Roller coaster markets

• European equities enjoyed a technical rebound
• The ECB confirmed a double normalisation in a context of upward revision of inflation projections
• We remain underweight equities and especially in Europe

European equities enjoyed a technical rebound over the period as the Eurostoxx50 volatility index (V2X) fell back to 41 after hitting 50 at the beginning of the month.  
And yet hopes for talks between Russia and Ukraine in Turkey failed to agree on a ceasefire. Russia then threatened the West with a riposte to sanctions. Vladimir Putin and his agriculture minister said Russian fertiliser prices could rise and that Russia was self-sufficient in food.

Even so, oil and gas prices retreated. At the Versailles summit, France proposed a reform of Europe’s energy market that would tag electricity prices to average decarbonised energy costs rather than fossil energy levels as is currently the case.

Elsewhere, the ECB said it now expected inflation to hit 5.1% en 2022 (vs. 3.2% in last December's forecasts), 2.1% in 2023 and 1.9% in 2024. Growth forecasts for 2022, however, were only massaged down to 3.7%. And in the move towards monetary normalisation, the PEPP programme will end on March 31 and net bond buying under the APP scheme will fall to €40bn in April and €20bn in June. Christine Lagarde also said that the first rate hike would occur in the weeks or months after the end of net asset purchasing.

As for the European budget, the energy crisis has rekindled solidarity. The European Commission announced a strategic plan to reduce Russian energy imports. The idea is to build up inventories before winter arrives and increase the number of alternatives to gas. Brussels is even considering issuing EU bonds, with the proceeds then being distributed to countries in the form of loans conditional on energy and defence targets.

In China, February’s underlying inflation fell to 1.1% over 12 months in another move lower. Producer prices also slipped to +8.8%. China has not put restrictions on Russian imports but will be affected by international competition for gas and oil supplies. Inflation should therefore rise in the coming months and hamper the PBoC’s efforts to ease policy further. However, the bank is expected to continue underpinning growth as February’s PMI data was only just above 50. Beijing's zero Covid drive has been restricting activity.

Amid today’s persistently high volatility, the time is right to formulate crisis exit scenarios. This crisis will definitely have a negative impact on global growth and Europe will be hit harder than others. But for the moment, a recession is not on the cards. Pending some stability on markets, we remain underweight equities and especially in Europe. We also remain underweight government and investment grade bonds and cautious on duration as inflation is set to persist.

EUROPEAN EQUITIES 

Markets ended in positive territory after the preceding week's sharp correction. Geopolitical issues continued to dictate trading. Efforts to reach an agreement between Russia and Ukraine continued but a solution appeared to be some way off. ECB chair Christine Lagarde stressed that institutions would have to be flexible in coming months. For the moment, the bank is sticking to its guns and hoping inflation will be brought under control by reduced asset purchasing. The energy and defence sectors rose on news of massive investments in the EU. Elsewhere, Germany's industrial production rose by a sharp 2.7% in January, or much more than the +0.5% expected. December’s figure was also revised up to +1.1%. Obviously, this was before the war in Ukraine but it is interesting to see how activity rebounded and comforting to have some strong growth in the bag for 2022.

Meanwhile, the decision to boycott Russia gathered strength. Adidas decided to stop trading in Russia and warned its 2022 sales would be hit. Dassault suspended all its Russian contracts. Porsche said the war had accentuated a components shortage and forced it to suspend production of its flagship electric model in its Stuttgart factory. Fears of a cyberattack led BNP to ban its Russian staff from access to its IT systems for an unspecified period. In telecoms, Orange and MasMovil started exclusive talks over merging  their Spanish businesses. Any success would be good news for Orange as competition in the country has been a problem for the French group. Sanofi reiterated its determination to be a big ARN player and plans to invest €1.6bn over 10 years in France.

US EQUITIES

Equity indices ended the period lower with  the Dow losing 1.84%, the S&P500 2.38% and the Nasdaq 3.01%. Hopes for some diplomatic progress with Russia triggered a brief rebound but a meeting between the Russian and Ukrainian foreign ministers failed to agree on a ceasefire. Sentiment was also buffeted after February's inflation accelerated for the sixth month in a row to 7.9%, a 40-year high. The US, the G7 and the EU decided to revoke Russia’s most favoured nation status from March 11. The move will open the door to customs duties on Russian products. WTI oil prices fell 2.5% to $106. The International Energy Agency is to present an emergency oil plan in the week starting March 14. It is expected to result in member countries releasing strategic reserves.
The House of Representatives approved the $1.5 trillion spending plan. Half will go on military spending and $13.6bn on the situation in Ukraine. The bill will now go to the Senate. The House also approved an embargo on Russian oil, gas and coal. Fitch cut Russia’s debt again, downgrading it from B to C and warning that a default was imminent.

Coca-Cola, Pepsi, McDonald’s and Starbucks joined companies which have stopped trading in Russia. Apple’s share price was stable after its new iPhone SE and iPad Air models were unveiled. The models will be available from March 18. Google rose 0.6% on Thursday after paying $5.4bn for cybersecurity company Mandiant. Rumours had already sent Mandiant’s share price 30% higher. Amazon jumped by more than 10% after the bell on Thursday on news of a 20-for-1 stock split and a $10bn share buyback programme. General Electric gained 3.5% after announcing its own $3bn buyback programme.

JAPANESE EQUITIES

The NIKKEI 225 and TOPIX fell 3.34% and 2.75% over the period. Equities traded lower across the globe on concerns over the negative effect of sanctions on Russia. Investor sentiment moved firmly into risk-off mode amid inflationary pressure from sharp rises in crude oil and commodity prices.

Sectors seen as benefiting from the sanctions like Marine Transportation, Warehousing and Fishery, Agriculture & Forestry gained 2.11%, 0.76% and 0.28%. In contrast, Air Transformation, Non Ferrous Metals and Transportation Equipment declined by 6.65%, 6.53% and 5.96%.

Japan Exchange Group, Aeon and Ono Pharmaceuticals advanced 4.98%, 4.61% and 2.58% as investors bought defensive domestic demand stocks on the dip. On the other hand, Suzuki Motor Corp., Shiseido and Sumitomo Electric Industries tumbled 12.82%, 10.62% and 9.83% on fears further disruption to supplies might force factories to shut down.

In Covid news, 25.86% of the country had received COVID-19 Vaccine Booster Shots (3rd Dose) as of March 7th 2022. The government lifted the 20,000 cap on audience levels in prefectures with Covid-19 quasi-emergency status, allowing people to attend events whether vaccinated or not.

EMERGING MARKET

The MSCI EM Index was down 3.60% as of Thursday’s close, led by Chinese stocks (-5.8%) amid delisting concerns over US ADRs. India (+2.2%) outperformed in USD. Brazil closed unchanged. Talks in Turkey between Russia and Ukraine failed to make progress towards a ceasefire while Chinese Premier Li Keqiang said that it was important to support Russia and Ukraine in attempts to reach an agreement.

China set its GDP target for 2022 at around 5.5%, or higher than consensus expectations of less than 5%. It also set a headline deficit target at 2.8% of GDP. February’s exports rose 16.3% YoY, beating the 15.7% expected, despite the high base and the Omicron impact. Imports were up 15.5%, or short of consensus at 16.8%. The PPI rose 8.8% YoY in February as expected, slowing from 9.1% previously. CPI was unchanged at 0.9%. Shanghai suspended in person classes due to a covid outbreak. China’s daily Covid cases exceeded 1,000 for the first time in two years. Thanks to front-loading of fiscal support, excavator sales beat expectations in both the domestic market and exports during the first two months of the year. The SEC released the names of the first 5 Chinese companies listed on US stock exchanges which will be forced to delist in 3 years’ time. The CSRC told banks that it would permit some US listings by companies that meet certain criteria, such as those that do not possess sensitive data. Both Moutai and China Tourism Duty Free saw revenue and net profits rise 20% during the first two months. Norway’s sovereign fund announced plans to divest its stake in Li Ning owing to the Xinjiang cotton controversy. In line with consensus expectations, JD delivered solid fourth-quarter results at both the top and bottom lines. Management is confident the group can maintain faster-than-industry growth in FY22 despite macro challenges. Ping An Bank released FY21 results with NPAT up 25.6% YoY, or in line with its preliminary announcement. AIA unveiled a share buyback for up to $10bn.

Yoon Suk Yeol, a conservative former top prosecutor, was elected South Korea’s new president, marking a shift to the right leaning People Power party.

In India, the ruling Bharatiya Janata party claimed victory in four of the five states up for election, including a convincing victory in Uttar Pradesh, usually a bellwether for general elections. The government announced plans to resume scheduled international flights from March 27.

In Brazil, Petrobras surprised with a hefty price increase. Refinery gate petrol prices went up by 19% and diesel prices by 25%. LPG prices will also increase by 16%. Markets had been speculating that the government would freeze prices; for the moment only ICMS taxes have been frozen.

CORPORATE DEBT

CREDIT

Faced with news from Ukraine and the European Union as well as the ECB’s decision to speed up its QE tapering, interest rate and spread volatility remained high. Germany’s interest rates came under severe pressure between March 4 and 10 with the yield on the 10-year Bund moving from minus 0.07% to +0.25% and the 5-year from minus 0.37% to minus 0.02%. Credit premiums had a roller coaster ride, moving from 380bp in March 4 to peak at 430bp on March 7 before retreating towards 390bp. Year-to-date bond returns worsened but CoCos bucked the trend by rebounding after being seriously attacked in the preceding weeks. Investment Grade bonds are now down 5% since January 1st and are yielding 1.5% compared to 0.5% on December 31. European High Yield indices are down around 6% with actuarial yields running at 4.7% due to YTD credit premiums rising 120bp to 460bp.

New issuance among banks remained becalmed as management focused on communicating over Russian and Ukrainian exposure. But apart from Raiffeisen and OTP, no other banks have said exposure will have a material impact on their balance sheets and capital bases.   Euro-denominated corporate debt issuance also stayed shut due to unfavourable market conditions. Elsewhere, telecoms continued to provide the news. Masmovil started talks with Orange to merge their businesses in Spain via a joint venture valued at €19.6bn. The new entity should generate €450m in synergies for sales of €7.3bn. Telecom Italia was downgraded to Ba3 by Moody’s with a negative outlook following the previous week’s disappointing results. The only bright spot is that KKR is reportedly still interested in buying Italy's legacy operator. The private equity group had already made a first move in November.

Emerging country debt is down 10% YTD and credit premiums on the JP EMBI rose from 410bp to 460bp before falling back to 430bp on Friday morning. Russian and Ukrainian debt is still trading at default rates of 10% and 30% of par.

CONVERTIBLES

The new issues market remained open for business despite geopolitical tensions, rising inflation in the US and the ECB’s switch to a more hawkish tone, In the US, Travere Therapeutics raised $316m at 2.25% due March 2029. The company identifies, develops and delivers therapies to people living with rare diseases.

And in company results, France’s Maisons du Monde returned to the black last year with €79m in net profits. The company also saw a 13% increase in e-commerce over the year. In the US, MongoDB (cross-platform document-oriented database programmes) reduced losses and reported a 48% jump in 2021 sales to $874m.

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

11/03/2022
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.
Past performance and volatility are not a reliable indicator of future performance and volatility and may vary over time, and may be independently affected by exchange rate fluctuations.
Source of the information: unless otherwise stated, the sources used in the present document are those of the Edmond de Rothschild Group. This document and its content may not be reproduced or used in whole or in part without the permission of the Edmond de Rothschild Group.

Copyright © Edmond de Rothschild Group – All rights reserved