Fresh political risk makes waves

Analisi di mercato - 08/06/2018

In another week dominated by European political developments, Pedro Sanchez finally managed to form a Spanish government and Madrid rose on the news. (English version)

But in Italy, Giuseppe Conte’s address to the Senate confirmed his administration's determination to reduce Italy’s debt over time by aiming for growth through fiscal stimulus. As Italy's debt is already running above 130% of GDP, this attitude is a stark illustration of conflicting views with Europe. The new government’s intention to stay within the eurozone was the only reassuring part of the speech. 

Elsewhere, several ECB monetary committee members confirmed that the upcoming meeting would discuss the asset buying programme between now and the end of 2018. This follows higher-than-expected inflation. May’s final PMI data slightly beat expectations with eurozone retail sales rebounding to 51.7, up from 48.6 in April. First quarter growth figures showed robust consumer spending and a gradual increase in investment, with exports dragging down the overall figure. 

In the US, the Fed is to raise its rates next week for the 7th time amid a persistently strong economy. Manufacturing and non-manufacturing ISM for May continued to rise. But trade tensions have intensified and the G7 summit could well be a rowdy affair. Last weekend's communique following a meeting of finance ministers and central bankers had already expressed concerns on US levies on country allies and friends. 

Perhaps as a result, eurozone equities this week underperformed due to a rally in the euro and various comments from ECB members. Performance dispersion between countries was significant with Madrid up and Milan sharply lower. Italian bond spreads also widened further after a brief lull at the beginning of the week and a move higher in German Bund yields. 

  European equities

Unsurprisingly, Giuseppe Conte’s new administration won the vote of confidence in the Italian parliament. The new Prime Minister also said there was no question Italy would exit the eurozone. But he argued in favour of social spending, sending Italian spreads even wider. 

In Madrid, Pedro Sanchez’s new government took a very pro-euro and disciplined economic approach which reassured markets. European long bond yields and the euro rose after the ECB’s head economist said the upcoming monetary committee meeting would discuss whether it was time to end its asset buying programme.

Defensives like food and pharma fell on the news. Luxury stocks fell sharply after Kering said second half growth in Asia would be less dynamic even if the group has ambitious targets for Gucci, including €10bn in sales and an operating margin of 40% over the medium term. Hermès, the 8th largest market cap in Paris which has gained 25% so far this year, joined the CAC 40, replacing Lafarge Holcim. Rémy Cointreau’s full year results were in line and the group expects to see margins improve more quickly. But the stock fell as it was trading on a demanding PE and luxury stocks were in any case generally weak. After IAG’s CEO said higher oil prices would start hitting airlines, Air France, Lufthansa and TUI lost ground. But tech stocks continued to rise, helped by upbeat semiconductor figures for April. 

In company transformation news, AccorHotels confirmed that it was mulling taking a minority stake in Air France-KLM with a view to joint ventures, notably in the digital field and in developing a shared customer loyalty and service platform. The FT said there had been talks between UniCredit and Société Générale over a merger. Société Générale also said it had settled its LIBOR and Libya legal disputes with the US. Deutsche Bank’s CEO denied talks with Commerzbank but recognised that there had been contacts with its main shareholders. Capgemini reinforced its US presence by acquiring the cyber security subsidiary of Leidos Cyber. Bayer finalised its acquisition of Monsanto which will mean the end of the Monsanto brand. 

  US equities

It was an excellent week on Wall St with the S&P up 1.3% and the Nasdaq ending 1% better after hitting fresh highs. There was however some profit taking towards the end of the week on the best YTD segments. FANG stocks gave up some ground. Small and midcaps followed suit after outperforming the S&P by more than 5% over the last 3 months (+6% for the Russell 2000). Non-manufacturing ISM rose to 58.6 or more than expected. But durable goods orders fell 3.6%. 

Yields on 10-year Treasury briefly popped above 3% when Peter Praet, the ECB's chief economist said he would not take the Italian crisis into account, a statement that caused yields to tighten across the board. 

While most of the FANGs advanced, Facebook shed 2% on news that it had shared user data with four Chinese companies, including the mobile phone maker Huawei. The harvested data was used by the companies to design apps tailored to customer needs. McDonald's jumped 6% over the period after management unveiled a new cost-cutting programme. Tesla soared 11% after Elon Musk said he was confident the group could produce 5,000 Models 3 a week by the end of the month. There is however still a huge short position on stock representing 31% of the free float. 

  Japanese equities

Tokyo rebounded this week following strong US market gains on optimism over US economic growth. With the US dollar up against the yen, economy sensitive stocks as well as export plays rose. During the week, the TOPIX gained 2.28%. 

Almost all sectors rose, notably Non-ferrous Metals (+5.90%), Pulp & Paper (+5.04%), Transportation Equipment (+4.15%), Wholesale Trade (3.99%) and Rubber Products (+3.84%) which were the top five performing sectors. Sumitomo Metal Mining soared 12.71% on higher copper prices. 

On the other hand, Other Products was the worst performer due to Game Producer Nintendo which sank 5.16% on heavy profit taking. 

Most earnings announcements from companies with a financial year ending ending 31 Mar 2018 are now in. In our analysis, most company guidance figures for FY2018 were very conservative. Even if the exchange rate stays around the current 108 against the US dollar, upward earnings revisions can be expected for FY2019. 

  Emerging markets

Asian investors focused on companies which were struggling to refinance. RMB 6.2 trillion is maturing in 6 months, making 12 trillion over 2018 as whole. There have already been 22 bond defaults this year compared to 49 in 2017. The 5-Year yield for A-rated companies is close to 11%. High risk is concentrated in property and bonds issued by provincial administrations. We should naturally monitor these defaults but it is too early to talk of systemic risk as these are still individual cases which the system can absorb. It is no coincidence that the PBoC has injected RMB 259bn to cover the 180bn falling due and to avoid stoking concerns over bond market illiquidity. The banking regulator has decided that any loan not repaid after 90 days must be considered an NPL which means that banks no longer have any say in the matter. The measure has been viewed as very positive as it will accelerate moves to clean up NPLs and at the same time improve bank transparency. 

In Macau, local papers say pawnbrokers shops are now illegal in casinos, a development that could hit operator's revenues. ZTE is to pay a $2.3bn fine to lift its ban on access to the US market. The group’s senior management has also been changed. China's exports rose as expected by 12% in May while imports rose by 26% or more than expected. India’s central bank raised its benchmark rate by 25bp to 6.25% but left its reserve rate at 4%. The liquidity ratio rose by 2 points to 13%, reducing banks’ needs to buy government bonds. In Malaysia, oil subsidies were scrapped to offset the disappearance of VAT (previously at 6%). Brazilian stocks continued lower due to mounting electoral risk. And expectations of rate hikes have increase following last month’s 9% plunge in the Real and in spite of favourable inflation prospects. The central bank intervened several times to stop the Real falling. Good news in Argentina: the IMF agreed a higher-than-expected $50bn loan over 3 years and the government’s budgetary and inflation objectives were seen as positive. 


Brent crude seems to have found a short-term floor of $75 but ended the week close to $77 amid fresh US dollar weakness and developments in Venezuela. The fall in the country’s production has accelerated since September 2017 and it is also running a month late in its export programme. It could declare force majeure in coming weeks. In April, Donald Trump tweeted that oil prices were artificially high, a situation he found unacceptable. He had probably forgotten that high oil prices stemmed primarily from US sanctions against Venezuela and Iran. In an effort to garner support from other OPEC members, both countries have asked for discussion of sanctions to be added to the next summit’s agenda. 

Already companies like Total, Lukoil and Peugeot have suspended business with Iran. Refiners who buy Iranian crude are still waiting for clarifications from Washington on the exact amount of sanctions and their timing. This uncertainty will not help OPEC in its efforts to decide how much crude should return to the market. However, the excellent relations between Saudi Arabia and Russia since the end of 2016 should, in our view, help provide the required market stability. They will also both meet on June 14 ahead of the OPEC-Russia summit. 

Also of note this week was copper, an essential metal in both the” old” economy and the energy transition universe. It jumped 7% over the week to $7,350/t, hitting levels not seen since January 2014 and a big contrast with the January 2016 low of $4,320/t. This performance reflects improving fundamentals as well as short term concerns. The world's biggest mine at Escondida (900,000 tonnes in 2017 or close to 5% global output) which is a joint venture between mainly BHP Billiton and Rio Tinto, is about to start wage talks and traders are worried about a strike. However, we do not expect any serious disruption to production. 

  Corporate debt



The market started the week on the front foot thanks to robust US jobs data and reduced fears of a new eurozone crisis. But the Xover then widened by 20bp between Tuesday and Thursday on the new Italian Prime Minister’s populist rhetoric which confirmed his determination to roll out the coalition's programme. Italian bonds came under heavy pressure and overall market sentiment was further undermined by concerns over a trade war and increasing customs barriers. 

Casino's shares and bonds were hit when research report reduced its price target. 

Holland’s Der Telegraaf newspaper said Lion Capital’s talks with the Core Equity investment fund over a sale of Hema (BB-, retail) would be called off. But other talks are reportedly in progress and there is still a plan to list the company. 

Construction group Algeco (B2, B6) reported upbeat first quarter results with sales up 31% and EBITDA 45.4% better thanks to strong revenue growth in Europe and the US. Debt/EBITDA is 7 or 0.3 points better than at the start of 2018. Automaker FCA (Ba2/BB+) presented its 2018-22 strategic plan which expects costs, capex and profitability to rise in 2021/22. The group is aiming to be investment grade rated by at least two agencies by the end of 2019. 


It was a busy week on the primary market with nine new deals. In Europe, Swiss Re came to market with a $500m 6Y 3.25% convertible with a CoCo clause for refinancing. In Vietnam, real estate development company Vingroup issued a $325m 5Y 3.5% premium redemption convertible with reset clauses for new project financing. 

In Japan, Toho Holdings, a wholesaler of medical tools and equipment, issued a JPY20bn 5Y zero coupon convertible for capex and share buyback purposes. Another deal in Japan was from Nippon Flour Mills which raised JPY25bn with a 7Y zero coupon convertible for capex financing. 

In the US, Twitter sold a jumbo $1bn 6Y 0.25% convertible to refinance its existing 2019 convertible. Electronic components manufacturer Vishay Intertechnology raised $575m with a 7Y 2.25% convertible to repurchase part of its outstanding convertibles. Another deal came from Avaya Holdings, a communications software solutions company, which issued a $300m 5Y 2.25% convertible for general corporate purposes. Software company Mindbody announced a $200 5Y convertible with a 0.125%-0.375% coupon range to fund working capital. Biotech company Exact Sciences returned to the market to tap its existing 2025 convertible for $150m.

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