The outlook remains uncertain

Market analysis - 8/12/2019

Markets struggled to regain their calm although the risk of Chinese currency manipulation abated.

Fundamental worries over an economic slowdown -with its litany of negative interest rates and yield curve inversion - returned to haunt investors. Second quarter results were relatively reassuring but the outlook remains uncertain.

Misgivings have spread to commodities, and especially oil. Traditional safe haven stocks like government bonds, gold, the Japanese yen and the Swiss franc, were once again in demand.

On the plus side, measures are in place and a brutal slowdown should be avoided. China has introduced stimulus drives, consumer spending is being underpinned by purchasing power gains and rock-bottom interest rates should encourage investment.

Even so, investors are preoccupied by political uncertainties and the end of the current majority coalition in Italy will only add to this even if it was expected.

We cut European equity exposure at the beginning of August and are maintaining our tactically cautious stance for the moment. 

  European equities

European equities rallied at the end of the week after a severe dose of stress due to trade war fears and the accompanying currency war. Nevertheless, a batch of macroeconomic indicators and political developments suggested investors should be careful. Germany’s June industrial production sank 5.2%, dissensions among Italy’s ruling coalition pointed to fresh elections and statements from the UK's Prime Minister seemed to herald a no-deal Brexit.

First quarter earnings reports slowed down. In a contrast to prevailing geopolitical and macroeconomic concerns, earnings were generally upbeat and sometimes came with upward revisions for the full year 2019. Crédit Agricole had a good second quarter, especially in retail banking. Management said it was confident its strong balance sheet would allow the bank to repurchase its SWITCH agreements. Natixis also reported better capital ratios than expected while results at insurance giants Munich Re and Allianz were in line. In pharma, Novo Nordisk raised its revenue and operating profit guidance and the FDA accused Novartis of data manipulation in early testing of one of its drugs. Elsewhere, Pirelli et Thyssenkrupp warned on full year profits. ABN AMRO said low interest rates would hit its future revenues and UniCredit reported disappointing cost of risk figures. Telia and HSBC both saw their CEOs resign. Renault is reportedly ready to review its ties with Nissan to facilitate a tie-up with Fiat. Vivendi sold 10% of UMG to Tencent and said it was looking to find other partners. Two ongoing deals now risk failing: 1) the take-up for Daniel Kretinsky's bid on Metro was low and 2) Osram’s biggest shareholder rejected a bid from private equity firms Bain and Carlyle

  US equities

After suffering their largest single-day drop of the year, US equity markets posted a small weekly gain. The S&P 500 and the Nasdaq were up 0.2% and 0.4% respectively at the August 8th close. Risk-off was the clear theme this week amid a net escalation in the US-China trade war, with the renminbi dropping below the psychological 7 handle to the US dollar to its lowest level since 2008. Concerns that the trade war could turn into a currency spat were a clear drag on the market. Beijing said its companies had stopped buying US agricultural products and did not rule out slapping tariffs on US agricultural products in retaliation against Donald Trump’s latest move.

Defensives and gold mines were the strongest performers with the S&P 500 Gold subsector jumping 6.44% by Thursday’s close. Utilities and property stocks benefited from their proxy-bond status, up 1% and 1.7% respectively for the week as a sharp rally in 10-year Treasury yields took them down to 1.7% last Thursday, one of the lowest levels since 2016. Most sectors are now down month to date, particularly cyclicals like energy, financials and industrials on fears of a global slowdown and a possible recession in the US. Oil prices also tumbled with WTI at $52.6, down 5.6% over the week and 8.7% so far in August. Prices rebounded on Thursday on reports that Saudi Arabia might be considering all options to stem the decline.

With most quarterly earnings in, the tally was better than expected, up 4% across the board and 6% above consensus estimates (which were going for a 2% contraction). Revenue growth remained at a remarkably high 4% year-on-year, indicating solid organic growth.

CVS in the healthcare sector announced better-than-expected results on all metrics including earnings growth, cash flow and debt reduction and guided higher for the rest of 2019, while insurance giant AIG also fielded upbeat results on higher investment income. 

  Japanese equities

Global market turmoil also dragged down Japanese equities on fresh worries after Washington fired a “fourth bullet of tariffs” at China. Risk off sentiment caused the yen to appreciate to 105 against the US dollar and sent 10-year Japanese government bond yields down to minus 0.20%. The TOPIX lost 2.27% over a volatile week.

Economy sensitive sectors such as Oil & Coal Products, Metal Products and Marine Transportation were the hardest hit. Oil refiner JXTG Holdings sank 9.6%. Softbank Group and life assurance companies were also weak.   

On the other hand, companies which delivered better-than-expected earnings climbed. Subaru surged 11.8% on favorable US sales, and pharmaceuticals companies such as Otsuka Holdings and Daiichi Sankyo posted positive returns.  

However, most companies reported reduced profits for the April-June quarter, especially in manufacturing sectors like autos and machinery.

The good news was a rebound in the semiconductor memory market. Investment in semiconductor production equipment is recovering earlier than expected, especially in logic IC foundries. 

  Emerging markets

Emerging markets fell as negative news flow on the US-China trade war continued to weigh on global growth prospects. In China, the renminbi reacted to Donald Trump’s tariff threat by weakening to below the symbolic 7 level against the US dollar level for the first time since 2008. Beijing also asked state-owned companies to suspend imports of US agricultural products.

On the economic front, July exports surprised on the upside as a 6.5% slump in trade with the US was offset by a 6.5% rise with Europe. Even so, trade war re-escalation means the outlook still looks dim.

In company news, Wuxi Biologics delivered a positive earnings pre-announcement of a likely 78% jump in earnings for the first half of 2019. Vivendi said it was in talks to sell 10% of Universal Music to Tencent. NetEase posted better-than-expected second quarter results thanks to better marketing cost controls and upbeat performance from its gaming and innovative business lines.

Elsewhere, MSCI said it would continue raising China’s A share market inclusion ratio from 10% to 15%, which means a 7.8% weighting in the MSCI China index and 2.5% in the MSCI EM index.

In a positive move in the Japan/South Korea dispute, Tokyo granted the first export license to South Korea under a stricter monitoring system introduced last month, lessening fears the clampdown could halt supplies of essential materials to some of the world's largest technology firms.

In India, New Delhi scrapped Kashmir’s special status and sent extra troops to the region, a flashpoint in ties with neighbouring Pakistan. The RBI, Indian's central bank, lowered its benchmark interest rate by an unconventional 35bp (consensus was for a 25bp cut) to 5.4% and with dovish guidance. This marked the 4th reduction this year aimed at supporting a slowing economy. The bank also cut its GDP projection for 2020 to 6.9%.

Brazil’s central bank published the minutes of its latest rate cut decision (-50bp to 6%) signaling further cuts ahead amid a challenging outlook (potentially with another 50bp cut to 5.5% on September 18th). The Committee noted a possible resumption of economic growth after a weak first half and said the advance in macro and micro reforms would allow it to cut its structural rate in the medium and long run. Short-term growth may benefit from timely measures such as the release of FGTS accounts to boost consumption. In company news, MercadoLibre beat expectations with an excellent 62% rise in net revenues. Off-line payments increased more than 120%and gross margins expanded due to lower subsidies. On the other hand, Banco do Brasil’s results disappointed on lower credit growth and higher delinquency.

In Peru, Credicorp’s results also disappointed due to higher provisions.

In Argentina, investors remained focused on the looming primary election.

  Corporate debt



The Xover widened by 6bp between Monday and Thursday and the Main by 1bp as US-China tensions resurfaced.  Italian markets came under pressure at the end of the week when Matteo Salvini said early parliamentary elections would be needed.

Lecta's bonds fell on a press report that the EU’s competition watchdog had ruled against French government aid to prevent the Condat factory closing.

In results news, the situation at Teva and Tereos worsened as leverage rose strongly. Teva’s revenues, however, improved slightly but Tereos saw EBIDTA fall across all divisions. The news dragged down their bond prices. On a more positive note, Softbank Group’s quarterly net profits more than tripled, mainly thanks to the sale of some of its Alibaba stake. Hapag-Lloyd also posted solid figures with freight volumes and rates stabilising. The group also made significant productivity gains and EBITDA more than doubled over a year. Schaeffler (auto parts) reported a disappointing 29.7% fall in EBITDA and revised guidance for 2019 lower. Adient and Tennecor released satisfactory figures and said full-year revenues would be unchanged or very slightly lower.

First half net profits at HSBC rose 15.8% on higher revenues and positive synergies from the Saudi British Bank's merger with Alawwal Bank. The bank also said that some of its bonds, including its Disco floating-rate perpetual instruments, would no longer be eligible for Tier 2 capital under new CRR2 rules. However, there will be a transition period up to January 2025 and the Disco bonds rallied 6 points on the news. Elsewhere, UniCredit reported lower revenues across most divisions and the bank once again cut its revenue target for the year which now stands at €18.7bn, down from €19bn.

In M&A news, Europcar Mobility Group is buying Fox Rent-a-Car in the US. The impact on leverage should be less than 0.3 times at the end of 2019.


This week featured a number of new issues in the US including a jumbo deal.

Snap Inc, which supplies technical services to social media players like Snapchat, raised £1.1bn over 7 years at 0.75% and with a 40% conversion premium. The funds are earmarked for future acquisitions and general corporate purposes.

Alteryx Inc (data analysis software) sold two $350m convertibles, one with a 5-year maturity at 0.5% and a 50% premium and the other over 7 years at 1% and a 50% premium. The funds will serve to repay part of the existing 2023 maturity.

Mesa Laboratories Inc (control and calibration solutions) raised $150m over 6 years at 1.375% and a 35% premium to continue its acquisitions strategy and for general corporate purposes.

IronWood Pharmaceuticals Inc (cholesterol, gastrointestinal and cardiovascular therapies) raised $335m over 3 years at 2.25% and with a 35% premium.

Clovis Oncology Inc, a Biopharma company specialized in cancer treatments, launched a 5-year, $225m issue at between 4-4.5% and with a premium between 25-30%.

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