Market Analysis
28/01/2022
  • The FOMC concluded on January 26 by confirming the move towards a more restrictive approach
  • Italy has still not managed to elect a President
  • Fears over a deterioration in the Ukrainian situation abated

Equity market volatility surged on prospects of monetary tightening in the US and Russo-Ukrainian tensions. GDP accelerated in the fourth quarter in the US due to a rebound in services and also stock rebuilding. In the eurozone, the impact of the Delta variant fed through to the economy faster but France still managed to grow by 0.7% over the fourth quarter, or better than Germany. Italy has still not managed to elect a President. Mario Draghi's chances faded, leaving Sergio Mattarella as favourite unless another consensus figure emerges.

The FOMC concluded on January 26 by confirming the move towards a more restrictive approach. With such a tight labour market and growth outpacing its potential, inflation is the big focus. Asset purchasing will be wound up at the beginning of March and the first rate hike will occur at the March 16 FOMC. Jerome Powell made no attempt to dissuade market expectations of rate hikes which were running at four for 2022 before the press conference. Nor did he rule out raising rates at each meeting, sticking to 25bp or shrinking the Fed’s balance sheet before end June. Markets read his tone as very hawkish, so much so that the interest rate futures market began to factor in 5 hikes this year.

Fears over a deterioration in the Ukrainian situation abated: Washington submitted a written response to Moscow’s demands, an informal meeting was held between Germany, Russia, Ukraine and France (the so-called Normandy format), and Beijing pressured Vladimir Putin not to start hostilities just before the start of the winter Olympics. Berlin is refusing to take economic sanctions like reducing gas and oil imports from Russia which would hit Germany hard, preferring instead to refuse access to financial markets (Swift payments, for example).

With volatility back centre stage, we remain neutral on equity markets. Government bond yields are rising so we feel our caution on duration and our underweight in sovereign debt and investment grade credit are both justified.

EUROPEAN EQUITIES

Trading was extremely volatile due to worries  over Ukraine, quarterly results and political uncertainty in Italy. The Russia-Ukraine standoff continued to drag markets down. Europe is already grappling with an energy crisis and any additional disruption to Russian gas deliveries could push prices even higher. And yet January's PMI for Europe looked very positive, even if the headline data papered over big country and sector deviation.

In Italy, the third round of the election for President failed to return a winner, a possible rebuff to Mario Draghi who appears to be struggling to convince the grand electors. 
In banking news, Deutsche Bank surprised markets by reporting its biggest profits in 10 years. Analysts were generally expecting losses. Investment banking drove the figures. Trading made a smaller contribution after last year’s record levels. Another surprise came from luxury giant LVMH which had its best year ever for growth and profitability. Net profits hit €12bn, or better than the €10.5bn expected and EBIT soared 107% to €17.1bn. Preliminary results at auto equipment maker Valeo were rather reassuring with figures coming in at the top of the spread, apart from DCF. Sales were €17.3bn and like-for-like growth was between 5% and 6%. In healthcare, Lonza's 2021 results and 2022-21 guidance were generally in line. Sales were CHF 5.4bn with its Biologics division up 24.7% and Cell & Gene 26.6% better. Philips, however, reported disappointing results due to supply chain disruption and installation delays. The group issued rather cautious guidance for this year. Schneider’s vice-chairman Christel Heydemann looks likely to succeed Stéphane Richard as CEO at Orange, pending board approval.

US EQUITIES

Indices once again ended the week in negative territory in highly volatile trading due to developments in Ukraine and Jerome Powell’s comments on the Fed’s stance. The Dow fell 1.6%, the S&P500 was down 3.48% and the Nasdaq tumbled by 5.66%. The VIX volatility gauge hit a 12-month intraday high of 38.94. Even better-than-expected fourth-quarter GDP growth, 6.9% vs. 5.5% estimated, failed to reassure investors.

Unsurprisingly, the Fed chairman signposted a rate hike in March but refused to be drawn on the pace of subsequent rises as he said the economic environment was too uncertain. He nevertheless stressed that the Fed had to act quickly. He added that its inflation forecasts would be raised from 2.7% to 3% at the next FOMC, a figure that could warrant 5 rate hikes this year. He promised the Fed would be clear on how it intended to shrink its balance sheet and that it would be essentially a question of allowing bonds to mature. Asset selling has, for the moment, been ruled out for this year.

After the bell on Thursday:

  • The FOMC concluded on January 26 by confirming the move towards a more restrictive approach
  • Italy has still not managed to elect a President
  • Fears over a deterioration in the Ukrainian situation abatedIBM jumped 6% after its cloud computing business reported better-than-expected figures.
  • Oil major Halliburton gained 3.8% after blowing past expectations.
  • Tesla's share price was flat despite record profits and an 87% increase over 12 months in deliveries (936,000). The group said it was struggling with supply chain issues which would prevent it from launching new models this year.
  • Intel fell 1.8% after delivering disappointing guidance on the current quarter due to costs getting out of control.
  • Microsoft gained 3.9% after better-than-expected guidance on its Azure cloud business.
  • Apple gained 6% in after-hours trading on record results and reassuring comments on supply chain normalisation.

According to Bloomberg, Nvidia is about to walk away from its £40bn bid for the UK’s Arm due to lack of progress in getting regulatory approval.

Following Netflix’s sharp fall following its quarterly results, Bill Ackman’s Pershing Square fund bought 3 million shares and is now among the group's top 20 shareholders. The news sent Netflix 7.5% higher on Thursday.

In retail, Kohl’s jumped 36% on rumours of a $9bn bid from private equity firm Sycamore Partners.

JAPANESE EQUITIES

The NIKKEI 225 and TOPIX tumbled 5.77% and 4.96% over the period. The Mothers Index suffered a 11.73% correction, with selling pressure in tech stocks. Market sentiment deteriorated amid uncertainties over the Fed’s monetary tightening approach and tensions in Ukraine.

Fishery, Agriculture & Forestry, Electric Power & Gas, and Insurance edged 0.36%, 0.36% and 0.05% higher, respectively. On the other hand, Services, Electric Appliances and Transportation Equipment plunged 9.28%, 8.95% and 6.65%.

Secom rose 3.87% as investors bought on the dip. Suzuki Motor gained 2.37% on upbeat earnings at its Indian subsidiary. Aeon rallied by 1.99% after falling in the previous week on poor quarterly earnings. Tokyo Electron sank 12.44% as semiconductors came under attack. Shionogi dropped 12.14% on expectations its Covid drug would have to contend with stiff competition. Denso declined by 10.99% on worries Toyota might adjust production.

The Ministry of Internal Affairs and Communications announced January’s consumer price index for Tokyo’s 23 wards. Core CPI (ex food and energy) increased 0.2% YoY. This was lower than market expectations, reinforcing concerns over low inflation.

EMERGING MARKET

The MSCI EM Index was down 4.2% as of Thursday’s close (in line with the MSCI World). China led the decline, down 7% in risk-off mood ahead of the week-long Chinese New Year break. India was down 4.7% due to more profit taking during earnings season. Brazil, on the other hand, continued its rally, rising 3.75% thanks to strong foreign inflows.

In China, December’s industrial profit growth was weaker than expected, moderating to 4.2% YoY from 9% in November. The MoF approved a draft bill to extend various preferential tax policies until December 2023, including exemptions from property taxes, urban land use taxes, and VAT for qualified technology business entities. The authorities lifted a month-long lockdown on the northern city of Xi’an. Several Chinese cities relaxed rules on borrowing from the Provident Fund to boost the sluggish housing market. Despite stringent testing and isolation rules for travellers, there were already 290 million trips in the first 11 days of the holiday period, or 45% more than in 2021. At least 15 Chinese mutual funds have committed to buying their own equity-focused products in the past couple of days, as state media touted the attractiveness of Chinese stocks on valuations and policy support. Property developer Shimao put $12bn into 34 projects on sale amid debt repayment pressure. Moutai announced a capacity expansion plan. China Resource Beer made a positive profit alert, driven by GPM expansion on product premiumisation and cost savings.
 
In Taiwan, fourth-quarter GDP grew 4.9% YoY, beating the 3.8% estimated, on the back of strong exports. Full-year GDP growth came in at 6.3% YoY in 2021, an 11-year high. MediaTek released strong quarterly results and guidance, driven by another increase in 5G adoption.

In Korea, LG Energy Solution soared 68% on its first trading day, after becoming the largest IPO in South Korea's history. Samsung Electronics’ fourth-quarter margins missed estimates on lower memory prices.

In India, Reliance Industries’ 3QFY22 earnings beat estimates driven by strong performance in the retail and telecom division. ICICI Bank reported strong results for its 3QFY22 with 25% YoY growth in net profits driven by lower NPA provisions. Maruti Suzuki 3QFY22 earnings showed better than expected sequential margin recovery driven by cost reduction efforts and moderating commodity price inflation.

In Indonesia, BCA reported upbeat results with ROE rising to 18.3%, mainly driven by strong loan growth (up 8% YoY) better asset quality and higher CASA.

In Brazil, President Bolsonaro defended sending a bill to congress to cut fuel prices by reducing (or eliminating) federal taxes on fuel and electricity; this would have a meaningful impact on easing the inflation rate. Iron ore prices continued to increase and are already 60% higher since November.

In Mexico, fourth-quarter results at Banorte were in line. Loans grew 2% YoY, the NPL ratio improved and the NIM was helped by higher interest rates, but higher insurance claims offset the impact. Management’s guidance for 2022 was above consensus (loans to grow 7-9% and an improved cost of risk).

In Chile, the parliamentary Mining Committee approved an amended version of the country’s mining royalty bill, which proposes higher tax rates for mining companies. The bill will be sent to congress for a vote. If approved, we expect a limited impact on production, but a big impact on future copper investments in the country.

In Russia, the focus was on the negotiations between the Kremlin, the US and Europe over Ukraine. Despite so many uncertainties, the MSCI Russia index rebounded 10% on more encouraging news flow.

CORPORATE DEBT
CREDIT

Volatility was definitely back in play as investors began to have doubts about monetary policy managing to curb inflation. Jerome Powell’s hawkish tone following the FOMC fuelled another 7bp rise in 10-year US Treasury yields. In Germany, 10-year yields gained 2bp. Credit spreads widened substantially over the week, more than 10bp for the Xover and 2bp for the Main. The high yield index fell 0.46% over the period while investment grade credit was down 0.25%.

Financial debt was equally volatile with credit premiums on euro-denominated AT1 bonds up sharply from 400bp to 420bp. With yields rising on euro government debt, this left investment grade bonds 0.73% lower YTD while subordinated debt was down by close to 1.5%.

Despite this volatility, there were still 3 new deals in euro-denominated high yield debt. Italian soccer club Inter Milan raised €415m at 6.75% to refinance its borrowings. Czech lottery operator Sazka returned to raise €500m due 2028 to reschedule its debt and for possible acquisitions. Finland’s Renta Group raised €350m at 4.75%to fund its acquisition of IK Partners.

In company news, Vodafone and Iliad were reportedly in talks over merging their Italian businesses. This could mean 36% in market share and sales of close to €6bn. Elsewhere in the telecoms sector, Altice failed to reach an agreement with the EQT and CVC Capital Partners funds on a price for its Portuguese business. Their bids were significantly lower than the €7bn mark fixed by Patrick Drahi as a basis for the talks to start.

The earnings season overall got off to a good start but Elior (contract catering) suspended its targets for FY 2021-2022 citing poor visibility due to the emergence of the Omicron variant. Fourth-quarter sales, however, rose 18.1%.

2021 results at banks like Sabadell, Deutsche Bank, Bankinter and SEB were boosted overall by commissions and investment banking. The outlook for costs has, however, been deteriorating although US banks are mostly concerned for the moment. The consolidation theme is still going. UBS acquired Wealthfront in the US, an automated asset manager targeted at millenials and the Z generation.

CONVERTIBLES

Despite high volatility and a focus on earnings reports, the new issues market stayed open. To refinance its debt, Shenzhen-based Logan Group raised HKD 1.95bn at 6.95% due August 2026.

In company news, fourth-quarter sales at tech giant Microsoft were $51.73bn, up from $43.08bn in the same quarter a year earlier. Its Intelligent Cloud division, which includes Azure, was the main growth catalyst with revenues up 26% over a year.

SouthWest Airlines returned to the black for the first time since 2019 thanks to demand for low-cost flying at the end of 2021. Fourth-quarter earnings were $68m compared to a $908m loss for the same period in 2020. For 2021 as a whole, the group made $977m but thanks to a close to $3bn pandemic government grant. Otherwise, losses would have amounted to $1.3bn.

2021 sales at LVMH jumped 44% to €64.2m and by 20% compared to 2019, and all thanks to staggering growth in its fashion and leather goods division. Excluding the newly acquired Tiffany, sales were still 36% up over a year and 14% better over 2 years. Sales for the fourth quarter alone rose 22% compared to 2019.

GLOSSARY

  • The FOMC concluded on January 26 by confirming the move towards a more restrictive approach
  • Italy has still not managed to elect a President
  • Fears over a deterioration in the Ukrainian situation abatedIBM jumped 6% after its cloud computing business reported better-than-expected figures.
  • Oil major Halliburton gained 3.8% after blowing past expectations.
  • Tesla's share price was flat despite record profits and an 87% increase over 12 months in deliveries (936,000). The group said it was struggling with supply chain issues which would prevent it from launching new models this year.
  • Intel fell 1.8% after delivering disappointing guidance on the current quarter due to costs getting out of control.
  • Microsoft gained 3.9% after better-than-expected guidance on its Azure cloud business.
  • Apple gained 6% in after-hours trading on record results and reassuring comments on supply chain normalisation.

DISCLAIMER

28/01/2022
This document is issued by the Edmond de Rothschild Group. It is not legally binding and is intended solely for information purposes.
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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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