Global Weekly: Lots of news

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Last week was another busy week for investors. The second-quarter earnings season is now in full swing. There was also a lot of news flowing into financial markets from central banks worldwide and continuing trade tariff discussions.

While last week US President Donald Trump had a constructive meeting with EC president Jean-Claude Juncker, concern over a trade dispute continued to weigh on sentiment this week. The effect is especially present in the Chinese equity market. The CSI 300 index, consisting of large Chinese mainland-listed companies, is down by more than 20% from this year’s high. This is mainly caused by continuing trade worries, a slowing economy and a weaker yuan. It looks like investors remain concerned about the uncertainties regarding an escalating trade war.

There has been a slowdown in the eurozone economic recovery, with 0.3% GDP growth in the second quarter, which could be confirmation that the economy is in a soft patch. The Bank of Japan made some important policy changes for its long-term yield targets. In the US, Federal Reserve policymakers kept monetary policy on hold this week. ABN AMRO expects the Fed to hike key rates four times by next June, when the Fed Funds rate is forecast to be 3%.

The  most anticipated earnings results were from Apple and Tesla. Apple’s results were better than expected. The company sold slightly more iPhones in its April-June third quarter, but at a higher average selling price. That resulted in 20% revenue growth compared to the third quarter of 2017. Apple’s guidance for the current quarter was also above consensus estimates. The share price rose by 6%. Net cash stands at USD 129 billion.

Tesla, on the other hand, has no net cash position. Its net debt is USD 8.8 billion, of which USD 2 billion is due within a year. Tesla therefore needs to quickly ramp up production and sales for its Model 3. The company states that it can currently produce 5000 units per week, which will gradually increase to 10,000 per week in 2019. Tesla also states that from the third quarter 2018, the company will be structurally profitable and that it will not need the market to fund its repayment obligations. We doubt this, as we believe that its sales targets are exaggerated and, in addition to repaying debt, Tesla is also planning a USD 5 billion investment for a factory in China. At this point, the company’s valuation appears stretched.

Bond markets look to Japan

In the last weeks of July and into August, Bund and US Treasury yields gradually moved up towards 0.5% and 3% respectively. Macroeconomic data were mixed, but, on balance, US data are slightly less positive, while data from Europe and most emerging markets are stabilising. Less divergence and more synchronisation between the US and Europe will likely reduce risks to the sustainability of the global growth trajectory.

Both the European Central Bank and the US Federal Reserve kept their monetary policies unchanged at recent meetings and emphasised that they will stay the course. With no movement in monetary policy in the eurozone or the US, the market can pay full attention to minor changes in Japan. The Bank of Japan is guiding markets that its extremely easy monetary policy will need even more time to finally spark inflation. To limit the negative side effects on banks, however, they will allow a bit more leeway for 10-year Japanese government bond yields to fluctuate. On balance, this seems to result in slightly higher Japanese yields, making them more competitive with European and US yields after currency risk is hedged. Overall, the direction for yields in the next few months is most probably sideways. The biggest risk is that trade tensions develop into a trade war.

Despite rising trade tensions, spreads on corporate bonds have been grinding lower for a month now, both for investment-grade and in high-yield bonds. Emerging-market spreads managed to keep up for most of July, but lost some ground last week. This is a sign that the impact of trade tensions may be increasing. The resulting uncertainty is starting to weigh on business confidence, mostly in emerging markets. Along with a stronger dollar, rate hikes in the US and trouble in Argentina and Turkey, this explains the relatively attractive valuations in all emerging-markets bond segments, ranging from US-dollar denominated sovereigns to local-currency corporate bonds.