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A whiff of optimism lifts markets

Market analysis - 9/9/2019

Equity markets finally rebounded on reduced tensions in Hong Kong, mounting obstacles in Boris Johnson’s way towards a no-deal Brexit and news that US-China talks were to resume.

Economic data remained mixed between upbeat consumer services and fears of an industrial slowdown.

However, investors are pinning their hopes on central banks and budget policies.

Uncertainty over the economic cycle has not gone away but a sudden downward lurch is not expected.

Pending more detailed announcements, we are remaining on the defensive. 

  European equities

Risk appetite revived, taking equity markets close to their 2019 highs. The mood was soured by US manufacturing ISM coming in below 50 but news that China and the US were to resume talks, the reduced probability of a disorderly Brexit and solid US jobs data all pushed worries onto the back burner. Expectations that the ECB would announce measures to support the economy on September 12 also lifted sentiment. Bond yields rose significantly and sterling rallied to a 5-year high against the US dollar. Sector dispersion was particularly high last Thursday, a break with the trend in recent months. The semiconductor sector advanced by 5% while staples ended the day lower. Autos and banks also led gains.

Company reports provided support. Safran (aerospace) reported robust results and raised its guidance on profits and free cash flow- a reassuring move amid the fall-out from the 737 MAX affair- and Dassault Aviation said its business jet order book had risen substantially. In contrast, Iliad lost ground partly on mixed new subscriber figures in France, but essentially due to roaming costs which weighed on its accounts in Italy.

In company transformation news, there were rumours that the lift sector was about to consolidate. Kone was reportedly looking for industrial partners to help it buy ThyssenKrupp’s lifts business and Otis might be interested in Schindler. Continental was reportedly about to sell its transmission business. 

  US equities

The S&P 500 gained 2.2% and the Nasdaq 1.7% as of last Thursday's close, one of the best weekly showings this year. Sentiment was buoyed by several macroeconomic and political factors:  

1) The economy remained strong with Non-Manufacturing ISM at 56.4, a 3-month high, while ADP reported that 190,000 jobs had been created in August, or more than the 150,000 expected.

2) China and the US seemed to be moving towards fresh talks in October.

3) An end to civil strife in Hong Kong came one step nearer after the authorities said the Extradition Bill, which had triggered the protests, was about to be withdrawn.

US 10-year Treasury yields rebounded by 15bp to 1.6% from last week’s 5-year low of 1.45%. Indices were overall higher but sector and factor dispersion was once again strong. Cyclicals outperformed with tech up 2.6%, industrials 1.9% better, energy up 2.1% and financials 1.9% higher while defensive saw profit taking. Consumer staples only gained 0.5% and utilities ended the period 0.6% higher. Both sectors were hit by rising interest rates and the fact that they had been largely overbought in recent weeks. Semiconductor stocks rose as trade war fears receded and thanks to a rebound in DRAM memory prices.

  Japanese equities

Receding concerns over political confusion in Hong Kong and the US-China conflicts took Japan’s Nikkei 225 index back to the 21,000. The TOPIX rose 1.42% for the week. Economy-sensitive sectors like Marine Transportation, Nonferrous Metal and Precision Instruments gained ground. Sumitomo Metal & Mining jumped 8.98% and high-tech names like Hitachi, SONY, Murata Manufacturing and Tokyo Electron led gains. 

There were also brighter indications among external demand-related companies. With demand for logic-based semiconductors strong, Intel in the US and Taiwan’s TSMC have started to invest more in semiconductor production.

In addition, earnings momentum in the information software and IT service industries remained favorable due to robust demand from companies looking to improve productivity.    

On the domestic front, people are getting ready for consumption tax to rise from 8% to 10% in October. While there is concern over potentially negative impacts, the Abe administration has carefully prepared various measures to avoid an economic downturn and underpin activity. These include (a) reduced tax on food and newspapers, (b) cash-back points for consumers who use cashless payment methods and (c) public infrastructure investment. 

  Emerging markets

Emerging markets (MSCI Emerging Markets) rose 1.9% week to date (as at Thursday’s close) as global equity markets rebounded from their August lows on the announcement of a resumption in trade talks between the US and China in October.

In China, the economy continued to exhibit some signs of a slowdown with Chinese PMI falling to 49.5 in August from 49.7 in July. Over the previous weekend, the State Council of China announced a new policy package to underpin Chinese consumption and the broader economy, including investing in infrastructure projects and regional developments, while maintaining prudent monetary policy with “reasonably” ample liquidity. Hong Kong officials formally withdrew the Extradition Bill and the Chinese government softened its tone towards the City’s protestors. On the corporate side, Alibaba announced the acquisition of oKaola from NetEase for US$2bn said it would invest $700m in NetEase Cloud Music.

India’s second quarter GDP grew +5.0% YoY (vs. estimates of +5.7%), its slowest pace in 6 years, after +5.8% in the first quarter. Auto sales were down for a ninth consecutive month with the government considering several measures to support the sector. India also announced the merger of its state-run banks to form fewer but stronger lenders, as Prime Minister Narendra Modi looked to boost lending and revive economic growth from a five-year low. Four new lenders will emerge from this operation and will hold assets worth RS 55.8 trillion ($781bn), or about 56% of the Indian banking industry. The government also plans to inject a combined RS 552.5bn into these entities.

In Argentina, President Mauricio Macri imposed capital controls in a blunt policy reversal aimed at containing the country's escalating financial crisis. In a rare Sunday intervention, the central bank ordered exporters to repatriate foreign currency from the sale of goods within five days, as well as other measures. Corporations will require the authorization of the bank to buy US dollars in the foreign-exchange market, except in cases of international trade. Individual Argentinians, meanwhile, will be limited to dollar purchases of no more than $10,000 a month.

Brazil’s Special Senate Commission approved the Social Security reform text after rejecting amendments. The Senate approved Brazil’s Transfer of Rights Bill that allows Petrobras to receive compensation that has been estimated at $10bn); the next step will be the Lower house. Petrobras printed very strong production figures in August with a total 3mmboe (with potential upside guidance for 2019)

In Mexico, Walmex, beat expectations with a strong 6.1% increase in same store sales in August. 

  Corporate debt

 

Credit

The market started the week on the back foot but rebounded on easing tension in Hong Kong, hopes for a resumption in US-China talks, optimism over a Brexit agreement and a raft of better-than-expected US indicators. The Xover tightened by around 8bp between Monday and Thursday and the Main was flat. 

Casino's bonds rose after Vesa Equity Investment, an investment vehicle belonging to Daniel Kretinsky and Patrick Tkáč, took a 4.63% stake. Vesa already owns stakes in European retail interests. Elsewhere, Iliad reported a 1.5% rise in French sales, a sign of a gradual recovery, but EBITDA continued to fall in Italy. The competition watchdog approved Cellnex’s purchase of 5,700 of Iliad’s mobile sites in France following its acquisition of the Iliad 7 subsidiary. The deal will make a big contribution to Iliad’s deleveraging drive. Loxam's second-quarter results were in line. Sales rose 5.4% and EBITDA was up 3% YoY thanks to continuing strength in European construction. 

China Merchants Port was reportedly in talks with CMA CGM to buy some of its stakes in port terminals. The disposals would help CMA CGM repay the loan taken out to acquire Ceva Logistics. ThyssenKrupp was said to be looking for buyers for its lift division as it prepares for an IPO. Rumours resurfaced of Selecta going for an IPO, possibly in September before the official Brexit deadline. 

RBS surprised markets with a higher-than-expected provision of between £600-900m in the third quarter for misselling of payment protection insurance (PPI). The cut-off date for claims set by the Financial Conduct Authority was August 31 which is why there was a rise in submissions. RBS has the robust financial ratios to absorb this provision which will shave around 50bp off its CET1. 

In a busy week on the primary market, Smurfit Kappa raised €750m over 8 years at 1.5%. Eurofins raised €300m with a hybrid bond at 2.875% to repay a €300m hybrid which is callable in January 2020. Rabobank and ING sold AT1 debt at 3.25% and 5.75%, raising €1.25bn and $1.5bn. Raiffeisen’s sale of a new Tier 2 bond at 1.5% due 2030 went down well and will allow the bank to buy in its 2025 Tier 2 bond before its first call date in 2020. 

Convertibles 

In a very active week on the new issues market, Edenred, the French commercial services company that offers prepaid vouchers for products and services raised €500m with a zero-coupon convertible due 2024. The issue was a success on markets as the company has a sound credit history and is a compelling equity story. Veolia raised €700 with a 2025 maturity, concurrent with the repurchase of its outstanding €700m zero coupon 0% due 2021. GBL is raising €750m with bonds exchangeable into LafargeHolcim. The offer represents approximately 23% of LafargeHolcim shares held by the group and would be used for general corporate purposes. The exchangeable bonds will bear no interest ant will have a maturity of three years.

In Asia, WuXi Apptec, a research and development service provider and contract manufacturer for pharmaceutical companies, issued a $300m convertible bond paying a 1.25% coupon with due 2024 to be mainly used to fund potential mergers and acquisitions. The bonds were actively traded on the secondary market through the week, as investors expect that Wuxi Apptec could be a big beneficiary of China’s push into advanced pharmaceuticals and rising spending on pharmaceutical research, capturing capital flows into the sector.

In the US, there were several new issues, mainly in the healthcare and technology sectors. Insulet, a medical device company that develops insulin infusion systems, raised $700m with a 2026 maturity at 0.375%, mainly to retire existing debt.  Aerie Pharmaceuticals, specialised in the glaucoma and eye diseases, raised $250m with 2024 notes. Invitae, a med-tech information company specialised in genetic diagnostics, raised $300m with 2024 notes.

The technology sector continued to be active in new issuance. OKTA, an application software company specialised in Identity Cloud – cybersecurity, raised $1bn to go on debt refinancing and potential new acquisitions. Zillow, an internet based real estate services firm, raised $1bn with 2 convertible bonds, one maturing in 2024 and the other in 2026.

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