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Market Analysis 11/06/2021

  • Markets focused on inflation

  • Talks over the size of Joe Biden’s stimulus package remained fraught

  • The ECB stuck to its extremely cautious stance by leaving bond purchases unchanged and reaffirming its determination to keep interest rates

Markets focused on inflation in a week full of reports. On Thursday, US inflation came in at 5%, or above expectations. However, most of the rise was due to temporary factors connected to the economy reopening, so the Fed’s view that this was just a temporary spike seemed accurate. Ten-year inflation expectations (based on inflation-indexed bonds) then fell further to 2.36%. However, job creations and the surge in property prices still leave a question mark over a more structural rise in inflation after the summer. Elsewhere, talks over the size of Joe Biden’s stimulus package remained fraught but there has already been agreement on spending around $250bn on technology research. Amounts for the rest will probably be revised lower and it looks increasingly likely that Republican hostility to tax rises will mean having to go through the budget reconciliation procedure to get the measures passed. The G7 announcement of a minimum corporation tax level of 15% for multinationals is part of the project. In Europe, the vaccination drive is now in full swing, and more and more economies are reopening. This is reflected in indices like the Sentix investor confidence gauge which rose to 28.1, a 3-year record. Even so, the European Central Bank (ECB) unsurprisingly stuck to its extremely cautious stance by leaving bond purchases unchanged and reaffirming its determination to keep interest rates low. Meanwhile, relations between United Kingdom and the European Union soured over the Northern Ireland question. This, and the spread of the Delta Covid strain in United Kingdom created some volatility in interest rates. The sanitary situation in Asia has improved significantly, probably due to a combination of seasonal factors and massive vaccination drives. India is a good example even if only 13% of the population has been vaccinated. China is making huge efforts and even managed to vaccinate 100 million people in one week alone. There are now hopes that restrictions will be rapidly lifted in Asia. We are maintaining our neutral stance on equities with a preference for Europe and China. In fixed income, we are still underweight on duration and prefer corporate bonds.


The ECB reassured European equity markets after higher-than expected US inflation had little effect on markets. The ECB stuck to its cautious stance. Asset purchases will remain at the same reinforced levels adopted last March even if the improving sanitary and economic situation led it to revise eurozone growth forecasts higher. Germany’s industrial production for April missed expectations, a reminder that supply chains are suffering from disruption and commodity shortages are having an impact on production levels. Volkswagen had a mixed message on the semiconductor shortage. The group expects the situation to improve from the third quarter of this year but nevertheless sees demand outpacing supply beyond 2022 as it takes to two years to reinforce production capacity. Elsewhere, results at Inditex, parent company of clothes retailer Zara, beat expectations even if net profits were a third below pre-crisis levels. Sales in May and early June were twice the level for the same period in 2020, a reflection of a particularly rapid rebound in trading as economies reopened and consumer sentiment was lifted by vaccination progress. Online sales momentum remained strong so the group is likely to continue rationalizing its outlets. In corporate activity, German sports equipment Adidas is increasingly using sustainable materials. The group had already embraced eco-responsible measures but has now taken a stake in Spinnova, a Finnish company which makes textile fibers from wood and agricultural waste. Textile giants are gradually turning more and more to responsible production. Also of interest over the week was the news that Altice had bought a 12.1% stake in the UK’s giant telecoms operator BT.


In the five trading sessions to Thursday, the Dow Jones slipped 0.32%, the S&P500 gained 1% to hit a new record higher and the Nasdaq jumped 2.98%. Economic data justified the Fed’s decision to remain accommodating. An examination of the inflation index’s components -higher second-hand car, transport and clothes prices- showed that the rebound was temporary. Meanwhile, average hourly wages fell 2.8% YoY. Infrastructure investment talks between Joe Biden and Republican senator Shelley Capito failed to reach an agreement. The president has reportedly decided to begin talks with a bipartisan group to find an alternative solution. Elsewhere, the Wall Street Journal said the Biden administration is about to discuss trade and investments with Taiwan, a move that could cause even more tension with Beijing. In healthcare news, Biogen’s Alzheimer drug received FDA approval. The entire pharma sector trended higher after Washington said it would be buying 500 million Pfizer vaccination doses to give to other countries. Pfizer gained 2.5%. At its developer conference, Apple unveiled Facetime updates in an attempt to compete with Zoom in video conferences. Airlines recovered after the US State Department eased travel advice for a number of countries. Restaurant stocks also gained: Chipotle expects average unit sales to rise and Wendy's surged after becoming the latest company to join the meme stock mania. According to the Financial Times, the UK’s Competition and Markets Authority (CMA) plans to investigate Amazon’s use of data. Hertz’s bankruptcies exit plan was approved by a US court. The car rental company could now emerge from Chapter 11 status at the end of June.


Investors remained cautious and watched economic indicators. The Nikkei 225 and TOPIX were down 0.34% and 0.10%. Vaccination progress and a decline in US long-term interest rates provided some support but not enough. Marine Transportation (+7.02%), Air Transportation (+4.43%) and Pharmaceuticals (+4.36%) led gains. Domestic demand sectors also rose after vaccinations were extended to the non-elderly population on June 8. Losing sectors included Machinery (-3.21%), Insurance (-2.62%) and Banks (-2.60%). Easing US rates also dragged down financials. Eisai soared 35.12% after the United States approved its Alzheimer drug. Sysmex also gained 7.08% as it develops test drugs with Eisai. Terumo jumped 6.58% on its AI drug administering system for diabetes. To offset the effects of Covid-19, some companies including airlines. ANA and JAL are thinking about accelerating vaccinations from June 14. 21 million people had been vaccinated as of June 10, an increase of more than 1 million from the previous day.


The MSCI Emerging Market index retreated slightly and was down 0.2% as of Thursday’s close. India outperformed other regions, rising 0.49%, followed by Taiwan (+0.26%). China was down by 0.76%, in USD. In China, exports rose 27.9% YoY in May, vs. an expected 31.9% and 32.3% previously. Imports surged 51.1%, vs. 50.9% expected and 43.1% previously. May PPI rose 9%, up from 6.8% last month, or above expectations (8.5%), while CPI rose 1.3%, up from 0.9% last month, but below expectations (1.6%). The PPI-CPI gap reached an all-time high. May aggregate financing (AF) data missed market expectations slightly, rising to RMB 1.92 trillion from RMB 1.85 trillion in April, while new RMB loans also increased slightly to RMB 1.50 trillion from RMB 1.47 trillion. Markets had penciled in a modest fall. Joe Biden revoked Donald Trump’s Tok-tok and WeChat bans but ordered a broad review of apps controlled by foreign adversaries. The government is to discontinue subsidies for new solar and onshore wind projects effective August 2021 as costs fall. Due to China-India geopolitical tensions, the Indian Olympic Association withdrew its apparel sponsorship contract with Chinese sportswear leader Li Ning. Apple is said to be in talks with BYD and CATL on its planned EV. In Taiwan, exports rose to another record, up by 38.6% YoY in May (vs. expectations of 30.5%), while imports increased 40.9% YoY (29.8%). The United States and Taiwan are planning trade talks. King Yuan, one of the leading testing companies in the semiconductor industry, has shut down one of its main factories over a Covid-19 cluster and capacity is expected to be cut by 30-35% this month. In India, the RBI kept rates unchanged and maintained its accommodative stance. Its FY22 growth forecast was lowered by 100bp to 9.5% to account for the second Covid-19 wave. Consumer confidence fell to 48.5 in May from 53.1 in March. Vaccinations accelerated to 2.5-3 million doses per day and the government announced they would be free for every adult. As Covid-19 new daily cases reached a two-month low at 100,000, various states began to share their reopening schedule. In Brazil, retail sales in May rose 3.8%, vs. 2% estimated. In Mexico, preliminary results showed that Morena had lost its supermajority in the lower house but maintained majorities in each chamber of congress. In Peru, Pedro Castillo closed in on victory in the presidential election. The result was very tight, so a recount is likely to be demanded. Non-domestic investors are waiting for some detailed regulatory guideline before any further investments.


CREDIT The market trended higher thanks to the ECB maintaining its accommodating stance and in spite of US inflation coming in higher than expected. Yields on the 10-year German Bund eased by 4bp and CDS index spreads tightened by 2bp for the Main and 8bp for the Xover. Cash bond spreads were unchanged for Investment Grade and 5bp tighter for High Yield, generating returns of 0.2% and 0.29%, respectively. Fitch raised the outlook on its BB+ rating for Faurecia from negative to stable, citing better-than-expected resilience to the pandemic. The rating agency sees operating margins rising to 5.5% this year, up from 0.9% in 2020, and 7% in 2023, primarily due to lower fixed costs. Altice UK, 100% held by Next Alt, bought 12% of BT Group for an estimated $2.2bn. The move by the group's founder Patrick Drahi will reinforce Altice’s presence in the United Kingdom’s fiber development and its position in the telecoms world. S&P downgraded Kantar from B to B- after the group bought Boston-based Numerator, a specialist in market intelligence. Funded by additional borrowings of $900m, the deal will send leverage above 10 times this year and 8 times in 2022, or above the 7.5 times required for a B rating. ABN Amro sold its Maas Capital affiliate which has stakes in shipping, transport and offshore service companies. The deal should complete in the third quarter of this year and will help reduce the bank’s non-core activities. In a busy week on the primary market, Derichebourg raised €300m at 2.25% over 7 years with a green bond to fund its acquisition of recycling company Ecore. Due to strong demand, Coty raised its new 5-year bond from €500m to €700m and reduced the coupon from its initial 4-4.25% spread to 3.875%. Greece’s Piraeus Bank sold its first Coco (Additional Tier 1) raising €600m at 8.75%. CONVERTIBLES The new issues market remained active with no less than $2.6bn raised over the week. The biggest deal was from e-commerce company Etsy which raised $1bn at 0.25% to refinance its outstanding 2025 convertible. Also in the United States, restaurant chain Cheesecake Factory raised $300m. In the Asian healthcare sector, Pharmaron Beijing raised $600 with two tranches due 2028. The company is specialized in small molecule drugs. In Europe, Safran raised €730m with OCEANE bonds (convertible into new or existing shares) due June 21, 2023. Basic-Fit (gyms) issued its first convertible, raising €304m at 1.5% due 2028. The company, which runs 905 gyms in France Belgium, Spain, Luxembourg, and the Netherlands, will use the proceeds to accelerate growth. In company news, sales at US company Coupa Software (Business Spend management) beat expectations, jumping by an annualized 40% as companies rushed to offset macroeconomic weakness. Tyler Technologies Inc (public sector software solutions) raised sales guidance for this year by 25% thanks to an upturn in demand. The group has also been busy with external growth. Over the week, it paid $84m to acquire VendEngine.

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