Reduced geopolitical risks underpins markets

Market analysis - 11/11/2019

Geopolitical risks continued to retreat while US economic data remained upbeat.

In the ongoing US-China trade talks, Beijing's conditions indicated that concessions were once again on the table despite an insistence on Washington cancelling all past and future import tariff hikes. Optimism also fed on comments from US Trade Secretary Wilbur Ross after he suggested some sanctions on Huawei might be lifted and that protectionist tariffs on European, Japanese and South Korean car imports might not be introduced.

Elsewhere, upbeat non-manufacturing ISM in the US provided confirmation that growth was resilient.

So far, the steep slowdown in the industrial sector has not really been visible in the services sector. Judging from third-quarter GDP, solid consumer spending is still enjoying strong growth while the services sector is being buoyed by resilient corporate investment in intellectual property areas like R&D, software and cultural activities.

International equities were lifted by trade talk developments and bond yields continued to rise, slashing expectations of further rate cuts.

Against this backdrop, we are sticking to our relatively cautious stance on risk assets. 

  European equities

Markets pushed higher on composite euro-zone PMI in October, which rose from 50.2 to 50.6, hopes for a US-China trade agreement in the near future and generally upbeat company results. Yields on France’s 10-year bond returned to positive territory for the first time since July and the pro-cyclical rally continued with autos, banks and commodities leading the field.

Banks gained on comments from Olaf Scholz, Germany's finance minister, on a banking union and a deposit insurance mechanism which should facilitate sector consolidation. UniCredit advanced on good figures and Société Générale also performed due to a reassuring CET1 ratio even if the bank’s operating profits fell short of expectations.

Autos also gained after the US Trade Secretary hinted that import tariffs might not be raised on German cars. Pharma and utilities, however, remained under pressure. Utilities were dragged down by mediocre figures from Engie. Siemens rebounded sharply after reassuring third quarter figures, notably a bounce in its flagship Digital factory division, and giving guidance for 2020 which was in line with expectations. Sodexo also reported convincing results and ArcelorMittal did better than (admittedly low) expectations. Even if Deutsche Telekom’s figures were in line and guidance was raised, the stock was hit by management caution over its dividend payout policy due to heavy 5G investments and the ongoing T-Mobile/Sprint merger. Adidas also retreated after solid year-to-date returns despite third quarter results coming in slightly better than like-for-like expectations. An acceleration in US and European sales offset a marginal slowdown in Asia. 

  US equities

US indices hit new records over the week (as of Thursday’s close) with the S&P 500 0.6% higher and the Nasdaq up 0.7%. Investors are now positioned for a low growth scenario but with no recession. In a sign of relatively healthy conditions in the US, job creations came in at 128,000 and unemployment fell to a 50-year low of 3.6%. Meanwhile, relations between Washington and Beijing seemed to be easing. Yields on benchmark 10-year Treasuries rose to 1.9% and WTI oil prices ended the period 2% higher at $57.

Cyclicals sharply outperformed defensives. Sectors witnessed an even bigger rotation with energy up 2.8%, financials 2.4% better and industrials 1.7% higher while utilities and property shed 3.4%. In company news, S&P500 quarterly results saw overall revenues and earnings rise 3%, or better than expected.

Elsewhere, Uber plunged 13% over the period after disappointing results and the end of the shareholder lock-up period. Ralph Lauren, in contrast, gained ground on improving sales in Europe and North America as well as wider margins. The group reassured investors on higher customs barriers by pointing out that it had reduced supplies from China.

Disney also created a pleasant surprise with excellent figures from its theme park and media divisions. 

  Japanese equities

Japanese stock prices advanced, especially on Tuesday November 5 following the progress of US-China trade talks and strong US markets. The TOPIX rose 1.90% for the week.

As the second July-September earnings season drew to a close, investors focused on stocks with impressive first half figures and earnings estimates for the full financial year. For October as a whole, economy sensitive stocks led markets.  

Major blood testing equipment producer Sysmex jumped 10.48% on improving earnings momentum during the second quarter and oil and gas producer Inpex also rose 8.4% on upbeat interim results. Toyota Motor (+2.45%) reported record sales and net profits for the first half.

On the other hand, companies which delivered disappointing guidance for the full year lost ground. Food producer Ajinomoto tumbled 9.50% and major brewery Asahi end the period 4.61% lower.

Softbank Group underperformed on poor second quarter results due to its WeWork holding but the decline was limited to 1.03%. 

  Emerging markets

The MSCI Emerging Markets index was up by a healthy 2.3% for the period as at Thursday’s close, led by China (the FTSE All World Greater China index was 3.4% higher), on hopes that the Phase-One trade deal might include a tariff rollback.

The PBoC trimmed mid-term funding costs to banks by 5bp for the first time since 2016. On the corporate side, China's telecom operators announced 5G data plans, with monthly subscriptions starting from RMB128 ($18) with 30GB data. This is 64% higher than average 4G prices with lower data. 5G data service price-points are lower than initially expected, a token of Beijing’s determination to roll out 5G rapidly. Elsewhere, Alibaba delivered upbeat quarterly results, with EPS up 24%. Revenues and EBITDA rose 40% and 39% respectively. The group increased investment discipline and improved the profit outlook for Ant Financial, its financial services subsidiary. Baidu also delivered a solid third-quarter results beat on a recovery in core sales and better performance from its video streaming subsidiary iQiyi.

In India, the government announced an Rs250bn ($3.5bn) fund to help stalled housing projects in a bid to solve the funding issues facing the property sector.

Maruti Suzuki announced a 4% year-on year rise in car sales in October (up 25% from the previous month) and was cautiously optimistic on a recovery. Titan, the jewellery company, posted weak revenue growth of 0.6% YoY and lowered its guidance for the second half of FY 2020.

Brazil held its largest-ever auction for oil deposits, but it proved disappointing as Petrobras did most of the bidding while major oil companies stayed away. As a result, the Real fell on reduced expectations of US dollar flows into Brazil. Central bank minutes continued to reflect a more hawkish tone and cautious views, highlighting the necessity of maintaining the pace of structural reforms. On the political front, the Supreme Court ruled that convicted criminals should only be jailed after all their appeals had been exhausted, a decision that might free high-profile prisoners, such as former President Lula. Banco Itaù posted a strong 10% jump in quarterly EPS as loan growth accelerated. Natura received earlier-than-expected approval from the antitrust regulator for its acquisition of Avon.  

  Corporate debt

 

Credit

Trends this week were unclear despite hopes that some US and Chinese tariff hikes might be gradually lifted. The Main tightened by 1bp and the Xover finished the period flat. 

Hema's bonds came under pressure as worries rose over a possible debt restructuring. Lecta’s bonds rose after its recapitalization plan was approved. The group expects EBITDA to reach €93m this year and €151m by 2023. Several companies performed well on upbeat results, including Nouryon, which saw EBITDA rise 6% with stable credit metrics, Adient, where EBITDA came in better than expected, and Teva which revised 2019 objectives higher. In telecoms, UPC Holdings remained under pressure from stiffer Swiss competition in the third quarter while VodafoneZiggo reported a slight 0.8% rise in quarterly sales. Schaeffler announced a 2.6% rise in third quarter revenues but EBIT fell 17%; the group maintained guidance for 2018 despite expectations of lower sales of light vehicles. Softbank Group's sales for the first half of FY 2019-20 were flat but EBIT moved into a loss due to write-downs in its Uber and WeWork investments. 

In financials, Société Générale reported a reassuring 46bp rise in its third quarter CET 1 to 12.5%, but revenues fell, partly due to certain market activities being reduced or abandoned. Crédit Agricole posted upbeat revenue growth due to strong sales momentum and efficient cost controls. 

In a busy week on the primary market, numerous high yield borrowers refinanced debt. Grifols raised €1.67bn with its first senior secured bonds due 2024 and 2027, Ardagh sold 8-year PIK Toggle notes, raising $1.13bn and €1bn at 6.5% and 5%. Casino also sold its first secured debt at 5.875%, after launching mandatory buybacks for its March 2020, May 2021 and June 2022 maturities. The new issue performed well, gaining 2/ 3 points. Dufry raised €750m over 8 years at 2% and OI €500m over 6 years at 2.875%. In financials, Unicaja, Standard Chartered and ING issued Tier 2 debt at 2.875%, 3.516% and 1.375%. DNB raised $850m with an AT1 at 4.875%. 

Convertibles 

The new issues market got off to a slow revival.

In the US, another mandatory appeared, a $675 issue from Stanley Black & Decker. The proceeds will be used to redeem in full the existing 5.75% Junior Subordinated debentures due 2052. Investment trust PennyMac raised $200m over 5 years at 5.5% and with a 10% premium for general corporate purposes. Investment trust Arbor Realty Trust also issued a $215m 3-year maturity at 4.75% to fund the exchange of its 5.25% 2021 convertible

In Europe, BW Offshore (shipping), one of the listed arms of the BW Group, announced a new $250m convertible priced at 2.5% and a 37.5% premium. The convertible will be used to refinance existing debt and general corporate purposes.

In the rest of the news, CA Immobilien Anlagen AG placed approximately 4% of IMMOFINANZ shares by way of an accelerated book building offering to institutional investors.

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