- In the US, the Senate approved the Republican proposal to raise the debt ceiling
- The OPEP+ cartel refused to increase production beyond the extra 400,000 barrels per month
- The ECB might create a new asset purchase programme to replace the PEPP which runs out in March 2022
October kicked off in more positive mood after a complicated third quarter. The MSCI AC World Index in local currencies bounced 1.1% between October 1 and 7.
In the US, the Senate approved the Republican proposal to raise the debt ceiling by $480 billion up to December 3, thereby avoiding a default on October 18. Joe Biden proposed cutting his social reform programme aimed at education, healthcare and the climate from $3.5 trillion to $1.9-2.2 trillion. Joe Manchin, the Democrat senator whose vote is crucial in the horse trading, stuck with his $1.5 trillion proposal.
Despite rising demand for oil, OPEC+ maintained the current monthly increase of 400,000 extra barrels, sending Brent crude above $80. The surge in gas prices paused on Wednesday after Vladimir Putin said Russia would increase exports to Europe in the coming weeks.
Christine Lagarde reiterated her stance on inflation, saying the situation did not require the ECB to react. She added that the ECB could create a new asset purchase plan to replace the PEPP when it ends in March 2022.
US advanced indicators confirmed that the economy was seeing a robust recovery with a boost in jobs but strong inflation. September’s non-manufacturing ISM rose from 61.7 in August to 61.9, or more than the 60 expected. This was due to higher new orders (63.5 vs. 63.2), a reflection of resilient US demand despite the sanitary situation and inflation. The price index rose from 75.4 to 77.5.
The ADP survey and weekly jobless claims figures were also surprisingly upbeat.
And another piece of good news came from Merck and Ridgeback who said phase 3 intermediary results for their antiviral Covid treatment showed hospitalisations and deaths among fragile people were reduced by around 50%. Death rates were 7.3% compared to 14.1% for subjects who had taken the placebo.
We are still neutral on risk assets but with a preference for Japanese equities.
In fixed income, we prefer corporate bonds to government debt.
EUROPEAN EQUITIES
Equity markets had a very choppy week due once again to the energy crisis. Markets only calmed down when Vladimir Putin said Russia intended to increase its gas exports to Europe. The Russian president’s geopolitical gamble is still getting the Nord Stream 2 project up and running. Meanwhile, the ECB reduced weekly asset purchases from €30.2m to 27.8m. The bank continues to support the economy while admitting that inflation could be higher than expected in the coming months.
Many companies are cutting profit forecasts due to rising commodity prices and various shortages. The trend was particularly strong in the autos sector where most companies have already scaled down forecasts.
BMW and Renault are banking on higher car prices to partly offset losses from semiconductor shortages. German semiconductor group Infineon Technologies now expects operating margins to hit a record 20% and management thinks the trend higher could continue in the coming years. The construction sector hopes to pull off the same feat as BMW and Renault. Saint-Gobain and its Sika division are confident that input costs can be passed on to end products. In the tourist sector, reservations for the half-term holiday are rather encouraging. The sector is starting to recover, judging from Ryanair’s load factor which increased to 81% from 71% YoY. Deutsche Post upped guidance thanks to strong performance in its online commerce division which is still doing well in the post-lockdown period. Mixed reactions to Ubisoft’s Far Cry 6 video game have led analysts to wonder if the company can meet its full-year targets. The stock price fell.
US EQUITIES
All major indices ended the week in positive territory. The Dow gained 2.69%, the S&P500 2.14% and the Nasdaq 1.42%, albeit with significant sector disparities as investors rotated into value and out of growth. S&P500 auto stocks, for example, surged 9.6% over the last 5 trading sessions and railway comapanies 7.9%. In contrast, retail shed 2% and semiconductor stocks were also hit. This all reflects varying market worries over inflation possibly running out of control, supply chain disruption and lack of visibility over raising the US debt ceiling.
WTI oil prices continued rising to a level not seen since 2014, after the OPEC+ summit decided to continue with its policy of only gradually raising output. Several countries had asked for an exceptional boost to production to counter the ongoing energy crisis but the cartel refused, citing persistent Covid risks to the economic recovery. The US Energy Department also said it had no intention of using strategic stocks to ease price rises.
Markets, however, heaved a huge sigh of relief on Thursday evening when the Senate approved an extension of the debt ceiling to December 3.
Elsewhere, St Louis Fed chairman James Bullard said he had doubts inflation would return to the Fed’s 2% objective. He expects higher inflation than usual for a certain amount of time. Meanwhile, Nancy Pelosi made October 31 the deadline for getting the infrastructure stimulus package through Congress.
Facebook, Instagram and WhatsApp resumed service after an unprecedented 6-hour outage which raised serious questions about the group’s monopoly. Facebook is still under the spotlight after a whistle blower suggested the group was more interested in profits than user safety.
JAPANESE EQUITIES
Tokyo was dragged down by concerns over the US debt ceiling, the slowing Chinese economy and rising oil prices. The NIKKEI 225 and TOPIX tumbled 6.02% and 4.46%. However, recovery stocks were in favour ahead of the new prime minister’s stimulus package.
Mining, Oil & Coal Products, and Insurance gained 2.13%, 0.14%% and 0.05%. All other sectors dropped. Marine Transportation, Precision Instrument and Electronics plummeted by 7.69%, 6.89% and 6.88%, respectively. Higher oil prices hit investor sentiment towards Japan’s exporters.
With the lifting of the state of emergency, Shiseido rose 3.68% on expectations of higher demand for cosmetics and Asahi Group Holdings was up 3.21% on hopes for a rise in alcohol sales. Kansai Electric Power gained 2.49% as the new administration is pushing to rebuild nuclear power plants. Fast Retailing sank 13.35% as YoY sales declined for two consecutive months. AEON plunged 11.21% hitting a year-to-date low on a slowdown in June-August earnings.
On October 4, Fumio Kishida was elected as the new LDP leader and the prime minister. He will deliver his general policy speech on October 8. The market is expecting themes like “a new capitalism” and “a virtuous cycle of growth and wealth distribution” to be the centre piece of his economic policies.
EMERGING MARKET
The MSCI Emerging Market index closed up 0.55% as of Thursday’s close. China gained 0.1%, outperforming other regions but the A-share was closed for most of the week for the National Day holiday. India rose 0.81%. Brazil led losers, down 3.81% on political concerns.
The Chinese authorities are taking steps to address the power shortage: coal mining SOEs are to be allowed to produce at full capacity even exceeding the annual quota with further capacity increase to be approved into the fourth quarter. Power tariffs will reflect coal cost changes within a reasonable range. Slight but constructive progress is being made in the China-US relationship as both parties agreed for their presidents to hold a virtual meeting before year end. This followed 6-hour talks between the US national security adviser and China’s top diplomat. Sinovac vaccines have been approved by Australia ahead of borders reopening. Travel during Golden Week was down by a third on pre-pandemic levels as trans-province restrictions were still in place while the UnionPay online transaction amount hit RMB 2.31 trillion +32% YoY. Ping An is considering a sale of Founder Group’s life assurance business for as much as $1bn.
Hopson plans to acquire 51% of Evergrande property services for more than $5bn.
Property developer Fantasia defaulted on a bond payment. China’s antitrust regulator fined Meituan $530m, or 3% of its 2020 revenue but the market was expecting $1bn.
Taiwan exports surged by 29.2% YoY in September, a monthly record.
In India, services PMI edged lower to 55.2 in September from 56.7. Composite PMI remained flat at 55.3. Coal reserves fell to their lowest level in years and are now down to 4 days. Reliance signed a deal to bring 7-Eleven convenience stores to India. Indian watch and jewellery maker, Titan, posted a 70% jump in revenues across all segments during 2QFY22, boosted by a gradual reopening in the country. Divi's Labs hit a record high on Merck's positive trial results for a COVID-19 drug.
In Brazil, Manufacturing PMI rose to 54.4 while Services PMI declined to 54.6 from 55.1 in August. August retail sales fell 4% YoY, or more than the 0.7% expected, as consumers faced rising inflation and higher borrowing costs. Industrial production fell 0.7% in August on supply disruptions. Analysts were expecting it to be unchanged.
Peru’s President replaced the controversial prime minister with a former head of congress to moderate economic policy.
Oil rose to a new seven-year high after OPEC+ chose to keep supplies fairly tight.
CORPORATE DEBT
CREDIT
Tension on Asian markets and mounting concerns over inflation dominated sentiment over the week. Worries were focused on supply chain problems and their amplifying effect on the cost of energy, goods and services. As a result, US 10-year Treasury yields gained 13 basis points and the European equivalent 7 basis points. Even so, credit markets remained relatively resilient with spreads on the Main index only widening by 1 basis point and by 5 basis points for the Xover.
It was much busier week for new issues with deals from Modulaire, Zoncolan, Keepmoat, Arcaplanet and Graanul while, in the telecoms sector, Iliad and Masmovil tapped the high yield market again to fund acquisitions.
In Travel & Leisure, Germany’s Lufthansa and Tui completed increases of capital for €2.14n and €1.1bn, respectively, with the proceeds to be used on reimbursing government pandemic aid. A drop in Covid cases and vaccination progress have boosted the sector. Lufthansa has stepped up flights to southern Europe to meet holiday demand and Ryanair’s passenger load factor over the third quarter rose to 80%.
In stark contrast, Cnova, Casino’s e-commerce subsidiary, postponed its increase of capital due to unfavourable market conditions.
German property group Adler hit the headlines during the week. First, it said it was looking at strategic options for its residential portfolio with the possible sale of a significant part. The proceeds would go on slashing leverage and returning capital to bond holders and shareholders. Short-seller Viceroy Research then accused the group of fraudulent accounting by significantly overstating the value of its rental property assets. Adler denied the accusations. On Friday, Aggregate Holdings, Adler’s parent company, said Vonovia had secured an option to buy a 13.3% stake in Adler at a much higher price than the last closing price.
In financial debt, changes put forward by Sweden’s regulatory authority caused Moody’s to downgrade SEB by one notch from Aa2 to Aa3. SWEDA was placed on negative review with no change to the Baseline Credit Assessment (BCA). Poland’s Bank Millennium is to post an additional €116m in third quarter provisions to cover Swiss franc mortgages. In another busy week for new issuance, the UK’s Rothesay Life raised £450m with an RT1 and CNP Assurances €500bn with a Tier 2 bond. BPCE sold an interesting Tier 2 CoCo in two tranches, €900m and €850m.
CONVERTIBLES
Convertible bond convexity provided resilience in a volatile market.
It was a quiet week for new issuance but an impressive $121.5bn has been raised since January 1st, a similar performance to 2020. The universe now represents $507bn (as of September 30) compared to $317bn at end 2019. Sector and style diversification has increased, enabling the segment to multiply performance drivers.
In company news, Zoom’s bid on cloud software company Five9 was rejected by the target company's shareholders. Zoom’s share price had surged during the pandemic and management had agreed in July to pay $14.7bn in stock for Five9, its first acquisition for more than $1bn and the second largest tech deal of this year. It has now lost an occasion to rapidly grow capacity.
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
08/10/2021
This document is issued by the Edmond de Rothschild Group. It is not legally binding and is intended solely for information purposes.
This document may not be communicated to persons located in jurisdictions in which it would be considered as a recommendation, an offer of products or services or a solicitation, and in which case its communication could be in breach of applicable laws and regulations. This document has not been reviewed or approved by a regulator of any jurisdiction.
The figures, comments, opinions and/or analyses contained herein reflect the sentiment of the Edmond de Rothschild Group with respect to market trends based on its expertise, economic analyses and the information in its possession at the date on which this document was drawn up and may change at any time without notice. They may no longer be accurate or relevant at the time of reading, owing notably to the publication date of the document or to changes on the market.
This document is intended solely to provide general and introductory information to the readers, and notably should not be used as a basis for any decision to buy, sell or hold an investment. Under no circumstances may the Edmond de Rothschild Group be held liable for any decision to invest, divest or hold an investment taken on the basis of these comments and analyses.
The Edmond de Rothschild Group therefore recommends that investors obtain the various regulatory descriptions of each financial product before investing, to analyse the risks involved and form their own opinion independently of the Edmond de Rothschild Group. Investors are advised to seek independent advice from specialist advisors before concluding any transactions based on the information contained in this document, notably in order to ensure the suitability of the investment with their financial and tax situation.
Past performance and volatility are not a reliable indicator of future performance and volatility and may vary over time, and may be independently affected by exchange rate fluctuations.
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