Risk assets enjoyed another strong week. Investors had been reassured on the previous Friday that Donald Trump’s comments on China had not been overly aggressive. Elsewhere, mobility indicators showed activity was slowly recovering from pandemic conditions.
And there was good news on the economic data front as advanced PMI figures generally turned out better than expected. China’s improvement was particularly marked as data came in above 50, a sign that the country really was returning to growth. Caixin PMI actually hit 55, its highest level since 2010. Europe also enjoyed positive surprises although, in absolute terms, the eurozone’s composite PMI remained at a feeble 31.9. To cap it all, US jobless data was less bad than expected. ADP said “only” 2.76 million jobs were lost, or much lower than the 9 million expected The ECB meeting fulfilled all its promise.
Chair Christine Lagarde said the PEPP would be raised by €600bn, or much more than expected, and that the programme would now run out in June 2021 at the earliest. Germany adopted an extra aid package of €130bn and Donald Trump suggested that might be another plan for $1,000bn in the US.
Lagging assets led gains over the week, particularly in the eurozone where the risk of a new political crisis abated after the Franco-German initiative received European Commission backing. Financials were the best performers. In this risk-on environment, government bonds rose, especially in the US where they had been treading water for several weeks.
We remain relatively cautious, but have, however, reduced duration in portfolios. We continue to prefer corporate bonds as they have central bank support. On the equity front, we tactically reinforced discounted European stocks a few weeks ago while reducing exposure to the US.
EUROPEAN EQUITIES
Equity markets moved to 3-month highs as successful lockdown exits fuelled hopes for a sharp recovery. Continued government and central bank support also upstaged US-China tensions and riots in US cities. ECB measures have overall been more substantial than expected. In the latest development, the bank increased its asset purchasing programme by €600bn and extended it to the end of June 2021 at least. Berlin managed to reach a compromise for a €130m aid package that includes a VAT cut for the rest of this year, bigger-than-expected subsidies for electric vehicle purchases and investments in 5G and railway networks.
The initial rebound on equity markets was underpinned by defensive and visible growth stocks but leadership has now passed to more cyclical areas like oil companies and autos. Healthcare, which is among the best performing sectors YTD, lagged the trend.
Some stocks were also lifted by the Chinese economic recovery. Rémy Cointreau now sees a strong recovery in the second half and has raised its guidance. Adidas also said trading in China had improved in May. Property sector stocks like Unibail and Hammerson also rose as shopping centres reopened for business. Unibail said it had finalised the sale of 5 shopping centres for €2bn. Axa surprised the market by only announcing a cut to its dividend for FY 2019, defying strong regulatory pressure for the group to pass completely on its payout.
In more cost-cutting news, British Airways’ CEO said IAG was in danger and that 12,000 jobs could be axed. TUI could halve capacity at its German airline. In autos, Bentley and Rolls-Royce could announce 1,000 and 3,000 redundancies in the UK. Aston Martin unveiled cost-cutting measures.
SSE to sell Total its 51% stake in the offshore wind farm project Seagreen 1 for £70m. After a board review of its Tiffany bid, LVMH could look again at the deal.
US EQUITIES
Once again, US indices ended the period decisively in positive territory with the Dow Jones up 3.47%, the S&P 500 2.73% better and the Nasdaq 2.63% higher.
Investors continued to rotate into value like financials and industrials while high-growth stocks lagged.
Services in China, the US and Europe recovered more quickly than manufacturing. PMI data confirmed impressions in the field. In developed economies, the hardest hit sectors are now showing signs of recovery. Retail sales started rising, hotel occupancy rates increased and restaurants began to take more bookings.
Demonstrations across the US led to an historic curfew in Manhattan and many stores had to close.
According to ADP data, the private sector shed 2.76 million jobs in May or much less than the 9.25 million pencilled in by analysts. Retail, transport and utilities saw the biggest drops. The leisure and hospitality sector plunged 46%, the biggest percentage drop YoY. U.S. employment report shows an unemployment rate of 13.3% in May, while it was expected to be over 19%.
Oil prices rallied on upbeat indications from the OPEC-Russia talks. Saudi Arabia and Russia had reportedly agreed to extend production cuts but other cartel members like Iraq were said to be less keen. There was a chance OPEC could meet over the weekend to decide on the issue.
In stock news, American Airlines soared 41% helped by a government rescue plan and an increase in activity. The airline flew 110,000 passengers in May or 71% more than in April. Zoom Video released unprecedented results, announcing 300 million daily users. Its market cap rose to flirt with the $60bn level.
JAPANESE EQUITIES
The rebound continued with the TOPIX and Nikkei 225 up by 2.57% and 3.74% respectively. Everyday life started to recover after the state of emergency was lifted nationwide.
Markets were buoyed by positive sentiment and massive liquidity created by global fiscal measures and monetary easing even if there were some new COVID-19 cases in Tokyo area in the latter part of the week. Outperforming sectors included economy sensitive sectors such as Machinery on signs of recovery in China, Glass & ceramics, Metal products, Electric equipment and Transportation equipment. On the other hand, Pharmaceuticals reversed previous gains and defensives like Fishery & Agriculture and Electric power & Gas retreated as investors turned more bullish.
Tokyo Electron and Kubota rose by 7.84% and 7.69% respectively on expectations of a demand recovery abroad. On the other hand, Daiichi Sankyo tumbled 9.05% on a reversal of preceding outperformance and less interest in defensive stocks.
EMERGING MARKETS
The MSCI EM index was up by an impressive 6.3% as at Thursday’s close in a broad-based rally across regions. Brazil’s Bovespa and India’s S&P BSE Sensex jumped 7.4% and 5.4% and the FTSE Greater China index ended 5.6% higher.
On the economic front, China Caixin services PMI rose to 55 in May from 44.4 in April, hitting its highest level since late 2010. Composite PMI rose to 54.5 from 47.6, its strongest reading since January 2011. Hainan said it was lifting duty-free purchase quotas to RMB100,000/person/year by 2025 vs. RMB30,000currently.
Singapore and China have agreed to create a fast lane to facilitate essential business and official travel between both countries. It will link six Chinese provinces and municipalities (Chongqing, Guangdong, Jiangsu, Shanghai, Tianjin and Zhejiang) as well as Singapore. The scheme is open to residents in Singapore and China who need to make essential business or official trips between the two countries and will be gradually expanded to other Chinese provinces and municipalities.
Following the US order to stop Chinese airlines from flying to the US, the Civil Aviation Administration of China (CAAC) said it was easing initial international flight restrictions. If no positive COVID-19 cases for passengers are recorded for three consecutive weeks, an additional flight frequency per week will be granted for the airline in question.
To address US moves to curb Chinese ADR listings in the US, NetEase proceeded with a $2.6bn secondary listing in HK and PinDuoDuo (ecommerce) had reportedly asked CICC to sponsor its HK listing.
India’s first quarter GDP growth came in at 3.1% YoY, down from 4.1% in the previous quarter, but above consensus of 1.6%. The Indian government said that data collection had been impacted by Covid-19, and that a downward revision was possible. May Manufacturing PMI came in at 30.8, a contraction for the second consecutive month but an improvement over April’s 27.4. In an interesting piece of anecdotal evidence of India’s long term attractiveness, Amazon was reportedly considering paying $2bn for a 5% stake in Bharti Airtel.
Despite the pandemic, Brazil’s manufacturing PMI showed some improvements, and the Senate approved a bill that would suspend drug and healthcare plan adjustments for 60 days.
CORPORATE DEBT
CREDIT
Markets pushed higher on signs of an economic recovery and the efficient roll-out of guaranteed loans and aid packages. The ECB added €600bn to its €750bn asset purchasing programme and extended it to mid-2021 at least. The Xover tightened by 68bp and the Main by 11bp between Monday and Friday lunchtime.
In the ongoing first quarter results season, figures at Parts Europe (Autodis) fell, but less than expected. Sales dipped 3.2% to €436.7m. The company also said the recovery was turning out stronger than expected.
Despite Covid-19, Atalian reported a resilient €739m in revenues, only down 1.1% YoY. This included the shutdown of some of its businesses in March due to the European lockdown. Sales at Sarens rose 7.4% but EBITDA was down 8% due to higher external costs, especially in outsourcing. Trading in China was hit during the quarter but April helped make up for lost ground. Nevertheless, the group expects to suffer during the current quarter due to the lockdown in Europe, Asia, the Middle East, and Africa.
Bombardier finalised the sale of its CRJ regional jet programme to Mitsubishi Heavy Industries for around $550m but retained $228 in liabilities. These commitments, which are not indexed on the fleet's value, will be paid during the next four years.
The French government approved the state-backed €5bn loan to Renault to help it surmount the coronavirus impact. Renault’s interim managing director also said there was no need for an increase of capital.
Banca Monte dei Paschi di Siena said it had received informal approval from the European Commission for the transfer of €10bn in non-performing loans to the Italia state-owned Amco entity. The commission considers that the deal does not fall under government aid. Italian insurance group Cattolica came under pressure after the country's regulatory body asked it to bolster its capital base by at least €500m. Solvency margins at some of the group's affiliates had reportedly fallen below the regulatory minimum.
On a persistently busy new issues market, Airbus raised €2.5bn in three tranches (2026, 2030, 2040) at 1.375%, 1.625% and 2.375%. Repsol raised a total of €2.5bn with two perpetual bonds, callable in 2026 and 2028, at spreads of 400 and 440bp.
Standard Chartered raised €1bn with a Tier 2 bond at 2,5%. The issue saw heavy demand and the order book was 5 times oversubscribed. Deutsche Bank sold its first green bond, a 6-year Senior Preferred maturity at 1.375%.
CONVERTIBLES
In another busy week on the new issues market, a total of $5.2bn was raised, thanks mainly to two jumbo deals. Palo Alto Networks (cyber security) raised $1.75bn at 0.375% due June 2025. The proceeds will be used to grow the company after revenues rose 24% in the first quarter.
Software publisher Splunk raised $1.26bn at 1.125% due 2027. Half of the proceeds will be used on a partial buy in of the convertible issued two years ago. Cruise company Royal Caribbean raised $1bn at 4.25/4.5% and a conversion premium of 25%. This was the third cruise company to issue debt since the beginning of the coronavirus crisis. The proceeds will reinforce the company's cash position as it consumes $250-275m each month.
US companies Hubspot and Livongo Health raised $460m and $475m.
In Europe, Iberdrola tapped its November 2022 convertible for an extra €249m.
In results, France’s Rémy Cointreau beat expectations for its financial year ending March 2020. It also raised first quarter sales guidance to minus 45%, up from minus 50/55%. Russia’s internet giant Yandex was reportedly in talks with Sberbank to buy back the bank’s 45% stake in Yandex market, an e-commerce grouping. In the US, Microchip raised its quarterly revenue guidance from $1.2/1.33bn to $1.25/1.3bn.