Weekly ECM update

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Weekly ECM update

22 Oct, 2018

Dear Reader,

Bumpy ride for markets last week with high volatility throughout. Last Saturday's meeting between Trump and Xi dominated headlines this week, global stocks rose on Monday as markets viewed the truce as a sign of de-escalation.


However, markets turned red as investors started to digest the details, whilst the arrest of the Huawei CFO added further doubts on a potential de-escalation between the two giants.

Chart of the week:
 
PEOPLE TALKING ABOUT YIELD INVERSION (GOOGLE TRENDS)



In Europe the Stoxx 600 recorded on Thursday its largest drop since the 2016 Brexit vote, closing 3.4% down and dragged by weaknesses of Automobiles & Parts suppliers, which remain under pressure as the Sino-US situation remains tense. The German DAX slipped into Bear territory closing -4.2% on the week, and down c.20% since January's peak.
 
On the other side of the Atlantic, the US Treasury yield curve partly inverted this week, with the spread between 10-year and two-year Treasury yields tightening to the narrowest level since July 2007. The curve between 3-year and 5-year and between 2-year and 5-year paper inverted on Monday, triggering a sharp sell-off of equities on Tuesday with investors in full risk-off mode. The S&P sank by 3.2% on the day, making it one out of the eight 3%+ drops over the last 5 years.  Despite signs of relief at the end of the week prompted by expectations of a more dovish FED, the S&P 500 ended the week 4.6% down, similar to the tech-heavy Nasdaq (-4.9%). In Asia HSI and HSCEI closed the week -1.7% and -2.4% respectively.
 
Our trading desks are seeing Long Only's positioning skewed to the buy-side (53%) with Hedge Funds marginally to the sell-side (51%). We have also seen futures/ETF selling as opposed to flows on high touch desks (futures: cash volume ratio hugely elevated). Our most traded sector was Consumer non-cyclical (23% of total volumes) where we were net buyers (52%). Feedback so far is pointing to some funds already positioning for next year bearishly giving up hope of a Santa Claus rally.
 
Our Equities colleagues held their Investment Strategy seminar for 2019 this week where they laid out their outlook for 2019, through thematic presentations by analysts as well as guest speakers and our disruption panels where we discussed issues shaping the future of our economy. In a nutshell, our strategists expect a low risk of downturn in the context of a maturing economic cycle which is not yet at its end.  As we see the USD to slow the most, EM should experience some relief after a tough year, as should commodities. In Europe, value cyclical shall benefit from  a rotation trade, though politics and modest hopes of global monetary coordination will likely make Eurozone vulnerable to external shocks.
 
The US November payroll survey was a weaker than expected on all metrics. However, there is still little sign of overheating in the labour market, which should allow the Fed to sound dovish when it raises rates. Eurozone inflation slowed down in November to 2.0% from 2.2% y/y due to softer energy prices, thus making it difficult to justify raising rates next year. German manufacturing orders surprised positively in October, increasing by 0.3% m/m. China Caixin Manufacturing PMI edged up in November to 50.2 from 50.1 in October, against consensus expectations of no change. However the new export orders index deteriorated by 1.1pt.
 
On the Brexit front, the Parliament provided what could be a meaningful development in the potential de-risking of the UK investment case, as PMs voted to give themselves leeway in deciding a plan B in case Theresa May's Brexit deal will be rebuffed in the upcoming vote on Tuesday and essentially taking a "no-deal" option off the table.

Most read research this week:

INVESTMENT STRATEGY FOR 2019: Europe: Defending the Flag
Defending the colours of Europe. What is the investment strategy for 2019? A summary of our Investment Strategy Conference for 2019 in Paris.

INFRASTRUCTURE: Infra penny, infra pound
We initiate on infrastructure, which has outpaced the broader European stock market by ~150% since 2010, with each of our nine stocks outperforming. But with bond yields now likely to rise, will the sector underperform? We don't think so. Our analysis shows superior earnings growth has been the main driver of this outperformance, rather than investors paying higher premiums for Infra's supposedly 'bond-like' cash flows. With this trend likely to continue, the sector should continue to outperform.

Things to watch out for this week:

  • Brexit. On Tuesday, the UK House of Commons is expected to vote on the EU divorce deal. The deal is unlikely to be approved on the first vote, which could create uncertainties. In our view, the chance of a no-deal Brexit remains low, as the very large majority of MPs are against it. 
  • Eurozone policies. The ECB will hold a policy meeting on Thursday. Change in the monetary stance is unlikely and the focus will be on the new macroeconomic projections (with possible downwards revisions of growth and inflation), details on reinvestment plans and any news on the possibility of new LTROs. On Thursday and Friday, EU leaders will meet to discuss the EU's longterm budget, single markets, migration and external relations. However, depending on the UK parliament vote on Brexit, renewing discussions between the EU and the UK could also be an important topic of debate.
  • Eurozone data. Eurozone, Germany and France PMIs for December will be released on Friday. The German ZEW survey will be published on Tuesday and should show a slight rebound. Industrial production out on Wednesday should remain flat.
  • China data for November. Trade data out on Saturday are expected to ease. Inflation (the next day) should be roughly stable. On Friday, we expect to see industrial production growth edging down, while growth in fixed assets investment and retail sales should improve slightly. Credit data will also be released next week, and a rebound after the previous month's sharp fall is expected. 
  • US data. Inflation for November will come out Wednesday, with the headline likely to ease and core edging up. On Friday, industrial production and retail sales data will be released. The NFIB survey will be out on Tuesday and should show a small increase.

Activity in Equity Capital Markets:

Despite the turbulence in European IPO markets, last week, 2 IPOs and a convertible priced. The largest deal to price was the IPO of AJ Bell (UK, Financials) for £169m, continuing the trend of small transactions for several weeks now. A number of small rights issues are in the market, including Showroomprive* (France, Retail) and F.I.L.A.* (Italy, Consumer Goods).
   
*BNPP led

Have a good week.

****************************************

This week's statistics:

Stoxx 600 trading volume as % of 3-month average: 102%
Stoxx 50 volatility (VStoxx): range 25-17%, finishing on 22%

ECM Volumes 2018YTD:

#EMEA €134bn
#US $229bn

Index performance:

This week: 

Stoxx 600 (-3.4%)
S&P500 (-4.6%)
Nasdaq (-4.9%)
HSI (-1.7%)
HSCEI (-2.4%)

Stoxx 600 sector performance:

This week:

Best: Utilities (-0.5%)
Worst: Insurance (-5.4%)

2018YTD:

Best: Oil & Gas (+0.0%)
Worst: Auto & Parts (-26.3%)

Country performance:

This week:

Best: Greece (+2.9%)
Worst: Austria (-5.1%)

2018YTD:

Best: Ukraine (+82.6%)
Worst: Ireland (-21.2%)

Deal priced this week (> €100m): 

- AJ Bell, £169m, IPO (UK, Financials)
- Solarpack, €100m, IPO (Spain, Energy)
- Almirall, €250m, EQL (Spain, Pharma)

Deal ongoing (> €100m): 

- SAAB, SEK 367m, IPO (Nordics, Business Services / Software)
- Grainger, c.£365m, Rights Issue (UK, Real Estate)
- The Restaurant Group, £315m, Rights Issue (UK, Restaurants)
- Kier Group, £264m, Rights Issue (UK, Construction)
- Ahlstrom-Munksjö, €150m, Rights Issue (Finland, Paper & Packaging)
- Safilo Group, €150m, Rights Issue (Italy, Retail)
- BF, €150m, Rights Issue (Italy, Agriculture)
- F.I.L.A, €100m, Rights Issue (Italy, Consumer Goods)*

*BNPP led

Andreas Bernstorff 
Head of Equity Capital Markets 
BNP Paribas
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