Inflation beruhigt die Investoren

• Emerging countries proved the most volatile
• US inflation came in below expectations
• Oil headed north

Global equity markets were little changed over the period but there were some big regional and sector swings. US Treasury yields were also stable but fluctuated by almost 0.1% over the week in line with economic data releases and ahead of the FOMC meeting on September 21 and 22.

Emerging countries proved the most volatile, led by China where new data confirmed that the economy had slowed in August due to sanitary constraints. Retail sales there only rose 2.5% over the month when they were expected to increase by 7%. China’s equity markets also buckled after Evergrande said that it could not service September interest payments on its debt.

In the US, however, it was a different tune. Total and core inflation in August came in below expectations and down from July’s level. It was reassuring news for investors and suggested that the Fed was right to talk of a temporary blip in inflation, especially as the drop mainly concerned sectors like tourism and second-hand cars that had previously pushed prices higher. There were also positive surprises from the Empire Manufacturing and Philly Fed indicators. To cap it all, August retail sales rose 0.7% when they were seen falling by the same margin.

One of the biggest movers was oil which headed north after US production was interrupted by a hurricane and OPEC revised its demand forecasts higher for this year and next. As a result, energy sector stocks posted the best returns over the period.
We are still neutral on risk assets but with a preference for European and Japanese equities. We remain cautious on government bonds and prefer corporate debt.

EUROPEAN EQUITIES

There were two distinct trends on Europe’s equity markets. Companies with significant exposure to China, like luxury groups, were hit by selling while others benefiting from rising commodity prices and higher long-term bond yields were in favour. Elsewhere, the ECB said it was not thinking about suspending its accommodating stance in the immediate future as inflationary pressure was merely temporary. The managing director of Airbus had previously said that supply chain problems would continue to loom large in the next 12 to 18 months. Michelin agreed by saying shortages of components like semiconductors would slow auto sales.

Producer prices in the eurozone rose 1.5%, or higher than the +0.6% expected, due to non-durable consumer goods (+3.5%), capital goods (+2.7%) and durable consumer goods (+0.6%). 

In company news, Vivendi raised its stake in the Lagardère Group to 45.1% by buying Amber Capital's holding. Vivendi will now have to launch a bid on the other outstanding shares. The Biotech sector was rocked after its champion Valneva tumbled by close to 40% following the UK government’s decision to suspend its Covid vaccine order.

London claimed the Austro-French company had failed to meet its obligations. Valneva said it was amazed by the decision and refuted all the allegations. On a more positive note, France’s Prodways (3D impressions) saw EBITDA soar 214% and margins rise by 7.9bp. The results were the fruit of strong growth and the effects of a transformation plan to reap synergies from various acquisitions.

US EQUITIES

Over the last five trading sessions to Thursday evening, the Dow Jones dipped 0.37% and the S&P500 and Nasdaq both lost 0.43%. Macro indicators were mixed: on the one hand, consumer inflation came in at a six-month low of 0.3% when analysts had pencilled in +0.4%. (The news had investors wondering what the Fed might say about tapering at its upcoming September 22 meeting.)

On the other hand, retail sales rose 0.7% when they were seen falling by 0.7% and the Philly Fed index came in 30.7, or much higher than the 19 estimated.

White House economic advisor Brian Deese said Democrats in the House of Representatives had made serious progress after the House economic committee approved a $2.1 trillion tax rise for wealthy companies and individuals. This could ease the way to Joe Biden’s $3.5 trillion stimulus plan being approved.

Elsewhere, WTI oil prices rose to a six-week high of $72.6 after weekly inventories fell by 6.4 million barrels, or more than the 3.5 million expected. This took US inventories back below pre-pandemic levels so prices should have some support.

Apple fell over the period despite the launch of the new iPhone 13 along with new tablets and connected watches.

Comcast's finance director said new cable subscribers had slowed “a little” at the end of August when Covid cases disrupted the usual pattern of house moves and the back-to-school period.

Oracle fell 3% in after-hours trading after a slight results miss due to its cloud business slowing. Cisco, the world leader in network equipment, said it wanted to make around half its sales in software over the next four years. Microsoft rose after unveiling a share buyback for possibly as much as $60bn and an 11% hike in its dividend.

JAPANESE EQUITIES

Tokyo hit a 31-year high over the week with the NIKKEI 225 and TOPIX up 1.05% and 1.22%. The move higher, before profit-taking intervened, was largely due to hopes for post-election fiscal stimulus. The TOPIX Small Value index gained 2.61%. 

Marine Transportation continued rising, adding 6.05%. Insurance and warehousing gained 4.80% and 4.26%. On the other hand, Air Transportation, Real Estate and Communication declined 2.36%, 1.99% and 1.06%, respectively.

Tokio Marine Holdings jumped 7.12% on a share buyback. Sekisui House gained 6.47% after posting its best-ever results. NIDEC rose 5.76% after announcing a JPY 100bn capex plan. Eisai tumbled 8.25% on slow sales of its dementia treatment Aduhelm. Mitsui Fudosan fell 4.94% after a broker downgrade.

The election for LDP head will start on September 29. Four candidates will formally file a notification on the 17th and the final result will be decided on October 4. 

In Covid-19 vaccination news, the Health, Labour and Welfare ministry has suggested that the timing for a third vaccination should be eight months after the second jab. The results of the consultation will be announced on September 17.

EMERGING MARKET

The MSCI Emerging Market index was down 1.83% as of Thursday’s close. China led the slide, tumbling 4.70% on August’s weak macro print and concerns over contagion from Evergrande. Brazil retreated by 3.48% while India continued to rally, rising by 1.40% on the government's support measures for various sectors.

China applied to join the Pacific trade pact CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) to boost its regional economic influence. In August, industrial production rose 5.3% YoY, vs 6.4% in July, or below the 5.8% expected. Retail sales growth decelerated sharply to 2.5% YoY, vs. consensus for 7.4%, dragged down by a further contraction in automobile sales and a dip in catering sales amid the recent Covid-19 outbreak. Fixed asset investment was roughly in line with expectations, +8.9% YoY for January to August. The Macau government launched a public consultation to revise the Gaming Law towards tightening oversight in areas such as licensing, profit distribution, daily supervision, and local shareholdings. This follows previous efforts to regulate illegal lending and cash transfers related to gambling. A rapidly expanding outbreak of the Delta variant in the southeastern province of Fujian is posing a new threat to the local tourism industry recovery. The Ministry of Industry and Information Technology (MIIT) is encouraging mergers and reorganizations of new energy vehicle (NEV) manufacturers to boost industrial concentration. Alibaba and Tencent said they would comply with MIIT’s order to open up access to each other’s platform.  

In India, the July IIP (Index of Industrial Production) jumped 11.5% YoY, beating the 10% estimated. The strong sequential move higher was the result of easing restrictions and rising mobility. August CPI eased to a four-month low of 5.3%, vs. 5.6% estimated, due to moderation in food prices along with a high base effect; this should help the central bank maintain its monetary easing stance. The government announced a relief package for the telecoms sector and said it would give the recently created bad bank a Rs306bn ($4.2bn) sovereign guarantee.

The Brazilian government raised its inflation forecast amid rising energy prices but reaffirmed its economic growth projections despite short-term risk factors. Iron ore prices continued to correct following weak economic data, curbs on steel production to decrease pollution and concerns over China’s property sector. All eyes were on the fiscal implications of the court-ordered debt. Meanwhile, MSC, a worldwide container shipping company, acquired Log-in (market cap $500m) a specialised e-commerce logistics company, at a 67% premium to the previous closing price.

CORPORATE DEBT

CREDIT

Credit markets were mixed after China’s retail sales suggested its economy was slowing while the US reported upbeat indicators, especially an unexpected rise in retail sales.

Long-term US Treasury yields continued to fall with the 30 year bond easing by around 6bp. Eurozone yields edged higher with the 10-year up 4bp and the 30-year 5bp higher. The Main tightened by 1bp and the Xover by 3bp, leading to investment grade and high yield bonds returning minus 0.04% and +0.25%. 

Corporate debt issuance rose significantly and the trend is expected to continue in October. Cirsa, Solennis, DIC, Pasubio and Almirall were among the week's syndications.

In company news, Vivendi acquired Amber Capital's 18% stake in Lagardère Group. As Vivendi was already Lagardère's biggest shareholder with 27%, the move requires it to launch a bid on the shares it does not own. Vivendi has until December 15 to do so and will offer €24.1 a share, a 24% premium to the last closing price.

The competition watchdog is to thoroughly investigate the sale of Conforama France to Mobilux. The authority is worried about furniture suppliers becoming too dependent on the new grouping and the fact that 75 towns have both a Conforama and a But store. In September 2020, Conforama had been sold by South Africa’s Steinhoff to the parent company of its rival But. The deal will mean a group with 460 shops and sales of €3.5bn, putting it in top place for furniture sales ahead of Ikea.

Lufthansa is reportedly once again thinking of selling a chunk of Lufthansa Technik to raise funds to exit the government’s rescue plan. This could mean an IPO for the subsidiary or a partial sale, a deal which would be complicated for intellectual property reasons. The pandemic forced Lufthansa to report a record €6.7bn loss in 2020. The group received €9bn from the government to keep it afloat.

News on financials focused once again on the Monte Paschi/UniCredit saga. Italian press reports said UniCredit’s audit had revealed a bigger capital deficit than expected for BMPS due to under-provisioning. Moreover, recent articles suggested there was some determination not to be lumbered with BMPS liabilities. BMPS bonds subsequently saw some selling. In regulatory news, the ECB and EBA signed a joint letter to the European Commission urging it to fully implement the Basel III reforms and not give in to lobbying for them to be watered down. The fact that the Bank of France and the Luxembourg and Danish central banks were not among the signatories did not go unnoticed.

In subordinated debt, Santander raised €1bn with an AT1 at 3.625% and Hamburg Commercial Bank €500m with a senior non-preferred bond.

CONVERTIBLES

In another busy week for issuance, Nippon Steel raised $2.74bn in two equal tranches, 2024 and 2026. The proceeds will go on funding the group’s new management plan to become the best steel maker in the world. The plan has four goals: rebuilding Japan’s steel industry and bolstering the group’s management ; promoting  a global strategy to grow business abroad ; taking on the challenge of decarbonised steel ; promoting digital transformation strategies. 

Vietnam’s Vingroup conglomerate raised $450m at 3% due September 2026. This follows its $500m convertible issued in April. Vingroup accounts for 15 % of the Ho Chi Minh stock market and is present in a number of activities like property, food stores, car production/marketing and smartphones.

In Europe, Mondelēz International raised €306m with a convertible exchangeable into Holland’s JDE Peet’s shares to cash in on a part of the stake it acquired in the coffee producer in May 2020. JD Peet’s is the world's largest coffee producer with a portfolio which includes L'Or, Senseo, Carte Noire, Maxwell and Jacob's . Mondelēz International will use the issue proceeds to continue seizing growth opportunities. In June, it bought Chipita S.A. a croissant and oven-cooked snack company which is enjoying strong growth in central and eastern Europe.

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

17/09/2021

This document is issued by the Edmond de Rothschild Group. It is not legally binding and is intended solely for information purposes.
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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.
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