The market volatility in a tweet

Market analysis - 5/10/2019

Volatility rebounded from lows after Donald Trump threatened to raise tariffs on certain Chinese imports from 10% to 25% from Friday May 10 if trade talks failed make substantial progress. He followed through on this threat even though China’s vice premier Liu He was in the US to continue discussions.

To make matters worse, pockets of geopolitical instability like the Middle East and North Korea resurfaced. Equities sold off until another more positive comment from the US president raised investor hopes that a rapid solution could be found. Chinese equities naturally fell and the mood was compounded by poor lending and PMI data: loan growth slowed more than expected after an upbeat first quarter, suggesting the recovery remained fragile.

Elsewhere, Spanish and Italian PMI missed expectations while Germany, France and Europe as a whole were in line, or even slightly better than expected, another sign that the situation was stabilising. However, the European Commission updated its 2019 growth forecasts by cutting them to 1.2% for the eurozone and to 0.5% for Germany.

Risk aversion was also reflected in government bond yields with Germany and the US falling and spreads between Germany and other eurozone countries widening.

We have been cautious on risk assets for several weeks and will remain so until visibility on the political environment improves. 

  European equities

Equity markets fell sharply following fresh trade talk worries after the US threatened to raise tariffs on $200bn of Chinese imports from 10% to 25%. The talks will still continue beyond the agreed term. Matters were further complicated when the European Commission cut its eurozone growth forecasts for this year from 1.3% to 1.2%.

Cyclicals with the highest exposure to global trade naturally sold off, especially autos, materials, semiconductors and luxury. Banks were also hit by this new wave of risk aversion while defensives outperformed. Results over the week were mixed but still reflected a slowdown in like-for-like growth for cyclical sectors like autos, chemicals, capital goods and semiconductors.

ArcelorMittal’s figures were hit by global overcapacity, steel price drops and higher commodity costs. HeidelbergCement’s robust results stood out from the pack as price momentum will from now on help offset costs. Continental fell despite reiterating its objectives and expectations of a recovery in the second half. But its figures showcased low profitability in its auto equipment division. UniCredit followed other banks lower in spite of better-than-expected figures due to lower loan provisioning and property sales. Wirecard had an excellent first quarter with like-for-like sales jumping 33% YoY and a 120bp surge in EBITDA margins thanks to particularly strong momentum in online payments. Management raised its objectives for the full year. Deutsche Telekom released upbeat figures thanks, once again, to T-Mobile.

Siemens beat first-quarter expectations and said it was to spin off its Gas & Power division. France's constitutional court gave the green light to a Shared Initiative Referendum on whether ADP should be privatised. Orange is buying Dutch cybersecurity specialist SecureLink, reaffirming its position as a sector leader in Europe. Iliad reached an agreement with Cellnex for the sale of 5,700 masts in France et 2,200 in Italy for €2bn. 

  US equities

Markets fell for the second week in a row on risk aversion triggered by Donald Trump’s threats to raise tariffs on $200bn of Chinese imports from 10% to 25%. The S&P dropped 2.5% and the Nasdaq tumbled 3.1%. Sentiment was dominated by shifting developments in talks between Donald Trump and Liu He, China’s vice premier, and logically led to trade-sensitive sectors falling. Basic materials were down 4%, tech 3.7% and industrials 3.2%.

Energy dipped 0.7%, the best performing sector due stable oil prices and Chevron’s rebound after withdrawing its bid on Anadarko. Defensives like healthcare and consumer staples slipped 1.5%. In company news, Electronic Arts rose after the launch of its APEX Legends boosted sales in its Live Service division by 25% YoY and led to quarterly EPS coming in 30% higher than expected. 

  Japanese equities

After a long national holiday, Japanese equities fell after Donald Trump unexpectedly tweeted that tariffs on $200bn of Chinese imports would be raised to 25%. Economic sensitive stocks in sectors like machinery and electric appliances, which had led the recovery on trade talk optimism before the break, fell back sharply. The TOPIX ended the week 4.15% lower.

Komatsu, SMC, FANUC and Murata Manufacturing, which all have relatively high exposure to China or smartphones, were hit especially hard. SONY, however, made gains after posting record earnings from income from diversified sources.  

Markets are currently focused on the US-China trade wrangle but the focus is expected to shift to company fundamentals thanks to the ongoing earnings season. 

  Emerging markets

Emerging markets were sharply down this week as the US-China trade war returned to the spotlight. Over the weekend, Donald Trump blamed China for lack of progress in the negotiations and announced it was increasing tariffs on $200bn of Chinese goods from 10% to 25% on May 10. Trade talks are still ongoing.

 Chinese macro numbers were rather disappointing, with both exports and imports missing expectations. After good numbers in the first quarter April credit growth also slowed more than expected to 11.3% YoY from +11.7% in March. Chinese auto OEM firms announced weak sales for April, with SAIC and Geely down 20% YoY for the month.

With the A-share results season almost over, aggregate earnings rose 9.8% for the quarter.

In India, ICICI Bank results showed improving asset quality, with good operational trends, and Titan Company stood out among consumption companies, with no impact from the current consumption slowdown.

Malaysia’s central bank was the latest to ease its monetary policy, cutting its benchmark interest rate by 25bp, the first move since July 2016, in an effort to support the economy.

In Brazil, retail sales came in below expectations, up 0.3% MoM. The main segments, such as supermarket sales (-0.4%), fuel (-0.8%) and furniture and white goods (-0.1%) all fell. Banco do Brasil published good first-quarter figures that beat expectations thanks to a lower effective tax rate and higher NIM with lending improving. ROE was 16%, with EPS growth of 44%. Petrobras’ results came in below expectations due to lower-than-expected oil production, but management explained it was due to a one-off event. Vale reported its first quarterly loss since 2015 as a result of the dam disaster in January.

In Argentina, Galicia’s results beat expectations due to high trading gains, although provisions doubled and the NPL ratio increased sharply.

In South Africa, the election count was underway. With almost 80% of the votes already counted, the ruling African National Congress seemed to have the edge with 57.02% compared to 21.9% for the Democratic Alliance and 10.08% for the Economic Freedom Fighters. Final results are expected next week. We remain upbeat on emerging markets. 


Iran reacted to sanctions on its oil exports by suspending its commitments in the 2015 nuclear agreement and threatening to increase uranium enrichment. The US had previously announced it was sending a carrier battle group to the Middle East, no doubt to prevent Iran blocking the Strait of Hormuz which is used by 20% of global oil shipping. Note that Donald Trump also included iron ore, steel, copper and aluminium in the sanctions. A significant 99% of Iran’s iron ore and 85% of its copper are exported to China. The actual volumes are low in global terms but the decision highlights the links between the sanctions against Iran, Venezuela and the ongoing US-China trade talks. The tone at the talks became tenser after Washington's threats to increase tariffs on Chinese imports, a move which immediately triggered a big shift to risk aversion on markets.

Commodities sensitive to global growth naturally followed financial markets lower. Copper shed 2% for the second week in a row, leaving it only up 2.3% YTD. Brent crude hit a recent low of $70-72 but rallied at the end of the week. Tanker movement data suggested less traffic - no oil tanker has left Iran’s export terminals since the beginning of May. Saudi Arabia said it would join with other OPEC countries if required to increase oil deliveries. However, the cartel confirmed that that it would not create any surplus to requirements.

Fresh geopolitical tensions were only of modest help for the gold price. It rose 0.3% over the week as markets fell but it was still unchanged YTD. China’s central bank, the PBoC, continued to buy, adding 14.9 tonnes in April, or 58 tonnes since the beginning of 2019.  

  Corporate debt



Fresh US-China trade tensions sent markets lower. Between Monday and Thursday, the Xover widened by 30bp and the Main by 8bp. 

UniCredit and Intesa Sanpaolo both beat quarterly expectations. Trading did surprisingly well and provisioning fell, offsetting soft net interest and commission income. Asset quality continued to improve and both banks now look well capitalised.

FCA (Ba2/BB+), which had already warned on a difficult first quarter, reported disappointing figures but reiterated full year objectives. Sales and EBIT fell by 5% and 29%. Cellnex’s results were in line with sales and EBITDA up 11% thanks chiefly to external growth. The group is also reinforcing its presence in France, Italy and Switzerland by rolling out new sites and acquiring others from Iliad and Salt for €2.7bn. UPC Holdings continued to suffer from competitive pressure in Switzerland with sales down 1% and EBITDA 4.4% lower. The group maintained, however, that asset disposals were going according to plan. Softbank Group (Ba1/BB+) saw sales rise by an upbeat 4.8% and EBITDA jump 21% thanks to strong performance across most of its divisions. Press reports suggested the group was mulling an IPO for its Vision fund and was in talks with Oman for an investment worth several billion US dollars in the current fund. Kronos unveiled another fall in results. EBITDA plunged 50% due to lower prices and higher commodity costs.

Spain’s market regulator said LetterOne could change the terms of its bid for Dia by withdrawing the minimal take-up condition. Dia’s bonds rose on the news but LetterOne’s €500m cash injection remains conditional on the bid going through. Press reports that PSA was interested in acquiring Jaguar-Land Rover were immediately denied by JLR’s parent company, Tata Motors.

In new issues, Cirsa raised €390m over 6 years at 4.75% to help fund its acquisition of Giga


It was a quiet week for new issues due to the earnings season.

Intercept (biopharma, with an OCA product in phase 3 for NASH and infant disease PBC) is seeking to raise $200m, with a $30m greenshoe, over 7 years with a coupon between 1.5 and 2% and a conversion premium of 30-35%. The proceeds will go on working capital requirements and general corporate purposes.

In results, Jazz Pharmaceuticals PLC posted excellent results with sales outpacing expectations for most products. The company sounded an upbeat note over its new Sunosi drug for sleep problems, saying it should do well from 2020. It also expects Xyrem (for children) to be approved.

Ubisoft, which reports in the week of May 13, rose on higher pre-orders than analysts expected across the board (apart from mobiles where growth declined) and also thanks to EA’s figures, particularly its EBIT which came in at $459m, or more than 38% higher than expected. Supernus Pharmaceuticals (biopharma, specialised in nervous system ailments) saw first-quarter sales fall from $102m to $83m, partly due to slack sales of two epilepsy drugs. However, management remained confident in its forecasts and reiterated its sales objective of $435-455m for the full year.

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