Markets tread water ahead of the G20

Marktanalyse - 28-6-2019

Pre-G20 summit stress kept markets on tenterhooks throughout the week, leading global indices to trade within narrow limits. The weekend’s summit will be decisive.

The Xi-Jinping/Donald Trump meeting are expected to help kickstart trade talks and find a compromise. However, both sides have very different demands so we should not expect a rapid agreement. Donald Trump, nevertheless, would be keen to find a solution sometime this year ahead of the 2020 presidential election. US diplomacy is going through a tough time as last Monday the US President signed a decree imposing fresh sanctions on Iran.

Elsewhere, the US trade deficit widened again in May to $74.5bn. This should logically make a negative contribution to trade in the second quarter GDP reading. New durable goods orders for May fell more than expected but mainly because of Boeing’s problems. Taking out defence and aerospace, the core figure actually bounced by 0.3%.

In this week's central bank news, Jerome Powell reined in market expectations by reiterating that some dissenting views had emerged among board members. He also insisted that overreacting to the latest data might be counter-productive and risked piling uncertainty onto uncertainty. James Bullard from the St Louis Fed said he expected growth to slow in the second half to below 2% but that it was not the end of the world. He thought a 50bp Fed Funds cut would be excessive. However, the consensus view is still 100% in favour of a probable rate cut on July 31.

In Europe, manufacturing proved more resilient than elsewhere. Business sentiment was stable for the third month in a row. It even rose in the services industry but edged lower in manufacturing due to a fall in order books, especially from outside the continent. The production outlook also moved lower. Elsewhere, INSEE’s turning point indicator remained in an area which suggested an upbeat economic situation.

Reuters reported that the ECB might breach its issuer holding limit. The bank normally cannot hold more than 33% of an entity’s bond issuance. If true, this development would give the ECB more leeway over any further quantitative easing.

The macroeconomic and political environment remained complicated amid an ongoing equity market rebound and more falls in long bond yields in Europe and the US. The situation suggests we should remain tactically cautious. After all, US markets returned to all-time highs at the end of the previous week and yields on the 10-year German Bund moved even deeper into negative territory at minus 0.31%. 

  European equities

Investors stayed on the sidelines this week ahead of the Trump/Xi Jinping meeting at the G20 summit in Osaka. Optimistic comments about getting a trade deal from Treasury Secretary Steven Mnuchin triggered a mid-week rally in auto and bank stocks but markets remained on their guard due to Donald Trump's latest about-turns on the issue.

Auto stocks had initially fallen after Daimler issued its third profits warning this year. The group has been hit by government measures against diesel motors with the group's VAN division suffering the most. Oil stocks tracked a rise in oil prices when US inventories fell sharply. Semiconductors also rallied after Micron said the first signs of an improvement in demand had appeared. Pharma, however, fell victim to profit taking amid US debates over health coverage and drug prices.

It was a busy week for corporate transformation news. Retailing group Casino rose after announcing its Latam interests would be simplified. Carrefour gained after the group sold 80% of its stores in China. Bayer jumped on news that Elliott had taken a stake; the activist fund thinks that chances of a legal settlement have risen now that a special committee has been set up to consult on legal disputes over glyphosate and the appointment of a specialist US lawyer to advise management. BASF rose after the group said it was rolling out a new cost adjustment plan due to slowing demand. Vivendi lost ground on rumours that the UMG listing could be put back to 2020. Capgemini acquired Altran, paying a 22% premium to the last quoted price. The deal will create a global leader in digital transformation with sales of €17bn and more than 250,000 employees.

  US equities

US markets gave back some of the previous week's gains. The S&P 500 and the Nasdaq shed respectively 0.87% and 0.93% but remained sharply higher over the month, +6.3% and +8.9% respectively. Trading was again dominated by macroeconomic concerns ahead of the next Fed and G20 meetings.

A slightly less accommodating tone from central banks last Wednesday sent yields on 10-year US Treasuries back above 2%. Markets are now only expecting a Fed Fund rate cut of around 10bp by the end of this year. The news had a mixed reaction from equity markets as a good deal of the rally in recent weeks was based on monetary easing expectations in the US. The Fed’s regular stress tests, introduced after the 2008 crisis, once again confirmed this year that major US banks were solid. They showed they could make positive returns on capital even with very conservative assumptions of a 50% slump in equity markets and an explosion in unemployment to above 10%.

Market performance over the week showed strong sector dispersion. Base materials (+0.6%) and financials (+0.06%) outperformed the S&P 500 while utilities and consumer staples did worse, falling 2.6% and 1.08% respectively. Micron jumped 11% after a results beat and the stock dragged the rest of the semiconductor sector up with it.

In M&A, Abbvie’s bid for Allergan came at around a 45% premium. The deal is two-thirds cash and one-third equity. It showcases the dynamic M&A market in the healthcare sector. Some big players are trading at serious discounts, thus providing opportunities for this sort of tie-up.

  Japanese equities

In a trendless market, the TOPIX inched 0.48% higher. The market narrative was basically the same sitting-on-fence stance as investors waited for the Trump-Xi meeting at the G20 summit in Osaka. On Monday 24 June, this led to extraordinarily thin trading not seen for about 4 1/2 years. The strengthening yen, which touched the 106 handle against the US dollar, was negative for exporters and geopolitical uncertainties in the Middle East weighed on utilities.

Marine Transportation, Metal Products, and Machinery were among outperforming sectors. Fishery, Agriculture & Forestry, Electric Power and Gas lagged.

During the week, Japan Tobacco Inc (2914) hit a YTD low. The scheduled rise in cigarette taxes in Japan (up to the year 2020) but also low earnings visibility on their business in Iran (where the US is reinforcing sanctions) and their heated tobacco products were cited as concerns. Tokyo Gas (9531). was another stock which revisited its YTD low. Its dependence on LNG imports from Kuwait is limited but geopolitical tensions in the Strait of Hormuz ignited speculative selling. 

  Emerging markets

Emerging markets ended the week with a slight gain and had rebounded strongly in June, up around 5% as at 27/06/2019 on a combination of factors including lower interest rates prospects in the US, the weakening dollar and the resumption of trade talks during the G20 summit. The China Securities Regulatory Commission, in another sign of its commitment to provide stimulus to the local economy and enforce some reforms, acknowledged that some changes in restructuring rules for Chinese capital markets were necessary to serve the real economy.

In a move to open up its electric vehicle market, the Chinese Ministry of Industry and Information Technology removed EV battery white-list restrictions to attract more global payers to China’s EV ecosystem, as part of an effort to promote more market-oriented competition for the Chinese EV industry.

Chinese banks had a difficult week as the Washington Post reported that three of them might face a fallout from a US probe into North Korean sanction violations.

Tech was generally softer in South Korea and Taiwan towards the end of the week, including the weakness of SK Hynix after this week’s rally, due to numbers showing June mainstream DRAM prices had fallen 10% MoM.

In India, the delayed impact of an investment cycle slowdown continued to weigh on the economy and consumption. The Securities and Exchange Board of India (SEBI) unveiled measures to tighten mutual fund investments in order to reduce systematic risk: one major change was the reduction of the sector cap for investments in debt and money market instruments from 25% to 20%.

In Brazil, central bank officials said they would ease reserve requirements on time in a move to free up R$16.1bn ($4.19bn) in the national financial system. President Jair Bolsonaro’s government said it had mustered enough support to pass a flagship pension reform bill in the lower house, with a projected vote tally that surpasses local media estimates.

On the corporate front, Caixa made $1.9bn(R$7.3bn) from selling its PETROBRAS stake. The proceeds will be used to help Caixa pay back R$40bn in perpetual bonds to Brazil’s federal government, which is pushing to reduce a budget deficit that remains above 6% of gross domestic product.

Some encouraging signs came out of Mexico and Argentina. Mexican retail sales increased 1.6% YoY in April, above our forecast (-0.1%) and also the market’s expectations of +1.4%. In Argentina economic activity posted a sequential gain in April. The EMAE (official monthly GDP proxy) posted a 0.8% MoM increase from March, although the quarter-over-quarter growth rate remained slightly in negative territory (-0.3%). 


Oil markets essentially trod water and Brent crude was more or less unchanged at around $65. The 176th biannual OPEC summit -which is also the 6th OPEC/non-OPEC meeting- will take place on July 1 and 2. This will be after the G20 summit so that strategy can be adapted to any international trade decisions that might be made in Osaka. There seems to be almost unanimous approval for a 6-month extension to the 1.2 million b/d production cuts decided last December. Current output is actually below that target, mainly because of Saudi Arabia's efforts. Even so, there has been serious restocking due to a bigger-than-expected drop in Venezuela’s production (because of the economic crisis) and also Iran’s output due to sanctions. Extending the cuts would help inventory regularisation in the second half of this year. Note, however, that supply could be abundant in 2020 as several big projects come into play and so the cuts might need to be maintained. In the meantime, Vladimir Putin and Mohammad bin Salman are scheduled to meet at the G20, mainly to finalise the agreement but also to discuss security issues from mounting US-Iran tensions and the consequences in the Strait of Hormuz. WTI bounced by 4% over the week due to a sharp fall in inventories. The combined retreat of crude and oil product stocks was the biggest since 1990.

Gold, meanwhile, gained 8% in June, its biggest move since June 2016. After hitting $1,439 intraday, a level not seen since May 14 2013, the ounce fell back a little. What is important is that in the last week, the ounce has always closed above $1,400, a level which now represents a short-term floor. 

  Corporate debt



Trading was mixed ahead of the G20 summit and amid mounting tension between the US and Iran. The Xover widened by 7bp to start the week but tightened by the same amount on Thursday while the Main was relatively stable over the week.

Metro's bonds lost ground after EP Global Commerce, an investment vehicle belonging to Czech and Slovak investors who already own 10.9% of the German group, made a €8.5bn bid for the rest. Metro said the bid underestimated the group's real worth. Casino remained under pressure at the beginning of the week after Monoprix chairman Régis Schultz left the group. Monoprix accounts for 25% of Casino's sales in France. However, Casino’s plan to simplify the structure of its Latin American activities was viewed in a positive light by the market. Atalian's bonds lost around 4 points on poor figures showing worsening margins in France and leverage stuck above 7 times, but they clawed back some of the losses on news of an asset sale. Europcar Mobility Group announced its new SHIFT 23 strategic plan. It makes no serious strategy changes but wants to double its active client base and get sales to above €4bn by 2023. Lufthansa’s CFO confirmed that it was very unlikely that the group would buy Condor, the German airline that Thomas Cook is selling. Good news for Deutsche Bank which passed the Dodd-Frank Act Stress Tests after failing the second phase several times in the past. H20, the Natixis investment affiliate, remained under pressure on liquidity concerns over bonds held in its funds. Significant outflows from these funds were registered in the past 7 days. The impact at the BPCE level is low due to the group's diverse revenue stream and H20’s somewhat limited contribution to the bank’s results. S&P said ratings and outlook for both Natixis and BPCE were not affected by the news.It was another busy week for new issuance in financials. Société Générale and UniCredit issued Senior Non Preferred bonds over 7 and 6 years at 0.875% and 1.25%. Intesa Sanpaolo sold a Senior Preferred bond in two tranches (5 and 10 years) at 1% and 1.75%, raising a total of €2.25bn. BNP Paribas sold a 12-year Tier 2 bond at 1.625%, raising €1bn. UMG Groupe VYV, France’s biggest health insurer, sold a senior 10-year bond at 1.625%. 


We wonder if it is the last rally before the summer holidays or a true pick-up in primary activity. This week the convertibles market saw 6 new issues for a total of $2.25bn. In the US, REIT Company Uniti Fiber came to market with $300m 4% due 2024 convertible to repay outstanding borrowings and for general corporate purposes including M&A (including the Bluebird acquisition). Telco Company Liberty Latin America raised $350m with a 2% five-year maturity for general corporate purposes. Change Healthcare (software platform) got its IPO green light to sell up to $700m in common stock and to raise an additional $250m from a mandatory convertible. In Europe, Spanish Telco and serial issuer CELLNEX came to market with a €700m deal, 1.4% yield to maturity, a 9-year maturity but a 70% premium. The proceeds will go on expanding its existing infrastructure portfolios. In China, Pharmaceutical Company LUYE PHARMA (specialized in oncology, cardiovascular, metabolism and the central nervous system) issued $250m over 5 years at 1.5% and with a close to 40% premium. Qudian (online consumer credit provider) priced a $300m convertible at 1% due 2026 for strategic investments, open platform development and share buybacks.

In the rest of the news, IAG is offering to tender for €500m of its 0.25% convertible bonds due 2020 subject to an issue of straight bonds which is currently being marketed. Semiconductor Company AMS’s shares were up close to 12% at the end of the week as chip stocks rallied ahead of the weekend G20 summit (also helped by good results from US peer Micron).



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