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  • Risk assets ended the period higher amid lower volatility

  • Government bond yields in the eurozone followed US rates higher

  • The left took the lead in the opinion polls in Germany

Risk assets ended the period higher amid lower volatility. The S&P 500 hit record after record in thin trading before stabilizing ahead of the Jackson Hole conference. Asian equities led gains but saw more volatility due to political developments in China. The biggest shifts concerned sovereign bond yields which trended higher. The move was triggered by progress in discussions over the US budget as Democrats agreed on plans to vote on the $1trillion infrastructure package by September 27. Another factor was arguably the fact that durable goods orders fell less than expected. Nevertheless, economic indicators were still mixed overall. PMI, for example, fell compared to the previous month. Several Fed members intervened, arguing for rapid tapering in spite of the sanitary situation. Covid cases actually improved in China and the US. Companies are increasingly insisting on employees being vaccinated. Government bond yields in the eurozone followed US rates higher. ECB officials confirmed that the zone’s economy was improving. Widespread vaccination is helping to limit the impact of the Delta variant. Philip Lane, the ECB's chief economist said the growth outlook was favorable but that it was still premature to discuss tapering. He thinks the autumn will give us a better grasp of where the sanitary situation and inflation are heading. With less than a month to go before Germany's elections, the situation has turned uncertain after the left took the lead in the opinion polls. An SPD victory could change European governance, leading to bigger budgetary stimulus and sending government bond yields higher. We are still neutral on risk assets but with a preference for European equities. Europe benefits from stronger growth momentum and persistently accommodating monetary policy. In fixed income, we continue to focus on corporate debt and remain cautious on sovereign bonds, especially in the eurozone as yields are still very low and there is little room for them to move lower.

EUROPEAN EQUITIES Trading on equity markets reflected the tail-end of the results season, pending monetary policy indications at the approaching Jackson Hole symposium on August 27. In construction, Bouygues posted better-than-expected figures driven by a buoyant building sector. The group raised guidance on operating profits for both this year and next. Results should be close to, or even higher than, 2019 levels. Management confidence is feeding on stimulus plans in Europe and also in North America where the group operates. In the same sector, first-half operating margins at Eiffage beat 2019 levels. The news reassured investors on the potentially negative impact of higher commodity prices and supply chain tensions on its public works division, especially as the group had warned on the segment at the beginning of the year. It was the same story at CRH (building materials) which beat estimates mainly because of strong trading in its European division. The group has a solid presence in the US and is upbeat on its prospects there thanks to the US infrastructure plan. Vinci said motorway traffic was 6.3% higher in July compared to the previous year and ahead of July 2019 levels. July improved on the trend over the last few months. The group's airport division enjoyed a sharp lift in European activity, especially in France and Portugal. The trend was also in evidence at Zurich Airports which said it was even possible that activity by the end of this year would be up 50% on 2019. And Airbus announced an order for 30 single-aisle A321 Neo planes from Delta Airlines in the US. This was in addition to the 25 aircraft ordered in April. French biotech Valneva's shares jumped on news that it had started the approval procedure in the UK for its virus-inactivated Covid-19 vaccine. In M&A news, Sainsbury’s, the UK's second largest supermarket chain is being targeted by private equity funds like Apollo. German real-estate company Vonovia launched another bid on Deutsche Wohnen at €53 a share, one euro higher than its previous (failed) bid in July. US EQUITIES Ahead of Jerome Powell’s Jackson Hole speech on Friday, August 27, US indices posted good gains over the last 5 trading sessions up to Thursday. The Dow rose 0.91%, the S&P500 1.46% and the Nasdaq 2.78%. The situation in Afghanistan, however, triggered a slight fall back on the Thursday. The FDA’s full approval for the Pfizer-BioNTech vaccine boosted hopes for a stronger economic recovery from wider vaccine coverage in the US. Congress approved the $3.5 trillion stimulus plan. Nancy Pelosi said the $550bn infrastructure plan should be pushed through by September 27. Elsewhere, Saint-Louis Fed chair Jim Bullard made a hawkish statement encouraging the Fed to get going with a taper and wind-up asset buying by the first quarter of 2022. He was joined by other Fed chairs, Esther George (Kansas City) and Robert Kaplan (Dallas). The tally after the second-quarter earnings season was 72% beats of standard deviation expectations (vs. 42% over a long period) and only 5% in misses vs. 14% historically. In a thin week for macro news, Salesforce gained 1.7% in after-hours trading after beating expectations and raising guidance. The group said the recovery in CRM investments by companies had been particularly strong. PC-maker HP, on the other hand, dipped 3% after Thursday's close after disappointing results due to semiconductor shortages. Meanwhile, volatility returned to GameStop (video game stores). The stock suddenly soared 28%, its largest gain in 5 months, despite zero news flow. Google said it would spend $10bn on advanced cyber security over the next 5 years. JAPANESE EQUITIES The NIKKEI 225 and TOPIX ended the week 1.69% and 2.01% higher. Sentiment was underpinned by the ongoing vaccination drive and hopes for economic measures if the Liberal Democratic Party head changes after the September 29 election. There was also a rebound from the “Toyota Shock,” following the decline triggered by the auto group’s decision to revise down production targets due to worsening Covid cases in emerging countries. Investors nevertheless remained cautious ahead of the Jackson Hole symposium and some profit taking emerged. Air Transportation, Land Transportation and Iron & Steel gained 6.43%, 5.30% and 4.50%, respectively. Cyclical sectors were mainly higher on expectations that increased vaccinations would drive the economic recovery. Pulp & Paper, Marine Transportation and Textiles & Apparel declined 1.10%, 0.61% and 0.10%. West Japan Railway jumped 6.85% on Covid recovery hopes. Tokyo Electron gained 6.68%. Semiconductor stocks advanced on higher US markets. On the other hand, Nitori Holdings dropped 4.81% on lower sales in August due to bad weather and the state of emergency. More than 40% of Japan’s population has now been vaccinated twice. The current system requires people to reserve before getting vaccinated. However, Tokyo has opened a public venue without reservations to accelerate vaccinations. EMERGING MARKET Emerging Markets rebounded this week (MSCI EM was up 3.7%), driven by China (MSCI China was up 5%). Chinese tech also pushed higher, despite the high volatility. The highlight was PBOC’s statement to support credit recovery and to lower lending rate. Looking forward PBOC will seek to stabilize credit growth to steer up the economy. Still on the macro side, special local government bonds picked up in August. The reacceleration of local bonds also turned the sentiment more positive. Moreover, Government has relaxed some Covid measures that have restricted mobility since July. On the micro side, HK Exchange announced it would launch the first A-share derivative (future A-share market index) in October. JD posted better than expected results with 26% top line growth and positive outlook for 3Q21. Pinduoduo’s results was a big beat. The company reported adjusted ebit of RMB3bn, while consensus expected a loss of RMB 700mn. Wuxi Biologics also reported strong set of results: sales growth of 127%, margin expansion, 42% project increase. On the other hand, Kingsoft disappointed after results and weaker guidance. Tencent, Alibaba and PingAn were active repurchasing their stocks in the market. A positive sign for the Chinese market. In Taiwan, TSMC is reconsidering its pricing strategy in order to preserve gross margin above 50%. Preliminary indication, 5-10% price increase, some starting this quarter, but the majority from 1Q22. The price increase comprises nodes below and above 12nm. In Korea, LG Chem price plunged on a size recall by GM, where LG Chem is the main battery supplier. In India, local news reported that RBI is going to release new regulations for data storage for e-commerce and payment companies, to be effective on January 2022. In Brazil, the market rebounded with the Chinese market. Iron ore price recovered 14%. On the macro side, the market remains cautious about the possibility of court-ordered debts surpass the spending ceiling. On a more positive tone, July’s job creation figure was better than expected at 316.6l jobs (consensus at 300k). Mercado Libre announced the acquisition of Kangdu in Brazil. Kangdu works with retailers to deliver their goods, with more than 1.4k collection points. In Russia, Tinkoff (digital bank focused on retail) reported very sound results and raised its guidance. CORPORATE DEBT CREDIT Ahead of the Jackson Hole meeting, trading mainly tracked interest rate movements. Selling ahead of Jerome Powell's speech sent yields 7bp higher in the US and 9bp in the eurozone. CDS indices tightened by 1bp for the Main and by 6bp for the Xover due to end-of-week catching up. Even so, cash bond prices were hit by rising yields leaving IG 0.29% lower and HY 0.04% better between Monday and Thursday. In a busy week for results, Germany's Douglas (perfume) saw second quarter sales rise 16% due to growth in online sales (+20% over a year) and the reopening of its stores (+14%). Business at US cosmetics company Coty also surged over the quarter with sales up 89.6% over a year to $1.06bn. PureGym, the UK’s biggest gym chain, returned to profitability. As facilities reopened, second-quarter sales rocketed more than 500% to £83m and EBITDA came in at £16m compared to a £20m loss in the previous year. To boost its domestic and international expansion, the group has mandated banks to examine a listing. Standard Profil A.S. (car parts) benefited from the car sales recovery while proving resilient amid current component and commodity shortages. Sales jumped 109.6% over a year and quarterly EBITDA was €13.4m, up from €1.9m in the second quarter of 2020. In financials, DWS, Deutsche Bank’s asset management affiliate, is being investigated by the German and US regulatory authorities. A former SRI head at DWS said the company had exaggerated its responsible investing activities. Results at Greece’s Alpha Bank were encouraging. The bank is continuing to clean up its balance sheet thanks to its recent increase of capital. The new issues market was more active with Germany’s Evonik (chemicals) raising €500m at 1.375% with a hybrid green bond. The proceeds will go on refinancing its debt. Swedish property company Castellum raised €1bn at 3.125% to fund external growth opportunities. In financial debt, Nordea raised $1bn with an AT1 c. September 29 at 3.75% and BNP €1bn with a Tier 2 12nc7 at MS+117. CONVERTIBLES Company results took pride of place as the new issues market paused ahead of the Jackson Hole symposium. In the US, quarterly figures from Palo Alto Networks (cyber security) were up 28% over a year, or more than expected. Management also raised guidance for 2022 by setting its sales target between $5.28 and $5.33bn. In China, Xiaomi, now the second largest smartphone manufacturer in the world, saw second-quarter sales jump 64% over a year to $13.56bn. Net profits rose to $1.28bn, or 38% above consensus expectations. In Europe, Symrise (flavors and fragrances) said it was planning to reimburse its 2024 €400m convertible on September 27.

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