- Energy prices eased after Russian troops started to withdraw from northern Ukraine
- The FOMC minutes said that high inflation and a tight labour market justified a series of rate hikes this year
- We are maintaining our neutral stance on equities and are still underweight government debt
Energy prices eased after Russian troops started to withdraw from northern Ukraine. Even so, the stand-off between Russia and Europe is putting a big strain on European unity as the bloc’s capacity to apply more pressure looks increasingly limited. EU countries managed to agree on new sanctions against Moscow, including a decision to stop coal imports, but there was still disagreement over gas and oil. And Viktor Orban’s success in Hungary’s presidential elections is problematic just as EU Commission chair Ursula Von der Leyen said a rule-of-law conditionality mechanism for EU funding would be activated against Budapest.
Elsewhere, the ECB minutes showed that patience in dealing with inflation was wearing thin. More and more committee members are now in favour of rapid tightening. Two rate hikes are expected this year along with a rapid winding up of the APP scheme.
The FOMC minutes said that high inflation and a tight labour market justified a series of rate hikes this year. A 50bp move is possible at the next two monetary committee meetings. And given the inflationary impact of abundant liquidity, the Fed pointed out that rate hikes would come with a $95bn balance sheet reduction each month. Several Fed members also stressed that market valuations were indulgent, even after the fall in risk assets over the first quarter.
Ahead of France’s presidential elections and worries that a eurosceptic party might win, selling hit the euro, French government bonds, bank shares and equities generally.
The sanitary situation in China, and particularly in Shanghai, is still worrying. Beijing's decision to introduce strict lockdowns shows it has no intention of ditching its zero-Covid strategy so growth is at risk.
In this environment, we remain cautious on allocations. We are maintaining our neutral stance on equities and are still underweight government debt.
European Equities
Markets ended the period in negative territory as European countries stepped up pressure on Russia and central banks moved towards rapid monetary tightening in the next few months. Volatility rose as investors reacted to European inflation data. The figures seemed to suggest the beginning of a big rise and the consequences of the Ukrainian conflict have yet to feed through fully to prices. In addition, the European Commission decided to stop buying Russian coal and promised even more sanctions against Russia. Faced with the possibility that rates could rise more quickly, defensives like healthcare and utilities outperformed. Sectors with a more cyclical bias like technology and autos came under fire.
In company news, Ryanair said it would lose less than previously expected in FY 2021-22 and that it was expecting ticket sales to be 5-10% more expensive than before the pandemic. Elsewhere, Volkswagen is to concentrate on the premium sector to improve margins as component shortages are likely to last for several quarters. The news echoed fears expressed by Italy’s FIM CISL trades union on lower production from Stellantis this year. France’s Fleury Michon (agrifood) is particularly cautious on inflation and said margins were under severe pressure. Shell raised the cost of quitting Russia to €4bn. EDF said its increase of capital had been a success. The French government subscribed to the tune of €2.7bn and now holds 83.9% of the shares. In healthcare, Roche released encouraging data on one of its multiple sclerosis drugs.
US Equities
US indices ended the period up to Thursday evening in negative territory. The Nasdaq led the move lower with a 2.27% decline over 5 sessions.
In the first quarter, the S&P fell 5%, the Nasdaq 9.1% and the Dow 4.6%. There were only 321 IPOs, a drop of 37% on the first quarter of 2021.
The week was dominated by Fed news. The FOMC minutes indicated a willingness to shrink the balance sheet by $1 trillion a year from its current $9 trillion while continuing to raise rates gradually. This breaks down into a $95bn reduction each month, $60bn in Treasury notes and $35bn in mortgage-backed securities (MBS), a pace that is twice as fast as the previous quantitative tightening episode in 2017 ($50bn a month).
Several Fed members came out in favour of one or several 50bp hikes if inflation showed no signs of abating. Fed vice-chair Lael Brainard adopted a hawkish stance and said inflation was now a major problem that had to be tackled with gradual rate increases and strong measures to shrink the Fed’s balance sheet.
WTI oil fell 5.6% to $96.2 after IEA countries said they would be releasing an extra 60 million barrels from their strategic reserves.
HP jumped by more than 10% after the bell on news that Warren Buffet’s Berkshire Hathaway had bought a $4.2bn stake. Twitter soared 27.1% after Elon Musk bought a 9.2% stake to become the company's largest shareholder. The stock gained another 3% when Elon Musk was invited to join the board.
Tesla delivered a record 310,048 cars worldwide in the first quarter (+68% YoY) and made 305,407 vehicles (+69%). The Digital World Acquisition SPAC, which is set to merge with Donald Trump’s Truth Social, slumped 10% after two senior executives left the group.
Starbucks retreated by 3.7% after CEO Howard Schultz suspended the group's buyback programme to concentrate on investments instead.
Cruise company Carnival gained 2.4% on Thursday after announcing its best-ever week for reservations.
After two crisis years in aviation, low cost Jet Blue airline made a $3.6bn bid for its rival Spirit Airlines, sending the target’s share price 22% higher.
Japanese Equities
NIKKEI 225 and TOPIX fell 3.35% and 2.75% for the period. The Japanese equity market continued to fall weighed on by news on Russia’s invasion of Ukraine, the Federal Reserve’s plan for aggressive policy tightening and concerns over possible global economic slowdown.
Pharmaceuticals, Communication and Other Manufacturing rose 2.96%, 0.86% and 0.24%, as Investors preferred defensive sectors as equity markets were vulnerable to negative news as above. Meanwhile, sectors such as Marine Transportation, Insurance and Metal Products declined by 13.08%, 6.02% and 6.01%, on the fear of possible global economic slowdown by soring crude oil price and disruption of supply chains mainly caused by the sanctions on Russia.
Sysmex Corp, Eisai Co., Ltd. and Terumo Corp rose 7.32%, 6.31% and 4.54%. They are pharmaceuticals and medical related stocks, and were preferred by the investors as defensive. On the other hand, Tokyo Electron Ltd. fell 12.74% as semiconductor related stocks were sold globally triggered by the sharp fall of Philadelphia Semiconductor Index. Denso Corp. fell 8.07% due to the shortage of semiconductors, supply chain disruption and decrease in auto makers’ productions. MS&AD Insurance Group Holdings fell 7.64% on the back of supply chain disruption and concern over possible global economic downturn.
Covid-19 infection situation in Japan seems to be in a lull state. Newly infected cases of Covid-19 on 7th April in Tokyo was 8,753, increased by 500 from the previous week. However, the seven days average of this week till 7th was 7,433.3 cases which is 98.7% compared to the previous week’s average. The Japanese government announced that 1) they will promote third round of vaccination to the younger generation whose infection numbers are increasing and 2) maintain current medical system to counter possible 7th wave of the infection.
Trading of stocks in three new TSE market segments (Prime, Standard, and Growth) begun at the Tokyo Stock Exchange on 4th April without any confusion. This is the first major restructuring in about 60 years of the TSE’s First Section, Second Section, JASDAQ, and Mothers markets.
Emerging Markets
The MSCI EM Index edged down 1.7% as of Thursday’s close with most regions closing in the red. China retreated 1.5% in USD as the ongoing lockdown in Shanghai escalated concerns on future earnings amid an economic slowdown. Brazil (-3.2%) also underperformed. India outperformed by closing the week flat.
Chinese regulators are preparing to give access to ADR's underlying auditing reports to US regulators. More Chinese regions eased property curbs. QuZhou (Zhejiang province) was the first to remove both purchase and sales restrictions. More than 60 municipal authorities started easing property restrictions in the first quarter. The PBoC extended its Digital Yuan trials to more cities, including Tianjin, Chongqing, Guangzhou, and six Asian Games-related cities in Zhejiang province. BYD became the first traditional automaker in the world to stop producing fossil-fuel powered vehicles; it will instead focus on EV and plug-in hybrids. Richard Liu stepped down as CEO of JD.com but will remain as chairman.
Korean exports rose to a record high in March on the back of robust performance in semiconductor and petrochemical shipments. Oversea shipments climbed 18.2% YoY, although slightly below the 19% expected and +20.6% in the previous month. Inflation topped 4% for the first time in over a decade due to the fallout from the war in Ukraine. Samsung Electronics released strong preliminary results, with record quarterly revenues beating consensus expectations. LG Energy Solutions’ first-quarter revenue and operating profits were also above estimates.
India’s manufacturing PMI fell marginally to 54 in March from 54.9 in February. Services PMI edged up to 53.6 from 51.8, the strongest rate of expansion since last December, mainly supported by strengthening demand. FY22 corporate tax collections jumped over 58% YoY. HDFC and HDFC Bank announced a merger deal, bringing the housing finance company under the wings of HDFC Bank. Both companies envision significant gains from the merger, allowing them to better cross-sell their products through a strong distribution network. Titan’s jewellery revenue declined 4% YoY from a high fourth quarter base due to Omicron and gold price volatility.
In Brazil, Lojas Renner completed its acquisition of urban deliveries company Uello and expects commercial and operational synergies.
Mexico’s supreme court upheld changes to the president’s proposed electricity reform. The bill will now be sent to Congress so there is still some overhang risk. Airport operator OMA’s terminal passenger traffic rose 47% YoY in March or better than consensus but still below 2019 levels.
The US rolled out fresh sanctions targeting Russian banks and government officials. Russia’s largest bank, state-run Sberbank, was included but energy transactions were exempted from the latest measures.
Corporate Debt
Credit
It was another mixed week for markets against an unfavourable geopolitical background and amid continuing worries over inflation. Fed vice-chair Lael Brainard suggested the bank could start to reduce its balance sheet as early as next month as well as going for a 50bp hike. The Fed is trying to stifle inflation before it has a lasting impact on consumer demand. But time is short as a fresh wave of anti-Russian sanctions from G7 countries risks aggravating commodity price inflation. In addition, opinion polls in France suggested the gap between Emmanuel Macron and Marine le Pen had continued to narrow ahead of the first round, fuelling fears on the outcome of the presidential election. All this bad news led to the Xover widening by 27bp and the Main by 4bp. And the aggressive tone from the Fed pushed government bond yields higher. Yields on Germany's 10-year Bund rose 12bp and by 28bp on US 10-year Treasuries. As a result, the high yield index lost 0.37% over the week and the investment grade index ended 0.58% lower.
In company news, a stock market battle erupted between the Benetton family’s Edizione holding company and Spain’s ACS construction group for the control of Atlantia. ACS wants to acquire Atlantia’s 50 motorway concessions. It has the support of the GIP and Brookfield Infrastructures funds and €4.9bn in cash from selling its energy division to Vinci. ACS had already tried to buy Italian motorway group Autostrade after the Morandi road bridge collapsed in Genoa but the Italian government blocked the bid. The Benetton family owns a third of Atlantia but the company is still fragile as the free float is 56%. It is also possible that a Blackstone/Edizione consortium might emerge to take firm control of the group in the near future.
Elsewhere, newsflow on the tourism and leisure sector turned positive. Germany’s Tui Cruises said summer reservations had almost returned to pre-Covid levels and US cruise company Carnival booked a record 55 cruises over the week. Clearly, household spending is on the up after efforts to save during the pandemic. It is also likely that operators have stronger pricing power, enough to absorb higher commodity prices. In financial debt news, Crédit Agricole bought a 9.8% stake in Banco BPM and does not require permission to go above 10%.
In new peripheral debt issuance, Banco BPM raised €300m with an AT1 c.27 at 7%, while Spanish insurance group Mapfre sold an 8-year in fine Tier 3 bond in euros at 2.875%.
Convertibles
New issuance slowed as volatility persisted and investors turned less enthusiastic. In Europe, Switzerland’s Medartis (medical devices) tried to raise CHF150m with an April 2028 maturity at 1.5% but had to cancel the deal due to unfavourable conditions. The group is likely to return at some stage to look for funding to help it grow. In Japan, however, Aica Kogyo (chemical products) raised JPY18bn (€130m). The company is specialised in floor coverings and internal/external finishing.
Elsewhere, France’s power company EDF completed its €3.2bn increase of capital with the French state subscribing to 84% of the shares. The group is now expected to roll out a €3bn asset disposal plan over the next two years to reinforce its balance sheet. EDF is a highly speculative stock with political ramifications, especially at the moment with France going to the polls. Since listing in 2005, the share price has been divided by 3 and the government has repeatedly reinforced its holding. The free float has now fallen to 15%. The stock price has not been helped by profit warnings and the decision to abandon the Hercules project (spinning off the renewable and nuclear energy divisions). The only hope now for investors is that the current drive to ensure sovereign control over energy might lead to a renationalisation.
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
08/04/2022
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