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MARKET ANALYSIS 23rd July 2021


The equity plunge at the beginning of the week was short-lived.

Investors reassured by signs that vaccination was slowing hospital intakes.

Governments are also adopting measures to reinforce programs.

Fears over the increasing spread of the Delta variant and government bond yield moves triggered a sell-off on equity markets at the beginning of the week. Oil prices followed suit and the move was amplified by OPEC’s agreement to increase production slightly next month. However, the equity plunge was short-lived. Encouraging second-quarter results quickly stopped the rot. Most companies have managed to beat expectations. In the US, a significant base effect means earnings growth has more than doubled compared to the previous year. Investors were also reassured by signs that vaccination was slowing hospitalization and preventing the most serious cases. Governments are also adopting measures to reinforce programs. After its monetary committee meeting, the ECB reaffirmed its highly accommodating stance and said any rate increase would depend on inflation being 2% minimum over the next two years and sticking to that level for several quarters. This new forward guidance suggests rates will stay low for some time. Markets were unsurprised by the news and bond yield movements were muted. Two members of the Bank of England’s committee said inflation was only temporary so there was no rush to abandon accommodating policies. The UK wants to renegotiate the Northern Ireland trade agreement, but the European Commission firmly rejected the idea. We are still neutral on risk assets but with a preference for European and Chinese equities. We remain cautious on government bonds and prefer corporate debt.


EUROPEAN EQUITIES


It was a volatile week on European equity markets which are still in thrall to any deterioration in the sanitary situation. However, markets quickly rebounded from an initial sell-off on excellent quarterly figures and upbeat PMI data, especially in Germany. Investor appetite for cyclicals also revived. The ECB’s first press conference since changing its monetary policy framework held no surprises. The message was still one of caution. In earnings news, many companies beat expectations. Even so, stock price movements mostly reacted to management comments on the outlook. In-line results and no upward revision to guidance generally triggered selling. That was no problem for Publicis which raised full-year guidance after sterling second quarter results. Management expects to return to pre-Covid levels of business this year. In pharma, Roche also beat expectations but maintained guidance for 2021. Results at ASML were once again excellent: the order book has jumped 75% since the first quarter on strong demand from semiconductor producers. The group said it was still struggling to meet demand despite significant investment in new capacity. That echoed comments from Daimler which expects semiconductor shortages to last until 2022, seriously hitting sales in the second half of this year and probably into next year too. The autos group nevertheless reaffirmed its margin targets which suggests it has strong pricing power despite the current surge in commodity prices. Quite the reverse of Unilever which reported a strong increase in second-quarter sales but cut its operating margin target for the year.


US EQUITIES


The week kicked off with a sell-off across markets. Covid fears were exacerbated by mounting US-China tensions as the US and its NATO allies officially accused Beijing of sponsoring the Microsoft Exchange server hack. This followed the fuss in the previous week when Washington warned investors of the risks of doing business in China. Markets were not down for long. The rebound took hold on Tuesday with one of the best daily rises in 4 months. The three-day rally looks like being the biggest since April. Optimism on earnings offset concerns over growth peaking and the Delta variant spread. Around 86% of S&P 500 companies have so far beaten expectations while 12-month forward expectations have been rising at the fastest pace in decades. However, reactions to good, and even excellent, results have been harsh with very few companies being rewarded with share price rises. Oil prices also rebounded as US petrol inventories fell, especially as the driving season is in full swing. In company news, Johnson & Johnson and Coca-Cola revised up guidance. Operating profits at Verizon Communications beat expectations. AT&T also reported upbeat figures, especially in streaming. The company added 2.8 million subscribers to its US platform. Netflix, however, lost subscribers in the US and Canada and the stock fell 3% on disappointing subscriber growth forecasts.


JAPANESE EQUITIES


The NIKKEI 225 and TOPIX fell 3.15% and 2.61% over the week. The Nikkei 225 at one point fell to a 2021 low on mounting concerns over Covid-19 and US rates. At the same time, trading volumes were low ahead of the Tokyo Olympic holidays on July 22 and 23. Mining (-7.13%), Air Transportation (-5.23%) and Oil & Coal Products (-4.61%) led falls but Marine Transportation (+1.47%) was an exception. Selling hit semiconductor-related sectors on market expectations of weaker earnings from TSMC. Canon (7751) jumped 6.85% on better-than-expected earnings. Nitori Holdings (9843) rose 1.22%, mainly due to upbeat furniture sales. On the other hand, Eisai (4523) plunged 11.99% after some US medical institutions said they would stop using its Alzheimer drug. The government said it had secured an additional 50 million vaccines at the beginning of 2022 Covid from Moderna and Takeda Pharmaceuticals, including shots for a 3rd booster. The minimum eligible age for vaccination was also reduced to 12. The Tokyo Olympics started on July 23 and most games will be held without spectators.


EMERGING MARKET


The MSCI EM index was down 0.96% in USD as of Thursday’s close. India (+0.21%) outpaced most markets, while Taiwan (-1.31%) and Brazil (-2.24%) underperformed. China (-1.03%) performed in line with the EM Index. In China, the PBoC kept its benchmark loan rate unchanged for the 15th straight month, confirming monetary policy stability. The Central Committee of the CCP and the State Council released a document on implementing the third-child policy and supportive measures. To mitigate commodity price inflation, China is set to release the second batch of its strategic reserves in the second half of July: 30,000 tons of copper, 90,000 tons of aluminum and 50,000 tons of zinc. On the geopolitical side, the US and NATO allies said Beijing was behind the Microsoft hack. With the rise in COVID-19 cases in Vietnam, local governments are tightening social-distancing measures to contain the pandemic and require suppliers to submit plans to avoid operation suspension. As a result, Shenzhou’s Vietnam capacity (low-20s % of total for garments) will be operating below normal capacity for the next 14 days. In June, Li Auto posted 7,713 Li ONE deliveries, up 320.6% year-on-year and 78.4% higher sequentially. Evergrande’s share price extended losses after a Jiangsu court ordered the freezing of a RMB 132m bank deposit held by its onshore division. A restructuring appears inevitable as policymakers worry about potential implications for the property sector. Apple suppliers fell due to the Henan rainstorm, despite Foxconn’s assurances that factories had not been significantly impacted. In Korea, Naver released slightly better-than-expected 2Q results off a high base, with performance strong across all divisions. E-commerce was driven by mobile and the introduction of new services such as Live commerce and Brand store, and is expected to remain strong in the second half as alliances with Shinsegae Group (expansion of product categories with groceries and luxury items) and CJ Group (logistics) start to bear fruit. In India, HDFC Bank first quarter results were below expectations due to Covid-related provisions, but management expects a recovery after the second wave. Bajaj Finance continued to face a tough environment for its asset quality but expects normalization in the second half and digital transformation to drive growth. Asian Paints reported strong 1QFY22 results despite the 2nd Covid wave and commodity price inflation. Reliance is to take a 40% stake in Just Dial to boost its e-commerce business. Zomato raised $1.3bn after pricing its IPO at the top of the range, with the first trading day on July 23. Adani group companies are being investigated by SEBI, the Indian market regulator, over alleged non-compliance with local security rules. In Brazil, Vale’s second quarter iron output was below expectations due to ramp up issues at a new plant. For the second quarter, PagSeguro and PagBank reported a 151% surge in consolidated total payment volume with 11.2 million active PagBank users, an increase of 2.1 million in the quarter.



CORPORATE DEBT


CREDIT It was another volatile week for bond yields and equities. Mounting concerns over the Delta variant spread and moves in Europe to introduce measures like Covid passes for vaccinated people triggered an equity market sell-off on the Monday. But by the end of the period, markets had more than recovered the ground lost. The Eurostoxx 50 was up 1.4% while the Main and Xover had tightened by 0.7bp and 3.1bp. There were, however, wide swings with the Xover hitting 250bp at the beginning of the week before returning to around 235bp. Yields on the German 10-year Bund ended the week down 5bp. 10-year US Treasuries were stable at 1.29% after falling to 1.19% on the Monday. In Europe, the ECB reinforced sentiment that rates would stay low from some considerable time. Chair Christine Lagarde said any rate hike would depend on inflation hitting 2% and staying there for 2 years. Clearly, the probability of a rate rises over the short to medium team is now much reduced. Elsewhere, US-China tensions rose after cyber-attacks. In financials, European bank results kicked off with solid figures from Nordic banks, both at the operating and asset quality levels. There were no bad surprises either from Spain’s Abanca and Bankinter. In Italy, the €3.8bn legal problem between Monte Paschi and its foundation was resolved. Press reports also said talks between the government and UniCredit on its acquisition of Monte Paschi were making progress. CONVERTIBLES After couple of days off, the primary market is kicking in. Shift4 (integrated payments capabilities to merchants) is coming back with initially $500M 2027 convertible bond (40%ish premium). The deal was well received, upsized by $50M and trading +1.5pts from issue. In the meantime, Clarios International (energy storage solutions, low voltage battery) is announcing a $500M mandatory preferred 2024 to be price later in July. The Earning season is still underway across our universe. In Europe, specialty chemicals company SIKA reported its H1 revenues. Revenues up 22% organically; most divisions above consensus (strong in distribution, renovation and private residential). The outlook comments were rather cautious, particularly on margins due to raw materials inflation. In the US, on the recovery side, the airline industry is beating profits forecasts amid leisure travel surges, and signs of life on business and long-haul international flights. American Airlines is saying that that it expects to fly more than 90% of its domestic seat capacity and 80% of international this summer. Yet the industry is facing new challenges as Jet fuel prices have surged in the last few months. In Asia, two themes are in the spotlights. The Chinese real estate sector continues to show some weakness after that Banks in Hong Kong including HSBC Holdings, its unit Hang Seng Bank and Bank of East Asia have stopped approving some mortgages for properties being developed by Evergrande while Standard Chartered and Bank of China also declined to offer new home loans for unfinished properties. On the other side, Chinese companies related to education and infant care showed strong performance after authorities in China pledged to reduce the cost of childbirth, parenting and education.

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