- Jerome Powell was reappointed as Fed Chair
- Advanced PMI indicators for November showed growth was still robust
- European stocks suffered from the possibility that the worsening sanitary situation could mean more restrictions and worries over Russian troops massing on Ukraine's border
The much awaited news on the Fed Chair appointment finally emerged. Jerome Powell was reappointed and Lael Brainard will be the new Vice-Chair. Joe Biden’s decision to stick with Powell reinforced expectations of a rate hike in 2022 and US bond yields rose by around 10 basis point, taking the US dollar with them. The trend was underpinned by the release of the FOMC minutes which led investors to anticipate an acceleration in tapering. Yields also rose by 10 basis points in Europe after the ECB’s Isabel Schnabel said inflation risks were likely to last longer than expected. The US dollar quoted 1.12 to the euro, revisiting June 2020 levels.
Equities lost ground over the week even if advanced PMI indicators for November showed growth was still robust. European stocks suffered from the possibility that the worsening sanitary situation could mean more restrictions and worries over Russian troops massing on Ukraine's border. US equities proved more resilient because of the Thanksgiving holiday. Demand remained buoyant in the US with consumer spending up 0.7% in October on a 0.5% rise in household revenues. But inflation continued to accelerate. PCE came in at an annualised +5% in October, up from 4.4% in September. And the rise in oil prices will not help, even if countries like the US, China and Japan decided to dip into their strategic reserves.
To reflect the possibility that the Fed and ECB might move towards a less accommodating monetary stance, we are now increasingly cautious over portfolio duration, especially as German Bund prices look even more expensive to us. We continue to be neutral on equities in a context of continued strong economic growth.
EUROPEAN EQUITIES
Markets were initially resilient as new Covid cases rose but recent research into a new variant in South Africa rekindled investor worries and indices plunged on Friday morning. Earlier in the week, several indications suggested the fifth wave was already a problem in Europe. Angela Merkel, for example, said current measures were not enough to deal with surging cases in Germany. As cases increased, only tourism stocks retreated; markets overall remained confident. And then the news over the new variant appeared and markets changed tack. Oil stocks started Friday 5% lower and banks followed suit. Cyclicals were the hardest hit but defensives did not put up much resistance. The sell-off occurred shortly after concerns over rising inflation triggered a drop in a consumer confidence indicator.
The tight shipping market is likely to persist until at least the second half of 2022 according to CMA CGM, a leading sector company. This is good news for pricing and the company has raised its guidance. In the tourism and leisure sector, Compass (contract catering) reported a sharp increase in full-year results thanks to its cost-cutting strategy and a record number of new contracts. Hotel giant Accor is betting on the luxury sector by launching a new label. In healthcare, Valneva said it had signed a contract with the European Commission to provide 60 million vaccine doses over 2 years. In the energy sector, Enel upgraded its energy transition objectives by undertaking to exit coal production by 2027 and gas by 2040. Orange’s CEO is to leave the group by January 31 when a new governance structure will be introduced.
US EQUITIES
Trading was quiet in the run-up to the Thanksgiving Holiday But the week looked like ending with a real Black Friday on markets as worries mounted over the latest Covid variants to appear.
The White House eventually chose to renew Jerome Powell's mandate as Fed chairman but appointed Lael Brainard as vice-chair. However, we still do not know who will act as vice chair for banking supervision. Elsewhere, Richard Clarida (outgoing Fed vice chair), Christopher Walker (a member of the governing board) and James Bullard (St Louis Fed chairman) all said the issue of whether or not to speed up tapering would be on the agenda when the Fed next meets in December.
Oil prices rose despite a concerted agreement, the first ever, between the US, China, India, South Korea and the UK to draw on strategic reserves. Traders are worried that OPEC+ could riposte by increasing output when the cartel next meets on December 2.
In a busy week for quarterly earnings in the retail sector, figures showed that demand was strong but margins were under pressure due to supply side problems and rising wages. As a result, most stocks were hit by heavy profit taking. Nordstrom plunged 29% in one session, Best Buy was down 18% and GAP tumbled 24%.
A few tech companies disappointed investors. Zoom reported better-than-expected earnings but analysts focused on low new subscriber growth and the stock sank 19%. Software company Autodesk also tanked (-17%) on the prospects of a slowdown in growth.
JAPANESE EQUITIES
The NIKKEI 225 and TOPIX edged 0.34% and 0.48% lower over the period. Jerome Powell’s reappointment as Fed chair sent US long-term interest rates higher, dragging down growth stocks. Financials, on the other hand, gained.
Marine Transportation, Mining, and Electric Power & Gas gained 4.42%, 4.36% and 3.13%. Air Transportation, Services and Pulp & Paper fell 8.11%, 3.74% and 2.93%. Domestic demand sectors sank due to concerns yen weakness could mean higher import prices.
Shionogi jumped 9.25% as investors cheered its commitment to COVID-19 medicine. Marubeni rose 6.80% after a broker upgrade. Kubota gained 6.35% after the company acquired a majority stake in an Indian tractor manufacturer. In contrast, ANA Holdings sank 9.42% as the airline company unveiled a JPY 150bn convertible bond issue. Nitori Holdings shed 7.83% on weak November same-store sales.
Recent PMI data reflected corporate optimism over the recovery. November’s composite PMI rose to 52.5 from 50.7. Manufacturing PMI advanced from 50.6 to 53.5, the highest level since January 2018. Shortage of materials is still weighing on manufacturing but delivery times improved for the first time in 6 months.
EMERGING MARKET
The MSCI Emerging Market index was down 0.54% as of Thursday’s close. Brazil (+4.2%) outperformed on cyclical stock strength. India rose 0.77% while China lost 0.68%.
China and the US agreed on discussions between top military officials while the US added 8 Chinese quantum computing entities to an export blacklist. In its third quarter report, the PBoC suggested there were chances of monetary and credit easing measures. Chengdu became the first large city to roll out a series of easing measures to boost liquidity for property developers. China's birth rate fell below 1% in 2020, the lowest in 43 years. Baidu and Toyota-backed startup Pony.ai have received China's first-ever regulatory approval for a robotaxi service on open roads in part of Beijing. The Ministry of Industry and Information Technology (MIIT asked Tencent to seek government approval for any new apps and app updates due to data collection issues. Some SOEs are limiting employee use of Weixin as well, adding to the strict enforcement of the recent data law. Midea plans to fully privatize KUKA and delist it from the Frankfurt Stock Exchange. Bilibili obtained a payment license after acquiring a majority stake in Zhejiang Yongyi Payment.
South Korea’s central bank raised interest rates for the second time in three months and revised its inflation outlook amid concerns over higher prices and rising household debt.
In India, the government is proposing to ban all cryptocurrencies and could help the RBI create an official digital currency. Reliance and Saudi Aramco have called off a deal that would have seen Reliance selling a 20% stake in their O2C business to Aramco. Bharti Airtel and Vodafone Idea have raised tariffs for their prepaid plans by 20-25%. The hike will help improve revenues and the ARPUs of both companies. Apollo Hospitals and Amazon are in talks over a pharmacy business partnership.
In Brazil, inflation for the first 15 days of November came in slightly above expectations at 10.73% YoY but decelerated compared to the previous month. Cyclical stocks benefited from the iron ore price rebound.
The opposition coalition lost the majority during the first round of Chile's presidential election, reducing the chances of more radical reforms.
Energy-consuming nations including the US, China, Japan and India are to release strategic oil reserves to combat the rapid rise in prices.
CORPORATE DEBT
CREDIT
Corporate bond indices moved sharply lower as new Covid cases in Europe accelerated and a new variant appeared. The sanitary situation weighed on spreads. The Main widened by 9bp and the Xover by 30bp as the risk premium rebounded sharply in the most cyclical segment of the high yield universe.
Due to Thanksgiving, it was a quiet week on the new issues market. France’s TDF Infrastructures (telecoms) nevertheless raised €800m at 1.75%.
Elsewhere, private equity giant KKR made a €10.8bn bid for Telecom Italia (TIM). The target has €22.5bn in debt so the enterprise value is around €33bn. France’s Vivendi (media), TIM’s biggest shareholder with 23.75%, has so far said it will not tender its shares but the Italian government seemed more receptive to the bid. Elsewhere, the UK’s Victoria (ceramic wall and floor tiling) is looking to acquired Belgium’s Balta (textile flooring).
In financial debt, German insurance group Talanx (parent company of Hannover Re and HDI) raised €500m at 1.75% with a green bond issue. The deal is part of the group’s sustainable development strategy. BPCE raised £500m at 2.5% due November 2032 with a Tier 2 bond. In other news, the Financial Stability Board (FSB) updated its list of global systemically important banks. France’s BNP Paribas moved from category 2 to 3 which means the bank is more systemic globally. From January 2023, its capital requirements will therefore increase by 0.5% for RWA and by 0.25% in leverage.
CONVERTIBLES
The segment's convexity helped it benefit from sharp equity market falls as Covid cases increased and a new variant emerged. The big new deal this week was a jumbo issue from Japan’s ANA. the airline raised JPY 150bn ($1.3bn). JPY 70bn of the proceeds will go on repaying the September 2022 convertibles and JPY 30bn will go on reimbursing long term debt falling due in March 2024. The remaining JPY 50bn will go on establishing a new brand which will be operated by Air Japan, an ANA subsidiary created in 1990 which offers passenger and freight flights from Narita airport to Bangkok, Hong Kong and Singapore. The new Air Japan project is to run medium-haul low cost flights in South-East Asia and Oceania.
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
26/11/2021
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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