Genuine uncertainties according to the latest indicators

Market analysis - 6/1/2019

Trade war uncertainties continued while the latest advanced indicators delivered increasingly contradictory signals.

Conference Board indicators on consumer confidence rebounded in May amid very buoyant labour market conditions. Note, however, that the survey was up to May 16 and therefore did not reflect continuing US-China tensions in the last two weeks. And amid fresh trade war ructions, Friday saw another drop in China's manufacturing PMI to 49.4, or lower than consensus estimates of 49.9 and April’s 50.1. In fact, PMI data have been retreating across the globe. May’s preliminary figures for France were unlikely to raise optimism at the ECB due to persistently tame inflation. Meanwhile, after taking on China, Donald Trump has attacked Mexico. In an attempt to further his wall-building plans to keep migrants out and please his electors, he has now decided on customs tariffs for all Mexican imports. From June 10, a 5% levy will be applied, rising by 5% each month until it hits 25% in October.

With Beijing refusing to bow to US demands and macro-economic indicators turning more mixed, equity markets continued lower while interest rates fell. German Bund yields even flirted with all-time lows. Italian spreads, however, widened due to fresh tension between the ruling coalition and the European Commission.

Our asset allocation choices remain unchanged. We are still underweight risk assets. Caution is the watchword as risks are still asymmetrical.


  European equities

Markets mostly brushed off the European election results and again focused on upheavals in the US-China trade war saga and the addition of Mexico to the US trade dispute tally. Germany’s labour market remained robust with May unemployment at 5% while retail sales rose by an annualised 4%, or much more than the +1.4% expected. French inflation in May came in at 1% or slightly below the +1.1% expected. At the same time, the eurozone’s business climate deteriorated further, returning to an August 2016 low.

Merger discussions between Renault and Fiat-Chrysler dominated sector trading. Doubts have, however, arisen since the initial declaration. Tensions between Renault and Nissan are still running high and, in any case, the talks could founder on the implied valuation of Renault in the new group. Peugeot, which has historically been closer to Fiat, was the main victim of the news and tumbled 5% over the week. Elsewhere, Donald Trump’s threat to impose 5% tariffs on Mexican imports - rising by 5% a month to 25% in October- if the country failed to adopt credible measures against illegal immigration, hit several stocks in the sector like Autoliv and Fiat. Volkswagen also suffered, just head of the listing of its HGV division, Traton.

In other news, KKR is in talks to acquire the German publishing house, Axel Springer a move which might end in its delisting. Management confirmed that discussions were proceeding but that nothing had been decided. Elsewhere, Mediaset bought a 9.6% stake in Prosieben, giving it 9.9% in voting rights. Lagardère is to sell its TV interests to M6 for €215m, another step in its so-far successful strategy to refocus on core businesses like Lagardère Publishing and Lagardère Travel Retail. Vivendi’s relative performance was strong: the stock gained 2% over the week as the index lost the same amount after Vincent Bolloré said he was in favour of returning the proceeds from the sale of UMG to shareholders.

  US equities

In another sharply down week in the US, the S&P500 and Nasdaq lost 2.36% as of the Thursday close. US-China trade tensions continued to grow. Investors were particularly worried by news that China might use its rare earth threat in the ongoing talks with the US. Rare earths are essential for sectors like technology and semiconductors in particular.

US 10-year Treasury yields eased further, falling 13bp to 2.17%. In less than six months, they have fallen by close to 100bp. Oil prices also continued lower, dropping 5% over the period to take WTI to $56. This followed on from the previous week’s selling on fears of rising inventories and falling growth in global demand.

The equity market correction hit all sectors and occasioned higher intra-sector correlation. News in the retail sector was mixed. Foot Locker plummeted 25% over the week after its first quarter margins fell short of expectations and management cut guidance for the current quarter. But deals in digital payments continued apace. Total Systems Services jumped 20% after being acquired by Global Payments. The sector is a hive of M&A activity as companies seek to consolidate and concentrate resources.

  Japanese equities

Donald Trump’s visit to Japan made little impact on the Japanese stock market as there was no rush into a trade agreement. The TOPIX was relatively stable, only edging 0.60% lower over the week despite lingering concerns over the US-China trade war escalation. Tokyo Electron and Murata Manufacturing rebounded after recently tumbling.

In the domestic demand related sector, retail and convenience stores were weak on mounting concerns over declining profits from higher wage costs. As well as a workforce shortage, the government’s discussions on lifting the minimum wage by five percent triggered worries of a margin squeeze in the sectors. AEON sank 5.66% and Seven & i Holdings shed 2.40%.

The market is now focusing on whether JPY 7 trillion of record dividends, which are going to be paid out to shareholders in June, will be fully reinvested in the equity market given the current investment environment.

  Emerging markets

Emerging markets continued to post mixed signals this week, with more evidence of an economic slowdown in China as industrial profit growth slumped to -3.7% year on year in April from a high of 13.9% in March. This was mainly driven by a drop in industrial production to +5.4% year on year vs. +8.5% in March and partly due to distortions related to the value-added tax (VAT) cut and the anti-smog campaign. Manufacturing PMI also fell to 49.4 (below April’s 50.1) and was the lowest reading since February.

Trade activity worsened with new export orders and imports contracting at a faster rate. In the automobile sector, the Ministry of Finance released the new car purchase tax policy (to be implemented by July 1st), with a new taxable base for purchase tax calculation that should benefit car promotions with steep discounts. The luxury car segment continued to grow at a healthy pace with a 10% volume growth in April (led by BMW) and +24% year to date. Another interesting event in China this week, was the seizure of Baoshang Bank, one smaller Chinese lender that used shadow-financing techniques to conceal its exposure to risky borrowers; this was the first bank seizure since 1998. Although the news was a short term negative, Chinese regulatory intervention will help reduce moral hazard in the longer term.

Indian equity markets continued to rise this week spurred by positive sentiment from the Bharatiya Janata Party (BJP) victory and Narendra Modi’s reelection. Indian equities have outperformed broader emerging markets over the last 3 months and year to date as investors have grown more optimistic about the election outcome and the capacity of the re-elected government to continue its broad agenda of reforms started in 2014. India is also benefiting from its relatively safe-haven position in the mounting US-China conflict.  

In South KoreaVolkswagen AG is making changes to its battery-purchasing plan worth about $56bn over concerns that one of its supply deals, with Samsung SDI Co. Ltd., might unravel. Samsung initially agreed to deliver batteries for just over 20 gigawatt hours, enough to power 200,000 cars with 100 kilowatt hour packs, before different views on production volume and schedule emerged during detailed negotiations. Nevertheless, Samsung SDI remains one of the key suppliers of EV batteries for Volkswagen and the car industry in general.

In Mexico, job data release this week showed a slight rise in unemployment and decelerating formal job creation although the labour market remained robust with unemployment at 3.5%.


Oil prices had bounced off steep falls last week but this week they again fell prey to heavy selling. Since May 16, Brent crude has lost $8 or close to 12% while WTI is down $6 (10%). The chief culprit was mounting trade tension between the US and more or less the rest of the world. Mexico is the latest country to come under attack from Washington. It could all end up having a disastrous impact on global growth. Already, after only 2 months of rebounds, China’s manufacturing PMI for May was down from 50.1 in April to 49.4. Note that May 31 marks the July contract expiry date which will aggravate the trend.

The fundamental oil market development was a rise in crude inventories in the US, China and Asia OECD. This might seem surprising as the futures market is in backwardation which is not generally a reason to build stocks. In fact, this time higher inventories were the result of precautionary measures as Venezuelan and Iranian exports kept on falling. Tanker movements suggest Iran is exporting 450,000-600,000 b/d, down from 1.5 million in February/March.

Meanwhile, China has brandished the rare earth threat in the ongoing trade war, a group of 17 elements which are vital for many industries and advanced technology in particular. They are not exactly rare but are geographically well spread out and low grade in quality which makes it uneconomic to harness them. China currently represents 80% of global production so clearly could prove a nuisance.

  Corporate debt



It was another risk-off week as Donald Trump said he was going to impose import duties on Mexico, the European Commission threatened Rome with a €3bn fine for letting the budget run out of control and China’s manufacturing PMI for May slipped from 50.1 to 49.4. US and German 10-year yields fell sharply to a low of 2.15% and minus 0.20%. The Xover fell 19bp to 314 and the Main by 5bp to 72.

Idiosyncratic risk also persisted, worsening yield dispersion.

S&P downgraded Casino from BB- to B with a negative outlook following the decision by Rallye and its holding companies to seek creditor protection. The ratings agency said it was well aware that Casino itself was not included but cited questions arising from the procedure, notably risks for Casino’s creditors from discussions at the Rallye level.

CMA CGM (B1/B+) reported disappointing first quarter figures compared to Maersk and Hapag-Lloyd and is to take additional action to cut costs. Its bonds lost between 7 and 10 points over the period.

First quarter results at Wind Tre (B1/BB-) were buoyed by non-recurrent items but underlying performance remained weak. The group also said shareholder CK Hutchison had bought €1.1bn worth of its bonds since the beginning of 2019.

Spain’s Aldesa (B3/B-) reported disappointing first quarter numbers due to delays in some Mexican projects. Sales fell 12.2% compared to the same period in 2018 and its 2021 bond plunged by 20bp to 55.


The primary market saw two new deals in the US. Solar panel system producer Enphase Energy raised $120m with a five-year maturity at 1% and a premium between 25% and 30%. The proceeds will be used to repay existing convertible bonds and general corporate purposes. MFA Financials (REIT) raised $200m over 5 years at 6.25% to invest in residential mortgage related assets and general corporate purposes.

Trading was light this week due to numerous holidays. Even so, fresh trade tensions created volatility and the index finished in the red as major equity indices retreated.

Palo Alto (network security solutions) lost close to 5% in Thursday’s after market after reporting an earnings beat in its third quarter but disappointing guidance.



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