Market Flash: The spotlight is back on the US inflation

Fed officials have in recent weeks justifiably focused on the bank's success in taming inflation and curbing the risk of an excessive hit to labour markets but the latest readings shook up the equation a little. September’s data painted a very positive picture of the US economy: job creations were much better than expected, unemployment fell and the GDPNow model was revised significantly higher to 3% for the third quarter. But inflation is proving sticky, judging from the CPI data, and especially the services ex shelter component. Government bond yields promptly reversed course to reach highs not seen since the end of July as expectations for Fed cuts sagged. US 10-year Treasury yields rose to flirt with 4.10%. Investors are now expecting only another 50bp in rate cuts, down from 75bp.

The news calmed equity markets a little but did not affect their upward march. Today's economic environment will continue to drive company results in spite of any doubts on the pace of Fed rate cuts. This equity market resilience is remarkable in what is a particularly uncertain geopolitical and political context. Investors are still waiting to see how Israel reacts to Iran's missile attack and oil prices and volatility indices are stuck around recent highs, with Brent Crude around $79 and the VIX at 21. In addition, the visibility on who might win the US presidential election next month has not yet improved. Opinion polls suggest a tight result and are within a margin of error both as concerns the overall federal score and results in key swing states. However, Donald Trump has now taken the lead.

Politics is also an issue in Europe, and especially in France where the Barnier administration has just unveiled its draft budget. It plans to save close to €60bn in 2025 with a combination of cost cutting and tax rises. The budget is expected to take the government deficit back down to 5% but the independent oversight body, the High Council of Public Finances, thinks this is based on optimistic assumptions and investors are wary. The OAT-Bund spread has stuck at a relatively high 76bp.

Elsewhere, China's equity markets consolidated after racking up significant gains in recent weeks. Traders want to see more details on the stimulus programme.

We are still neutral on equity markets but with a preference for emerging country equities.

EUROPEAN EQUITIES 

Beijing’s stimulus programme developments had an impact on European markets to start the week. The National Development and Reform Commission (NDRC) presented measures which fell short of investor expectations. Markets are now waiting to see if more radical steps are announced before the end of this year. Communication and healthcare dominated trading in Europe with both outperforming, followed closely by tech.

In M&A news, Rio Tinto paid $6.7bn for Arcadium Lithium, a bumper 90% premium on the last quoted price. The acquisition will help diversify Rio Tinto’s production and increase capacity, especially in Argentina and Quebec. In France, SPIE bought Spefinox, a company which designs equipment for the agrifood, cosmetics and pharmaceutical sectors. This was Spie’s 6th deal this year, another illustration, albeit a small one of its external growth strategy.

In the luxury sector, Kering appointed a new CEO at Gucci. Stefano Cantino, formerly at Louis Vuitton and Prada, took over to reboot and improve brand communication after a few years of underperformance.  

In auto supplier news, Germany's Continental warned that third-quarter sales would be lower than in the previous quarter but management reassured investors by declaring that improved profitability would help it reach annual targets. This upbeat news helped others in the sector and was a welcome lift after a series of profit warnings in the autos sector. Brembon (brakes) acquired Ohlins Racing, a specialist in suspension systems for racing cars.  

Edenred’s targets to reduce greenhouse gas emissions were approved by the Science Based Targets initiative. The group is hoping for a 51.4% reduction in scope 1 and 2 emissions compared to 2019 by 2030 and a 90% reduction by 2050. For scope 3, the company’s targets are 55% and 97%, respectively, per €1m in added value.

US EQUITIES

Wall Street had another good week with the S&P 500 advancing 0.55% and the Nasdaq 100 ending 1.08% higher. Consumer price inflation came in higher than expected but failed to worry traders, with the exception of small caps which shed 1.05%. 

Software and cybersecurity stocks ended the week on form: Cloudfare jumped 9% on Thursday after poaching ServiceNow’s chief product officer, the man who helped the company’s revenues increase by close to 8 times. Astera Labs, which specialises in purpose-built connectivity for AI and cloud infrastructure, recovered to trade near to its IPO price after unveiling a new fabric switch for AI data centres. Presentations from AMD and Tesla were the week's two pivotal events. AMD said it was seeing very strong demand for its AI chips, a rival to Nvidia’s GPUs. Tesla’s presentation on robotaxis left investors slightly disappointed because they were given few hard and fast details. The outlook was put back to 2030. Markets viewed General Motors’ investor day more favourably as management reaffirmed full-year targets and market share gains. 

Quarterly reports started to come in with Delta Airlines missing expectations largely due to the Crowdstrike outage over the summer. Management said demand was robust for the festive season but expected traffic to pause over the elections. Results from banks are expected today with  JPMorgan and Wells Fargo the first to report.

In M&A, Butterfly Equity bought Duckhorn Portfolio (Californian vineyards) for a massive 105% premium. The deal is interesting as the alcoholic drinks segment has been depressed in recent months.

There was also a flurry of activist shareholder initiatives in healthcare, a sector where some players are trading at undemanding multiples. After taking a stake in CVS, Starboard Value made a move on Pfizer in an attempt to boost the group's valuation.

EMERGING MARKETS

The MSCI EM index was down 1.88% this week as of Thursday’s close, with China pulling back 6.75% from the previous day’s historic rally. India, Korea and Taiwan rebounded by 0.47%, 0.5% and 1.93%, respectively. Brazil and Mexico continued last week’s decline, down 2.52% and 2.77%.

In China, NDRC held a press conference and pledged to accelerate the implementation of a package of incremental policy measures. All eyes are on the MoF special briefing on the coming Saturday. China published a draft law on private sector promotion to boost private economy investment and financing environments. The PBoC launched a $70bn swap facility for banks, insurers and asset managers to invest in the equity market. Data showed a healthy consumer sentiment boost during the Golden Week holidays. Mainlanders made 765 million trips, +5.9% YoY and +10.2% from 2019. Domestic tourist spending grew 6.3% YoY, +7.9% from 2019 levels. Property sales staged a rebound during the Golden Week holiday, with new home transactions up 26% YoY in 22 cities. Some developers cancelled discounts, underscoring signs of improved sentiment in the property market.  Macau’s gross gaming revenue during the Golden Week jumped 30% YoY, led by strong premium mass gaming demand, and was well above market expectations, the highest run-rate in the five years since 2019.

In Taiwan, September exports rose 4.5% YoY, or significantly lower than the median estimate of 10.9%. TSMC reported better-than-expected September sales, up 40% YoY. Hon Hai plans to build the world’s largest AI server production facility in Mexico.
In Korea, Hyundai’s $7.6bn EV plant in Georgia is now operational. Alphabet's Waymo will add EVs from Hyundai Motor to its robotaxi fleet. Samsung electronics third-quarter preliminary earnings fell below expectations due to weak chip demand for smartphones and one-off costs. 

In India, the RBI kept rates unchanged but unanimously softened its monetary stance to "neutral" from "withdrawal of accommodation". The Cabinet Committee on Security reportedly cleared defence deals for building nuclear submarines and buying piloted aircraft from the US. Overall automobile sales witnessed a significant decline of 9.26% in September. Varun is considering a capital increase to invest in Africa. Divi’s saw 25% YoY export growth in September. TCS 2Q25 disappointed on top line growth and the EBIT margin, despite better order intake on a sequential basis.

In Brazil, IPCA inflation was 4.42% in September, or in line with expectations. 

In Mexico, Traxion announced the acquisition of Solistican FEMSA’s logistics service company for $200m.

In Argentina, MELI reported September’s numbers on consumption on its platform with a significant improvement since March’s lows (units sold were up 21% YoY; sales rose 10% YoY; total loans outstanding were up 69% YoY).

CORPORATE DEBT

CREDIT
Credit markets proved resilient over the week as inflows continued to underpin spreads. Euro Investment Grae spreads tightened to 109bp and High Yield spreads narrowed by 10bp to 330bp. Inflows continued to benefit from prospects of further rate cuts and persistently attractive yields. JP Morgan estimates that €2bn flowed into Euro Investment Grade and High Yield in September. Investment Grade is yielding 3.4% and High Yield 6%. Returns, however, were put on pause as interest rates reversed course and edged higher. Yields on Germany's 10-year Bund gained 8bp to 2.29%. Euro Investment Grade slipped 0.10% over the period (+3.57% YTD) and Euro High Yield was flat (+6.7% YTD).

New deals like Metlen 2029, Stada 2030 and UnitedGroup 2031 took overall High Yield issuance since January 1st to more than €70bn, a reflection of today’s refinancing possibilities.  

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. 
• 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. 
• AT1s belong to a family of bank capital securities known as contingent convertibles or “Cocos”. Convertible because they can be converted from bonds to shares (or depreciated entirely) and contingent because this conversion only occurs if certain conditions are met, such as the issuing bank's capital strength falling below a predetermined trigger level.

DISCLAIMER

This is a marketing communication.

11/10/2024
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