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The stock market plunges: is it a feeling of déjà vu?

Market analysis - 10/4/2019

Apart from a technical lift on the last day of the third quarter, markets retreated as a fresh wave of bad political and economic news arrived.

Both industrial and services ISM data fell much more than consensus expectations. Manufacturing ISM hit a low not seen since 2009 with a sharp drop in new orders. Services ISM, which had been resilient, dipped in September to 52.6 with the employment component falling to 50.4, a five-year low. Europe’s final PMI figures also provided confirmation of softness in industrial sectors exposed to world trade.

Meanwhile, political worries shifted to Europe as the WTO confirmed that European aid to Airbus flouted US interests. The US Department of Commerce then decided to slap new tariffs on European goods, notably planes and some agricultural products. Elsewhere in Europe, Brexit talks influenced markets. Boris Johnson put forward an alternative to the Irish backstop, the issue that is preventing any agreement for the time being. Europe has not yet rejected the plan and sterling bounced but EU comments were nevertheless skeptical about its chances.

Equity markets suffered two sessions of severe falls that wiped out all of September's gains. Interestingly, falls in European bond yields were relatively modest compared to the extent of damage to risky assets. US bond yield falls were more marked with US 10-year Treasuries flirting with August’s lows. Expectations for another cut at the Fed’s next meeting at the end of October also rebounded.

Chinese markets will reopen next week after the celebrations to mark the 70th anniversary of the Popular Republic. Investors will be focused on market moves and any US-China statements ahead of their meeting on 10 October.

As the economy slows further, we have continued to buy US and German sovereign debt. We remain cautious on risky assets. 

  European equities

European equities tumbled by close to 3% on 02 October, the biggest drop in the MSCI Europe index since December 2018. The fall was triggered by poor macroeconomic indicators, notably manufacturing ISM in the US, but the rout stabilised at the end of the week.

There was little earnings news but Commerzbank warned that 2019 revenues will not rise. In contrast, H&M said sales and margins had both rebounded.

Switzerland’s Sunrise (telecoms) reduced the amount it needed to raise from an increase of capital to acquire Liberty’s Swiss businesses. This was an attempt to convince reluctant shareholders, including Freenet which owns the largest stake. The acquisition will be put to the vote at a shareholders’ meeting.

In France, Suez and Thales held their investor days. Suez’s strategic plan seeks to boost value creation with its stakeholders and will focus on more selective growth. This should mean less capital intensity, an operational efficiency programme and some shuffling in its business portfolio to increase return on capital employed and increase dividend payouts. Thales detailed the technological challenges from its recent acquisitions of Gemalto. The deal should generate revenue synergies of €300-500m. However, the group's financial objectives for 2019-23 sounded a little cautious with no growth in its transport division and an increase in R&D spending that will only be partially offset by further efforts to cut costs. Former Saint-Gobain subsidiary Verallia, the world’s N°3 in glass packaging which now belongs to the Apollo fund and BPI France, raised close to €1bn in the largest French IPO since ALD in 2017.

The week also saw top management changes. After appointing Dominique Leroy, ex-Proximus, as CEO, KPN changed tack and promoted its COO. BP also replaced its CEO as did Tesco, which announced the surprising departure of David Lewis. Alison Cooper, after 9 years as CEO of Imperial Brands, Alison Cooper, will leave when the tobacco giant finds a replacement. 

  US equities

The S&P 500 and Nasdaq fell 2.3% and 1.7%, starting the month firmly in the red on mounting fears of a US slowdown. The risk-off movement accelerated as macroeconomic data missed expectations. Manufacturing ISM dropped to 47.8, a low not seen since June 2009, and non-manufacturing came in a 52.6, or below the 55 expected. Yields on 10-year US Treasuries fell 15bp to 1.52%.

Energy tumbled 4.4% as Brent crude lost 6.5% to $58. Industrials shed 3.9% and financials 3.6%. Defensives fared less badly. In company news, online brokers bit the dust. E-trade plunged 15% and Charles Schwab 14% after some industry players chose to cut private client commissions to zero.  

  Japanese equities

Ahead of the earnings season, the TOPIX came under pressure and ended the period 2.21% lower.

The only rebound was on 01 October thanks to a better than expected Tankan Survey for September and the White House’s denial that the Trump administration was considering investment restrictions on Chinese companies (including a de-listing of ADRs). But for the rest of the week, the market bled lower. Dragged down by international news, the TOPIX hit the hardest on 03 October when it tumbled 1.72%. Risk appetite was dented after September’s manufacturing ISM in the US came in below 50 for the second time in a row and the WTO allowed Washington to impose tariffs on European goods. 

  Emerging markets

Emerging markets were down 0.9% this week as of 03 October. Last week ended on a bad note, with some market speculation that Washington was considering putting limits on US portfolio flows into China, but China’s latest macro indicators were more encouraging; both the official and Caixin manufacturing PMIs rose more than expected compared to the previous month. Property sales also improved in September, rising 33% YoY, an acceleration from the 21% increase seen in August. Among the 493 companies providing guidance on third quarter earnings, 216 reported a positive profit alert. Apple supply chain companies received a boost this week, as the iPhone 11 launch appeared stronger than expected. Apple raised output for this year’s smartphone model range by as much as 10% according to Nikkei.

In India, news flow on the NBFC was again worrisome, with Indiabulls Housing Financial down 34% on 30 September on fraud allegations. This occurred after the RBI put Lakshmi Vilas Bank, which is seeking to merge with Indiabulls, on a prompt corrective action plan, potentially jeopardising the merger. Auto sales were down again for September but showed sequential improvement. Maruti Suzuki’s sales, for example, were up 17% MoM. The RBI also cut its key rate by 25bp for the fifth time this year, while maintaining its dovish stance.

Brazil’s Senate in the first vote voted 56 to 19 to approve the base text for pension reform. As it stands, the reform will save R$750bn over ten years. It was a positive move for the Brazilian economy, but the total amount to be saved was lower than the approximately R$1bn first mooted. This week’s macro indicators showed some improvement, with manufacturing PMI at 53.4 in September continuing to improve from its low point of 49.9 in July. Industrial production also improved on a monthly basis to 0.8% MoM up from 0.2%.

Political uncertainty rose in Peru after President Vizcarra declared the constitutional dissolution of Congress. 

  Corporate debt

 

Credit

It was a mixed week on credit markets as Brexit issues and disappointing US indicators rekindled concerns on global growth. The Xover widened by 19bp and the Main by 3bp.

Fives came under attack after Moody’s downgraded the group from B2 to B3 with its negative outlook maintained. The ratings agency cited excessive leverage (9.8 times at end June 2019). HEMA's bonds also fell sharply after disappointing second quarter results. Sales rose 3.5% but adjusted EBITDA tumbled 25% and leverage increased to 7.5 times, up from 6.9 only 3 months ago. The group was not helped by an Italian enquiry into the chairman of Ramphatos Investments, one of its shareholders. Elsewhere, there could be progress in the opioid scandal involving Teva. The group is looking to participate in the bankruptcy of Purdue Pharma via a dedicated trust fund. WeWork officially postponed its IPO and Fitch followed S&P's lead and also cut its rating on the group. A recovery plan is expected to be announced soon. 

According to press reports, United Group and Providence Equity Partners have made an unconditional offer for Vivavom, a Bulgarian telecoms operator. Vivavom is currently owned by Spas Roussev and the London affiliate of Russian bank VTB. Banco Sabadell is mulling the sale of its asset management affiliate. The entity makes only a modest contribution to group revenues and its sale would have a limited impact on profitability. Any disposal would be motivated by strategic considerations.

On the new issues market, Wind Hellas raised €525m over 5 years at 4.25%. Hannover Re sold a Tier 2 bond with a 20-year maturity and 10-year call at 1.125%. AIB raised €500m at 5.25% with an AT1 bond which was six times oversubscribed.  

Convertibles 

The new issues market was somewhat becalmed ahead of the next earnings season. France’s Neoen, a solar, wind and biomass energy company, raised €200m over 5 years with a 35% conversion premium. Elsewhere, Sika (specialty chemicals for construction and industry) raised its guidance on 2023 margins from 14-16% to 15-18%.

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