- There is still talk of Europe adopting an embargo on Russia’s oil
- Jerome Powell confirmed that the Fed wanted to return rapidly to a normal monetary stance and that several 50bp hikes were probable
- We have a more cautious view on equities and duration
The TV debate between the two remaining contenders for France’s presidential election had no impact on opinion poll trends. Emmanuel Macron is still leading Marine Le Pen by 4 points.
In Ukraine, Russian troops are now concentrated in the south and east and have just claimed to have taken Mariupol. Its mayor says the city has been 90% destroyed. The escalation in anti-Russian sanctions and arms deliveries to Ukraine mirrors an intensification in the fighting. Five million Ukrainians have now fled the country. There is still talk of Europe adopting an embargo on Russia’s oil.
Elsewhere, April's PMI data came in better than expected. There were worries that activity would slow in Europe but instead it held up thanks to sanitary measures being lifted and stock-building in preparation for any shortages and/or higher prices. The IMF, meanwhile, cut its global growth forecasts from 4.4% to 3.6%. A third of the drop is due to the expected slump in Russia.
Remarks from central bank officials continued to weigh on bond and equity markets. At the IMF summit, Jerome Powell confirmed that the Fed wanted to return rapidly to a normal monetary stance and that several 50bp hikes were probable. James Bullard even argued for 75bp. In Europe, bond yields and the euro rose after ECB vice-chairman Luis de Guindos said a rate hike was possible in July.
A strong start to the earnings season underpinned equity markets at the beginning of the week with companies sounding a reassuring note on consumer spending, for the moment at least. The trend reversed due to the outlook for more restrictive monetary policy.
As a result, we have a more cautious view on equities as downside risk from reduced liquidity carries more weight than persistently upbeat prospects on company earnings. We are also still reserved on duration, especially in Europe. On the other hand, current short-term yields in the US appear to have already factored in a good deal of future Fed hikes.
European Equities
Indices ended the period slightly in positive territory. Investors focused on monetary policy news. Bundesbank governor Joachim Nagel said the ECB could wind up its asset purchasing at the end of the second quarter; officially, this was scheduled for the third quarter. And the ECB’s vice-chair said a possible rate hike was possible by June this year. In macroeconomic news, investors were slightly reassured by a consumer confidence index but analysts are still revising down European growth estimates. The IMF cut its forecast by 1.1% to 2.8%. Government bond yields rose over the week and weighed on equity market performance. Elsewhere, Russian troops continued to attack in Ukraine and Vladimir Putin said Mariupol had been taken, raising the possibility that Europe could respond with an embargo on Russian oil.
In France, the TV presidential election debate appeared not to have had a major impact on opinion polls. Emmanuel Macron is ahead but with a lower lead than in 2017.
In company news, Stellantis complied with sanctions by suspending production at its only factory in Russia. In luxury goods, Prada reported excellent figures driven by strong performance in the US. Heineken gained from out-of-home drinking as the sanitary situation improved. Its results benefited from price rises and a shift in its marketing mix to more upmarket products. Nestlé’s price rises had no effect on consumer demand in the first quarter. The group maintained its guidance on margins for this year and said it would proceed with further price rises to offset cost inflation. In semiconductors, ASM International gained 4% after record orders in the first quarter.
US Equities
Apart from the Dow (+0.66%), the other indices ended the period in the red. The Nasdaq tumbled 3.44% due to shock results from Netflix and Jerome Powell's comments that he would be in favour of a 50bp hike at the next FOMC on May 4 with the possibility of the same in June and July. The Fed chairman said the labour market was too tight and the Fed would have to act more quickly to curb inflation. His remarks echoed Thursday’s weekly jobless claims falling to a low not seen since the 1960s.
The Beige Book said the economy had enjoyed moderate growth up to mid-April thanks to increased spending in retail outlets and non-financial companies. It added that the growth outlook was less bright due to recent geopolitical uncertainties and rising prices.
The IMF cut its global growth forecasts for 2022 from 4.4% to 3.6% to reflect the impact of the Ukraine war.
WTI oil prices were unchanged at $103 despite a surprising drop in US inventories.
In results news, only 87 S&P 500 companies have so far reported but 80% of them have beaten expectations.
Netflix plummeted 35% after losing 200,000 subscribers in the first quarter, the first drop since 2011. Management also expects to lose 2 million subscribers in the second quarter due to tougher competitions and password sharing. To redress the situation, the group is to introduce a version with advertisements and cut spending on productions.
Netflix’s plunge also dragged down other Nasdaq heavyweights like Meta (-7.7%), Tesla (-5%) and Amazon (-2.6%). In contrast, the S&P 500 and the Dow were underpinned by Proctor & Gamble, up 2.7% after upbeat figures and improved guidance, and strong results from IBM (+7%).
Tesla jumped 7% after the bell on Wednesday after record results and the group's confidence that it can accelerate production from 936,000 vehicles in 2021 to 1.5 million this year.
Just Eat Takeaway said it was considering finding a strategic partner and/or selling some or all of Grubhub, the US meal delivery company it bought last year for $7.3bn.
Japanese Equities
The NIKKEI 225 and TOPIX rose 1.40% and 1.05% for the period but equities were still held back by 1) the Fed’s more hawkish stance, 2) rising inflation led by energy and food prices, 3) the Covid-19 lockdown in Shanghai and 4) the ongoing war in Ukraine.
The rise was due to the weaker yen’s positive impact on exporters and falling Covid-19 infection cases.
Marine Transportation and Transportation Equipment rose 6.88% and 5.31%, as oversold cyclical stocks gained from hopes for economic normalisation. Mines pushed higher (+ 3.66%) supported by rising commodity prices. However, Air Transportation declined 2.26% as Japan Airlines revised down its business outlook for this year due to a significant drop in domestic travel demand caused by the Omicron variant. Services and Communication fell by 1.42% and 1.04% as investors focused on exporters.
Fast Retailing Co., Ltd. jumped 11.25% after revising up net profits for the first half of 2022 and despite concerns over lockdown in China and the Ukraine war. Major exporters Nissan and Suzuki rose 7.77% and 6.83% as the yen weakened. On the other hand, domestic demand related stocks like M3 Inc., Ajinomoto and Nitori Holdings fell 5.16%, 3.38% and 2.38%, respectively.
On Tuesday, comments from finance minister Shunichi Suzuki at the G7 meeting expressing concerns over the weaker yen failed to stop it rising above 128 against the US dollar to a 20-year low, its 13th down day in a row. This followed St. Louis Fed President James Bullard saying the Fed should not rule out a rate increase of 75bp to curb inflation. BoJ Governor Haruhiko Kuroda, who also attended the meeting, said excessive exchange rate volatility could harm business activity.
Emerging Markets
The MSCI EM Index was down 2.31% this week as of Thursday’s close. China (-6.69%) underperformed in USD as economic disruption from zero-covid lockdown measures outweighed the PBoC’s supportive easing tone. India was flat while Brazil continued to outperform, edging up 0.20%.
China grew 4.8% in the first quarter, or better than market consensus, but March retail sales started to see the negative impact from the doubling down of zero-covid measures: -3.5% YoY, and -6% in real-terms if we exclude inflation. The central bank announced a lower-than-expected 25bp RRR cut to release more liquidity and help shore up market confidence. The onshore renminbi local currency fell almost 2% vs. the US dollar on the deteriorating growth outlook and the negative spread of nominal 10Y treasury yields between China and the US. Lockdown in Shanghai reached 1 month this week with daily cases peaking and a partial easing in stringent measures. 70% of the 666 designated industrial sites resumed operations, including Tesla Giga Shanghai which is housing 8,000 workers in the factory to respect the closed-loop policy. The Ministry of Commerce is to roll out more targeted policies to stimulate consumption, based on how local governments control the Covid situation. China Merchants Bank saw its board chairman step down and is changing its CEO because of investigations. Sportswear maker Lining maintained its full-year top-line growth guidance in the high-teens to low twenties after its first-quarter results were in line.
Both Taiwan and Korea continued to report strong export growth, led by semiconductors. Exports rose 16.8% YoY in March for Taiwan and 16.9% for Korea in the first 20 days in April.
In India, HDFC Bank’s results came in below expectations. Despite strong loan growth, NIMs contracted due to the sharp rise in share of corporate loans and slower growth in credit card and auto loans. Nestlé India missed consensus estimates, due to higher-than-expected margin pressure from higher commodity prices. HCL Tech revenue for 4QFY22 was above expectations, and its guidance of 12-14% growth for FY23 was also better than expected.
In Brazil, Vale's first-quarter iron ore production was 6% below consensus, due to heavy rains, license delays and weaker output. The situation could persist in the current quarter. Overall 2022 production guidance was maintained at 320-335mt.
In Mexico, Banorte reported stronger than expected first quarter results. Net interest income rose 22% and the efficiency ratio improved.
In Chile, the Constitutional Conventional plenary rejected in general terms the articles of the Environmental & Economic mode commission. Santander Chile posted good first-quarter results. Net income increased 30% YoY, or 11% above consensus and guidance. Performance was mainly driven by strong growth in fee income and low provisions. The cost of risk remained low despite the economic slowdown and higher inflation.
Corporate Debt
Credit
Markets continued to trade in line with interest rate volatility. Several Fed and ECB officials argued for a return to monetary normalisation and its pace should rise in coming months in attempts to control inflation. There was marked yield curve flattening in Germany with 2-year bonds up 20bp to 0.25% and the 10-year up 10bp to 0.95% as well as in the US (+30bp to 2.75% and +11bp to 2.94%). Credit spreads were unchanged on derivatives with the Xover at 378bp and the Main at 79bp. Cash HY tightened by 6bp while investment grade widened by 2bp. Total returns were negative for both IG (-0.34%) and HY (-0.12%).
Technical factors remained fragile as investment grade bonds suffered $630m in redemptions and high yield $380m. The new issues market was again becalmed
Elsewhere, S&P upgraded LKQ from BB+ to BBB-, citing the company’s constant operating performance, notably a bigger market and strong cash flow generation despite reduced mileage and repairs. S&P also upgraded Loxam from B+ to BBB-. The group’s strong figures in 2021 helped reduced leverage and the ratings agency believes it can continue to improve its financial leverage. Fourth-quarter 2021 margins at Paprec beat estimates. Sales jumped 40% to €536m from €383m.
It was a rather quiet week in financial debt. Euro CoCo spreads were stable and there were no subordinated debt issues. Interest rate volatility and the earnings black-out period meant no new issues. Bankinter launched the earnings season for European banks with a solid and reassuring first quarter. Loan volumes and commissions were satisfactory and there were the first signs of higher margins.
Convertibles
Convertible returns over the week were close to nil as the earnings season continued and 10-year US bond yields moved closer to 3%. Some stocks like IAG (+5%) and American Airlines (+10%) gained as cyclicals and reopening stocks rebounded.
There were also rumours of a possible tie-up between Dufry and Autogrill to form a new retail leader. Elsewhere, JustEat Takeaway is mulling a partial or total sales of its US subsidiary Grubhub.
In the US, Zendesk jumped 8% after the company approached Qatalyst Partners for a possible sale. Elon Musk launched a $54.2 a-share bid on Twitter for a total of $46.5bn.
The new issues market was quiet until Friday morning when JPM raised €400m with a 3-year synthetic convertible into Deutsche Telekom.
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
22/04/2022
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