THE GLOBAL ATMOSPHERE CAUSES WORRY

Falling temperatures have exacerbated the global sanitary situation. In Europe, Germany, and the UK reinforced restrictions. Cases have also started rising again in Asia, a worry for Japan and South Korea which had managed to control the first wave. Schools and bars in Seoul have closed. 

But although the short-term growth prospects have taken a knock, markets are focusing on the post-crisis period as vaccination drives are rapidly rolled out and support measures remain in place.

At the same time, Europe’s PMI indices improved sharply but with a significant gap between resilient manufacturing and services which continued to fall.

That is why central banks in Australia, Japan, the UK, Switzerland, and the US reaffirmed their accommodating stances over the week. Asset purchasing programs have been maintained and some central banks are keen to control yield curves, allowing governments to orchestrate budgetary stimulus. Markets are expecting a fresh round of US stimulus by the end of December. 

As for Brexit, fishing remained a bone of contention but there appears to be agreement on a mechanism to allow the UK to diverge from European standards. Both sides are taking a positive approach and discussions are continuing ahead of the December 31 cut-off date. The risk of a no-deal is waning in favor of a free trade agreement, or more probably a series of partial and temporary arrangements to avoid too much disruption. 

Against this backdrop, global markets traded higher and the US dollar continued on its downward trend, especially against the euro and emerging country currencies. 

We remain upbeat on equities and have extended exposure to all zones, including the UK which could play catch-up in the post-Brexit era. We are still overweight emerging country sovereign debt. The segment is still attractive with interest rates set to stay low for some time, ongoing US dollar weakness and strong political support.

Despite worsening epidemic indications, equity markets continued higher on upbeat eurozone PMI data, the Fed’s commitment to lasting support and, above all, expectations of an imminent Congressional agreement on the budget. Vaccine advances continued to encourage investors to look beyond what looks like a tricky period just ahead. Even so, there remained a few risks. Brexit talks remained unfinished, the US and European stimulus plan have still not gone through and the second rounds of the Georgia senatorial elections have yet to be decided. 

Germany performed particularly well as its industry continued to feed on China’s economic rebound. The DAX is weighted towards cyclical and export stocks and Volkswagen also gained when its CEO kept his job. Nevertheless, the auto sector suffered a sharp drop in November sales in Europe following stricter restrictions designed to curb Covid-19 infections. And with Germany’s recent decision to impose tough lockdown measures, sales in the country should fall further. Lockdown effects also hit sales at H&M and Inditex, both of which reported figures at the bottom end of analysts’ expectations. 

The ECB extended its dividend payout restrictions on banks up to September 2021. Any payouts will have to respect a tough criterion, viz. either 15% of cumulative underlying earnings in 2019 and 2020 or 20bp of the CET1 ratio at the end of 2020, whichever is the lower amount. Banks fell but only wiped out a small part of their outperformance since the beginning of November.

On a persistently active M&A market, especially in healthcare, Philips launched a $2.8bn bid on BioTelemetry. The acquisition will reinforce the group’s presence in cardiovascular monitoring solutions in the home.

US indices enjoyed a slight rebound over the last 5 trading sessions up to Thursday with the Dow Jones up 1.01% and the S&P500 1.48% better. The Nasdaq finished the period 2.89% higher. 

The vaccination campaign started last Monday in the US as the death rate moved above 300,000. The FDA unanimously approved, with one abstention, Moderna’s vaccine which will start being used from December 21. 

The Fed kept its asset purchasing program at $120bn a month but said it would use all the instruments at its disposal to underpin the economy in these difficult times. The bank now expects GDP to contract by 2.4% this year and rebound by 4.2% in 2021 and 3.2% in 2022. 

Elsewhere, retail sales in November lurched lower, down 1.1% MoM compared to the 0.3% rise in the previous month. Only building material and e-commerce sites remained in positive territory, up 1.1% and 0.2%.

The Fed reduced its jobless rate forecasts for this year from 7.6% to 6.7% and expects it to fall to 5% in 2021 and 4.2% in 2022. 

Weekly jobless claims came in at 885,000, or higher than 818,000 estimated, a development that was interpreted as another encouragement to rapidly reach an agreement on a stimulus plan. 

Oil prices continued to rise after a surprise drop in US inventories. M&A deals continued apace in the healthcare sector. Biotech’s surged after AstraZeneca paid $39bn for Alexion Pharma. 

Apple is planning to increase iPhone production by 30% in the first half of 2021. Tesla gained more than 5% ahead of its inclusion in the S&P 500 on December 21. 

Stocks moved higher thanks to global monetary easing and the start of COVID-19 vaccinations in the US and UK. The TOPIX advanced 0.59% and the Nikkei 225 gained 0.58% over the week. TOPIX core and large cap stocks led gains as game producer Nintendo jumped 12.3% and Keyence rose 6.11% while Softbank Group added 5.52%. Auto and Electric Appliances were also firm. Elsewhere, Mitsubishi Heavy Industry climbed 9.52% after it announced a restructuring program for its loss-making aviation business. 

In contrast, Air Transportation tumbled 9.02% and Land Transportation, which includes railways, lost 1.93% after the government requested a nationwide suspension of existing travel promotion measures over Christmas and the New Year to curb coronavirus infections. The TOPIX Growth Index gained 0.94%, outperforming the TOPIX Value Index (+0.11%).

The government revised growth forecasts upwards to 4% from 3.4% for FY2021 (April 2021 to March 2022) on stimulus measures recently decided by the Suga administration. 

In more upbeat news, the Nikkei newspaper said IOC Chairman Thomas Bach was optimistic that the 2021 Tokyo Olympic Games would be held from July 23 thanks to vaccine progress allied to careful distancing procedures.

The MSCI Emerging Market Index traded 1.22% higher as of Thursday’s close. Brazil and China outpaced other regions, rising 2.98% and 1.63% respectively. 

China’s industrial output rose 7% YoY in November as expected, up from 6.9%. Retail sales were up 5% YoY in November also as expected and 4.3% previously. Online retail sales rose 11.5% YoY for the first eleven months. Online retail sales of physical goods rose 15.7%, accounting for 25% of China’s total retail sales. Fixed asset investment growth edged up to 9.7% YoY in November vs. 9.5% in October. The PBoC injected a record RMB 950bn in the interbank market. Latest data showed local commercial banks were shrinking the balance of structural deposit business, causing a liquidity shortage. 

China may open up its borders to seaborne coal and set price ceilings for Chinese coal in an attempt to cool domestic prices. Meanwhile, Australian coal has been exempted from the new order approval. MIIT was seeking public opinion to exclude solar glass from the latest draft of Cement and Glass Capacity Swap Implementation Plan, which could ease the tight supply situation. 

The authorities fined Alibaba and WeChat (a subsidiary of Tencent) for allegedly failing to declare past acquisition deals under antitrust laws. On the corporate front, Jiangsu Hengrui received official approval from NMPA on its PARP inhibitor to enter the market, the first China-made PARP inhibitor drug for ovarian cancer. 

India’s CPI rose 6.93% YoY in November, or lower than the 7.2% expected and last month’s 7.6%. Industrial production grew 3.6% YoY in October, or higher than consensus expectations for 1.1% YoY, and last month’s +0.5%. Wistron, an iPhone assembler, saw one of its factories vandalized, causing as much as $7m in damage, after workers claimed they had not been paid. 

In Indonesia, CATL will invest $5bn in a lithium battery plant. Production is expected to start in 2024. 

In Brazil, the government decided that emergency aid to informal workers would not be extended beyond December 31. The central bank indicated that food inflation had started to cool off and suggested an uneven recovery in domestic activity. Despite stores reopening, Brazilians continued to increase online spending. Anima (education) said it might spin off its medical courses. Intermedica announced another good acquisition, a well-known hospital in Belo Horizonte. 

Mexico’s central bank decided to keep the rate unchanged at 4.25 (in line with consensus). 

The US imposed sanctions on Turkey over its purchase of a Russian S-400 missile defense system.

CREDIT

Markets pushed higher on hopes for an imminent US stimulus plan agreement and a satisfactory Brexit deal. Upbeat economic indicators in the middle of the week boosted investor sentiment. The eurozone’s flash PMI were better than expected, partly due to France’s services sector coming in at 49.2, or much better than the 40 expected. The Fed left its monetary policy and asset purchasing program unchanged but said support would remain in place until solid progress had been made towards achieving its targets. 

The Main and Xover tightened by 3bp and 20bp although yields on the 10-year German Bund rose 7bp. 

Casino finalized its recently announced funding operation, increasing its 2026 senior bond to €400m, up from €300m initially, and its Term Loan B from €200 to 225m. It also reduced the coupons, cutting its 2026 bond to 6.625% from initial price talk levels of close to 7.5%. 

Pemex said it had monetized $5bn in Mexican government bonds to improve its short term cash position. Mexico’s government provided short term cash by agreeing to exchange promissory notes for longer dated government bonds. 

The ECB asked banks not to pay out dividends or at least to limit amounts up to end September 2021. Banks can pay out up to 15% of 2019 and 2020 earnings combined as long as the amount does not exceed 20bp of their CET1 ratio. Elsewhere, the EBA in its annual Risk Assessment report said that although the Covid crisis had sent profitability to record lows with the first signs of asset quality deterioration appearing, banks still had strong capital bases and liquidity ratios. 

In new issues, as well as the Casino 2026 bond, Belgium’s House of HR (ex-Accent), a temping and permanent staffing specialist, raised €200m due 2027 at 7.5%.

CONVERTIBLES

The new issues market remained busy across all zones. The US was the week’s biggest contributor, notably with a $2bn jumbo deal from telecom company Dish Networks. The proceeds will go on 5G infrastructure development. The company already has a frequency block. Zynga (gaming) raised $762m due December 2026. The company is specialized in interactive widgets for social networks and has seen sales surge this year thanks to its Farmville license. 

Vail Resorts raised $575m. The company operates 37 skiing resorts in the US, Canada and Australia. The proceeds will go on underpinning the balance sheet as sales have been hit by the Covid crisis, halving in the previous quarter compared to the same period in 2019. 

In Asia, streaming platform IQIYI raised $800M due December 2026 at 4%. Viva Biotech raised $280m. The Shanghai-based research company has seen sales jump 52% this year. At the beginning of the month, it finalized its acquisition of Langhua Pharmaceutical. 

Italy’s Pirelli (tyres) raised €500m due 2025. The proceeds will be used in part to refinance existing debt. 

In company news, EDF revised its EBITDA targets for this year higher to €16bn. This is in line with its plan to increase nuclear electricity production for the end of the year.