Beijing tightens regulations in several sectors
The Fed sticks to its accommodative stance
The IMF maintains its forecasts of 6% global growth in 2021
The week’s headline news was dominated by upbeat company results in Europe and the US, along with China’s moves to tighten regulation. Beijing’s initiatives were designed to give purchasing power back to the middle classes, counter the private sector’s increasing importance and reduce risks of bubbles developing. The news triggered a strong correction in China with indices plummeting by 8.2% in only 3 trading sessions. The authorities intervened by asking several Chinese banks to stabilize the country’s financial markets while the central bank injected liquidity. Despite rising US inflation which the Fed continues to view as transitory, the bank maintained its accommodating monetary policy but nevertheless hinted that tapering was on the horizon. Discussions of any move to reduce asset buying should take place during future FOMC meetings which suggests there is little chance of an announcement at the Jackson Hole symposium. Elsewhere, Joe Biden said restrictions could return if vaccination trends and contaminations were to continue. This could hit activity and the jobs market. As for future US stimulus measures, broad Republican support for a bipartisan agreement on infrastructure could mark an important step forward. The Senate is now debating the issue and an agreement looks imminent. The IMF maintained its global growth forecasts at 6% this year but said unequal access to Covid vaccines would increase the gap between developed and emerging countries. US second-quarter GDP rose much less than consensus expectations due to higher-than-expected inflation and heavy government spending. On the other hand, consumer spending was better than expected and underlying private demand in the US still looks robust. Against this backdrop, we recommend a wait-and-see attitude amid today’s stretched valuations and persistent supply chain problems We are still neutral on risk assets and have downgraded Chinese equities to neutral following recent regulatory moves which could be extended to other economic sectors.
EUROPEAN EQUITIES
Indices revisited all-time highs thanks to a crop of upbeat quarterly results. Companies are still benefiting from the rapid economic bounce. Its effects have been amplified by recent restructuring efforts which have reduced break-even points. But stock market gains still depend on companies beating expectations by a wide margin as well as management comments on the outlook. Luxury sector stars reported much higher figures with LVMH and Kering beating expectations in almost all their divisions. Both groups say they can increase sales and profitability in the second half. In healthcare, Sanofi revised full year guidance higher after a strong second quarter driven by Dupixent and non-Covid vaccines. Airbus reported €2.7bn in operating profits in the first half thanks to cost savings and higher aircraft deliveries. Nestlé was also optimistic and raised annual targets. All geographical zones are performing well, especially out-of-home activities, a sign that the economy is returning to normal. First-half margins at Danone were hit by cost inflation and category mix but the group managed to offset the impact with productivity gains and premiumization. An €800m buyback program is scheduled for the second half. Higher shareholder payments were also in evidence elsewhere. Oil majors Shell and Total Energies rode on an 87.5% jump in the oil price over a year to report much better profits and announce share buybacks. ArcelorMittal followed suit. The question of input costs is increasingly important for companies. Smurfit Kappa (packaging) increased prices by 5% in the last quarter to offset persistent cost inflation. A slight sales miss at Reckitt Benckiser disappointed investors but the real problem was the company's difficulty in satisfactorily passing on higher input prices to end clients.
US EQUITIES
In a bumper week for results, most reports were upbeat, but the market's reaction was muted. Consumer confidence rose in July for the sixth month in a row to hit a fresh pandemic high. Americans have become more optimistic on current business conditions and the jobs market. The strong up trend in durable goods orders since March 2020 has begun to taper off but there is still a considerable backlog to clear as basic capital goods orders have outpaced deliveries over this period. Strong spending on equipment in the second quarter will last into the current quarter. Unsurprisingly, the Fed left its monetary policy unchanged and said it would provide strong support to underpin the economic recovery. But the bank also said it was prepared to reduce asset purchases if the economic recovery picked up speed. No details on timing were provided but Fed chairman Jerome Powell said it would still be a long wait before tapering would be introduced. The week saw a blitz of tech stock earnings reports. Apple had an excellent fiscal third quarter across all divisions with iPhone sales rising the most. However, the stock sank 3% when management took a cautious approach to the outlook, citing semiconductor supply side problems for the iPhone and iPad. Microsoft fell 2.6% despite an earnings beat. The group enjoyed the fastest growth in 6 years with commercial cloud revenue jumping 31%. Management sounded an upbeat note for its fiscal first quarter, but chip shortages will nonetheless have some impact. Alphabet gained 3% when its results came in higher than expected. Advertising spend grew significantly and the Search, Cloud & YouTube divisions also performed very well. Facebook tumbled 3.5 %, its biggest fall in more than two months, after its cautious guidance on the outlook. The company warned on head winds from Apple’s new targeted ad rules. Amazon plunged 7.4% in pre-market trading following its earnings release due to a slight miss. Online stores accounted for most of the disappointment while AWS and advertising improved. Management said growth would dip in the third quarter due to difficult year-over-year comparisons and people moving around more. Tesla’s margins were improved by electric vehicles and the company reported more than $1bn in second-quarter income. Second-hand car sales also boosted the figures. Universal Health's second-quarter results beat expectations and the group raised guidance for the full year. Workday suffered its biggest fall in more than two months following claims that Amazon had stopped using its human resources software. PayPal plunged 8.5% after its figures fell short and the company provided disappointing guidance. Qualcomm gained 3.5% on strong demand for 5G smartphones.
JAPANESE EQUITIES
Indices recovered with the NIKKEI 225 and TOPIX gaining 1.44% and 2.04%. Sentiment was boosted by US stock gains during Japan’s public holidays in the previous week as well as positive quarterly earnings and upward revisions. However, enthusiasm was capped by the economy still being subject to restrictions during the Olympics due to spreading Covid infections. The Suga administration also sank to a low in the opinion polls, so markets are wondering if a change of government is in store. Iron & Steel gained 6.50%, Nonferrous Metals rose 5.89% and Textile & Apparel ended the week 4.92% higher. Lagging cyclical sectors rose over the week. Other Manufacturing, Electronics Power & Gas and Communication edged 0.66%, 0.32% and 0.32% lower. Nissan Motor soared 15.02% as the company now expects to make a profit this year. Sumitomo Metal Mining jumped 9.01% as copper prices increased. Canon plunged 7.64% on profit taking. Softbank Group dropped 2.21% to a year-to-date low on concerns over China. The Tokyo Olympic games started with no spectators but the number of daily Covid infections hit a high. The government decided to extend the state of emergency until the end of August and include more areas outside the capital. The AstraZeneca vaccine was approved for people over 40. The government had previously been cautious about using the company’s vaccine due to possible blood clot risks.
EMERGING MARKET
The MSCI Emerging Market index was down 1.21% as of Thursday’s close. China ended the period 4.53% lower despite a strong rebound after the government made efforts to assuage mounting concerns of a regulatory risk spillover after the release of harsher-than-expected regulations targeting the after-school tutoring sector. Brazil gained 2.84%, outperforming other regions, and India was almost flat (-0.05%). In China, the finalized “Double Reduction” guideline was issued with very strict rules applied to the entire academic after-school tutoring segment on mandatory education: companies offering such AST services will become non-profit institutions and be banned from conducting capital-driven operations. Foreign investors cannot control or hold stakes in academic tutoring companies via Variable Interest Entities (VIE). Beijing also announced new rules aimed at improving working conditions for food delivery workers. The China Securities Regulatory Commission (CSRC) stepped in to calm down the market rout by saying the VIE structure was essential. China also released support measures for the three-child policy including tax deductions and expanding childcare services, etc. Panzhihua’s local government in the Sichuan province decided to offer subsidies to families with two and three children. Following Linkdoc and Daojian, HelloBike, the Alibaba-backed bike-sharing company, cancelled its US IPO plans. China Telecom, one of the three state-run telecom groups, was approved for a Shanghai Stock exchange listing. It hopes to raise $8.4bn which would make it the country’s biggest listing in a decade. In Taiwan, Mediatek’s second-quarter results beat expectations on higher 5G penetration rates and market share gains in the mid-end segment. Management revised up its 2021 revenue guidance by more than 45%. In Korea, Samsung Electronics reported better-than-expected second quarter figures, driven by strong earnings from semis and displays. The management highlighted solid underlying end market demand and recovery across all divisions. In India, Zomato shares jumped more than 60% on its first day of trading, making it one of India’s 50 largest companies. Reliance reported earnings miss on weaker retail volumes but O2C, O&G and digital growth continued to improve. ICICI Bank’s second-quarter results highlighted strong core performance on better-than-expected margins, while asset quality took a hit due to the second Covid-19 wave. In Brazil, Vale reported record earnings driven by higher metal prices, but the figures were still below consensus estimates due to higher-than-expected cost inflation. In Russia, the central bank raised its benchmark rate by 100bp to 6.5% due to strong inflationary pressure.
CORPORATE DEBT
CREDIT In another busy week for second-quarter figures, markets were buoyed by upbeat results and the Fed’s decision to maintain its accommodating monetary policy. As a result, the Main and Crossover tightened by 0.3bp and 1.3bp over the period. Rates were generally stable over the week. Yields on the German 10-year Bund tightened by 3bp and 10-year US Treasury yields hit 1.27% on Thursday evening. In company news, first-quarter sales at Casino Guichard dipped 0.5% to €14.5bn but operating profits rose 24% to €444m and net losses were reduced to €35m. The group also finalized the sale of Floa, its banking joint venture with Crédit Mutuel, to BNP Paribas for €258m. The deal was part of Casino’s €4.5bn disposal program. Europe’s largest vehicle rental company, Europcar Mobility Group said it had agreed to be bought by a consortium led by Volkswagen. The € 0.5 a share price tag could by upped by a centime if more than 90% of the shares are tendered, thus qualifying the company for a mandatory delisting. The deal means Volkswagen has taken back control of the company for €2.9bn, 15 years after selling it to Eurazeo for €1.26bn. Elsewhere, Iliad’s founder and main shareholder Xavier Niel, launched a bid on the company at € 182 a share, a 61% premium. Niel’s move comes a few months after Patrick Drahi delisted Iliad’s direct rival Altice Europe. In financials, BNP Paribas reported a 26.6% rise in quarterly net results to €2.91bn. The cost of risk fell 43.8% to €813m. Credit Suisse, in contrast, continued to suffer from the Archegos fall out. It cost the bank CHF 594m over the quarter, dragging net profits 78% lower to CHF 253m. Elsewhere, talks between UniCredit and the Italian government over the acquisition of 64% of Monte dei Paschi made some progress. The Tuscan bank had been rescued by the state in 2017. CONVERTIBLES Trading continued to be driven by the earnings season with most companies reporting upbeat figures. Sales at STMicroelectronics jumped 43.4% over a year to $2.99bn, or 3% better than consensus expectations. Improved order book visibility led the company to raise guidance for the full year. First-half results at luxury giant LVMH beat expectations, confirming strong demand across the globe as economies reopened. The group has now largely improved on its pre-pandemic levels. But figures at French fintech Worldline were slightly disappointing. The operating margin came in lower than expected by analysts and the company failed to provide any news on a possible sale of the payment terminal business that came with the merger with Ingenico. Second-quarter sales at Canada’s e-commerce giant Shopify rose 7% to $1.12bn and net profits came in at $879.1m, thanks mainly to a capital gain from its sale of Global E shares. Elsewhere, private equity firm Thoma Bravo paid $6.4bn, or a 20% premium, for tech company Medallia. The deal follows Thoma Bravo’s $12.3bn acquisition of Proofpoint last April. The new issues market revived even though the earnings season was in full swing. Switzerland’s Idorsia LTD (healthcare) raised CHF 600m at 2.125% due August 2028. The proceeds will allow the company to fund product launches on several key markets in 2022 and boost its portfolio of treatments which are in the later stages of development. Taiwan’s Hon Hai Precision Industry raised $700m due 2026. The group, which is also trades under the Foxconn Technology name, is an electronics contract manufacturer and is well-known as a supplier for Apple’s smartphones.
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