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Markets kick off April on the front foot

Market analysis - 4/15/2019

Risk assets made further gains over the week and many have now recuperated all the losses racked up in the fourth quarter of 2018.

Sovereign bond yields also rose with the yield on the 10 years Bund just moving back into positive territory. Economic data, and PMI in particular, boosted markets. China’s manufacturing PMI rose in March, reflecting the expected lift to the economy from Beijing’s stimulus measures. Europe’s data for March were more mixed, with somewhat negative surprises for manufacturing, especially in Germany, and rather positive indications for services, notably in Spain and Italy. In the US, manufacturing ISM also enjoyed a small rebound in March whereas non-manufacturing fell while remaining at high levels. This is consistent with a moderate economic slowdown. 

Markets cheered progress in the US-China trade talks. Beijing has agreed to increase US imports by 2025. After a meeting between Donald Trump and Liu He, China’s vice prime minister, hopes increased for an official deal by June. In the UK, Theresa May shifted her stance and agreed to start Brexit talks with Labour leader Jeremy Corbyn in an attempt to break the deadlock. She has now asked the EU to postpone the actual exit deadline to June 30. 

The first-quarter earnings season kicks off in the US in the week of April 8 and will be closely watched by investors. YoY earnings are expected to contract but company guidance will be crucial in confirming whether today's optimism is warranted or not. 

  European equities

Markets made significant gains over the week due to hopes for a successful conclusion to the US-China trade talks and more positive macro indicators. China’s Caixin PMI index for March rose sharply, the eurozone’s services PMI improved and the zone’s unemployment figures hit a 10-year low. Bond yields edged higher on this news and performance was driven by pro-cyclical sectors like banks, commodities and autos. Michelin reiterated its 2020 objectives even if the environment is expected to remain choppy, especially in the first half of 2019. The DAX outperformed, brushing off poor industrial orders which fell 4% in February when they were seen unchanged. Technology, and semiconductors in particular, rose after TSMC said it expected to see smartphone chip orders recover. Unsurprisingly, traditionally defensive sectors underperformed.

In company transformation news, Commerzbank gained after an FT article said UniCredit might be interested in submitting a counterbid to Deutsche Bank’s offer. Saint-Gobain rose after news of a plan to sell 60% of Pont à Mousson (pipes) to a Chinese company. ThyssenKrupp gained after its CEO said he was relatively confident of securing the green light from EU Anti-Trust authorities for asset sales it plans to make with its partner Tata in Belgium, Spain and the UK. Publicis, however, suffered heavy selling after its proposed €4.5bn acquisition of Epsilon in the US triggered fears of an increase of capital. 

  US equities

US markets rose sharply on reassuring economic data. The S&P500 gained 2.2% and the Nasdaq 3%. Markets started the week on the front foot after China’s manufacturing PMI came in at 50.5, or better than expected. Cyclicals sectors were in demand with basic materials up 5%, financials 3.6% and industrials 3.4%. Defensives underperformed with non-cyclical consumption down 0.65% and utilities 0.5% lower. Oil prices rose on the upbeat macro data and WTI gained 3% to trade above $62. Even so, the energy sector only rose by a modest 0.4% over the period.

In company news, Walgreen Boots Alliance led losers in the S&P500 by plummeting 14% after cutting its annual guidance. In contrast, DOW, the Dow Dupont spin-off, surged 17.5% on its first day of trading. Banks will kick off the quarterly earnings season in the US in the week of April 8. Analysts are expecting S&P500 companies to report an average 2.5% decline in earnings. 

  Japanese equities

On 1 April, Japan started its new fiscal year by celebrating a decision to call the next Emperor “REIWA”, or beautiful harmony. On the market, a fall in the DI index of the BoJ’s Tankan Survey (Short-term Economic Survey of Enterprises), failed to stop the TOPIX gaining 1.78% on better Chinese economic data as well as higher US stock prices.

Hopes for an economic recovery in China and a bottoming-out in inventory adjustments helped economy sensitive stocks like China-related names rise. Sumitomo Metal & Mining climbed 10.12% and FANUC and KOMATSU added 9.83% and 9.32% respectively. Semiconductor-related Shin-Etsu Chemical and Tokyo Electron were also strong. Eisai rebounded after last week’s plunge.

On the other hand, domestic demand-related sectors such as Real Estate, Land Transportation, Electric Power & Gas lost ground.

  Emerging markets

Emerging markets rebounded by 2.6% due to positive news flow on the trade deal talks and better economic figures in China. The 9th round of trade negotiations concluded with some progress, but with no final deal yet. President Trump suggested that a deal framework was still about four weeks away, with another two weeks needed to finalise it in official documents.

In China, March official PMI rebounded to 50.5 from 49.2 in February, the biggest increase since 2012, and above consensus of 49.6. The stronger-than-seasonal rebound pointed to a recovery in the second quarter. Heavy truck sales jumped 85% MoM in March and property transactions in tier-one cities surged 50% MoM. Earlier-than-expected cement price hikes entering the peak season and the timely launch of certain infrastructure projects boosted investor sentiment. The total balance of A share margin trading continued to climb, approaching RMB 1 trillion. SAIC saw revenues rise 3.6% in 2018 and its first decline in profits in 10 years due to macro headwinds. Sino Biopharma reported a 41% increase in top line growth with a 37% rise in profits. Management is expecting better visibility in the second-round national tender policy this summer. Kweichow Moutai delivered consistently solid results for the first quarter with revenues up 20% revenue and earnings 30% higher.

Just one week before the general election in India starts on April 11, the Indian central bank cut its policy rates by 25bp as expected due to macro weakness. Manufacturing PMI retreated to a 6-month low in March from a 14-month high in February. The retreat was driven by a deterioration in both domestic and external demand indicators, particularly new orders.

In Korea, exports fell for a 4th straight month in March with shipments down 8.2% YoY. Samsung Electronics announced its first quarter preliminary figures with earnings and sales both below consensus numbers even after the downward revision following the profit warning on soft sales in its Display and Memory divisions. And yet the stock price stayed put.

In Brazil, attention focused on Economy Minister Paulo Guedes’ presentation at the Justice Committee (CCJ) and President Bolsonaro’s decision to meet all party leaders, another important steps towards pension reform approval. We expect this execution/negotiation period to remain volatile in Brazil. In company news, Linx bought Hiper, and said it was considering a listing of its shares in the US. Stone reported strong preliminary figures (net adds of 39,000 and total payment volume up 60%) and a secondary offering.

In Mexico, airport operator OMA’s total traffic increased 3.5% in March, in line with February’s growth, but much lower than 9.7% posted last year. Walmex reported better than expected same store sales.

Moody’s published its rating review report for South Africa, leaving the rating outlook unchanged (versus consensus expectations that SA would lose its investment grade status).

Turkish equities and the currency rallied strongly, especially banks. The European Bank for Reconstruction and Development (EBRD) and the IFC said they were ready to support the banking sector.

We remain upbeat on emerging markets. 

  Commodities

Oil prices remained buoyant with Brent crude getting nearer to closing at $70 after briefly moving above that level intraday. Firm prices are hardly surprising given recent production figures, persistent constraints on Iranian and Venezuelan output and fresh tension in Libya. Bloomberg estimates show OPEC production down 295,000 b/d in March to 30.38 million. Saudi Arabian production hit a low of 9.82 million b/d, a low not seen since February 2015 and a 1.3 million b/d fall since last November. The country is thus leading efforts among producer countries to cut excess supply. The EIA said US production fall by 90,000 b/d in January to 11.87 million, although this followed record production in December, a figure which was revised higher. Of note is Saudi Arabia’s new strategy of rechannelling oil from the US to China, thereby reducing supply in a zone which is the most sensitive because of weekly inventories while gaining market share by selling to a country where demand is strongest. And this week’s surprise improvement in China’s manufacturing PMI to 50.5 provided an additional boost. Not only did the index move back above the watershed 50 mark but it was the biggest monthly increase since March 2012.

Metal prices also gained from this renewed optimism and copper, nickel and zinc rose by between 1% and 2%. The star performer was iron ore which jumped by close to 9% over the week to $93/t for 62% Fe content. Since the beginning of January, prices have risen on reduced output from Vale in Brazil but also because of tropical storms hitting production in Western Australia. 

  Corporate debt

 

Credit

Credit markets made further advances on progress in the US-China trade talks. The Xover and the Main indices tightened by 13 and 3bp to 256 and 61bp. High-beta and long-duration segments outperformed as investors looked for yield.

A particularly active new issues market saw yields systematically tighten by 25-50bp on syndication indications due to strong investor appetite. In high yield, equipment leaser Loxam (BB-) raised €500m in two tranches to refinance part of its bond debt and extend maturities. The senior (BB-) tranche was for 7 years and €300m at 2.875% and the subordinated tranche (B) for 8 years and €265m at 4.5%. SGL Carbon (B) raised €250m over 5 years at 4.625%. Elis (BB+) raised €400m over 5 years at 1.75%. Adler Real Estate (BB) raised €400m with a short-dated 3-year bond at 1.5%.

France’s retail sector came under pressure this week after Casino was downgraded by 2 notches to Ba3 negative by Moody’s. The two main reasons for the move were: (1) insufficient cash flow from its French businesses, reducing the group's capacity to pay down its gross debt despite asset disposals and (2) poor liquidity at Rallye (Casino’s biggest shareholder with 51.4%) and a high loan-to-value ratio (LTV), a source of concern for Casino’s future financial plans. Casino’s bonds lost between 1 and 3 points over the period. Elsewhere, the Aldesa 7.25% 2021 soared 16 points on encouraging 2018 figures. The world's largest sugar producer, Suedzucker (BBB-), had its outlook downgraded to negative. This is one move nearer to fallen angel status. Its hybrid bond was also downgraded from B+ to CC as its coupon will not be paid for at least a year, following non-compliance with the cash flow event clause in the bond’s issue document. 

Convertibles 

There were two new issues, both of them in China. This is part of the growing trend for Asian companies to issue convertibles when looking for funding. Asian tech companies are enjoying strong growth, especially in China, and need to tap markets. Increasingly, they are turning to IPOs or convertibles to do so.

A good example is Bilibili, a video sharing platform popular with the Z generation which offers live videos and games. The company raised $192m with an ADS and $300m initially with a 7-year convertible at 1.375% and an issue premium of 37.5%. Due to strong demand, the issue was raised to $430m. The proceeds will go on enriching content, possible acquisitions, technology investments and general corporate purposes.

Baozun offers a comprehensive e-commerce solution to gain access to the Chinese market, assisting brands throughout the chain: internet site, delivery, digital marketing and AI models designed to improve average basket size. Its issue is ongoing and is currently for $225m over 5 years at a yield between 1.375% and 1.875% and a 30-35% premium. The proceeds are earmarked for general corporate purposes, debt repayments and any acquisitions.

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