Market Analysis

MARKET ANALYSIS | 20/08/2021

  • US consumer spending slows down sharply
  • Interest rates remain at rock bottom
  • China shows worrying signs of slowing

The week saw the end of 10 up days in a row on financial markets. US surveys suggested consumers had cut spending sharply due to a resurgence in Covid-19 cases and inflationary pressure. The Michigan survey showed house and auto buying intentions had sunk to a low not seen since the 1980s. Retail sales were also down but by not as much. On the other hand, manufacturing rose, and labor market data remained upbeat.

Interest rates remained at lows despite the Fed wanting to reduce asset purchases. The July FOMC minutes suggested a consensus was emerging to start tapering from the end of 2021 for a period of roughly 12 months.

China’s slowdown is much more worrying and comes amid further moves to tighten the regulatory environment and increase sanitary constraints. Even so, Beijing has only made small steps to ease monetary restrictions currently weighing on the economy. More generally, we can expect bad weather and sanitary restrictions to disrupt supply chains and the relevance of global industrial production data.

Faced with the highly contagious Delta strain, many Asian countries are still going for the severely restrictive zero-Covid and tracking approach, pending the effective roll-out of vaccinations. New Zealand, for example, decided on a 3-day nation-wide lockdown after only one Covid case was reported. Its central bank immediately postponed its rate-hike program.

Economies in Europe, however, have been able to reopen a little thanks to more people being fully vaccinated. The UK eased its sanitary measures while keeping a close eye on hospital occupation rates. The snag is that Israeli and British surveys show vaccine efficiency falling rapidly over time which suggests herd immunity will never be reached. And so we are moving towards a third, booster dose, at least until more efficient treatments emerge.

We are maintaining our neutral stance on equities with a preference for Europe. In fixed income, we are still underweight duration and prefer corporate bonds.


There is no such thing as a betting strategy that always wins! After two weeks of non-stop rises, markets finally came back to earth.

Investors are now grappling with signs the US economic recovery is running out of steam, the possibility that the Fed could introduce tapering by the end of this year and question marks over the strength of China’s economy amid a resurgence in Covid cases. In addition, Beijing now wants to tackle income inequalities and that could hit the luxury goods sector. As a result, companies including LVMH, Kering, Burberry and Ferragamo ended the period more than 10% lower.

Against this backdrop of mounting worries, the tail end of first half results came in. They were in tune with the upbeat trend seen in July with mostly better-than-expected strong rebounds, both in sales and in margins. Alcon and Carlsberg posted excellent second-quarter figures and raised guidance for the full year. Geberit remained cautious despite a more than 10% revenue beat. Management said that higher input prices had forced them to raise their prices at the beginning of the summer. Input prices are expected to rise by another 6% in this quarter.

In the autos sector, persistent semiconductor shortages led to Stellantis temporarily shutting down two factories while production at Toyota is expected to fall 40% this September.

Elsewhere, corporate activity continued at a brisk pace: Hella’s family shareholders sold their majority stake to France’s Faurecia which will now bid for the rest of the shares in the German company. This ambitious deal will make Faurecia the seventh largest auto equipment maker. The stock jumped more than 10% on the news.

BHP Group said it planned to quit the oil sector by selling its fossil fuel activities to Woodside and move its main market listing from London to Sydney.


The headline news of the week was the 1.1% drop in July retail sales compared to June. Among likely contributing factors were the increase in social distancing amid the spread of the Delta variant, the reduced impact of stimulus measures and higher prices due to supply chain shortages. Nevertheless, retail sales are still 13% higher than they were at the beginning of this year and 19% better than before the pandemic struck. For an economy geared to consumption, these figures are still very strong.

Any disappointment from these data was offset by excellent figures from major retailers like Walmart, Home Depot, Macy’s, and Target. Most do not expect Covid-19 to hit their sales and hope to maintain high margins due to reduced promotional activity. Higher wage and commodity costs are for the moment being absorbed.

Industrial production is still on a upswing and just starting to return to pre-pandemic levels. Inventories are low so new orders should remain buoyant as companies restock, giving an additional lift to manufacturing. The economy is clearly slowing but activity is still running at a strong pace and the background picture remains encouraging.


The quarterly earnings season ended. The NIKKEI 225 and TOPIX fell by 2.62% and 2.89%. Although GDP in April to June was up more than expected, the stock market brushed off the news. It hit a 7-month low, weighed down by spreading Covid variants, weaker economic indicators in the US and China, and a possible move towards tapering suggested in the latest FOMC minutes.

Pharmaceuticals rose 2.53%. Food gained 0.79%. Defensive sectors outperformed cyclical sectors. Oil & Coal Products, Mining and Iron & Steel tumbled 9.37%. 6.75% and 6.57%, respectively.

Fujifilm soared 12.06% to a record high on an upward earnings revision. Daiichi Sankyo jumped 8.12% on hopes for a Covid vaccine. Chugai Pharmaceutical rose 5.06% thanks to its Covid treatment. Nippon Steel plunged 11.22% on heavy profit-taking. Eneos plummeted 11.10% after failing to deliver earnings guidance.

Daily Covid infection cases moved above 23,000 on August 18. The government is trying to encourage people to move around less and extended the state of emergency lockdown until 12 September with 7 more prefectures concerned.


The MSCI Emerging Markets index was down 3.8% as of Thursday’s close. India (+0.8%) outperformed other regions. The MSCI China fell 6.3% on increasing concerns over an economic slowdown, the fast-spreading Delta strain and regulation tightening. Brazil’s Bovespa retreated by 3.3% on a commodity price slump and concerns over fiscal expansion.

In China, Covid-related restrictions, heavy rains and floods, tighter economic policies and component shortages seem to have dampened July activities across the board. The latest retail sales and industrial output data revealed a slowdown. July’s retail sales were up 8.5% vs. 10.9% expected and 12.1% in June; July’s industrial production rose 6.4% vs. 7.9% expected and 8.3% in June.

On the regulatory front, state media said China should tighten gaming industry regulations. Elsewhere, Tencent also warned on more regulatory changes. The group reported very strong second-quarter results. Highlights were fintech and business services, which grew 40% YoY. However, this was not enough to prevent the stock selling off.

AIA results beat consensus estimates with the value of new business up 34%. Li Ning (sportswear) raised guidance and now expects a 40% jump in sales and a net income margin of 16-17.5%. Ping An Bank’s second-quarter profits (for FY 2022) rose 45% YoY to RMB 7.45bn on lower lending costs. Profits were expected to be up 21%.

The Reserve Bank of India removed restrictions on the issuance of new cards. Apollo Hospital Q122 results were better than expected on a strong recovery in bed occupancy rates. Revenues rose 73% YoY.

In Indonesia, Sea Ltd.’s results swept past consensus expectations. Gross merchandise volume came in at $15bn vs. £13.7bn expected on higher commerce growth and higher take rates. Net adds and payer users also continued to grow. The company raised its guidance for 2021.

In Brazil, the focus this week was on tax reform discussions and the payment of government judiciary bonds. The market seemed concerned about the fiscal expansion induced by the reform and changes proposed by Congress. Elsewhere, iron ore prices continued to retreat and are now down 20% since the beginning of August. Anima Education reported mixed results, with a 64% rise in net revenues but a net add decline of 6%.



Trading was dominated by the Fed’s less accommodating stance as evidenced in the FOMC minutes. There is less consensus among committee members and their forecasts suggest tapering could start before the end of 2021. CDS indices proved relatively resilient with the Main up 1bp and the Xover 6bp higher.

M&A deals picked up speed in the high-yield segment. The main event concerned auto equipment makers, France’s Faurecia and Germany’s Hella. Faurecia is to pay €6.7bn (of which €3.4bn in cash) for the 60% stake in Hella owned by the Heuck family.

Faurecia is currently the global number one in seats and dashboards. The acquisition of this lighting and electronic components specialist will extend its product range. In telecoms, United Group finalized an agreement with Crystal Almond Holdings Limited to acquire Wind Hellas for €950m. This follows United Group’s acquisition of Nova Broadcasting in January.

In the UK, the bidding war continued for Morrisons, the country’s fourth largest supermarket chain. Private equity firm CD&R sweetened its bid to £7bn, or more than the £6.3n offered by Fortress in July. Elsewhere the CPP Investments-BC Partners consortium paid €800m for CeramTec (high-performance ceramic components).

At the tail end of the results season, insurance groups followed on from banks by posting upbeat second-quarter figures despite a rise in non-life claims, particularly in the autos sector as economies reopened for business. This summer’s soap opera concerned UniCredit’s efforts to buy part of Monte Paschi (BMPS) in a deal designed to be neutral in shareholder equity terms for UniCredit. To do so, the Italian government, which owns 64% of Monte Paschi, is reportedly considering an increase of capital for BMPS first.

In new issues, Swedbank raised $500m with an AT1 at 4%. The order book reached $3.7bn, a sign that investor appetite remained strong even in the middle of a holiday month.


The situation is less favorable but there were still two new issues in the US. Open-door Technologies, an online residential property company, raised $850m at 0.25% with a 2026 maturity. The company buys houses from individual sellers and sells them on to individual or institutional investors. It deals with any renovation work before putting the properties up for sale. Upstart Holdings, an AI lending platform, raised $661.25m at 0.25% due August 2026. The company pools consumer loan requests and then sends them on to its network of banking partners.