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  • The gradual lifting of restrictions goes along with a strong rebound in the economy

  • Cryptocurrencies suffered massive losses

  • We remain neutral on equities with a preference for Europe and the United Kingdom

At the Fed’s last meeting in April, some of the committee wanted to start reducing asset purchases if the economy continued to improve at such a rapid pace. However, the latest US data pointed to local slowdowns, bolstering the Fed’s wait-and-see position. Retail sales, new housing starts and confidence indicators like the Philly Fed all came in below expectations. This weakness is in part due to inflation worries over commodity prices surging as well as supply chain problems for some components. Note that low stocks as a percentage of retail sales have hit an historic low. There are many reasons why inflation should continue to rise but this is already fully discounted by markets. In fact, 10-year inflation expectations in the United States have fallen back to 2.45%. Europe’s vaccination campaign has picked up speed and restrictions are being gradually lifted ahead of the summer season. The economy has consequently seen a strong rebound along with long bond rates. The yield on the 10-year German Bund has risen to minus 0.1%. In contrast, a number of Asian countries like Japan and South Korea, which had succeeded in controlling the pandemic, are behind in vaccinating their populations and are now introducing restrictions in an effort to catch up. As a result, Asian equities are now lagging global equity indices. In other news, cryptocurrencies suffered massive losses mid-week with Bitcoin and Ethereum notching up intraday losses of 30% and 44%, respectively. This followed Elon Musk’s announcement that he was changing tack on Bitcoin and repeated attacks from China’s central bank. The mood spread to equity markets which turned volatile but with no clear direction or strong sector rotation. Credit and currency markets, however, brushed the whole affair off. We remain neutral on equities with a preference for Europe and the United Kingdom where the vaccination campaign is now accelerating, and earnings have been rebounding. In fixed income, we are still underweight duration and continue to prefer spread assets.


This week’s headline event was a spectacular cryptocurrency plunge after Elon Musk turned negative on Bitcoin and China’s central bank also attacked it. The damage spread to equities, perhaps because some investors had to cover cryptocurrency losses. Even so, markets remained focused on central bank policy with particular concerns the Fed might tighten. However, central banks, and especially the European Central Bank (ECB), reaffirmed their cautious stance, helping to maintain support for equity indices. Even so, we will need some hard-and-fast signs of earnings growth to push markets higher. There was no significant sector rotation over the week but basic resources struggled as Beijing showed its willingness to curb any further commodity price rises. In company news, Iliad fell sharply after saying it would have to tap into its reserves to accelerate its 5G investments in France. Richemont's results beat expectations with fourth-quarter sales 36% higher. The company said the trend had accelerated since the beginning of 2021. Plane reservations have picked up speed. Ryanair said the summer was looking encouraging and Lufthansa said demand for transatlantic flights had quadrupled in the last few days. Even so, investors remained unconvinced. Elsewhere, the United Kingdom’s Trainline plummeted after the government said it was to reform railways. Corporate activity remained brisk with TF1 planning to buy 30% of M6. The deal aims to create bigger scale economies and curb the strong trend towards streaming platforms. Bouygues raised its guidance for EBITDA this year after strong sales at Bouygues Telecom in mobile phones and fiber. There has also been an encouraging rebound in construction. Saint-Gobain is acquiring Chryso, a specialty chemicals leader for construction materials, for an enterprise value of €1.02bn. Nordic Semiconductor rose on rumors STMicroelectronics was mulling a bid.


Indices ended the period in positive territory with the Dow Jones up 0.18%, the S&P500 1.13% better and the Nasdaq leading the pack with a 3.13% gain. The minutes of the last Fed meeting went down well. Weekly asset purchases were kept at $80bn but will now be focused on longer maturities of above 7 years. Some committee members broached the idea of reducing the program due to concerns over inflation. Two of them even said they were worried it could rise to unwanted levels before the Fed realized and tried to take action. However, consumer confidence in May fell in November to 82.8 from 88.3, and below the 90 expected while industrial production only rose 0.7% compared to a 1.4% rise in the previous month and 0.9% expected. Retail sales were flat when they were expected to rise 1%. In March, they had jumped 9.8%. On Thursday, the Biden administration detailed its new fiscal policy. It aims to raise $700bn more tax over 10 years. Key points included a global corporation tax of 15% minimum and a tax on bitcoin transactions above $10,000. In company news, AT&T said it was discussing spinning off its media activities (HBO, CNN, Warner Bros) to merge them with Discovery, the owner of Eurosport and the Discovery travel and documentary channels. The new group could be worth $50bn. Amazon is reportedly in talks to buy the MGM studios for $9bn. Disney fell 5.3% on disappointing results and less-than-expected growth in subscribers to its Disney+ streaming platform (103.6 million vs. 110.3 million expected). Airbnb gained 2% after announcing a 52% YoY surge in first-quarter reservations and a similarly strong trend in the current quarter. According to the New York Post, Authentic Brands in the United States has bid more than $1bn for Reebok, currently owned by Adidas. Bitcoin plunged to close to $38,000, its lowest levels since February, after Elon Musk said Tesla might now sell part of its holding. The currency lost close to 30% intraday, falling below $30,000 before rallying to around $40,000 on Friday morning. In mass market retail, Walmart, Target, and Macy’s all posted upbeat figures despite already high comparison bases.


The Japanese stock market edged higher for the week with the NIKKEI 225 and TOPIX up 0.05% and 0.66%, respectively. The NIKKEI 225 hovered around 28,000 and we saw buy-on-dip movements below the milestone. Concerns over inflation, Covid-19 infections and tumbling crypto currencies weighed on the market. The earnings season is now over, and the NIKKEI 225 PE has revisited 14 (the same level as the 5-year average up to the end of 2019), down from 22 at the beginning of this year. Investors went for relatively cheaper sectors including Precision Instruments (+5.07%) and Real Estate (+3.66%). Rubber Products continued to rise, adding 4.37%. On the other hand, Nonferrous Metals (-4.20%), Iron & Steel (-3.03%) and Mining (-2.25%) were hit by selling. Commodities and Materials also declined. Hoya surged 9.17% on a 10% rise in net profits compared to the previous half. Dai-ichi Life jumped 7.54% on expectations for a recovery in investment returns due to higher US interest rates. Suzuki Motor also rose 6.54% on strong earnings. In Covid-19 news, the government is increasing vaccine supplies and now allowing dentists to perform vaccinations to boost progress. The Moderna and Astrazeneca vaccines have been approved. However, the use of Astrazeneca will be postponed and the target age will be carefully considered due to a blood clot risk.


The MSCI Emerging Market index was up 1.67% as of Thursday’s close. China and India outperformed other regions, rising 3.50% and 1.92% in USD respectively, on better-than-expected first-quarter results. Taiwan was up by 1.59%, despite an increase in new Covid-19 cases. China’s April CPI was 0.9% YoY vs. 1% expected, while PPI came in at 6.8%, or higher than the 6.5% expected. Credit expansion slowed in April as the central bank guided loan growth to a more moderate level following a record first quarter. Chinese regulators banned the country’s financial institutions and payment companies from providing services related to cryptocurrency transactions. The State Council will strengthen its management of commodity supply and demand to curb unreasonable and speculative price movements. April's smartphone sales declined 24% MoM, while 5G penetration continued to increase to 78%. Midea Group announced its second buyback plan for up to RMB 5bn in shares. Sunny Optical expects a decline of smartphone sales in this quarter after a strong first quarter. Internet companies released broadly-in-line, or better-than-expected- quarterly results: Alibaba, Tencent and Meituan all announced increased investments in new opportunities to drive long-term growth. JD results were a strong beat on both revenue and earnings. Baidu guided on non-marketing revenue growth accelerating despite a margin drag in FY21 due to AI investments. NetEase reported broadly-in-line first-quarter results with record gaming revenues. Bilibili’s first-quarter results and second-quarter guidance beat expectations on higher advertisement revenues. also had a better-than-expected first-quarter thanks to a recovery in domestic travel. Hong Kong and Singapore put brakes on a travel bubble for the second time, following a Covid-19 outbreak in Singapore. Taiwan imposed phase 3 restrictions as daily new Covid-19 cases have now been above 100 for more than 7 days. The vaccination rate remained below 1%. Moderna vaccines are to arrive in June with domestically developed vaccines due by July. Giant, the world’s largest bike manufacturer, delivered better-than-expected first-quarter results, with record operating margins on improving product mix and a higher utilization rate. In Singapore, SEA reported consensus-beating first-quarter results on strong trading at Garena and Shopee Indonesia Gojek agreed to merge with Tokopedia to create the largest internet company in the country. In India, April CPI was 4.3% YoY vs 5.5% last month, or in line with expectations. March IIP was up 22.4% YoY on a low base, and up 0.4% from March 2019. New Covid-19 cases started to show signs of flattening. Ultratech Cement beat expectations on higher volume growth and better cost controls. Asian Paints saw revenue growth above expectations as it continued to gain market share but posted a slight miss on profitability due to commodity inflation. The company has announced price hikes to reflect higher input prices. In Brazil, April IPCA inflation was 6.8%, or in line with consensus. Results at NotreDame Intermedica (GNDI) were below expectations as higher medical losses during Brazil's severe Covid-19 second wave dragged the EBITDA margin down. Anima announced solid results driven mainly by M&A. Natura reported a strong first-quarter, ahead of market expectations. CCR’s largest shareholder is to sell its entire stake at a 27% premium to the current share price. Peru's uncertain presidential election race is led by extreme left while in Chile, the new constitutional convention will be highly fragmented with independent and far left candidates performing much better than expected at the expense of center right.


CREDIT Markets were volatile over the week as investors worried the ECB might decide to reduce its Pandemic Emergency Purchase Program (PEPP) when it next meets in June. The mood worsened when the Federal Open Market Committee (FOMC) minutes were couched in a less accommodating tone than expected. Government bond yields continued to edge higher with the 10-year Bund moving from minus 0.13% to minus 0.1%. The Xover and Main widened by 1.5bp and 6bp. Spread stability failed to offset the impact on cash bonds which on average fell 0.14% for Investment Grade and 0.02% for High Yield. In company news, results for Jaguar Land Rover’s fourth quarter ending March 31st were up by a creditable 20.5% to £538m with adjusted EBIT at £491m vs. -176m for the same period in the previous year, or a margin of 7.5% vs. minus 3.2%. Thanks to rebounding demand in China and the United States, the group sold 123,500 vehicles over the quarter, an increase of more than 12%. First-quarter results at Petrobas were mixed. Sales were $15.7bn, down 8.4% compared to the first quarter of 2020. However, higher oil prices helped them rise 12.5% compared to the previous quarter. Casino confirmed that its energy infrastructure GreenYellow subsidiary was looking at the possibility of an IPO to fund external growth. It aims to spend €1.9bn by 2025 to take capacity at its photovoltaic power stations to close to 2.3GWC. Funding could come from a concomitant increase of capital to be launched before the summer. Carnival wants to renegotiate the two credit lines it arranged in June 2020, $1.9bn (at Libor +7.5%) and €800m (at Euribor +7.5%). It wants to replace them with two new term loans at between 3.75%-4% and 4%-4.25%, saving $100m in interest payments even with a $60m reimbursement premium. Generali's first quarter profits came in at €802m, up from €113m for the same period in 2020 and better than consensus expectations of €705m. Gross premiums rose 4.2% to €19.7bn, mainly because of increases in life assurance and property & casualty insurance. The solvency margin has risen 10 points over the last 6 months to a particularly comfortable 234%. Moody’s is reviewing Deutsche Bank for a possible upgrade based on its solid capital base and strong liquidity as well as the bank’s significant progress towards a better balanced and sustainable economic model. On a relatively busy new issues market, Constellium raised €300m at 3.125% due 2029. Ryanair raised €1.2bn over 5 years at midcap +120bp. Ericsson raised €500m over 5 years at midcap +103bp. In financials, Société Générale sold an AT1 at 4.75%. Banco de Credito Social (CAJAMA) issued a Tier 2 bond at 5.25%.

CONVERTIBLES The big event on the new issues market was a $1.25bn jumbo deal from Coinbase in a week that saw a huge-sell off in cryptocurrencies. Coinbase is a cryptocurrency trading platform which also provides custody services. The proceeds will allow the company to reinforce its cash position and look at M&A opportunities on what is a rapidly growing market. Elsewhere, Sunnova Energy raised $575m at 0.25% due December 2026. The company provides home solar energy and storage services in the United States. In company news, Singapore’s Sea saw first-quarter sales soar 146.7% over a year to $1.8bn on continued growth in its gaming and e-commerce activities. China’s iQIYI beat expectations with first-quarter sales growth accelerating to 4% over a year while losses were halved to $193m. In M&A news, there were rumors of a tie-up between STMicroelectronics and Nordic Semiconductor.

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