MARKET ANALYSIS Published-18/09/2020

The focus was on central banks.

Central banks hold as, the Fed left its rates unchanged. It even said they would not move until inflation rose above 2% and stayed there for some time, a situation it does not expect to see before 2023. The bank also raised its GDP forecasts for this year from a contraction of 6.5% to minus 3.7%. But it lowered its growth forecasts for 2021 from 5% to 4%, adding that the road back to full employment was still long. All this echoed the negative impact from Congress’s failure to reach an agreement on a new stimulus package, especially as the week’s data on retail sales, industrial production and jobless claims suggested the recovery was stalling. In China, however, the rebound continued with upbeat industrial production and retail sales data.

The Bank of Japan also left its rates unchanged but sounded a more optimistic note on the economy than back in July. The rebound has continued but at such a slow pace that deflationary pressures remain. As a result, the bank is ready to introduce further monetary easing if required. The new prime minister, Yoshihide Suga, said he would stick with the current expansionary monetary policy.

Meanwhile, the Bank of England started to prepare for a no-deal. Relations between the European Union and the UK have deteriorated since the Internal Market draft bill which violates international commitments. The bank made no change to its interest rates but said the political and sanitary situation had worsened considerably with a knock-on effect on the outlook for growth and inflation. Talks between the EU and the UK continued with Commission president Ursula Von Der Leyen insisting an agreement was still possible.

Equity markets remained erratic but less so than previously. Volatility also fell. We believe index falls, especially in the US, are the result of a technical correction rather than a trend shift lower so we seized the opportunity to increase equity weightings and are now back to neutral. To do so, we upped US equities to neutral. We still remain keen on European and emerging country equities, especially China. Markets are being supported by the overall recovery, positive upward momentum in earnings revisions and expansionist monetary and budgetary policies. Bond yields are still very low. We still like US Treasuries and emerging country government bonds but have turned neutral on corporate bonds.


Markets traded in a narrow range, reacting to vaccine hopes, indications on the strength of the recovery and the amount of support from central banks and governments. Risk aversion resurfaced at the end of the period on investor disappointment that the Fed had not announced further easing measures. The Bank of England also created some alarm by saying it might have to resort to negative interest rates. The European Commission revised up its targeted reduction in greenhouse gas emissions by 2030 compared to 1990 from 40% to 55%.

Following on from H&M, Inditex, Zara’s parent company, said sales had rebounded rapidly with profits for the May-July period double expectations. The digital segment will remain a crucial growth area for the company. Although earnings have not returned to 2019 levels, Inditex stressed how important its rigorous cost-cutting policy had been. Fnac-Darty also said sales had been buoyant in recent months.

At the other end of the scale, companies which had taken the brunt of the crisis continued to suffer. Lufthansa said it might reduce its fleet further, a move that would also mean even more redundancies. Commercial property companies are in the same boat. Unibail-Westfield launched a €9 billion plan to shore up its balance sheet.

In M&A news, the London Stock Exchange said it was in exclusive talks with Euronext for the sale of Borsa Italiana. Enel received a firm €2.65 billion bid, net of debt, for its 50% stake in Open Fiber. The merger between Caixabank and Bankia was approved by the boards of both banks and will now be put to shareholders at an extraordinary meeting. According to Bloomberg, Apollo Global Management is mulling a bid on Covestro. Apollo denied the report.


The Fed said rates would remain low until 2023 at the earliest, citing uncertainty that the economy would continue to recover. The bank warned that the road back to full employment would be long. Fed chair Jerome Powell also said more support for US households and companies would probably be necessary to help the economy recover from the pandemic’s effects.

Sector rotation continued with profit taking on growth and tech stocks after their record run since the summer. Given economic and political uncertainties, it is still too early to say if a rotation into cyclicals will occur.

In a busy week for M&A news, Nvidia paid $40 billion to acquire its rival ARM Holdings, a record price tag in the semiconductor sector. In healthcare, Gilead said it intended to buy Immunomedics, a specialist biotech which makes a breast cancer drug, at close to a 100% premium on the last quoted price. Elsewhere, Oracle confirmed it had offered to buy a stake in TikTok, a move which appears to be backed by the Trump administration.

In results, FEDEX saw a steep 31% rise in sales over the quarter thanks to the booming e-commerce sector. The company confirmed that its aim to transport 100 million parcels would be reached in 2023, or 3 years ahead of schedule.

Pfizer said its Covid vaccine could be available in the US by the end of the year if it proved efficient and devoid of dangerous side effects. Moderna said it might release the final results of its clinical vaccine trial at the end of October, only a few days before the US elections.

At the end of the period, Facebook suffered profit taking after press reports that it might be facing an antitrust suit launched by the Federal Trade Commission.


Toshihide Suga was officially elected as the 99th Prime Minister of Japan. Katsunobu Kato, former Minister of Health, Labor and Welfare, succeeded him as the Chief Cabinet Secretary. Former Defense Minister Taro Kono was appointed as Minister of State for Administrative Reform where he is expected to accelerate Suga’s key policy, an administrative and regulatory reform to end vertically-segmented bureaucratic sectionalism. The new cabinet’s members are seen as capable and highly-well-experienced people. According to a Nikkei opinion poll, the reform-oriented new government made a good start with 74% approval ratings.

Japanese stocks edged higher. Upside was capped by falling US markets and concerns over the strong Yen. The TOPIX advanced 0.11%. Small caps continued to outperform large stocks with the TOPIX Growth index up 0.64% while the TOPIX Value Index fell 0.52%).

Information & Communication Technology and IT services led gains. Infomart (e-market services) jumped 16.33%. Investment company Softbank Group rebounded 12.92% after ARM, a UK semiconductor design company, was sold to Nvidia in the US. In contrast, the Land/Air/Marine Transportation sectors underperformed. East Japan Railway and West Japan Railway declined on a significant earnings decrease due to the epidemic. Auto stocks were also weak on worries over the Yen’s appreciation while Toyota’s car production recovered.

After the September 16-17 Monetary Policy Meeting, BoJ Governor Haruhiko KURODA said large-scale monetary easing and the 2% CPI target would be maintained. He also reaffirmed he wanted to continue working closely with the new government and serve out his remaining tenure until April 2023.


The MSCI Emerging Markets Index was up 1.4% as at Thursday’s close, with Brazil, South Korea and China outpacing other regions.

In China, August’s financial data beat market expectations: incremental loans to the real economy grew by RMB 115.6 billion, with a sharp increase in household and medium/long-term corporate loans driven by rising real estate sales and loans to manufacturing industries and infrastructure projects. China’s macro data was also strong: industrial production rose 5.6% YoY (vs 5.1% estimated and +4.8% last month) and retail sales edged 0.5% higher, a sequential improvement and also better than expected. Investment-related data also improved: fixed asset investment was only down 0.3% YoY, with some remarkable strength in property investment which rebounded by 4.6% YoY. August’s auto sales grew 9% YoY, their fastest pace in more than 2 years. In company news, Oracle beat Microsoft to acquire TikTok. Bytedance, TikTok’s owner is poised to receive a payment license from the Chinese authorities.

Nvidia bought ARM Holdings (it is unclear at this stage whether ARM’s Chinese subsidiary will be kept by Nvdia). The transaction is good news for TSMC and Samsung. Alibaba is set to invest $3 billion in Grab, acquiring Uber’s stake, while Tencent will join other companies to invest RMB 10 billion in SME SaaS (which comprises over 50 vendors). In Korea, Samsung is said to have won all orders for the next Snapdragon 875 series 5G chipset from QCOM, for a launch on Dec 12. The contract is worth around $1 billion. LG Chem announced the split of its battery business, prompting concerns on shareholder dilution.

In India, the Securities and Exchange Board released a circular requiring multi-cap funds to allocate at least 25% of their portfolios to large, mid and small-caps, a good move from a financing point of view. On the macro front, inflation data is now under better control judging from August’s CPI which came in at 6.7% YoY, or lower than the 6.9% expected. In tech, Infosys acquired GuideVision, a software provider focused on cloud services while HCL Tech hiked its guidance for the second quarter of FY 2021 and now expects revenues to grow 3.5% QoQ, up from 1.5-2.5% previously, on strong broad based momentum from all verticals.

In Brazil, August’s construction inflation rose to 4.5%, after a strong rebound in housing starts, especially for low income homes. Property developer Cury, specialising in low income housing, said housing starts were up 50% YoY. Consumer and business confidence continued to improve in August, but was still below pre-Covid levels. Rumo made an early payment of R$1.5 billion for a railway concession to save on future costs.

In Argentina, the government announced further measures to tighten capital controls after a sharp drop in foreign exchange reserves and Corporate debt.


Encouraging economic indicators helped push the market higher initially before the trend reversed last Thursday. Doubts on the strength of the recovery increased after the Fed said there were signs it was slowing in the US but made no reference to any fresh support measures. Between Monday and Thursday, the Xover tightened by 28bp, largely because Matalan left the index, and the Main by 1bp.

Second-quarter sales at Fives fell by a disappointing 28% with new orders down 9%. EBITDA fell from €24 million to almost zero. Management expects the picture to improve gradually from this quarter and sees things returning to normal by the end of the year. Second quarter sales at Paprec fell 21% but EBITDA increased by an upbeat 11% on cost cutting. Note, however, that the group expects to make significant acquisitions in the next 6 to 12 months in a bid to almost double sales. Ellaktor’s bonds performed well after Dutch investment fund Reggeborgh said it had taken a 4.97% stake with an option to buy 12.54% more up to March 2021.

The merger between Caixabank and Bankia has been made official. The all-equity deal values Bankia at €4.3 billion and should complete in the first quarter of 2021. The impact on solvency ratios is limited. The new group’s CET 1 will be 11.6% after restructuring charges of €2.2 billion, most of which be booked in 2021. Elsewhere, the chairman of the UBS board has reportedly been looking at merging with Credit Suisse. The project is part of a recurrent strategic options exercise at UBS and has not been discussed with the group’s executive committee.

The High Court in London ruled in favor of insured parties which had suffered operating losses due to the Covid pandemic. The tests were requested by the Financial Conduct Authority (FCA). Many insurance companies then provided estimates of the possible impact. The damage looks as it can be controlled. Revenues will come under pressure but not solvency ratios.

In new issues, Maxeda raised €420 million over 6 years at 5.75% to buy in its 2022 maturity. Altice France raised €900 million over 8 years in two tranches, one for €500 million at 4.125%, and the other for $475 million at 5.125%. The proceeds will go in part on refinancing the ACF 2023 facility for €1.06 billion and reimbursing amounts drawn down from the company’s revolving credit. SPCM raised €700 million in two tranches, one due 2026 at 2% and the other 2029 at 2.625%. The proceeds will be used to refinance the 2023 maturity as well as credit-line drawdowns. Unipol is buying back its 2021 maturity and issuing a senior Green bond for €750 million at 3.25%.


The new issues market remained busy with Canada’s Shopify raising $800 million. The Shopify platform allows companies to create e-commerce sites. Growth was exponential in the second quarter with sales doubling in size. US software company Medallia raised $500 million. The company’s products help improve the customer experience by providing real-time feedback. In Europe, Italy’s Falck Renewables raised €200 million. Falck is a wind farm company with generating capacity of 1.13MW. The proceeds from the issue will go on developing new projects.

Elsewhere, Qiagen acquired NeuMoDx Molecular for $248 million, taking the 19% holding it had held since 2018 to 100%. The deal reinforces Qiagen’s position in PCR testing. Also, of interest was Greece’s decision to buy 18 Rafale fighter planes, 6 new and 12 second-hand, against a backdrop of heightened tensions in the Mediterranean. The deal will keep Dassault Aviation’s production chains busy for the next 12 months.