Gas prices hit the euro

• Sanitary risk is rising in Europe
• Faced with the threat to the recovery from rising energy prices, the US, China and Japan are leading the fight back
• An auto industry rebound showed that semiconductor shortages had eased

Sanitary risk is rising in Europe. Nevertheless, vaccinations and the near-term prospects of an oral treatment will help governments focus on measures that will have less of an economic impact. Belgium's decision to make working from home mandatory is one example.

Russia has been slow to increase its gas exports to Europe and now Germany's regulator has suspended approval for the Nord Stream 2 pipeline. The decision sent gas prices in Europe over €100/MWh. And price tensions could get even worse if the standoff with Belarus results in Minsk threatening to disrupt the pipeline which runs through the country. Inflation could therefore continue to rise, jeopardising the rebound in consumer spending. In a reflection of these concerns, the euro slid below 1.13 against the US dollar.

Faced with the threat to the recovery from rising energy prices, the US, China and Japan are leading the fight back by coordinating the release of some of their strategic reserves. The aim is to halt the upward trend in oil prices and increase pressure on OPEC.

In the US, the week's macro data showed that the economy had started the fourth quarter on the front foot. After the 1.3% contraction in September, industrial production rebounded by 1.6% MoM in October. An auto industry rebound also showed that semiconductor shortages had eased. Retail sales growth for October accelerated to 1.7% MoM after +0.8% in the previous month, taking them to 20% above pre-Covid levels.

Such strong momentum will raise tax takings, allowing Treasury Secretary Janet Yellen to push back the deadline for raising the debt ceiling from December 3 to 15. This gives Democrats more time to agree on the last section of the stimulus package and a debt ceiling decision. 

Japan’s third-quarter GDP contracted by 0.8% QoQ, a disappointing performance as it was expected to dip by 0.2%. With October inflation at a negative 0.1% MoM, the Bank of Japan cannot imitate central banks in developed countries and exit its accommodating monetary policy stance. Prime Minister Fumio Kishida unveiled a $490bn stimulus package, or more than expected. A significant portion ($170bn) will go on supporting consumer spending, the weakest element in Japan’s growth.

We are still neutral on equities and continue to prefer Japanese equities. In fixed income, we have continued to cut overall sensitivity and still prefer corporate debt to government bonds.

EUROPEAN EQUITIES

Europe’s markets showed resilience as Covid cases rose again. Investors are trusting governments to deal with this resurgence without handicapping their economies. Covid-sensitive tourism stocks, for example, largely brushed off developments. On the other hand, energy stocks were more affected as the oil price fell on news of fresh contaminations. Gas prices, however, jumped after Germany suspended approval for the Nord Stream 2 pipeline from Russia. And yet, approval was a condition for Moscow increasing gas exports to Europe. Elsewhere, most European companies saw jobless claims fall, a sign of robust economic growth even if sectors like airlines are struggling to get back to pre-pandemic levels. Activity at Vinci’s airport subsidiary is still running at 50% of October 2019 levels and only very gradually improving.

In company news, Diageo (alcoholic beverages) raised its medium term objectives on hopes for productivity gains, a bigger focus on up-market products and efficient management of revenue growth. This is yet another example of a company managing to cope with rising input costs. Despite October’s poor car sales, BMW is confident its margins will be at the top of its guidance spread thanks to higher prices and strong demand for electric vehicles. In aerospace, Airbus hogged the limelight at the Dubai air show with 408 orders and commitments over three days, mostly for its best-selling A321. Boeing only managed to win 80 orders.

In M&A, SIKA, European leader in building sector supplies, paid CHF 5.5bn for MBCC (ex-BASF Construction Chemicals). BNP is mulling the sale of Bank of the West, its Californian affiliate. The price tag could be around $15bn.

US EQUITIES

The Dow Jones ended the last 5 trading sessions down 0.14% but the S&P 500 gained 1.19% and the Nasdaq 1.84%. 

Sentiment was boosted by solid economic data: retail sales outpaced the 1.4% gain expected, rising 1.7% to a high not seen since March 2021; industrial production was up 1.6% or better than the +0.9% analysts were going for.

There were a number of comments from Fed officials, most of whom argued for tapering to be increased because of inflationary pressure. Boston Fed chair Raphael Bostic thought it might be appropriate to raise rates in the summer of 2022. Janet Yellen said that the US could face default if there was no agreement on raising the debt ceiling by December 15. The House of Representatives was due to vote on November 19 on Joe Biden’s $1.65 trillion social programme. The IEA said it expected oil prices to stop rising in 2022.

Berkshire Hathaway’s third-quarter report revealed that Warren Buffet had slashed the fund's exposure to healthcare. The Merck position was sold and stakes in AbbVie and Bristol Myers reduced. For the first time, the fund took profits on payment groups, cutting its position in Visa by 4.3% and Mastercard by 6%. 

The Amazon/Visa standoff continued. After announcing that payments by Visa in the UK would no longer be possible from January 19, Amazon threatened not to renew its partnership with the group in the US.

Cisco declined after the group said it expected to see sales grow by 4.5/6.5% in the next quarter, or below the 7% expected. Management said it was affected by the component shortage.

In contrast, Nvidia, the world’s largest semiconductor market cap ($713bn), advanced after raising fourth-quarter guidance on strong demand for chips in the server/cloud sectors.

Applied Materials, the global number one in semiconductor manufacturing equipment, tumbled 8.8% after the bell on disappointing guidance. Once again, component shortages were blamed for the problem. Pfizer gained 1% after winning a $5.3bn US government order to supply 10 million doses of its new antiviral treatment for Covid-19. FDA approval for the treatment is pending.

JAPANESE EQUITIES

Supported by upbeat earnings and hopes for fiscal measures, the NIKKEI 225 and TOPIX gained 1.10% and 1.05%. The TSE Mothers Index jumped 5.09% on semiconductor interest. Manufacturing companies released solid second quarter earnings and investors took profits. Toyota revised its production forecast upwards, sending auto stocks higher. Third-quarter real GDP came in below market consensus, but the negative reaction was limited as the market expects strong domestic demand amid a recovery in consumption following the lifting of the state of emergency.

Electric Appliances, Transportation Equipment and Precision Instruments rose 3.45%, 3.38% and 3.13%. In contrast, Marine Transportation, Oil & Coal, and Fishery, Agriculture & Forestry lost 6.43%, 4.15% and 3.17%, respectively. Materials sank on a drop in commodity prices.

Subaru jumped 7.79% after releasing its first electric SUV. Tokyo Electron was up 7.24%, revisiting its highs on expectations the company would benefit from increased Capex in semiconductor companies. Sysmex rose 6.95% on strong guidance. On the other hand, Eisai tumbled 9.59% after its Alzheimer’s drug came in for criticism from the European Medicines Agency (EMA). Sumitomo Mitsui Trust Holdings declined by 7.25% on profit-taking after good earnings.

The government unveiled a record JPY 55.7 trillion stimulus package. The previous programme in April 2020 was for 48.4 trillion. In addition to Covid-19 measures, the new programme will feature substantial subsidies for households and businesses. Including private sector funding like emergency bank loans for struggling companies, it will amount to about JPY 78.9 trillion, the second largest ever. 

EMERGING MARKET

The MSCI Emerging Market index was down 0.89% as of Thursday’s close. Taiwan (+2.17%) outperformed on tech stock strength. China was down by 1.21% after Alibaba reported disappointing earnings. India retreated 1.58% while Brazil tumbled 5.5%.

In China, industrial production and retail sales came in above expectations in October, with IP up 3.5% YoY vs 3% expected and retail sales 4.9% better (+3.7%). Presidents Xi and Biden held a virtual meeting, with some signs of a positive tone but no major deliverables were announced. The US Court reinstated tariff exemptions on bifacial solar modules by lowering the tariff from 18% to 15%. October passenger car sales contracted by 5% YoY due to a high comparison base but were up 15% MoM amid an easing in semiconductor shortages. 70-city average property prices edged 0.25% lower for the second consecutive month in October. China plans to let property companies resume ABS issuance, ending a three-month market freeze. Regulators are reportedly to restart issuing online game licenses after a 3-month suspension. The Beijing Stock Exchange launched with 81 stocks on its board. Bytedance is in talks with Tencent on content sharing. An Alibaba-led alliance is to acquire Tsinghua Unigroup, China’s indebted chip champion for around $7.8bn. Alibaba reported a quarterly results miss. Full year revenue guidance was revised down from 23% to 20% on current macro headwinds and intense competition. JD.com’s 3Q21 results beat estimates on both the top and bottom lines despite the weak consumption environment. Management delivered a positive 4Q outlook thanks to repeat users, merchant expansion and strong logistics. Baidu’s third-quarter results were in line; the marketing business was weak due to the economic slowdown and Covid but was offset by stronger cloud revenues. BiliBili delivered mixed 3Q21 results with healthy user and revenue growth beating expectations but a soft bottom line due to an unfavorable mix. Third-quarter revenues at NetEase topped expectations on solid game revenue growth driven by its quality pipeline and strong performance from its flagship games.

In Taiwan, Mediatek unveiled Dimensity 9000, the company’s most powerful chip ever, which targets Android flagship smartphones.

In India, the auto sector saw a sharp rebound on signs of some easing in chip shortages. Results at Apollo Hospitals surprised on the upside with the highest-ever average-revenue-per-occupied-bed. PayTM had a disappointing debut in what was the largest Indian IPO ever.

In Singapore, SEA announced mixed 3Q results: strong e-commerce sales were offset by a decline in gaming growth.

Thailand’s 3Q GDP contracted by 0.3% due to the Covid situation but the figure was still better than the 1.3% contraction expected.

Brazil’s economic activity contracted in the 3Q, with the central bank IBC-Br indicator down 0.27% MoM in September, a possible harbinger of recession. Natura had a soft third quarter, with both revenues and margins missing consensus across all brands. This was due to supply chain disruptions, input cost inflation and FX headwinds. Third-quarter results at Anima beat estimates, mostly on the back of the initial benefits from the business combination with Laureate. 

Initial results in Argentina's election showed the opposition winning key races. Mercado Libre announced a public equity offering to finance its credit and logistics business.
European gas prices jumped after Germany’s energy regulator decided to suspend the certification of the Nord Stream 2 pipeline from Russia.

CORPORATE DEBT

CREDIT

Interest rate shifts once again dictated trends on credit markets. Credit spreads were unchanged, but higher US retail sales in October and a plea from the Saint Louis Fed chair for tighter monetary policy sent US yields higher. Yields on 30-year Treasuries gained 4bp, causing investment grade credit to lose 0.43%. High yield debt, which is less sensitive to interest rate movements, ended the period 0.05% lower.
 
On the new issues market, Accor refinanced its debt by raising €500m with a Sustainability-Linked Bond. French retailer Casino also launched a refinancing operation to extend debt maturity and reduce cost. The group hopes to issue a €400m tap on its August 2025 Term Loan B. It will also offer to redeem its January 2023 and March 2024 maturities. The group’s electronic commerce subsidiary Cnova, parent company of its online Cdiscount site, has appointed Luc Péligry, ex-Europcar, as its new CFO.

Europcar revised up guidance for 2021. It now expects EBITDA to top €170m, up from €150m at end October and its initial forecasts of €110m. Europcar was bought by Volkswagen in September. In this week’s rumours, Audi was said to be interested in moving into Formula 1 racing by buying McLaren Technology. Munich-based BMW is also said to be a potential buyer for Bahrein Mumtalakat’s 42% stake in McLaren.
Iliad, Free's parent company, reported a 34.6% jump in third-quarter sales to €1.91bn on strong sales in France and Italy as well as the consolidation of Poland’s Play.

But in the energy sector, it was a disappointing week for Vallourec and EnQuest. Third-quarter sales at Vallourec rose 16.4% to €834m as oil companies increased capex and offshore drilling recovered but the drop in iron ore prices weighed on the group’s margins and management was forced to revise guidance for its gross operating margin lower for the full year. The UK’s independent oil company EnQuest reported production below expectations in the third quarter due to problems in the Magnus and Kraken fields. However, at the beginning of this month, the company paid £240m for Suncor’s 26.7% stake in the CNOOC-operated Golden Eagle field, so production will rise in the future. 

In financial debt,  Deutsche Bank raised €1.25Md at 4.5% with an AT1. The deal will help the bank’s  AT1 pillar to be managed prudently and profitably while meeting first and second-pillar requirements. Popolare di Sondrio raised €300m with a tier 2 bond due 2032.

Elsewhere, S&P raised  the outlook for Bank of Cyprus, the island’s largest, from stable to positive following a further reduction in NPLs in an effort to clean up the balance sheet. The ratings agency also confirmed its long term and short term debt at B+ and B. Spain's BBVA launched a bid on the 51.15% in Turkey’s largest private bank Garanti that it does not yet own. The deal will cost €2.25bn and comes at a 34% premium to the last quoted price.

CONVERTIBLES

In a very busy week for new issuance, deals amounted to $6.5bn. With the earnings season almost over and improved sentiment on markets, several jumbo deals were launched.

The biggest came from Unity Software which raised $1.73bn with a November 2026 maturity. The company offers a video game platform with real-time tridimensional content. Elsewhere, DigitalOcean (cloud computing) raised $1.3bn due 2026. Marathon Digital Holdings raised $650m.

Among repeat issuers, Norwegian Cruise Line raised $800m due 2027 to refinance loans taken out when the Covid crisis was raging, thereby cutting borrowing costs. When reporting its third-quarter results, the group also said reservations for 2022 were better than in 2019.

In Asia, Bilibili raised $1.6bn to enhance its content offer and boost R&D. Some proceeds will also go on general corporate purposes. The company also plans to use an equivalent amount to the net proceeds on refinancing its debt. Sales surged 61% in the third quarter thanks to a significant increase in live streaming this year.

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
19/11/2021
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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