Equity markets are bubbling away at their highs
The US economy might be overheating
The future direction of monetary policy is a key concern among investors
Largely positive earnings surprises kept equity markets bubbling away at their highs. In the United States, around 85% of companies have beaten expectations and by an unprecedented margin. Investors had been expecting first quarter earnings to grow 20% in the United States compared to the same period in 2020 but they came in 40% better. It has been the same story in Europe with more than 70% of positive earnings surprises, a record. However, markets are looking a little more fragile after such significant gains. But there has been no sharp fall even if the Treasury secretary, Janet Yellen, suggested the economy might be overheating and long bond yields could rise. Her words were brushed off by bond markets. Equity markets retreated for one session then recovered. Another consequence was a more marked rotation from growth stocks to cyclicals as well as seriously undervalued stocks. The future direction of monetary policy is a key concern among investors. The Bank of England revised its growth forecasts higher and said it would be slowing asset purchases. The bank was keen to describe the move as technical -the overall amount of asset purchases is unchanged- and Chairman Andrew Bailey insisted this was not the start of monetary tightening. Bond markets believed him, and yields stayed put. We are maintaining our neutral stance on risk assets with a preference for those most exposed to the cycle and reopening economies. In geographical terms, this means focusing on Europe rather than the United States. We are also cautious on government bonds as they could be impacted if yields start returning to normal.
European equity markets continued to be underpinned by good earnings but still struggled to move higher. Stock prices seem to have already discounted number of positive factors. Investors are keeping a close watch on central bank messages for signs that the improving sanitary situation and inflationary pressures might lead them to change strategy. Some cyclical sectors and financials benefited from yield curve steepening, but sector switches were also influenced by earnings reports. Several companies continued to mention the rising cost of goods purchased but these concerns were offset by the outlook for an increase in activity. Société Générale jumped after a robust recovery across almost all its divisions. True, revenues fell in retail banking in France, but the group expects the situation to turn around this year with interest margins set to rise on increase lending and higher commissions. After a 47% rise in first quarter sales, Zalando raised guidance for 2021 and said it would invest more in e-commerce. Denmark’s giant shipping company Maersk gained on momentum in its main markets. The group raised its forecasts for container demand this year. Given the recent surge in bottlenecks, management thinks it will take months for freight prices to return to normal. Demand is extremely strong and the impact of the Suez Canal blockage will be felt until July. Stellantis thinks semiconductor shortages could last until 2022. Even so, the group has maintained its margin forecasts as it benefits from strong sales momentum, especially in the most profitable segments. The damage done over winter to Infineon’s Texan factory was a blow, but the group nevertheless raised guidance for 2021, citing frenetic demand for semiconductors. The group said its factories were working flat out but that it expects semiconductor shortages to persist in coming months. It estimates that production constraints will mean 2.5 million fewer vehicles will leave factories in the first half of this year.
In a mixed week for US indices, the Dow Jones gained 1.43% while the S&P 500 slipped 0.23% and the Nasdaq tumbled 3.19%. Economic indicators fell slightly: manufacturing ISM dropped from 64.7 in March to 60.7 last month due to industrial component shortages. Another factor was higher commodity prices with prices paid rising to a record 89.6 or well above the 86 expected. ADP said private sector job creations in April missed expectations but still came in at a 7-month high of 742,000, up from 565,000 in March. Treasury secretary Janet Yellen clarified her message on inflation after warning that higher base rates might be needed to stop the economy overheating. She said she was not expecting inflation to return for good but that, if such a scenario were to occur, the Fed had all the tools it needs to prevent prices getting out of control. Boston Fed chairman Eric Rosengren said the property market could manage without the same level of support as before, opening the door to monetary policy normalization. New home sales and building permits have hit levels not seen since 2006. And the number of houses for sale is as low as in the 1970s. Over a year, property prices have risen 12% and supply is still lagging demand. Markets were also underpinned by a rally in commodities. Copper hit a record high and iron ore pushed above $200. With reports from more than half of S&P500 companies now in, earnings have soared 54% YoY. Berkshire Hathaway gained 1.5% after Warren Buffett said Greg Abel would replace him when he stands down. Pfizer said it is targeting $26bn in anti-Covid vaccine sales this year, up from a previous forecast of $11bn. CEO Albert Bourla said he thought people would need an annual Covid-19 vaccination just like the flu jab. Healthcare stocks retreated after Washington suggested Covid-19 vaccine patents should be suspended. It could be difficult to get this idea approved by all 160 World Health Organization (WHO) countries as new vaccine versions will need to be developed to protect against new strains.
The NIKKEI 225 index and TOPIX index gained 1.80% and 1.54% following the national holiday as investors bought back positions previously sold for portfolio adjustments. Sentiment was also supported by widespread price increases amid expectations increasing vaccinations would drive an economic recovery. Most sectors rose for the week with Iron & Steel (+6.00%) and Pulp & Paper (+4.60%) benefiting from higher commodity prices. Marine Transportation (+4.59%) revisited a March 2011 high. Nippon Steel (+7.50%) and Sumitomo Metal Mining (+7.07%) also jumped as commodity prices rose. Wholesale companies such as Mitsui & Co (+6.62%) also gained. On the other hand, investors unloaded electric appliances and work-from-home stocks including Nintendo, Sony and Panasonic. Regarding Covid-19 situation, the state of emergency for major cities was extended to the end of May. The government is considering approving Moderna and AstraZeneca vaccines.
The MSCI Emerging Market index closed in positive territory, up 0.14% as of Thursday’s close. China’s A-share market was closed for the Labor Day holiday. Brazil and India outperformed other regions, rising 3.64% and 1.15% in USD, respectively, while China underperformed and slipped 0.98%. In China, April’s manufacturing PMI came in below market consensus, decelerating to 51.1 from 51.9 in March. Exports rose 32.3% in April, or well above market expectations. Imports rose 43.1%, largely in line with consensus. Pent-up demand was in full swing during the five-day Golden Week holiday: Chinese tourists made 230 million domestic trips, surpassing the pre-Covid level, and both box office and cinema admissions set new records. More than 60% of MSCI China companies and all A Share companies have now released their first-quarter results: aggregate revenue growth is around 30% while profits are up 35% YoY. Excluding the low base effect, listed companies reported a 20% top line increase and profit growth in the high teens vs. the first quarter of 2019. Taiwan’s first-quarter GDP rose 8.2% YoY, its fastest pace since the third quarter of 2010. Investment and trade saw the biggest improvement in sequential growth. Airtac revised up both its revenue and margin guidance for 2021, as well as capex, a reflection of strong industrial upcycle demand in mainland China. Korea’s exports jumped 41.1% YoY (vs. 16.6% in March), thanks to a favorable base effect and a broader recovery in the global economy. In India, April PMI was 55.5 (vs. 55.4 in March). The Reserve Bank of India (RBI) announced pragmatic measures to support the healthcare sector and SMEs, including significant loan relief as Covid-19 infections surged to more than 400,000 cases a day. The latest mathematical model provided to the government suggests the outbreak could peak in the coming days. Last quarter profits at Reliance Industries doubled YoY but were slightly below expectations due to weakness in its refining business. Brazil’s central bank increased interest rates by 75bp, or in line with consensus and indicated a possible hike of 75bp at the next monetary committee meeting. Tax reform was presented earlier than expected to Congress. Brazil is targeting carbon neutrality by 2050, or ten years earlier than the previous plan, and hopes to end illegal deforestation by 2030. Itau announced solid quarterly results on stable asset quality and lower provisions. Meli’s GMV soared 77% YoY in the first quarter, or 7% above consensus with the top line rocketing 111%. In South Africa, President Ramaphosa took a big step forward in the anti-corruption campaign by removing the Secretary General of African National Congress.
CREDIT It was a mixed week overall. It got off to a good start, but investors were disappointed by economic figures, and especially manufacturing data in the United States and Europe which slipped (while remaining at relatively high levels). Yields on 10-year US Treasuries eased by 6bp and by 2bp for the equivalent Bund. The Main widened by 1bp and the Xover by 5bp. Investment Grade bonds edged 1bp wider and High Yield 2bp, but the shift was more than offset by falling underlying yields, leading to returns of 0.16% and 0.02%, respectively. 2020 sales at Adler Pelzer fell 18.2% to €1.17bn but EBITDA rose 6.7% to €137.6m, thanks to cost savings and an €18.4m gain from revaluing its STS Acoustics acquisition. Vehicle deliveries at Stellantis rose 11% over the first quarter to 1,567,000 and sales were up 14% to €34.3bn. This was due to a sharp rebound in demand but also a favorable base comparison as production had been hit in the first quarter of 2020. Pemex reported rather good first quarter results. Sales rose 12% to $Mex 317bn thanks to higher volumes and prices. Financials continued to post particularly strong figures. Société Générale’s net profits swept past expectations of €285m to €814m vs. a €326m loss for the same period in 2020. Net banking income rose 21% to €6.2bn thanks to a 60% surge in investment banking and despite a 2.4% decline in retail banking. The figures also benefited from a marked 66% drop in the cost of risk (21bp). CET1 came in at 13.5% or close to 450bp more than the required regulatory level. Intesa Sanpaolo also beat expectations with a net result of €1.52bn, 32% better than in the same period in 2020 and close to 55% above the €987m expected. As of end March, CET1 was 14.9% and the total capital ratio 19.5%, or a persistently broad Maximum Distributable Amount (MDA) of 675bp. The new issues market was particularly busy in spite of the earnings season. In its debut deal, France’s Verallia (packaging) raised €500m at 1.625% over seven years. Allied Universal raised €813m with a secured bond at 3.625% due 2028. Tui Cruises raised €300m at 6.5% over five years. Deutsche Bank and Santander both sold CoCos, raising €1.25bn at 4.625% and €750m at 4.125%, respectively. CONVERTIBLES After a record number of deals so far this year, the new issues market paused for breath. New issuance for the first four months of 2021 came to $68.8bn, a 71% increase on the same period last year, and +311% compared to January to April 2019. There was, however, a new deal from Herbalife in the United States. The company raised $500m with a May 2029 maturity. Herbalife develops and sells dietary supplements. The proceeds will go on buying in its 2026 convertible. In the ongoing first-quarter earnings season, the trend remained upbeat. In the United States, Chegg (education technology) reported a 51% surge in sales over a year to $198.4m, or 7% above consensus expectations. Management revised full-year sales and EBITDA higher. Sales at ON Semiconductor rose 16% over a year to $1.48bn on the back of much higher demand for semiconductors.