- Meanwhile, inflation continued to spread beyond energy and food
- The publication season is coming to an end
- Several European countries are seeing rises in Covid cases and are preparing to tighten up sanitary measures to avoid being overwhelmed over the winter
In the US, the Bi-partisan Infrastructure Framework, or BIF, finally got through Congress. It amounts to $550bn in new spending, $110bn for bridges and roads, $70bn for electrical infrastructure, $66bn for railways and $65bn for the internet.
Meanwhile, inflation continued to spread beyond energy and food. Producer prices rose 8.6% over a year (+6.8% ex food and energy). The news caused 10-year inflation expectations to ramp up to 2.7%, a similar level to 2006. Long bond yields rose, breaking the recent downward trend. The CPI also came in sharply higher than expected but is not likely to lead the Fed to change its view that inflation is merely temporary.
With 92% of company results now in, 80% have beaten expectations with results up by an aggregate 44.6%. The rise was driven by energy, basic materials and industrials. However, the NFIB index charting SME confidence fell last month due to hiring problems and rises in end prices and wages.
China’s central bank presented its programme to help companies reduce their carbon footprint. It offers one-year loans at very low interest rates to banks. The aim is to get them to lend to clean/efficient energy companies, those that protect the environment and carbon-reducing technologies.
China’s trade surplus hit a record $84.5bn in October with exports up 27.1% (+28.1% in September). Exports to Asia and Europe accelerated but they fell back with the US. The exports were mainly household goods but also Covid products like masks. Crude oil import volumes fell 11.2% but coal imports rocketed 96.2% over a year, a sign perhaps that the domestic economy is slowing while foreign demand is recovering.
European natural gas prices remained around a lofty $145 despite Vladimir Putin’s promise that deliveries would resume to Germany.
The German ZEW index gained 9.4 points in November when it was expected to fall. The “current situation” section, however, tumbled 9.1 points as supply bottlenecks and inflationary pressure put the brakes on the recovery. The trend was similar in the Europe-wide index.
So far this year, Germany's exports have risen by €0.3bn a month on average but momentum is still hostage to higher energy prices. Import/export volumes have been practically flat since January.
The Bank of France’s survey now sees fourth-quarter GDP rising 0.75%. There were fewer hiring problems in October in the services and construction sectors but difficulties persisted in industry and autos.
Industrial activity is overall back to pre-pandemic levels but the situation is still poor in aerospace, transport and autos.
Several European countries are seeing rises in Covid cases and are preparing to tighten up sanitary measures to avoid being overwhelmed over the winter. The Netherlands and Austria are talking about a new lockdown. Germany has introduced restrictions for non-vaccinated people.
We are still neutral on equities but Tokyo’s stimulus package means we continue to prefer Japanese equities. In fixed income, we are still focusing on corporate debt. We have trimmed overall sensitivity and are still underweight government debt.
EUROPEAN EQUITIES
Equity markets proved resilient thanks to robust third-quarter figures. The European Commission’s updated forecasts now see growth rising 5% this year and 4.3% in 2022 but the report also pointed to mounting uncertainties over rising energy prices, supply side disruption and increasing Covid cases. However, falling shipping and container freight rates would seem to suggest tensions are gradually abating. Should the trend continue, inflation could also retreat over time.
In company news, Adidas reduced guidance for this year. The sportswear company highlighted supply chain tensions which have been aggravated by some of its suppliers closing factories in Vietnam while a boycott from Chinese consumers led to slow sales. In contrast, UK retailer Marks & Spencer upped its annual guidance for the second time in three months despite cost pressures. Management said it was confident for Christmas sales but also stressed the importance of its restructuring strategy focused on digital transformation. At its “digital day”, Carrefour said it would be investing €3bn to aim at making €10bn in online sales by 2026, a move that it hoped would raise operating profits by €600m. German chemicals company Covestro raised its earnings guidance for this year for the third time. Strong demand for its products had given the group significant pricing power. Switzerland’s Richemont reported better-than-expected first half results. The world’s biggest jewellery company said it had sold its stake in YNAP, a source of losses for the group. Press reports said Third Point had bought a stake in Richemont to put pressure on the group. Bouygues, which had been looking to expand in multi services, beat Eiffage and private equity group Bain in the race to acquire Equans. The UK TV group ITV said advertising revenue had rebound sharply over the first nine months of this year, easily beating pre-pandemic levels.
US EQUITIES
US indices retreated over the last 5 trading sessions up to Thursday with the Dow 0.56 lower and the S&P500 down 0.66%. The Nasdaq ended the period 1.48% lower.
And yet the earnings season tally has been particularly good. With 98% of S&P company results in, 60% have beaten estimates by more than one standard deviation.
This is much more than the historic 46% score. Only 10% have missed (vs. 14% historically). Despite these robust figures, upward EPS revisions were limited as companies opted for caution. Among S&P companies, EPS for 2022 were only revised 0.4% higher.
The previous weekend had seen Joe Biden's infrastructure plan finally getting Congressional approval.
Elsewhere, the Fed’s semi-annual Financial Stability Report said risk assets could tank if sentiment worsened, the epidemic ran out of control or the recovery slowed. It also pinpointed the risk from China’s commercial property sector and said worries that inflation might last for some time and trigger tighter monetary policy were now bigger in investors’ minds than the Covid threat.
As if to underline the point, consumer prices rose 0.9% MoM to a 30-year high of 6.2% over a year, or more than the 5.9% pencilled in by analysts. Persistent inflation could force the Fed to increase the pace of its tapering programme and hike rates earlier than expected. Joe Biden said that his absolute priority was to slow price rises, and especially soaring petrol prices. People are now talking about the government tapping into the country’s strategic resources. WTI oil prices were unchanged at $83.
In company news, PayPal gained ground after Amazon agreed to use its Venmo digital wallet for payments. General Electric advanced after spinning off its aviation, healthcare and energy divisions into three separate companies.
Disney plunged 7% on disappointing results and news that subscribers to its Disney+ channel had only rise by 2 million, or much less than the 8 million expected.
Tesla plunged and the Nasdaq tumbled after Twitter users voted in favour of Elon Musk selling his 10% stake.
Crypto exchange Coinbase was down 12% in after-hours trading after reporting worse-than-expected results. Transactions on the platform fell sharply over the summer months. Bitcoin hovered at all-time highs after Apple CEO Tim Cook said he had bought cryptocurrencies for his own account.
Online brokerage Robinhood fell 3.3% after it revealed it had been the object of a cyber attack. No financial damage was done but the hacker escaped with the email addresses of 5 million clients.
JAPANESE EQUITIES
The NIKKEI 225 fell 1.73% and the TOPIX 2.01% on persistent concerns over inflation and China’s economy. Investors sold stocks which missed earnings estimates. Stocks with large overseas exposure also retreated as the US dollar weakened to 112 against the yen. However, downside was limited thanks to companies with upbeat earnings and falling Covid-19 cases.
Mining, Communication and Air Transportation rose 1.43%, 0.49% and 0.26%, respectively. Most of the other sectors were down, with Iron & Steel, Textile & Apparel and Rubber Products sinking 8.05%, 4.76% and 4.43% due to increases in material prices.
Oriental Land jumped 6% as profits at Tokyo Disneyland recovered after visitors started to return. Nissan Motor gained 3.47% after restructuring pushed earnings higher despite a decline in sales. Unicharm rose 2.66% on record net profits. Asahi Group Holdings tumbled 8.52% after reducing guidance. Kubota sank 7.59% on worries over rising material prices and slow sales due to inventory shortages.
The Kishida administration is planning to pay JPY 100,000 to anyone aged 18 or below. But in an opinion poll conducted on November 10-11, only 28% of respondents thought this fiscal stimulus was appropriate. The government’s approval rate is unchanged at 61%.
EMERGING MARKET
The MSCI Emerging Market index was up 0.99% as of Thursday 11th, led by Brazil (+5.35% in USD) and China (+3.16%). India (-1.04%) and Korea (-0.96%) underperformed.
In China, PPI inflation surged to 13.5% YoY in October compared to 10.7% in September, or higher than estimates (+12%) on sharply higher energy prices. October CPI inflation increased to 1.5% from 0.7% in Sep (+1.3% estimated). October new bank loans came in at RMB 826bn, or higher than the RMB 800bn estimated. The PBoC announced its carbon reduction support tool, offering low-cost funding (at 1.75%) to financial institutions to encourage them to offer carbon-reduction loans to enterprises. The new monetary policy tool will support the clean/efficient energy, environment protection and carbon-reduction technology sectors. The government plans to loosen control for real estate companies to issue local currency bonds. On the regulatory side, Beijing is reportedly considering granting a dozen licenses to after school tutoring companies. There is talk of a Biden/Xi virtual meeting next week. October auto production and wholesale rebounded 12.2% and 12.8% MoM, respectively. On the corporate front, Haidilao decided to close 300 inefficient restaurants before the year-end. CATL plans to spend $2.3bn building two battery plants in China. Tencent results were below expectations amid company efforts to comply with regulations. Management gave a positive outlook on gaming, as approvals are expected to resume, but remained cautious on the ad segment due to macro uncertainties and weakness in certain sectors. Alibaba reported record sales of RMB 540.3bn for Singles’ Day, an 8.5% increase on last year’s figure. AIA’s results missed estimates as volumes were disrupted by covid measures.
In Taiwan, exports rose 24.6% YoY in October to a record $40.1bnn led by semiconductor chips, electronics and metals. Sony announced it would participate in TSMC’s Japan fab project by contributing $500m.
In India, PayTM’s IPO raised $2.4bn, the largest IPO in India’s history. E-commerce company Nykaa, which raised $700m in its IPO saw its share price almost double on the first day of trading. Pharmeasy, a digital healthcare platform, filed for its IPO and hopes to raise as much as $842m. Tata Steel’s profits were up 8 times in 2QFY22, driven by a sharp increase in global demand.
In Brazil, the Lower House approved the second round of the “precatorios” bill by a wider margin than expected. October inflation accelerated to 10.67%, or more than expected. PagSeguros reported a 56% increase in net revenues but net income was below consensus due to higher transaction costs and financial expenses.
In Chile, the last polls before the first round of the Presidential election on November 21s showed José Antonio Kast mostly improving his lead but he remained statistically tied with Gabriel Boric. Play-off simulations between the two candidates give a slight edge to Kast.
In Russia, Tinkoff unveiled a top management change. There will now be a joint CEO focusing on Russia and expansion abroad. Any capital increase to finance further growth will have to be approved by the board).
CORPORATE DEBT
CREDIT
There was more interest rate volatility as US inflation came in at 6.2% YoY, or above consensus estimates of +5.9%. US 10-year Treasuries rose by 10bp to flirt with 1.6%. The Xover widened by 5bp and the Main by 1bp. The high yield CDX underperformed, widening by 9bp. Cash bonds made up lost ground thanks to positive inflows: high yield tightened by 5bp and investment grade was stable, generating returns of 0.1% and minus 0.2%, respectively.
Upbeat company results reassured investors worried about inflationary tensions. In company news, Coty’s first quarter for FY 2022 came in above expectations and the group raised annual targets. Sales rose 22% YoY to $1.37bn, or higher than expected by the company. Adjusted EBITDA rose 67% to $279m, taking margins to 20.3% (+550bp). Sales for the first nine months at EDF were €57.06bn, up 15.7% like-for-like on an increase of €1.4bn in nuclear energy production and higher pricing, especially in France.
Third-quarter sales at IGT rose 21% over a year to $984m thanks to a post-pandemic surge in gambling. EBITDA jumped 41% to $407m thanks to operating leverage and cost reductions. Leverage fell to an all-time low of 3.8 times, down 0.4 times over the quarter and 1.9 times over a year.
In financials, the positive trend in earnings continued along with rating agency views. S&P upgraded its long-term rating on Deutsche Bank from BBB+ to A-, citing an improvement in operating performance and also raised Italian insurance group Cattolica from BBB to A- (with a positive outlook) after Generali acquired 84.48%. In new AT1 debt, Spain’s Sabadell and Unicaja raised €750m and €500m. Portugal’s Millennium BCP raised €300m with a Tier 2 bond.
CONVERTIBLES
Markets continued to focus on earnings reports.
Tencent rebounded by 5% after its results reassured markets. The Asian property sector was highly volatile. Beijing’s latest announcements fuelled a rebound in Country Garden Services (+15%) and Shimao Service (+18% compared to its lows).
In Europe, Sika jumped 10% after acquiring MBCC for $6bn. The deal might be funded with another convertible. In contrast, Adidas fell after an earnings miss with provisional margins below consensus expectations.
In the US software sector, New Relic gained 35% and Ring Central 20% after posting upbeat figures. But fears of a fifth Covid wave left reopening theme plays like RCL, UBER and Live Nation 7-8% lower.
On the US new issues market, specialty chemicals company Amyris raised $600m and 3D printer manufacturer ED Systems $400m. In Asia, Smoore International (vaping devices) issued an exchangeable bond.
Over the period, European convertible prices were unchanged. Global convertible prices edged lower.
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
12/11/2021
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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.
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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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