MARKET UNCERTAINTY

After 5 weeks of non-stop gains, markets turned more hesitant. Fundamentally, risk assets are still in favorable positions thank to hopes that vaccination campaigns will trigger a cyclical rebound, especially amid today’s very advantageous financing conditions. 

Pfizer’s vaccine has been approved in the US and UK and Moderna should soon follow suit. This is a genuine game-changer even if disappointments are possible; the news that Sanofi’s vaccine would be delayed is one example. 

The economy and corporate earnings will suffer for weeks to come but consumer and company confidence levels have recovered sharply and suggest we should be optimistic on the upcoming rebound. 

That is why we have extended our preference for equities to all zones, even the UK. Uncertainties over final Brexit details will end whether the current talks succeed or fail. Emerging country equities should also rise on the expected cyclical recovery. In fixed income, we prefer corporate and emerging country debt as well as inflation-indexed bonds. 

Having some medium-term clarity is essential for investors if the European equity market is to continue rising. This means better visibility on vaccine efficiency/safety and budgetary stimulus and less political uncertainty. However, the latest vaccine news has been mixed. The Sanofi and GlaxoSmithKline vaccine will now be delayed until the end of 2021 and the UK’s medical authorities have warned that safety issues will have to be closely watched. At the same time, final Brexit discussions are still tense and, in the US,, where the pandemic is spreading, there are lingering uncertainties over the next stimulus plan. All this has prevented investors taking on more risk. The good news is that the EU has finally approved its budget and its stimulus package. 

And there have been no major surprises from the ECB. The bank has given clear indications that funding conditions will remain highly favorable until pre-crisis inflation levels return, i.e. in mid-2022. It is still unclear if it will recommend that financial institutions should be able to resume dividend payouts, so banks came under pressure. However, the UK regulator struck a more positive note and authorized the country’s banks to start paying dividends again under certain conditions next year. Oil prices pushed higher with Brent crude briefly popping above $50 for the first time since March. Oil stocks naturally benefited. Cyclicals and discounted sectors generally held onto recent gains but there were still some difficulties for individual companies. 

STMicroelectronics pushed back its sales target from 2022 to 2023, citing persistent US-China tensions. German tourist group TUI reported a heavy loss despite slashing fixed costs by 70% during the lockdown. It only expects to be running at 20% of capacity over this winter but hopes to recover to 80% in the summer of 2021. On the plus side, HelloFresh raised guidance for 2021 and unveiled ambitious sales and EBITDA margin targets.

Indices edged higher over the period with the Dow Jones up 0.10% and the S&P500 0.04% better. The Nasdaq finished the period 0.23% higher. 

Covid cases are rising sharply in the US but markets are mainly worried about talks over a stimulus plan as horse trading continued between Democrats and Republicans. Senate Republican head Mitch McConnell added his support to Treasury Secretary Steven Mnuchin’s $916bn plan. Nancy Pelosi is keen on the $908bn bipartisan package proposal. The difference between the two concerns benefit roll-out and investment priorities. Both sides have up to December 18 to reach an agreement. 

Meanwhile, weekly jobless claims have rebounded since the beginning of December to close to a 3-month high. This is probably due to increasing layoffs as coronavirus cases rise. Claims totalled 853,000, up from 716,000 in the previous week, another good reason for Congress to rapidly adopt a stimulus plan. 

Oil prices rose, with WTI up 3% to $47 after an attack on drilling sites in Iraq. 

Tech stocks succumbed to fresh worries after STMicro plunged 15.2% on a profit warning and an antitrust suit was filed against Facebook (-1.9%). 

By 17 votes in favor, 4 against and one abstention, the FDA approved the Pfizer/BioNTech vaccine for marketing. Validation is only a question of hours and the first vaccination could start in days. 

Two highly anticipated IPOs both rocketed on their first day of trading despite issue-price ranges being raised several times. Food delivery company DoorDash soared 86% and Airbnb more than doubled to reach a market cap of $86.5bn.

Stocks were almost flat over the week, falling on increasing Covid cases and rallying on news that vaccinations had started in the US and Russia as well as possible stimulus in the US and Japan. The NIKKEI 225 and TOPIX both edged up 0.02%. At one point, markets advanced when October machinery orders rose by a better-than-expected 17.1% compared to September. The TOPIX Value Index gained 0.15%, outperforming the TOPIX Growth Index which dipped 0.11%. 

Softbank Group jumped 14.41% after taking a big stake in US IPO stock, DoorDash, a major food delivery service provider. Autos outperformed while some high-tech names such as Nidec in the Electric Appliances sector were hit by profit-taking. Toyota Motor rose 4.14% and Nissan Motor added 3.65%.

Japan’s third quarter GDP growth was revised upwards to 5.3% QoQ, or an annualized +22.9%, as Capex rose after a four quarter interval. After the JPY 230 trillion in economic measures decided last April and May, the government added JPY 73.6 trillion in economic relief measures including JPY 40 trillion in fiscal expenditure, or more than the negative GDP gap in supply & demand estimated at JPY 34 trillion (-6.2% of Japan’s GDP on a preliminary basis). On top of COVID relief, the measures contain a JPY 51.7 trillion plan for structural transformation of the economy for post-Corona days. This includes a mid-to-long growth strategy through digitalization, DX and Green promotion. 

Following the government’s announcement that it was targeting a carbon neutral society by 2050, Tokyo’s governor asked for petrol-driven cars to be banned in the capital by 2030, or earlier than the government’s goal of the mid-2030s. Furthermore, the LDP & New Komeito ruling parties put forward a proposed tax reform for FY2021 to promote a change to EV/FCV, decarbonization and DX investments through tax reductions.

The MSCI Emerging Market Index had edged 0.33% higher as of Thursday’s close. Brazil and India outpaced other regions, rising 4.21% and 1.73% respectively while China was down 1.23%. 

China’s exports jumped in November by the most since early 2018, increasing 21.2% YoY, vs. 12% expected and 11.4% in the previous month. Import growth eased to 4.5%, vs 4.3% expected and 4.7% in October, leaving a trade surplus of $75.4bn, or +23% YoY over the first 11 months of this year. CPI fell .5% in November, the first drop in 11 years, mostly due to pork prices falling. Retail passenger vehicle sales in November rose 7.8% YoY to 2.11m units. Credit growth slowed slightly to 13.6% YoY in November, vs 13.7% previously. 

On the corporate front, Sino Biopharmaceutical paid $515m for a 15% stake in Sinovac Life Sciences. Sinovac said that it would be able to manufacture 300 million vaccine doses annually and aims to complete construction of a second production facility by the end of 2020, taking annual COVID-19 vaccine production capacity to 600 million doses. Nio, following its peers Li-Auto, X-Peng and Tesla, is raising $2.7bn in an American depositary share issue to accelerate the EV transition. 

Singapore is joining the UK and Hong Kong in opening up its banking system to purely digital entrants. Two fully digital banking licenses were granted to Sea and Grab-Singtel, while two wholesale licenses went to Ant-owned entity and Greenland Financial consortium. 

In India, the RBI was said to be considering relaxing the CPI target band of 2-6% for formulating monetary policy, opening the door to low interest rates for longer. New property registrations in Mumbai were up 67% YoY and 17% QoQ in November, driven by low interest rates, inventory clearance and government incentives.

In Brazil, vehicle output increased 4.7% YoY in November, a token of a second-half recovery, while exports jumped 38.6% YoY. Retail sales rose 8.3% YoY in October, vs 7% expected and 7.3% in September. The National Broad Consumer Price Index (IPCA) in November stood at 0.89%, or higher than expected. The central bank decided to keep interest rates unchanged at 2% as expected, but with a hawkish comment as they mentioned the possibility of removing forward guidance. Brazil’s Supreme Court voted against Alcolumbre’s re-election as Senate chief and Maia’s re-election as Lower House speaker. Notre Dame Intermedica announced a new quality hospital acquisition in Belo Horizonte.

CREDIT

This week’s main talking points were new developments in the Brexit talks and the latest ECB announcements. 

Comments from European officials seemed to point towards a no-deal exit for the UK. As a result, market volatility resurfaced at the end of the week. 

The ECB, meanwhile, upped its economic support by increasing the PEPP to €1.8bn and extending the program to March 2022. It also prolonged lending to banks at negative rates while increasing the amounts on offer. The announcements on program duration and banking support were a little more ambitious than expected. 

Over the week, the Main widened by 5bp to 50 and the Xover by 50bp to 263. UK banks underperformed on news of how Brexit talks were going.

Casino unveiled a move to shore up its finances with (i) a €500m debt issue (€200m in TLB and €300m in SUN due 2026) along with (ii) an offer to buy in €1.2bn in unsecured 2021-2025 maturities. The new issues will boost liquidity and help the group pursue it asset disposal plan. The bond package gained 1.5 points over the week amid outperformance from the long end of the yield curve. 

Air France-KLM could receive another several billion euro in government aid in early 2021. Press reports suggest that the French government, which already owns 14% of the shares, wants to double its stake by reinjecting €4-5bn. The 5-year CDS has tightened by 500bp since its October high but is still at trading at a broad 510bp compared to rivals. 

Lisbon’s restructuring plan for TAP Portugal has been submitted to the European Commission. Portugal’s finance minister said the plan included a significant transformation of the company aimed at improving efficiency and cutting payroll costs. 

According to the business plan, TAP will still need €970m in government aid in 2021. The Jornal de Negocios said the restructuring plan included a 25% reduction in TAP’s routes. Holders of the two bonds issued in 2019 are not expected to be concerned.

CONVERTIBLES

The new issues action over the week was mostly in the US with a $1.15bn deal from Uber. The group also announced that it was refocusing on its core car hire and food delivery services and selling its self-driving car division to start-up Aurora. At the same time, it took a 26% stake in Aurora to maintain some exposure to the sector while saving on cash consumption. Elsewhere, software publisher MicroStrategy raised $550m due 2025 at 0.75%. The proceeds will go on bitcoin investments. 

In Europe, Qiagen (molecular diagnostics) raised $450m with a 2027 maturity to fund the buy-in of its 2121 convertible. The company’s positioning has been particularly profitable during the pandemic: Corona detection kits are expected to add $450m this year and $550m in 2021 to sales. 

In company reports, Coupa Software’s third-quarter sales rose 31% to $133m. The operating margin also rose from 5% to 10.8%.