- Interest rate volatility stayed high ahead of the Fed and ECB meetings in the week starting May 1st.
- In spite of major monetary tightening, the US consumer has still not stopped spending and US tech company results are still robust.
- We would suggest caution on equities, especially in the US. We remain upbeat on corporate debt and are taking advantage of rising government bond yields to gradually reinforce duration.
Interest rate volatility stayed high ahead of the Fed and ECB meetings in the week starting May 1st.
Initially, First Republic Bank’s poor results -massive outflows coupled with a promise to sell around $100bn in assets- sent bond yields lower. At one point, markets were expecting a 75bp cut to the Fed’s rates by the end of 2023.
All US economic data point to growth slowing, whether regional Fed surveys (Richemont, Chicago and Philadelphia), consumer confidence indicators or the sharp contraction in durable goods offers (ex-defence and transport). In addition, US first-quarter growth slowed to only 1.1%, when 1.9% was expected, admittedly due to massive destocking.
However, the resilient labour market and a rebound from 4.4% to 4.9% in the Fed’s preferred core inflation indicator in the first quarter rapidly reversed the trend on bond markets. In spite of major monetary tightening, the US consumer has still not stopped spending and US tech company results are still robust.
All this is likely to make the Fed’s job more complicated when it meets on May 2-3. The ECB is facing the same problem amid increasing wage pressure. Germany’s public sector workers, for example, have secured a 11% rise. And yet, comments from central bank officials this week were clearly accommodating. Sweden said rate increases would soon be over and Czechia and Hungary both opened the door to a rate cut.
In Japan, the new BoJ governor is even sticking with the bank’s ultra accommodating, negative-rates and yield curve control policies. He hopes wage increases will push inflation up to around 2% before considering a return to normal conditions.
We have moved from negative to neutral on the dollar, mainly because US yield curve inversion has gone too far but also because the dollar has recently uncoupled from interest rate movements.
With lending slowly deteriorating, risk premiums do not look attractive enough to us and we would suggest caution on equities, especially in the US. We remain upbeat on corporate debt and are taking advantage of rising government bond yields to gradually reinforce duration.
European Equities
Markets edged lower over a week full of earnings reports. The ECB made relatively hawkish noises. Looking beyond the short term economic outlook, board member Fabio Panetta said geopolitical tensions and less globalisation could lead to inflation lasting. The IFO, Germany's business climate index, edged higher from 93.4 to 93.6 in a sign that industrial demand was picking up.
In company reports, Philips (healthcare equipment) reported upbeat results as easier supply conditions helped it meet its bumper order book; margins also improved after a massive redundancy plan. In pharma, Novartis raised guidance thanks to a strong increase in volumes that management expect to last. In consumer staples, both Nestlé and Danone showcased strong pricing power with excellent figures. Pernod Ricard, however, was more impacted by slowing demand although management is optimistic for the end of 2023. AB Foods, Primark’s parent company, suffered from falling household purchasing power.
European tech companies released downbeat reports. Results were satisfactory at ASM and Dassault Systèmes but ASM’s reduced order book and a slowdown in software licenses suggest both sectors could be facing a bigger challenge than expected as the cycle turns down. After the plunge in electricity prices in the first quarter, profits at TotalEnergies fell 27%. The group is to sell its oil sands activities in Canada. In hotels, Accor’s results beat expectations and the group is more optimistic on REVPAR in 2023. In the luxury sector, Kering's disappointing results, especially in China and North America, set it apart from its rivals.
US Equities
US indices moved in line with company earnings reports. On Thursday, the S&P 500 jumped 1.96%, its biggest daily rise since the beginning of the year. Investors cheered results from companies like Meta/Facebook (+13.9%), Eli Lilly (+3.7%), Honeywell (+4%) and eBay (+5.1%). Meta rocketed 11% after an earnings beat on the back of rising ad spending.
In sharp contrast, Snap (Snapchat’s parent company) plunged 20% after the bell due to a first-quarter sales miss despite a rise in user numbers. The company gave no guidance.
Microsoft soared 9.7% on better-than-expected earnings. The group's cloud business made a big contribution but the stock was also bolstered by management's confidence in future contributions from artificial intelligence. However, the chances of the group buying video-game maker Activision look unlikely after the UK's competition watchdog opposed the acquisition.
Alphabet also beat expectations thanks to a rebound in ad revenues but the stock failed to shine due to more nuanced comments from management on IA solutions.
Amazon ended up dipping 1% in after-hours trading after jumping 11%. The group said revenue growth had slowed in its AWS cloud division from 16% in the first quarter to 12% in April.
Intel was up 5% in extended trading following upbeat remarks from management on profitability in the second half of 2023. The group sees margins rising on a production ramp-up and the end of destocking. Texas Instruments fell on soft guidance for the current quarter. Due to lower parcel volumes, UPS expects annual revenues to be at the low end of forecasts ($97-99.4bn), or below the $98.1bn pencilled in by analysts.
Destocking was chiefly responsible for first-quarter GDP growing by a disappointing 1.1% or much lower than the 1.9% expected. Consumer spending was up by a robust 3.7% YoY, a boost for those who think a soft landing is possible. However, prices rose by 4% QoQ, up from 3.9% in the previous quarter, and above the 3.7% expected. Weekly jobless claims slowed markedly to 230,000, or below the 248,000 expected.
Japanese Equities
The NIKKEI 225 and TOPIX fell 0.70% and 0.35% over the period as concerns over banks hit Wall Street and investors worried about global growth. The yen also edged higher.
Construction, Electric Power & Gas and Real Estate rose 3.21%, 1.51% and 1.33%, respectively, as economic uncertainties pushed investors into defensive domestic demand stocks. Marine Transportation and Iron & Steel fell 5.52% and 3.67% as value stocks sold off. Securities & Commodities Futures tumbled 5.29% on financial market worries.
Defensive plays Tokyo Gas and Daiwa House Industry, a construction company, jumped 6.98% and 6.54%. Canon gained 5.91% after 2023 guidance came in above market expectations. Shimano, a bicycle parts maker, tumbled 10.74% after company guidance for this year missed market expectations significantly. Investment bank Nomura plunged 7.74% after a big drop in 2022 earnings. Sumitomo Metal Mining shed 5.40% due to soft commodity prices and profit taking after the recent rally.
The dollar slipped from the high 134s to high 133s against the yen on concerns over a possible global slowdown due to a credit crunch, especially in the US.
The Japanese government is bringing forward the lifting of its current Covid-19 border control measures, originally planned to end on May 8, to this Saturday in anticipation of an increase on foreign tourists during the Golden Week holidays.
Emerging Markets
The MSCI Emerging Market index was down 0.9% as of Thursday’s close. With the return of geopolitical noise, India (+2%) outperformed while China, Korea and Taiwan all lost around 2% in USD. Brazil and Mexico slightly outperformed other regions but remained in the red.
China had another busy week for geopolitical developments: Olaf Scholz invited Chinese Premier Li Qiang for talks in Berlin while Xi Jinping had a "long and meaningful" phone conversation with Volodymyr Zelensky. China’s politburo sent a pro-growth message on Friday, saying China’s economic recovery needed continued fiscal and monetary support for the coming quarters. So far in the first quarter earnings season, most results have been upbeat with more positive forward guidance from listed companies. Earnings at Anhui Conch Cement were better than expected on higher volumes even after subdued demand due to lower new starts. At Ping An Insurance, NBV growth recovered across all channels, rising 20% YoY. China Merchants Bank saw lower NIM and fee income, but a gradual year-on-year improvement is expected.
In Korea, SK Hynix reported weak first-quarter results as expected while management sounded confident about a second-half recovery and expects double digit QoQ bit growth in both DRAM and NAND, marking an inflection point for the memory segment. Results at LG Energy Solutions came in above expectations, with the benefit of Won 100bn from the Advanced Manufacturing Production Credit in its US capacity.
In India, the state of Gujarat announced a capital restructuring policy for all state public sector units starting FY24. This could mean higher cash returns for shareholders and an increase in investment. Rural wage growth continued to improve, rising 6% to a 30-month high as new housing starts hit a 9-year high. Adani ports will purchase up to $650m in debt using cash reserves in a bid to shore up investor confidence. Fourth-quarter results at ICICI Bank were upbeat thanks to decent volume growth and better NIM. EBIT at Maruti Suzuki rose 8.1%, the most in 18 quarters, and the group unveiled another 1 million unit capacity addition.
In Brazil, retail sales dipped 0.1% sequentially in February. WEG’s first quarter showed a softer top line offset by strong margin expansion.
In Mexico, exports increased to $53bn in March, the highest amount ever in a single month and a sign that nearshoring is booming. Total exports increased by almost 7% in the first quarter, with 90% from manufactured goods. OMA (airports) announced a solid set of results on the back of strong traffic growth. First-quarter results at FUNO (REIT) were in line with expectations, with healthy fundamentals in all key verticals.
In Chile, the government delivered its long-awaited lithium development policy in which the state will partner with companies in projects to tap more of the world’s biggest reserves of the battery metal.
Corporate Debt
Credit
In a low-volatility week, credit premiums widened a little, taking investment grade to 162bp (+5) and high yield to 479bp (+12). However, 5-year Bund yields fell 16bp to 2.36%.
Returns over the week were more or less flat with investment grade up 0.09% and high yield 0.13% lower, or +1.67% and +2.93% since the beginning of the year Actuarial yields for investment grade were 4.2% and 7.3% for high yield, still good entry points for carry strategies.
On a persistently dynamic new issues market for high yield, Loxam raised €300m at 6.375% BB- due 2028, Cheplapharm €425m at 7.5% BB- due 2030, and Benteler €525m at 9.375% due 2028. We subscribed to all three and they were largely oversubscribed, another sign that investors are hungry for spread issues.
In financial debt, subordinated issues fell throughout the week, mainly due to rekindled worries over First Republic Bank in the US. AT1 calls by UniCredit (UCGIM 6.625 EUR) and Lloyds (LLOYDS 7.625 GBP) lifted sentiment at the end of the week.
Insurance groups are actively managing their debt, witness two exchange offers and a new Tier 2 issue from NN Group and Ethias European banks continued to report excellent figures with margins boosted by higher rates, modest or zero deposit flight, and an almost imperceptible drop in asset quality. Details on exposure to risky areas like commercial property have so far reassured investors. In other words, there is no sign of a downturn and management are not expecting any serious deterioration.
Convertibles
Significant risk apathy persisted in global markets this week as we headed into the busiest week for earnings reports; 43% of S&P 500 companies were due to report. The convertible universe remained in neutral mode as the month end approached with no issuance. Deals in April should be close to $3bn. Historically, May is the biggest month for new issues.
In company news, STM plunged by close to 9% despite a strong first quarter and a slight increase in guidance. Markets were concerned about demand from the key automotive sector and bearish analysis from both management and peers (WolfSpeed plummeted by around 20% on Thursday). The Cellnex board proposed Marco Patuano as new CEO (he was chairman in 2018-2019 and CEO of TIM). In the US, Enphase Energy’s first quarter beat expectations in all metrics but, due to weaker domestic demand, management guidance for this quarter was 5% below consensus and the shares cratered 25% on Wednesday.
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
This is a marketing communication.
28/04/2023
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
EDMOND DE ROTHSCHILD ASSET MANAGEMENT (FRANCE)
47, rue du Faubourg Saint-Honoré 75401 Paris Cedex 08
Société anonyme governed by an executive board and a supervisory board with capital of 11.033.769 euros
AMF Registration number GP 04000015
332.652.536 R.C.S. Paris