Market Analysis 18th June
The exact timing of any tapering is still up in the air
The yield curve flattened, and the dollar enjoyed a hefty rebound
We remain neutral on equity markets
The Federal Open Market Committee (FOMC) marked a change from the bank’s usually accommodating tone. Despite European central bank (ECB) and Bank of Japan (BoJ) assumptions to the contrary, US monetary policy will not be frozen for a considerable time. US policy makers think rates could now be raised by the end of 2023. Tapering is also a possibility. The exact timing of any tapering is still up in the air but Jerome Powell said he was expecting particularly good jobs data over the summer. If the infrastructure plan gets Congressional approval, the Jackson Hole summit at the end of August might be the right place for such an announcement. At the press conference, he was resolutely optimistic on the economic outlook and said policy makers were confident tapering would occur earlier than expected. The shock wave triggered by these comments triggered big investment shifts. The yield curve flattened, and the dollar enjoyed a hefty rebound. The dollar's appreciation could have big consequences not only for commodities, inflation expectations and emerging country currencies but also for the euro which revisited April lows. Economic data and events failed to dent positive momentum on markets. Retail sales for May fell more than expected following the end of government stimulus cheques and producer prices jumped 6.6% due to shortages. Households are now spending more on services as the economy reopens. US industry has also improved, judging from higher utilization capacity and an acceleration in industrial production in May. Europe continued to recover thanks to an efficient vaccination campaign and the gradual lifting of sanitary restrictions. The biggest ever bond issue took place on Tuesday 15th June when the ECB raised €142bn to fund its stimulus package. Elsewhere, the United Kingdom postponed its lifting of Covid-19 restrictions by four weeks following a slight increase in the Delta (or Indian) strain. The outlook for UK growth was subsequently revised slightly lower. We remain neutral on equity markets and still prefer Europe with a focus on value stocks. We are still overweight Chinese equities. Technical indicators and stretched US tech valuations have accentuated our cautious approach. In fixed income, we remain cautious on government bond sensitivity.
Tapering continued to dominate investor worries after the Fed said benchmark rates could be raised earlier than expected. The announcement naturally made investors cautious. However, yields on 10-year government bonds in Europe's biggest countries only moved a little higher. Meanwhile, most commodities like copper retreated due to the rising US dollar, and inflation expectations fell back. Retail sales for May were still much higher than in the pre-crisis period with households now spending more on services as economies reopen. The rapid rebound in spending triggered by easing sanitary restrictions was mirrored in H&M’s upbeat quarterly sales. Figures from Vinci’s motorway division showed that traffic had more than doubled between May 2020 and May 2021, led by light vehicles. The group nevertheless stressed that the recovery in air traffic was still much weaker. Germany's Lufthansa is planning an increase in capital to meet targets for the coming quarters. The airline wants to see a sharp improvement in profitability by 2024 and to be able to pay back State aid. However, its expectations that it will be running at 40% of 2019 capacity this year before returning to normal in 2024 are a reminder that the recovery will be gradual. Norway’s Equinor, like its rivals BP and Shell, is also reinforcing environmental sustainability projects and is now targeting carbon neutrality by 2050. The group is to gradually spend more on renewable energy projects so that they account for half of its overall investments by 2030. Elsewhere, HSBC has completed the sale of its French retail banking activities. The UK bank is pressing on with restructuring and moves to refocus on core activities as a complement to its cost saving efforts.
In another mixed week on US markets, the Dow Jones lost 1.86% and the S&P 500 0.41%. The Nasdaq ended the last five trading sessions to Thursday 1.01% higher. Recent economic data was also mixed. Production prices rose 6.6% YoY in May while a switch to spending on services caused retail sales to dip 1.3% MoM, or more than expected. New York’s Empire Manufacturing index also fell short, coming in at 17.4 vs. 22 estimated. The Philly index came in at 30.7 when it was seen at 31. On the other hand, industrial production rose 0.8% MoM in May (vs. +0.7% estimated). Weekly jobless claims were 412,000, or higher than the 360,000 expected. Bond yields were flat. There was no change in monetary policy either, but the dot plot increased: 13 out of 18 policy makers now expect a rate hike by the end of 2023. Last March, 11 out of 18 saw no change before 2023. The Fed reaffirmed its intention to continue asset purchases until substantial progress had been made in the recovery, with the gauge set from December 2020. Chairman Jerome Powell added that the right conditions for bond purchasing to stop were still some way off. When asked if a new taper tantrum might stop the bank reducing its purchases, he said that the Fed would do everything possible to avoid an adverse market reaction but that if macroeconomic objectives had been attained, purchases would be trimmed if necessary. Elsewhere, there was progress in talks over the new infrastructure package according to press reports. A bipartisan agreement could go before the Senate in the next few days. Financials fell after JP Morgan’s CEO Jamie Dimon said that trading revenues in the second quarter had slumped by close to 40% YoY. He also described loan growth as anemic. Markets reacted the same way when Citigroup lowered forecasts due to higher costs and lower revenues than in the same period in 2020. Adobe advanced 2.5% in after-hours trading after raising guidance for the second quarter. This followed an acceleration in company spending on publishing software like Acrobat, Photoshop, and Flash, etc. The Federal Communications Commission voted unanimously to ban products made by Huawei and four other Chinese companies because of national security risks.
The Nikkei 225 and TOPIX edged 0.21% and 0.35% higher over the week. The initial upward trend was halted by profit-taking and news that the United States would raise rates earlier than previously planned. Nevertheless, the lifting of the state of emergency, vaccination progress and positive G7 views on the Tokyo Olympic Games helped underpin sentiment. Marine Transportation (+7.89%) continued rising. Mining (+3.54%) and Rubber Products (+3.22%) gained on economic recovery hopes. On the other hand, Air Transportation (-4.39%) was hit by profit-taking. Nonferrous Metals retreated by 2.21% after China decided to release its reserves. Eisai soared 14%, adding to previous gains on its strategic alliance with Bristol Myers. Approval for a new Alzheimer drug also benefited Sysmex which gained 4.92%. Keyence jumped 5.24% after its AGM. To date, 16.3% of the Japanese population has been vaccinated against Covid-19 at least once. The state of emergency will be lifted in major cities on June 21. The BoJ is going to maintain easing and extend the period of Covid-19 corporate financing support till the end of next March.
The MSCI Emerging Market index was down 1.38% as of Thursday’s close. Brazil outperformed other regions, edging 0.42% higher, while India was down by 2.35%, followed by China (-1.56%), in US dollars. In China, retail sales growth decelerated from 17.7% in April to 12.4% in May due to Covid-19 resurgence in Guangdong Province. Industrial production rose 8.8% in May, slower than the 9.8% surge in April. Tourism spending during the recent Dragon Boat Festival long weekend was about 25% lower than pre-pandemic levels, while tourist visits almost fully recovered, bouncing 94% compared to the same weekend in 2020. To ensure stable commodity prices and ease raw material cost pressure, China released more of its copper, aluminum and zinc reserves while ordering state-owned enterprises to limit exposure to overseas commodity markets. Vice Premier Liu He was reportedly appointed to lead China’s third-generation chip development efforts to increase competitiveness in the domestic semiconductor industry. May smartphone shipments fell 16% MoM and 31% YoY. 5G smartphones accounted for 74% of total shipments. China’s market regulator began an antitrust probe into ride hailing giant Didi ahead of its IPO. Anta announced a positive profit alert: revenues are now expected to rise 50% YoY and net profit by at least 110%. Taiwan’s central bank left its benchmark lending rate unchanged and hiked its 2021 economic growth forecast from 4.53% to 5.08%. In South Korea, LG Chem surged on reports the UK government was in talks with several manufacturers to build a Gigafactory. A consortium comprising Naver and E-Mart will buy eBay Korea for $3.1bn. In India, April IIP (index of industrial production) surged 134% YoY from an extremely low base, or better than expected. IIP was flat on a 2-year basis, despite Covid-19 disruptions. May CPI inflation came in at 6.4% YoY, or 90bp above consensus estimates, up from 4.2% in April. Inflation surged across all components including, food, fuel and core inflation. India’s forex reserves crossed the $600bn mark for the first time and are now the fourth highest in the world, just behind Russia. Adani Group stocks plunged after a report suggested that NSDL had frozen foreign funds holding the stocks. Thailand’s Prime Minister promised the country would reopen fully in the next 120 days, with total resumption of business activity and cross-country travel. In Brazil, pandemic emergency aid will be extended for another three months but is not expected to cause ripples in financial markets. The central bank increased interest rates by 75bp as expected, albeit with a more hawkish tone. The Senate approved the Eletrobras privatization bill, which will now go back to the lower house to be voted on. This bill had been in Congress for a long time and its approval is clearly positive for Brazil’s fundamentals.
CREDIT The Fed’s less accommodating stance was the week’s big news. US policy makers now see benchmark rates rising in 2023 rather than 2024. Euro and US rates rose by 8bp and 5bp but stopped short of reaching highs seen earlier this year. The Main widened by 1bp and the Xover by 3bp. Although Investment Grade and High Yield spreads were relatively stable, (0bp and 2bp) cash bonds fell 0.16% and 0.1%, respectively, due to higher yields. Moody’s upgraded Grupo Antolin from B3 to B2, citing a faster-than-expected improvement in credit ratios following a recovery in the autos sector and the group’s cost saving measures. Lufthansa mandated banks to organize its increase of capital. No date or amount have been given but the proceeds will go on repaying €1bn in 2026 convertibles held by the German state and replacing the, as yet, unused €4.5bn from a subordinated loan. Webuild signed a $16bn civil engineering and maintenance contract with Texas Central, the company which will run the high-speed train link between Dallas and Houston. The agreement should generate an annual $500m in sales from 2023. Press reports said that Banco Santander was in talks with CPPIB and Cerberus over the sale of €1.5bn in Spanish non-performing loans. If the deal goes through, the bank’s overall NPL ratio would fall 15bp to 3.05% and its Spanish NPL ratio to 5.4% from 6.2%. In a particularly busy week on the primary market, Nomad Food raised €750m in secured bonds at 2.5% due 2028. NH Hotel raised €400m in secured bonds at 4% due 2026. Antolin raised €390m with a secured bond at 3.25% due 2028. In financials, Macif raised a total of €1.75bn in three tranches: an RT1 for €400m at 3.53% (instead of the 4.125% announced initially) a Tier 2 for €850m at 2.2% and a Tier 3 for €500m at 0.73% due 2027. Commerzbank raised €500m with a CoCo at 4.25%. CONVERTIBLES The mood remained bullish on the new issues market with $1.98bn in issuance over the week. In Europe, Spanish investment company Criteria Caixa raised €200m due 2025 in bonds exchangeable into shares in Cellnex Telecom, Europe’s largest mobile infrastructure player. In the United States, NextEra Energy raised $500m due 2024. The proceeds will go on funding part of the cost of acquiring a company with 391 megawatts in wind farm projects. Vroom's first ever convertible raised $650 at 0.75% due 2026. Vroom runs an online platform which helps people buy, sell and finance second-hand cars. Restaurant chain Cracker Barrel and metals group HTA both raised $300Mn.