Die Inflation begleitet uns weiter

• US and European government bond yields continued to ease
• The FOMC minutes confirmed that the Fed wanted to start tapering before the end of 2021
• On equity markets, the third-quarter earnings season got off to a better-than-expected start

US and European government bond yields continued to ease but the long-term upward trend remained in place. The recent fallback in real and nominal interest rates is due to mounting worries that growth might suffer as central banks get ready to reduce monetary support.

The FOMC minutes released last Wednesday showed a willingness to start tapering before the end of this year. This was expected and it will continue to push long bond yields higher. The US consumer price index came in at 5.4% or just ahead of the 5.3% expected. Inflation is not therefore running out of control but its future trajectory is still the main question.

On equity markets, the third-quarter results season got off to a better start than expected but there is still a risk that rising commodity prices will dent company margins, especially those which are not in a position to pass on price increases.

In the US, the JOLTS job survey showed that the Covid rebound in August had reduced job openings from 11.1 to 10.4 million so no change to the persistent gap between labour market supply and demand. Rising energy prices are less of a problem in the US than in Europe which depends more on sources outside the zone, but wage tensions are higher. This was reflected by the drop in the small business NFIB confidence indicator amid persistent hiring problems.

Ironing out international supply chain problems will take several quarters. China’s producer prices in September, for example, surged 10.7% mainly due to soaring commodity prices, a situation that has not been seen since 1996. Beijing also has to manage various regulatory issues and their consequences like the Evergrande affair and the uncertainties clouding its entire property sector.

In France, President Macron unveiled the France 2030 stimulus package. €34bn will be spent over 5 years to re-industrialise the country and make it less dependent on imports. 
Against this backdrop of inflationary pressure and encouraging company results, we are staying neutral on risk assets. We continue to keep a close eye on the outlook for company margins. In fixed income, we prefer corporate debt to government bonds.

EUROPEAN EQUITIES

Markets surged by close to 4% on several upbeat company reports. Even so, investors remained aware of problems like rising energy prices and supply chain blockages.

Energy stocks continued to perform well as oil prices advanced further. Upbeat US bank results pushed bank stocks higher. The UK released rather encouraging labour market figures which suggested the country was returning to normal.

Among the week’s upbeat company results, figures from luxury giant LVMH indicated that growth was slowing, as expected by the market, but the group’s long term prospects remained rosy. Management sought to reassure investors on China where problems have weighed on the stock price in recent weeks. Germany’s SAP posted excellent results with strong growth in its cloud business. Publicis also surprised the market with like-for-like growth of 11.2%, or much better than the 7.2% expected. The group raised its annual growth guidance from 7% to 8.5/9%. (The Bloomberg consensus before the results were announced was at +6%).

Asos, however, posted disappointing figures due to the sort of logistical problems all companies are currently experiencing. In the supermarket sector, Auchan revealed that its bid for Carrefour had failed. Carrefour CEO Alexandre Bompard said there were disagreements on exchange parities and that any appraisal of a family-held, non-listed group like Auchan was bound to be tricky. Société Générale said that its merger with Crédit du Nord would result in 3,700 jobs being cut by 2025.

US EQUITIES

US indices rebounded at the end of the period thanks to upbeat figures from Bank of America and United Health, the lowest increase in producer prices this year (+0.2% ex food and energy when +0.5% was expected) and weekly jobless claims which fell below 300,000 for the first time since the pandemic began.

And yet the week had begun mired in the same worries over rising energy prices and the ability of companies to maintain margins. WTI oil moved above $80 for the first time since October 2014.

The risk of inflation has not receded. Consumer prices for September rose 5.4% over 12 months when they were seen rising 0.4% MoM.

The FOMC minutes confirmed that tapering would start between mid-November and mid-December. Purchases will be cut by $15bn a month up to mid-2022. It was also clear that committee members were divided over how much of a threat inflation posed so we can rule out any rapid rate hikes.

Elsewhere, the IMF warned that equity and property markets could suffer a sharp correction due to central banks withdrawing support.

Apple fell after a Bloomberg article said the group could cut production of its iPhone 13 by 10 million to 90 million units due to electronic component shortages, especially at Broadcom and Texas Instruments.

The third-quarter results season started with mixed reports from major banks. JP Morgan’s figures were disappointing due to only a slight increase in lending whereas Bank of America posted better-than-expected interest income. But all banks benefited from strong investment bank activity.

JAPANESE EQUITIES

The Japanese stock market gained for the week. NIKKEI 225 and TOPIX both rebounded by 3.15% and 2.44%. The market continued to be weighed by concerns over global economic slowdown and rise of interest rates and oil price while it was supported by JPY depreciation. Also, the market concerns toward possible raise of financial income tax has receded, as the new prime minister mentioned not to touch it for the time being.
Nonferrous Metals, Mining and Transportation Equipment gained 6.21%, 6.02% and 5.79%. Marine Transportation continued declining by -8.36%. Electric Power & Gas dropped -3.69%. In Financial sector, Banks and Insurance declined by -1.57% and -1.50%, respectively.

Nissan Motor rose 10.62%, expecting increased exports with JPY depreciation. Panasonic gained 9.55% as they expanded the production capability for e-bike. Sumitomo Metal Mining rose 9.34% by selling the interests of copper mine.

Tokyo Gas and Kansai Electric Power were sold by -5.49% and -3.82% due to rising resource prices.

Prime Minister Fumio Kishida approved the dissolution of the Lower House on 14 Oct. The Lower House election will be held on 31 Oct. The investors are having their eyes on the policy and measures of LDP to win the election.

EMERGING MARKET

The MSCI Emerging Market index was up 0.78% as of Thursday’s close. India (+2.37%) outperformed other regions and hit all-time highs. China gained 0.71%, led by a tech stock rebound on relief over the Meituan fine. Brazil closed up 0.37%.

China’s exports surged to a new monthly record in September, up 28.1% in USD YoY vs. +21.5% estimated, while imports decelerated a little to +17.6%. Strong demand ahead of year-end holidays and rising prices outweighed the effect of production disruption due to power shortages. September factory inflation rose to a record on soaring coal prices, but weak demand capped consumer inflation: the gap between PPI and CPI increased to 10%, its widest level since 1993. The PBoC renewed its MLF this week without any liquidity drain after the Golden Week holiday. The bank is also said to be designing a new monetary policy tool for a total amount of RMB 1 trillion, a funding facility targeted at renewables, environmental protection, and carbon reduction technology with an interest rate of 1.75%. During a news briefing on Friday, the PBoC said the authorities and local governments are resolving the Evergrande situation based on market-oriented and rule-of-law principles while urging banks to maintain current lending to the real estate sector. China’s thermal coal prices surged to record highs as recent floods in the key coal-producing province Shanxi worsened a supply crunch. 
Meituan was fined $530m or 3% of its 2020 revenue for antitrust abuse. The fine was lower than expected. Lenovo withdrew its CDR listing application in mainland China, just eight days after the application received regulatory approval.

In Taiwan, TSMC reported above consensus revenue in 3Q21, with a better than expected margin outlook for the current quarter. TSMC and Sony are considering jointly building a chip factory in Japan to increase the production of chips used in cameras, automobiles, and other devices.

South Korean battery maker LG Chem reached a deal with GM to share the costs of the GM Bolt recall, resulting in LG Chem booking a provision of W620bn in 3Q21.

In India, the RBI left policy rates unchanged and kept its monetary stance accommodative. It also lowered its FY22 inflation projections by 40 basis points to 5.3%, as CPI moderated to 4.35% in September thanks to lower food prices and a high base effect. Separately, August IIP contracted 0.9% MoM after 2 quarters of strong growth but remained above pre-pandemic levels. Tata Consultancy Services reported 2QFY22 results with both revenue and margins below estimations on weaker deal momentum and attrition headwind. Infosys’ results, on the other hand, surprised positively on margins and the group hiked its FY22 revenue growth guidance for the second time this year. Tata Motors is to sell a 15% stake in its EV division to TPG for $1bn. Reliance acquired an integrated solar PV maker REC Solar Holdings for $771m as part of its green energy push. Tata Group acquired Air India for $2.4bn. Dixon received approval from the Indian government under the PLI scheme for the manufacturing of telecom devices.

In Brazil, IPCA, the official inflation index, rose 1.16% sequentially in September, or better than expected, on deeper moderation of food and beverage prices. PagSeguro’s stock came under pressure due to macroeconomic challenges and regulatory changes on the interchange rate gap.

CORPORATE DEBT

CREDIT

Spreads on US short and long-term Treasuries narrowed after inflation edged higher in September and weekly jobless claims fell. Yields on 10-year US Treasuries eased by 7 basis points over the week. The equivalent German Bund eased by 2bp. The Xover tightened by 8 basis points and the Main by 1 basis point.

New corporate issuance slowed as the third quarter earnings season kicked off in the US. The one deal came from Iliad Holding (telecoms) which raised €3.7bn in 4 tranches to fund its delisting and future development. It was the largest high-yield issue this year and Iliad’s biggest deal since October 2017. The four tranches were: €1.1bn at 5.125% over 5 years, €750m at 5.625% over 7 years, $1.2bn at 6.5% (or the equivalent of about 5% in euros) over 5 years and $900m over 7 years at 7% (around 5.3%). Faced with strong demand, Iliad managed to optimise funding at around an average 5.3% for an average maturity of around 6 years.

In company news, Adler group sold around 20% of its property assets for €1.5bn to rival LEG Immobilien. The goal was to cut debt amid attacks from short sellers, accusations of fraud and an enquiry from the BaFin regulator. 

Vinci said its Vinci Airports subsidiary had a mixed September. Traffic admittedly rebounded by 84.4% compared to September 2020 but was still 56% lower than in the same month in 2019. The group observed that the recovery in Europe was promising with the easing of sanitary restrictions, especially in France and Portugal but said the international situation was still suffering from partial or total restrictions on travelling to many countries.

Financial debt issuance was relatively busy with 4 deals ahead of quarterly results for Europe's banks. BPCE raised $1.75bn with two Tier2 bonds, Groupe des Assurances du Crédit Mutuel €750m at 1.85% with a Tier2 bond due 2042 (first call 2032) and Italy’s Iccrea banca €300m. In the first US bank reports for the third quarter, Bank of America’s profits jumped 58%. The improving economic situation allowed the bank to cut provisioning and increase lending. Citigroup's results bounded by 48% to $4.6bn on a drop in pandemic-related reserves and strong investment bank business. Morgan Stanley also beat expectations due to good investment bank figures. Net profits rose 36% to $3.7bn.

Elsewhere, La Banque Postale is to stop funding fossil fuel activities by 2030, a decision that is in line with the Paris Climate Agreement’s objectives. The bank is already less exposed to this sector than rivals with only €500m in coal and €700m in oil and gas.

CONVERTIBLES

The new issues market remained quiet ahead of the quarterly results season. However, there was lots of news on convertible bond issuers. Global luxury leader LVMH once again beat expectations  due to strong demand in Asia and the US and the lifting of sanitary restrictions in Europe. Sales rose 20% over a year to €15.5bn (+11% like-for like compared to the same period in 2019). Consensus estimates were for sales of €15.1bn. Just Eat Takeaway said third-quarter orders including Grubhub, had risen 25% to 266 million compared to last year. Even so, order numbers were overall a little below market expectations. The UK saw 70 million orders and Germany 38 million.

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

15/10/2021
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