Global Weekly - A week of stabilisation

News item -

This week, after a difficult October, we saw some recovery in equity markets worldwide. Also, we saw unusual stock price movements in response to results of some companies, both on the upside and the downside.

On the upside, L’Oreal sees higher sales growth and an increase in profitability for the future - shares rose 6.6% after this announcement. General Motors announced better than expected results for the third quarter. Due to favourable tax rates and improving performances in the US and China, profits for 2018 may surprise on the upside. The stock rose 9.1% after this announcement.

On Friday 26 October, General Motors (GM) asked the US federal government to promote electric cars, responding to Trump administration’s proposal to freeze carbon-dioxide emission standards at 2020 levels. According to GM’s plan, which looks like California’s Zero Emission Vehicle Program, automakers have to sell at least a certain percentage of zero-emissions vehicles or pay credits to companies that make such vehicles. GM expects a boost in the number of long-range electric vehicles to more than 7 million, that would also spur investments in infrastructure for electric cars. GM has already invested heavily in electric vehicles and committed to launch 20 emission free models by 2023.

On the downside, we saw General Electric declining 8.3% after the announcement of their results. They reduced their dividend to USD 0.01. GE also announced that federal regulators will look into their accounting practices with regards to a large write-down (USD 22 billion) from its power unit. Also, Kellogg declined sharply (-8.9%) after the announcement of its quarterly results. Kellogg cut its profit forecast and it also mentioned a decline in breakfast foods in the US, which was partly caused by a recall of Honey Smacks in June. Kellogg wants to adjust to consumer preferences shifts by selling healthier cereals.

After a poor October, we saw some recovery this week. This recovery was seen in all equity markets: US, Europe, Japan and emerging markets, although emerging markets lagged a bit. The materials and financials sectors globally performed well this week, where consumer discretionary and consumer staples were worldwide relatively underperforming.

ECB still very determined

Economic growth in Europe continues to disappoint this year, confirmed by recent numbers, after a sharp fall in confidence indicators in October. Nevertheless, Bund yields and US treasury yields moved higher last week, as equity markets stabilized at the end of a poor October month.

The improved risk sentiment was not visible in corporate spreads, that continued to grind higher from early October lows. This could well continue over the next few months, as the credit cycle looks very advanced in the US and in Europe, the corporate bond market has to digest the end of the ECB’s asset purchasing programme.

The ECB seems very determined to end its asset purchasing programme this year, as several officials are downplaying the recent disappointing growth data. Without any significant pick-up in inflation, however, the ECB might have to gradually adjust its forward guidance to prepare markets for a delay of its first rate hike, towards 2020. With ECB rates firmly on hold, the scope for higher yields in Europe will remain limited.

Italian spreads over Bunds fell towards 3% again, after rating agency S&P was even milder than Moody’s and did not (yet) downgrade Italian debt. Bond markets are now putting less pressure on the Italian government in its ongoing dispute with the European Union (EU) regarding its 2019 budget. Still, a more constructive attitude from Italy will still be needed for spreads to return to their previous trading range between 2 and 3%. A further weakening of the position and influence of German Chancellor Angela Merkel will not change the stance of Germany nor the EU in this conflict.

Emerging market bond spreads in USD markets grinded higher together with other spread markets this week. At the same time, local emerging markets yields were flat and emerging markets currencies were stable. The expected victory of the far-right president elect Bolsonaro in Brazil already boosted emerging markets debt in local currencies over the last few weeks. A further rebound can be expected over the next few months, as emerging economies prove more resilient than markets are still suggesting.