Market Analysis 25/06/2021
The debate over how long inflation could last is still wide open
Record PMI data show Europe’s recovery is still accelerating
The new US budgetary stimulus package could soon get approval
The Fed’s surprise decision to raise its interest rate forecasts -as well as comments from various FOMC members on how to interpret the news- fueled market volatility. In his Congressional testimony, Fed chair Jerome Powell clearly reaffirmed his conviction that inflation was temporary. He added that the Fed would be extremely cautious in normalizing interest rates. There is no question that the Fed’s approach has changed tack, but policy should remain accommodating for the next few months. The debate over how long inflation could last is still wide open but asset inflation is already creating problems in wealth distribution. Property prices in the US have risen by an explosive 23.6% over the last year and by more than 15% across the country over the last four months. Budget talks appear to be going well and a bipartisan agreement on a $1.2 trillion stimulus package should soon be reached. Senate democrats are still counting on reverting to the reconciliation procedure to get the most divisive parts of the package through Congress. In Europe, central banks in the east have started interest rate normalization. Hungary raised its benchmark rate for the first time in 10 years and the Czech Republic followed suit. The ECB, however, is not expected to surprise markets pending the conclusions of its strategic monetary policy review in September. As countries lift restrictions, record PMI data show Europe’s recovery is still accelerating. Germany is leading the way. We believe there is still room for more progress in services. China, meanwhile, is making huge efforts to vaccinate more than 20 million people a day, or the equivalent of the entire French population in 3 days! Lending is still being restricted but Beijing’s interventionist release of strategic commodity reserves to stop prices rising and the gradual reopening of the economy should facilitate a recovery by the end of this year. As a result, we are maintaining our neutral stance on equities but with a preference for Europe and China. In fixed income, we are still underweight duration and prefer corporate bonds.
Initial PMI data for June showed the pace of the economic recovery was running at a close to 15-year high, driven by a rebound in services and accelerating vaccination drives. Equities were also underpinned by hopes that the new US budgetary stimulus package could soon get Congressional approval. Nevertheless, there are mounting worries over the rapid spread of the Covid-19 Delta strain. The UK has already been forced to push back the official lifting of restrictions. The stronger-than-expected recovery has led Pernod Ricard to raise its forecast of operating profit growth from 10% to 16% amid rising demand as stores reopen. In Germany, Siemens raised its sales target for the coming years along with margin guidance in its logistics and automation divisions. The group now expects EPS to rise by an annual 10% or so in the coming years. Switzerland’s Mikron (automation, machining solutions) also raised guidance for its half-year results, citing particularly strong demand amid the economic recovery, especially in Europe. In spite of semiconductor shortages, Volkswagen is sticking to its annual targets. The group said its ability to pass on price increases to offset supply chain problems was still essential if margins and profits were to be protected. It also made its interest in the car rental company Europcar official. Zalando signed a strategic partnership with LVMH’s Sephora (cosmetic stores) to allow its products to be sold on the German company’s online platform. The agreement is another sign that e-commerce is essential for companies. Online sales will continue to rise in coming years, over and above the lift provided by the pandemic.
US equities extended gains over the week as the strength of the economic recovery outweighed the risks of monetary tightening. Interest rates continued to dictate market and investment style trends. Appearing before a Congressional committee, Jerome Powell reaffirmed his belief that inflationary pressures were merely temporary. He said the Fed would be patient before increasing rates. His words were backed up by New York Fed chair John Williams who said any discussion of rate hikes was still some way off. Loretta Mester, Cleveland Fed chair, said that job creations would have to accelerate for several months before a reduction in asset purchases could be considered. Talks on the infrastructure stimulus package resumed but the amounts in play were much reduced. At the end of the period, the Biden administration said a compromise had been reached with Republicans. The new money will go on roads, bridges, and other traditional infrastructure projects. The deal is a big step forward, but it will be some time before it goes before the Senate. All 23 major US banks passed their twice-yearly stress tests. The Fed’s tests, which assume a long and severe recession, have become much more relevant since the Covid crisis. The test results mean banks could resume dividend payouts and share buybacks: some $200bn could be paid out to shareholders this year. Strong demand and regular drops in inventories pushed Brent crude to $75 for the first time since October 2018. Oil prices were also underpinned by the election of Ebrahim Raisi as Iran’s president, a development that could complicate talks on the country’s nuclear program. The Nasdaq hit an all-time high over the period as long bond yields stayed under control. Tech stocks swung back into favor. Microsoft joined the elite club of companies capitalizing more than $2 trillion.
The NIKKEI 225 and TOPIX lost 0.49% and 0.84%, respectively. The market sank at the beginning of the period but rebounded as the BoJ purchased ETFs and investors bought on the dip. Vaccination progress had fueled hopes for an economic recovery but investors turned into risk-off mode due to spreading Covid variants and uncertainty over US fiscal/monetary policies. The Yen’s depreciation caused markets to focus on exports. Domestic demand remained weak. Gains included Marine Transportation (+1.85%), Precision Instrument (+1.72%) and Warehousing (+1.64%). Losers were Insurance (-4.38%), Air Transportation (-3.75%) and Securities & Commodities (-3.43%). Cyclical sectors generally fell as US long term rates declined. Eisai and Sysmex continued rising (+7.46% and +6.09%). Online medical service provider M3 jumped 6.98% after its announcement that it was sending doctors into companies to vaccinate staff. More than 20% of the Japanese population has now been vaccinated against Covid-19. The state of emergency was lifted in major cities. However, restrictions will remain in place until July 11.
The MSCI Emerging Market index was up by 0.51% as of Thursday’s close. Brazil outperformed other regions, rising 3.28%, followed by China (+0.85%) and India (+0.44%). In China, the strategic reserves administration said it was releasing 50,000 tons of aluminum, 20,000 tons of copper, and 30,000 tons of zinc to ease pressure on commodity prices. The US Commerce Department added five Chinese Xinjiang-based solar energy companies to its banned entity list. The move is unlikely to hobble China’s solar industry or make it difficult for US businesses to build or sell solar panels, though they will have to ensure the materials they import comply with the order. Hong Kong is planning to shorten quarantine for most vaccinated arrivals to 7 days, while the border restrictions for mainland China are likely to be kept in place for another year. Beijing has tightened its crackdown on cryptocurrencies, banning Bitcoin mining in Sichuan and requiring banks and payment platforms to stop supporting digital currency transactions. During the 618 Shopping Festival, GMV at major e-commerce platforms rose 26.5% YoY to RMB 578.5bn, with the Tmall platform ranking first. In the 5th round of China's national drug procurement, drugs from 61 categories won bids with average price cuts of 56%. In Taiwan, export orders rose 34.5% YoY, or less than the 42.1% expected by the Bloomberg survey but still a record for May. TSMC said orders for auto manufacturer customers and Apple for the new iPhone launch would get priority. The group also said it planned to raise prices for some 8-inch and 12-inch wafers by 10% to 20% next year due to strong demand. In India, the 7-day vaccination rate reached 4.7 million, a 49% increase over the previous week. Several announcements were made during the Reliance Industries AGM, including the appointment of the Saudi Aramco chairman to the board, a partnership with Google to launch a low-cost 4G smartphone in September, and a $10bn investment in renewable energy over the next 3 years. Apollo Hospitals reported a decent set of quarterly earnings driven by the healthcare services business. The company is to create India's largest omni-channel digital health platform by merging its online, offline pharmacy and tele-medicine verticals into a single entity. Brazil’s lower house approved the Eletrobras privatization bill. The government sent the tax reform to Congress. Mexico’s central bank caused a surprise by increasing interest rates by 25bp to 4.25%. Russia’s Economy Minister announced a new tax on metal exports, effective as of August 1st.
Economic indicators remained upbeat in Europe but hawkish comments from certain FOMC members weighed on sentiment. Rates continued to rise in the US and Europe and equities edged lower. Credit spreads shrugged off rising yields and the Main and Xover tightened by 2bp and 12bp. Although cash bond spreads were unchanged, IG and HY bonds reflected interest rate movements and returned a negative 0.1% and 0.01%. In company news, Ineos Quattro’s initial first quarter results were excellent. EBITDA rose across all entities, soaring 129% to €647m (up from €283m in the same period of 2020) as market conditions improved significantly. At Ineos Styrolution, EBITDA hit an all-time high thanks to strong trading in polymers, especially in Asia. Pharma group Teva said Japan’s health minister had approved its migraine drug AJOVY after clinical trials conducted in partnership with Otsuka in Japan. Teva expects AJOVY sales this year to hit $300m, up from $165m in 2020. Elsewhere, the ECB has decided to extend leverage ratio relief for banks until March 2022 to avoid any reduction in lending which might jeopardize the eurozone’s recovery. The move amounts to giving Europe’s banks around €70bn in extra leeway. On a persistently active primary market, Air France raised €800m in 2 tranches, €300m at 3.125% due 2024 and €500m at 4% due 2026. Paprec sold €450m in green senior secured bonds at 3.5% over 7 years to finance its acquisition of Dalkia Wastenergy and CNIM O&M and to repay part of its government-backed loan. Moblux (BUT) raised €500m in senior secured bonds at 4.25% over 7 years. Inpost raised €390m at 2.25% over 6 years. Generali sold a sustainable Tier 2 bond at 1.713% over 11 years. CONVERTIBLES New issuance was concentrated in the US as repeat issuers returned to the market. The biggest deal was from tech company Splunk which raised $1bn at 0.75% due 2026 in a private placing for private equity firm Silver Lake. The proceeds will go on funding growth and managing the company's capital structure, notably a $1bn share buyback program which will be carried out over time. Bentley Systems raised $500m at 0.375% due 2027. The proceeds will be used to reimburse its outstanding debt. Australia’s mining company New Hope Corp raised AUD 200m at 2.75% due July 2026. The company is specialized in coal mining in the State of Queensland. The proceeds will go on external growth opportunities. Turkey’s Sasa Polyester Sanayi AS raised €200m at 3.25% due June 2026. The group produces and markets polyester fiber and thread.