Geopolitical tensions are back

Marktanalyse - 20.09.2019

Hopes for a week of reduced geopolitical tensions following renewed dialogue between the US and China were dashed when a Saudi Arabian oil facility was attacked by drones, escalating strained relations between Iran, the US and Saudi Arabia.

The attack destroyed 50% of Saudi production and 40% of its capacity. Crude oil prices immediately jumped more than 8 dollars. Demand estimates for 2020 had previously been lowered, causing oil prices to trend lower. But the return of the oil price risk premium has led to investors worrying that prices might go even higher, with the risk that US consumption might be hit by increasing petrol costs. Could we see further attacks? It is difficult to say but Riyadh’s confident statements that oil exports would be maintained and damaged capacity rapidly rebuilt have allayed fears of supplies being interrupted and an oil price spike. However, the geopolitical consequences are fresh US sanctions against Iran and increased Middle Eastern tensions. As a result, the oil risk premium has only been slightly reduced.

Elsewhere, the Fed cut its interest rates by 25bp as expected. Markets were generally looking for some clarity on further easing but voices within the Fed, as inside the ECB, are increasingly being raised against further cuts even if so far a majority of FOMC members expect to see more. This has led to a drop in the probability of a second US rate cut from 100% to 80%.

US markets reacted to the FOMC decision by taking yields on 10-year US Treasuries down a little and pushing the dollar slightly higher. On equity markets, oil stocks had ended the previous week sharply higher as the wind turned more favorable for cyclicals. Indices dipped on news of the drone attack but then rebounded to wipe out losses. They are now flirting with 2019 highs.

  European equities

The drone attack on Saudi oil facilities sent oil prices sharply higher last Monday and dragged markets lower. Quite logically, high energy users -cement and steel companies as well as airlines- were the hardest hit. More generally, the incident put a halt to sector rotation into cyclicals. Aerospace and luxury stocks also came under pressure. Airbus lost its WTO appeal against the US over alleged EU’s subsidies. The group could now be the target of customs duties. In the luxury sector, Moncler fell sharply after its CEO said caution was in order over full-year sales due to the Hong Kong demonstrations and macroeconomic factors. Markets trod water ahead of the FOMC, on Saudi reassurance over production rapidly returning to normal, before indices rebounded after the Fed rate cut. The CAC 40 ended the period at its highest level since 2007.

In company transformation news, Covestro gained after selling its European polycarbonate sheets business to SEAFIN. The payments sector was underpinned by consolidation hopes. Wirecard gave details on its strategic partnership with Softbank with a focus on the promising Japan and South Korea zones. Merck received US approval to acquire Versum, a new growth area for its Performance Materials division. Casino gained ground on the looming sale of its Leader Price shops to Aldi for almost €400m.

  US equities

The S&P 500 and Nasdaq finished almost flat as of 19 September close in a week dominated by macroeconomic and geopolitical news. The previous weekend’s attack on the Saudi Aramco facilities halved Saudi Arabia’s production capacity which fell from an average of 9.8 million to 5.7 million b/d. WTI prices jumped 6% over the period to $58. On Monday, when trading resumed, they even soared 15% as short sellers scrambled to cover positions but then stabilized as Riyadh said production would restart earlier than expected. Yields on 10-year US Treasuries slipped to 1.77% after the Fed cut its benchmark rate by 25bp while leaving the way clear for further cuts if the economic slowdown were to worsen. Energy (+0.9%), utilities (+1.8%) and property (+2.4%) led gains. Consumer discretionary and stables underperformed, falling 1% and 0.4% respectively.

In company news, FEDEX sank 12% after cutting earnings guidance by 20% due to the deteriorating macroeconomic environment. Large department stores like Macy’s and Nordstrom also tumbled, down 8.3% and 7.6%, after Cleveland Research said retail sales might miss expectations in the third quarter. Also of note was US Steel’s warning that third quarter EBITDA would be 30% lower than previously indicated. The group said higher steel prices would be rapidly offset by slowing global demand.

  Japanese equities

The attack on Saudi Arabia’s crude oil production facility surprised oil-importing countries including Japan. However, it had a limited impact on the TOPIX which gained 0.36% over the week. Japan depends on Saudi Arabia for approximately 40% of its total crude oil imports but it has reserves for more than 230 days.

Value stocks with relatively low valuations continued to outperform growth stocks. Real Estate, Electric Power & Gas and Land Transportation outperformed. Mining and Coal Products also gained on a surge in oil prices. Leading oil & gas developer INPEX (1605) jumped 6.07% while energy-consuming sectors such as Iron & Steel, Pulp and Paper and Air Transportation were weak. Major steel producer JFE Holdings (5411) lost 5.04%.

According to the latest data from the Japan National Tourism Organization, tourist inflows for August decreased 2.2% YoY mainly due to a sharp 48% YoY fall in South Korean visitors as political tensions between the two countries surged. However, tourists from China, the US and Europe continued to post double-digit growth.

The Bank of Japan decided to maintain its current policy of large-scale monetary easing at the MPM on 19 September. The bank is prepared for additional easing to counter any economic downturn from the consumption tax hike which comes in on 01 October.

  Emerging markets

Emerging Markets were down 1% over the week as at Thursday’s close (19 September). Chinese equities (FTSE All World Greater China index) lost 1.8% as China's economy continued to slow. The preemptive measures announced recently such as the cut in the Required Reserve Rate was a clear response to this slowdown whilst expectations for further benchmark rates cuts increased. Retail sales rose 7.5% in August vs. 7.6% in July and consensus estimates for +7.9%. Rural sales (+8.9%) held up better than in cities (+7.2%), while auto sales continued to contract, down 8.1% in August. Industrial production was up 4.4% in August vs. 4.8% in July, or lower than consensus of +5.2%, while unemployment remained stable at 5.2% in August, slightly down on July’s 5.3%. On the corporate front, Tencent and the private equity partner Hammer Capital offered $16 a share to buy out the other shareholders in Chinese car comparison website Bitauto Holdings.

In India, the corporate tax rate cut announcement on 20 September, down from 30% to 22%, was another hallmark of Narendra Modi’s commitment to provide more stimulus to a sluggish economy. This is by far the most significant measure announced this year and indicates that the government is finally loosening fiscal discipline. Autos and bank stocks, major corporate taxpayers, jumped on the news. Companies incorporated after 01 October this year will have a 15% tax rate (a complementary measure to the FDI rule relaxation announced a few weeks ago) to attract foreign companies.

Brazil’s central bank cut interest rates by 0.5%, in line with expectations for a strongly dovish stance. SoftBank agreed to double its 8.1% stake in Brazilian online lender Banco Inter which offers zero-fee products. Another milestone in the mobile payment secular growth theme in the region was an announcement from Linx (the retail technology specialist) that it was forming another partnership with AME (a fintech and mobile business platform). Linx will integrate AME's mobile wallet with Linx's retail clients through its management software solutions. This is another important strategic initiative after the Mercado Libre partnership. In the energy sector, Petrobras announced price increases for diesel (4.2%) and gasoline (3.5%), a sign that the company remains committed to implementing its pricing policy.

  Corporate debt



Sentiment was mixed over the week due to Middle Eastern tensions and Matteo Renzi’s decision to quit Italy’s Democratic Party and set up a centrist breakaway party. As expected, the Fed cut its benchmark rate by 25bp but said little about its intentions in coming months. The Xover widened by 7bp between Monday and Thursday and the Main by 2bp.

Spanish supermarket chain Dia posted a disappointing 7% drop in half-yearly sales and a net loss of €419m. The group, which is 70% owned by LetterOne, nevertheless maintained that its robust long-term capital base meant it was ready to face any challenges.

Softbank's bonds were under pressure this week amid rumors that investors might not follow through on promises to invest in the Vision fund. Vallourec also fell slightly due to management changes. Casino confirmed that it was in talks with Aldi over selling the Leader Price chain, a good indication on the group’s divestment programme which pleased markets. Talks between Thomas Cook and creditors continued. A vote on the financial restructuring plan has been put back to 27 September. German press reports suggest that the group and TUI were looking to merge their Condor and Tuifly airlines.

It was a very dynamic week on the primary market. On the previous Friday, Altice France had raised €2.55bn in three euro and US dollar tranches due 2028 and 2025 Strong demand led the group to increase the offer by €1.5bn. There was a crop of Senior Non Preferred and Senior Preferred deals this week from banks like Société Générale and Caixabank completing their new issue programme for 2019. Barclays and Nationwide sold AT1 debt at 6.375% and 5.875% and order books were up to 6 times oversubscribed. In insurance, Generali and Allianz said they would be buying in some of their Tier 2 bonds and issuing new bonds instead. Allianz has already placed bonds worth €1bn at 1.301%. Achmea raised €500m with a RT1 bond at 4.625% and €250m with a Tier 2 bond at 2.5%.


Several issuances have marked the week. Ubisoft Entertainment (video games) raised €500m with a 5-year maturity at a 65% premium. The proceeds will go on funding the call on its 2021 convertible.

Small cap SailPoint (identity software) raised $300m over 5 years at between 0.125-0.625% and a premium between 32.5-37.5%.

Etsy (E-commerce) raised €650m at 0.125% and a 47.5% premium, mainly to fund a share buyback and for general corporate purposes.

Listed property investment company RWT Holdings, an affiliate of Redwood Trust, raised $175m with a bond at 5.75% and a 10% premium which is exchangeable into Redwood Trust shares. The proceeds will be used on the partial repayment of the 2019 maturity.

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