Improved visibility

Analisi di mercato - 27/07/2018

European markets rallied thanks to a joint statement from Donald Trump and Jean-Claude Juncker in Washington that raised the possibility of trade tensions abating. Their compromise agreement should help start a period of talks, during which no trade tariffs will be introduced in the US, thus giving financial investors better visibility. Note that the agenda includes reducing customs duties and regulatory barriers with the exception of the autos industry; clearly, the Trump administration wants to keep the door open to future tariffs on vehicles. Naturally, the compromise requires confirmation after last April’s escalation in US-China tensions following a short period of talks.

The same wait-and-see mood can be found in Germany's advanced indicators. The IFO index has stabilised after 6 down months while remaining in expansionist territory with present and future business conditions running above their historic mean.

Elsewhere, Beijing's pro-growth message has finally got through judging from an easing in credit restrictions and fiscal policy. As well as a massive liquidity injection from the PBoC at the beginning of the week, the State Council also discussed going for tax cuts and more bond issuance to stimulate the economy. This confirms the most recent data which showed that tax expenditure had already started rising in June. Investors took heed and Chinese equities rebounded with base materials leading the way.

The other factor which is good news for equities compared to bonds is the reduction in ultra-accommodating central bank policy. The ECB apparently wants to stick to its schedule of ending asset purchasing in December 2018 with an initial rate hike after the summer of 2019, but it is the BoJ which is fuelling the current move higher in global sovereign yields. The bank looks worried about the negative effects of practically zero, or even negative, interest rates on banks. Expectations that the BoJ might raise its 10-year yield rate target to 0% to help its banks have already had an impact on yields and caused US and Japanese yield curves to start to steepen again.

  European equities

European markets advanced on investor relief after the unexpected success of the Donald Trump-Jean-Claude Juncker talks. The rebound was led by base materials, banks, telecoms, autos and building materials, all of which had been in in negative territory year to date.

A quarter of European companies had released interim results by the close of the week and generally good quality results bolstered market sentiment. Among results which went down particularly well with investors, Airbus posted much better-than-expected free cash flow and CNH raised its annual guidance after reporting excellent figures.

Peugeot jumped 15% when it announced a remarkably good first half with record operating margins of 8.5% in its autos division and 5% at OPEL. Mid cap stocks like Lectra, Tarkett, Akka and Dia rose on upbeat figures and Saipem advanced after winning new contracts. Europcar’s first half was strong and the company confirmed its full-year guidance. Korian, meanwhile, seems to have returned to growth and Elis saw its margins improve across the board. SEB struck an optimistic note for 2018 as a whole and revised sales and operating profits higher.

However, others were less fortunate. Valeo fell after cutting annual guidance and Casino’s balance sheet continued to worry investors. Coface said it expected to see a business contraction in the second half. Accor’s first half RevPar growth was slightly disappointing and STM fell when management forecasts for the full year suggested a poor fourth quarter.

  US equities

US markets had a good week with the S&P up 1.3% and the Nasdaq 0.4% higher. The Donald Trump/Jean-Claude Juncker meeting had been seen as a major market risk, but they reached an agreement to target zero industrial import tariffs apart from the autos sector. Europe agreed to buy more US soya while Donald Trump promised to solve the issue of duties on European steel and aluminium. On the macro front, existing home sales fell 0.6% in June compared to May whereas they were expected to rise 0.2%. New home sales dropped 5% compared to expectations of a 3% slide. And durable goods orders only rose 1%, or less than the 3% pencilled in by analysts. 

Qualcomm failed to get Beijing's green light for its merger with NXP and will therefore go ahead with a massive $30bn share buyback representing almost a third of its market cap. Facebook said its second-quarter sales growth would slow from 44% in the second quarter to 26% in the fourth quarter of this year due to reduced monetisation of ad inserts (stories vs. news) and more user involvement in data usage policy. GrubHubb saw second quarter revenues jump 51% and Amazon’s AWS, or cloud business, grew by 49%.

In a rising market, energy, materials, healthcare, industrials and financials outperformed the S&P with only telecoms and cyclical consumption losing ground.

  Japanese equities

Japanese equities started the week on the back foot but then rebounded in thin trading. The TOPIX ended the week 1.19% higher.

The market had fallen after Donald Trump’s weekend remarks accusing other major economies of manipulating their currencies. Another factor was the BoJ’s plan to reduce the share of Nikkei 225 ETFs while increasing the TOPIX in its ETF purchasing, a decision which had investors wondering if this suggested the end of current monetary policy. In any case, the yen rose and the equity market fell. The rebound was prompted by US-EU trade talks which hinted at the possibility of avoiding a trade war. Most investors are still on the sidelines ahead of the earnings season, but some have started to look at oversold value stocks such as natural resource plays.

Nonferrous Metals (+4.91%), Iron and Steel (+4.68%) and Banks (+4.67%) outperformed the market. Resona Bank rose 9.88% and other mega banks were also strong. JFE, Sumitomo Metal Mining and Nippon Steel gained 7.01%, 6.75% and 4.26% respectively as investor attention shifted to value stocks.

On the other hand, Information & Communication      (-1.40%) and Pharmaceuticals (-0.80%) underperformed. Eisai lost 10.41% after announcing the results of its Alzheimer Disease Phase II clinical study. And following the possibility of lower BoJ ETF purchases, high PE stocks in Nikkei 225 ETFs like First Retailing and Softbank tumbled 8.33% and 6.12% respectively.

  Emerging markets

Industrial profit growth in China for June came in at 20% compared to 21.1% in May. To boost growth, Beijing announced an RMB 65bn cut to corporation tax, less stringent regulation of wealth management products and stimulus for infrastructure funding projects. The prime minister stressed that this stimulus was quite different from the 2008 RMB 4 trillion package. The government has also demanded country-wide inspection of vaccines after a falsified data scandal and a change in production procedures at the second largest vaccine producer. 

Wuxi Biologics posted a surprisingly good 250% surge in profits for the first 6 months of 2018. China Merchants Bank announced a 14.5% increase in second quarter earnings and improved asset quality with a 5bp drop in its NPL ratio. In education, TAL and New Oriental saw results rise 107% and 36% respectively but both companies tempered investor expectations.  Sands China reported a 22% rise in second quarter EBITDA. ASM Pacific reported a 19% rise in first quarter sales but said the outlook for the second half had been clouded by trade tensions.

Taiwan’s industrial production slowed to +0.4% in June, down from +7.6% in May, or well short of market expectations of +4.8%. South Korea’s GDP grew 0.7% in the second quarter vs. 1% in the first on tepid growth in domestic spending. SEMCO’s operating profits soared 193%. SK Hynix’s second quarter earnings rose 83% with sales up 55% thanks to higher DRAM prices. India’s GST has been cut from 28% to 18% for electric household goods, paint and shoes in an attempt to boost consumption.

Results from the country's banks were generally in line with HDFC Bank up 18% and Yes Bank 31% better, but both were hit by their bond holdings which suffered from rising interest rates. Yes also had to contend with pressure on its interest margins. In life assurance, ICICI Prudential and HDFC Life released good-quality results thanks to the protection afforded by higher margins.

In two-wheelers, Bajaj and Hero both missed expectations with results up 24% and 4% respectively. Bajaj says it is prepared to wage a price war to claw back market share, an announcement that put the sector under pressure. As expected, Maruti reported a 27% increase in results. In spite of higher oil prices, Asian Paints reported an impressive 30% increase in results and Jubilant saw earnings rise three-fold. In electronic household goods, Havells and Crompton saw results rise by an upbeat 71% and 30% respectively. Cement companies beat expectations but have been ordered to pay anti-cartel fines. In Indonesia, BCA posted a slightly disappointing 7% increase in results while Astra reported a robust 27% rise. Russia’s Yandex managed to increase earnings by 23% after stabilising losses in its taxi division. In Mexico, Walmex reported an 8% rise in operating figures or slightly below expectations, but Pao de Acucar managed to boost operating profits by 47%. Banorte reported an upbeat 27% rise in earnings with stable asset quality. Brazil’s Localiza improved EBITDA by 16%, an achievement given the negative impact of recent strikes.  

Results from emerging country companies have generally been good but trade war uncertainty has led companies to be cautious over the outlook.

  Commodities

Oil prices parted ways at the end of the week with Brent crude rebounding to $74 on a temporary interruption of Saudi oil shipments in the Red Sea while WTI dipped below the $70 mark.

The Saudis suspended exports via the Bab al-Mandeb strait after 2 tankers were attacked by Yemenite Houthi rebels. According to the US energy agency, 4.8 million barrels worth of oil use this passage each day. We do not expect the interruption to last long, but this sort of attack goes to show how vulnerable the oil market is to such events amid today’s Middle Eastern tensions.

In the US, crude inventories fell sharply according to the Department of Energy’s weekly report, mainly because of imports returning to comparatively normal levels in the preceding week. Refined product stocks also fell as refineries work flat out to meet strong driving season demand.

In company news, BHP Billiton sold its on-shore oil and gas businesses to BP for $10.5bn. This is the first major unconventional oil acquisition by a European company in the US. Base metal prices rebounded over the week, led by copper, following Beijing's new stimulus to offset the adverse effect of trade tensions with the US on the Chinese economy. Wage talks continued between BHP Billiton and unions at Escondida, the world's largest copper mine. The group has offered an inflation-indexed rise +1.5% and workers will vote on the proposal on August 1st. Nevertheless, the risk of a strike remains.

  Corporate debt

Credit

The market rose with the Xover shrinking by roughly 15bp on persistently robust growth data in Europe. The contraction in spreads was also helped by reduced trade tensions between the US and Europe following top-level talks and the ECB’s unsurprising policy statement. Financials performed particularly well with many buyers returning to insurance group debt and CoCos.

Among a crop of earnings announcements, PSA (Ba1) reported a 40.1% jump in sales with operating margins of 7.8%, both better than expected, and also surprised investors after OPEL ended the period in the black. Investors were, however, disappointed by FCA (Ba2/BB+) which saw EBIT fall 11% and reduced its guidance. In financials, UBS reported a surprising 9% increase in net results for the year.  Constellium (aluminium, B3/B-) saw EBITDA increase 19% over a year and raised its guidance.

Sales and EBITDA at steel tube manufacturer Vallourec (B) came in higher than expected but the group still posted a net loss and net debt rose.

Telecom Italia (Ba1/BB+) posted results in line, but slightly lower than the first quarter with sales down 4.5% and EBITDA 8.4% lower. No surprise at Europcar either which reported a 26.2% increase in half-yearly sales thanks to the consolidation of Goldcar and Buchbinder. Gamenet (B1/B) is paying €265m or 5.3 times EBITDA for Goldbet, an online sports book gaming website. The deal will make the company the biggest sector player in Italy and will be entirely debt financed, taking gearing to 3 times.

Convertibles 

The earnings season dominated convertible trading. In Europe, Outokumpu posted solid Q2 results with EBITDA coming in at €136m thanks to stronger prices in the US and the shares jumped 9% on the day. Valeo’s figures disappointed and the group revised down FY18 guidance with second half sales expected to rise 5% vs 7% previously; management cited raw material headwinds putting pressure on margins. Ence Energia & Celulosa posted in-line numbers with €204m in sales and management said the outlook for pulp prices was favourable and would allow the company to beat its €300m EBITDA target.

In the US, NXP Semiconductors was down 12% on the week after Qualcomm eventually pulled out of its $44bn bid due to Chinese regulators holding off on clearing the deal. ServiceNow reported a strong quarter with billings up 34% YoY and operating margins at 17.5%.

In Japan, Kansai Paint was up 9.5% on the week on the back of the news that India’s goods and services tax on paint would be lowered from 28% to 18%, boosting sales growth expectations.

 

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