The focus shifts to earnings reports

Análisis de mercado - 28/10/2019

Brexit commotion dominated market sentiment after the agreement reached by Boris Johnson failed to go to a vote in the Commons over the last weekend (English version).

The UK prime minister eventually got a majority for his text but accelerated adoption was refused so as to allow MPs time to look at the agreement in greater detail and possibly table amendments. It is now up to the European Union to decide on allowing a further delay beyond October 31. Faced with the parliamentary stalemate, Boris Johnson called for early elections on December 12 to capitalise on the Conservative party's lead in the poll. However, he will need a two-thirds majority in the house to go ahead.

Elsewhere, the ECB meeting held no surprises with Mario Draghi sticking to his dovish message in his last appearance as chairman. In the US, the Fed is expected to cut rates in the week starting October 28.

Economic data over the week were mixed. Preliminary euro-zone PMI showed Germany was continuing to slow but France did better than expected. Composite PMI for the euro-zone as a whole edged higher from 50.1 in September to 50.2 in October. In the US, durable goods orders were once again disappointing but preliminary composite PMI data for October recovered slightly from 51 to 51.2. Bond yields only shifted a little and were stable over the week.

The results season was in full swing. With a third of US reports in, 82% surprised on the upside and growth rates were slightly positive when they were expected to fall. In Europe too, positive surprises outpaced negative news but growth was slightly negative.

Some stock prices saw hefty moves when results came out but equity markets as a whole only edged higher over the week, remaining close to year-to-date highs. Investors are looking for more clarity on Brexit and the trade war.

Against this backdrop, we remain relatively cautious on risky assets. 

  European equities

As well as more Brexit uncertainties, quarterly results dominated sentiment over the week. Positive surprises included Elis (+4%) which gained on strong French momentum. Management revised up annual guidance. Luxury group Kering also performed well, reassuring investors, after a complicated second quarter, with 7% like-for-life sales growth at Bottega Veneta and an 11% jump at Gucci. There were also pleasant surprises from Michelin and Valeo, up 4% and 10%, after both reiterated annual guidance although the environment continued to deteriorate. Scor jumped 5% after its P&C division saw its combined ratio fall and a better-than-expected financial result.

Among disappointments, AB-InBev sank after tougher conditions in China hit its quarterly figures. Capgemini shed 4% after the IT group revised down guidance on growth to the low end of the spread due to weakness in its banking and UK divisions. Nokia had a terrible week, plummeting 25% on another disappointing quarter: management said the pricing environment was complicated, the group had lost market share and China was extremely tricky. At Dassault Systèmes, new license sales also fell a little short of expectations but margins and FCF generation were both better than expected. Saint-Gobain reported good quality results up 3.1% but said the business climate was getting worse. Ubisoft (video games) plunged 25% on news that three out of its four launches had been pushed back. 

  US equities

The S&P 500 was up 0.8% and the Nasdaq 1.3% as of Thursday’s close in a choppy week for sector moves amid a flurry of quarterly results.

The yield on 10-year US Treasuries was unchanged at 1.76% but WTI gained 4.7% to $56 on a drop in oil inventories. Sentiment on cyclicals remained downbeat with no improvement in growth prospects factored into prices. Yet a US-China trade deal, less likelihood of a no-deal Brexit and a drop in the US dollar could rekindle global growth from 2020.

Technology (+1.3%), utilities (+1.6%) and consumer staples (+1.1%) led winning sectors. Telecom operators (-0.6%), in contrast, fell prey to profit taking. Healthcare (+0.2%) and basic materials (+0.23%) underperformed.

In company news, Tesla surged 20% after reporting its first ever quarterly profits, especially as the market was expecting another loss. PayPal and Proctor & Gamble also announced results that easily beat consensus expectations and both stocks gained more than 5% intraday. In industrials, Caterpillar and 3M cut earnings guidance for the year, citing a persistently downbeat macroeconomic environment and the negative impact of trade tensions on order books. Internet stocks Twitter, eBay and Amazon all tumbled by more than 10% after results fell well short of expectations. Twitter saw a particularly disappointing sag in user base growth and sales fell. Amazon’s downward revision in earnings was due to higher-than-expected investments in its same-day delivery programme. 

  Japanese equities

With no major news and the yen sticking to 108 against the US dollar, Japanese stocks revisited their year-to-date highs. The TOPIX gained 1.34% for the week with sectors such as Nonferrous Metals and Mining outperforming.   

In pharma, Eisai jumped 35.75% after Aducanumab, a new drug for Alzheimer’s Disease, was reassessed as effective by a clinical test. Its business partner the US Biogen is going to apply to the US FDA for approval of the new drug. On the other hand, chemical producer Toray fell 4.91% on worries that Boeing might reduce plane production. 

Elsewhere an amendment to the Foreign Exchange & Foreign Trade Act is being discussed. It concerns cutting the threshold of mandatory prior notification for non-Japanese investments in listed companies involved in national security (including IT) from 10% to 1% of outstanding shares. The news triggered some concerns but non-Japanese banks, insurance companies and asset management companies will be exempted. 

  Emerging markets

Emerging markets were up 1.3% as at Thursday’s close (24 October 2019) with Brazil (+2.2%) and Russia (+4.2%) outperforming. US Vice President Mike Pence denied that the US was seeking to decouple from China while laying out a wide-ranging critique of China ahead of the phase I deal, which is expected to be signed in mid-November.

In China, the new loan prime rate (LPR) was left unchanged this week, suggesting easing would be slower than expected. On the company front, Hikvision’s quarterly results were in line with expectations: earnings at the leading provider of security solutions were up 23% with no disruptions from US suppliers.

New Oriental Education reported a 25% surge in first quarter 2020 EPS due to strong student enrolment. Tal in the same sector, announced a 33% jump in net revenues. China’s leading K-12 after-school tutoring services provider also raised guidance for next quarter.

Taiwan’s export orders for September were down 4.9% as the weakening US economy continued to be a major risk for the country. Moreover, relocation of manufacturing from China was limited by Taiwan’s resource constraints. On the company front, TSMC reported and guided for better-than-expected results as a strong 5G roll-out and high performance computing demand outweighed any slowdown from the trade war, resulting in a sharp increase in capex.

In South Korea, exports have already fallen a further 20% this month after September’s 22% decline.

In India, Infosys plunged 16% after whistle-blowers accused its CEO of unethical practices in recent quarters in an attempt to boost short-term revenues and profits. HDFC Bank reported better-than-expected second quarter results for FY 2020, with stable asset quality.

The biggest news this week in Brazil was the Congress’s final approval of pension reform with 60 senators in favour, or more than the 49 votes needed. On the corporate front, Petrobras announced a 17% YOY increase in its third quarter crude oil production, beating consensus estimates by 4%.

In Mexico, Grupo Aeroportuario Centro Norte reported upbeat quarterly earnings with a strong 7% increase in traffic growth. Cemex, however, had a disappointing quarter and cut guidance as the building products manufacturer continued to suffer from a fall in cement sales. 

  Corporate debt

 

Credit

Brexit developments once again influenced trading this week. The European Union was looking at agreeing to a third postponement and Boris Johnson’s call for early parliamentary elections triggered fresh uncertainty. Mario Draghi’s farewell speech as ECB chairman had little impact on spreads. Monetary policy remained unchanged. The Main tightened by 2bp and the Xover finished the period flat.

SoftBank said it was to inject $5bn in WeWork and launch a $3bn bid to buy out existing shareholders. The move should result in Softbank's stake increasing from 29% to 80%. Teva said it had reached an agreement with the state of Ohio to avoid a Federal court case over the opioid scandal. Teva will pay a $20m fine spread over 3 years and supply £25m-worth of free drugs. Teva’s bonds initially dropped on the news as the terms of the agreement were harsher than expected but they later recovered. Casino’s bonds were heavily traded after the group said liquidity had been reinforced by credit line extensions and a new capital-restructuring plan. This will include €1.5bn in new funding to refinance part of its existing debt, notably its 2020, 2021 and 2022 maturities. S&P then moved the group from “negative credit watch” to “negative outlook” and Moody's cut its rating from B1 to B2.

Elsewhere, Coty said it was looking at strategic alternatives for its professional beauty division, including a possible disposal, as part of its drive to cut leverage. Sunrise scrapped plans to acquire UPC after cancelling an extraordinary shareholders’ meeting, which was supposed to agree an increase of capital to fund the deal.

Europcar Mobility came under attack after a 10% drop in third quarter EBITDA and a downward revision in full-year guidance. In financials, UBS saw results drop 13% over the year with a disappointing contribution from investment banking. However, its Global Wealth Management division performed well and took in $15.7bn in new money.

The new issues market was busy and high yield in particular. Kantar raised €1bn with a secured 2026 maturity at 5.75% and €475m with an unsecured bond due 2027 at 9.25%. Crown raised €550m over 4 years at 0.75%. Netflix sold an 11-year maturity in two tranches, raising €1.1bn at 3.625% and $1bn at 4.875%. 

Convertibles 

With the new issues market inactive, the focus was on the earnings season.

In the US, Tesla reported stronger-than-expected quarterly earnings, which reflected robust demand for its Model 3 and margin improvements driven by solid operational execution. The stock jumped 18% on the day.

On the contrary, Twitter slumped 21% after missing expectations and despite a 17% YoY rise in daily active users (DAUs).

In Europe, gaming company Ubisoft cut its net bookings target for FY 2020 from €2.19bn to €1.45bn amid lower revenue expectations for Ghost Recon and The Division 2.

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