Marktturbulenzen zum Quartalsende

• US and European bond yields rose by 20 basis points in only a few days
• In the US, talks on the second part of the new stimulus package have been dragging out
• Rising energy prices fuelled worries over inflation

The third quarter ended amid increased volatility with the MSCI AC World Index in local currencies losing 2.5% between September 24 and 30. Several factors weighed on markets:

• US and European bond yields rose by 20 basis points in only a few days as investors factored in the latest FOMC’s slightly less accommodating stance.
• The US Congress managed to avoid a shutdown by extending the deadline to early December but talks on the second part of the new stimulus package have been dragging out, highlighting the gap that separates Republicans and Democrats.
• Rising energy prices fuelled worries over inflation amid gas supply tensions.

Fed chair Jerome Powell and the ECB’s Christine Lagarde both expressed their frustration over the uncertainty on how long bottlenecks might last. Both are keeping a close eye on the situation with a special focus on inflation expectations and knock-on effects on labour markets. Nevertheless, they are convinced inflation will only be temporary.

Elsewhere, advanced PMI indicators were generally higher in Asia following August’s relatively poor figures but they continued to decelerate in Europe even if they remained high. China’s services PMI rose from 47.5 in August to 53.2 as certain regions lifted sanitary constraints. The industrial picture was less rosy with manufacturing PMI falling from 50.1 in August to 49.6 due to difficult access to energy. In the US, composite PMI for September came in at 54.5, down from 55.4. In the eurozone, its fell from 59 to 56.1.
Germany's election results were tight so it will take time to form a new coalition. The Greens scored 15% so will weigh on the final result. 

In China, in addition to concerns about Evergrande, some regions have seen power outages. This is partly due to bad weather and higher prices but mainly the consequence of efforts to comply with the government’s carbon emissions targets. At the same time, the PBoC has sought to provide reassurance by continuing to inject liquidity into the banking system.

Given the circumstances, we are still neutral on risk assets. We have already trimmed European equity exposure and upped holdings of US equities which we consider more defensive. We remain cautious on government bonds and still prefer corporate debt.

EUROPEAN EQUITIES

Worries that higher oil, electricity and gas prices would hit household spending left markets sharply lower. Governments lost no time in reacting. France's prime minister said he would freeze gas prices and put a ceiling on electricity price increases. At the same time, government bond yields rose as inflation increased. The situation was naturally good news for oil companies, one of the few sectors to end the period higher.

But for others, inflation and higher energy costs will only add to labour market shortages, especially in northern Europe. There was, however, some good news, notably excellent business climate figures and another good consumer confidence indicator.
Elsewhere, in the first consequences of the submarine crisis with Australia, the European Union interrupted talks on a free trade agreement with Australia. 

In company news, Plastic Omnium followed Faurecia in cutting its forecasts. The reason was semiconductor shortages, a crisis which both markets and auto makers now seem to have underestimated. For the same reasons, Volkswagen reduced working hours in its main German factory after employees were prevented from working due to missing spare parts. In the banking sector, Société Générale is expected to bid for ING France in a move designed to reinforce its online banking offer. The acquisition would allow its Boursorama affiliate to reach the critical 4 million client level one year earlier than scheduled. Diageo (alcoholic drinks) said it expects operating margins to rise as consumers turn increasingly to premium brands and bars and restaurants reopen for business.

Icade has cancelled the IPO of its healthcare property subsidiary due to market conditions. There are quite a few IPOs in the pipeline that could be affected.

US EQUITIES

In a laborious end to the quarter, the Nasdaq had another down week, its fifth in a row. And it was the same story across the boards: 90% of S&P 500 stocks ended in the red along with all eleven economic sectors, notably cyclicals (industrials, financials and energy). September was the worst month since March 2020.

Recent concerns persisted: the likelihood of central banks tightening, inflationary tensions and Chinese property group Evergrande’s financial woes.

True, a US administration shutdown was avoided but Congress only adopted a 9-week extension to December 3. Consequently, markets are still fretting over the lack of progress in raising the debt ceiling before the October 18 official deadline. Even some Democrats are dragging their feet. Nancy Pelosi had worked for the $1.2 trillion infrastructure stimulus plan to be approved on September 30 but the vote had to be postponed. Talks were due to resume on October 1.

Nerves were also frayed by Democrat senator Elisabeth Warren’s description of Jerome Powell as a dangerous man who had undermined the US banking system. Her outspoken opposition to extending his mandate raised doubts over whether he would be maintained as Fed chairman. President Biden is expected to decide on who will lead the Fed in the next few days.

There was no joy either from macroeconomic data: US consumer confidence dipped for the third month in a row, hitting its lowest point since February. And yet US growth was revised up to an annualised 6.7% in the second quarter thanks to robust consumer spending (+12%) and a 7.6% rise in exports.

At the ECB forum in Sintra, Jerome Powell said it was frustrating to see that supply chain bottlenecks were not being more quickly resolved. He added that the situation could last into 2022.

JAPANESE EQUITIES

Tokyo was dragged down by concerns over China’s economy, rising US long-term rates and end-of-month NIKKEI 225 portfolio reshuffling. The NIKKEI 225 and TOPIX shed 0.63% and 0.66%. Downside was limited by the lifting of the state of emergency on September 30 so domestic demand stocks were in favour. Fumio Kishida was elected as the new prime minister. The market is now hoping that childcare and digital technology will benefit from his policy approach.

Mining, Air Transportation and Land Transportation jumped 9.80%, 8.02%% and 4.48%. Cyclical sectors rose on reopening expectations. On the other hand, Marine Transportation plunged 17.40% on profit taking and index weighting adjustments. Machinery and Electric Power & Gas declined by 3.70% and 3.67%.

Expectations for a recovery in domestic travel drove up East Japan Railway and West Japan Railway by 11.47% and 8.56%. Fast Retailing which owns UNIQLO bounded by 8.58% after PMI data suggested consumer spending was recovering in China.

In the September BoJ Tankan survey, the current Diffusion Index (DI) for large manufacturing enterprises recovered for 5 consecutive quarters but the forecast for DI was lowered. CAPEX plans for large enterprises in all industries gained 10.1% YoY, or more than is usual.

EMERGING MARKET

The MSCI Emerging Market index was down 0.91% as of Thursday’s close. China (+0.61%) outperformed. Brazil retreated by 3.64% with investors concerned about the rise in inflation and a potential interest rate hike ahead of schedule. India also fell 2.10% in USD.

China’s September manufacturing PMI fell to 49.6 from 50.1 in August due to production cuts caused by energy constraints. Non-manufacturing PMI rebounded to 53.2 from 47.5 in August on a recovery in services as COVID restrictions eased. The authorities are encouraging state-owned enterprises and financial institutions to cooperate with the government to help stabilise the housing market and homebuyers. The PBoC has injected RMB 750bn via open market operations since September 17 to provide sufficient liquidity before the Golden Week. Some provinces implemented power cuts to control energy consumption and meet carbon neutral policies at the end of the quarter. The government is considering increasing power prices for industrial consumers to help ease the supply crunch. Huawei’s CFO returned to China after an agreement was reached with US prosecutors to end the bank fraud case against her. Under regulatory pressure, Tencent and Alibaba are opening external payments and links to breakdown their walled gardens. By outbidding Ganfeng Lithium, CATL agreed to acquire Canada Millennial Lithium to secure a stable supply of lithium while enhancing its cost advantage in the battery business.

South Korea‘s export growth slowed down in September to +16.7% YoY from +35% in August. The government is considering a ‘vaccine pass’ for a gradual return to normal life and may ease rules for fully vaccinated people by the end of October. SK Innovation and Ford will invest $11.4bn in EV and battery production in the US, paving the way for SK Innovation to become the largest battery manufacturer on US soil.

Singapore’s finance minister said that any discussions on wealth tax were premature.
India‘s Manufacturing PMI expanded to 53.7 in September from 52.3. The current account recorded a $6.5bn surplus (0.9% of GDP) in the second quarter or better than the $2bn estimated. Talks are ongoing with Taiwan to bring semiconductor production to India, with the introduction of tariff reductions. Automaker Maruti Suzuki revised up its October production target from 120,000 to 180,000, or from 40% to 60% of normal levels due to an improvement in semiconductor sourcing from Malaysia.

Brazil beat expectations by creating more than 370,000 payroll jobs in August. Fiscal prospects have improved due to strong revenue recovery and contained spending growth. Nevertheless, the government is proposing to extend Covid emergency fiscal support to the population until April 2022. As a result, inflation may continue to be a problem for longer than expected.

If Russian gas prices stay at current levels until the year end, preliminary estimates suggest fiscal revenues will only increase by 40%, despite gas export prices being 4 times higher this year. This is because Russia’s gas industry relies mostly on long term contracts.

CORPORATE DEBT

CREDIT

Over the past few days, investors factored in the Fed’s latest declarations. They seem to be preparing the group for some tapering of asset purchases from November. 10-year US Treasury yields rose by 4bp to 1.49%, the biggest monthly rise since March. In the eurozone, it is difficult to say if rising Bund yields were due solely to similar moves in the US or by a possible rise in government funding requirements under a new government coalition. Credit spread decompression accelerated in volatile market conditions with the Main widening by 1bp and the Xover by 11bp. As a result, investment grade credit performance fell by 0.12% between Monday and Thursday and by 0.28% for high yield.

In new issues,  Britain’s online grocer Ocado raised £450m at 3.75% with a 2026 maturity. The proceeds will go on funding growth in the UK. Spanish healthcare group Grifols raised €2bn to fund its €1.6bn acquisition of Germany’s Biotestfin, thereby enhancing its biological treatment portfolio (haematology, clinical immunology and intensive care). Spain’s Masmovil announced a €1.75bn loan syndication to fund its acquisition of Euskaltel in the Basque region.

Patrick Drahi, who owns Altice, is bidding for Eutelsat at a 25% premium to the last quoted price. Eutelsat, the third largest satellite operator in the world, uses its fleet to broadcast 8,000 TV channels. The group has entered the new space race to provide connectivity across the globe. The company recently spent $550m on acquiring a 17.6% stake in the OneWeb satellite constellation.

New subordinated debt issuance picked up speed with two euro-denominated Tier 2 issues from Credit Agricole Assurances (€1bn) and Belfius Bank (€500m), and a sterling-denominated T2 from Santander for £850m at 2.25%.

CONVERTIBLES

New issuance remained relatively active despite market turbulence. Californian fintech SoFi Technologies raised  $1.1bn to fund growth. The company was set up in 2011 to offer refinancing for student loans and has since enjoyed strong growth. Its application now helps users manage, borrow, spend, save and invest money. Also in the US, Brookdale Senior raised $200m at 2% due 2026. The company runs 700 nursing homes in the US with more than 60,000 residents.

In company news, EDF should be a big winner from the current surge in European energy prices as 25% of its electricity, whether nuclear or hydraulic, is sold at spot prices. EDF confirmed that its margins would be close to €18bn, up from €16bn in 2020. Galloping commodity prices -gas has jumped 40% over the last 6 months- have an automatic knock-on effect on electricity prices in most European countries.

Carrefour was also in the news because of a rumoured tie-up with its rival Auchan. In 2018, Carrefour mulled an alliance with Casino Guichard and earlier this year a bid from Canada’s Couche Tard failed after being vetoed by France’s finance minister.

GLOSSARY

• Investment Grade: bonds rated as high quality by rating agencies.
• High Yield: corporate bonds with a higher default risk than investment grade bonds but which pay out higher coupons.
• Senior debt benefits from specific guarantees. Its repayment takes priority over other debts, known as subordinated debt.
• Debt is considered to be subordinated when its redemption depends on the earlier payment of other creditors. To offset the higher risk, subordinated Senior debt has priority over other debt instruments.
• Tier 2 / Tier 3 : subordinated debt segment.
• Duration: the average life of a bond discounted for all interest and capital flows.
• The spread is the difference between the actuarial rate of return on a bond and the rate of return on a risk-free loan with the same maturity.
• The so-called "Value" stocks are considered to be undervalued.
• Markit publishes the Main iTraxx index (125 leading European stocks), the HiVol (30 highly volatile stocks), and the Xover (CrossOver, 40 liquid and speculative stocks), as well as indices for Asia and the Pacific.
• EBITDA: Earnings before Interest, Taxes, Depreciation, and Amortization.
• Quantitative easing describes unorthodox monetary policy from a central bank in exceptional economic conditions.
• Stress Test: a process which simulates extreme but possible economic and financial conditions so as to assess any impact on banks and measure their resilience to these events.
• The PMI, for "Purchasing Manager's Index", is an indicator of the economic state of a sector.

DISCLAIMER

01/10/2021

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