Germany’s SPD members elected a left-wing duo to lead the party, putting the ruling coalition at risk and raising the possibility of early elections. However, the new situation might end up with the government spending more to underpin growth. In any case, financial markets reacted favourably. Equities rose and interest rates recovered.
Sentiment was also buoyed by China’s PMI which rose by more than expected. The mood rapidly soured when Donald Trump, as is his wont, took to Twitter to say import tariffs on steel and aluminium from Brazil and Argentina would be brought back in. And doubts on a quick phase 1 agreement between China and the US resurfaced when he declared that he had no end-date in mind for a trade agreement and that it could wait for the 2020 elections. His administration stepped in to try to reassure markets and equities stabilised. ISM indices in the US edged lower but PMI advanced. Europe’s definitive PMI data confirmed that the zone was stabilising.
With economic data stabilising and/or improving, we have moved to make our global equity exposure more balanced. In fixed income, we prefer US short and medium-dated bonds as they stand a good chance of rebounding and protecting portfolios.
European equities |
Yet again, markets remained in thrall to trade developments. Indices dipped at the beginning of the week as tensions resurfaced. Donald Trump said he wanted to reinstate import tariffs on steel and aluminium from Brazil and Argentina. He added that an agreement with China might well only occur after the November 2020 presidential elections.
In a riposte to France’s GAFA tax, Paris was also threatened with punitive duties on exports to the US and also had to contend with the WTO ruling on European aid to the Airbus A350 programme. Positive remarks on a Phase 1 agreement before any new tariffs then helped markets stabilise; this was in spite of mixed macroeconomic data, notably a fall in industrial orders in Germany in October. In the UK, sterling's fall eased but continued to weigh on sentiment. Oil prices rebounded after a drop in weekly US inventories and Iraq’s decision to lobby for bigger OPEC production cuts.
After retreating on threats of higher US import tariffs, luxury stocks recovered after Kering started talks on a tie-up with Moncler. Ferragamo and Burberry also gained on prospects for sector consolidation. Several stocks rebounded after providing the market with reassuring news. After falling in sympathy due to cautious guidance from Compass, Elior bounced on encouraging results. Margins for the second half contracted but free cash flow was strong and the outlook for 2020 is upbeat. Nexans rose after its CEO said the 2018-21 strategic plan was going well. Accor advanced after selling 5% of China’s Huazhu for €450m. Deutsche Bank gained on possible changes to CRD5 treatment as part of CET1 requirements.
On the debit side, Orange fell sharply after EBITDA, capex and dividend objectives in its 2025 strategic plan disappointed investors. RWE was hit on worries that the SPD/SDU coalition might collapse after the SPD party membership elected a more left wing leadership duo. The risk is that the financial compensation for abandoning coal production might be affected. Commodities declined after Glencore's share price plummeted on the official launch of a UK enquiry into corruption.
 | US equities |
The S&P500 was down 0.75% and the Nasdaq 1.3% lower as of last Thursday’s close. Trading was marked by increased volatility after Donald Trump said a trade agreement with China could be put back until customs tariffs come into force on December 15. US 10-year Treasury yields ended the period at 1.79% after a risk-off episode saw them testing 1.7%. WTI oil was unchanged at $58.5 ahead of the next OPEC summit. Market sentiment remained nervous due to memories of last year’s big sell-off in December. There is still a serious risk of overweight portfolio positions being unwound, especially by hedge funds. This concerns some tech and defensive stocks. Strong market polarisation was also visible in ETF outstandings with cyclicals close to all-time lows. Defensive sectors held up best in a down market. Consumer staples gained 0.55%, healthcare 0.3% and utilities 0.5%.
 | Japanese equities |
Led by large caps, Japanese stocks pushed higher even if Donald Trump’s hawkish remarks on his trade policies toward other countries occasioned some weakness. The TOPIX advanced 0.71% for the week. Economy-sensitive sectors such as Iron & Steel, Marine Transportation, Construction and Metal Products outperformed. Leading steel producer Nippon Steel and JFE Holdings gained 5.77% and 3.73%, respectively. In contrast, Chinese demand stocks were relatively weak. Fast Retailing and Unicharm lost 4.47% and 4.24%, respectively. Shiseido sank 4.11%.
The government has decided on a JPY 13.2 trillion stimulus package, or more than expected. Including private sector money takes it to JPY 26 trillion. According to the government office, it is expected to boost GDP by 1.4%. By 2021 Key measures, include (a) public infrastructure reinforcement spending for restoration after natural disasters, (b) preparations for economic downturn risk, and (c) investments in growth fields to underpin the economy after the 2020 Tokyo Olympic Games.
 | Emerging markets |
The MSCI Emerging Markets edged higher this week, up 0.3% on a strong rebound of Brazil and Argentina (Brazil Bovespa and Agentina Merval closed respectively up +2.2% and +2.7%) while Mexico, India and Korea underperformed (down respectively -1.5%, -0.8% and -1.3%) as at Thursday close. In China, November official manufacturing PMI showed a reading above 50 (at 50.2), the first time since April. Seasonal factors have largely played out in the rise as factory deflation remain. Non-manufacturing indicator came out at 54.4, its highest reading since March.
PBoC governor’ cautious tone indicated that monetary policy makers would continue to refrain from large-scale easing steps. However, some positive announcements came out from the Ministry of Finance, as it plans to issue special local government debt totalling RMB1 trillion to fund specific investment orientations include the financing of infrastructure projects. Auto sales continue be sluggish as the China Automobile Dealers Association estimated a double digit decline (-10%) for the Chinese auto industry for 2020
As Taiwan will hold its general election on Jan 11th, 2020, latest polls suggest that current President Tsai Ing-wen from the DPP has been leading M. Han Kuo-yu, the candidate from the KMT party, a potential reflection of the resilient growth in the Taiwanese economy.
In India, 3Q GDP growth has dropped to 4.5% yoy, its slowest pace since 2013, down from 5% in the previous quarter. November composite PMI output rose to 52.7 from 49.6 in October, led by both manufacturing (51.2 from 50.6) and services (52.7 from 49.2). The Reserve Bank of India kept interest rate unchanged due to higher than expected inflation. In the Telecom sector, the top three operators announced a rise of over 40% for mobile phone tariffs. Bharti Airtel board approved a 2bn$ in equity capital raising to strengthen its balance sheet.
In Brazil, 3Q’19 GDP came at 0.6% q/q better than expected (+0.4%) while October industrial production rose for the third straight month, +1% yoy. In another sign of Trade War escalation, President Trump said he would impose tariffs, effective immediately, on all steel and aluminium shipped into the United States from Brazil and Argentina, as he criticized both countries for cheapening their currencies to the detriment of the US farmers.
 | Corporate debt |
Credit
Markets started the week on the back foot as US-China trade talks failed to progress much and on news that Washington intended to renew import tariffs on steel and aluminium imports from Brazil and Argentina. White House rhetoric then softened with indications that an agreement might be possible before December 15. Spreads had initially widened but then retraced some of the losses with the Xover only 1basis point wider for the period between Monday and Thursday and the Main back to square one.
Part Europe (Autodis) reported an upbeat 28.6% rise in sales thanks to M&A deals and solid like-for-like growth of 10.8%. Swissport announced a satisfactory 5.7% rise in sales for the first 9 months with an acceleration in the third quarter (+4.9%). Picard’s figures were line: sales rose 1.3% and leverage was unchanged at 7.6 times. The group delivered no precise numbers but said it was cautious in today’s competitive and socially tense environment. Adler’s bonds came under a little pressure after sales fell 2.3% and EBITDA came in 25.7% lower.
Moody’s downgraded Hema from B3 to Caa1 on disappointing operating performance, weak liquidity and faltering credit ratios. The ratings agency also downgraded Atlantia to negative outlook, citing risks from the collapse of the Genoa bridge in 2018. Moody’s was the first downgrade the group to high yield status.
UniCredit launched Team 23, its 2020/23 strategic plan, which continues on from the preceding plan. The bank continues to clean up its balance sheet and says it is aiming for revenues of €19.3bn in 2023 and planning a new cost-cutting drive. 8,000 jobs will go.
On the new issues market, Kiloutou raised €860m in good conditions. There are two tranches, one fixed at 3.375% and the other floating. Ageas said most Fresh holders had agreed to change the bond's conditions so as to help Ageas buy them in. Building on this success, Ageas also raised €750m with an RT1 at 3.875%.
Convertibles
Market sentiment was rather upbeat despite a new issue from Ocado, a European online retailer, which came with a 0.875% coupon and a 45% premium, hardly very attractive conditions for investors. And yet the issue size was upped from £500 to 600m.
There were two new deals in Asia. China Yuhua (education) raised HKD 2bn at 0.9% over 5 years at 0.9% and with a 30% premium and a 3-year put. The proceeds will go on repaying its January 2020 convertible (HKD 940m). Bosideng (textiles & clothing) raised $275m at 1% with a 27.5% premium over 5 years and with a 3-year put.
The US market was relatively calm with only one deal. Allscripts Healthcare Solutions raised $200m at 0.875% and a 32.5% premium and a January 2027 maturity.
In other news, 65.40% of Fresh holders accepted changes, allowing Ageas to buy in 59% of its bonds and issue a new one. The calendar for the private equity consortium’s purchase of Immarsat was confirmed. Cellnex continued on the acquisitions trail by paying €250m for 1,500 Orange telecom sites in Spain. Moncler jumped 6% after Kering started talks over a tie-up.
Glencor’s convertible lost more than 2 points on fresh corruption rumours. The Encavis 5.75% perpetual rallied further, rising to as much as 130% after a 10-year contract with Amazon was announced. SMCP issued a profit warning, triggering a 20% drop in the shares and the TopSoho/SMCP exchangeable came under pressure.
In the US, Twitter started marketing its HY $600m issue. There was no impact on its 2021 and 2024 convertibles.