks (-0.96%) and Insurance (-0.77%) were relatively weak. Electric parts supplier Murata Manufacturing tumbled 5.72% after its downward earnings revision disappointed investors. Other losers were Mitsubishi Heavy Industries (-6.06%) and Kao (-3.97%). 

  Emerging markets

Most companies released solid results over the week. In the Chinese internet space, Alibaba surprised on the upside by delivering 63% earnings growth YoY thanks to a better-than-expected 61% increase in top line growth and better-than-expected margins. Recurring profits at Baidu rose by 103% (ex gain from the disposal of the O2O business) and were also above expectations. However, investors were disappointed by softer guidance for the fourth quarter due to the deconsolidation of the food delivery business and soft video revenues from Iqiyi. CTRIP’s results were also above expectations (+72% YoY) but revenue growth guidance was lowered to 25/30% (vs. 30/35% earlier) to reflect the impact of the recent ban on cross-selling value-added services during air ticket sales.

In Korea, Samsung Electronics delivered an excellent set of results (+147%) with a huge effort in terms of corporate governance: the dividend was increased by 20% this year and will double next year and a Won 2.3 trillion share buyback was announced. The company has undertaken to give back 50% of its free cash flow to shareholders in the future. As expected, BYD’s results were 24% down YoY due to cuts in subsidies. However, earnings guidance improvement was lower than expected for the fourth quarter.

In Taiwan, Chroma surprised on the upside with a 51% surge in EPS.

In India, consumer staples companies had mixed results: strong for Godrej (+13%) but still modest for ITC (+6%) and Dabur (+1%).

In Indonesia, United Tractors published encouraging 74% jump in results mainly due to a rebound in construction and mining investment.

In Brazil, both Itau and Bradesco reported results in line at +11% and +2% respectively with stable asset quality. The unemployment rate continued to decline, falling to 12.4%, which is very encouraging for consumption.

Mexico’s GDP was only 1.6% up YoY due to 2 large earthquakes, another headwind on top of NAFTA uncertainties and the upcoming elections.

In Argentina, manufacturing activity rose 2.3%, or in line with expectations. Construction was very strong (+13.4% YoY). Note that S&P raised Argentina’s long term foreign currency rating to B+ (from B).

The overall picture reinforces our optimism on emerging markets where EPS growth should continue to be higher than in developed markets.

  Commodities

Metals were in vogue over the week, led by nickel which gained close to 10% in 2 sessions to test $13,000/t ($5.9/lb). This helped it make up for the ground lost to other metals which had on average risen 24% in USD since the beginning of 2017. The international metal community was in London for the LME Week. Spirits were high, partly because of upbeat global economies but mainly because of the opportunities from the growth of the electric vehicle industry. Electric cars will need a lot of copper for engines and cables as well as nickel, cobalt and lithium which are key components in batteries. There is still a lot of technological change ahead but the next generation battery, the NMC 811, will use more nickel than cobalt. This was already well flagged but the market seems to have suddenly woken up to the fact. We should however, be cautious over how quickly this new market will develop. Tesla, the emblematic electric car brand, has just announced that its target production of 5,000 model 3 cars a week will be put back. And a Republican draft bill wants to abolish the current $7,500 subsidy per electric car.

Brent crude prices stayed above $60 all week. Oil output in Mexico and Venezuela fell by a significant 18% in October due to reduced investment. OPEC is to meet on November 30 and will then decide whether to extend capacity reduction efforts beyond March 2018. Until recently, the trend was towards an extension to the end of 2018 but the recent oil price rally has complicated matters.

The gold ounce was relatively stable over the week. Jerome Powell’s appointment as the next Fed chair should underpin prices as his monetary policy is similar to Janet Yellen’s.

  Corporate debt

 

Credit

Upward momentum emerged after the ECB’s dovish statements, lower concerns over Catalonia and S&P’s decision on the previous Friday to upgrade Italy.

In a moderately active new issues market, Bormioli (pharmaceuticals, B2/B) raised €275m with a 7-year senior bond. Constellium (aluminium products, B3/B-), raised €400m and $500m with a dual tranche 9-year senior bond.

In company news, Nyrstar (metals, B3/B-) saw quarterly sales rise 33% and EBITDA 35%. Third quarter results at Dufry (duty free, Ba2/BB) were in line, with particularly strong performance in Southern Europe and Africa. Maxeda (B2/B), a Dutch company specialising in DIY stores, saw second quarter sales slip due to less favourable weather and fewer Sunday openings. UPC (cable, Ba3/BB-), reported a 1.5% rise in sales but EBITDA slipped 1.1% due to rising costs. Even so, the upbeat trend in central and Eastern Europe continued thanks to growth in B2B services. VodafoneZiggo (Ba3 /BB-), which operates in the same sector, had less favourable results with sales down 5.2% and EBITDA 3.6% lower. However, the group raised its EBITDA target for 2017 to €1.7bn.

Constellium (B3/B) launched a rights issues with 25m new shares at $11 a share. This will help raise $275m and reduce debt with leverage set to fall from 4.8 to 4.1 times. The deal is part of a refinancing package of 2021 and 2023 debt which pays high coupons.

Convertibles 

It was a buoyant week for new convertible issues.

In Europe, Dutch company Fugro, which provides geotechnical services to oil and gas and infrastructure industries, came to market with a €100m 4.5% 7Y subordinated convertible for refinancing purposes.

In Asia, Taiwanese contract electronics manufacturer, Hon Hai Precision industry, issued a €500m zero coupon 5Y convertible to help purchase raw materials.

In Japan, travel agency, H.I.S. Co, issued a JPY 25bn zero coupon 7Y convertible for capex and share buybacks.

Finally, in the US, Chart Industries, which makes equipment used in the production, storage and distribution of LNG and industrial gases, came to market with a $225m 1% 7Y subordinated convertible to repay its existing 2018 convertible. Another deal came from Cypress Semiconductor Corp which issued a $130m 2% 5.25Y convertible to repay its outstanding in-the-money 2020 convertible.

US biotech Neurocrine Biosciences (NBIX) jumped over 19% with quarterly revenue of $60.8m, far in excess of expectations of $27.1m, owing to strong sales from its lead asset Ingrezza. The product which treats tardive dyskinesia, had sales of $46m in the quarter despite the introduction of a rival product by Teva.

Electric car-maker Tesla fell around 7% after posting a $671m loss in the quarter, owing to issues with a battery assembly line at its Gigafactory. This once again delayed the ramp up of its Model 3 production. The company also saw record sales from competitors in October, notably the Chevrolet Bolt.

In Japan, 47% of Topix companies have reported so far, with 62% beating EPS estimates.

In Europe, German chemicals company Evonik posted solid third results with a favourable outlook for the current quarter; sales grew 12.4% YoY and EBITDA was up 10.6%, driven by the Resource Efficiency and Performance Materials entities.

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