EDR: Market Flash – June’s ISM data for the industrial sector came in at 55.3 vs. 53.5 in May


On the markets
June’s ISM data for the industrial sector came in at 55.3 vs. 53.5 in May, the first advanced indicator of this type to show that business conditions had stopped deteriorating. New orders only edged higher to 51.6 vs. 51 but the jobs components moved from  58.32 to 59.9. 12 out of 18 industrial sectors covered by the survey rose. Services slipped from 54.6 to 53.3 in a reminder that lower petrol prices and Japan’s return to normal will only feed through to statistics this summer….

Edmond de Rothschild Group (Market Outlook: 08/07/2011) 

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The  drop  in  June  car  sales  to  an  annualised  11.4  vs. 11.7 million units is essentially due to Japanese auto makers who are still suffering. US companies actually increased sales as they had more cars available. Unlike fleet operators like car rental  companies, sales were buoyant in car dealerships, a sign that consumer demand is driving sales despite limited promotional campaigns.  
The ECB raised its benchmark rate on Thursday from  1.25%  to  1.5%  amid  high  tension  on  Greece’s debt and Portugal which had just been downgraded by S&P. Looking beyond the CDS issue, France’s proposed rollover plan for Greek debt for maturities up to mid-2014 puts the ECB’s repo arrangements under the spotlight. S&P thinks this  rollover could be viewed  as a selective default.
Theoretically, Greek debt could then no longer be  accepted by the ECB in return for injections of 100bn into Greek banks. The various parties will continue to try and find a practical solution. Over the short term, Greece’s maturing bonds are covered by euro zone and IMF loans.


For once, it was a rather calm week with less volatility  and practically no change to indices. Markets took the ECB’s expected rate rise in their stride. Even the failure to find an agreement on rolling over Greece’s debt failed to disrupt sentiment. In theory, discussions have been put back to September. The only danger is the idea that any participation by
the private sector could be construed as a selective default.   

The outlook for Europe’s auto industry is looking very rosy, especially based on Germany’s performance in the first half.

New registrations were up and prices could even be raised on certain models (especially for BMW) in China which is still driving volumes higher. June was also a good month in the US for Volkswagen (+35%),  Audi (+16.9%), Porsche (+18.9%), BMW (+15.1%) and Daimler (+18.8%). It looks, however, as if Renault is expecting the second half to be better than the first. Air transport figures were more mixed: Easy Jet increased passenger traffic by a more-than-expected 9.1% in June while Air France declined by as much due to Japan and the Middle East. Pages Jaunes issued a profit warning on half yearly figures and is no longer expecting sales and operating margins to be stable this year.    

The Carrefour/Casino struggle to control CBD in Brazil continues. Meanwhile, Dia, which was spun off by Carrefour, started trading on the Spanish market. In Switzerland, Publicis raised its stake in Spillmann, Felser and Leo Burnett from 40% to 100% and PPR moved from 23% to 50.1% in independent watch maker Sowind Group. RWE might sell Npower, which produces and distributes electricity in the UK, for more than EUR 5bn. Elsewhere, the UK government could delay News Corp’s attempt to buy BSkyB.   

Equities rose for the third week in a row. The S&P500 gained  3.5% over the first 5 days of July despite the July 4th oliday and global concern following Moody’s decision to downgrade Portugal’s debt by 4 notches.
On the macroeconomic front, manufacturing ISM was higher than expected and pushed indices higher, especially the industrial sector. Thursday’s better than expected ADP data on private sector jobs and lower initial weekly claims alvanised US equity indices. But Friday saw only 18,000 job creations, far less than the 105,000 expected. That should weigh heavily on the trend. Thursday’s ADP figures were  better than expected and lower weekly jobless claims have fuelled investor optimism.  

The US still has to tackle the debt issue. Barack Obama admitted on Thursday that Democrats and Republicans were still a long way off agreement.

In the auto sector, GM and Ford had much better sales in June than expected by analysts. Ford was up by 13.6% over a rolling one year period when the market had pencilled in 11%.  

Over the last five days, all S&P500 sectors advanced, led by technology (+5.3%) and industrials (+4.4%) which were galvanised by the manufacturing ISM data.  

The Nikkei average advanced for the 7th day in a row, closing above 10,000 for the first time since March 11, the day when the quake struck. The Topix also rose by an impresive 3.5% in JPY and even 3.7% in EUR, led by large caps. Investor sentiment improved as economic data in both US and Japan showed stronger signs of growth. Easing Greek yields and rallies in Asian stock markets also helped. The EUR/USD and EUR/JPY remained virtually flat throughout the week.
Largely, domestic-related laggards were sought after while exporters were mixed. Real estate stocks such as Sumitomo and Mitsui again ranked among the top 10 Topix 100 gainers and megabanks Sumitomo Mitsui and Mitsubishi UFJ also
moved higher. Kubota and Bridgestone did better while Denso, Canon and Toshiba saw partial profit taking.

M&A deals by Japanese firms in the first half of this year amounted to JPY 7.6 trillion (EUR 64.6 billion), up nearly 80% YoY, and the trend continued into July. On Friday, HOYA unveiled the sale of its Pentax camera business to Ricoh for an undisclosed amount. HOYA soared on investor approval but Ricoh softened due to profitability concerns. Also, JS Group Corp. (housing material/appliances -TSE1 5938) was said to be acquiring its Italian counterpart Permasteelisa for about EUR 600m. The company declined to comment.

China raised rates again, perhaps for the last time this year.  Inflation is expected to peak at 6.2% or 6.3% when the figures are released on July 9 before slowing down sharply (in theory) to 3.5% by November. 1 year rates are now at 6.56% after rising 5 times and by 125bp since 2010. In the bullish 2006-2008 cycle, the PBoC intervened 8 times, raising rates by 162bp in all with inflation above 8% so we could conclude that most of the tightening is behind us.

The social housing programme will be a key topic in the second half of the year. The government plans to spend USD 230bn on building 10 million flats. The big question is over financing this ambitious programme. It is supposed to allow many Chinese workers who currently sleep in company dormitories to be able to rent accommodation before eventually buying property. The economic consequences could be considerable.

Taiwan’s Q2 exports remained buoyant, rising 12.8% YoY in June.  Closer inspection reveals a big gap between exports to the US which rose 66% Q/Q while China fell 5.2%.   It is the same story in Korea, where US exports rose 45% Q/Q but only edged 0.7% higher to China.  We do not believe that this indicates a sharp fall in the pace of China’s growth. Rather the explanation can be found in the impact of the Japanese quake and the ensuing  supply chain problems. This is confirmed by much lower Japanese exports to Korea and Taiwan since March.

Thailand gave a strong majority to the Peu Thai party which is run from Dubai by the country’s former Prime Minister,
Thaksin Shinawatra. A strong 75% turn out and a clear majority bode well for future political stability. The market cheered the results by rising 4.7% in THB and 5.4% in EUR. Strong growth in domestic consumption will receive a further boost from moves to raise the minimum wage and lower income tax. The giant retailer BIG C, Casino’s local subsidiary which now owns the Carrefour network, should be one of the companies to gain most from this. So too should CPALL, the 7Eleven local store brand. CPALL plans to open 500 minimarkets a year.


Despite high oil prices in Q1 of fiscal 2012, India’s trade deficit was USD 5.4bn instead of the USD 6bn expected. The monsoon is going to plan so inflation could calm down if the trend persists. The first Q1 results are due next week. They should see only moderate growth due to higher commodity prices and wages. However, lower oil prices and slowing inflation are having a significant impact on the macroeconomic outlook. That is why we are advising investors to gradually return to the Indian market.

The market remained practically flat this week. In the US, economic leading indicators confirmed the recovery was under way. Nevertheless, in the local market the June inflation print disappointed, because it was three times higher than the consensus. As a result, the YoY rate of IPCA inflation rose to 6.71% in June, versus 6.55% in May. The main deviation with expectations was in services where inflation was much higher than projected. The decline in food &transportation was not enough to offset the increase in services. This is  because labour markets remain tight. Having said that, we believe the Central bank may continue to increase interest rates until the end of this year. On the micro front, and on a more positive note, Vale announced a share buyback programme. The company sees good results ahead and says its share price is undervalued.

The big news was Moody’s sweeping downgrade of Portugal which looked like kicking somebody who was already down. Convertibles and exchangeable bonds which make up a significant part of the pool were particularly badly hit. ESF 2025, BES/Bradesco and Parpublica/Galp are now trading at par with  very high yields. The ECB nevertheless said it would accept Portuguese bonds as collateral whatever their rating. It is, however, clear that this situation is playing out like the Greek crisis and European leaders will once again have to send out a very strong signal to markets to avoid wasting time. On some Portuguese convertibles, par levels should provide a cushion despite widening spreads and low liquidity. Alcatel is expected to sell various business units soon for USD 1.3bn (roughly an EV of 0.75) which should allay concerns over the company’s financial health. Cap Gemini has made several acquisitions in France and Italy in a sign to the markets that it can take the initiative in scooping up small targets. Ahead of their results, SAP and Daimler also advanced after positive broker recommendations.


Equity markets rallied strongly when the Greek parliament adopted austerity measures. Risk appetite returned and commodity prices rose. Copper jumped 3.3% to USD 9,470 a tonne, only 4% below February’s all time high. This was due to the end of destocking in China and (ii) worries over supply as strikes in Indonesia and Chile go on and weather conditions which are unfavourable in both countries.
Gold edged 1.1% higher. This was because the Greek problem has been settled for the time being, investor interest in risky assets has consequently revived and the ECB raised its rates to 1.5% (+25bp).  That said, gold could gain on worries over raising the US debt ceiling. An agreement must be reached with Congress by August 2 at the latest. If not, the US government will be unable to meet debt repayments and will be in default. The resilience of the gold price around USD 1,500 an ounce has led investors to look at gold stocks which are particularly undervalued.

The oil price rallied further, adding 3.9% despite the 60 million  barrels sold last week by the IEA and a 1.8% drop in weekly US demand figures. Oil reacted more to upbeat ADP figures showing that job creations in the US were higher than expected.

In commodities, potassium fertiliser rose USD 70 to USD 470 a tonne after negotiations between Canadian and Ukrainian producers and their Chinese clients. After a stable Q3, thermal coal is expected to rise too as underlying demand is sound.

Uncertainty is still rife but investors have decided to focus on the good news over the short term. After high volatility in the middle of June, indices made strong advances, leaving the DJ within 1.5% of its May highs. Between June 30 and July 7, the major indices performed as follows in local currency:

– Standard&Poor’s 500              +2.5%
– Euro Stoxx 50                    -0.1%
– TOPIX                                +2.5%
– MSCI Emerging markets          +3%    (in EUR)

Bond markets were little changed. The yield on 10-year Treasuries was almost unchanged at 3.1% while yields on the equivalent German Bund slipped to 2.95% from 3%. Tension was, however, high on peripheral markets including Spain
and, in a new development, in Italy where the yield rose from a YTD average of 4.9% to more than 5.2%.

The EUR shed roughly 1% against the USD (1.43) and the JPY slipped marginally to 81.3 after a long period at 80-81. The RMB hit a fresh high of 6.46 but ended the week unchanged. We have reduced equity positions after indices, particularly in Europe, rebounded in the first few days of July. We took some profits on oil positions after the price jumped 10% in 10 days. But to reflect our change in equity scores, we have continued to reinforce Japan.

In bonds, we took advantage of higher German yields at the beginning of the period under review to reinforce positions. German bonds will act as a safe haven should tension resurface in peripheral country debt.

Written on Friday June 10, 2011
Saint-Honoré Chinagora is more lightly regulated UCITS that avoid leverage. It is not subject to the same rules as UCITS that are open to all investors and may as a result be riskier. Only persons mentioned under the section “subscribers concerned” in the simplified prospectus may subscribe to shares in this UCITS. The subscription to, or acquisition of, shares in this UCITS either directly or through any third party, is reserved to investors listed in article 413-2 in the General Regulations of the French Market Authority (AMF). When subscribing for the first time to one of this UCITS, investors must state in writing that they have been duly forewarned.

The data, comments and analyses in this document reflect the opinion of the Edmond de Rothschild Group and its subsidiaries with respect to the markets and their trends, regulation and tax issues, on the basis of its own expertise, economic analyses and information known to it at present. However, they shall not under any circumstances be construed as comprising any sort of undertaking or guarantee whatsoever on the part of the Group or its subsidiaries. In no event shall the Edmond de Rothschild Group assume liability for any decision to invest, to disinvest or to maintain a position on the basis of these comments or analyses. It is the responsibility of each and every investor to obtain the various regulatory prospectuses for each fund or financial product prior to making any investment and to analyze the risk incurred and establish his or her own opinion, independent of the Edmond de Rothschild Group, and where necessary, to take specialist advice regarding such questions, and especially in order to determine the relevance of such investment to his or her own financial situation. Past performance and volatility is no guide to the future: the value of investments may fall and rise and performance is not constant overtime. Main risks: risks associated with emerging markets, discretionary risk management, equity risk, currency risk, risk of capital loss, concentration risk. The full prospectuses of funds certified by the French market authority, the Autorité des Marchés Financiers, are available upon request or from our website ( The funds mentioned are only intended for distribution to persons resident in France and this bulletin has not to be regarded as an offer to buy or sell or the solicitation of any units of these funds in any jurisdiction other than France. These funds can’t be subscribed by an individual or an entity if the law in his country of origin or any other country concerning the person or entity prohibits it. For instance, these funds can’t be sold in the United States or any of its territories or ownerships. It cannot be marketed to legal entities or individuals in the United States or to citizens of the United States or United Kingdom.
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