A choppy week

Market analysis - 8/17/2018

The traditionally quiet week around August 15th actually turned out to be one of the choppiest this summer. The Turkish saga obviously continued to weigh on sentiment but trade war concerns and emerging country currency falls against the US dollar also played a part. The question is with what impact on global growth. So far, data is still upbeat, and nothing suggest a slowdown is in the offing.

Equity markets are holding up well and corporate debt markets have not yet suffered. The most marked development has been the safe haven status of government debt in countries which are deemed the most robust, particularly in the Eurozone.

The question now is whether central banks will be influenced by liquidity risk in emerging countries. It appears the Fed will not be, but neither the ECB nor the Bank of Japan seem in a hurry to tighten. Looking beyond short term volatility, this looks like a relatively good time to invest in equities, especially in the US and the Eurozone. The possibility of US-China trade talks in the near future should help restore investor confidence. 

  European equities

During what should have been one of the quietest weeks of the year, markets were confronted with several negative developments.

The Turkish lira crisis, the first victim of the Fed’s monetary tightening moves, was accentuated by US trade sanctions and continued to pile pressure on European banks. In a flight to quality, peripheral country spreads tightened, led by Italy on speculation over the contents of its budget and ahead of a likely conflict with Brussels by September.

In stock news, Bayer and Atlantia came under severe fire. After a US court ordered Monsanto to pay our €250m in damages to a gardener suffering from an alleged glyphosate-linked cancer, shares in the company’s new owner Bayer plunged by close to 20%. If the verdict becomes case law, it could apply to numerous lawsuits in the US.

As for Atlantia, the collapse of the motor way bridge it manages in Genoa led the government to consider cancelling all or parts of the group’s concessions as well as ordering it to pay damages and rebuild the bridge.

In France, after a long governance crisis at Air-France KLM, the board appointed Benjamin Smith (ex-Air Canada) as CEO. And ahead of the government’s sale of its ADP stake, three groups have emerged as potential buyers, Global Infrastructure Partners (GIP), Vinci and the Australian fund IFM

  US equities

The crisis in Turkey helped US defensive stocks rally, somewhat wiping out their underperformance since the beginning of 2018. Telecoms, utilities and defensive consumer gained more than 2% in a falling market. Energy, meanwhile, tanked, falling into negative territory year to date, no doubt because of the stronger US dollar and investor caution over cyclicals. 

The most recent tech stock reports have been excellent for hardware companies like Cisco and NetApp but a little disappointing for semi-conductor plays like Nvidia and Applied Materials, both of whom said order books had slowed. Walmart shone, with sales up 3% and more than 40% growth in e-commerce. The distribution giant is now a serious e-commerce rival to Amazon and investors sent its stock more than 10% higher over the week. 

The quarterly earnings season ended with 82% of companies beating estimates, a new record. Sales were up 9% on average and earnings more than 23% higher, thanks in part to US tax reform. 

  Japanese equities

Japanese equities, along with European and emerging markets, tumbled on concerns over the Turkey crisis. Although Japanese bank exposure and exports to Turkey are rather limited compared to European countries, the stock market was hit by deteriorating market sentiment as well as renewed worries over a slowdown in Chinese economy and further falls in the renminbi. The TOPIX lost 1.92% over the week. 

Economic sensitive sectors such as Oil & Coal Products (-5.40%), Nonferrous Metals (-4.77%), Metal Products (-4.54%) and Iron & Steel (-3.83%) lost ground. JXTG Holdings shed 6.68% and Sumitomo Metal & Mining lost 5.66%. In addition, tourism names such as Shiseido (-7.94%) were hit by profit-taking on reports of slower growth in visitors to Japan in July. However, we believe the slowdown was only temporary as July had terrible weather. 

On the other hand, domestic demand sectors such as Electric Power & Gas (+1.58%), Services (+0.54%) and Insurance (-0.04%) were relatively firm. Recruit Holding soared 8.40% and SOMPO Holdings gained 4.83%. 

  Emerging markets

Beijing announced a new rule for the education sector stipulating that a private education group could not control non-profit private schools via M&As, franchising, or contractual agreements. This new rule aims to make non-profit private schools and for-profit private schools genuinely separate entities. The rule is not applicable for after-school tutoring players such as TAL and EDU. China also announced it was freezing game approvals due to restructuring of the agency responsible for game content. Elsewhere, the healthcare sector was hit by the news that 4 key officials, and nearly 35 sub officials had been asked to step down, including the former head of the CFDA Bi Jingquan who was considered a champion of reform in the sector.  In results, Tencent’s second quarter came in below consensus on lower mobile game revenues. The miss was mainly due to the suspension of game monetisation license distribution. Since April, no new online licenses have been approved. Moreover, advertising growth was similarly weak (39% versus 55% in the first quarter). Sunny Optical’s second-quarter earnings missed consensus by 22% due to foreign currency losses and lower than expected gross margins on the camera module business. JD reported results in line, with second quarter revenue growth of 31.2% and third quarter guidance of 25-30%, or better than feared but margins will be lower.

On the macro side, July’s industrial production, retail sales and FAI came in below expectations. Elsewhere, China’s online retail sales (excluding sales of virtual goods and services) were up 27% YoY vs. June’s 30%. Sequentially, online retail sales declined 20% MoM in July as there were more special offers in June.

Indonesia surprised the market and increased interest rates by 25bp. In Mexico, Walmex announced the launch of gas stations in 4 States. We view this as a positive move for the business model. Argentina hiked interest rates by 500bp and increased reserve requirements to restrain currency depreciation and inflation. Turkey was the centre of attention as the currency has depreciated by almost 10% recently due to escalating tensions with the US and the country’s external imbalance. Turkey is also a large importer of oil. Other emerging market countries with large external imbalances like South Africa and Indonesia also saw their currencies depreciate. We remain cautious over the short term due to escalating trade war concerns and US dollar strength. 


Amid an uncertain geopolitical environment, oil prices ended the week lower with Brent crude down to a little over $70, a 3-month low, and WTI trading above $65. The drop was due to the higher US dollar in the aftermath of US sanctions against Turkey as well as the persistent trade war climate. This could have direct consequences for fundamentals (increased buying of Iranian rather than US crude by China) and an indirect impact on global growth which would lead to lower demand for oil. The fall was amplified by DOE weekly inventory data showing that US crude stocks had risen sharply in the preceding week, partly because of a 9 million b/d increase in imports, or more than the usual 8 million. But we should put these figures into perspective as week-on-week data are highly volatile. According to Bloomberg, Libyan output has gone above 1 million b/d (664,000 b/d according to OPEC’s July report) due to the El Shara field restarting operations; it is the country's biggest producer (more than 300,000 b/d). The IEA, OPEC and the EIA all released their monthly reports. The IEA now sees demand in 2018 rising by 1.4 million b/d, compared to 1.6 million for the other agencies, but it has revised up growth demand for 2019 to 1.5 million b/d, or in line with OPEC but less than the EIA. All three expect insufficient supply in 2018 with a more contrasted picture for 2019 even if supply should remain under pressure.

This week also saw a sharp fall in industrial and precious metal prices on US dollar strength and trade tensions. Copper fell by close to 5%, even dipping below the $5,800/tonne mark on August 15, a low not seen since July 2017! Demand for copper, nevertheless, remains strong with Chinese imports up 16% in July and by the same margin since the beginning of 2018. Talks between BHP and employee representatives are still ongoing, but it would appear that the group is on the verge of making a new wage offer to avoid a strike at the Escondida mine, the world’s largest.

Gold was naturally hit by the stronger US dollar and fell by close to 3% over the week, moving below the $1,200 mark that had constituted a floor since January 2017. For the time being, gold seems to have lost its safe haven status. 

  Corporate debt



In a nervous market, the trend was on the downside with the Xover widening by as much as 7bp on Wednesday. Worries over Turkey and the lira weighed on sentiment, but investors took heart at news that Qatar was to make investments in the country. Financials were particularly badly hit. Some European banks have exposure to Turkey (BBVA via Garanti, UniCredit via Yapi Kredi, BNP via TEB and ING via ING Bank Turkey) while Italy's banks came under fresh pressure, this time due to concerns over bonds issued by Atlantia (Baa2/BBB+) which plunged along with the group's shares. Its motorway concession runs up to 2028 but could be cancelled following the collapse of the Genoa road bridge managed by its subsidiary Autostrade. 

In results news, Nordex (B3/B) and Senvion (B2/B+) both reported figures in line. Their second quarter sales plunged by 36.2% and 51.9% respectively but both saw order books expand and both confirmed guidance.  Senvion also unveiled a €62.5m increase of capital to help it fund its move into new markets. Packaging supplier Klöckner Pentaplast’s bonds gained around 6 points on satisfactory results. EBITDA fell 11% over the year due to rising commodity prices but sales were up 4% ex currency effects. 

Industrial baker Aryzta is to launch a €800m increase of capital with the proceeds going primarily on paying down debt and helping to improve its financial flexibility. 


Markets were volatile this week with the VSTOXX rising to 18.5% from 14% just a week ago. Negative newsflow weighed on the market: economic turmoil in Turkey after Donald Trump announced a doubling in customs duties on steel and aluminum, weakness in China on disappointing macroeconomic data, tech sector falls after Tencent missed expectations, softness in the internet sector on government gaming regulations, and lingering trade war fears with the next $16bn sanctions on goods to be activated on August 23. 

As the second quarter US earnings season came to an end, new convertible issuance picked up. FTI Consulting (corporate finance and restructuring consulting services) issued a $275m convertible over 5 years at 2% to repay a 6% straight bond. New Mountain Finance Corporation (investment management) came to market with a $100m 5-year 5.75% convertible to repay a revolving loan. And on Thursday Illumina ($48bn market cap, Life Science Equipment in genome sequencing) raised $650m, plus a $100m green shoe, with a 5-year zero coupon convertible for share buybacks and repayment of a 2019 zero coupon convertible. Most recent issues were priced at best, but Illumina came in the mids. Illumina (IG, unsollicited rating) is a well-known convertible issuer and its outstanding issues are trading in the high 130s. 

In other convertible related news; the SEC is said to have subpoenaed Elon Musk over his plans to take Tesla private. Elsewhere, Folli Follie is to discuss a possible standstill with creditors and explore options for the future restructuring of the group, and, after several months of intensive headhunting, Air France-KLM has appointed Benjamin Smith as CEO.

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