Worrying protectionist rhetoric

Market analysis - 3/16/2018

Global economic data was still generally upbeat but the White House’s protectionist rhetoric hogged the limelight. US economic data is no longer surging, and the recent retail sales figure is a good example, but growth and inflation trends remain encouraging.

The latest US jobs data was sound: monthly job creations hit record highs, with the figures for the two previous months being revised higher, but this failed to trigger any fresh acceleration in wages. In the eurozone, definitive inflation data in Germany and Spain showed that underlying inflation was gradually recovering. 

But despite encouraging fundamentals, markets have still been focusing on the likelihood of fresh protectionist measures with concerns that new duties could target $30-60bn in imports, notably in the tech and telecoms sectors. US markets were hit by more falls in blue chip industrials with exposure to trade tensions. Apart from the risk of a Chinese backlash, enhanced protectionism could drive inflationary pressure in the US, especially as the US dollar is trending lower. The president of the US Chamber of Commerce, the country’s biggest trade lobby, has warned of the effects a unilateral decision from Washington might have on US consumers and growth. Note however, that the trade deficit is partly the effect of profits made by US companies abroad. 

Another issue of note was the press conference given by Matteo Salvini, the head of Italy’s Lega Nord party, a constituent of the right-wing coalition which came first in the Italian elections. It is in talks with the populist M5S party to form a government. Italian credit spreads widened but only modestly. Markets will be scrutinising the results of the first talks on March 23. 

With company results still surprising on the upside, we are still keen on equities, especially in Japan and in the eurozone. 

  European equities

The earnings season ended on generally positive note even if guidance proved less upbeat than expected. 76 out of 394 companies revised 2018 prospects higher, 200 left them unchanged and 118 decided to downgrade them. 

After years of cost cutting, many companies now say they have to invest again, a move which will necessarily hit operational leverage in spite of good like-for-like growth. 

German utilities made the headlines this week. EON and RWE unveiled an agreement to share INNOGY’s assets. RWE could sell its stake in INNOGY to EON, in exchange for assets including renewable energy businesses. RWE would end up owning 16.67% of the new entity. This would leave RWE as a renewable electricity producer and EON in charge of networks and clients. 

Elsewhere, Adidas rose on excellent 2017 figures. The group raised it guidance on margins and announced a hefty €3bn share buyback programme up to 2021 with €1bn scheduled for 2018. Munich Re raised its net earnings guidance for 2018 to € 2.1/2.5bn (vs. 2/2.4bn) and said it would buy back €1bn of its shares by the time of the 2019 AGM. Volkswagen, which is targeting 2018 margins of 8/10% (up from 8.4% in 2017) and €10bn in efficiency gains by 2020, expects to invest €40bn by 2022. 

BAE Systems said it had sold 48 Typhoon Jets to Saudi Arabia, giving the company’s suppliers lots of visibility over the next decade. In Italy, Generali, which is to release its new strategic plan next November and Leonardo, which expects double digit growth in its helicopter business by 2020, both beat expectations and saw their shares advance. 

In company transformation news, the activist Elliott Management fund said it had bought a stake in Telecom Italia (TIM). Vivendi said it was willing to support an alternative strategy with Elliott which wants to replace 6 TIM board members at the April 24 AGM including Arnaud de Puyfontaine, chairman of Vivendi’s executive committee and TIM's chairman. Melrose made a new bid on GKN, only sweetening the deal by offering more shares and the bid was immediately rejected. 

In IPO news, Siemens has listed its medical engineering division, Healthineers and Deutsche Bank is to list its DWS affiliate. 

  US equities

US markets had a down week with the S&P losing 1.4% and the Nasdaq ending 1% lower. CPI for February came in at 2.2% and +1.8% ex food and energy, or exactly in line with expectations. But the Empire Manufacturing index surprised on the upside by hitting 22.5, or much more than the 15 expected. Retail sales slipped 0.1% but rose 0.3% when restated for autos and energy. 

It was another week of headlines on customs barrier rhetoric and turnover among Donald Trump's top advisors. CIA head Mike Pompeo is to replace Rex Tillerson as head of the State Department. Pompeo is known for taking a hard line in defending US interests. When he was a member of Congress, he was in favour or taking hostile attitudes to ‘ward of the Chinese threat.’ And for his first public outing, Larry Kudlow, the president’s new economic advisor, said the US was in favour of a strong dollar and would take a tougher approach to China. For the moment, US trader partners have adopted a reasonable tone when reacting to all this. Some US allies are angling for exemptions on metal imports, promising to help Washington counter China and its overproduction. Others like Europe are mulling a 3% digital tax on tech giant revenues. 

Earlier in the week, Donald Trump blocked Broadcom’s acquisition of Qualcomm, citing national security interests. This was unexpected as the deal concerns two semiconductor firms. The real reason would be to keep the US in the telecom patent race. Currently, ZTE, Huawei and Qualcomm own the most sensitive technologies and the acquisition of Qualcomm by Broadcom might lead to reduced R&D spending, leaving China with a monopoly on innovation. 

  Japanese equities

Japan rebounded on the back of strength on Wall Street and mounting expectations of wage increases, however, upside was capped by political confusion due to a scandal involving Finance Minister Taro Aso who admitted documents had been altered by his ministry in the controversial sale of state-owned land to private school operator Moritomo Gakuen. 

By sector, Electric & Gas (+4.89%) outperformed the market led by Kansai Electric Power and Chubu Electric Power. Eisai (pharmaceuticals) remained strong, jumping 9.10% and Daiichi Sankyo advanced 5.46% on expectations of a new drug development. 

In contrast, Oil & Coal Products lost 2.28%, and Marine Transportation (+0.24%), Mining (+0.28%) and Construction (+0.28%) underperformed. Yamato Holdings dropped 2.52% and there was also relative weakness from JXTG Holdings (-2.37%) and steel producer JFE Holdings (-1.27%). 

The government’s proposal to reappoint Haruhiko Kuroda as Governor of the Bank of Japan was approved by the Diet. Two Vice-Governors, Masami Wakatabe considered as pro-reflation, and Masayoshi Amamiya were also approved.  

  Emerging markets

In China, the merger of the CBRC banking authority and the CIRC insurance watchdog should improve financial risk management, an essential condition if deleveraging is to succeed. The CSRC financial markets authority is examining the possibility of a double listing of internet giants like Alibaba, Tencent and Baidu on the domestic A share market in the form of Chinese Depository Receipts (CDR). ABC (Agriculture Bank of China), the country’s third largest lender, successfully raised RMB 100bn this week to bolster its capital base. Ping An's operational figures for February showed insurance premiums had risen 23% but life assurance products were 18% down. 

Ctrip’s fourth quarter 2017 results were in line, with better margins, but the company's guidance for a 9-11% rise in revenues for the first quarter of 2018 disappointed the market. Samsonite’s margins missed expectations despite a 23% increase in sales, but management is upbeat on margins improving in 2018. Bitauto's media business had a good fourth quarter in 2017 but markets were worried to see declining asset quality at its Yixin affiliate (car loans). 

US-China tensions persisted as US press reports talked about new customs duties possibly targeting $30-60bn in Chinese imports. 

India's trade deficit fell from $15bn in January to 12bn last month mainly due to lower growth in oil imports (+2%) and a more favourable base effect. In an attempt to reduce fraud, the Reserve Bank of India told banks not to issue letters of credit and commitments for import loans without guarantees. Life assurance product growth slowed to 10% in February. 

In Argentina, inflation rose by another 2.4% in February to 25.4%, justifying the central bank's decision to leave its refinancing rate at 27.25%. In Brazil, Randon (trucks) returned to the black thanks to a 37% jump in sales in the fourth quarter of 2017 but the results were nonetheless less than expected. Retail sales and industrial production remained upbeat, rising 0.9% MoM.  


Brent crude prices were little changed at around $65 but WTI reduced the spread between the two by jumping by close to 2% to $61.2. This resulted from falling inventories at Cushing, which determines WTI prices, and rising US oil exports. 

The market failed to move much on the monthly IEA report which raised its expectations of demand growth in 2018 by 1.5 million b/d. It also slightly upped non-OPEC growth demand by 1.8 million b/d (increased US supply is partly offset by lower Mexican and Norwegian output).

The agency also said OPEC supply slipped in February to 32.17 million b/d which suggested quota compliance was running at 147%, or more than in January. The drop was due to Venezuelan output falling by 60,000 b/d. The agency also expects Venezuelan production to hit 1.38 million b/d, its lowest level since the 1940s. OECD stocks are now at 2,871 million or only 36 million above their 5-year mean. Note that the cartel's aim is to get global inventories down to this 5-year level. The replacement of Rex Tillerson at the State Department by Mike Pompeo could also mean more anti-Iran sanctions. 

There were no marked trends on base metal prices apart from iron ore, and thermal and metallurgical coal which fell by 4-5% over the week. Mounting worries over iron ore stocks in Chinese ports weighed on trader sentiment amid only a soft recovery in domestic demand following the Chinese New Year. The Democratic Republic of the Congo is said to be intending to add copper to Cobalt and Coltan on its strategic mineral list. That would increase royalties paid by mining companies to the government and, for copper, could mean a rise from 2% to 10%.

The gold ounce was unchanged at $1,320 in a week with little news flow. 

  Corporate debt



Credit indices were relatively unchanged with the Xover around 250bp and positive returns from the high yield index. The IG index also rose, mainly due to falling interest rates. The new issues market was back on form with Spain’s Caixa Bank and Santander returning to the AT1 market. Elsewhere, Progroup (packaging) and France’s Paprec (recycling) raised €450m and €800m respectively on the high yield market.

In results news, Altice, one of the foremost high yield issuers, said that profitability was more stable than expected, reassuring investors alarmed by last November’s profits warning.  


Primary activity in the convertible space picked up, especially in the US and in Asia. In Asia, Singaporean property developer, OUE, debuted in the convertible bond market by raising S$ 305m. This included a S$155m convertible, due in 2023 with a 1.5% coupon and 10% premium, together with a S$150m exchangeable bond into OUE Hospitality Trust, also due in 2023, with a 3% coupon and 10% premium. The proceeds of both bonds will be used to fund the repayment of OUE’s existing debt and general corporate purposes. In Korea, repeat issuer Lotte Shopping raised KRW 303.6bn with an exchangeable bond into electronic retailer, Lotte HiMart. The bond has a 5-year maturity, zero coupon and 16% premium and the proceeds are earmarked for debt repayment and general corporate purposes. 

There were 4 US deals. The former US subsidiary of Shire Plc, specialty pharmaceutical company, Supernus, raised $350m with convertible senior notes due in 2023 at 0.675% coupon and with a 37.5% premium. The company, which specialises in the treatment of central nervous system diseases such as epilepsy, plans to use the proceeds for licensing or acquiring new products. Oil & Gas company, Helix Energy Solutions Group, priced a $125m, 4.125% 5Y convertible and customer service software developer, Zendesk, issued a $500m, 5Y convertible at 0.25% and with a 32.5-35% premium with the proceeds being used for capped call transactions, working capital and general corporate purposes. Live Nation Entertainment, the world’s largest live entertainment/concert promotion/ticketing group, returned to the convertible market with a $500m, 5Y deal to fund the repurchase of its existing 2.5% 2019 convertible and for general corporate purposes including M&A. The deal has not yet been priced but the indicative coupon range is 2.25%-2.75% and the premium should be around 50%.

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