Risk appetite returned in force over the period as a number of countries unveiled plans to ease lockdown measures, encouraging investors to anticipate a gradual recovery in activity. S&P amplified the trend by maintaining Italy's rating and its government bonds then barely moved when Fitch downgraded last Tuesday.
The risk-on movement concerned peripheral countries as well as corporate bonds. Sentiment was lifted further after Gilead said its anti-Covid-19 treatment was showing encouraging signs in trials. Very poor economic data failed to dent the optimism. First quarter GDP in the US, for example, contracted by 4.8%, or worse than the 4% drop expected, largely due to a collapse in consumer spending. In Europe, the ECB’s economic sentiment gauge for April came in barely above the level seen at the low point in the 2009 crisis. Job expectations plummeted.
First quarter results were also upstaged by the ambient optimism. They were generally poor but investors were prepared. Companies are loath to say what the current quarter might hold but it will reflect the full impact of the lockdown. US tech stars Alphabet and Microsoft and semiconductor plays reported upbeat results and extended gains.
Markets were also keen to see what central bank committee meetings decided. The Bank of Japan upped its asset purchasing programme for commercial paper and corporate bonds to JPY 20,000bn and said it would buy unlimited quantities of government debt. It intends to pursue its yield curve controls and is ready to embark on fresh measures if required. The Fed took no new decisions but gave more details on its recent emergency measures while reaffirming its determination to maintain an accommodating stance. Jerome Powell said the bank had the leeway to intervene should the economy deteriorate further and long bond yields rise. And the ECB, which met earlier today, is ready to increase its Pandemic Emergency Purchase Programme (PEEP).
Elsewhere, US oil inventories increased by 9 million barrels in the previous week and are now less than 8 million barrels short of their all-time high. Note that for the first time in 2 years, government strategic stocks also increased.
We remain cautious on equity valuations following the significant rebound since the March low. We continue to buy what central banks are buying, i.e. investment grade corporate bonds.
EUROPEAN EQUITIES
Europe's equity markets enjoyed a sharp recovery due to signs of a gradual easing in lockdown measures in several countries and economic stimulus plans. Risk assets are rebounding on the back of massive monetary and budgetary action and hopes for an efficient anti-coronavirus drug. At the same time, governments have continued to provide financial support for struggling companies. With the approval of the European Commission, France’s finance minister unveiled a government-backed €5bn loan to Renault. The Fed left its benchmark rates unchanged and stuck to its accommodating stance. European countries registered sharp contractions in first-quarter GDP.
In a week of considerable thematic rotation, previously battered sectors and stocks rallied. Financials led last Tuesday and autos and auto suppliers on the Wednesday. Reassuring figures from highly cyclical stocks triggered big price rises. SPIE, for example, reported better-than-expected first quarter figures. Sales were generally unchanged and even rose in Germany and Northern Europe. Austria’s AMS (semiconductor sensors) beat first quarter expectations thanks to strong demand for optical sensors in mass market and medical products and despite less positive momentum in the autos sector and industry overall. Among groups bucking the trend, Reckitt Benckiser saw strong demand for cleaning products and Carrefour benefited from households pantry loading.
Poor visibility has naturally led to most companies abandoning efforts to provide guidance and the indication is that the real impact will be felt in the second quarter. Royal Dutch Shell ditched its share buyback programme and slashed its dividend by 66%, the first dividend cut since the second world war.
US EQUITIES
US indices all gained around 5% in the last 5 trading sessions as of Wednesday evening. The Dow Jones jumped 4.93%, the Nasdaq 4.94% and the S&P 5.01%. At the end of the period, markets surged on encouraging test results on Gilead’s Remdesivir’s capacity to treat Covid-19. Upbeat figures from tech stocks also underpinned the trend.
If April were to finish at the time of writing, the Nasdaq (+15%) would have had its best month since 2002 and the S&P (+14%) its best month since 1974. Stock concentration reached extreme levels. The market caps of Google, Apple, Facebook, Amazon and Microsoft (GAFAP) are euqal to the bottom 70% of the S&P combined while only accounting for 14% of profits.
The Fed left its benchmark rate (0-0.25%) unchanged. At the subsequent press conference, Jerome Powell said he would do everything possible to help the US economy.
According to the Bureau of Economic Analysis, first quarter GDP contracted by 4.8%, or more than the 4% expected, and was down from +4.8% in the fourth quarter of 2019. The government deficit is expected to hit 18.7% of GDP; during the financial crisis, it never went above 10%.
Consumer sentiment fell in April for the third month running according to the University of Michigan. The index plunged from 89.1 to 71.8, the lowest reading since 2011.
WTI oil ended the period at $15.06 on hopes for lockdown easing in the US and elsewhere and relatively better indications on inventories. The EIA said weekly inventories had increased by 9 million barrels, down from 15 million and less than the 10.6 million expected.
Boeing, which has been severely hit by the crisis, reported a first quarter net loss of $641m and a 26% plunge in sales. The group is to lay off around 10% of its employees and reduce production of long-distance planes. Alphabet had an excellent quarter due to the lockdown fuelling more search activity. The crisis inevitably impacted advertising but the effect was somewhat limited for Youtube for example. Nevertheless, the group expects a trickier second quarter as the drop in advertising revenue feeds through. General Electric warned of a big impact from the crisis on its second quarter. Ford said it had suffered a $2bn shortfall in the first quarter and expected even bigger losses in coming months.
With almost half of first quarter results now in, investors are brushing off poor figures and banking on a rebound in the second quarter.
JAPANESE EQUITIES
The Bank of Japan unveiled a package of additional measures to stimulate the economy to help companies hit hard by the coronavirus outbreak. The central bank said its purchases of government bonds are now unlimited and will boost (=almost tripled) its purchase of corporate bonds and commercial paper from JPY 7,4 trillion up to JPY 20 trillion by the end of September with aims to help funding needs of companies struggling amid the pandemic state. Furthermore, the BOJ revised down its outlook on Japan’s GDP growth for this fiscal year (FY2020) from +0,9% to -3 to -5% in its economic outlook.
The stock market was strong in favor of good news on anti-coronavirus medicine and restarting of economic activities in the US and Europe. Nikkei 225 index climbed to 20193.69 and TOPIX gained 3.01% this week. The gain was also accelerated by high-tech names and short-covers of oversold names hit by the coronavirus. FANUC attracted the market’s attention gaining 20,03% despite announcing a reduced earnings for last fiscal year as the companies publicly unveiled its earnings guidance amid many companies were facing difficulty to show the figures.
The Japanese government plans to extend a nationwide state of emergency beyond 6 May, until the end of May or until 7 June, as the country’s coronavirus outbreak has yet to desirably subside. People shall be urged to stay at home one month longer.
EMERGING MARKETS
The MSCI Emerging Market index jumped 4% over the period thanks to Brazil rebounding by 10% and India by 7%. China extended VAT exoneration on loans to SMEs and individual firms by 4 years, a move designed to improve access to lending. The Chinese People's Political Consultative Conference (CPPCC) will start on May 21 and the National People's Congress (NPC) the day after.
Guangdong province unveiled an RMB 1.78bn consumer stimulus plan to boost auto and household electric goods sales with an expected effect of RMB 32bn for the former and RMB 9bn for the latter. The programme will mainly be funded out of taxes. China’s economy is gradually returning to normal judging from the transport minister's decision to reopen all toll roads from May 6, or earlier than June 30 as previously announced. The education minister urged parents to use more catch-up courses during the week, a good sign for companies like Tal Education and New Oriental.
In company results, Hikvision saw first-quarter earnings edge 2.6% lower but refused to provide guidance for the current quarter. Hengrui's first quarter earnings jumped 10% despite the epidemic. Moutai (spirits) also had a good quarter with EPS up 17%.
India’s sharp rebound was due to some easing in lockdown measures with non-essential shops reopening. Following Franklin Templeton’s decision in the previous week to shut 6 debt funds, the Reserve Bank of India unveiled an INR 500bn special liquidity facility for mutual funds.
In Brazil, ViaVarejo acquired logistics company ASAPLog. The deal will help the household electric goods distributor to slash delivery times to less than 24 hours. ViaVarejo said its online sales had more than doubled from 30% to 70%. In the same sector, B2W and Lojas Americanas agreed an e-commerce partnership with BR Distribuidora. In the bank sector, Santander Brazil’s first quarter results rose 10% compared to the same period in 2019, or better than expected. This was due to a sharp increase in lending, higher net income and lower-than-expected provisioning.
In contrast, Boeing ended its agreement to create a joint venture with Embraer’s commercial plane division.
CORPORATE DEBT
CREDIT
Markets rose on indications that some countries were to ease lockdown measures and thereby help activity restart gradually. The Xover tightened by 24bp and the Main by 6bp between Monday and Wednesday.
Car hire companies were in the spotlight over the period. Moody’s cut Avis Budget from Ba3 to B2 and Hertz from B3 to Caa3, citing the collapse in air traffic. More than two-thirds of both group's sales are linked to airports. S&P also downgraded Hertz from B- to CCC- and said there was a strong chance the group's heavy debt load would be restructured. However, Europcar's bonds rose sharply after Eurazeo said it would take part in a government and bank aid plan for the group. In company services, Selecta came under pressure due to EBITDA in the fourth quarter of 2019 slumping by around 40% and little indication from management on the impact of the epidemic. Spie’s first quarter EBITDA rose by 2.6%, a resilient performance in today's climate. However, the group expects a weaker second quarter due to countries in lockdown. The European Commission approved a French government-backed €5bn loan to Renault.
S&P left Italy's rating unchanged at BBB with a negative outlook. Italy’s banks, which have high exposure to government debt, outperformed on the news. Deutsche Bank's results surprised the market by beating expectations. Revenues rose 19% and investment banking performed well. UK banks announced sharp drops in first quarter results due to beefing up provisions for the expected impact of the crisis.
To support the banking sector, the European commission amended transitional arrangements for IFRS 9. The new period will run from 2020 to 2025 to take any Covid-19 losses into account. Leverage calculation methods will also be changed to allow for the possible exclusion of central bank exposure.
The investment grade new issues market was busy, with deals from companies like PepsiCo, Air Products and Schlumberger. There were new issues on the senior non-preferred market from Santander and Rabobank.
CONVERTIBLES
New issues were concentrated in North America. A total of $3.35bn was raised, taking year-to date issuance to more than $25bn. Low cost pioneer Southwest Airlines raised $2bn with a May 2025 maturity at 1.25%. The deal arrived on the heels of the company’s first quarterly loss in 9 years. Colombia’s Copa Airlines raised $350m via its parent company, New-York listed Copa Holdings.
Online retail platform Farfetch raised $350m ahead of a probable price war among retailers due to the lockdown. CNX Resources (natural gas producer and midstream player) raised $300m and golf equipment specialist Callaway $200m. Data security firm Rapid7 raised $200M to fund the acquisition of the start-up DivvyCloud. NeoGenomics (oncology) raised $150m.
In Europe, Remy Cointreau's first quarter sales for the 2019/2020 financial year fell 25% on weak demand for spirits due to the lockdown. First quarter revenues at Airbus fell to €10.6bn and losses amounted to €481m. However, the group took in 290 new orders over the quarter. Safran (engines) saw first quarter sales fall 8.8% and deliveries tumble 44% compared to the same period in 2019. Delivery Hero’s sales soared 92% vs. the first quarter of 2019 despite a slowdown in the second half of March after lockdown measures came into force. Utilities also proved resilient in the crisis. Iberdrola, for example, saw earnings rise 5.3% in its first quarter while EBIDTA was up 5.8%.
In the US, first quarter sales at Dexcom (glucose monitoring systems) jumped 44% compared to the same period in 2019 and EPS came in at 30 cents, or 16 cents higher than consensus expectations. Silicon Labs (semiconductors) also had an encouraging first quarter with sales up 14%.