Risk aversion resurfaced on worries over a second epidemic wave, the timid post-lockdown recovery and mounting tension between the US and China. Contamination rates started raising again in the US, South Korea and Germany as well as in many emerging countries. Admittedly, the rise was modest but it still weighed on sentiment. People were asked to observe strong social distancing and there were warnings that a vaccine could only be available at the beginning of 2021 at the earliest.
In the US, Democrats worked on another massive stimulus plan, this time for $3 trillion, but Republicans seemed unwilling to do more for the moment.
Jerome Powell painted a very gloomy picture of the economy and argued for budgetary stimulus. At the same time, he excluded any negative interest rate moves.
The Bank of England now expects the UK to contract by 14% this year and said it supported massive fiscal stimulus. The result could be a record budget deficit of between 15-19% but it is a marked contrast to Europe’s stimulus programme -weak, slow and vague- which is focusing essentially on loans rather than direct aid. Interestingly, Angela Merkel has turned more conciliatory and said that even a treaty change could be discussed. We believe it will take more than this to reassure markets that the eurozone is united.
Elsewhere, Ukraine's parliament approved the banking law, thus clearing the way for a deal with the IMF. In China, the PBoC said it would underpin activity by cutting rates, offering loans to companies and buying stakes. And oil prices recovered significantly thanks to activity recovering and additional production cuts by OPEC countries, led by Saudi Arabia and Kuwait.
Unsurprisingly, company results fell sharply with the US down 13% and Europe by twice as much. The difference is due to the US going into lockdown later and higher index weightings for tech and defensives.
Against this uncertain backdrop, we remain cautious on equities, especially in Europe, and on emerging country currencies. We remain overweight investment grade debt as central bank buying continues to provide massive support for the segment.
EUROPEAN EQUITIES
European equities fell as fears of a second coronavirus wave increased and US-China tensions escalated, pushing any news on an economic recovery onto the back burner.
Despite Angela Merkel's more conciliatory tone, the sheer vagueness of Europe’s stimulus plan is still weighing on the eurozone. The UK meanwhile prolonged its partial unemployment measures.
The crisis has entailed structural shifts in economies, especially over consumer behaviour amid social distancing measures. Some companies are doing well from the situation but most, and especially highly cyclical companies, are suffering the consequences. Telecoms have generally proved resilient. Deutsche Telekom, for example, has maintained its 2020 guidance thanks to rising profits at T-Mobile US. And Vodafone confirmed its dividend payout. Sales at Bouygues’ telecom subsidiary were also good but the group's construction division has obviously been hit. Other winners from the crisis include Euronext, which posted better-than-expected first quarter figures, and TeamViewer which raised its full-year guidance.
Many companies are now preparing for restructuring due to sharply lower results and zero visibility for the rest of the year. Due to the aerospace collapse, Solvay cut its composite segment workforce by 20% and shut down two factories, one in the UK and the other in the US. Press reports claimed Renault was preparing a radical restructuring plan, starting with its product range. In financials, ABN Amro’s results fell short of expectations due partly to higher-than-expected NPLs. ArcelorMittal launched a surprise increase of capital and convertible bond issue.
US EQUITIES
The Dow Jones lost 1.05% and the S&P500 1% while the Nasdaq edged 0.4% lower.
The trend turned lower after Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, said it was too early to kickstart the economy. And then the CEO of Novartis warned that a vaccine would not be available before the second half of 2021. Jerome Powell added to the market gloom, upsetting Wall Street and annoying Donald Trump, by saying negative interest rates had not been discussed by the Fed and were therefore not planned. This all occurred in a market which had to absorb close to $30bn in new issuance, or much more than the weekly average of $6bn.
The Fed chair also warned that the damage from the pandemic could have a lasting effect on the US economy. He said urgent aid was costly but essential to ward off a deep recession.
Markets also focused on fresh US-China tensions amid worries they might aggravate the global slowdown. Washington repeatedly said it had proof that the new coronavirus came from a lab in Wuhan where the disease was first observed.
New weekly jobless claims fell to 2.98 million, down from 3.17m in the previous week, but still less than expected. 36 million people, or 20% of the US workforce, are now out of work. Jerome Powell said 40% of Americans earning less than $40,000 were now jobless.
Oil ended the period higher at $27.40, just 48 hours before the June contract expired. Traders clearly no longer expect a rerun of the April 20 scenario when buyers were unable to take delivery of physical oil and were forced to pay a fortune to warehouse it. A drop in US inventories also helped sentiment.
The verbal escalation between Beijing and Washington weighed on semiconductor stocks like Intel, Micron Technology and Texas Instruments. The sector is generally seen as a barometer of relations between the US and China.
Quarterly figures at Cisco Systems beat expectations due to the increase in home working. The stock also rose on upbeat guidance for the current quarter.
Delta Air Lines is to retire its long-haul Boeing 777 fleet by the end of the year to be in a better position to withstand the crisis. Subsequent writedowns, including for the MD-90 withdrawal in June, could cost between $1.4-1.7bn. Norwegian Cruise Line said it was strong enough to survive 18 months of zero activity.
JAPANESE EQUITIES
Japanese stocks edged down, leaving the TOPIX and Nikkei 225 0.80% and 1.31% lower. Despite weak stock markets in the US, the decline in Japan was limited by better news on COVID-19 infections and expectations the state of emergency would be lifted in cities like Nagoya (although not yet in Tokyo, and Osaka, for example).
The mood was affected by FY2019 figures and earnings guidance for FY2020 with big swings following the sharp fall due to the pandemic.
Air transportation rebounded despite the poor business outlook and pharmaceuticals rose on upbeat results from TAKEDA which rose 7.82%. Securities & Commodity trading was the worst performer. NOMURA tumbled 7.10% after its figures revealed it had been hit harder than expected by Japan’s soft lockdown.
The Economy Watcher Survey released on May 13 showed both consumer and business sentiment hitting a record low. However, this looks like the bottom. The lifting or loosening of Tokyo’s state of emergency for Tokyo is within sight.
EMERGING MARKETS
Emerging markets were down 1.2% this week as of Thursday as geopolitical risk returned. President Trump threatened to cut ties with China over the coronavirus epidemic and said he was considering a crackdown on US-listed China stocks.
In China, Wuhan will test its entire population of 11 million as it reported new infections for the first time since the lockdown was lifted. April export growth beat expectations amid supply-chain normalisation and demand for medical equipment. Exports rose 3.5% YOY (-6.6% in March) or much better than consensus estimates of an 11% fall. Import growth dipped to -14.2% (vs. -1.0% in March, consensus -10%) due to a high base on VAT distortion last year, weaker processing trade in line with slipping new export orders and foreign supply bottlenecks. Credit data, especially total social financing, were better than expected. China’s new total social financing (TSF) in April was RMB 3.1tn, above consensus estimates of RMB2.8tn, pushing up credit balance growth to 12% YoY, vs 11.5% in March. Short-term financing made up 29% of new TSF (vs. 51% in Mar), a shift in credit mix towards new project financings, amid lower refinancing needs for corporates and households impacted by Covid-19. More credit being used for productive purposes should help GDP recover from the second quarter. The PBoC and SAFE said they were scrapping investment quotas on QFII and RQFII schemes and offering more flexibility on the choice of currency and timing of remittance into China. Retail sales in April moderated to a 7.5% contraction while factory output was up 3.9%, or better than expected. Unemployment edged back up to 6% in April from 5.9% in March. In company news, Tencent’s first quarter results beat on all fronts but with a mixed outlook for the rest of the year.
In Taiwan, TSMC announced plans to build a new semiconductor production facility in Arizona with support from the state and US federal government. The project will focus on manufacturing 5nm chips and will cost $12bn and create over 1,600 jobs.
Construction will begin in 2021, and chip production should start by 2024.
In South Korea, Samsung and Hyundai Motor met to start discussing their EV battery partnership, pushing EV battery stocks higher.
As India continues the process of gradually reopening from its nationwide lockdown, Narendra Modi announced a Rs20tr package (10% of GDP) to boost the economy, with early measures focusing on micro, small and medium enterprises and non-banking financial companies. It will also provide financial support to migrant workers and farmers. Industrial production contracted by 16.7% YoY in March, or much worse than the 8% drop expected. April CPI inflation was in line with consensus at 5.8% YoY. ICICI Bank’s fourth quarter results for FY2020 results were slightly better than expected on the top line but profitability was below estimates due to Covid-19 provisioning and two overseas accounts. Balance sheet and liquidity criteria remained strong.
In Brazil, the Senate is studying several drafts bills to increase tax for the banking and mining sectors. B2W announced a partnership with Grupo Big (former Walmart in Brazil) for the integration of their sales platforms. Delivery times will be 2 hours or a pick-up at the stores. This is B2W’s first step into the grocery segment. The main goal is to increase frequency and assortment and to leverage B2W’s logistics structure. The company has increased the number of third-party carriers from 800 to 17,000 since the beginning of the Covid-19 crisis. Banco do Brasil reported weaker-than-expected numbers due to higher provisions. Although the trend was the same as for private banks (higher provisions, higher corporate loans, suspension of guidance), credit risk increased less. ViaVarejo reported strong first quarter results. Despite closed stores, management was quick to adapt and increased sales through its digital channel.
CORPORATE DEBT
CREDIT
Credit markets started the week on the front foot thanks to optimism over economies restarting, but the trend reversed on Wednesday on signs of a possible resurgence in contaminations and Jerome Powell’s comments that the recovery risked being a slow affair. Concerns that US China relations would sink further subsequently accentuated the selling. The Xover widened by around 26bp and Main by 5bp between Monday and Thursday.
In company results, Dufry’s sales fell 23.6%, or in line with preliminary indications when the funding plan was announced in April. The group expects to see a 94% plunge in April sales but liquidity is now satisfying thanks to the company’s recent measures. Vallourec saw quarterly volumes and sales fall but margins resisted thanks, in part, to cost cutting. The group said it intended to proceed with the €800m rights issue first unveiled in February. Hertz made a $356m loss in the first quarter with an 8.7% drop in sales. Talks are still ongoing with creditors to reach an agreement on a debt restructuring. Selecta came under intense fire over the week as investors feared a restructuring would be necessary due to the group's liquidity position. Coty’s bonds rose when exclusive talks with KKR were announced over the sale of 60% of the Professional Beauty division which is valued at $4.3bn.
UBI Banca boosted provisions by 21% YoY in the first quarter but revenues were more or less stable. Its 2022 objectives still stand. No comment was made on the Intesa SanPaolo equity bid. Commerzbank lost €295m in the first quarter after it increased provisions to €332m, up sharply from €78m in the first quarter of 2019. The bank has also put the sale of its Polish affiliate mBank on pause due to poor market conditions, good news for profitability but less so for solvency which still needs to be reinforced.
The high yield and subordinated financial segment new issues market reopened. Synlab raised €850m over 5years at a floating rate. The issue size was more than doubled from the initial €400m to enable the early reimbursement of the existing €940m bond. PPF Telecoms and Rubis Terminal raised €500m and €1410m over 4 and 5 years at 3.5% and 5.625%. In financials, Deutsche Bank raised €1.25bn over 11 years (non-call 6 years) at 5.625%. The Bank of Ireland raised €675m at 7.5% in the first AT1 deal since the Covid-19 crisis started. The proceeds will go on refinancing its AT1 issue at it first call date in June. Both issues went down well and were around 2 times oversubscribed.
CONVERTIBLES
In another relatively busy week, global new issuance came to more than $6bn. In Europe, Safran (aerospace equipment) raised €800m with an Océane (convertible into new or existing shares) at 0.875% due 2027. Arcelor Mittal raised $1.25bn with a mandatory convertible to reinforce its balance sheet after Moody’s downgraded it to Ba1, or speculative status.
There were a number of deals in the US, notably a $1.15bn jumbo deal from Pioneer Natural Resources. The company explores for shale oil in part of the Permian basin and chose to reinforce its balance sheet with a convertible issue at a very difficult time for fossil energy companies. Dexcom (glucose monitoring systems) raised $1.05bn to consolidate its leading position in the sector and reimburse part of its previous convertible issue. Other US issues included ridesharing company Lyft for $650m, BioMarin Pharmaceuticals for $550m and Zillow Group for $500m.
In company results, Wirecard missed expectations but first quarter sales were still up 24% to €700m and EBITDA 26% higher to €199.2m. The group’s biggest challenge is still the German regulator’s enquiry into possible accounting irregularities. Sales at Amadeus IT fell 27% and net earnings tumbled 58% due to trip cancellations. Dufry AG (duty free airport shops) also suffered a sharp 23.6% decline in sales.
Chinese internet giant Tencent beat first quarter expectations with sales up 26% on the same period in 2019.
Lockdown has acted as a catalyst for sales in sectors like fintech (+22%), advertising (+32%) and smartphone apps (+64%).