- The week’s PMI data provided confirmation of a manufacturing slowdown but suggested services would drive a recovery in the coming months.
- In the meantime, the Fed’s wait-and-see approach has piled pressure on currencies with more accommodating central banks, and especially the Yen.
- Due to this strength in micro and macro data, inflationary worries are still weighing on bond markets.
The week’s PMI data provided confirmation of a manufacturing slowdown but suggested services would drive a recovery in the coming months.
In the US, first quarter GDP only rose by an annualised 1.6% and the core PCE deflator was too high for any chance of a Fed rate cut in the near future. Less growth and too much inflation? If we examine the figures, domestic demand still looks strong but the worsening trade deficit and inventories made a negative contribution. After a year of disinflation thanks to moderating goods and energy prices, these inflation data show that the trend has been struggling to continue since the start of 2024.
Weekly jobless claims also showed that the labour market was proving resilient. The figures will not encourage the Fed to cut rates rapidly and often. Markets are now going for a first rate cut after the presidential elections in November. They have also revised down expectations for the number of rate cuts in 2025.
Nevertheless, the Fed’s balance sheet could provide a more accommodating way forward. Next week's FOMC will be looking at the end of the Fed's quantitative tightening phase.
In the meantime, the Fed’s wait-and-see approach has piled pressure on currencies with more accommodating central banks, and especially the Yen. But the Bank of Japan has held firm and left rates unchanged. Treasury interventions to shore up the Yen are increasing.
The prevailing macroeconomic environment is not ideal for risk assets but the earnings season is providing support, especially in the US where companies have on average beaten estimates by 6.8% compared to 2.1% in Europe. Expectations were very high for large caps with exposure to the artificial intelligence theme but not elsewhere.
Due to this strength in micro and macro data, inflationary worries are still weighing on bond markets. Any rebound in risk assets would require some stabilisation in real rates. For the moment, we are sticking with our neutral stance.
European equities
Markets made big gains over a period with numerous earnings reports. Eurozone PMIs rose from 50.3 to 51.4 in April, or better than the 50.7 expected. There was, however, a big contrast between the sharp rise in services and falling manufacturing.
Tech stocks stood out this week. The semiconductor sector was boosted by excellent results from Holland’s ASM International which also said its order book had increased significantly. The figures reassured investors over sector momentum. And management gave more optimistic guidance than expected.
The rest of the tech sector was relatively volatile. German software company SAP beat expectations but Dassault Systèmes saw its healthcare division contract in the first quarter and the group’s cash flow generation was lower than expected. France’s OVHcloud (data centres) cut growth forecasts for 2024, citing weak demand in Europe. Following short seller Hindenburg’s research report on Temenos (software), the company's first-quarter figures missed expectations and a new CEO was appointed. These developments echoed Hindenburg's observations.
Heineken's results were a beat thanks to increased volumes as consumer appetite for beer held up. However, the group did not raise its full-year objectives.
High expectations mean luxury sector companies have no margin of error. Results at Hermès and Moncler failed to push their shares higher, even amid persistent Chinese demand.
In a bad sign for Europe's already worrying labour market, Holland’s Randstad reported a sharp fall in profits. Finland’s Kone (lifts) beat estimates in its main markets except for China, another reflection of the country's ailing property sector.
IPOs continued at the same dynamic pace. After software company Planisware in the preceding week, private equity fund CVC started trading on Friday at an estimated market cap of €13-15bn.
US equities
Wall Street rallied, recuperating most of the losses made in recent weeks. The Nasdaq climbed 1.7% over the period and the S&P 500 ended 1.5% higher. In a week with a third of S&P 500 companies reporting, Big Tech dictated volatility. Google announced its first ever dividend and its results crushed expectations, mainly due to growth at YouTube and Search. It was the same story at Microsoft which saw Azure grow by 31%.
But Meta’s results disappointed investors due to less encouraging prospects and heavier CAPEX than expected. Even so, the results were good, especially in advertising. The reports showed that the AI investment cycle was still a major market driver and even more so than expected.
In energy, revenues at SLB rose 13% over 12 months and margins expanded for the 13th quarter in a row. Revenues at energy supplier NextEra were disappointing but EPS rose 8% over a year. Investors were reassured by strong demand for renewable energy, a contrast with rivals who are struggling with delivery times.
House builder Pulte once again reported excellent figures thanks to a recovery in demand in the first quarter after a soft fourth quarter. The US property cycle is still intact due to a structural deficit in housing.
Steelmaker Cliff suffered its biggest one-day sell off in more than 3 years after a first quarter miss and downbeat indications for this quarter due to thinner-than-expected volumes. In a token of US economic resilience, 79% of S&P 500 companies managed to beat estimates, Communication and utilities led performance with commodities and consumer discretionary at the bottom of the pile.
In IPO news, Microsoft-backed Rubrik, which offers backup as a service solutions, hit a valuation of $5.6bn on its first day of trading.
Emerging markets
The MSCI EM index had gained 2.46% this week as of Thursday. China (+5.71%) led gains, easily outperforming. India, Taiwan and Korea advanced 2.41%, 1.60% and 1.40% respectively. Brazil edged 0.66% higher.
In China, the CSRC announced a package of measures to boost liquidity, attract international investors and enhance market competitiveness. The PBoC left the loan prime rate (LPR) unchanged in April. LGFV borrowing costs dropped to a record low fuelled by stronger-than-expected government support. Beijing greenlit a US listing by autonomous driving startup Pony.ai, raising the potential for an increase in Chinese tech IPOs in New York after a more than two-year hiatus. US Secretary of State Antony Blinken visited China to try to maintain relations. The US Congress passed a TikTok “Ban or Divest” bill as part of a military aid package and it was signed into law by Biden. Ping An Insurance Group profits dropped in the first quarter as stock market declines and falling bond yields eroded investment returns. Tencent announced plans to cooperate with Toyota on cloud computing, AI models and big data.
In Taiwan, March export orders rose1.2% YoY, or lower than the 4% expected. Semiconductor output grew 18.9% YoY in March, while overall industrial production was up 3.99%, or less than the 7.25% forecast.
In Korea, first-quarter GDP rose 3.4% vs. an estimated 2.5%. Exports for the first 20 days rose 11.1% YoY in April. Hyundai Motors reported a healthy quarter and the company sees auto demand in key markets remaining resilient while expecting further product mix improvement. SK Hynix had a very strong first quarter driven by soaring demand for high-density eSSD and better HBM order visibility in 2025.
In India, net direct tax collections for FY24 rose 17.7% YoY and slightly ahead of revised estimates. The PLI Scheme for ACC batteries had an auction for 10GWh capacity and the government received seven bids. HDFC reported mixed results with flat NIM and better LCR on higher deposit growth but muted loan growth. Axis bank enjoyed a strong quarter with margin expansion and lower LDR. Reliance’s results were in line as telecom capex continued to trend down. HUL posted weak topline growth and said it expected a muted near-term recovery. Ultratech announced its plans to buy a 1.1mnt grinding unit from India Cement.
In Brazil, the Petrobras board endorsed a 50% payout of extraordinary dividends with potential for future distributions of the remaining amount as well. Vale reported a miss despite strong production levels at its flagship mines.
In Mexico, Alsea reported a miss on a weak revenue growth in its Europe subsidiaries. Gentera reported good results, driven by a more than 30% jump in Mexican loans, stable asset quality and flat NIM. Traxion despite reporting decent 15% top line growth of 15%, disappointed investors on margins. In nearshoring, Vesta reported rental revenues up 19%, with occupancy figures improving further and 30% GLA growth in the development pipeline.
Corporate debt
Credit
Core PCE in the US surprised traders by coming in at 3.7%, or more than the 3.4% expected. The news rekindled higher for longer fears over interest rates. GDP also slightly missed expectations but the consumption component remained strong. On bond markets, 10-year US Treasury yields gained 10bp to hit a year high of 4.71%. Europe followed suit with the equivalent German bond yield rising 11bp over the week to 2.61%. Markets again pushed back bets on the Fed’s first rate cut. The first 100% probability is now November. The ECB, in contrast, continued to flag a move this June.
On credit markets, spreads brushed off the news. Investment grade spreads were unchanged at 112bp while high yield even fell 10bp to 355bp. Strong inflows into bond markets continued to showcase appetite for the segment's total return.
Corporate and financial issuance continued apace with Goodman BBB+ 4.25% 2030, Mahle BB 6.5% 2031, AIB 7.125% in an AT1 deal, Eurobank BB 4.87% 2031 and Bank of Cyprus BB 5% 2028 in Senior Preferred and Achmea BBB 5.625% in Tier 2.
Between April 19-25, IG lost 0.24%, taking YTD falls to 0.6%. Note, however, that spreads have so far this year provided a cushion for investment grade as government bond indices are down 2.5% since January 1st. High yield, which has shorter sensitivity, gained 0.12%, taking YTD gains to 1.49%.
Rising interest rates mean bond markets still offer interesting entry points on a medium to long term horizon. IG is currently yielding 4% and HY 6.8.%.
Convertibles
In a very active week for convertible bonds, the focus was on earnings and new issuance. This week was one the busiest for first-quarter reports and earnings were generally better than expected. Guidance has been largely neutral with relatively fewer upgrades or downgrades than usual as firms look ahead to an improving demand outlook and earnings recovery later in the year.
In Europe, BE Semi-conductor lost ground as quarterly order intake and guidance came in below expectation while STM also dropped but later reversed the decline as it said carmakers were expecting a pickup at the end of the year. Results at Cellnex offered several positive points with first-quarter trends running ahead of yearly and mid-term expectations, and the Austria sale process is well advanced. Schneider Electric’s sales came in slightly ahead of consensus and full-year guidance was reiterated; management said the order book had increased during the quarter, confirming sustained demand strength and underpinning the sales growth forecast for the year. Remy Cointreau, also in focus given recent concerns over the luxury sector, reported better than-expected fourth-quarter results due to better results in China. However, the group also said that the US appeared to be weakening. Safran reported solid results driven by double digit revenue growth in all divisions.
In Asia, Vinhomes 3% convertible bonds were paid after investors exercised the put clause.
The primary market had three new deals: in Korea, Kakao (internet and media services) raised $212m over 5 years. In Japan, Resonac raised JPY 100bn due 2028 and Goldman Sachs issued a new synthetic issue on Alibaba.
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.
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26/04/2024
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