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Market Analysis 03/09/21

Updated: Sep 8, 2021

The Fed remains focused on restoring the jobs market

Sharp slowdown in PMI data in China

Fresh hopes for economic stimulus In Japan

Jerome Powell's much-anticipated Jackson Hole speech reassured investors. The Fed chair suggested that the decision to start tapering should not be seen as a sign that benchmark rates were to rise. The Fed remains focused on restoring the jobs market and ensuring price stability now that inflation has returned to levels close to the targeted 2% average. US jobs data will therefore be the key indicator for investors hoping to anticipate the Fed’s gradual reduction of asset purchases. Delta variant fears might have limited any improvement in August, but companies still seem keen to take on staff. The Challenger survey showed hiring intentions were up and layoffs down. The reopening process should logically continue to help the jobs market improve but that will depend on how eager Americans are to return to work. The participation rate is still well below pre-crisis levels. Labor shortages will force companies to increase wages, thereby fueling fears that a wage/inflation cycle might kick off, a development that would oblige the Fed to raise rates more quickly than planned. The same fears played out on US long bond yields over the summer months. Meanwhile, the ECB's accommodating stance is geared to inflation rising to around 2% for some time before the question of a rate hike is discussed. In China, the sharp slowdown in PMI data, especially new orders which are suffering from factory stoppages amid a Covid resurgence, is the big question for markets. In Japan, PM Yoshihide Suga announced that he would not be standing for re-election as party head. His departure could fuel fresh hopes for economic stimulus and an ambitious economic policy. Elsewhere, industrial activity has been holding up well faced with the sanitary situation. Industrial production retreated in August, but this comes after strong performance in June. We remain neutral overall on equity markets. We still prefer European equities and are neutral on China. We also like Japan because of its cyclicality; the sanitary situation is improving and corporate earnings momentum if strong. In fixed income, we have returned to neutral on US Treasuries and still prefer corporate debt.


Following on from August’s gains, equity markets started September in resilient mode despite China’s slowdown, mounting Delta variant cases and more mixed data from the US. Manufacturing PMI in the eurozone came in at 61.4 in August. The rise was driven by increased demand as sanitary restrictions eased and in spite of supply chain problems and commodity and labor shortages. Sovereign bond yields in the zone rose after inflation came in higher than expected and some central bank heads made hawkish statements. Energy stocks were in demand amid a rise in oil prices. Traders were worried about supply due to the consequences of hurricane Ida. ENI announced a major oil and gas discovery off the Ivory Coast. The group is to accelerate development of what looks like a highly promising field. Ryanair said its planes had carried 75% of the passenger load for the same period in 2019. Management said this was a sign of things beginning to return to normal. Daimler, like other car companies, is expecting a sharp drop in sales of Mercedes due to semiconductor shortages. Closures of factories in Malaysia have only worsened the problem. Stellantis extended its production stoppages in several European factories for the same reason. Pernod posted excellent results and expected sales to continue rising. The rebound was driven by demand in China and the US thanks to sanitary measures being eased. Management reassured investors by declaring that Beijing's regulatory moves would not affect the company. In fact, they could even work to its advantage by reinforcing purchasing power among middle class households. Carrefour is continuing to roll out its strategy aimed at improving the group's positioning. Surveys conducted in the first half showed the group was improving on rivals, especially in fresh food. Bernard Arnault’s Financière Agache nevertheless sold its 5.7% stake via an accelerated book building process.


Jerome Powell’s Jackson Hole speech was much more accommodating than expected. The Fed is in no hurry to start tapering, especially as the latest jobs data could push the start date even further back. ADP said private sector job creations had come in at 374,000, or much lower than the. 625,000 expected. The trend was confirmed in August’s manufacturing ISM where the jobs component fell to 49 from 52.9 in the previous month. However, at 59.9, the overall index was still better than the 58.5 expected thanks to new orders (66.7 vs. 64.9), inventories (54.2 vs. 48.9 and production (60 vs. 58.4). Property prices in major urban areas also continued to surge, rising 19.% YoY, the biggest increase in 30 years. Commodities stayed strong. WTI oil rose to $70 after hurricane Ida hit the east coast but the trend could be hit if the weekend OPEC summit announces output increases. Aluminum hit a 10-year high after China reduced production in an effort to cut its carbon emissions. Gold edged lower to $1,812. The big negative was the consumer confidence survey which fell to a 6-month low due to the spread of the Delta variant and the looming end to the Biden administration's payments to households. In company news, Spotify Technology jumped 6.6% after Apple eased payment rules for streaming apps. Virgin Galactic lost 3% after the Federal Aviation Administration said its spacecraft could not take off again in the immediate future. The regulator wants to wait for the conclusions of an enquiry into an incident that occurred during the inaugural flight in July when Richard Branson was aboard. The Justice Department is reportedly about to launch a second probe into Google’s parent company Alphabet for abuse of a dominant position in online advertising. Moderna had a mixed week. The stock rose when a Belgian study found that its vaccine produced more antibodies than the Pfizer rival but fell when Japan opened an enquiry into two post-vaccination deaths.


The NIKKEI 225 and TOPIX jumped 2.89% and 2.49% over the period, driven by the Jackson Hole symposium and then political developments in Japan. The dissolution of parliament was expected but then PM Yoshihide Suga announced that he was resigning, and the house would continue to sit. Investors are now expecting his successor to go for more economic stimulus. Marine Transportation soared 13.98%. Glass & Ceramics and Metal Products rose 4.67% and 4.43%, respectively. Most sectors advanced after quarterly corporate data from the Ministry of Finance revealed that companies had upped capex. Only Land Transportation, Air Transportation and Electric Power & Gas bucked the trend, shedding 4.87%, 1.61% and 0.04%, respectively. Shiseido jumped 8.38% on expectations cosmetics sales would recover outside Japan as well as the announcement of a restructuring plan. Murata Manufacturing rose 7.17% after restarting a production site that had been closed due to Covid clusters. Daiwa Securities gained 5.92% on its JPY 70bn solar power fund. Elsewhere, West Japan Railway tumbled 14.87% after saying it would sell new shares, dragging down East Japan Railway (-8.32%). There were reports in the media that the government was planning to ease Covid-19 restrictions. Current bans on bars and restaurants serving alcohol are expected to be lifted even under the state of emergency, depending on the progress of vaccinations.


The MSCI Emerging Market index was up 3.08% as of Thursday’s close on dovish comments from FED chair Jerome Powell during the Jackson Hole conference. China outperformed after a 5.03% rebound led by tech stocks. India rose 4.28%. Brazil underperformed other regions, down by 2.06% on concerns over energy rationing and the potential fiscal impact of a tax reform which reduces corporate tax rates. In China, August’s official manufacturing PMI edged down to 50.1 from 50.4 in July while the Caixin China manufacturing PMI came in at only 49.2. Official non-manufacturing PMI was down to 47.5 in August vs 53.3 in July due to a sharp deceleration in services activities amid a COVID resurgence. China is to set up Beijing’s third stock exchange to boost support for SMEs. Tianjin city required municipally controlled companies to migrate data to SASAC (State-owned Assets Supervision and Administration Commission) cloud infrastructure by next year. The government is to curb medical services prices and deepen healthcare sector reforms. The CSRC securities regulator urged brokerages to strengthen supervision on noncompliant margin trading. The regulators tightened online gaming rules to limit minors to only three hours per week. Meituan delivered solid core business profits while embracing regulations. Li auto’s August delivery volumes hit a record 9,433 units, or better than market expectations. Nio’s August deliveries fell 26% MoM, vs. consensus expectations for no change. The company also cut its delivery outlook for the third quarter on uncertainties over semiconductor component supplies. The Hong Kong Exchanges are to offer index futures for mainland Chinese shares, an important hedging tool that could broaden the exchange’s appeal to international investors. Korean exports in August jumped 34.9% YoY on solid demand for memory chips and petrochemicals. LG Energy will decide on its IPO plan by October amid the impact from the General Motors recall probe. In India, GDP surged 20.1% YoY in the June quarter from a low base, or broadly in line with expectations. Sequentially, GDP contracted 6.3% QoQ due to the Covid-19 2nd wave. August Manufacturing PMI fell to 52.3 from 55.3 in July. Covid-19 vaccinations continued to accelerate, with daily inoculations reaching 8 million people. More than half of the adult population has now received at least one dose. Auto OEMs are expecting an adverse impact on production in September due to the persistent semiconductor shortage. Maruti Suzuki will operate at 40% capacity, while Mahindra & Mahindra will shut down production for a week. Tata Motors will also adjust its output. In Brazil, August manufacturing PMI fell to 53.6 from 56.3 in July. The Energy Ministry announced a 6.8% hike to electricity tariffs to mitigate the hydro risk due to the severe drought. The lower house approved the tax reform draft, after making some important changes to the original version: 15% tax on dividends, the end of interest on capital deductibility, and corporation tax cut from 34% to 25%. As a result, if the Senate approves this tax reform version, the government could be short of R$40bn instead of the expected R$12bn fiscal gain. In company news, Stone reported weaker-than-expected results due to a deterioration of asset quality in its credit portfolio. In Chile, the central bank increased interest rates by 75bp to 1.5%, or above market expectations of 50bp. Chile has the highest vaccination rate, with 70.5% of the population now fully vaccinated In Russia, Yandex is to buy out Uber’s stake in their joint ventures to increase its exposure to mobility and food tech niches.


CREDIT Trading revolved around eurozone interest rate moves. A member of the ECB governing council said it was time for the bank to start thinking about reducing PEPP asset purchases. Yields in the zone gained 8bp after his remarks. However, the Main tightened by 1bp and the Xover by 2bp as sentiment remained bullish. Even so, cash bond prices were mixed because of rising yields, leaving IG 0.11% lower and HY 0.14% better between Monday and Thursday. In company results, Adler (property management) posted a 71% surge in first half revenues to €299m. Total rental revenues rose to €174m (+52%) and rental division EBITDA gained 46% to €112m. Management raised sales and profitability guidance for the full year. Quarterly sales at oil company EnQuest came in at the lower end of the spread due to a drop in output at its main Magnus field. However, available cash flow rose 63% to $141.5 over the first half thanks to higher crude prices. As a result, the company was able to cut debt to around $1.18bn as of June 30. The company had previously refinanced debt to the tune of $750m to fund its acquisition of the Golden Eagle field in the North Sea from Canada’s Suncor. S&P upgraded shipping company CMA CGM to BB from BB-. Quarterly sales rose 77% to $12.4bn over a year while EBITDA rocketed by 280% thanks to the spectacular rise in freight rates. In financial debt, Greece’s Eurobank posted €120m in quarterly net profits, up from €16m in the same quarter in 2020. The cost of risk fell to 0.99% over the quarter from 11.4% in the first quarter and 1.53% in the second quarter of 2020. Bank of Cyprus registered a €7m loss in the second quarter after a €8m profit in the first quarter and a €100m loss in the second quarter of 2020. The loss was chiefly due to a €12m public tender in the second quarter. Fitch Ratings upgraded BPER Banca to BB+ from BB, citing improved asset quality after the bank reduced NPL risk. The move also reflected the improved outlook for sales and the bank's overall financial profile following its acquisition of 620 Sanpaolo branches in the first half. New issuance accelerated over the week. Allianz sold an RT1 in two tranches: €1.25bn in a PerpNC31 at 2.7% and $1.25bn in a PerpNC27 at 3.2%. German insurance company Wuestenrot & Wuerttembergische raised €300m with a Tier 2 41c.31 at 2.125% and Spanish bank Cajamar €500m in preferred senior debt 28nc27 at MS+215. CONVERTIBLES The new issues market restarted after a week’s pause as investors returned to their desks and the macroeconomic environment became less tense. Korian (nursing homes and specialist clinics) raised €300m with a perpetual convertible. The proceeds will fund both the redemption of its so-called Odirnane bonds (bonds with a redemption option or convertible into new/and or existing shares) as well as general corporate purposes. Germany’s Delivery Hero returned to the market, raising €1.25bn in two tranches (2026 and 2029). This is the company's sixth convertible, and the proceeds will continue to go on expanding into new markets. In results news, Okta (identity and access management) saw quarterly sales jump 47% compared to the previous quarter. MongoDB (databases) once again beat expectations with a 44% rise in quarterly sales to €199m. Management also revised up guidance on third-quarter and full-year sales.

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