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Market Analysis 26/03/2021

Updated: Mar 30, 2021

  • Talks began over a new infrastructure plan in the United States

  • Europe’s markets received support from a sharp rise in indicators

  • The biggest variations concerned currencies and commodities

Geopolitical risk resurfaced as relations with China soured after the United States and Europe introduced sanctions because of human right violations against the Uighur community. Turkey’s president also dealt a blow to emerging country assets by sacking the Central bank’s governor for jacking up interest rates. The Turkish lira promptly sank 10% against the US dollar. But it was not the only Central bank to raise rates. Brazil had already done so and Russia followed suit over the period in an attempt to stop inflation running out of control and the ruble depreciating. In the United States, talks began over a new infrastructure plan that could amount to $3 trillion. Janet Yellen said the richest companies and taxpayers would be asked to help pay for it, a comment that pushed the tax hike subject center stage. As a result, healthcare and tech fell, with the Russell 2000 mid cap index bearing the brunt. End-of-quarter adjustments by pension funds also weighed on risk asset fund flows. Europe’s markets, however, received support from a sharp rise in March flash PMI indicators in Germany and France. They were much better than expected and were probably driven by hopes for pandemic restrictions to be eased in the future. However, Europe’s vaccination rollout is struggling to pick up pace and tensions are rife with the United Kingdom over production and exports of the AstraZeneca vaccine. Risk appetite revived at the end of the period after Joe Biden upped the United States vaccination target, the Fed said it would lift restrictions on bank dividends and share buybacks, and US Treasury yields stabilized. The biggest variations concerned currencies and commodities. The US dollar gained ground as the mood turned more nervous and oil prices were volatile after a container ship got wedged in the Suez Canal, blocking traffic. We remain upbeat on risk assets amid the ongoing economic recovery and expectations for a rebound in earnings. We are still cautious on government bonds, whether in the United States or in Europe.


End-of-quarter adjustments accentuated market volatility. Investors are still torn between the worsening situation in Europe -with its chaotic vaccine rollout- and hopes for a global recovery. Several governments have announced tighter restrictions to combat the virus spread but investors were reassured by flash PMI indices for March and a sharp bounce in eurozone consumer confidence. Volatility was reflected in oil prices with the ship blocking the Suez Canal providing additional worries. Meanwhile, the European Central Bank (ECB) continued to offer support, reiterating its determination to stay cautious for some time and making a big increase in asset purchasing. Government bond yields started to trend lower and the rotation into value stocks lost some steam. In company news, Volvo warned that the semiconductor shortage would hit production in coming months. Companies set to gain from economies reopening are optimistic for the second half but will suffer over the short term. Compass, for example, revised second quarter margins higher but the British company/school catering company expects to see sales tumble 31%. Germany’s TUI (travel agent) has cut holiday offers for July further but remains optimistic as reservations for the summer are on the increase due to vaccination progress and the development of rapid testing kits. France’s SMCP (ready to wear) expects trading to rebound significantly in the second half and for the same reasons but the group also cited Asia's rapid recovery and strong online sales. Carrefour wants to reinforce its presence in Brazil by bidding for Grupo BIG, the country's third-largest food retailer. Philips completed its move to refocus on healthcare by selling its domestic appliances business.


In a mixed week for US indices, the Dow Jones slipped 0.74%, the S&P 500 0.15% and the Nasdaq 1.06%. Joe Biden used his first press conference to say vaccination targets had been doubled to 200 million people by the end of April. The initial aim was 100 million by the middle of March. He also said the infrastructure program would be detailed on March 31. US media expect the package to amount to $3 trillion. Jerome Powell and Janet Yellen added nothing new to the economic outlook or higher inflation when they appeared before Congress. However, after Janet Yellen's comments to the Committee on Financial Services of the House of Representatives, investors are beginning to worry about tax hikes to fund new government investment. Elsewhere, new weekly jobless claims came in at 684,000, falling back below the 700,000 level for the first time since the pandemic began. Fourth-quarter GDP growth was revised up from 4.1% to 4.3%. The Fed said it would lift its restrictions on dividend payouts and share buybacks for most banks on June 30. Oil prices jumped when a Taiwanese container ship got wedged in the Suez canal, blocking all traffic. Experts say it could take 10 days to move the vessel. In M&A, Bloomberg said Microsoft was about to buy video game company Discord for more than $10bn. The global chip shortage forced Ford to pause production in a light goods vehicle factory in Ohio. Ark IM said Tesla's share price could hit $3,000 by 2025, arguing that there was a 50% chance Tesla would manage to produce fully autonomous vehicles in the next five years. Intel rose 2% in after-hours trading after unveiling a $20bn investment plan to build a new foundry to rival TSMC. According to Citi research, Netflix loses billions of dollars each year due to password-sharing fraud. The bank said the practice costs US companies around $25bn a year with Netflix's losses accounting for around 25% of this.


Dragged down by economy-sensitive cyclicals, the market declined on concerns over higher US bond yields and the increased spread of Covid-19 variants worldwide. The end of the fiscal year was also a temporary factor. The Nikkei 225 index dropped 3.57% and the TOPIX 2.82% for the week. The Nikkei 225 fell more because of the Bank of Japan’s announcement that its new ETF purchasing program would be concentrating on TOPIX-tracking ETFs and excluding Nikkei 225 index trackers. Big weightings in the Nikkei 225 came under pressure. Fast Retailing tumbled 6.72%. However, the good news is that investors are becoming more diversified. Banks and cyclical sectors like Air Transportation and Land Transportation underperformed on expectations the Covid-19 variant spread would delay the recovery. Elsewhere, Transportation Equipment sank 5.07% on worries over a semiconductor shortage for electric vehicles following a fire in a Renesas Electronics factory. In contrast, Electric Power & Gas gained ground. Japan Exchange Group, which owns the Tokyo and Osaka stock exchanges, jumped 5.46% after an earnings upgrade. The pandemic has fueled trading and earnings are now expected to reach record levels. Although the state of emergency was lifted on March 21, business hours for bars and restaurants will in practice remain restricted until the end of April. Nevertheless, with vaccination levels steadily increasing, people seem to be going out more. EMERGING MARKET

The MSCI Emerging Market index was down 3.62 % as of Thursday’s close amid weakening sentiment on geopolitical tensions. China was down 5.87%. Brazil declined by 5.12%, while the MSCI India was down 2.86%. Taiwan outperformed other regions, retreating by 0.91%. The SEC adopted measures that will delist foreign companies from stock exchanges if they fail to comply with US auditing standards, a sign that Biden-era financial regulators will continue the tough stance on China. H&M, Nike and some other Western apparel brands are facing a boycott in China because of the stand they have taken against Xinjiang Cotton. Tourism within China is expected to experience a boom during the upcoming Tomb Sweeping holiday and recover to 2019 levels with 100 million tourist trips. Air ticket bookings have risen 30%. On the corporate front, China Merchants Bank published solid fourth-quarter results with improving asset quality and robust fee growth. Tencent published slightly better-than-expected results with growth drivers such as games and advertising intact during the fourth quarter. Li Ning’s revenue and net profits in 2020 were better than expected and the company guided on solid margin expansion as sales so far this year have been strong. Mengniu reported in line profits and is targeting double-digit CAGR in the next 5 years. China Resources Beer’s 2020 results came in below consensus for both sales growth and margins. Management wants to accelerate mix upgrades to drive margin expansion in 2021. Wuxi Biologics reported a 43% surge in 2020 earnings as revenue climbed 41%, or better than expected. In Taiwan, TSMC’s shares fell after Intel announced a $20 billion capex plan to expand its advanced chip manufacturing capacity and to sustain its IDM model. India’s Supreme Court decided against extending the 6-month loan moratorium period offered by the Reserve Bank of India (RBI) but ruled that no borrowers could be charged any extra interest incurred on loans. The judgement came as a relief to banks. Maruti Suzuki said it would increase prices again in April -after doing so in January- to partially reflect rising input costs. Brazil is going through the worst period of its Covid-19 crisis. The second wave has been much more severe than expected due to variants. Hospital utilization is peaking. All eyes are now on the vaccination rollout which started in January. Daily vaccine doses increased from 300,000 to 600,000 in March and are expected to hit 1 million in April. The government expects to vaccinate 40% of the population by June. Elsewhere, CPI came in a bit lower than expected. In Mexico, the Central bank kept rates unchanged, after cutting by 25bp in its previous meeting. Higher US bond yields in United States were the bank’s main concern. Chile’s lower house approved a bill that proposes a new mining royalty of 3% (above the existing rate), applicable to copper and lithium revenues. The royalty will apply to companies with production above 12,000t. If approved by the Senate, the new bill should trim producer profitability, albeit very marginally since Chilean companies have the lowest cash cost in the world but should not affect production. The measure is the first in a move to rebalance the government’s finances. Turkey’s currency tumbled as much as 15% after President Erdogan sacked the country’s Central bank chief. He had been regarded as a crucial force in helping the lira recover from historic lows.


Despite encouraging flash PMI data in the United States and Europe, market sentiment remained mixed, mainly because of rising Covid-19 cases in Europe. Equity markets slipped and yielded on Germany's 10-year Bund dropped by 10bp to minus 0.37% but credit held up. The Xover and Main tightened by 7bp and 1bp, taking the roll effect into account. Investment grade gained 0.29% and European High Yield 0.18% as spreads stayed relatively stable thanks to interest rate movements. In company news, 2020 sales at Webuild included Astaldi but fell 5.9% to €6.4bn due to the pandemic. Even so this was better than the €5.7/6bn the company expected last November. Excluding exceptional from Astaldi's integration, EBITDA was a disappointing €273m, or a margin of 4.2% (compared to 4/5% expected by management). Net debt, however, fell to €449m, or better than the €600-800m expected. This was due to Italy's new rules on advanced payments which can now account for as much as 30% of total projects. Casino is to extend its debt maturities and lower costs. It will raise €800m with a new secured Term Loan B due August 2025 and €425m with a new April 2027 maturity. The proceeds will be used to redeem all its €1.22bn secured bank loan due 2024. Paprec said it was in exclusive talks to acquire EDF subsidiary Dalkia Wastenergy. The unit employs 800 people and manages 27 sites, 16 of which are in energy treatment, in France, the United Kingdom and Poland. No price has been disclosed but the deal is expected to complete in June. The Fed said it would be stopping relief for US banks under the supplementary leverage ratio. The exemption allowed them to exclude US Treasury holdings or deposits with the Fed. Bank of America and others said the move would not affect their plans to pay out dividends. The new issues market was busy, with a raft of green issues. Novelis raised €500m with a 9-year green bond at 3.375%. Nidec raised the same amount over 5 years with a green bond at midswap + 40bp. In financials, Arval Service Lease, a BNP affiliate, raised €800m with a 2024 maturity at midswap +45bp. PEBR Banca raised €500m with a social senior preferred 6-year maturity at midswap +175bp. Norway’s Storebrand, (insurance) sold a green Tier 2 bond due 2051 at midswap +195bp.

CONVERTIBLES The new issues market remained active with no less than $4.3bn raised over the week. New arrivals on the convertible scene included low-cost operator JetBlue Airways which raised $650m over 5 years at 0.5%, and mining company MP Materials with a $690m green issue. MP’s main asset is Mountain Pass, the biggest, rare earths mine in the United States. The company intends to use the proceeds from the issue on reducing its environment footprint. Property brokerage Redfin Corp raised $500m, adding to the $575m raised last October. TripAdvisor raised $345Mm to reinforce its balance sheet after a 61% plunge in 2020 sales. In Europe, Sagerpar raised €500m with an exchangeable into Groupe Bruxelles Lambert shares. Swiss duty free giant Dufry raised CHF500m to offset the huge drop in airport footfall. In company news, China’s Tencent beat expectations with a 175% jump in fourth quarter earnings thanks to strong performance in its online games business. Elsewhere in Asia, Pinduoduo became China’s biggest e-commerce site with 788 million active users, ahead of rivals and Alibaba.

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