Inflation moves center stage

• The IMF calls on the ECB to maintain its accommodating monetary policy
• Looking beyond Omicron concerns, investors are scrutinising inflation indications
• The Fed could be tempted to increase the speed of tapering 

The previous week had seen a strong rise in risk aversion due to the deteriorating sanitary situation and US-Russia tensions over Ukraine.

Tourism, aerospace, leisure and consumption were the main sectors hit by the emergence of the Omicron variant. Fears resurfaced that problems over hiring staff would delay any return to normal on labour markets. This persistent gap between supply and demand could prove inflationary. But then reassuring news trickled in. Pfizer and BioNTech said their vaccine could prevent another wave of lockdowns in the west and avoid growth stalling.

Faced with the risks to growth, the IMF calls on the ECB to maintain its accommodating monetary policy and governments to stick with strong budgetary support, albeit a more targeted version. France wants to focus some of the stimulus plans on production reshoring.

Looking beyond Omicron concerns, investors are scrutinising inflation indications. China is seeing mounting inflationary risk. Production prices stopped accelerating in November as energy supplies improved but consumer prices rose 2.3%, following a 1.5% increase in October, due to energy and food prices. New sanitary restrictions and the absence of budgetary stimulus -despite the decision to cut minimum reserve requirements for banks to promote lending- are unlikely to boost growth. Yet December’s Politburo communique, which is supposed to indicate the political trend for the beginning of 2022, looks pro-growth. It focuses on maintaining stability and encouraging domestic demand. Its GDP growth target for next year is around 5.5%.
In the US, all eyes were on November’s inflation index due Friday December 10. It was seen as rising again after moving above the 6% threshold in October. If this proves right, the Fed could be tempted to increase the speed of tapering when it meets on December 14 and 15. The challenge is not merely financial. Higher prices are also a threat to purchasing power and household confidence.

In Europe, Olaf Scholz was elected chancellor in Germany. The new government will now present an amended budget for 2021 and will be able to issue €100bn in bonds as scheduled in the previous budget. Parliament will also vote on new pandemic measures.
Industrial production rebounded by 2.8% in October and September's drop was revised to 0.5% vs. 1.1%. 

In today’s volatile markets, we are sticking with our neutral position on equities.
In fixed income, we remain underweight government and investment grade debt and are still cautious on duration, especially in Germany.

EUROPEAN EQUITIES

Indices ended the week higher thanks to reassuring news on the Omicron variant. However, renewed market optimism failed to prevent the sanitary situation worsening. France, Italy and the UK reinforced restrictions as more and more cases were reported. Elsewhere, industrial orders in Germany plunged 6.9% in October, raising fears on the strength of the European recovery. Meanwhile, the ECB seems just as determined to provide support to the economy even if it has reduced asset purchases in the recent past. Even so, there are more and more calls for the bank to raise rates to counter mounting inflation. 

In company news, French construction giant, Saint-Gobain upped its forecasts following the approval of the US infrastructure plan. The group also said it had signed an agreement to buy GCP Applied Technologies in the US for $2.3bn. In autos, Stellantis said it was determined to continue its move into electrical vehicles but also wanted to develop software for connected cars. Worldline has raised its market share in Greece to 21% following its alliance with Eurobank. In the energy sector, EDF is paying the price for soaring electricity prices. Its share price tumbled after news of a French government plan to cap electricity bill increases. Wavestone reported strong 15% like-for-like growth in the first half and operating margins of 14.6% or well above expectations. The group now has a very ambitious target of 15% profitability for 2025. And there are plans for external growth, too. Sales of wine and spirits as recorded by the London International Vintners Exchange have increased sharply in 2021 with momentum accelerating in the current quarter. This could boost growth at luxury giant LVMH with margins that could hit 40% (compared to 34% in the first quarter).

US EQUITIES

Wall Street indices took their cue from Covid news. South Africa’s medical adviser said most indications suggested the new Omicron variant was not severe. Joe Biden's chief medical advisor, Anthony Fauci, agreed but thought it was still too early to say for certain.

Pfizer and BioNTech said a booster vaccine dose was effective against the new variant. They added that a new version of their vaccine specifically targeting the variant would be available by March 2022.

In macro news, the trade deficit shrank from $80.9bn in September to $67.1bn in October as exports jumped 8.1%. But in the previous week, job creations had come in at a disappointing 210,000 vs. 550,000 estimated. Inflation is still a market priority with 6.8% expected to be announced for November. In an indication if the lack of visibility on the economy, Bloomberg said there was a 20% range of estimates for 2022 earnings, a gap that has rarely been as wide in the last 10 years.

Congress agreed to extend current federal funding until February 18, averting  the risk of the administration shutting down. President Biden then promulgated the bill. 

Elsewhere, tensions resurfaced between the US and Europe, and Russia. Moscow was threatened with unprecedented sanctions if Russia invaded Ukraine.

Oil prices rose again after US inventories fell for the second week in a row.

Nvidia’s stock price retreated after the European Commission suspended its inquiry into its bid on UK chip-designer ARM, pending further details.

Intel rose last Thursday on news that it intended to list its autonomous driving subsidiary Mobileye by the middle of 2022.

Tesla, however, sank 6.1% after the release of documents indicating that Elon Musk had reduced his stake for the fifth week running.

Electric vehicle manufacturer Lucid also tumbled (-18%) after it announced a $1.75bn convertible bond issue.

Uber fell more than 3% after the European Commission unveiled a plan to reinforce social rights and advantages of the ride-hailing company's drivers by requalifying them as salaried staff.

Broadcom (semiconductors) gained 7% in after-hours trading after raising first quarter sales guidance on increased global demand for 5G and cloud computing solutions.

JAPANESE EQUITIES

The NIKKEI 225 and TOPIX rebounded by 3.50% and 3.34% after worries abated over the Omicron variant. China’s Evergrande was certified as a selective default, but the market’s reaction was limited.

All sectors gained, led by cyclicals. Air Transportation jumped 9.06% as the government withdrew its ban on new bookings for international flights. Mining and Marine Transportation increased by 8.10% and 7.32%. Fishery Agriculture & Forestry, Transportation Equipment and Electric Power & Gas underperformed, edging 0.57%, 1.16% and 1.31% higher, respectively.

Asahi Group Holdings gained 9.33%. The company is to create a new sustainability subsidiary in January 2022 to develop new business. Ono Pharmaceutical added to gains, up another 8.73% on its new cancer drug. ANA Holdings rebounded by 8.58%. On the other hand, Fuji Film Holdings dropped 3.28% after sales of Covid-19 related products peaked. Z Holdings was down 1.26% on share dilution fears as the company issued stock acquisition rights to meet the Tokyo Stock Exchange’s new requirements.
The Covid-19 situation in Japan is currently moderate. Daily new infection cases in Tokyo have averaged less than 50 for 8 weeks. The Bank of Japan’s November Corporate Goods Price Index jumped by 9% YoY. Intermediate goods prices soared 15.7%, their largest increase in 41 years.

EMERGING MARKET

The MSCI Emerging Market index was up 2.79% in USD as of Thursday. China (+4.93%) and India (+3.28%) outperformed. Brazil (+1.23%) underperformed.

In China, the PBOC cut the Reserve Requirement Ratio by 50bp to 12%, thus releasing RMB 1.2 trillion in liquidity. The Politburo meeting this week confirmed that stabilising growth was a top priority for next year. November PPI decelerated to 12.9% YoY from 13.5% last month but came in above expectations (12.1%). CPI rose to 2.3% YoY from 1.5% in October, or below the 2.5% estimated. Imports soared 31.7% in November (20.6% in October) led by commodities, another sign that activity is bottoming as policy easing filters through. Exports beat expectations again thanks to continued resilience in domestic supply chains despite Omicron concerns. ADRs had a volatile week on concerns of accelerated delisting risk while the CSRC clarified that the Chinese government had not banned VIE structures from listing abroad, adding that some companies were still preparing for a US listing. The CSRC also said that it was actively working with the SEC and PCAOB to solve accounting issues. The China Banking and Insurance Regulatory Commission (CBIRC) stated that it would prioritise mortgage demand from first-time home buyers and upgrade demand. Evergrande formally defaulted and trading in Kaisa was suspended amid uncertainty over debt repayments. Sensetime is reportedly putting back its HK IPO as the US plans to blacklist the artificial intelligence firm.

Taiwan’s November exports rose 30.2% YoY, or more than the 22.8% expected. Giant Manufacturing reported strong revenue growth for November (+7.3% MoM and 16.6% YoY), a possible indication of an improvement in the supply chain.

In India, the RBI kept policy rates unchanged and maintained an accommodative stance, while continuing to normalise excess liquidity. PayTM received bank status for its PayTM Payments Banks.

In Brazil, the central bank increased interest rates by 150bp to 9.25%, while continuing to strike a hawkish tone. The Senate approved the constitutional change to alter payments of court-ordered damages or Precatorios. This allowed the government to accept the new Auxilio Brazio social programme, (R$54.6bn). Retail sales were down 7.1% YoY in October, or worse than the 6.2% drop expected. Nubank raised $2.8bn in its IPO and jumped 14.78% on its first day of trading in New York.

In Russia, Vladimir Putin was warned by Joe Biden that the US and its allies would take strong measures if Russia were to attack Ukraine. The Russian market has been falling over the last month on higher sanction risk and lower oil prices.

CORPORATE DEBT

CREDIT

Markets staged a comeback as worries over the new Omicron variant receded and upbeat macro data was released. Government bonds enjoyed sharp bounces with 10-year US Treasuries up 16 basis points over the week and the German Bund 5 basis points better. The momentum was shared by credit spreads with the Xover tightening by 23bp and the Main by 5bp, leaving the IG index 0.14% higher and the HY index up 0.32%.

The main deal on the new issues market came from T-Mobile Netherlands which raised €800m. The company was bought by investment funds Apax Partners and Warburg Pincus in September for €5.1bn.

Casino jumped 9.5% over the week after Czech billionaire Daniel Kretinsky’s Vesa Equity Investment raised its stake to 6,8%. Rallye, Casino's parent company, also advanced as its funding conditions depend on the Casino share price. 

Vivendi is poised to acquire the 17.5 % in Lagardère held by Amber Capital, taking its stake to 45% and opening up the possibility of a bid on the remaining shares in February. That would see the group topping up its media and publishing assets with names like Paris Match, Le Journal du dimanche, Hachette and Europe 1 as well as the Relay travel retail outlets.

In financial debt, ABN Amro raised $1bn. UniCredit said it expected results to grow by 10% on average by 2024 to more than €4.5bn, thank to  gradual rises in commissions. CEO Andrea Orcel's new strategic plan also sees at least €16bn being returned to shareholders in 2021-24 through dividends and share buybacks. For 2022, €3.7bn is expected to be distributed.

CONVERTIBLES

A number of US companies issued new convertibles in a week of rebounds on equity and debt markets. The biggest deal was the $1.75bn raised by Lucid Group with a 2026 maturity. The company makes electric vehicles in the US and Canada and, like Tesla and Fisker, is funding like-for-like growth through new convertible bonds.

The second largest issue was from Confluent which raised $1bn with a January 2027 maturity. Confluent designs data infrastructure to connect applications and systems on a real-time platform.

There were also many medium-sized deals. Lithium Americas raised $258.75m at 1.75%, China’s Hopson Development (property) $250m at 8% and Patrick Industries $225m due December 2028 with its first ever convertible. 

In company news, France’s power company EDF came under pressure on rumours that regulated price increases for electricity would be capped at 4% next year. The move would be designed to limit commodity inflation, and especially natural gas, so as to avoid hitting French households.

Note that Spanish utilities, and Iberdrola more than most, also suffered from the introduction of electricity price caps two months ago.

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

10/12/2021
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