Markets prove resilient

• Oil and gas prices started to head north again
• The Fed chair said he could not rule out a 50bp hike at future FOMC meetings
• We remain underweight equities after the rebound

Russia and Ukraine continued to talk but unfortunately a ceasefire still looks like a distant prospect. As the conflict got bogged down, NATO, G7 and European summits continued to discuss new sanctions against Russia. Oil and gas prices started to head north again, triggering further rises in government bond yields in the US and Europe on concerns over inflation. Jerome Powell's more hawkish stance also played a part. The Fed chair said he could not rule out a 50bp hike at future FOMC meetings nor the possibility of moving monetary policy into restrictive territory by pushing rates above the neutral 2.5% level. In addition, the next Fed meeting could announce details on balance sheet shrinking.

Even so, equity and bond markets proved resilient to the latest rise in bond yields. European equities stabilised with energy stocks once again outperforming. US equities continued to push higher as buyers returned and investors adopted prudent positioning. China’s markets were underpinned by Beijing's plans to reduce VAT and provide more funding for regions. But the mood remained volatile as tensions with the US are still not completely over. Japanese equities rose over the period thanks to yen weakness. Mr Kuroda insisted on the stability of the Bank of Japan's monetary policy.

Elsewhere, consumer confidence in the eurozone fell more than expected and is now flirting with Covid crisis levels. However, the first PMI figures for March were better than expected. Russia's invasion of Ukraine has not yet been a big problem for companies, certainly not in the US where composite PMI rose from 55.9 last month to 58.5 in March.

Given the circumstances, we remain underweight equities after the rebound. The rally could go further but for technical rather than fundamental reasons. At these levels, we think that risks are asymmetrical. We are also still cautious on duration as central banks are turning more restrictive and strong inflation looks set to last.

EUROPEAN EQUITIES

Markets were stable pending developments in the Ukraine conflict. However, flash PMI for March, the first figures to appear since the war started, fuelled volatility. They naturally fell but less than expected. But consumer confidence in March tumbled to a low not seen since the beginning of the Covid pandemic. Elsewhere, the debate on stopping oil and gas imports from Russia was rekindled by Vladimir Putin saying they should be paid for in roubles The energy and commodity sectors gained as a sustainably high prices seem increasingly inevitable. Property stocks, however, were hit by inflation-driven rises in bond yields.

In company news, Renault decided to suspend production in its Russian factories (10-12% of its operating margins) following moves by other French companies to boycott Russia. French biotech Valneva saw sales rocket by 216% in 2021 thanks to new contracts for its Covid vaccine. In technology, Nemetschek surprised investors with upbeat guidance on 2022 objectives which expects a very limited impact on Bluebeam’s migration to a subscription service. Daimler Truck sounded a relatively confident note for this year. In spite of the Ukraine conflict and Covid disruption in some countries, management expects momentum to remain solid in coming quarters, enough to offset any persistent supply chain problems in the second half of 2022.

US EQUITIES

All major indices ended the week in positive territory with the Dow up 0.66% and the S&P500 2.46% better. The Nasdaq ended the period 4.24% higher. The week kicked off with Jerome Powell making more hawkish comments than expected. He said the conflict in Ukraine would exacerbate price tensions and that he might be in favour of a 50bp hike in May if needed. He was followed by the normally dovish Mary Daly (San Francisco Fed) who said she also favoured a more muscular monetary policy stance to seriously curb inflation. But comments on the economy’s strength fuelled a market rebound and fresh interest in tech stocks.

And then on Thursday, the market cheered upbeat economic data. Weekly jobless claims fell to a fifty-year low and PMI figures hit an 8-month high. Manufacturing PMI came in at 58.5 vs. 56.6 expected and Services PMI at 58.9 vs. 56 expected. Investors reacted by ploughing into growth stocks.

Meanwhile, oil prices rose after talks between Russia and Ukraine failed to produce results and little progress on a Russian oil export embargo at the EU level. 

Elsewhere, a new SEC ruling means companies quoted on Wall Street will soon have to indicate their greenhouse gas emissions and their exposure to climate risk (Scope 1 & 2). They will have between 2024 and 2026 to comply.

Bloomberg said Apple was preparing a monthly iPhone and iPad subscription service to make its devices more accessible and increase retention rates. Uber gained 5% after an agreement which will mean New York taxi companies using its application.

Nike rose 5% after the bell on Thursday on better-than-expected online sales. All regions apart from China (-5% YoY) increased. And although production is still lagging demand, the company said supply chains were improving. Warren Buffet’s Berkshire Hathaway gained 2.3% after paying $11.6bn for Alleghany Corp (+25%), a holding company with a focus on insurance. Meme stocks resurfaced mid-week. On Wednesday, Gamestop jumped 14% on news that board chairman Ryan Cohen had spent $10m on buying another 100,000 shares.  Cinema chain AMC rose 13.5% in sympathy.

JAPANESE EQUITIES

The NIKKEI 225 and TOPIX rose 5.47% and 4.35%, rallying throughout the week as 
1) negative news related to Russia’s invasion of Ukraine was discounted to some extent, 
2) concerns over inflation receded due to the FED’s consistent tightening policy and 
3) the yen fell to 122 against the US dollar. 

As of March 24, the NIKKEI 225 had risen for 8 consecutive days, revisiting its recent January 18 high.

Mining and Non Ferrous Metals rose 12.33% and 9.12% on higher resource prices. Insurance gained 7.04% on the FED’s tightening. In contrast, Marine Transportation and Air Transportation declined by 10.09% and 1.07%. Retail Trade was almost flat.

Sumitomo Metal Mining and Sumitomo Corporation jumped 11.92% and 9.36% on surging resource prices. Mitsubishi Heavy Industries rose 9.68% on the government’s decision to increase military spending. On the other hand, Nitori Holdings fell 2.22% as existing store sales fell for the second month in a row. Unicharm fell 1.89% on profit-taking after previous gains on expectations that Beijing would introduce new stimulus measures. Tokyo Gas fell 0.73% on higher natural gas prices.

According to the Ministry of Land, Infrastructure, Transport and Tourism, the average price of land in Japan rebounded on the back of solid housing demand. Prices had fallen in 2021 for the first time in 6 years due to Covid-19. Land in all categories nationwide, including residential and commercial, rose 0.6% compared to January 1st, 2021. The ministry said a recovery had been observed, driven by housing demand in urban areas and vicinities, as the pandemic receded. The survey covered 26,000 locations across the country before the sixth Covid wave hit Japan. Residential land prices rose 0.5% on average and 0.4% for commercial land.

EMERGING MARKETS

The MSCI EM Index was up 1.94% as of Thursday’s close with most regions closing in the green. China continued to rebound, up 3.68% in USD. Brazil (+4.84%) also outperformed, up .84% on a commodity price surge.

Chinese president Xi called for cooperation with the US to end the Russia-Ukraine conflict.

China announced RMB 2.5 trillion in tax cuts while the MoF issued a special financial subsidy of RMB 400bn to support SOEs in 2022. The CSRC asked some US listed Chinese firms including BABA, Baidu and JD to prepare for more audit disclosure to the US authorities. Evergrande said a debt-restructuring proposal would be unveiled before the end of July by bringing in financing from state-backed firms. On the corporate front, Tencent’s fourth-quarter results met estimates with soft online game and advertising revenue growth. The company plans to converge resources on strategic growth areas while rationalising its non-core businesses. Alibaba raised its share buyback programme to $25bn from $15bn. Wuxi Biologics delivered solid FY21 results with robust backlog growth. China Merchant Bank reported 4Q21 and FY21 results with impressive core earnings and ROE, both in line with its preliminary announcement. East Money reported strong FY21 results on enhanced margins and expanded market share. Chinese telecom equipment maker, ZTE, scored a significant win as a US court ruled to end a five-year compliance probation for violating American sanctions.

Mainland China is yet to see daily new COVID cases peak but Hong Kong plans to lift flight bans and relax social distancing measures in three phases starting April 1st.

In South Korea, Samsung said it would invest $250m in expanding a high-performance semiconductor substrate plant.

India’s exports hit $400bn for the first time and ahead of schedule. The RBI is in initial consultations on a ‘rupee-rouble’ trade arrangement with Moscow. India will allow all international flights from March 31 with no need of a PCR test. From April 1st, 30% tax will be applied to all forms of virtual digital assets or crypto assets in India. 

Brazil’s central bank raised its inflation forecast for 2022 and 2023 due high oil and commodity prices while maintaining its forecast for economic growth at 1% this year as the jobs market performed better than expected. It also signalled plans to end interest rate increases at its next meeting in May as long as commodity prices remain relatively steady. Industrial group Votorantim and holding company Itaúsa are to buy stakes in the infrastructure group CCR.

CORPORATE DEBT

CREDIT

Markets showed resilience despite little progress in Russia-Ukraine talks. Long bond yields continued to rise in what is still a decidedly inflationary environment due to commodity price surges. Yields on US 10-year Treasuries gained 16bp while the equivalent German Bund added 14bp. Quite logically, investment grade returns suffered, falling 0.51% over the period. The high yield index, however, managed to edge 0.1% higher despite Xover spreads widening by 33bp.

Standard & Poor’s downgraded Casino Guichard’s outlook from stable to negative. The French retailer is caught in a scissor movement, hit by rising inflation while suffering from a drop in pricing power on an overcrowded domestic market. Worse, the group’s failure to reduce borrowings last year is weighing on investor appetite for its debt.
In stark contrast, Paprec was upgraded by Standard & Poor’s from B+ to BB- after a record 2021, and notably a €326m increase of capital in financial years 2021 and 2022 which took shareholder funds to more than €800m. UK oil company EnQuest, which operates fields in the North Sea, reported a solid 35% increase in annual profits to $743m. The company naturally benefited from rising crude prices throughout the year. Management also delivered upbeat guidance for this year amid a shifting geopolitical landscape likely to keep oil prices on an uptrend.

As with high yield bonds, subordinated financial debt had a better week as buyers returned. Credit premiums tightened by around 15bp on senior debt and by roughly 20bp on more junior euro AT1 bonds, helping offset the negative impact of higher rates.
Issuers who had been deprived of the new issues market took advantage of the lull to issue new bonds,  UBS and KBC in senior debt, Sabadell in Senior non Preferred and Deutsche Bank (T2). Intesa San Paolo issued the first AT1 since the Ukraine war started, rising €1bn  Non Call 5 at 6.375%.

CONVERTIBLES

Despite little improvement in the  geopolitical situation, convertible bond performance rose as fixed income and equity indices advanced over the week. The new issues market reopened with Ascendis Pharma (biopharma) raising $500m due 2028. The proceeds will go on developing the company’s TransCon technology which helps create prodrugs for rare diseases.

Blackstone Mortgage Trust raised $300m due March 2027 with the proceeds to go on refinancing its 2022 convertible. The company is active in property financing and mortgage-backed loans to commercial property in North America, Europe and Australia.

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

25/03/2022
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