The International Monetary Fund (IMF) upgraded its global economic growth forecasts
A scenario of gradual rise in government bond yields is possible
The level of long bond yields is temporizing
US markets hit new all-time highs over the week. The tech-led rally was driven by a drop in US 10-year Treasury yields. Elsewhere, the International Monetary Fund (IMF) upgraded its global economic growth forecasts to 6% and 4.4% for this year and next, citing additional budgetary stimulus and the vaccination campaign. Due to an unexpectedly strong rebound in the second half of 2020, GDP contracted less over the year than was expected last October. As a result, the latest sanitary measures had only a limited impact on activity. The VIX volatility index continued to retreat, even falling to 17 for the first time since February 2020. Services ISM in the United States hit its highest level since inception in 1997. All components were sharply higher, whether activity, new orders or jobs. However, Joe Biden's stimulus plans have boosted inflation expectations. The Federal Open Market Committee (FOMC) minutes were released on April 7 and held no major surprises. There is a consensus view at the Fed that there is no hurry to invert the current monetary stance, notably because sanitary risk has not gone away, even in the United States. As a result, investors were reassured over the Fed’s policy exit calendar. This reinforces our view that government bond yields will only rise gradually, even with this additional budgetary stimulus. Fed chairman Jerome Powell also said the jobs market recovery was uneven and the international vaccine campaign too sluggish. His remarks caused long bond yields to dip and the rotation into cyclicals to pause. In Germany, industry continued to recovery with new orders rising in February, mainly because of domestic and Eurozone demand. Fresh lockdown procedures in continental Europe have so far had little impact on markets. Investors are still confident vaccine campaigns will prove successful in the current quarter. We have maintained our tactically neutral stance on equities due to low volatility and even though long bond yields have stopped rising. Another consideration is that moves to raise corporate taxation could spread to all G20 countries.
EUROPEAN EQUITIES
Equity markets resumed after the Easter break in the same mood as in the first quarter. Hopes persist for a strong economic bounce this year thanks to global vaccination campaigns and forthcoming budgetary stimulus measures. Major Central banks reaffirmed their determination to provide lasting support to economies. The Fed also minimized the risk that inflation might accelerate, assuaging investor concerns and helping long bond yields to fall back. Even so, there is some investor caution as the pandemic in Europe is a long way from coming under control. The rotation into cyclicals has turned mixed. Automobiles and Tourism/Leisure, for example, underperformed last Thursday.
In company news, Amundi is in exclusive talks with Société Générale to buy the French bank's asset management affiliate Lyxor. The €825m price tag would mean Société Générale booking €430m in capital gains after tax. The deal would also have a positive 18bp impact on its CET1. Amundi expects €90m in synergies from the acquisition. Air France's board approved the French government’s recapitalization project, a deal negotiated directly between the Elysée Palace and the European Commission. In return for new aid, the government will increase its stake to as much as 30%. The Dutch government said that, unlike 2019, it would not follow suit. In telecoms, US press reports suggested KPN had received a bid for more than $15bn from a private equity consortium led by Sweden’s EQT. KPN is still facing significant investments in its fiber rollout.
US EQUITIES
Over the last five trading sessions to Thursday evening, the Dow Jones gained 1.58%, the S&P500 3.13% and the Nasdaq 4.40%. Markets were partly lifted by upbeat economic data for March. Job creations, for example, came in at 916,000, or much better than the 660,000 estimated and February's 379,000. And Services ISM hit a record 63.7 compared to 59 estimated and 55.3 last month. Joe Biden said the vaccination calendar would be open to all adult Americans from April 19 and not May 1 as previously scheduled. The latest FOMC minutes reassured investors. The key message was that ultra-accommodating monetary policy would remain in place until employment and inflation targets had been hit. The Fed also said risks over inflation prospects were well balanced. More surprisingly, markets then brushed off Janet Yellen’s plan to raise corporate taxes from 21% to 28%. She also detailed a plan to introduce a global 21% minimum tax rate to stop companies resorting to fiscal optimization. This represents a major paradigm shift as the tax trend in the United States, and the world in general, had been down for decades. Energy stocks dropped 1.3% last Thursday when Saudi Arabia confirmed that it wanted to raise output quotas from next month. Elsewhere, Joe Biden suggested spending $174bn to promote electric vehicles and ensure a twelve-fold increase in recharging points from today’s 41,000 to 500,000. The SEC said Chevron should allow shareholders to vote on a motion to reduce carbon emissions, a position which contrasts with its previous stance when Donald Trump was president. In the past, Chevron and Exxon Mobil had successfully blocked any motions requiring them to slash their greenhouse gas emissions. The CDC, the US health watchdog, said cruises could resume but with certain restrictions from the middle of this summer. The news sent Royal Caribbean Cruise and Carnival 5% higher in after-hours trading.
JAPANESE EQUITIES
Stocks declined over the week with the Nikkei 225 index and Topix down 0.49% and 1%. The Nikkei 225 had initially rebounded to 30,000 on Biden’s infrastructure plan and positive economic data, such as US employment, but was hit by profit-taking afterwards. As most Japanese companies report in April, focus shifted to guidance for FY 2021. Investors are taking a cautious attitude towards upcoming earnings. Marine Transportation jumped 8.20% on economic recovery hopes as the vaccination campaign advanced, a big contrast to Pharmaceuticals (-5.19%), Air Transportation (-3.14%) and Land Transportation (-3.08%). Some cyclical sectors fell on the significant gap between market expectations and the actual recovery from the Covid-19 turmoil. In a surprise move, CVC Capital Partners, a UK private equity fund, made a bid for Toshiba that could be worth about $20bn (£14.5bn). Nippon Steel and Sumitomo Metal Mining gained 3.83% and 3.51% on their efforts to promote ESG measures including decarbonization. In Covid-19 news, infections have been increasing since the state of emergency was lifted. The government announced on April 7 that they would start examining semi-emergency coronavirus measures which are almost the same as the state of emergency.
EMERGING MARKET
The MSCI Emerging Market index closed in negative territory, down 0.26% as of Thursday’s close. Brazil and Taiwan outperformed other regions, rising 1.18% and 1.09% in USD, while China retreated by 1.37%. US-China geopolitical tension returned as US warships entered the East China Sea but the US State Department backed away from the idea of boycotting the 2022 Winter Olympics in Beijing. Seven Chinese supercomputing firms were added to the US entities list and are now banned from receiving exports related to American technology. In China, the March Caixin PMI Services came in at 54.3 vs 52.1 estimated, marking the 11th month of expansion and its highest level since December 2020. Caixin PMI Manufacturing was 50.6 vs. 51.4 estimated and 50.9 previously. The People’s Bank of China (PBoC) asked major lenders to curtail loan growth for the rest of the year. The Ministry of Education is to limit the time primary and secondary school students spend on online and offline tutoring courses. During the three-day Tomb-Sweeping Day holiday, domestic trips recovered to 94.5% of their pre-Covid-19 level, soaring 145% YoY. Tourism revenue rocketed 230% YoY, or about 57% of the 2019 level. On the corporate front, SMIC raised prices for all semiconductor products from April 1st including orders that had not yet been delivered to customers. EV companies including BYD, Li, Nio and XPEV all posted better-than-expected delivery numbers for March despite a component shortage. In India, March Manufacturing PMI was slightly lower at 55.4 vs. 57.5 in February. The Reserve Bank of India (RBI) kept rates unchanged while maintaining an accommodative stance. With fresh cases of Covid-19 increasing, Maharashtra imposed a night curfew and closure of non-essential shops in April. HDFC Bank balance sheet indicators for the fourth quarter of FY 2021 maintained solid momentum, with loan growth up 14% YoY and deposit growth 16% higher, outperforming the system (+6.5%/+12%). Fund flows into Indian equity mutual funds in March turned positive for the first time in nine months, totaling $1.6bn. Brazil’s Markit Manufacturing PMI tumbled to 52.8 in March, vs. 58.4 in February. It is still in expansionary territory but at its lowest level since July 2020. Services PMI also declined, driving the overall index to 44.1 in a sign of renewed headwinds in the sector. The contraction was explained by several lockdowns across the country due to the second Covid-19 wave. Car sales rose 16% in March, but the first quarter still saw a 5% drop. Vale is to launch a larger-than-expected $4.6bn share buyback. In Mexico, OMA's traffic continued to improve MoM from minus 48% in February to minus 35% in March. Chile’s CPI rose less than expected in March. A drop in food costs softened the blow from higher energy rates.
CORPORATE DEBT
CREDIT It was a quiet week on credit markets. In the United States, Jerome Powell said it was too early to talk about tapering and that it would be some time before enough progress would warrant a reduction in its asset purchasing. As a result, yields on US 10-year and 5-year Treasuries dipped by 7bp and 12bp. In Europe, they were largely unchanged. The Main and Xover (-1bp) were also stable while cash bond spreads tightened by 2bp for Investment Grade and 8bp for High Yield, producing returns of 0.14% and 0.29%, respectively. Air France-KLM approved a plan to shore up its capital base and cash position. The French government is to convert its €3bn loan into a hybrid bond vehicle which will qualify as equity. The group will launch a €1bn increase of capital. The French state will subscribe but maintain its stake at less than 30%. China Eastern Airlines will also subscribe. However, the Dutch government, which owns 14%, will not take part and will see its stake diluted. The measures will help Net Debt to EBITDA fall below three times by 2023. The state-backed €4bn loan has been extended by 2 years to 2023. Lufthansa is also planning a rights issue that could amount to as much as €5.5bn. The proceeds will be earmarked for the repayment of government aid. Carnival lost $1.97bn in the first quarter but the cruise company gave no more detail. With all ships in dock, its cash burn is estimated at around $500m a month. But the group still had a considerable $11.5bn in cash at end February, thanks to the latest increase of capital, debt raisings and February’s bond issue. The group is upbeat on a recovery. First-quarter reservations soared 90% compared to the previous quarter. And reservations for 2021-2022 are now even higher than for the same period in 2018-2019. Credit Suisse expects pre-tax losses of CHF 900m for the first quarter including a CHF 4.4bn write down for its Archegos exposure. Its CET1 at end March should be at least 12%, down from 12.9% on December 31st. The bank has dismissed the head of its investment banking and risk divisions and will cut its dividend for 2020. Its share buyback program has also been suspended pending an improvement in solvency ratios. Société Générale is in exclusive talks to sell its asset management affiliate Lyxor to Amundi. Lyxor has €140bn under management, €77bn in passive investment management and €47bn in active investing for the accounts of French and international clients. The €825m deal should mean Société Générale booking a €430m capital gain after tax. It should also make Amundi Europe's biggest ETF player with €142bn under management, taking its European market share from 6.2% to 14%. On a relatively quiet new issues market, Organon & Co, Merck’s Women’s Health spin-off, raised €1.25bn with a secured bond at 2.875% due 2028. The deal is part of a total financing program of $9.5bn. Dutch insurance company Athora raised €300m with a Tier 2 issue at midway +260bp. CONVERTIBLES New issuance accelerated to $3.65bn. The biggest deal came from biotech Invitae Corp which raised $1.15bn due 2028. The company is a genetic testing specialist in areas like hereditary cancer, cardiology, neurology, and pediatric genetics. The proceeds will go on underpinning the company's exponential growth and funding its acquisition of Genosity. Another biotech, Ionis Pharmaceuticals (RNA-targeted therapeutics) raised $550m with an April 2026 maturity. The second largest deal came from Li Auto which raised $750m at 0.25% due 2028. The proceeds will go on funding electric vehicle R&D with a focus on battery technology. In Europe, the UK’s Asos (e-commerce) raised £500m at 0.75% due 2026 to fund its online platform. TUI AG (travel and tourism) raised €350m to bolster its finances amid a persistently difficult environment for the sector in Europe. In company news, French power company EDF was the subject of rumors that it might buy in its minorities as part of its huge Hercules reorganization plan. The news sent the share much higher as the €10bn sum mentioned for the 16% minority stake was much higher than current price levels.
