- The surprise resignation of Japan's prime minister fuelled hopes for further economic stimulus
- In China, the government shows its determination to bring the economy under tight regulatory control
- The Bank of England already talks about the end of the crisis
The surprise resignation of Japan's prime minister fuelled hopes for further economic stimulus and revived markets. The Bank of Japan’s governor said highly accommodating monetary policy would be maintained even after the end of the Covid crisis and for as long as inflation remained below the 2% target. The Nikkei jumped more than 5% over the week.
In China, the approach is completely different as the government shows its determination to bring the economy under tight regulatory control. Amid abundant liquidity, the authorities are rolling out measures and pushing the private sector towards the party’s objectives of a more inclusive capitalism. The sell-off on equity markets and signs the sanitary situation was improving have, for the moment, only resulted in a trickle of international investors returning. But with elections due next year, the base effect augurs well for an economic rebound.
In the US, the Fed's Beige Book reported a structural improvement in the economy despite the effects of the Delta variant. It also highlighted labour market tensions and supply constraints, two inflationary factors weighing on company performance. The latest job opening data show an historic 2.5 million surplus in vacant positions compared to the number of people unemployed.
In Europe, the ECB has sounded a more cautious note on the economic outlook with a subtle indication that asset buying in its PEPP will be lowered but at a moderate pace. The term “tapering” was avoided.
The Bank of England has been much more forthright in talking about the end of the crisis and the need to raise rates. The UK is also the first developed country to raise taxes to fund Covid spending. The Commons approved an additional £12bn national insurance tax representing 0.6% of GDP.
In the circumstances, bond yields rose, especially in Europe. We are maintaining our neutral stance on equities with a preference for Europe and Japan. In fixed income, we are still underweight duration and prefer corporate bonds.
EUROPEAN EQUITIES
Trading on Europe’s equity markets was geared to the run-up to last Thursday’s ECB meeting. In the end, the bank decided to trim asset purchasing via its PEPP but stayed flexible by avoiding any talk of amounts or the key “tapering” word. For the Bank of England, the crisis is over and the way is now clear for rate rises. The ECB’s optimism on growth, in spite of the sanitary situation getting worse over the summer, is good news for company earnings and further upside on European indices. Even so, getting the epidemic under control is still key.
Elsewhere, auto makers delivered fresh estimates on the end of the semiconductor shortage. BMW expects the situation to remain tense for another 6 to 12 months. Daimler had factored in shortages up to 2023 but thinks the crisis should ease before then. Renault said the current quarter would be more difficult than expected but that the fourth quarter would compensate. Aluminium group Norsk Hydro’s share price rose thanks to a coup d’état in Guinea which fuelled fears over bauxite supplies, a key commodity in aluminium production. Despite PPG and Sherwin Williams warning on higher input prices, AkzoNobel’s third quarter activity avoided any major shock and the group’s pricing power was on show.
In capital transactions, Sampo continued to reduce its stake in Nordea with a €745m placing at levels close to historic highs. The proceeds will fund a share buyback programme. Other placings are on the horizon up to August 2022 as Sampo wants to sell its entire stake. Assa Abloy is paying $4.3bn for Spectrum Brands' hardware and home improvement division, thereby considerably reinforcing its presence in the US residential sector.
US EQUITIES
US markets had another down week with the Dow Jones, S&P500 and Nasdaq 1.23%, 0.68% and 0.40% lower as of Thursday evening.
The August jobs reports showed the lowest increase in 7 months, fuelling worries over the Delta variant impact while underpinning the idea of the Fed waiting for other data before beginning to taper its asset purchases. The Fed’s Beige Book reinforced the mood by reporting only moderate growth due to the Delta spread and supply chain problems for components. Nevertheless, some regional Fed members were impatient for tapering to start by the end of the year and even as early as possible.
WTI prices dropped to $68.5 after Beijing said it was tapping into its strategic oil reserves to cushion the impact of high crude prices on its refining companies.
In company news, Apple said it would be holding a new Keynote on September 14 to unveil its new iPhone model, new Airpods and possibly a new Apple Watch Series 7. Nvidia dipped 0.8% after the Financial Times said the European Commission was not keen on its buying ARM, the UK’s specialist semiconductor architecture. The EU is worried that the deal might stifle competition. Match Group, Tinder's parent company, jumped 7.5% on Thursday after it was admitted to the S&P500 index.
The SEC is threatening Coinbase with legal action if it pays interest on client cryptocurrency holdings. Bitcoin plunged more than 9% to $46,900, after an intraday low of minus 17%, on the day the currency became legal tender in Salvador. The move was mired in technical problems, raising concerns that Bitcoin might struggle to achieve the same status in other countries.
Video game publisher Gamestop was down 4% in after-hours trading after a results miss. Investors are now waiting to see the restructuring plan from the new CEO Matt Furlong who was previously at Amazon.
JAPANESE EQUITIES
The NIKKEI 225 and TOPIX jumped 5.13% and 4.10% over the week on receding concerns over political uncertainties and hopes for economic measures after PM Yoshihide Suga said he was resigning. Falling Covid-19 infections also had a positive effect.
Marine Transportation, Communication and Iron & Steel leapt 8.86%, 7.12% and 5.91% but all sectors were up. Laggards included Pulp & Paper, Textiles & Apparel and Other Manufacturing, up 0.77%, 1.64% and 1.68%. Cyclical sectors were also relatively weak.
Japan Exchange Group soared 10.89% to a year-to-date high on expectations trading volumes would rise. Sumitomo Realty & Development gained 9.50% after posting record earnings and unveiling a new solar power service. KDDI advanced 9.41% after the prime minister’s resignation announcement as he was keen on lowering communication charges.
Currently two candidates, Fumio KISHIDA (former Foreign Minister) and Sanae TAKAICHI (former Internal Affairs Minister) are running to be LDP head. Taro KONO, the Minister for Administrative and Regulatory Reform is expected to declare his candidacy officially on September 10.
EMERGING MARKET
The MSCI Emerging Market index was down 1.15% as of Thursday’s close. China and India were down 0.38% and 0.37% respectively. Brazil underperformed other regions, retreating by 3.54% due to political tensions.
China’s export growth surged 25.6% in August to a new record on strong US/EU demand despite disruptions at the country’s second-largest port. CPI inflation was only up 0.8% YoY in August after food prices declined. PPI inflation accelerated to 9.5% YoY in August from +9% in July, driven by rising coal, chemicals, and steel product prices. August New Renminbi Loans were slightly below expectations while aggregate financing got a seasonal boost thanks to an acceleration of local government bond issuance.
Xi Jinping and Joe Biden held their first call in seven months. China National Reserve said it was releasing crude oil reserves onto the market to lower cost pressure on refiners amid rising commodity prices. The Vice Premier Liu He made a strong pledge to continue supporting private businesses after a spate of regulatory crackdowns. Chinese regulators summoned gaming companies to instruct them to break their “solitary focus” on profit and prevent minors from becoming addicted to games.
10 major internet companies including Tencent, Alibaba, Meituan, Eleme and Didi have been convened by authorities to optimise protection of labour rights. China’s Financial Stability and Development Committee, the nation’s top financial regulator, approved the Evergrande group’s proposal to renegotiate payment deadlines with banks and other creditors.
Taiwanese exports rose 26.9% in August from a year earlier to a record high thanks to electronic components. ICs, in particular, accounted for 90.2% of export value.
Korea’s financial authorities are reportedly to start regulating sales of financial products on internet platforms. The share prices of Naver and Kakao plummeted on mounting concerns over tightening regulations on big IT companies which have seen their influence increase in various fields, ranging from mobility to commerce to finance.
In India, August services PMI jumped from 45.4 in July to an 18-month high of 56.7 on improved vaccine access. 8 million doses are now being given each day. Coupled with Manufacturing PMI at 52.3, the composite index is now back in expansion territory at 55.4 vs 49.2 last month. HDFC Life, India's largest private insurance company, has acquired Exide Life Insurance for $915m in an effort to boost its distribution reach. Reliance announced the acquisition of a major stake in the genomic testing firm Strand Life Science. Edtech decacorn Byju is reportedly bringing its IPO forward to the second quarter of 2022 thanks to strong interest in Indian tech IPOs.
Brazil's inflation surged in August on the back of higher food and fuel prices. The IPCA index rose 0.87% or more than consensus expectations for a 0.71% rise, pushing 12-month inflation to nearly 10%. August vehicle production dropped by a sequential 7.9% due to input shortages. A new national truck strike scared the market but this time the dispute was settled quickly.
CORPORATE DEBT
CREDIT
The spotlight was on the ECB meeting which decided to trim asset buying under its PEPP and revised up its eurozone growth forecasts to 5%. As investors were waiting to see if the bank would opt for a more significant shift in monetary policy, the effect was positive. Long-term US Treasury yields continued to retreat after the Fed released its Beige Book and eurozone yields were unchanged. CDS index spreads tightened by 1bp for the Main and 4bp for the Xover. Cash bond spreads tightened by 1bp for investment grade (returning minus 0.02%) and 2bp for high yield (+0.08%).
Corporate bond trends remained upbeat thanks to results. Poland’s Inpost (parcel dispatch and collection points) saw second-quarter sales jump 30% over a year and margins increase. The group benefited from accelerating e-commerce demand and in July consolidated its Western European presence by buying Mondial Relay (15,000 collection points).
The gambling sector also enjoyed high growth. Czech conglomerate Sazka continued to tap into growth in physical sale points and digital connections. First-half sales soared 96% on the previous financial year to €1.26bn. Spanish casino group Cirsa also benefited from catching up after economies reopened. Revenues rocketed 485% in the second quarter and EBITDA returned to positive territory (€81m). Free cash flow is still positive and management sees it sticking at high levels in the second half. As a result, leverage is now running at 12.1 times, down from 36.8 times in March this year.
In the same sector, Intralot SA was upgraded by Moody’s to Caa1from Caa2. The group had restructured its debt/capital base in August, refinancing its September 2021 bond issues and cutting total debt by €163m.
On a relatively busy new issues market, Spain's Cellnex (telecoms) raised €1.85bn in two tranches, 2027 and 2032. The group took advantage of favourable market conditions to reduce the average cost of its debt to a reasonable level while extending maturities.
Danone raised €500m with a hybrid bond at 1% to optimise its financial structure. The proceeds will mostly go on an early redemption of outstanding bonds. Energias de Portugal (EDP) also sold a hybrid bond, raising €1.25bn in two tranches.
It was a good week for new financial debt issues. Holland’s ING Groep raised $2bn with an ATI in two equal tranches at 3.785% and 4.250%, and Eurobank €500 M€ with a senior preferred bond at 2.25%. The sterling-denominated market was also active with a sustainable RT1 from insurance group Just Group (£300m at 5%), Tier 2 issues from Utmost Group and National Australia Bank (NAB) while, in France, BNPP sold a senior non-preferred bond and BFCM a senior preferred bond.
CONVERTIBLES
The new issues market remained relatively busy with $3.4bn in new deals over the period. Singapore’s Sea Ltd returned to the segment by raising $2.87Mds. The group enjoyed sensational growth during the pandemic with its share price returning more than 600% over the last 18 months. It rapidly grew its market share in e-commerce and gaming thanks to its Free Fire battle game and it online shopping application Shopee. In the US, Radius Global raised $230m and Japan’s Nipro Corporation (medical equipment) $270m.
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
10/09/2021
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