France has extended its current lockdown to the entire country
The US infrastructure plan could create a risk of rising inflation expectations
Tactical return to neutral weightings on equities to avoid a period which could prove more volatile
In a shortened week, France has extended its current lockdown to the entire country. However, the main event was not Emmanuel Macron's TV address but Joe Biden’s speech in Pittsburgh. He unveiled details on his new $2.2 trillion infrastructure package. It will target renovation of existing infrastructure like bridges and roads as well as plans to develop clean energy, improve internet connections and give old people better access to care. Funding will mainly come from raising corporate taxation from 21% to 28%. Economic data over the period were upbeat. China’s composite PMI rose from 51.6 to 55.6 on strength in services. PMI in the United States also rose but the most remarkable development was consumer confidence which bounced sharply, both at the ‘present situation’ and ‘expectations’ levels. Advanced indicators in Europe were similarly upbeat. Pending Joe Biden's announcements, US equities stabilized but the midcap Russell 2000 continued to suffer. The collapse of hedge fund Archegos had a big impact on several technological stocks. Emerging country equities rebounded despite the US dollar's rise accelerating. Government bond yields also started rising again in the United States and Europe to year-to-date highs. The US infrastructure plan could create a risk of rising inflation expectations and US company earnings might be affected. New sanitary restrictions in Europe will have a short-term impact on the economy just as markets move back to recent highs. As a result, we have turned neutral on equities. This is a tactical move. We want to avoid a period which could prove more volatile: risk premiums are rising as government bonds will remain under pressure.
EUROPEAN EQUITIES
Optimism resurfaced on markets on the previous Friday as Joe Biden doubled vaccination targets and investors anticipated news on a vast infrastructure program. As a result, government bond yields rose, and cyclicals were lifted. European yields followed suit but a rise in March inflation also played a part. The European Central Bank (ECB) nevertheless said it was looking beyond short term factors like higher petrol prices and Germany’s VAT returning to pre-crisis levels. Instead, it would wait until there was better visibility on the sanitary crisis and inflation firmly established at around 2% before reducing its asset purchases. European sovereign yields eased a little after these comments and interest rate sensitive sectors fell back, especially as some European countries unveiled fresh restrictions. Europe's banks were also hit when hedge fund Archegos failed to meet margin calls and was forced to sell holdings. Credit Suisse was the most severely affected and ended up issuing a profits warning. Results at clothing company Next in United Kingdom reported annual figures for the year ending January 31st that were in line but raised guidance following stronger-than-expected online sales in February and March. Around 60% of the group's total sales are now online. Among companies engaged in restructuring efforts, Air France continued talks with its main unions to reach an agreement on a new cost-cutting plan. Paris, meanwhile, reached an agreement with Europe on providing fresh aid to the struggling group. Elsewhere, the global semiconductor shortage continued to affect companies and notably auto groups.
US EQUITIES
The Dow Jones, the S&P500 and the Nasdaq bounced by 1.73%, 2.15% and 2.2% over the last four trading sessions up to Wednesday evening. And yet risk aversion had soared at the beginning of the week over the collapse of hedge fund Archegos and forced selling of its positions. According to some estimates, $36bn in stock was sold between Thursday evening and Mondaywith a peak of $20bn on Friday. Markets then perked up after Joe Biden said 90% of US adults would be entitled to a vaccination over the next three weeks. 10-year US Treasury yields hit a 14-month high of 1.7760% after he spoke. Elsewhere, US-China tensions remained high after Washington said the United States was not about to lift Donald Trump’s import duties. On Wednesday, the US president presented his American Jobs Plan, a vast $2.2 trillion boost to infrastructures, especially clean energy, and carbon-reducing technologies, over the next 10 years. $1.3 trillion in funding will come from higher corporate taxes. However, the plan as it stands has little hope of getting through Congress. A follow-up Human Infrastructure Plan for $1.75 trillion will be detailed in the middle of April. It will go on universities, schools, creches and hospitals. It will be mostly funded by higher income tax. Economic data was mixed. Job creations hit a 6-month high of 517,000 but new house sales tumbled 10.6%, or much more than the 3% decline expected. M&A remained intense: the first quarter saw $1.4 trillion in deals with 400 for more than $500m, a 68% increase over the 5-year mean. Tech and healthcare took the lion's share of this with 43% of total deals. In company news, the Federal Trade Commission dropped its antitrust case against Qualcomm. Boeing gained 2.3% after winning a sizeable new order. The Federal Aviation Administration (FAA) approved a version of the 737MAX (737-8200) for Ryan Air.
JAPANESE EQUITIES
The stock market started a new fiscal year during the week. Trading was mainly driven by dividend detachments and the huge loss of hedge fund Archegos. The Nikkei 225 index edged 0.01% higher and the TOPIX declined 1.52% for the week. Sentiment continued to be supported by expectations for an economic recovery through vaccinations and yen depreciation, but the mood was undermined by the risk of US long-term yields rising further. Even so, high-quality companies gained. The Jasdaq TOP20 index, which focuses on earnings quality, advanced 4.82%. Financials like Securities & Commodity (-11.04%) and Banks (-5.08%) tumbled as investors worried about the Archegos impact. On the other hand, Transportation Equipment (+1.80%) rebounded after falling on concerns over a fire in a Renesas Electronics factory. Nomura Holdings slumped 19.33% on its heavy exposure to Archegos. In contrast, Tokyo Electron (+5.69%), Komatsu (+3.61%) and Suzuki Motor (+3.37%) all enjoyed healthy gains. 950,000 people had been vaccinated by the end of March. Vaccinations for 36 million senior citizens will start on April 12.
EMERGING MARKET
The MSCI Emerging Market index closed in positive territory as of Wednesday’s close, as did most of the major regions. Brazil outperformed, rising 2.80% in USD. In China, both manufacturing and non-manufacturing PMIs for March rebounded more than what is normal for the season and market expectations. Manufacturing PMI came in at 51.9 vs. 51.2 expected. Non-manufacturing PMI was 56.3, driven by improvements in both construction and services. The Ministry of Industry and Information Technology announced a new round of NEV purchase stimulus measures for consumers in rural areas. 2020 results for Chinese construction machinery companies were in line with expectations; the industry demand outlook is still favorable and strong sales growth is expected to continue throughout 2021. Xiaomi said it would be entering the EV market with a $10bn investment in the next 10 years. In Taiwan, Giant Manufacturing and Merida reported strong fourth-quarter results, driven by e-bike sales, and improving capacity utilization. TSMC said it would be investing $100bn over the next 3 years to increase production capacity in the face of ever-increasing demand. India’s new Covid-19 cases surged. More targeted measures will be considered instead of another national lockdown. Pakistan and India resumed limited trade after 2 years. Joe Biden decided to let Trump’s first half-B visa ban expire, a move which will benefit Indian IT firms. Maharashtra’s government decided not to extend its stamp duty waiver on property registrations. HDFC Bank reported a third outage on its digital platform. Brazil created a net 401,000 formal jobs in February, its best result since 1992. Credit conditions improved in February with loan book growth up 16.1% YoY. The fiscal budget discussion remained in the spotlight. In company news, WhatsApp payments were approved by Brazil's Central bank for P2P transactions. Mercado Livre is expected to have another good quarter in the first quarter as GMV and TPV growth is running well above 100%.
CORPORATE DEBT
CREDIT The proof of the Covid-19 vaccine's efficiency is that the pandemic's spread is now much more muted in countries which have succeeded with their rollout. Against this encouraging backdrop, Joe Biden announced a vast $2.2 trillion infrastructure package over years. Upbeat economic data in the United States and Europe added 7bp to the yield on German 10-year Bund and 6bp to US Treasuries. The Main and Crossover indices tightened by 2bp and 11bp between Monday and Thursday morning. Investment Grade credit slipped 0.12% due to rising rates while High Yield, which is less interest rate sensitive, gained 0.1%. Moody’s upgraded the secured debt of Douglas by one notch to B2 after the previous week’s refinancing operation. This was to take a bigger PIK component into account (€475m instead of the €300m initially scheduled). Masmovil made a friendly bid for rival Euskaltel which valued the target at €2bn. The offer is conditional on getting 75% of the shares and the two groups forming a solid and complementary industrial project. This is a good move operationally for Masmovil which will see its N° 4 position in Spain reinforced. It will also gain access to Euskaltel’s fixed line network. Leverage, however, will rise sharply from 4.7 to 6 times. Moody’s reacted by putting Masmovil’s B1 rating on negative watch. Kloeckner Pentaplast (packaging) reported a close to 30% rise in EBITDA to €291m in 2020. Lower charges and restructuring costs helped free cash flow to jump 156% to €113m. The company sees EBITDA rising by more than €300m this year and free cash flow by €85m. EBITDA at Altice International also rose sharply in the fourth quarter of 2020 thanks to its digital advertising subsidiary Teads and a big increase in Portuguese subscribers. Sales for the full year rose 1.1% to €4.1bn while EBITDA was up 3.6% to €1.58bn. Credit Suisse warned it could be hit by significant losses in its first quarter due to liquidating positions with hedge fund Archegos. Press reports estimated the loss at between $3bn and $4bn. Among other exposed banks, Nomura said it had exposure of close to $2bn. In new issues, Casino raised €525m at 5.5% due 2027. London’s Gatwick Airport raised £450m with a 5-year secured bond at 4.375%. Insurance company CNP raised $700m with a US dollar-denominated restricted Tier 1 bond at 4.875%. CONVERTIBLES The market slowed down after a record number of issues so far this year. There was, however, a successful new issue from video games company XD Inc in the United States. It raised $280m at 1.25% due 2026. Elsewhere, Australia’s online travel agency Webjet raised AUD250Mm to restructure its debt maturities and prepare for a recovery in tourist and business travel following the country’s successful vaccine rollout. Sweden’s Scandic Hotels raised €175m with a 2024 maturity. The group is Scandinavia’s biggest hotel chain with 280 establishments in 6 countries.
