- The ECB reaffirmed its determination to fight inflation by raising its benchmark rates by 75bp
- Russia said Gazprom would be halting gas deliveries via the Nord Stream 1 pipeline
- We prefer to wait for yield curves to stabilise before adding risk to portfolios
The ECB reaffirmed its determination to fight inflation by raising its benchmark rates by 75bp. This acceleration is expected to continue, taking short rates to around 2% over the winter despite next year’s poor economic outlook.
As the ECB met, Jerome Powell reaffirmed his Jackson Hole message that the Fed had to take rates higher for some time if inflation expectations were to be kept under control.
The European Commission said it would be capping energy prices to help reduce bills for households and companies, with €200/MWh as a possibility. There were talks of a windfall tax on certain companies to offset the impact.
The UK’s new PM Liz Truss unveiled a stimulus package for more than £100bn to block energy prices over 18 months and help stagger the impact of sharp price rises.
OPEC’s decision to reduce output by 100,000 b/d in October, a first since early 2020, might have been a riposte to any agreement with Iran but also a warning that the cartel would not sit by idly if oil were to fall below $90.
Russia said Gazprom would be halting gas deliveries via the Nord Stream 1 pipeline as long as the EU refused to lift sanctions.
Yield curves continued to rise but risk assets proved resilient. The euro managed to preserve parity with the US dollar but the yen fell to a 1998 low of 144 to the dollar. We prefer to wait for yield curves to stabilise before adding risk to portfolios.
EUROPEAN EQUITIES
Market volatility echoed big shifts in energy prices. The prolonged shutdown of the Nord Stream 1 pipeline fuelled worries over an energy crisis in Europe. Energy ministers are to meet to discuss several proposals. Emmanuel Macron, for example, would like one windfall tax on companies across Europe to avoid distortions from each country deciding on its own approach.
Meanwhile, the ECB unanimously decided to raise its benchmark rates by 75bp. The bank said the decision was warranted by resilient growth, persistent inflation and the euro's weakness. European countries continued to ramp up budgetary stimulus. Germany introduced a new $65bn plan over the previous weekend. And following the arrival of the new PM Elizabeth Truss, the UK announced a massive aid plan.
In company news, the focus turned to measures to address energy shortages. Arcelor Mittal is to pause several sites, notably in Germany. Speira is to halve production to avoid running at a loss. Among utilities, Finland’s Fortum and Switzerland’s Axpo both obtained government-backed lines of credit to help them resist inflationary pressure and avoid any systemic risk from rising energy costs. German power company Uniper has already received government aid. Fertiliser producers are another victim of rising prices. France’s Borealis, for example, decided on a partial shutdown of production.
US EQUITIES
The Dow and the S&P500 gained 0.84% and 1.29% over the last five trading sessions up to Thursday evening while the Nasdaq added 0.39%.
Services ISM came in 56.9, or better than the 55 expected, and WTI oil fell as low as $82 on worries over the extent of the slowdown and Covid measures in China.
The main message in the Fed’s Beige Book was that nothing much had changed for the economy: 5 districts reported slight-to-modest growth and 5 experienced a slight-to-modest slowdown. But the report did point out that there were signs of price inflation slowing. The labour market stayed tight but with a slight improvement in people available to work.
Financials shone at the end of the week on various comments from Fed officials. Markets cheered Jerome Powell’s clarity on monetary policy ahead of the September 21 meeting. He said the bank had to act now and move with just as much determination as in previous months.
Fed fund futures are now 70% expecting a 75bp rise when the Fed next meets.
In company news, there were no big surprises at the iPhone 14, AirPods Pro and new iWatch launches apart from the fact that the iPhone would stay at $799 and the iPhone Plus at $899. Apple gained 1% after the presentation.
Former Walt Disney CEO Bob Iger echoed Elon Musk's comments on Twitter. He said Disney had abandoned moves to buy the social network group in 2016 precisely because of suspicions over the number of fake accounts. Changing the subject, he went on to say that cinemas had not returned to pre-pandemic levels due to consumers migrating to streaming services.
JAPANESE EQUITIES
The NIKKEI 225 and TOPIX rose 1.46% and 1.14% over the period. Markets were downbeat for most of the period in tune with Wall Street after the Jackson Hole symposium’s hawkish tone. However, they rebounded on Thursday due to a bounce on US equity markets, a fallback in US interest rates, commodity price falls and Yen weakness.
Precision Instrument and Glass & Ceramics rose 3.87% and 2.34% on hopes of a global reopening, especially in China. Insurance gained 2.07% as high US bond yields improve returns. In contrast, Marine Transportation remained fragile, falling 6.35% as supply chain disruptions eased and containership freight rates retreated. Mining and Oil & Coal Products declined by 3.97% and 1.39% due to falling commodity prices.
Olympus rose 4.37% on a broker upgrade citing the company’s efforts to refocus on the medical field. Resona Holdings and Sompo Holdings gained 3.93% and 3.29% on the benefits of high interest rates for banking and insurance. On the other hand, Shiseido fell 4.27% after the company cut 2022 earnings guidance due to lockdowns in China. Oriental Land and Nitori Holdings declined 4.01% and 3.86% when they failed to join the Nikkei 225 Index as expected.
The yen continued to tumble against the US dollar, moving from 140.21 to 144.01 on monetary policy divergence. After a meeting involving the Ministry of Finance, the Bank of Japan and the Financial Services Agency, vice financial minister Masato Kanda said they would be watching currency markets closely and would not rule out any options if the situation were to continue. The market reaction was muted.
EMERGING MARKETS
The MSCI EM Index retreated by 1.48% as of Thursday’s close. China and Brazil markets were down by 2.82% and 1.6% respectively, while India continued to outperform other regions, closed higher by 1.32%.
In China, Caixin manufacturing PMI slid to 49.5 in August from 50.4 in July amid power shortages and fresh Covid disruption. Service PMI dipped to 55.0 from 55.5 in previous month, but remained well in expansionary territory. CPI inflation exceeded PPI for the first time since almost 2 years and rose by 2.5% below 2.8% estimated, while PPI fell to 2.3% from 4.2% in July and short of 3.1% expected, driven by continued property sector weakness. China’s credit growth rebounded strongly in August with 1.25tn yuan new loans more than double the 679 bn yuan in the previous month. August exports, in USD terms, grew 7.1% yoy well below 13.5% expected, slowing sharply from +18% in July amid weaker external demand. Imports grew 0.3%, compared to 2.3% growth in July vs 1.6% gain expected. PBoC cut FX reserve ratio by 2pt to support RMB. Biden administration is reportedly considering further restrictions on US investment in Chinese tech firms. China approved the world’s first needle-free Covid vaccine made by CanSino to be used as a booster. Meanwhile, the city of ChengDu extended a weeklong lockdown with more mass testing. Premier Li held meeting to deploy policies to increase credit and tax support. 24 Chinese cities have allowed parents to fund their children's home purchase by withdrawing their own housing provident funds. Ubisoft’s board authorized Tencent to increase its direct stake in Ubisoft from 4.5% to 9.99%. CATL and Sungrow signed a strategic cooperation to collaborate on energy storage, while CATL’s JV agreement for a lithium carbonate project with YongXing Materials has been terminated. Bilibili reported 2Q results, with the midpoint of 3Q revenue guidance missing expectations. Nio reported better-than-expected 2Q22 topline on stronger pent-up demand in June.
India has surpassed the UK to become the fifth largest economy in the world. The government has imposed 20% tax on some rice exports to secure domestic supplies. Tata group is in talks with Wistron to assemble iPhones in India.
In Brazil, August export showed record high figures driven by strong Chinese demand. President Bolsonaro beat former President Lula da Silva with the error margin in a possible 2nd round, according to the local servey. Shopee announced the closing eCommerce ops in Chile, Colombia & Mexico and Argentina. Shoppee will keep the Brazilian operations, but limiting the losses, positive for Mercado Libre, which will have lower competition.
Chileans massively reject the new proposed constitution, with more than 60% voting against, a higher number than expected.
Mexico’s annual inflation surged to the fastest pace since late 2000 in August even as US price growth begins to ease. CPI rose 8.7% in line with expectations.
Opec + decided to cut oil production by 100k/bd from October to prop up prices.
CORPORATE DEBT
CREDIT
Market nerves predominated ahead of the ECB’s monetary policy meeting. In the end, Chair Christine Lagarde chose to imitate the Fed by increasing rates by 75bp to curb inflation. The refinancing rate rose from zero to 1.25% in just two sessions, a first in the bank’s history since it was set up in 1998. Naturally, long bond yields rose: Germany’s 10-year Bund gained 24bp while 10-year US Treasuries added 11bp. Credit premiums tightened after the ECB's move on Thursday. The Xover contracted by 8bp and the Main by 1bp. The high yield index gained 0.18% over the week while investment grade dipped 0.79%, a victim of accelerating bond yield rises.
It was another week with no issuance in the high yield segment. In company news, Spain’s Cirsa (casinos) saw second-quarter sales rise to a creditable €400m with EBITDA up to €132m. The group tapped into economies reopening and managed to return to pre-Covid profitability in 2019.
Credit premiums on financials continued to widen. Euro CoCo debt rose to 963bp at call. This compares with a high of 1,013bp in July. But there was also some good news. S&P upgraded the Bank of Cyprus to BB-.
The new issues market was quieter than in the preceding week. Banco BPM raised €500m in non-preferred senior debt at 6% while reimbursing a Tier 2 bond early.
CONVERTIBLES
The news issues market revived despite persistent volatility, downbeat macroeconomic indicators and the ECB’s warlike tone. Europe was particularly busy. Renewable energy producer Neoen raised €300m at 2.875%. The proceeds from this Océane bond will help the company launch an early repayment of its outstanding 2024 convertible. Siemens Energy is to raise €960m at 5.625% with a mandatory convertible due September 2025. The proceeds will allow the company buy in the shares in its Siemens Gamesa Renewable Energy subsidiary.
Elsewhere, second-quarter sales at Coupa Software rose 18%, or more than expected, and losses were reduced to $75m, down from $91.5m in the previous quarter.
In M&A, France’s Ubisoft (video games) authorised Chinese giant Tencent to take its stake from 4.5% to 9.99%. The stock plunged on the news as markets were hoping for Tencent to buy the entire company.
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
09/09/2022
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