Monthly Review : November 2019

Monthly Review : November 2019

Economies:

 

United States

The US economy added 128,000 jobs in October according to the non-farm payrolls report.  The annual increase in average hourly earnings held steady at 3.0% but the unemployment rate ticked higher to 3.6% as the labour force participation rate, workers and those actively looking for work, increased to 63.3%.  Gross domestic product expanded at a 2.1% annualized rate in the third quarter, revised higher from an earlier estimate of 1.9%.  The robust jobs market continued to underpin consumer spending.

 

Euro area

Germany narrowly avoided slipping into a recession in the third quarter as GDP grew by 0.1%.  Higher household and government spending offset a slump in the country’s manufacturing sector.  The better than expected data may ease some of the pressure on Angela Merkel’s government to provide more fiscal stimulus.  Annual Eurozone CPI inflation increased to 1.0% in November, breaking a six-month run of declines.  11-year low unemployment has fed through into higher wages.

 

United Kingdom

The UK economy expanded 0.3% in the third quarter and 1.0% from a year earlier, the slowest annual growth rate since the first quarter of 2010.  The dominant services sector, which represents around 80 per cent of the economy, grew 0.4% in the quarter and offset a sharp contraction in manufacturing.  Private consumption also increased 0.4% whilst business investment stagnated due to Brexit uncertainty.  Annual CPI inflation slowed to a three-year low of 1.5% in October, driven by lower energy bills, and the number of people in employment fell by 58,000 in the three months to September.

 

Switzerland

The OECD lowered its forecast for Swiss economic growth in 2019 to 0.8% due to increased risks from ultra-low interest rates and global trade tensions.  It also cut next year’s forecast to 1.4% and called on the government spend some of its considerable fiscal surplus to stimulate inflation and allow for higher interest rates, although this is hindered by the constitutional debt brake (“Schuldenbremse”).    Subsequently it was reported the Swiss economy grew 0.4% in the third quarter, driven by pharmaceuticals and energy exports.  Excluding those sectors, the economy stagnated according to the SECO.

 

Central banks:

 

Federal Reserve (next meeting December 11th)

Minutes from October’s FOMC meeting revealed Federal Reserve officials felt geopolitical risks, including trade tensions and Brexit, were easing and should allow for a pause after cutting rates for a third time this year.  There was also a discussion on the high levels of corporate debt and some members expressed concern that deteriorating credit quality could lead to sharp increases in credit spreads, amplifying the effects of any adverse shock to the economy.  Fed chairman Jay Powell also warned US lawmakers that the Federal government’s deficit is on an unsustainable path and “could restrain fiscal policymakers’ willingness or ability to support economic activity during a downturn”.

 

European Central Bank (next meeting: December 12th)

Christine Lagarde urged European governments to boost public investment in her first major policy speech since taking over as European Central Bank president on 1 November.  She told attendees at a banking conference  in Frankfurt that monetary policy “cannot and should not be the only game in town” and pledged to launch the first strategic review of the ECB’s policy objectives since 2003.  Bundesbank president Jens Weidmann welcomed the review but warned that he would strongly oppose any proposals to change to its principal objective of keeping inflation below, but close to, 2 per cent or to make climate change a critical priority for the bank’s monetary policy.

 

Bank of England (next meeting December 12th)

The Bank of England left its key interest rate unchanged at 0.75% in November, although the decision was not unanimous.  Two external members of the Monetary Policy Committee voted for a cut, pointing to the weakness of the economy and subdued inflationary pressures but the majority preferred to wait and see for more clarity on domestic political and global trade developments.  The UK Chancellor Sajid Javid confirmed that the appointment of next BoE governor will be delayed until after the 12 December election, leaving a small window before the incumbent Mark Carney is due to leave on 31 January 2020.

 

Swiss National Bank (next meeting: December 12th)

SNB President Thomas Jordan rejected criticisms of the bank’s negative interest rate policy, asserting the franc would be even more highly valued without it which would “greatly slow down Switzerland’s economy and cause unemployment to rise substantially”.  The SNB has held its deposit rate at -0.75% for nearly five years to limit the appreciation of the franc and support exports but the unconventional policy is facing increasing oppostion from Swiss pension funds and the country’s largest banks.  Crtics warn of a property market bubble as retirement savings are driven out of bonds into higher yielding assets.

 

Market issues:

 

  • UK political parties hit the campaign trail and published their manifestos for the 12 December general election. Boris Johnson’s Conservative Party is the early frontrunner and the pound rallied after the release of a YouGov opinion poll which pointed to his party winning by a majority of more than 60 seats.  A decisive majority would allow the government to push Johnson’s Brexit deal through parliament by 31 January and remove some of the uncertainty that has cast a cloud over UK assets for more than three years.
  • President Trump ratified the Hong Kong Human Rights and Democracy Act which had received overwhelming support in Congress. China condemned the move and reiterated its warming that it will respond with “resolute countermeasures” which could further complicate the difficult phase-one trade negotiations.  Hopes that a deal would be reached soon had already faded with the US seeking more concessions over intellectual property and agricultural purchases to meet China’s demand for a rollback of tariffs.  President Trump warned that new tariffs will be applied on a further USD 156 billion of Chinese imports on 15 December if the two sides fail to reach an agreement by then.
  • Argentina’s president-elect Alberto Fernandez has given little away about his intentions for tackling the country’s debt crisis ahead of taking office on 10 December. Fernandez told an audience in Buenos Aires “I do not want to give haircuts to anybody” but also distanced himself from Argentina’s USD 57 billion programme with the IMF by stating he would not seek to draw down any more funds. Investors continue to see a ninth sovereign debt default as inevitable and the country’s “century bond” currently trades at around 40 per cent of face value.

 

Credit Markets:

 

  • AbbVie, the US pharmaceuticals group, sold USD 30 billion of bonds to help fund its USD 83 billion acquisition of rival Allergan, the producer of Botox. The fourth-largest corporate bond sale in history was split across 10 different issues with maturities ranging from 18 months to 30 years and was more than two times oversubscribed.  The combined companies will have sales of more than USD 48 billion and operating cash flow of more than USD 19 billion.
  • Rolls-Royce was downgraded by Fitch (BBB+), Moody’s (Baa2) and Standard & Poor’s (BBB-) after it revealed operating profit and free cash flow will come in at the lower end of its guidance this year due to higher costs relating to its Trent-1000 engine. Rolls-Royce will take an exceptional charge of GBP 1.4 billion in 2019 to cover costs associated with disruption to airlines customers and losses on long-term maintenance contracts.  The agencies warned that the engine problems could lead to a loss of market share and longer-term damage to the company’s reputation.
  • Tesco Plc was upgraded to BBB- by Standard & Poor’s, the last of the big three credit rating agencies to restore its investment grade status. S&P stated credit metrics have benefitted from improved operating results in a challenging UK retail market and strong progress in reducing both debt and pension liabilities. In the wake of the upgrade, Tesco was able to issue EUR 750 million of 6.5 year bonds at 0.9%, 35 basis points lower than initial price guidance.
  • Lebanon’s foreign currency denominated sovereign bonds plummeted below fifty percent of face value after the country’s political and economic crisis triggered multi-notch ratings downgrades to CCC. Lebanon has never previously defaulted but its debt has swelled to around 150% of GDP due to its unsustainable fiscal deficit and outflows of foreign currency deposits have accelerated.  A debt restructuring is inevitable and international assistance will be contingent on the formation of a stable government and agreement to a credible fiscal plan to cut public spending and raise revenues.
  • CMA CGM bonds climbed to a two-month high after it reported a USD 45 million net profit for the third quarter and reduced its nine-month loss to USD 107 million. The French transport and logistics group also revealed plans to raise USD 2 billion from the sale of container terminals and the sale and leaseback of some ships to reduce net debt which rose to USD 18.4 billion as at 30 September.  It will sell 10 terminals to Terminal Link, a joint venture with China Merchants Port, for USD 968 million.
  • Moody’s revised its outlook on Aaa-rated Exxon Mobil to negative due to its substantial cash burn to fund growth. The world’s largest energy company by market capitalisation plans to rebuild its upstream portfolio, build new chemicals facilities and upgrade its refineries which will impact its credit metrics in the near-term.  Moody’s forecasts negative free cash flow will be around USD 7 billion in 2019 and USD 9 billion in 2020 and debt levels will increase even it raises USD 15 billion from planned assets sales.  It also warned the focus on climate change is an emerging threat to oil and gas companies’ profitability as governments use tax and regulation to shift demand towards renewable energy.
  • LVMH reached a deal to purchase Tiffany & Co for USD 16.6 billion, the largest ever in the luxury sector. The acquisition will give LVMH a leading share in one of the fastest growing sectors in luxury, ahead of Cartier-owner Richemont.  Moody’s affirmed LVMH’s A1 rating, noting that although the deal will push leverage up to around 3x by 2020, it will improve LVMH’s operating diversity and give it another prestigious brand with global recognition.

 

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