Cachet's Insight 15/06/2020

Market Outlook

As of 11 June, JACI Total return index delivered +0.93% last week. Primary market remains very active, with more HY issuance.


Investor sentiment soured last week on concerns about the pace of recent rallies. The Fed warned that the pandemic could inflict long-lasting damage on the economy. As more economies loosen lockdown restrictions and reopen, second waves are emerging in several cities, especially in the US. Cases reported worldwide now exceed 7.4million. 10Y UST yields tightened 15 bps to 0.67% as of 11 June close. Investors should keep a close watch on developments of the coronavirus spread and oil price collapse, and their impact on market liquidity and issuer fundamentals. Investors may look out for attractive opportunities upon recent spread widening and may selectively add risk.


Despite stronger-than-expected US labor market data, the Fed left interest rates near zero last week and committed to continue providing stimulus to the US economy. Powell also suggested it would be a long road to recovery to pre-covid levels. Investors should closely monitor geopolitical events especially Saudi-Russia oil price war, US-China trade progress and Middle east tensions as global geopolitics remain volatile. As new issuance begins to pick up in the IG and HY space, investors may participate selectively.


On economic data, China's exports fell in May, but a sharper-than-expected drop in imports suggest that exports may stay under pressure in the near term as some imports are export-order driven. Separately, India's central bank expects GDP to contract by 1.5% yoy for fiscal year 2020-2021, before a rebound next year. Maintain low China exposure on heightened US-China tensions.

The US stock market was down drastically on June 11, and the gold pricee also peaked and dropped significantly about 2% untill today, and the bond interest rates have also increased, reflecting a decline in market risk appetite. The investors tend to be conservative and hold more cash to reduce asset risk in response to possible future adjustments.


Hot Topic

The FOMC meeting on 10 June:

The FOMC left the funds rate target range unchanged at 0-0.25% and kept its policy outlook characterization unchanged. The median projected path for the policy rate showed no change through 2022. The statement’s characterization of the economic situation was mostly unchanged but acknowledged the easing in financial conditions since the prior meeting. The median GDP growth projection in the SEP showed -6.5% for 2020 (Q4/Q4), +5.0% for 2021, and 3.5% for 2022, and the median projection for the unemployment rate was 9.3% at the end of 2020, 6.5% in 2021, and 5.5% by the end of 2022. The FOMC said that it will “increase its holdings” of UST and residential and commercial MBS at “at least the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions,” with the current pace equivalent to around $80 billion per month of Treasury securities and $40 billion per month of agency MBS.

Main Points:

  1. The FOMC left the funds rate target range unchanged at 0-0.25%, as widely expected, and made no change to its forward guidance, stating that it expects “to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” The median projected path for the policy rate showed no change in 2020-2022, in line with our expectations, with one participant showing one hike and one participant showing four hikes in 2022. The median estimate of the longer run funds rate remained unchanged at 2.5%, against our expectation of a slight decline.

  2. The statement’s characterization of the current economic situation was mostly unchanged from the April FOMC meeting, and continued to acknowledge the “tremendous human and economic hardship” caused by the virus outbreak. The statement once again noted “sharp” declines in economic activity, “a surge” in job losses, and that weaker demand and lower oil prices are “holding down” inflation. The statement acknowledged the improvement in financial conditions and credit access relative to the prior meeting. The statement repeated that the health crisis will weigh “heavily” on economic activity, employment, and inflation in the near term, and pose “considerable” risk to the medium-term economic outlook.

  3. The FOMC released its summary of economic projections for the first time since December 2019. The median GDP growth projection for 2020 was -6.5% (Q4/Q4)— significantly lower than consensus expectations and our growth forecasts—and +5.0% for 2021, and +3.5% for 2022. The longer-run projection for GDP growth edged down by a tenth to +1.8%. Projections for the unemployment rate at the end of this year varied widely, from 7-14%, and the median projection was 9.3%, falling to 6.5% in 2021 and 5.5% by the end of 2022. The median projections for core PCE inflation for 2020 declined by 1.1pp from the December projection to +0.8% and remains below +2.0% for 2021-22 at +1.6% and +1.7% respectively.

  4. The FOMC said that it will “increase its holdings” of UST and residential and commercial MBS at “at least the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions,” with the current pace equivalent to around $80 billion per month of Treasury securities and $40 billion per month of agency MBS. This language was slightly changed from the April 29 statement, which stated the Federal Reserve would “continue to purchase” securities “in the amounts needed” to sustain smooth market functioning.

Hot High Yield Bonds

*Please noted that product prices are indicative only subject to refresh before trade, the prices change subject to market conditions.

Hot Chart

Hong Kong’s benchmark Hang Seng Index dipped below its 50-day moving average on Friday, a level which has been underpinning shares this month. Should that line fall, the next area of support is likely around 23,000 points -- where the 23.6% Fibonacci retracement from this year’s intraday high and low meets an uptrend that began in March. Equity investors may also find some comfort in the city’s attractive valuations, as the Hang Seng remains about 50% cheaper than the S&P 500 Index on a forward price-to-earnings basis.

Investment Ideas

The market downturn at the end of February was unprecedented in its pace and scale. The recovery since the second half of March is equally impressive, if not more, in that it happened while a series of negative macro news were being released. The action of Central Banks and Governments around the world has been more than supporting markets and the S&P500 is now close to its February peak (3,386.15 points on 19/02/2020 vs 3,193.93 on Friday close). While macro news are improving in most developed economy (record beat on Non-Farm payroll numbers in the US, China trade surplus surging), there are still uncertainties around the impact of the crisis in the real economy and the question that remains is “how much longer will Central Banks and Governments keep on supporting the market?”.

To play a further market recovery yet having some form of downside protection, we provide a route to market with an attractive conditional yield and decent buffer downside protection via a Phoenix payoff with a European Knock-In barrier (i.e. observed at maturity only) and a Low Coupon barrier with Memory features (i.e. if Coupon condition is fulfilled at any observation date, then all previously missed coupons are paid).

*Please noted that product prices are indicative only subject to refresh before trade, the prices change subject to market conditions.

With a downside buffer of 30.00% on EKI and yielding a conditional 10%p.a. coupon if coupon conditions are met.

*Please noted that product prices are indicative only subject to refresh before trade, the prices change subject to market conditions.

Payoff Mechanism:

  • Auto callable every month at 100% + Coupon if Worst of underlying closes at or above 95% of its initial price

  • Every month, if Worst of underlying closes at or above Coupon Barrier, investor receives a Fixed Coupon + All preceding unpaid coupon.

At maturity:

  • if the Worst of underlying closed above the EKI, Investors receive 100% of Investors nominal, plus all preceding unpaid coupon, including the final coupon.

  • If the Worst of underlying closes below the EKI, Investors receive cash delivery of the worst of underlying at the strike level (Initial Investment x final fixing/Strike) and no coupon is paid.


S&P 500 Index:


SX5E Index:


HSCEI Index:

Asset Allocation



Asia Bond Market

Issuance in the Asian dollar bond market to Thursday already topped June first week’s tally, sales so far last week total ~$7.8b, with about 20 borrowers pricing notes, compared with $5.6b last week


Wynn Macau on last Thursday guided for a $750m 5.5NC2 note at the 5.5% area. Mandates for Asian dollar bonds slowed as last week progressed, but investors will be watching to see if Indonesia’s PLN emerges with a mulled offering in the U.S. currency. The risk-off sentiment in Asia’s credit market deepened Friday, after the rally of recent weeks. In the Japanese market, Nissan Motor scrapped a yen issuance planned for this month. Despite weaker sentiment in markets, at least three Asian borrowers, including Thai Oil and MGM China Holdings, brought deals last Thursday, and at least five Asia borrowers were marketing dollar deals last Wednesday, including China Mengniu Dairy and International Container Terminal Services from the Philippines.

China Mengniu Dairy Company Limited (2319.HK)

  • ISSUER RATINGS: Baa1 Stable by Moody’s / BBB+ Stable by S&P

  • EXP ISSUE RATING: Baa1 (Moody’s) for each series of the Bonds

  • STATUS: Fixed rate, senior unsecured

  • FORMAT: Reg S only, Registered form (Cat 1)

  • TENOR: 5-year 10-year

  • OPTIONAL REDEMPTION: Make-Whole Call; 1-month par call on 5-Year; 3-month par call on 10-Year

  • USE OF PROCEEDS: Refinancing existing debt and general corporate purpose

  • COC: 101% Put

  • TERMS: US$200k/US$1k denoms; SEHK Listing; English Law

  • JGCs, JLMs and JBRs: Bank of China (Hong Kong), Barclays, Citigroup (B&D), DBS Bank Ltd., Goldman Sachs (Asia) L.L.C. and J.P. Morgan

  • JLMs and JBRs: Mizuho Securities, Societe Generale and Standard Chartered Bank

MGM China Holdings Limited (2282.HK)

  • Issuer Ratings: Ba3 by Moody’s / BB- by S&P / BB- by Fitch

  • Exp. Issue Ratings: Ba3 by Moody’s / BB- by S&P

  • Format: 144A / Reg S

  • Status: Senior Fixed Rate Notes

  • Issue Size: US$ Benchmark

  • Tenor: 5NC2

  • Initial Price Guidance: 5.625% AREA

  • Use of Proceeds: To repay a portion of the amounts outstanding under the Revolving Credit Facility and for general corporate purposes

  • CoC Put: Investor put at 101% upon occurrence of a change of control and a rating decline

  • Special Put Option: 100%, upon the occurrence of certain events relating to the termination, rescission, revocation, or modification of our gaming license

  • Covenants: Customary covenants for a transaction of this nature

  • Expected Settlement: June 18, 2020 (T+5)

  • Listing: HKEX

  • Denoms/Law: US$200k x US$1k denoms; New York Law

  • Sole Global Coordinator: BofA Securities

  • Joint Bookrunners: ICBC (Macau), Bank of Communications Macau, Bank of China Macau Branch, Barclays, BNP PARIBAS, J.P. Morgan, SMBC Nikko, UBS,B&D: BofA Securities

IPO

  • 9958.HK Litian Pictures Holdings Limited (2020/06/10 - 2020/06/15)

  • 1650.HK Hygieia Group Limited (2020/06/12 - 2020/06/19)

Newly Listed

  • 9618.HK JD.com, Inc. (2020/06/18)

Result Announcement

2020/06/15

  • Annual: 0341.HK Cafe de Coral Holdings Ltd

  • Quarter: JKS.US JinkoSolar Holding Co Ltd

  • Quarter: VOXX.US VOXX International Corp

2020/06/16

  • Annual: 0151.HK Want Want China Holdings Ltd

  • Quarter: GRPN.US Groupon Inc

  • Quarter: LEN.US Lennar Corp

2020/06/17

  • Annual: 3818.HK China Dongxiang Group Co Ltd

  • Annual: 0480.HK HKR International Ltd

  • Quarter: ABM.US ABM Industries Inc

2020/06/18

  • Annual: 0178.HK Sa Sa International Holdings Ltd

  • Quarter: AMSWA.US American Software Inc/GA

  • Quarter: KR.US Kroger Co/The

2020/06/19

  • Annual: 0345HK Vitasoy International Holdings Ltd

  • Quarter: KMX.US CarMax Inc

  • Quarter: JBL.US Jabil Inc

Analyst Recommendation

  • CMB International Capital gave its price target on Cafe de Coral Holdings Ltd (0341.HK) to HK$18.31 a share and gave the buy rating.

  • Yuanta Securities gave its price target on Want Want China Holdings Ltd (0151.HK) to HK$6.80 a share and gave the buy rating.

  • BOCI gave its price target on JinkoSolar Holding Co Ltd (JKS.US) to US$25.00 a share and gave the buy rating.

  • Northcoast Research gave its price target on Kroger Co/The (KR.US) to US$36.00 a share and gave the buy rating.

  • Guggenheim Securities gave its price target on CarMax Inc (KMX.US) to US$106.00 a share and gave the buy rating.

Global Indices

  • SSE Composite Index was down 0.38% last week.

  • Hang Seng Index was down 1.89% last week.

  • Dow Jones Industrial Average index was down 5.55% last week.

  • NASDAQ Composite Index was down 2.30% last week.

  • S&P 500 Index was down 4.78% last week.

Cachet Group

28/F YF Life Tower,
33 Lockhart Road, Wanchai,

Hong Kong

T(HK): (852) 3579 2090

T(CN): (86) 150 1251 8130

Wechat ID: CACHETGROUP 

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