Equities enjoyed a sharp bounce

Market analysis - 10/21/2016

Equity markets, and especially eurozone markets, enjoyed a sharp bounce after several down sessions. The focus remained on central banks and oil prices but the beginning of the third quarter earnings season also played its part with some pleasant surprises from US banks.

The US dollar continued to strengthen while sterling weakened every time Theresa May made a statement. The UK economy has so far been rather impervious to any Brexit consequences but should start to suffer from a sharp bounce in imported inflation and a likely drop in consumer spending. We continue to focus on eurozone equities and bonds with the best yields.

  European equities

European equities made further gains. The week saw a mixed batch of third quarter sales figures. Disappointments included Bureau Veritas (Testing, inspection and verification) which revised its annual outlook lower due to a 10% drop in sales in its Marine division and poor performance in industry, especially the oil sector, as well as government services. In the consumer sector, Reckitt Benckiser announced 2% in like-for-like growth, its weakest performance since the beginning of 2011. Nestlé cut its annual growth target due to low inflation and Danone’s like-for-like figures were also disappointing. Essilor’s growth slackened to +3% in the third quarter. Technip’s CEO Thierry Pilenko said that, despite a slight upturn in the oil price, the crisis in the oil services sector had only just begun and that 2017 and 2018 could still be extremely difficult. Hotel group Accor maintained its annual guidance but at the lower end of the spread. In the media sector, Publicis saw a slight drop in US sales after losing accounts but the recovery seemed to be gaining traction in Europe (+8%) and Latin America (+13%). Pearson (publishing and education) continued to suffer from a persistently difficult US education sector.

There was brighter news from Thales which saw sales accelerate to +15%. And from Carrefour which reported like-for-like growth of 1.2% after a 0.9% drop in the preceding quarter while its market share rose 30bp in September according to Kantar. There were also robust figures in wines and spirits for Pernod Ricard (+4% like for like, healthy momentum in the US, a rebound in Europe and a recovery in China) as well as Rémy Cointreau (sales up 7%, additional growth in the US and confirmation that cognac sales were expanding in China). In airlines, Ryanair cut its earnings guidance due to the fall in sterling but Lufthansa raised its outlook on better-than-expected business travel and the first results from its moves to reduce capacity. Similarly, in the autos sector Continental issued a profit warning, albeit because of non-recurrent items, while Michelin's sales were in line and Valeo beat estimates, reporting like-for-like growth of 9% in Europe (in a market that fell 2%) and raising its margin targets to 8%. Elsewhere, Edenred’s share rose after it announced its 3-year targets at its investors' day. The group expects sales to rise 7% and operating profit by 9% and it also reaffirmed its generous dividend payout policy.


  US equities

With the third quarter earnings season in full swing, the S&P advanced by 0.4%. Macroeconomic data was generally upbeat. As expected, industrial production rose 0.1% in September compared to August and CPI was 1.5% higher over a year (+2.2% excluding food and energy). Home sales came in at 5.47 million (+3.2%) and housing permits jumped 6.3%.
The third and last debate between Hillary Clinton and Donald Trump failed to reverse opinion poll trends. Investors are still betting on a Clinton victory with polls putting its probability at more than 85%. However, she will almost certainly have to contend with a Republican majority in the House of Representatives and that could limit her scope for action.

Elsewhere, William Dudley, chairman of the New York Fed, said that the US Fed was now in a position to raise its rates in December but that a 25bp hike would make no difference. His declarations bolstered market expectations of a December move and the yield on 10-year US Treasuries stabilised at around 1.75%.

Stanley Fischer said that he was sceptical that the Fed could put up with an economy under pressure, i.e. with inflation above the level Janet Yellen had referred to.

In company news, investment bank earnings surged due to favourable conditions in fixed income trading. In technology, IBM, Intel and eBay all flagged disappointing sales for the fourth quarter. Yahoo rose on better-than-expected results and Netflix’s figures swept past estimates due to a rise in international subscribers. Halliburton rose 4.2% after reporting EPS that was slightly positive.

Banks outperformed sharply over the period, rising 2.5% due to William Dudley's comments and upbeat third quarter figures. Energy was 0.8% higher after the Saudi oil minister said supply and demand was balancing out. Consumer staples and utilities both retreated by more than 1%.


  Japanese equities

The TOPIX advanced for five days in a row to end the week 2.1% higher. The Nikkei 225 also rose to a nearly six-month high, buoyed by rising US share prices and after seeing the final US Presidential election debate. Up to September, Japan’s equity market had primarily been underpinned by the BOJ’s ETF purchase programme and share buybacks. But this month, active foreign investors seem to have come back to Japan’s markets.
32 out of 33 sectors posted positive returns. Real Estate, this week’s top gainer, jumped 7.3%. Fishery, Agriculture & Forestry added to last week’s gains while Pharmaceuticals dipped 0.7%.
Property developers bounced back this week. Mitsui Fudosan and Sumitomo Realty & Development jumped 10.2% and 9.2% respectively as investor concerns over earnings receded after reports that another sector company would probably achieve its target of housing sales for FY2017/3.

In contrast, ONO Pharmaceutical, make of the famous “Opdivo”, shed 4.6% after the Japan’s health ministry decided to slash the price of the expensive cancer treatment drug. 


  Emerging markets

Emerging equities touched a one-week high in the middle of the week with the Mexican peso hitting a six-week peak after the final US presidential debate before the November 8 election gave no clear boost to Republican candidate Donald Trump.
Third quarter growth in China rose 6.7% signalling that the country is in line to meet the government's projection for full year GDP expansion of between 6.5 and 7%. Growth was led by retail sales, which gained 10.7%, while industrial output missed estimates, rising 6.1%. Moreover, September credit data came in stronger than expected (RMB 1.2bn vs. consensus expectations of RMB 1bn). This indicated that credit policy had remained loose, but less so than in August.
India’s quarterly earnings season got off to a mixed start as Infosys reduced its revenue estimate for the second time in three months. Tata Consultancy Services, the country’s largest software services exporter, climbed after reporting better-than-expected earnings.

Russia’s oil giant Rosneft joined a consortium led by trading group Trafigura to buy almost all of privately-held Indian refiner Essar Oil for some USD 12.9bn, the world’s biggest downstream acquisition since at least 2005.
The Brazilian Real was steady after the central bank cut interest rates by 25bp for the first time in four years. But the bank warned it could go for steeper cuts in the future, which is in line with our investment case. Petrobras reduced petrol prices, but more importantly, announced that its pricing policy would be based on import parity margins (including logistic costs). The announcement reduced the risk of political interference in the company and we view this as quite positive.



Brent crude prices seem to have stabilised between USD 49-51 and finished the week below the USD 50 watershed. The market continued to wait for details of a production freeze or cut, a move that could take effect after the next OPEC meeting on November 30.

In the meantime, speculation was rife and it was a busy week for news. Recent statements would appear to suggest that Iran, Libya and Nigeria might be exempt from any production agreement. In any case, Iran this week said it wanted to raise production to 4 million b/d by the end of 2016 and to 4.28 million b/d over the next 4 years so no sign of a freeze there. Similarly, resumption in production at the Waha site has increased Libyan production to 580,000 b/d and Tripoli is still targeting a return to 900,000 b/d after the El Sharara and El Feel sites come back on stream. Although the effort from each cartel member has not yet been decided, Saudi Arabia seems determined to take part. This much was clear when the country’s oil minister said he wanted collective action to ensure a price rebound and thus future investment in the industry. He even said a fall in unconventional US production was not desirable.

The good news this week included a sharp drop in US crude inventories due to weak imports. The US Department of Energy’s drilling productivity report is still forecasting a drop in production in major US fields of 260,000 b/d between August and November. That would take the annual decline to 820,000 b/d by November 30. A further drop in US on-shore production is therefore to be expected and the recent rise in the rig count to 428, up from 316 last May, would not be enough to ensure a recovery. In China, the decline in production worsened to 9.8% YoY in September but demand remained high, with Chinese refining rising 2.4% YoY to 10.66 million b/d in September.

And with Janet Yellen signalling the Fed’s readiness to raise rates, the US dollar rally continued, hitting base metal prices across the board. The market brushed off upbeat Chinese data and yet they still suggest that both government spending and property investment remain robust sources of demand for metals, especially as China has hit 80% of its annual capacity reduction targets for coal and steel.

Gold rebounded to USD 1,265/oz despite the rise in the US dollar.


  Corporate debt


Mario Draghi and the ECB’s board of governors said they would wait until December before deciding the future of the QE programme after March 2017. Over the last 7 days, credit spreads tightened across all debt market segments, subordinated debt by 19bp, High Yield by 17bp and investment grade debt by 4bp.

In the approach to the earnings season, activity slowed down a little on the new issues market. But there were refinancing deals from Aviva (2023 at 0.625%, Warner Music (2024 at 4.125%) utilities company SNAM (0% due 2020) and transport and logistics company UPS (1% due 2028). Following their quarterly results, Citigroup and Goldman Sachs raised EUR 1.75bn and 1.25bn respectively.

In headline debt market news, since June 30, CMA-CGM has reimbursed half of the USD 1.6bn it borrowed to fund the acquisition of NOL. Elsewhere, Alain Afflelou filed its IPO document with French market authorities for a possible listing at the end of 2016.



This week, the convertible bond primary market welcomed high yield issuers looking to lower their otherwise generous coupons. Holding company Rallye issued a EUR 200m5.25% bond exchangeable into French retailer Casino shares. Dutch company Fugro (geotechnical services primarily to the oil and gas industry) sold a EUR190m 4% subordinated convertible.

On the European earnings front, Valeo reported strong Q3 results, revising up its EBIT margin to 8% by the year end. Ablynx tumbled 12% after AbbVie walked away from its partnership on Ablynx’s Phase 2 rheumatoid arthritis drug. In the US, semiconductor stocks were under some pressure after Intel’s Q4 guidance disappointed investors on weak results in its data centres division. Another semiconductor producer AMD reported a beat on the top line for Q3 as sales of Xbox One S and PS4 ramped higher.

In Asia, Semiconductor Manufacturing International Corporation (SMIC) announced a capacity expansion project for its Tianjin factory that will make it global leader in 8-inch wafer production. In Japan, Terumo will acquire part of the vascular catheter-related business of St Jude Medical and Abbot Laboratories for USD 1.12bn.




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