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MARKET ANALYSIS 19th April 2021

  • Inflation in the United States rose in March

  • Europe’s indicators improved

  • The first reports for first-quarter figures were encouraging

Investors focused on economic data and the start of the first quarter earnings season. March’s much-anticipated inflation figure came in at 2.6% YoY vs. 1.7%, largely because of energy price base effects. These will continue this month and next. However, underlying inflation also rose sharply Core Consumer Price Index (CPI) was up 0.7%, its largest monthly move since February 2013. Even so, US Treasury yields stayed put. This was followed by better-than-expected jobless data and retail sales for March which jumped 9.8%. The New York and Philly Fed indicators also accelerated. Even so, government bond yields started to fall, possibly because of non-domestic’s investors finding these levels attractive. Japanese investors were rumored to be big buyers.Europe’s indicators also improved with the Bank of France’s industrial confidence indicator up. Germany’s ZEW indicator also rose. China grew 18.3% in the first quarter compared to the same period in 2020. This was slightly below the 18.5% expected but retail sales jumped 34.2%, or better than the 28% penciled in by analysts. Expectations for first-quarter figures were riding high with a 25% rise for US companies, mainly because of the positive base effect compared to the first quarter last year. The first reports to appear were encouraging both in the United States (Nvidia, Goldman Sachs, Wells Fargo) and in Europe (Just Eat, LVMH, SAP). Equity markets reacted by pushing higher. That said, fears over the pandemic persisted as some countries continued to suffer critical levels. Concerns over new strains also remained high. To make matters worse, the FDA suspended the Johnson & Johnson vaccine rollout, and its return could take more time than initially thought. Against this backdrop, we remain neutral on risk assets but with a preference for Europe. The ongoing economic rebound is providing solid support for undervalued stocks so Europe should do well. In fixed income, we are still underweight duration and continue to prefer spread assets.


European equity markets remained upbeat, taking year-to-date net gains to more than 10%. Indices wobbled briefly after the FDA suspended the Johnson & Johnson vaccine but soon recovered. Initial first-quarter earnings reports showed encouraging growth and led several companies to upgrade guidance. SAP’s performance was slightly better than the group expected and it raised its outlook for the full year. ABB swept past consensus expectations and the group is more optimistic about the current quarter. Activity accelerated towards the end of March, particularly in short cycle segments. Publicis reported promising growth, especially in the United States and in its digital divisions. Daimler beat forecasts thanks to China and robust free cash flow. In cosmetics, L’Oréal's revenues were up 10%, or twice as much as in 2019, but LVMH did even better, reporting an impressive 30% surge in first quarter like-for-like growth. Corporate activity remained busy thanks to IPOs but also the end of the Veolia-Suez struggle. After months of legal battles, both groups reached an agreement. The bid price was raised, and business lines were divided up geographically. Crédit Agricole sweetened its bid on Italy’s CreVal and there was talk Spain’s ACS might be interested in Atlanta’s stake in the Italian motorway concessions group Autostrade. In energy services, press reports suggested Spie, Bouygues and various investment funds might bid for Engie’s Bright division (sales of more than €12bn).


US indices were boosted by the first quarter earnings. The Dow Jones rose 1.59%, the S&P500 1.79% and the Nasdaq 1.51%. In addition, the latest macro data remained encouraging with new jobless claims falling sharply to 576,000, or much lower than the 700,000 estimated. US inflation also reassured global markets as it suggested there was no reason for the Fed to adjust its monetary stance. Yields on 10-year US Treasuries eased further, sending interest-rate sensitive tech stocks higher and the S&P500 to a fresh record. Retail sales in March rebounded sharply from February’s levels, offsetting their poor showing in the fourth quarter of 2020. March was a strong month all round and will probably lead to GDP estimates being revised higher for the quarter as well as for the full year. Major banks kicked off the earnings season with robust figures. JP Morgan booked its best quarter ever with $14.3bn in profits, including an exceptional write back of more than $5bn. Loan growth remained at a tepid 2% as clients reimbursed debt amid an improvement in their financial situation. Goldman Sachs had a record quarter for trading thanks to strong markets. Wells Fargo and Bank of America also beat estimates. The reaction from bank shares was mixed overall due to loan demand remaining negative in most segments. Coinbase’s first day of trading was even more mixed. After opening at $318 and hitting a high of $429 barely 10 minutes later, the stock ended 14% lower at $328. Bitcoin, meanwhile, hit a new high at more than $64,000. Apple gained more than 2.4% on rumors the company would be unveiling its new iPad this Tuesday. In healthcare, Johnson & Johnson fell after the United States decided to pause its vaccine rollout following 6 cases of a rare thrombosis for 6.5 million injections. Thermo Fisher acquired PPD for $47.50 a share, or an enterprise value of $17.4bn. The commodity rally continued with copper up 5% over the period, its largest move in two months. Oil jumped 7%, its biggest weekly gain since the beginning of March.


Stocks were more or less flat for the week with the Nikkei 225 and TOPIX down 0.02% and 0.42%, respectively. Sentiment continued to ride on earnings expectations and strong Chinese economic data, but the mood was offset by rising Covid-19 infections and vaccination uncertainties. Rising sectors included Iron & Steel (+4.89%), Rubber Products (+1.68%) and Transportation Equipment (+1.61%). Cyclical sectors were bought on the previous week’s dip. As for individual stocks, Seven & I surged 8.42% after earnings fell less than for its peers. Nippon Steel rose 6.70% on ESG efforts. Shiseido gained 5.52% on its business expansion in China. Regarding the Covid-19 situation, semi-emergency measures were implemented. The government said it would be reporting vaccination statistics on every Monday starting April 19.


The MSCI Emerging Market index closed in positive territory, up 0.17% as of Thursday’s close. Brazil and Korea outperformed other regions, rising 2.64% and 2.48% in USD respectively, while China was flat (+0.08%). India underperformed (-2.15%). China’s first quarter GDP climbed 18.3% YoY, or in line with the 18.5% expected. But QoQ growth slowed to 0.6% from 2.6%. Industrial output rose 14.1% YoY, trailing estimates; retail sales expanded 34.2% in March beating expectations and fixed-asset investment climbed 25.6% YoY. New bank loans rose more than expected in March from the previous month thanks to strong corporate and household demand. M2 Money Supply came in at 9.4% in March, or below expectations of 9.6% and 10.1% previously. New total social financing (TSF) came in lower than the market expected at RMB 3.3 trillion, vs consensus estimates of RMB 3.7 trillion. Trade continued its strong rebound over the month, with imports surging 38.1% and exports 30.6%. Antitrust regulators summoned 34 internet corporations to rectify their anti-competitive practices within the next month. Alibaba was fined $2.8bn, or 4% of its sales in 2019, for anti-competitive practices over an exclusive dealing agreement. CTG Duty Free’s preliminary net profits were slightly below estimates. In Taiwan, TSMC first quarter results beat consensus, driven by HPC and milder smartphone seasonality. Management hiked both revenue and capex guidance and expects strong demand throughout 2021 and supply tightness well into 2022. In Korea, SK Innovation and LG Chem settled a trade-secret dispute over EV batteries, freeing up both firms to expand in the United States. Russia’s anti-monopoly authority-initiated proceedings against internet giant Yandex on its search engine. The United States imposed new sanctions on Russia targeting primary issuance of RUB sovereign debt as well as officials and entities. India’s CPI rose to 5.5% in March, vs. 5% last month, or slightly above expectations. The IIP contracted by 3.6% in February, primarily on account of manufacturing and mining sectors. TCS announced EMFY21 results which were in line with expectations thanks to a strong international order book, especially in banking. The company said it had seen a record number of new deals. Infosys’s fourth quarter results came in below expectations, while FY22 revenue guidance is still going for a robust 12-14% increase. In Brazil, real estate company Cury reported robust results. In Peru, the left-wing candidate led in the first round of the Presidential elections. Chile’s banks reported results for March which beat ROE consensus, mainly driven by lower provisions and cost controls. South Africa’s retail sales rose 2.3% YoY in February and were up 6.9% monthly. It was the first annual increase since March 2020.


CREDIT Despite mounting concerns over vaccines like AstraZeneca and Jansen, markets were underpinned by upbeat economic indicators and the ECB’s ongoing accommodating monetary policy. ECB chair Christine Lagarde said the ECB would support the economy until a recovery happened, a statement that suggested the bank would be on hand to help even after the end of the pandemic. The Bank of France’s governor, François Villeroy de Galhau, said the Pandemic Emergency Purchase Program (PEPP) could be prolonged up to the end of 2022. Elsewhere, the European Commission unveiled its funding strategy for the Next Generation EU plan. €800m will be raised up to end 2026. Funding will be entirely in euros with maturities of between 3 to 30 years. Yields shifted slightly higher amid curve steepening. Germany’s 5 and 10-year Bund yields added 1bp and the 30-year 3bp. The Xover and Main tightened by 2bp and 0.5bp. Spreads on cash bonds were unchanged over the week but the carry helped offset the yield impact. Investment Grade and High Yield returned 0.01% and 0.09%, respectively. In company news, Atlanta retained control of its payment solutions affiliate Telepass but finalized the sale of a 49% stake for €1.06bn to investment fund Partners Group. Tereos sold a €125m tap on its 7.5% Oct-25 issue from last October. The proceeds will go on repaying a €50m bank loan contracted in early 2019 and the balance will be used to shore up liquidity. Dufry refinanced its bank maturities, notably CHF 1.2bn due November 2022. It issued a CHF 300m tranche at 3.625% due 2026 and another for €750m at 3.375% due 2028. Moody’s confirmed its B1 rating and raised its outlook from negative to stable, citing various efforts to reinforce liquidity in 2020 and 2021. JPMorgan reported first quarter earnings of $14.3bn for an ROE of 23% and Goldman Sachs $6.84bn (31%). In both cases, strong investment banking and significant writebacks contributed to the figures. In a particularly busy week on the primary market, TI Group Automotive Systems raised €600m at 3.75% due 2029 in its first venture into the High Yield market. Another newcomer, Spain’s Neinor (house building) raised €300m at 4.5% due 2026 with a green bond. In financials, Rabobank raised €750m with a CoCo at 3.1%. CONVERTIBLES New issuance slowed to $787m as the first-quarter earnings season swung into action. The biggest deal was from Vietnamese conglomerate Vingroup which raised $500m at 3% due April 2026. Vingroup weighs 15% of the Ho Chi Minh market and is present on a number of markets including property, food retail and car and smartphone production. In Europe, property developer Nexity raised €240m with an OCEANE at 0.75% due 2028. The proceeds will go on extending the group's maturities by funding the partial buy-in of its 2023 OCEANE (€270m). In results, Fnac Darty reported a 22% jump in first-quarter sales thanks to online momentum. The group, which sells household electrical goods, books and records, nevertheless sounded a cautious note on the outlook for this year. First quarter sales at luxury giant LVMH jumped 32% to €13.9bn, sweeping past consensus expectations thanks to its Fashion and Leather Goods division (close to 60% of group profits) which saw like-for-like sales rocket by 52% to €6.37bn. American Airlines’ first quarter loss of $1.3bn would have been even worse if the government had not contributed $2.1bn to pay its employees. M&A continued apace with Microsoft paying $19.7bn for Nuance Communications, a 23% premium on the last quoted price. Nuance provides conversational artificial intelligence solutions for voice recognition.

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