The spirit of compromise returns

Marktanalyse - 13.09.2019

US-China tensions eased further over the week and Beijing exempted US products from import duties only a few days before both sides were due to meet for talks.

China might even resume importing US agricultural products like soya. Meanwhile, over in Washington, Donald Trump announced that a 5% additional tax on Chinese imports had been put off for a fortnight and said he was mulling a partial agreement.

Elsewhere, central banks opted for growth stimulus measures. In China, the PBoC cut its required reserve ratio for banks. And the ECB unveiled a series of measures including a cut in deposit rates, €20bn in monthly QE for as long as necessary, a move to a two-tiered system to exempt part of surplus bank reserves from negative interest rates and a TLTRO3 extension from 2 to 3 years.

There was some debate within the ECB over these steps but the overriding conviction among governments is that the economy needs some support. Germany, for example, is thinking about setting up a body that can borrow cheaply to promote budgetary stimulus. And the US is seeking to underpin growth through possible tax cuts or lower interest payments on house purchases.

Equity markets cheered these moves and gained more than 1.2%. But the rise overshadowed strong sector rotation at the beginning of the week into cheap cyclicals like energy and banks as the yield curve steepened and long bond yields rose.

We took some profits into strength on equity markets while we maintain a weak duration. We also maintained a slightly cautious stance on equity markets. Economies are still fragile and political risk could resurface with no warning. 

  European equities

European equities pushed higher on easing US-China tensions and news of ECB measures. Most of the central bank’s steps were factored in but the fact that a fresh monthly €20bn asset buying programme was open-ended provided strong support. Mario Draghi emphasised the eurozone economy’s softness and also said the deposit rate would fall by 10bp to minus 0.5% although banks would benefit from a two-tier system (or tiering). Another TLTRO programme was also announced. The ongoing big sector rotation into cyclicals like banks, autos and oil companies and out of defensives like pharma and consumer staples was triggered by rising interest rates but the trend weakened mid-week. Banks turned in mixed performance after the ECB news as the tiering system will barely offset the negative interest rate environment. Italy's banks nevertheless rose on cheaper funding costs and lower Italian yields lifted highly leveraged groups.

Corporate transformations also featured. Continental rose ahead of a new restructuring plan in October when its CEO said at the Frankfurt Auto Show that the group was in talks with BMW and Daimler over setting up a joint venture in autonomous vehicles. Elsewhere, Alstom fell on news that Bouygues was placing 13% of its stake, leaving it with 14.7%. AB InBev once again said it might list in Asia. The BFM TV channel claimed Carrefour was preparing to bid for Casino. Carrefour refuted the report. The Hong Kong stock exchange made a $36bn bid for the London Stock Exchange, a 23% premium.

  US equities

The S&P 500 rose 1% and the Nasdaq gained 0.8% as of last Thursday’s close. Sentiment was lifted by hopes for a truce between the US and China in the ongoing trade war as well as upbeat economic data.

Yields on 10-year US Treasuries rose by 20bp to end the period at 1.8%. Higher yields were an extra catalyst for the sector rotation that had kicked off in the preceding week. Relative returns between momentum and value stocks actually saw one of their worst weeks in 10 years. Cyclicals, which had been heavily shorted, returned in force. Energy bounced by 2.6%, financials by 3% and basic materials by 2.2%.

Flagship sectors and stocks had driven the market higher year to date but this week underperformed. Technology was more or less flat over the week but software players, a sector with the highest hedge fund presence, slumped 2.1%. Utilities also underperformed by only rising 0.6% as interest rates rose and long positions were unwound. Some estimates put long-short fund rotation impact at around minus 50bp for the week and minus 110bp since January 1st.

In company news, AT&T jumped 5.9% over the week after the activist Elliott fund said it had bought a stake and was demanding changes to improve value creation for shareholders. Apple gained 4.6% this week after unveiling its new iPhone Pro and iPhone 11 at lower-than-expected pricing. It will also be launching its new Apple TV+ streaming service in November for $4.99 a month. 

  Japanese equities

Japan’s April-June real GDP growth was revised down from +1.8% to +1.3% due to downward revision in capex (excluding software). In addition, preliminary machine tool orders for August were a disappointing JPY 90m, down 37% YoY.

However, as concerns over the US-China trade issue receded and the yen kept steady against the US dollar, Japanese equities rose. The Nikkei 225 gained ground seven days in a row and the TOPIX rose 3.77% for the week. Oversold value stocks on relatively low P/B valuations outperformed high PE growth stocks. Financials, materials and pharmaceuticals staged strong rebounds but we believe earnings growth will be needed to justify further upside.

Mining, Banks, Securities & Commodities Futures and Insurance led top performing sectors. Resona Holdings jumped 12.17%, T&D Holdings posted double-digit returns and Nomura Holdings gained 7.95%. On the other hand, property lagged. Mitsui Fudosan lost 4.04% and Orental Land also ended lower. 

  Emerging markets

The MSCI Emerging Markets index ended the week 1.4% better as negative sentiment on the US/China trade war eased after both parties agreed to resume talks in October. China announced that a range of US goods would be exempted from the 25% extra tariffs put in place last year; Beijing is seeking to soften the impact from the trade dispute without lifting charges on major agricultural items like soybeans and pork.

China’s central bank continued to provide ample monetary stimulus to its flagging economy by cutting the amount of cash that banks must hold as reserves for the third time this year. This will release RMB 900bn ($126.35bn) in liquidity. In addition, the bank said it would cut the reserve requirement ratio (RRR) by 50bp for all banks, with an additional 100bp cut for qualified city commercial banks. RRR for large banks will also be lowered to 13%.

China's loan growth rebounded faster than expected in August after a seasonal decline the previous month, signaling that policy efforts to channel funds to companies may be gaining further traction. Aggregate financing was RMB 1.98 trillion ($278bn) last month, compared to about RMB 1.01 trillion in July, said the central bank on Wednesday. The median estimate from economists was RMB 1.6 trillion.

On the corporate front, consolidation attempts continued in the global stock exchange sector. The Hong Kong Exchange announced an unsolicited $36.6bn bid for the London Stock Exchange. The takeover would create the world's third biggest stock exchange group behind the New York Stock Exchange and Nasdaq in terms of company listings. Elsewhere, Naspers successfully spun off Prosus, its non-strategic asset, in Amsterdam.

In Brazil, retail sales rose 7.7% or more than the 4% expected, on strong non-durable goods and semi-durable goods. Brazil’s Senate approved the telecom reform which will now allow: (1) the change of fixed-line concession titles for authorization, (2) the end of asset reversibility which can now be monetized and; (3) fixed-voice capex obligations to be replaced by broadband capex, a positive development for the operators in the sector. 

  Corporate debt

 

Credit

Markets staged a vigorous rebound last Thursday after a mixed start to the week. As expected, the ECB unveiled measures -lower deposit rates and a fresh QE programme- to underpin the economy. Banks were also offered some support. The Xover tightened by 4bp and the Main by 3bp between Monday and Thursday.

Steel maker Schmolz+Bickenbach warned on profits and reduced its 2019 targets. The bonds lost up to 15 points after the news. In the same negative vein, Ford Motor slipped back to high yield status after Moody’s downgraded the group from Baa3 to Ba1 but with a stable outlook. Moody’s cited operating difficulties and the costly restructuring plan’s impact on earnings. In results news, CMA-CGM’s second quarter figures beat expectations due to the first effects of its cost-cutting programme. The group billed 500m in sale and leaseback deals on its ships and overall sales rose 35%.

After RBS in the preceding week, Lloyds and Barclays said third-quarter provisions would be more than expected -£1.2-1.8bn and £1.2-1.6bn- due to PPI missellling. But both banks have strong capital bases and will be able to absorb the provisions. This will mean 50bp less on Barclays’ CET1 capital. Lloyds’ CET1 will fall by 80bp and the bank said it was suspending its share buyback programme.

The European Court of Justice’s advocate general gave his opinion on the IRPH indexed loans dispute in Spain. The conclusions were for information only and are not be taken as an indication on how the court might rule when it pronounces round the end of this year. However, Spanish AT1 debt initially lost 1 point before recovering some of the loss.

The new issues market was busy and high yield in particular. IGT raised €500m over 8.5 years at 2.375%, Salt (Matterhorn) €825n in two tranches, 5 and 7 years, at 2.625% and 3.125%, and Intrum €850m over 8 years at 3%. In financials, Groupama raised €500m with a 10-year Tier 2 bond at 2.125%. The proceeds will go on reinforcing solvency which will fall by 8 points in October when its Tier 2 2039/19 bond is repaid. 

Convertibles 

Momentum remained strong on the new issues markets with deals worth more than €1bn, mainly in Europe. Demand also remained robust and issues were easily placed.

MTU Aero Engines AG (aerospace parts) raised €500m at 0.05% due 2027 and with a 55% conversion premium. The proceeds will go on buying back its 2023 convertible.  

JPM is seeking to raise €400m with an exchangeable bond into LVMH at a 15% premium.

Last Thursday, RH (Restoration Hardware, a home-furnishings company) said it was to raise $300m with a 5-year zero coupon bond and a conversion premium of 25-30%.

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