Swinging between relief and trepidation

Analisi di mercato - 06/04/2018

Financial markets were very choppy in line with the war of words between the US and China. Beijing started the week with tit-for-tat retaliation, imposing 25% in tariffs on $50bn of US exports. The big difference was that the products targeted are made in pro-Donald Trump areas. (English version)

As the battle grew more heated, markets took more refuge in risk aversion. Mid-week, however, several US officials opened the door to a favourable conclusion to trade talks. Equity markets rebounded on the news and the eurozone even managed a 3% bounce. But the relief was short-lived as Donald Trump then said his administration would be looking at the possibility of taxing a further $100bn in Chinese imports. Market volatility will continue as long as this game of ping pong continues and in spite of fundamental support for equities.

Elsewhere, March’s ISM suggested the US economy was still vigorous. And equity market valuations have returned to more neutral levels with earnings growth this year expected to come in close to 10%. We believe most downward revisions are over and that analysts’ expectations are attainable. At the same time, the M&A market remained on form with a fresh acceleration in deal-making in the first quarter.

But due to the US-China stand-off, markets in our view are no longer taking promising fundamentals on board. We remain overweight equities, especially in Europe. On the other hand, falling European government bond yields have led us to up our Bund short as its current yield now strikes us as much too low.

  European equities

European equities traded in line with the US-China trade dispute. Tech and industrials remained under pressure and Germany’s Dax, which is the reflection of an export-heavy country, suffered from US threats against China and Mexico. To make matters worse, Germany's retail sales were disappointing and the eurozone's manufacturing PMI retreated.

Defensives proved rather resilient. Luxury stocks gained on the outlook for future earnings reports.

First quarter results are expected to be slightly down on the strong messages delivered in the last quarter due to fewer business days and peak currency effects. The sector hierarchy has flattened sharply in recent weeks with banks and tech falling back into line and weak performance dispersion overall since the beginning of 2018. This helps us remain positive, all the more so as the macroeconomic base has not collapsed.

It was an active week for corporate transformation. Fiat jumped after the announcement that it would spin off Magneti Marelli at the end of 2019. The Fiat Chrysler group also benefited from excellent US sales in March. Ingenico surged after rumours that several companies might be interested in bidding for it. Atos is a possibility, following its failure to acquire Gemalto, and Wirecard is another potential buyer. Telecom Italia rose on rumours that investment bank Cassa Depositi might buy up to 5% ahead of the April 24 AGM and the May 4 extraordinary shareholders’ meeting to decide on changes to the board of directors. The bank says it wants to back national infrastructure and is a long-term investor. It could act as the arbiter between Vivendi and the activist Elliott fund.

Mediaset gained on the news that it had signed a cross-distribution agreement with Sky in Italy. Its share price was also lifted by rumours that Netflix might acquire EuropaCorp. Netflix has said it is in talks with several companies. Accor has acquired 50% of South Africa’s Manti. Continental and Osram Licht are to set up a 50/50 joint venture in automobile lighting solutions. Lagardère is expected to sell most of its media interests.

  US equities

The S&P gained 0.8% and the Nasdaq 0.2% against a background of US and Chinese posturing over trade barriers. Manufacturing ISM came in at 59.3, or below expectations of 59.6. New orders remained in positive territory but slowed to 61.9 from 64.2 in the previous month. Non-manufacturing ISM was in similar vein, slipping from 59.5 in February to 58.8 in March. Durable goods orders rose 3%.

Markets were initially surprised by the speed of escalation in the US-China war of words over tariffs and the S&P briefly shed close to 3%.

Atlanta Fed chairman Raphael Bostic struck an accommodating note by saying that he was very comfortable with inflation over 2%, that the 2% target was a mean and not a ceiling, and that were the Fed to introduce strong measures if the 2% inflation target was hit, it would send a negative message. These comments echoed statements from Bill Dudley, Robert Kaplan and Charles Evans in recent days and reinforced the scenario of a maximum of 3 rate hikes this year.

Energy and commodities led gains (+1.7%) while defensives and tech lagged.

  Japanese equities

Tokyo ended the week slightly higher with the TOPIX up 0.48% but investors still seemed cautious on the direction of the US-China trade dispute. While US markets remain volatile, many investors will take a wait-and-see stance.  

In sectors, domestic-demand related sectors advanced overall. Fishery & Agriculture (+2.73%), Land Transportation (+2.59%), Retail (+2.51%) and Food (+2.47%) outperformed the TOPIX. Fast Retailing rose by 7.54% on brisk same-store sales and Aeon, a supermarket chain operator, also gained 4.50%. Shiseido (cosmetics) added 5.37%, hitting a record high on expectations of strong demand for its premium products in both domestic and Asian markets. Kansai Electric surged by 7.61% on a broker upgrade due to the increased likelihood of nuclear power plants resuming operations. 

On a negative note, sectors sensitive to global trade fell. Oil & coal products (-2.36%), Marine Transportation (-2.22%), non-ferrous metal (-2.22%) were all hit.

Sumitomo Metal Mining fell by 2.70%, and oil companies such as JXTG Holdings and INPEX Corporation declined by 1.01% and 1.22% respectively. Stocks that had been strong in the previous fiscal year were also hit. Keyence, Softbank and SMC all lost more than 4% over the week.

  Emerging markets

Samsung Electronics reported better-than expected prelims with operating profits 57.6% higher due to margins beating estimates. This was probably down to better-than-expected profitability from the Galaxy S9 model and stable memory chip prices. The Hyundai Motor stake bought by the activist Elliott fund would seem to suggest corporate governance in South Korea’s Chaebols will continue to improve.

Elsewhere, the Reserve Bank of India left its interest rates at 6% and lowered its forecasts for inflation to 4.5% for fiscal 2019. Indian companies were on the acquisitions trail this week: Motherson Sumi bought Reydel for only 2x its EV/EBITDA 2017. HCL Tech acquired C3I Solutions to reinforce its business process outsourcing division.

China’s manufacturing PMI rebounded in March to 51.5 thanks to output resuming after the Chinese New Year as well as rising domestic and international demand. And despite numerous deleveraging measures, SME momentum has recovered.

In Brazil, the Supreme Court voted against letting former president Lula off a prison sentence, a move that should have a positive effect on company and consumer confidence levels. Brazil’s industrial production in February rose 10.2% or less than the 0.6% expected due to the mining and intermediary goods sectors. Year to date, the industrial sector has grown 4.3% compared to the same period in 2017. CVC saw reservations rise by a robust 13% YoY in the first quarter of 2018, or higher than the 10% generally expected, a like-for-like increase of 11.2%, up from +9.2% in the fourth quarter of last year.

In Mexico, the tone has changed on NAFTA talks. The outcome is still uncertain but top civil servants are now expecting the end result, which is soon to be announced, to be better than previously thought. Walmex swept past consensus expectations with a 13.5% surge in sales per store. Passenger traffic in Mexico’s airports jumped 13.6% (18.7% for domestic passengers and 10.5% for international travellers). Even so, Asur saw only a modest 5.3% increase due to weakness in Porto Rico and Colombia.


The trade war has not started but the US-China war of words is in full swing. Commodities were particularly jolted by escalating announcements of products destined for import duties. Donald Trump’s advisors cleared the air on markets mid-week with conciliatory messages before the President doubled his bets.

In news on fundamentals, Macquarie said global PMI in March had returned to October’s 54.3, down from 54.8 in the previous month and providing confirmation of an economic slowdown. The figure is high in absolute terms so should be put into perspective and China surprised observers by rising.

Oil prices were less sensitive to global trade concerns as they benefited from very positive news flow. US output was flat in January at 9.96 million b/d (+1.1 million b/d over a year) while demand rose by a strong 4% to 1.2 million b/d. OPEC’s production was hit by problems in Venezuela where output fell by 100,000 b/d in March to 1.51 million (down 500,000 b/d over a year). This limited overall OPEC production to 32.04 million b/d (-170,000 b/d). Russia confirmed that it would probably sign an agreement with OPEC and non-OPEC countries when the current pact runs out. Of note, was a steep drop in US weekly inventories, partly due to lower net crude imports, a further sign that inventories are rising less than is normal for the season.

At the geopolitical level, markets may well be focused on the US-China stand-off, but they should be aware of mounting tensions in the Gulf of Aden. The Iran-sponsored Houthi movement in North-West Yemen has stepped up missile launches into Saudi Arabia. The latest attack targeted a Saudi tanker in the Bab-el-Mandeb straits through which 5 million barrels of crude and oil products pass each day.

Elsewhere, gold continued to act as a safe haven. Gold ETF assets rose by 22.5 tonnes in March to 2,415 tonnes or $103bn.

  Corporate debt



Credit markets were largely unchanged despite rising equity market volatility and intense speculation over a possible global trade war. At the end of the week, the trend turned positive and spreads tightened a little. Shipping companies bore the brunt of concerns over the US-China war of words. Companies like CMA-CGM (B1/ B+), Hapag-Lloyd (B2/B+) and AP Moller-Maersk (Baa2/ BBB) came under strong pressure. The high yield new issues market was rather quiet but financials were busy. Société Générale sold a $1.25bn CoCo with a 6.75% coupon. UBI Banca raised €500m with a Senior Non-Preferred bond at 1.75%. Dutch insurer Aegon issued a 30-year Tier 2 bond for $800m at 5.5%.

Machine industry group Fives (B2/B) unveiled satisfactory fourth quarter results for 2017 with sales up 7% thanks to new orders surging 44% over the year and new contracts with US Steel and FedEx among others. Excluding exceptional gains, EBITDA rose 2%, enabling the group to cut leverage from 4.2 to 3.7 times. Greece’s Intralot (B1/B, lotteries and sporting bets) reported reasonable fourth quarter results for 2017. Gross income for the year was 18.1% higher, EBIDTA rose 4.9% and the most dynamic countries were Poland, Azerbaijan and Bulgaria. Net debt, however, rose by €15m due to bond refunding costs, and net leverage accordingly rose from 4.9 times in 2016 to 5.2 times last year. The group says it intends to invest around €115m in 2018. Synlab (B2/B+), which offers medical services, reported rather mixed fourth-quarter results. Sales were up 15.7%, or 2.1% like for like, but profitability paled with margins down from 19.3% to 16.7%. Cash generation, however, remained at a positive €15m in 2017, up from €10m in the previous year.


There were two new deals in the US. All-flash storage platform Pure Storage issued $500m in 5Y 0.125% coupon convertibles to finance potential acquisitions and investments. Bank of America raised $250m in 5Y 0.25% coupon cash settled notes linked to the common shares of US insurance company Voya Financial. This is the third such exchangeable structure into Voya Shares and stems from significant warrant positions held by US banks.

Ubisoft shares surged 10.8% on Thursday as the company announced impressive Far Cry 5 first week sales, breaking franchise records. Sony sold 17.2% of its 5.71% stake in Spotify in the music streaming company’s successful IPO and should book a capital gain in first quarter earnings. Steinhoff updated on the fair value of its real estate assets held in Hemisphere International Property, estimating it at €1.1bn, down from 2.2bn in the last update in February. Steinhoff 2023 convertible bonds reacted negatively, losing around 4-5 points.

In China, Alibaba announced the acquisition of the remaining 57% of the food delivery platform Ele.me shares that it did not already own in a $9.5bn deal, marking a strategic move into grocery deliveries.

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