The economic scenario gets stronger as economic and sanitary indicators have been improving
The US GDP has risen for the last three quarters
The Fed and the ECB are sticking to their wait-and-see stance
The economic scenario gets stronger with each passing week. Economic and sanitary indicators have been improving in the United States and, to a lesser extent, in Europe. Meanwhile, central banks are being patient, watching how events unfold and treading carefully when communicating. There is no longer any doubt that the US economy is enjoying a strong rebound. GDP has risen for the last three quarters, taking the United States close to pre-crisis levels, and all thanks to a rebound in consumption driven by massive stimulus packages. This acceleration alone is excellent news for global growth, a token of an unparalleled rebound. But in spite of this industrial boom, both the Fed and the ECB are sticking to their wait-and-see stance and have maintained asset buying levels. The most interesting change following the latest Federal Open Market Committee (FOMC) was the focus on inflation. Even so, the bank said higher prices had been fueled by temporary factors. At the subsequent press conference, Jerome Powell said he thought a sustained rise in inflation was unlikely given some persistent weaknesses in the jobs picture. He reminded investors that the Fed was not just targeting the overall unemployment figures but also looking at a panel of indicators. The target would only be met when broad and inclusive progress had been made, notably among minorities and the most precarious workers. As for our asset allocation, we believe the Fed’s “behind the curve” stance amid such a powerful cyclical recovery will result in bond yields continuing to return to normal, mainly due to inflation expectations which are heading north. As a result, we are maintaining our defensive approach to managing interest rate risk. We are notably underweight on German Bunds. We remain neutral on equities but prefer geographical zones which are the most sensitive to the cycle. This means Europe but also China on more strategic grounds.
EUROPEAN EQUITIES
Although most earnings reports came in higher than expected, markets were capped for the second week in a row. A billion vaccine doses have been injected across the globe and several European countries plan to reopen gradually in May, but indices still paused for breath. One explanation might be a marked increase in commodity prices. Metals, for example, have risen by 60-200% over a year and grain by 40-100%. In results news, most banks beat expectations, whether at the net or capital ratio levels. Santander, Deutsche Bank and HSBC were notable examples. BNP Paribas and BBVA also beat consensus expectations, primarily because of lower-than-expected provisioning. But UBS lost $774m from the Archegos scandal and Barclays also disappointed by anticipating rising costs. Higher oil prices helped groups like Total, Royal Dutch and BP generate more cash. Media companies also did well. Mediaset saw advertising revenues rise 6% in Italy when they were expected to fall 4%. Sales at WPP rose 3.1% instead of the expected 1.8% drop. All divisions at Philips made gains but the group provisioned €250m for quality problems with certain products. ABB raised guidance for 2021 (along with BASF) thanks to a 9% rise in first-quarter volumes and a 13% increase in prices. Saint-Gobain posted robust first-quarter figures with sales up 14% thanks to the renovation market in Europe, new building in the United States and strong growth in emerging countries. Airbus beat expectations on its main financial metrics, and especially cash flow generation. STMicroelectronics benefited from the chip shortage. The group said visibility was excellent up to end 2021, thanks to automobiles, industry and consumer electronics. Corporate activity remained at high levels. Nestlé paid $5.7bn for Bountiful Company (vitamins and food supplements) and Leonardo bought a stake in German defense company Hensoldt.
US EQUITIES
Strong results and more upbeat macroeconomic data pushed the Dow Jones, the S&P 500 and the Nasdaq 0.72%, 1.85% and 1.91% higher. Services PMI hit a record 63.1 in April, up from 60.4 in the previous month and better than the 61.5 estimated by analysts. New home sales for March came in at 1.02 million, their highest level since 2006 and much more than the 885,000 penciled in. On Wednesday evening, Joe Biden presented his $1.8 trillion American Families plan which will be funded by higher taxes on top earners. $1 trillion will go on education and $800bn in tax cuts for the middle class. However, getting the plan through the Senate looks like being difficult. The Fed maintained the status quo, reaffirming its determination to keep rates low and maintain the pace of asset buying. It qualified inflation worries as fleeting, saying they would not cause it to change tack. And yet, commodities like lumber, copper and soybeans are trading at all-time, or decade, highs. Several leading companies said they had raised prices, or were about to, in efforts to offset rising material costs. At the same time, restaurants seem to be struggling to hire staff even though 8 million jobs were lost for good during the crisis. The situation is causing delays to restaurant reopening. Elsewhere, energy stocks rose 1.2% after OPEC+ left quotas unchanged for the next three months. A third of S&P 500 companies reported results over the week, including four tech giants. Google jumped 5% after beating expectations thanks to a surge in advertising revenue. A $50bn share buyback program also helped. Microsoft slid 3.3% in after-hours trading when its results were in line. Facebook saw first-quarter sales soar 48%, or more than expected, thanks to strong demand for advertising from companies hoping to appeal to the network’s billions of users. Apple lost ground on concerns that it would struggle to repeat such an exceptional quarter, in part because of supply issues for chips used in some of its devices. Ford actually issued a profit warning because of semiconductor shortages. The stock slumped 10%, dragging the entire sector 3% lower. Amazon gained 3% in after-hours trading after sweeping past expectations and giving upbeat guidance. In stark contrast, Twitter tumbled 9% after the close when user numbers came in shy of consensus and the company issued low guidance at the bottom of analysts’ expectations.
JAPANESE EQUITIES
The NIKKEI 225 index ended a volatile week 0.11% higher while the TOPIX slipped 0.31%. Sentiment was lifted by earnings from major companies but offset by investors adjusting positions ahead of the upcoming “Golden Week” holiday on concerns that Covid-19 infections might rise during the break. Elsewhere, the Bank of Japan said it would maintain current easing. It also raised its GDP forecast but lowered inflation expectations. Air Transportation (+4.34%) Security and Commodity (2.95%) and Mining (+1.85%) led gains. Lagging sectors were also sought after in contrast to Pharmaceuticals (-3.85%) and Chemicals (-2.02%). Healthcare related sectors, which had risen during the previous week, were hit by profit taking. Stocks were mainly driven by earnings announcements. Denso gained 5.05%. Ana rose 4.54% on cost cutting efforts in spite of reporting its largest ever fall in profits. Z Holdings was up 4.41% as e-commerce gained ground. The government implemented a state of emergency among four major cities to control movement and curb infections over the holiday. Large shopping surfaces have been closed. The period is scheduled to run from 25th Apr to 11th May.
EMERGING MARKET
The MSCI Emerging Market index closed in positive territory, up 0.85% as of Thursday’s close. India and Brazil outperformed other regions, rising 4.63% and 2.27% in USD respectively, while China underperformed and slipped 0.23%. China's first-quarter industrial profits surged 137% YoY on high demand for commodities amid the economic recovery. More than 250 million people are expected to travel during the coming Labor Day Golden Week holiday and advanced bookings have significantly exceeded the same period in 2019. Chinese regulators launched an anti-monopoly probe into Meituan, the number one food delivery platform on alleged abuses including forced exclusivity agreements. Beijing city authorities fined four online AST (After School Tutoring) operators for false advertising on course pricing. The government removed its 13% VAT rebate on steel exports and cut tax on raw material imports to zero in an effort to accelerate its carbon neutral target. First-quarter revenues at Moutai were in line with expectation but earnings missed due to a temporary business tax hike. First-quarter earnings at Lufax beat and management lifted guidance on a better take rate and cost saving trends. Hong Kong’s Exchange posted resilient first-quarter core revenues while earnings were largely in line. CATL announced solid first-quarter results with better-than-expected margins and a strong growth outlook. In Taiwan, TSMC is to invest $2.8bn in China to ramp up auto chip production. Mediatek’s first-quarter results beat estimates as operating margins returned to 20%. The company lifted its 2021 outlook with a stronger guidance for the current quarter and also unveiled an aggressive cash dividend policy for 2021-2024. UMC will spend $5.1bn over the next three years to expand 28nm capacity amid a global chip shortage. In Korea, Samsung’s revenues and operating margin beat estimates, while Display missed expectations. First-quarter revenues at SK Hynix came in above consensus due to stronger-than-expected memory bit shipment, while OP was below estimations. The company said it would bring forward part of its 2022 capex in the second half of this year because of longer lead times on equipment as well as expected tightness in the memory market in the second half of 2022. LG Chem reported its highest ever operating profit, driven by chemicals margins. Its battery division recorded an 8% OPM, a sharp improvement from last quarter when it was loss making. In India, ICICI Bank released another set of strong quarterly results, with core pre-provision operating profit (PPoP) up 23% and improved net interest income (NII); asset quality continued to show improvement. First-quarter results at Axis Bank beat expectations on strong retail loan growth. HCL Tech’s results were below estimates for the topline and EBIT margin but big deal wins bode well for future growth. Russia’s central bank unexpectedly raised its key interest rate by 50bp to 5% and signaled more tightening as ruble volatility contributed to inflation risks. Yandex delivered another strong quarter and management increased top-line guidance for the year. Brazil’s Inflation slowed for the first time since August 2020. Consumer confidence was up despite the lockdown. Santander Brasil Bank’s results beat market expectation on strong credit growth and stable asset quality. WEG delivered strong first-quarter results with revenues, margins and ROIC all beating estimates. The company announced a partnership with Renault and EDP for EV charging stations. Grupo Soma and Hering decided to merge their operations in the highly fragmented apparel sector. Vale had a record first quarter as iron ore and copper prices soared in a tight market, but slightly missed expectations due to lower-than-expected volumes and higher costs. Mexico’s trade balance was well below expectations due to weak exports of auto parts from supply chain disruption. Peru is in the middle of an election that will pick the country's fifth president in five years.
CORPORATE DEBT
CREDIT It was a quiet week on credit markets even if US 10-year Treasury yields gained 9bp and the German Bund 6bp. Central banks continued to sound accommodating notes. Following the latest FOMC, the Fed said growth and inflation data were transitory and the pandemic still a risk for the economy. Jerome Powell also said tapering would precede any rate hikes. Against this backdrop, the CDS Main and Xover were unchanged at 50bp and 249bp while cash bond spreads tightened by 1bp for Investment Grade and 6bp for High Yield, even so, higher underlying rates hit investment grade returns (-0.22%) but high yield managed to rise 0.10% over the week. First-quarter figures at Saipem missed expectations. The order book improved to €22.4bn but sales fell 25.5% to €1.6bn. (vs. €2.2bn in the first quarter of 2020). This financial year should be impacted by the suspension of the Mozambique LNG project after Total declared force majeure. Total said it was as yet unable to provide a figure for the impact on its own 2021 results. Teva’s first-quarter sales fell 9% to $3.82bn and its EBITDA was down 12% to $1.21bn. Note, however, that the first quarter of 2020 hit record highs, especially for generics in Europe and US distribution which benefited massively from pandemic fears. The group maintained its 2021 guidance. S&P upgraded Douglas (Kirk Beauty One) by one notch from CCC+ à B-, citing reduced short-term liquidity risks after debt refinancing measures. However, it remained under negative watch as leverage remains high and free cash flow is negative. Moody’s upgraded the outlook for Elis (Ba2) from negative to stable. This was due to the group's resilient results during the pandemic and the possible improvement of credit ratios after management accelerated deleveraging and the hotel sector started to recover. In financials, Deutsche Bank beat expectations after posting its best net profits since 2014. Much higher bond brokerage fees made a big contribution. Over the quarter, the bank’s CET1 ratio rose 10bp to 13.7%. Santander also posted upbeat results thanks to rising revenues and lower provisioning. Driven by investment banking and stable lending, its net banking income rose from €10.9bn in the fourth quarter of 2020 to €11.4bn. The CET1 ratio was unchanged at 12.3%, or still above its 11-12% target. New issuance continued apace despite the earnings season. Rexel raised €300m with a green bond due 2028 at 2.125%. The coupon could be raised by 25bp in June 2024 if the company fails to meet two greenhouse gas emission targets. Germany’s Birkenstock (footwear) raised €430m over 8 years at 5.25%. Greece’s Eurobank sold a senior preferred bond at midswap +240bp due 2027. CONVERTIBLES In spite of a rash of earnings reports, the new issues market remained busy. In the United States, Snap raised $1bn with a new May 2027 maturity. Low-cost Spirit Airlines returned a year after its first venture to the convertibles market with a 2026 maturity for $440m at 1%. The proceeds will go on refinancing the debt taken on at the pandemic's peak. In Europe, the UK’s WH Smith (book and newspaper retailer) raised £325m due 2026. The proceeds will help the group open 100 new outlets in airports. Italy’s DiaSorin (in vitro diagnostics) raised €500m, days after paying $1.8bn for its US rival Luminex. Convertible issuers continued to post upbeat first-quarter figures. In Europe, STMicroelectronics saw sales rise 35.2% to $3bn over a year as global demand for semiconductors surged. Airbus confirmed that the sector was on the mend by reporting €362m in net earnings. Deliveries also accelerated over the quarter with no less than 125 commercial planes leaving its factories. In the United States, Tyler Technologies (public sector software) reported a 6.6% rise in sales to $294.8m and said it had finished integrating NIC. Chinese smartphone maker Xiaomi retained its position as global N°3 with a 62% rise in handset sales compared to the first quarter of 2020. M&A deals continued at a strong pace. Proofpoint (cyber security software for electronic messaging) received a $12.3bn bid from investment fund Thoma Bravo. The price tag represents a 34% premium on the last quoted price. California’s Lyft sold its autonomous driving division for $550m to Japan’s Toyota. Lyft intends to refocus on hire cars and food deliveries. The announcement followed Uber's decision a few months ago to do the same thing by selling its Aurora business.