- The ECB said that any budgetary policy to protect growth would require stricter monetary tightening
- Macroeconomic data suggest that the US economy is still going strong and so is the labour market
- Global equity and bond valuations are now more attractive but our portfolios are still cautiously positioned
The UK’s mini budget announced by the Liz Truss administration forced the Bank of England to intervene to quell bond market turbulence. Yet on September 22, the bank had released its plans to shrink its balance sheet by £80bn over the coming 12 months. The about turn, which may be temporary, was designed to help pension funds cope with higher rates. From September 18 to October 14, the bank will spend £5bn a day to buy in bonds with maturities over 20 years. The total bill could come to £65bn. This emergency action, which flies in the face of its restrictive monetary stance, helped reduce yields on 30-year gilts by 100bp and sterling to rebound.
In Germany, Olaf Scholz’s government unveiled an aid programme for almost €200bn for households and companies. It will be totally funded by debt and seeks to limit gas and electricity prices up to Spring 2024. A plan for a new tax on household energy bills has been shelved and VAT on gas will be cut from 19% to 7% from this October. The plan also includes investment in energy infrastructure.
Meanwhile, German consumer prices accelerated by 1.9% between August and September, taking the rise over 12 months to 10%.
The ECB said that any budgetary policy to protect growth would require stricter monetary tightening if inflation were to fall back to 2%. The bank intends to continue tightening and then will take steps to shrink its balance sheet.
In the US, hurricane Ian was more devastating than expected and Florida was badly hit. Macroeconomic data suggest that the US economy is still going strong. And so is the labour market judging from lower jobless claims and falls in the number of people on unemployment benefit. However, the property market is showing signs of a slowdown. The rapid rise of 30-year mortgage rates to 7% is starting to have an impact on house prices. Fed officials, much in evidence over the week, reiterated their determination to beat inflation despite the market turbulence caused by the strong dollar. The renminbi ’s depreciation to 7.2 against the US dollar, its lowest level since 2008, forced China’s central bank to insist the currency's stability was an absolute priority.
The Ukraine conflict moved into a new dimension after the Nord Stream 1 and 2 pipelines in the Baltic Sea suffered 4 sabotage explosions and Russia officially annexed 4 Ukrainian regions.
Global equity and bond valuations are now more attractive but our portfolios are still cautiously positioned. We will remain underweight equities as long as government bond market turbulence persists. We are also underweight duration and prefer US Treasuries to European, and especially UK, government debt.
EUROPEAN EQUITIES
Markets fell but with no real sign of capitulation. And yet the black clouds are gathering over Europe, to the extent that the picture is competing with the satellite images of hurricane Ian in Florida, a big worry for the reassurance sector.
The UK’s radical budgetary gamble, from the new prime minister Liz Truss, forced the Bank of England to intervene to stop sterling sliding and gilt yields rising. In Italy, the centre right coalition, led by a party considered to be post-fascist, sent 10-year government bond yields above 4.5% with debt running at 150% of GDP.
Pressure on interest rates and falls in the euro and pound sterling combined with severe tension on energy prices. Oil prices may have fallen back now that a slowdown is taking shape but European gas prices remained at unsustainably high levels. The Russo-Ukrainian crisis worsened over the week after the Nord Stream pipelines in the Baltic Sea were sabotaged. Germany reacted to record energy prices by adding a €200bn aid programme for households and companies to the existing €100bn plan.
September marked an economic downturn. More and more companies are issuing profit warnings. Food retailer Colruyt said wage pressure could not be totally passed on to customers. Operating results at H&M and the UK’s Next were a third below consensus expectations and both downgraded the outlook for growth with the second half now expected to be in negative territory. Akzo Nobel (paints and coatings) said European consumers were depressed and that destocking was weighing on sales.
Only energy companies are bucking the trend. TotalEnergies said it would be paying out a special dividend and spending €2bn more on capex.
US EQUITIES
Wall St ended a volatile period up to Thursday evening in the red once again. The S&P500 tumbled 3.13% and the Nasdaq ended 2.98% lower.
The VIX volatility index broke above 30 for the first time since June, surging 7.8% to 32.26.
Treasury secretary Janet Yellen said markets were working reasonably well and were simply reflecting monetary policy actions against high inflation.
James Bullard at the St Louis Fed hammered home the Fed’s determination to use more restrictive policy to curb inflation, even if that meant widening the gap between US rates and those in China and Japan.
Interesting fact in the FT: there have been no US tech IPOs for more than $50m in the last 240 days, a first in the last 20 years. And total amounts raised in IPOs across all sectors in the US are, so far this year, down 94% to $7bn compared to the same period in 2021.
In company news, Apple said its iPhone 14 will also be made in India, a move to diversify away from China. Apple was the only Dow stock to fall on Wednesday (-1.27%) after Bloomberg said the company had cut its iPhone 14 production target for the rest of the year. In pharma, Biogen rocketed by 39.8% after encouraging news on its Alzheimer drug.
JAPANESE EQUITIES
The NIKKEI 225 and TOPIX dropped 3.26% and 2.71% for the period, dragged down by heavy selling on US, European and Chinese equity markets. Markets rebounded after border controls were eased and US and European bond yields seemed to have peaked but the move triggered profit taking.
Pharmaceuticals rose 2.11%, led by Eisai which surged on news that in a final-stage trial its Lecanemab drug slowed down Alzheimer’s disease. Land Transportation gained 0.91%, led by railways on hopes for a resumption of inbound tourism following the decision to ease border controls. Food, a defensive sector, rose 0.77%. Marine Transportation cratered 20.77% due to pre-ex-dividend sales and concerns over falling demand from any global recession. Mining and Iron & Steel declined 8.88% and 6.77% on softer commodity prices.
The three best performers were all pharmaceutical companies. Eisai soared 30.27% (see above). Chugai Pharmaceutical and Shionogi gained 5.37% and 3.06% as investors turned defensive and new drug developments were revalued. Nippon Steel tumbled 9.16% on selling ahead of its ex-dividend day. Tokyo Electron fell 8.39% as tech stocks bore the brunt of higher US Treasury yields. Orix dropped by 7.08% on pre-ex ex-dividend day selling and the end of its shareholder incentive plan.
The yen traded almost flat against the US dollar (from 144.06 to 144.46). On September 22, the government intervened to stop its steady decline, helping it to touch the mid-140 level during the day.
The government said it would allow visa-free, independent tourism and abolish its daily arrival cap as of October 11, marking a major policy shift after nearly two and a half years of strict COVID-19 restrictions. The government will also launch a nationwide travel discount programme, previously shelved due to the spread of COVID-19 infections.
EMERGING MARKETS
The MSCI EM Index was down 3.56% as of Thursday’s close. Brazil (-6.1%) underperformed. China and India lost 2.5% and 3.4%, respectively.
China September official manufacturing PMI was 50.1, beating the 49.7 estimated, while the Caixin manufacturing reading was at 48.1, or lower than the 49.5 expected, an indication of divergences between large and small companies. The renminbi stabilised after the PBoC warned against one-way bets and asked key banks to safeguard the RMB fixing. The bank is also to provide more than RMB 200bn to special relending funds to commercial banks to support firms for equipment upgrades. In property news, CIFI, the 13th largest developer, missed payments on certain non-standard bonds. The PBoC and CBIRC are to allow cities to cut mortgage rates for first-home buyers and to expand a lending programme to ensure delivery of delayed housing projects. Home purchases have been on the rise since mid-September. The City of Wuhan lowered down payments to 40% from 50%-70%. The MoF and MIIT are to extend purchase tax exemptions for New Energy Vehicles to the end of 2023 to support the autos sector. Bilibili confirmed that it was moving its primary listing to HK.
In Hong Kong, Trip.com flight orders surged 50% from the previous week after the city announced an end to hotel quarantine. Macau expects to resume issuing e-visas and welcome Chinese group tours around late October or early November. In Taiwan, Hon Hai announced a $560m expansion plan for its EV business in Singapore and Mexico.
In India, the RBI raised its repurchase rate by 50bp to 5.9%, or in line with consensus estimates. Tata Motors unveiled India's cheapest EV priced at $10,000. Apple is going to assemble the iPhone 14 in India six months earlier than previous models assembled in the country.
Brazil’s equity market consolidated amid the increasing probability that Lula would win the presidential election. That would indicate less of a balance of power. Elsewhere, Lula fuelled uncertainties by saying that Petrobras’s price policy needed to be changed. On the macro side, August job creations were 279,000, or above the 267,000 expected. July FDI came in at $7.7bn, or well above the $4.9bn estimated. The first round of the Presidential election is on Sunday October 2. Markets expect a second round on October 30.
Russia said it would formally annex four partially occupied Ukrainian regions. The EU is seeking to impose new sanctions on Russia.
CORPORATE DEBT
CREDIT
It was yet another bad week on corporate debt markets as yields moved even higher. The yield on the 10-year Bund hit 2.15%.
Credit premiums were affected by worrying geopolitical developments and negative fund flows. Investment grade premiums moved to a year high of 217bp. High yield premiums, which had held up at the beginning of September, eventually broke above 600bp for cash bonds. The synthetic index rose to 640bp on Friday morning, a slight rise on the week but it had swung between 600 and 700bp in nervous trading over the period.
Subordinated financial debt was also affected with premiums rising to 1,200bp to call, a year-to-date high. Index yields rose further: 4.17% for top-rated companies, 8.25% for high yield and close to 14% for Euro CoCos to call.
CONVERTIBLES
It was another volatile week with muted primary activity. Trading focused on macro events but there was some specific news on companies.
In Europe, Atos rejected an unsolicited letter of intent from Onepoint, in association with the British private equity fund ICG, to acquire its Evidian branch for €4.2bn in enterprise value.
Elsewhere, the French government confirmed Luc Remont as EDF’s new CEO. The group’s renationalisation is to be launched in the coming days.
Food delivery group, Just Eat Takeaway, now expects to generate positive adjusted EBITDA in the second half with more information to be released in mid- October.
In the US, trading was thin as companies like Nike, Carnival and Micron are reporting Friday September 30.
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
30/09/2022
This document is issued by the Edmond de Rothschild Group. It is not legally binding and is intended solely for information purposes.
This document may not be communicated to persons located in jurisdictions in which it would be considered as a recommendation, an offer of products or services or a solicitation, and in which case its communication could be in breach of applicable laws and regulations. This document has not been reviewed or approved by a regulator of any jurisdiction.
The figures, comments, opinions and/or analyses contained herein reflect the sentiment of the Edmond de Rothschild Group with respect to market trends based on its expertise, economic analyses and the information in its possession at the date on which this document was drawn up and may change at any time without notice. They may no longer be accurate or relevant at the time of reading, owing notably to the publication date of the document or to changes on the market.
This document is intended solely to provide general and introductory information to the readers, and notably should not be used as a basis for any decision to buy, sell or hold an investment. Under no circumstances may the Edmond de Rothschild Group be held liable for any decision to invest, divest or hold an investment taken on the basis of these comments and analyses.
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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