*Yuan firmer:
Overnight, PBoC fixed yuan’s midpoint at 6.5552 per dollar, 0.22% firmer than prior fix of 6.5693 that marked weakest level in over five years and generated a lot of headlines. Yuan has been under a lot of scrutiny as of late amid concerns that some re-pricing of Fed policy normalization expectations could drive renewed worries about the potential for a material depreciation of the Chinese currency that could unleash another wave of deflationary pressure across global markets. Such concerns played a big role in market selloffs last August/September and earlier this year. However, such concerns have failed to gain much traction (helping global risk sentiment) with some of the focus on the reported flip-flop in China’s yuan policy in favor of stability.
*IMF says no more Greek aid money until EU commits to debt relief:
Post Eurogroup headlines getting attention. IMF official said EU’s acknowledgement that Greece needs debt relief was enough to keep IMF involved in future bailouts. However, stressed that Fund cannot help Greece with fresh aid cash because EU has not yet committed to detailed debt relief. WSJ said this shows Eurogroup/Greek deal this week lacks key elements. WSJ also discussed potential of ECB buying Greek bonds, which it thinks there’s little appetite for given extent of purchases since 2010. Following the Eurozone peripheral bailouts, 25% of outstanding Greek bonds were already on the ECB’s balance sheet by the end-2015, which is dangerously close to the 33% limit the central bank can hold.
*Oil pushes above $50 a barrel:
Lots of stories this morning about Brent crude pushing above $50 a barrel for first time since November. However, nothing particularly incremental in the articles. Some discussion about larger-than-expected crude stockpile draws reported this week. Despite some Canadian production ready to come back on line, more attention on supply outages. Reuters reported that CVX source said today that the company’s onshore activities in Nigeria’s Niger Delta have been shut down by a militant attack at its Escravos terminal. Added that the Niger Delta Avengers said on Wednesday it had blown up the facility’s main electricity feed. OPEC dynamics seem to be largely on the backburner at this point. No surprise surrounding Bloomberg report that there were no discussions of output limits at pre-OPEC meeting.
*Sector performance fairly bunched; defensives outperform:
Telecom and utilities best performers after lagging on recent rotation out of defensives. Rates helped. Consumer staples boosted by discount/club retailers and food space (COST-US, SAFM-US earnings). Select retailers (DLTR-US, DG-US, SHLD-US, PVH-US, WSM-US) helped consumer discretionary following earnings. Casual diners (and JACK-US on upgrade) and builders also fared well. Media got some deal attention (AAPLUS expressed interest in TWX-US last year; helped NFLX-US). Most accessory/apparel plays weaker (MOV-US, SIGUS earnings). Tech firmer. Earnings drove more notable moves (HPQ-US better, NTAP-US, PSTG-US worse). Hardware better overall. BABA-US and YHOO-US bounced. Hospitals and managed care capped upside in healthcare. Pharma a relative outperformer. Industrials saw a modest pullback. Airlines lagged. Financials underperformed as rates dampened bank rally. Materials worst performer despite pockets of strength in steel on latest tariff/G7 headlines. Chemicals getting hit.
*Headline durable goods orders beat, but details softer; claims down more than expected:
Headline durable goods orders increased 3.4% m/m in April following an upwardly revised 1.9% gain in March. This was better than consensus for a 0.5% gain. However, upside driven by volatile commercial aircraft segment, while details disappointed as core durable goods orders fell 0.8%, marking a third straight decline. Consensus was looking for a 0.4% increase. Elsewhere, some better labor market data as claims fell 10K to 268K in week-ended 21-May, below the 275K consensus. Labor Department reported no special factors amid a lot of scrutiny about potential seasonal adjustment/transitory issues behind recent backup in claims. Four-week moving average increased to 278,500 from 275,500.
*Busy day of retail earnings:
Good day for dollar stores with DLTR-US and DG-US underpinned by solid comps and strong cost control. COSTUS getting credit for execution as earnings beat as GM and MFI upside offset softer sales. SHLD-US a big gainer on narrower loss. Also exploring alternatives for some segments, including Kenmore and Craftsman. All segments comped positively at WSM-US, while analysts noted benefits of no apparel exposure. PVH-US beat despite difficult apparel backdrop. Both CK and TH surprised to upside. Also raised guidance. Not all good news in apparel, however. ANFUS missed and comp weakness and margin contraction expected to continue in Q2. CHS-US comps unexpectedly declined, while gross margins hit by heightened promotional environment. SIG-US missed on comps (Jared worse, while Kay better).
*Japanese Prime Minister Abe warns of Lehman-scale; may be setting stage for sales tax hike delay:
Big headline out of G7 meeting in Japan has been warning from Japanese Prime Minister Abe about a crisis on the scale of Lehman Brothers. Nikkei noted Abe presented data showing commodities prices have plunged 55% since 2014, the same amount they fell during the global financial crisis. Warning has drawn a lot of attention amid recent flurry of reports noting that Abe has already decided to once again postpone the second phase of sales tax increase currently scheduled for April 2017. While government officials have been quick to deny the reports, they have also reiterated that another Lehman-style crisis or natural disaster would warrant a delay. A heightened emphasis on fiscal support out of the G7 meeting has also been flagged as possible cover for a delay.
*Japanese manufacturers’ sentiment hits three-year low:
Reuters Tankan survey showed that sentiment at Japanese manufacturers fell to +2 in May from +10 in April, the lowest level in three years. The index is only expected to see a modest rebound in the next three months (to +5). DIs in electric machinery, autos and transportation equipment and precision machinery saw the biggest declines. Yen strength and supply chain disruptions from the Kumamoto earthquakes were among the widely cited headwinds. The service sector DI fell to +19 in May from +23 in April. It is expected to slide further to +18 in August.
*Bayer could get ECB financing help for Monsanto takeover:
More discussion in press about ECB corporate bond buying, which officially starts next month. Reuters said terms of the program could allow Bayer (BAYN-DE) to access financing to help with takeover of Monsanto (MON-US). Monsanto rejected Bayer’s ~$62B offer this week, but remains open to discussions. Article noted purpose for which bonds are issued not among the criteria set by the ECB corporate QE program. Cited sources who said while it’s not the ECB's first choice for money it spends buying bonds to help firms finance acquisitions, it could give fresh impetus to the stock market. Sources added if issuers ended up exchanging euros raised through bond sales for dollars, it would also help weaken EUR/USD.
*Kaplan latest Fed official to talk near-term rate hike:
Dallas Fed President Kaplan, who is not a current FOMC voter, said that if economic data continues to come in line with recent trends, he will advocate for a near-term rate hike. He noted that may be in June or July. However, he seemed to express more concern than other officials about the potential complications of a move at the June meeting from Brexit uncertainty. While a number of other officials have recently discussed the potential for two or three rate hikes this year, Kaplan refused to get into such specifics, noting that his preferred approach is to look at policy one meeting at a time. Kaplan also stressed the need for fiscal policy to do more to support growth given the limitations of monetary policy.
*More hedge fund scrutiny:
Hedge funds continue to attract a lot of scrutiny amid concerns about poor performance, crowded positioning and excessive fees. FT the latest to discuss this dynamic, highlighting signs of traction behind an exodus from hedge funds on the part of some institutional investors, including pension funds. In addition, Bloomberg cited comments from Blackstone’s COO, who said that the $2.9T hedge fund industry may lose roughly a quarter of its assets in the next year as performance slumps. Article pointed out hedge fund industry suffering its worst start to a year in terms of performance and investor withdrawals since the global financial crisis. Hedge funds have lost 1.8% this year, while they have seen $16.6B of outflows in past two quarters.
*Moody’s confident Beijing has tools to avert crisis; more focus on bad debt:
Moody’s noted China has pressure points associated with financial crises globally, but said authorities had tools to manage contraction in credit supply or disruption to financial intermediation. Expects Beijing to continue applying existing capital controls more rigorously given likely challenges to liquidity, ability of accommodative monetary policy to avoid defaults, and likelihood of sharp devaluation. Separate FT article noted bad loans rising sharply at lowest tiers of financial sector. Noted many analysts believe that including special mention loans (overdue but not yet considered nonperforming) as distressed would expand average level of bad loans from official 1.75% to 5-7% at the end of March.
Overnight, PBoC fixed yuan’s midpoint at 6.5552 per dollar, 0.22% firmer than prior fix of 6.5693 that marked weakest level in over five years and generated a lot of headlines. Yuan has been under a lot of scrutiny as of late amid concerns that some re-pricing of Fed policy normalization expectations could drive renewed worries about the potential for a material depreciation of the Chinese currency that could unleash another wave of deflationary pressure across global markets. Such concerns played a big role in market selloffs last August/September and earlier this year. However, such concerns have failed to gain much traction (helping global risk sentiment) with some of the focus on the reported flip-flop in China’s yuan policy in favor of stability.
*IMF says no more Greek aid money until EU commits to debt relief:
Post Eurogroup headlines getting attention. IMF official said EU’s acknowledgement that Greece needs debt relief was enough to keep IMF involved in future bailouts. However, stressed that Fund cannot help Greece with fresh aid cash because EU has not yet committed to detailed debt relief. WSJ said this shows Eurogroup/Greek deal this week lacks key elements. WSJ also discussed potential of ECB buying Greek bonds, which it thinks there’s little appetite for given extent of purchases since 2010. Following the Eurozone peripheral bailouts, 25% of outstanding Greek bonds were already on the ECB’s balance sheet by the end-2015, which is dangerously close to the 33% limit the central bank can hold.
*Oil pushes above $50 a barrel:
Lots of stories this morning about Brent crude pushing above $50 a barrel for first time since November. However, nothing particularly incremental in the articles. Some discussion about larger-than-expected crude stockpile draws reported this week. Despite some Canadian production ready to come back on line, more attention on supply outages. Reuters reported that CVX source said today that the company’s onshore activities in Nigeria’s Niger Delta have been shut down by a militant attack at its Escravos terminal. Added that the Niger Delta Avengers said on Wednesday it had blown up the facility’s main electricity feed. OPEC dynamics seem to be largely on the backburner at this point. No surprise surrounding Bloomberg report that there were no discussions of output limits at pre-OPEC meeting.
*Sector performance fairly bunched; defensives outperform:
Telecom and utilities best performers after lagging on recent rotation out of defensives. Rates helped. Consumer staples boosted by discount/club retailers and food space (COST-US, SAFM-US earnings). Select retailers (DLTR-US, DG-US, SHLD-US, PVH-US, WSM-US) helped consumer discretionary following earnings. Casual diners (and JACK-US on upgrade) and builders also fared well. Media got some deal attention (AAPLUS expressed interest in TWX-US last year; helped NFLX-US). Most accessory/apparel plays weaker (MOV-US, SIGUS earnings). Tech firmer. Earnings drove more notable moves (HPQ-US better, NTAP-US, PSTG-US worse). Hardware better overall. BABA-US and YHOO-US bounced. Hospitals and managed care capped upside in healthcare. Pharma a relative outperformer. Industrials saw a modest pullback. Airlines lagged. Financials underperformed as rates dampened bank rally. Materials worst performer despite pockets of strength in steel on latest tariff/G7 headlines. Chemicals getting hit.
*Headline durable goods orders beat, but details softer; claims down more than expected:
Headline durable goods orders increased 3.4% m/m in April following an upwardly revised 1.9% gain in March. This was better than consensus for a 0.5% gain. However, upside driven by volatile commercial aircraft segment, while details disappointed as core durable goods orders fell 0.8%, marking a third straight decline. Consensus was looking for a 0.4% increase. Elsewhere, some better labor market data as claims fell 10K to 268K in week-ended 21-May, below the 275K consensus. Labor Department reported no special factors amid a lot of scrutiny about potential seasonal adjustment/transitory issues behind recent backup in claims. Four-week moving average increased to 278,500 from 275,500.
*Busy day of retail earnings:
Good day for dollar stores with DLTR-US and DG-US underpinned by solid comps and strong cost control. COSTUS getting credit for execution as earnings beat as GM and MFI upside offset softer sales. SHLD-US a big gainer on narrower loss. Also exploring alternatives for some segments, including Kenmore and Craftsman. All segments comped positively at WSM-US, while analysts noted benefits of no apparel exposure. PVH-US beat despite difficult apparel backdrop. Both CK and TH surprised to upside. Also raised guidance. Not all good news in apparel, however. ANFUS missed and comp weakness and margin contraction expected to continue in Q2. CHS-US comps unexpectedly declined, while gross margins hit by heightened promotional environment. SIG-US missed on comps (Jared worse, while Kay better).
*Japanese Prime Minister Abe warns of Lehman-scale; may be setting stage for sales tax hike delay:
Big headline out of G7 meeting in Japan has been warning from Japanese Prime Minister Abe about a crisis on the scale of Lehman Brothers. Nikkei noted Abe presented data showing commodities prices have plunged 55% since 2014, the same amount they fell during the global financial crisis. Warning has drawn a lot of attention amid recent flurry of reports noting that Abe has already decided to once again postpone the second phase of sales tax increase currently scheduled for April 2017. While government officials have been quick to deny the reports, they have also reiterated that another Lehman-style crisis or natural disaster would warrant a delay. A heightened emphasis on fiscal support out of the G7 meeting has also been flagged as possible cover for a delay.
*Japanese manufacturers’ sentiment hits three-year low:
Reuters Tankan survey showed that sentiment at Japanese manufacturers fell to +2 in May from +10 in April, the lowest level in three years. The index is only expected to see a modest rebound in the next three months (to +5). DIs in electric machinery, autos and transportation equipment and precision machinery saw the biggest declines. Yen strength and supply chain disruptions from the Kumamoto earthquakes were among the widely cited headwinds. The service sector DI fell to +19 in May from +23 in April. It is expected to slide further to +18 in August.
*Bayer could get ECB financing help for Monsanto takeover:
More discussion in press about ECB corporate bond buying, which officially starts next month. Reuters said terms of the program could allow Bayer (BAYN-DE) to access financing to help with takeover of Monsanto (MON-US). Monsanto rejected Bayer’s ~$62B offer this week, but remains open to discussions. Article noted purpose for which bonds are issued not among the criteria set by the ECB corporate QE program. Cited sources who said while it’s not the ECB's first choice for money it spends buying bonds to help firms finance acquisitions, it could give fresh impetus to the stock market. Sources added if issuers ended up exchanging euros raised through bond sales for dollars, it would also help weaken EUR/USD.
*Kaplan latest Fed official to talk near-term rate hike:
Dallas Fed President Kaplan, who is not a current FOMC voter, said that if economic data continues to come in line with recent trends, he will advocate for a near-term rate hike. He noted that may be in June or July. However, he seemed to express more concern than other officials about the potential complications of a move at the June meeting from Brexit uncertainty. While a number of other officials have recently discussed the potential for two or three rate hikes this year, Kaplan refused to get into such specifics, noting that his preferred approach is to look at policy one meeting at a time. Kaplan also stressed the need for fiscal policy to do more to support growth given the limitations of monetary policy.
*More hedge fund scrutiny:
Hedge funds continue to attract a lot of scrutiny amid concerns about poor performance, crowded positioning and excessive fees. FT the latest to discuss this dynamic, highlighting signs of traction behind an exodus from hedge funds on the part of some institutional investors, including pension funds. In addition, Bloomberg cited comments from Blackstone’s COO, who said that the $2.9T hedge fund industry may lose roughly a quarter of its assets in the next year as performance slumps. Article pointed out hedge fund industry suffering its worst start to a year in terms of performance and investor withdrawals since the global financial crisis. Hedge funds have lost 1.8% this year, while they have seen $16.6B of outflows in past two quarters.
*Moody’s confident Beijing has tools to avert crisis; more focus on bad debt:
Moody’s noted China has pressure points associated with financial crises globally, but said authorities had tools to manage contraction in credit supply or disruption to financial intermediation. Expects Beijing to continue applying existing capital controls more rigorously given likely challenges to liquidity, ability of accommodative monetary policy to avoid defaults, and likelihood of sharp devaluation. Separate FT article noted bad loans rising sharply at lowest tiers of financial sector. Noted many analysts believe that including special mention loans (overdue but not yet considered nonperforming) as distressed would expand average level of bad loans from official 1.75% to 5-7% at the end of March.
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