Weekly ECM update

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Weekly ECM update

10 Jun, 2019

Dear Reader,

European and US markets rallied strongly this week, while Asian equities continued to suffer from trade war rhetoric.


Global market sentiment improved after the Fed chairman suggested an interest rate cut if trade tensions damage economic outlook, with US markets clocking in their biggest one-day gains in 5 months on Tuesday 4th June. An end (for now) to the Mexican stand-off on migration/ tariffs should help momentum next week. Stoxx 600 was up 2.3%. S&P 500 was also up +4.4%, ending the week somewhere 2% below its YTD high. 

Highlight for many European largecaps and investors is our 21st European CEO Conference this week over three days in Paris: 110 companies (2/3 non-French; 85 CEOs).
 
All European sectors were up during the week except for Real Estate (-1.5%). Read more on flows below. 

Chemicals and Utilities were up the most the last week (+4.8% both). So far in 2019, Food & Beverages are the #1 performers (+23.0%) followed by Technology, trading up 20% and keeping posting a strong performance despite recent G20 agreement on digital companies taxes which will mainly affect US Giants such as Google and Facebook. Technology being among the most active sectors with majority of sell orders through our books. 
 
Instead of most read research, this week, it's the "most frequently asked questions..." (from weekly equity flows analysis)

Punchlines: (1) US investors are becoming more active (also evidenced by a big increase in attendance at our annual CEO Conference this week; and (2) some renewed rotation out of defensives into cyclicals.

Will Value continue to outperform Momentum ?
It is a tricky question. Who has been buying Europe on the way down? A crude way to look at this is to see how price reaction of the Stoxx50 futures behave over different parts of the trading session. If we plot the daily price performance over the last month from 1.30am – 8am, 8.15am – 1.30pm, 1.30pm – 8pm, we can use this as a proxy for Asia, European and US investor behaviour respectively. The afternoon session has outperformed the morning session by almost 250 points. Asia is unsurprisingly muted. This observation nicely supports our flow where we see US Long Only's as net buyers over the month. These clients have been particularly buying into Staples and the wider yielding areas this month. This is an important observation.



What we have seen so far...
 
1. Real money slicing the YTD European equity rally. This is as expected with Lipper data also showing consistent outflows from European equities. However, in May Long Only (LO) flow direction reversed. There were only 4 trading days where flow was on the sell side. Buying the dip mentality for LOs has persisted over the decline. But buying what?



2. What has real money been buying? It is unsurprising to see they have been buying staples and defensives against a backdrop of UST yields. When we group all the real money flow EBNPP have seen in May (Telcos/staples/healthcare) we were skewed 58% to the buy side. Valuation of staples do not appear to be putting off LO buying yet and supports price action between value and momentum. However, we have also seen cautious buying of cyclicals and more specifically 'value' for the first time since February. It seems value funds are using weakness as a buying opportunity.



And what do they say in China....?

Our analysts have returned from their trip to China where they met a number of policy makers and companies. "We returned to China in the midst of renewed tensions with the US. The rhetoric has hardened as China prepares for the risk of a prolonged confrontation....

What surprised us the most? Officials sounded less at a loss about the risk of long-term standoff with the US than during our trips last year. Meanwhile, domestic communication is also preparing the country for potential hardships. Private sector confidence is still very low, despite supportive policies over the past year. This may have rubbed off onto consumers, whose sentiment is not as good as we expected.



Equity Capital Markets: 

A pretty busy week for the European markets despite low volumes: 12 transactions priced for a total of €1.9bn, including 2 IPOs and mostly smallish blocks (€1bn). Three further IPOs were launched, all BNPP-led: Traton (Germany – Trucks)*, Airtel Africa (UK/ Nigeria – Telecoms)* and ReAssure (UK – Insurance)*. 

Things to watch out for this week:

  • US data: We expect positive releases next week, with retail sales surprising on the upside on Friday and industrial production to also be up. Furthermore, while the CPI could slightly ease, we and the consensus expect core CPI to remain stable at 2.1 % y/y, reducing the risk of deflation.
  • China data: May activity data will be released on Friday. We expect industrial production and retail sales to improve a little after the big decline in the previous month. Investment ytd growth should remain stable. Credit data out next week should confirm the gradual upwards trend. Trade data (on Monday) should continue to reflect soft external activity. Finally, inflation (on Wednesday) should increase, on higher food prices.
  • Eurozone data: We expect April Industrial production, due on Thursday, to fall more than expected, mainly reflecting the big drop seen in Germany. Data coming from France should, conversely, remain supportive, with the Bank of France business survey on Tuesday expected to show rising confidence.
  • Italian budget: On Tuesday, Finance Minister Giovanni Tria will address the Italian parliament following the launch of the Excessive Deficit Procedure by the European Commission. At this stage, there are little indications that Italy will reply positively to the Commission.
  • UK Politics: On Monday, the Conservative Party will start the contest to choose a new leader.
Have a good week.

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

This week's statistics:

Stoxx 600 trading volume as % of 3-month average: 102%
Stoxx 50 volatility (VStoxx): range 15-17%, finishing on 15%

ECM Volumes 2019YTD:

#EMEA €53.0bn
#US $114.0bn

Index performance:

This week: 

Stoxx 600 (+2.3%)
S&P500 (+4.4%)
Nasdaq (+3.9%)
HSI (-0.6%)
HSCEI (-1.1%)        

Stoxx 600 sector performance:

This week:

Best: Chemicals (+4.8%)
Worst: Real Estate (-1.5%)

2019YTD:

Best: Food & Beverages (+23.0%)
Worst: Telecoms (-0.9%)

Country performance:

This week:

Best: South Africa (+4.8%)
Worst: Ukraine (-2.0%)

2019YTD:

Best: Greece (+33.0%)
Worst: Luxembourg (-5.0%)

Deals priced this week (> €100m):

- Marel, €350m, IPO (Iceland – Food processing)
- John Mattson, €130m, IPO (Sweden – Real Estate)
- Derwent London, €198m, CB (UK – Real Estate)
- Orchard Therapeutics, €114m, ABB (UK – Biotech)
- AJ Bell, €163, ABB (UK – Financials)

Deals ongoing (> €100m): 

- Okea, €100m, IPO (Norway – Drilling)

 * BNP Paribas led

Andreas Bernstorff 
Head of Equity Capital Markets 
BNP Paribas
Extel 2017 & 2018 - Exane BNP Paribas #1 Equity House

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