28th May Market Analysis
Formal approval of the €750bn stimulus plan by European parliaments
Retreat of government bond yields and a weaker dollar
A new €15bn package for French companies
Comments from the Fed, hopes for the economic recovery in Europe to accelerate as vaccination efforts intensified and the formal approval of the €750bn stimulus plan by European parliaments all helped reassure markets. The Fed has jumped on the retreat of government bond yields and the weaker dollar to prepare investors for some form of monetary tightening in the coming months. Talks of cutting monetary support will depend on economic data, especially unemployment statistics. The United States labor market has been rapidly recovering but inflation has not run out of control over the short term despite robust domestic demand. Investors are focusing on inflation but the chances of a rise taking them by surprise have fallen. Solid demand will continue to push prices high pending a gradual return to normal on the supply side. Labor is hard to find, supply chains are running behind and commodity prices have risen. The Fed is sticking to its view that this inflation is merely temporary. Elsewhere, Joe Biden cut his stimulus package proposal from $1.9 to $1.7 trillion. He will soon be meeting Republican members of Congress. They are arguing for a much smaller $928bn plan. Both sides will try to reach an agreement on infrastructure, especially how much will go on roads, as well as internet access, airports, and water. Back in Europe, Austria and Poland were the last countries to get parliamentary approval for the stimulus package and the first funds should be made available from July. France’s finance minister Bruno Lemaire announced a new €15bn package for companies which had been hit the hardest by the epidemic. This should ensure the economic rebound continues in the coming months. Already, the gradual lifting of restrictions can be seen in May’s business climate index. It rose sharply, led by services. The government will continue to benefit from low interest rates to fund the deficit as the European Central Bank (ECB) has maintained its asset purchasing program for almost all upcoming issues. In the commodities sector, Beijing is still determined to clamp down on price rises by fighting against speculation and reinforcing efforts to control supply and demand. The fear is that otherwise purchasing power could be hit. These moves caused inflation expectations to fall back, taking interest rates with them. We remain neutral on equities. We still prefer Europe because of relatively attractive valuations and upbeat prospects from economies reopening. We also like value plays which are sensitive to the cyclical recovery. In fixed income, we have trimmed our sensitivity underweight by increasing exposure to government bonds but are still underweight.
The conditions for further upside in European equity indices are still present. The economic outlook is encouraging, central banks are proceeding cautiously, and the sanitary situation is improving. 10-year government bond yields are trending lower as inflation expectations retreat and commodity prices calm down. Industrial metals have fallen back. New weekly jobless claims came in at their lowest level since the pandemic began. The news channeled investors into basic materials, banks and automobiles as well as out of utilities and healthcare. Elsewhere, the tech sector remained in thrall to interest rate movements. In company news, Airbus increased its production targets by 2025. The group expects to see a big rebound in flying in the next few quarters and airline manufacturers will benefit. After slashing production by 40% last year, the group plans to significantly expand capacity, notably in mid-size planes, and expects to see production levels exceed pre-crisis levels by the second quarter of 2023. In the United Kingdom, Marks & Spencer is continuing to restructure and rationalize its stores in the hope that consumption will recover in the coming months and help profits recover further. HSBC is also pressing on with restructuring. The bank is to withdraw from retail banking in the United States as part of its ongoing efforts to refocus on merchant and investment banking. After being rebuffed in 2015, Vonovia has launched a new bid on rival Deutsche Wohnen but this time with the approval of the target’s executive team. The deal should complete by the end of August. Worldline has bought 92.5% of Cardlink, an electronic network service provider in Greece. Worldline says the sector is consolidating and that it is seizing a strategic opportunity to expand its merchant offer on the promising Greek market.
US data remained strong with first-quarter GDP growth confirmed at 6.4% and an 11.3% surge in consumer spending. New home sales, however, amounted to an annualized 863,000, a slightly disappointing figure as analysts were going for more than a million. The slowdown was primarily due to low levels of available stock. The S&P500 finished the period 1% higher and the Nasdaq 1.48% better after various Federal Open Market Committee (FOMC) members said higher inflation was only a fleeting phenomenon. Treasury Secretary Janet Yellen said she expected inflation to return to normal in 2022. Oil supply remained under pressure and WTI jumped 5% to $67. Iran appears not yet ready to strike a nuclear deal with the United States. And yet, an agreement would help lift US sanctions and allow Iran to start exporting its oil again. Exxon edged lower over the week despite higher oil prices. An activist fund managed to get two people elected to the supervisory board to challenge management decisions. Investors pressure on oil groups to shift investment into clean energy is now being felt in the United States and Europe. Amazon bid $8.45bn for the MGM studios.
Stocks made slight gains on vaccination progress but were weighed down by the MSCI decision to remove 29 Japanese companies from its index and mounting calls for the Olympics to be cancelled. The NIKKEI 225 and TOPIX rose 0.82% and 0.33%, respectively. TOPIX Growth outperformed TOPIX Value by 0.54%. Investors bought growth stocks after US interest rates declined. Air Transportation surged 7.72% on hopes vaccinations would encourage people to fly. Other Manufacturing gained 2.35% as production and sales recovered. Transportation Equipment rose 1.94% on hopes for an economic recovery. On the other hand, Fishery Agriculture & Forestry dropped 3.22% as supermarket sales fell 6% YoY due to the epidemic. ANA jumped 7.38% on recovery hopes and news that it had started testing a travel pass application to check passenger Covid records. Panasonic gained 5.52% after adopting a zero-carbon target by 2030. OLC rose 4.65% after saying profitability would improve after the drop due to Covid-19. The government extended the state of emergency till June 20. Now that the Food and Drug Administration (FDA) in the United States has approved vaccinating children above 12, the Japanese government is also considering lowering the current minimum age of 16 for the Pfizer vaccine from May 31.
The MSCI Emerging Market index was up 1.82% as of Thursday’s close. China outperformed other regions, rising 2.44% on improved A-share market sentiment as worries on domestic inflation and monetary tightening eased. Brazil and Taiwan rose 2.07% and 1.91%, respectively in USD. In China, April industrial profits jumped 57% YoY and 106% YoY for the first four months of this year. The renminbi continued to strengthen to multi-year highs, gaining more than 1% over the week. 86 domestic online games obtained monetization approval in May. The government approved calls to further reduce the homework and after-school tutoring burden on students of mandatory education (i.e., K9). The parent company of Moutai (premium liquor brand) aims to double revenue to RMB 200bn by 2025. Longi, China’s largest solar panel player, expects earthquakes in the Qinghai and Yunnan provinces to impact May capacity by 10%. Production should recover within a week. First-quarter results at PDD showed a strong revenue beat as the take rate improved while margins beat estimates on reduced marketing expense. JD Logistics raised $3.2bn in Hong Kong’s second largest IPO this year. In Taiwan, TSMC announced it had increased output for microcontrollers by 60% YoY to help the automotive sector which has been suffering from a semiconductor shortage. In Korea, LG Chem said it was recalling more than $350m in energy storage systems made in 2017-2018 due to a potential fire risk. The Indian government is reportedly planning a stimulus package for sectors like tourism, aviation and hospitality which have been the worst hit by the Covid-19 second wave. FMEG company Crompton Consumer released strong results, driven by an increased distribution reach (rural and e-commerce), while margins surprised positively as the company was able to pass on half of commodity price increases. PayTM, India’s largest fintech company, is considering an IPO before the end of this year. The company is looking at raising $3bn in what would amount to the largest IPO ever in India. In Brazil, first-quarter economic activity surprised positively, and fiscal revenues came in better than expected. Nevertheless, April’s job creations were a slightly disappointing 185,000 due to the Covid-19 second wave. The trend nevertheless remains positive. Tone announced the acquisition of 4.99% of Banco Inter.
CREDIT Sentiment was underpinned by reassuring messages from the ECB suggesting a reduction in its asset purchasing program would not be announced at its next monetary committee meeting in June. Interest rates eased by 3bp, taking the yield on 10-year French government bonds from minus 0.14% to minus 0.17%. CDS index spreads tightened by 2bp for the Main and 12bp for the Xover. Cash bond spreads were unchanged for Investment Grade and 6bp tighter for High Yield, leading to returns of 0.21% and 0.25%, respectively. In company news, Auchan is reportedly looking to sell its 65% stake in its Taiwan activities for $300-400m. Auchan has 22 RT-Mart stores in Taiwan. The sale would complete the group’s exit from Asia following the sale of its 36% holding in SunArt in China last year for €3bn. Third-quarter results at Moblux (BUT) for FY 2020/21 were impressive and helped the group end the quarter with a record cash position of €452m. Sales jumped 45% to €542.2m. All segments rose with online sales (10% of the total) soaring 86%. Verisure had an excellent first quarter with sales up 16.7% to €596m. The client base increased 13% to 120,437. According to press reports, Intesa Sanpaolo is planning to offload €4bn in NPLs in two tranches, one of them a leasing debt portfolio. The potential buyers are Bain Capital, Fortress and Intrum. At the end of March, the bank had €20.7bn in NPLs, or 4.4%. On a quieter new issues market, Danone raised €1bn over 4-and-half years with a zero coupon. Strong demand caused the issue spread to tighten from 60bp to 32bp. In financials, UBS sold a CoCo for $750m at 3.875% and BFCM raised €1.5bn with a 7-year senior non preferred bond at midcap +77bp. CONVERTIBLES In a busy week on the new issues market, no less than $3.5bn was raised. Asia was in the spotlight with a $1bn jumbo deal from semiconductor firm GlobalWafers. Chinese tech play Weimob raised $300m. The group is the largest supplier of WeChat solutions for small and medium companies looking to develop their online business. The Middle East also featured with a $1.2bn deal from Abu Dhabi National Oil Company, a 2024 maturity at 0.7%. In Europe, Engie raised €290m with a bond exchangeable into GTT shares. By reducing its stake in GTT, an engineering company specialized in membrane containment systems for the transport and storage of liquefied gas, Engie will be able to continue refocusing on its core business. In M&A news on the segment, German property group Deutsche Wohnen is to merge with rival Vonovia in a €18bn deal. This will create Germany’s biggest residential property group with more than 500,000 accommodation units.