Central banks dictate the trend

Market analysis - 7/7/2017

The Fed and ECB minutes were released over the week. Most central banks have changed their tone. Following on from the Bank of England, the Bank of Canada and the Fed, the ECB also suggested it was moving towards tightening in a few months’ time.

The shift was presented as a ‘no change in very accommodating policy’ but with the possibility of an adjustment to reflect the strength of the European cycle. The less accommodating tone has become generalised and bond yields continued to rebound while equity markets slipped back.

This week’s economic data generally indicated that the European recovery was still intact. In the US, for example, June’s ISM surveys improved while manufacturing and services were surprisingly upbeat. The eurozone’s composite PMI for June remained high at 56.3. The recovery is now more broad-based and lagging countries have caught up with the leaders. France’s PMI readings even moved ahead of the eurozone’s performance.

At the political level, fresh tensions surfaced in Asia after North Korea launched another intercontinental missile. The US criticised China for not controlling its neighbour. Elsewhere, amid worries that the US might make a move towards protectionism, the EU and Japan said they were about to sign a free trade agreement that would abolish customs duties on 99% of trade.

  European equities

European markets lost ground amid signals of future monetary policy normalisation from the ECB. European long bond yields jumped as did the euro against the US dollar, creating a favourable climate for financials. Autos and mines also headed north while most other sectors finished the week lower.

In company news, Reckitt reduced guidance on sales from +3% to +2% due to June’s cyber attack. Auto sales remained satisfactory in France and Europe, providing support to European auto stocks. A number of new contracts were announced over the week. Airbus said its order book for 2017 was filling up.

There were 203 net new orders in the first six months of the year and 306 aircraft delivered. Eiffage won a big contract to build a solar power station in Chile. Nokia and Ericsson were awarded contracts to modernise Telefonica’s network.

In results, Carrefour posted €21.8bn in second quarter sales, a sign that growth was accelerating across the board, including in France, and in all business lines. But markets worried about margins in the second half due to June’s price promotions in hypermarkets. Bayer revised guidance for the second quarter higher and the full year, mainly due to the integration of Merck’s OTC division which it acquired in 2014. Sodexo warned on its like-for-like growth and cut sales forecasts from +2.5/3% to +1.5/2%.

In M&A, Amundi finalised its acquisition of Pioneer Investments and will now be able to start operational integration. LVMH took effective control of Christian Dior with its Semyrhamis holding company which now owns 94% of the voting rights. Axa might sell its Hong-Kong wealth management division. 

  US equities

Indices edged lower again as the S&P gave up 1.3% and the Nasdaq ended the period 2% lower.

Bond yields continued to rise with 10-year US Treasuries hitting 2.37% compared to 2.15% a fortnight ago. The trend was naturally fuelled by upbeat macro data: manufacturing ISM came in at 57.8 (up from 54.9 in the previous month) and, more importantly, the new orders component hit 63.5, a level that left no doubts over the real economy's buoyant health.

The FOMC minutes revealed a split over future policy but the provisional calendar still stands and that means gradual rate hikes and careful shrinking of the Fed's balance sheet.

Sharp bond market moves were the principal factor in weekly sector returns. Financials led gains (+1.5%) followed by commodities and energy while defensive sectors were the biggest losers. Property fell 3%, technology 2.6% and telecoms ended 2.5% lower. 

  Japanese equities

The TOPIX edged up 0.2% over the week, although the market dropped on Thursday. The Nikkei225 closed below 20,000 on the day for the first time in about three weeks on profit taking due to concerns over North Korea and political uncertainty after the LDP lost the Tokyo metropolitan assembly election. However, auto and steel stocks remained strong during the week due to firm overseas demand.

By sector, the best performers were Iron & Steel (+3.8%) and Transportation Equipment (+2.8%). Automaker Subaru jumped 7.5% and Toyota Motor advanced 4.1% on robust US auto sales in June.

Steel makers Nippon Steel & Sumitomo Metal (+3.8%) and JFE Holdings (+3.3%) also gained ground.

In contrast, Other Products (-3.1%) and Pulp & Paper (-1.5%) were relatively weak. Nintendo plunged 7.2% and Toshiba (-5.7%) had another bad week. Other major losers included pharmaceutical companies such as Daiichi Sankyo (-4.7%) and Shionogi (-3.4%). 

  Emerging markets

It was a very quiet week for emerging market news. Last Saturday India introduced its Goods and Services Tax (GST) replacing 29 different state GSTs with a single tax for the whole country.

China’s state-owned People’s Daily published 2 editorials criticizing Tencent’s mobile ‘Honour of Kings’ game for its ‘unhealthy’ influence on gamers, especially on minors. The company is to implement a cap on access time for players under 18. The limitation and the probability of more to come will probably not have any material impact on the company’s profitability as minors lack significant purchasing power.

Elsewhere in China, the National Development and Reform Commission released guidelines promoting the sharing economy’s role in pushing innovation-driven growth and job creation, through the use of IT and resource allocation optimisation. The guidelines detail measures that improve access to the sharing economy, such as simplifying approval procedures, lowering entry barriers, and relaxing tax policies. There was also positive news flow in the insurance sector with the Government’s reform of the commercial pension system. The big news is that China will start an individual tax-deferred commercial pension trial by the end of this year. In Korea, inflation moderated to 1.9%.

In Mexico, June PMI was well ahead of consensus with manufacturing at 54.1 (vs. expectations of 48.6), the first time in nine months that it had moved above 50. The services index also went up to 54.5 (52.0 expected). Confirming this trend, Walmex reported a 7% increase in June SSS or better than expected.

Gap’s June footfall rose 12.9% YoY, higher than the consensus and better than May’s 11% YoY. Banxico’s minutes adopted a hawkish tone but with no clear indication of more hikes. Terrafina announced a capital increase to finance acquisitions. Mexico’s EPS growth is running at 17% and the market is trading at 16 times. We see room for an earnings upgrade, and valuations are below historic levels. We remain positive. 


It has become challenging to explain persistently high volatility on oil markets. The first drop in the US rig count in 24 weeks - 2 less out of a total of 756 - helped Brent crude flirt with $50 and WTI with $47. However, after 8 up sessions, prices suffered a deep correction over the week, a trend accentuated by a return of short sellers after a few weeks’ absence. And yet June witnessed a 7% drop in Russia’s monthly exports to 5.4 million b/d while production remained stable at 10.95 million b/d.

US demand had been a cause of concern in recent months but came in better than expected rising by 260,000 b/d in April when it was expected to mark a 490,000 b/d drop. In fact, we believe that market has convinced itself that OPEC needs to make further production cuts. But Russia said it would oppose any such motion at the next OPEC/Non-OPEC meeting and that was enough to fuel short-term pessimism. Even encouraging US weekly inventories failed to sustainably reverse the trend. Crude inventories fell by 6.3 million barrels. Add in lower oil products and the total decline came to 13.4 million, the biggest drop since last September. In addition, there was confirmation of a rebound in demand for petrol and imports fell to a 2-month low, a sign of lower OPEC exports.

In other news, China’s manufacturing activity remained upbeat. June's PMI (51.7) was already out but steel PMI data remained strong (54.1 compared to 54.8 in May) and electricity generation jumped 6.7% in May after rising 6.6% over the first four months of 2017. 

The gold ounce fell to $1,220 at the beginning of the week on a slightly stronger US dollar and higher US Treasury yields. The FOMC minutes told us nothing new about the Fed’s future policy moves and the consensus view is still expecting another hike in December. 

  Corporate debt



The high yield market had a quiet start to the week with German Bund yields edging lower partly due to a dovish comment from an ECB board member. The end of the week turned frankly lower with the Xover losing 7bp between Thursday and Friday as government bond yields rose after a disappointing 30-year bond auction in Paris and a more hawkish ECB tone.

But the new issues market was very busy. Two major maritime transport companies refinanced existing debt. Hapag-Lloyd (B+) raised €450m with a 7-year senior bond and CMA $600m with 5 and 7-year senior debt. Italian construction company CMC di Ravena (B2) raised €250m at close to 7% to refinance its short term debt. Packaging company Kloeckner Pentaplast (B) issued a €400m PIK bond at 8.5% to fund its dividend and an acquisition. In IG, Atlantia (BBB /Baa2), an Italian company active in airport and motorway infrastructure, raised €1bn with a Senior Unsecured 10 year maturity. In financials, Bankia sold its first AT1 debt (€750m) and Caixabank raised €1bn with a Tier 2 issue.  

Monte Paschi’s subordinated bonds made significant gains after its government-aided preventive recapitalisation was approved. The bank will now go ahead with a restructuring plan to ensure its long term viability.

In M&A, WorldPay (Ba2/BB) and Vantiv (not rated) have agreed in principle to merge. Both hope to make cost synergies and create a global group with offices in Asia, South America, Europe and the US. Vantiv had 2016 EBITDA of $839m and WorldPay 549m. Post merger, the new group’s leverage will rise to 4.5x compared to 3.2 for WorldPay and 3.7 for Vantiv.  


The convertible bond primary market went quiet this week, only a couple of days before the second quarter earnings season.

In the news this week and in Europe, Carrefour posted second quarter sales. They were up 6.1% growth but the recent promotions in France and Europe and group investments will weigh on future margins. Steinhoff via Conforama is buying a 17% stake in Showroomprivé (for a cash amount of approximately €160m). Steinhoff also announced a series of roadshows coming soon for new 6 and 9Y benchmark Euro straight bonds.

In the Ubisoft/Vivendi saga, Ubisoft will propose 2 new independent directors at the next AGM on September 22 as part of its efforts to promote independent figures.

In the US, Tesla tumbled 17% during the week on mounting concerns over deliveries, safety but also growing competition (Volkswagen will start deliveries of its first only electric car, the Neo, in 2020 with autonomy o 600km).

In Asia, China Gas Seller rose as the National Development and Reform Commission recommended using more natural gas use (ENN Energy jumped more than 8% after brokers raised its target price citing growth potential in gas projects).

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