*China pushes back against steel oversupply criticism:
Global pushback against Chinese steel exports being met with increased rhetoric from China’s Ministry of Commerce. In statement, ministry deflected blame for fueling steel overcapacity, adding China will encourage its firms to leverage WTO rules to safeguard their interests. Recall US recently imposed punitive duties on Chinese steel imports, while US international Trade Commission said it is investigating claims by US Steel (X-US) China stole trade secrets. Separate Bloomberg report noted G7 leaders specifically discussed steel with European Commission Juncker seeing China’s steel overcapacity as a problem for Europe. Article noted China has previously pushed back against such criticism, pointing to 90M tons of steel capacity it has cut over past five years.
*Yellen’s Harvard appearance uneventful:
Honored at Harvard’s annual Radcliffe Day, Fed Chair Yellen spoke at some length but broke no new ground. Despite• high level of anticipation, she mostly reiterated points regularly raised in recent Fed statements. Noted both stronger recent economic growth and labor-market improvement. Said further labor gains are possible, suggesting number of PT workers looking for FT positions unusually high and indicative of some slack. Voiced some concern over “miserable” pace of recent productivity growth. When pressed for rate comments, Yellen said economic growth appears to be picking up; if that continues and contingent on risks to the outlook, it might be appropriate to cautiously and gradually raise interest rates “in the coming months.” The market may get more guidance from her 6-Jun speech in Philadelphia, particularly as she will have had a look at May employment data by that point.
*Most sectors trading higher:
Financials outperforming on consumer finance names; banks lagging. Consumer discretionary outperforming as retail earnings provide a lift. ULTA and BIG the post-earnings standouts. The former posted strong comps, and analysts pleased with ability to beat elevated bar. Techhigher, but focus on some weak software earnings. PANW hit by weaker product revenue. SPLK another post-earnings laggard. Healthcare outperforming today, with pharma leading the sector. M&A in focus with VRX reportedly receiving takeover interest. Industrials weighed down by machinery. Materials underperforming as metals sell off. Precious metals getting hit particularly hard.Energy the worst performer on broad-based weakness.
*Q1 GDP revised higher, profits better, sentiment up:
US real Q1 GDP revised up to 0.8% SAAR from 0.5%, in line with consensus. Personal consumption expenditures were unrevised. Spending on residential structures was stronger than first estimate, rising 17.1% in Q1 vs advance estimate for a 14.8% rise. Trade deficit also smaller, with net exports revised up and imports revised down. Business inventories were revised upward. Disposable personal income saw upward revisions to both Q1 and Q4’15 levels. Savings rate revised to 5.7% from 5.2%, hitting its highest level since Q4’12. Release also reported that preliminary estimates show after-tax US corporate profits rose 1.9% in Q1 following two quarters of declines. However, level still 3.6% below Q1’15 report. Elsewhere, final May reading for U Mich consumer sentiment came in at 94.7, down from preliminary 95.8 but still sharply higher than April’s final 89.0 reading. Release noted political uncertainty largest factor on consumers’ horizon, spurring emphasis on precautionary saving.
*No surprises from G7:
No surprises from G7 communique released following leaders’ summit. Flagged rising risks to global economy and highlighted commitment to strengthening policy responses in a cooperative manner to support global economy. As expected however, no mention of fiscal policy coordination despite an aggressive push by Japan. Also reiterated commitment to use all policy tools - monetary, fiscal and structural – individually and collectively. This balanced approach was widely telegraphed in previews ahead of meeting. Cautioned against relying too much on monetary policy and reaffirmed that it should not be used for competitive currency devaluations. Also reiterated desire to avoid excessive volatility in the foreign exchange market. In addition, G7 warned that a British exit from EU would be a serious risk to global growth.
*At depths of crisis, Valeant received takeover offer:
VRX-US saga continues to generate some interesting headlines. WSJ reported that a month or two ago, when VRX was engulfed by an accounting scandal, concerns about its debt load and looking for a replacement for Michael Pearson as CEO, it received a takeover approach from Japan’s Takeda Pharmaceutical and PE firm TPG. Paper said there was never a formal offer, while no talks are currently taking place and board wants to give new CEO Joseph Papa time to turn the company around. According to article, Takeda was interested in the Salix Pharmaceuticals business, while TPG would take the bulk of the rest of the company. In line with one of the takeaways from the report, early analyst commentary noted offer highlights underlying value of company’s assets despite all controversies.
*Flow data highlights continuation of risk-off theme:
Risk-off theme again the big takeaway from the latest BofA Merrill Lynch Flow Show report. Another $9.2B left global equities, marking the seventh straight week of outflows. Bonds attracted $2.6B, and have now seen inflows in 12 of the last 13 weeks. Of interest, $2.1B left high yield bonds, the largest outflow in 15 weeks, while Treasuries saw first inflows in 14 weeks. Money markets also saw $12.2B of inflows. However, report did note that firm’s Global Flow Trading Rule very close to generating a contrarian buy signal with four-week outflows from equity and high yield funds at 0.9% of AUM (1% required for buy signal). In terms of other interesting themes, report noted Fed rate hikes starting to get discounted with financials seeing biggest inflows in five months and first outflows from REITs in 14 weeks.
*OPEC tensions ease as Saudi strategy gains traction:
OPEC’s 2-Jun meeting widely expected to be a non-event in the wake of last month’s inability to finalize a production freeze deal with Russia. Bloomberg also discussed the likelihood of a less contentious meeting than last one in December, when Saudi Arabia’s market share strategy drew public criticism from fellow members Venezuela and Iran. Noted that Saudis now able to highlight some traction behind their strategy of squeezing high-cost rival producers, which has almost eradicated global oversupply, helping drive an 80% rally in crude since January to above $50 a barrel. Pointed out that IEA expects production outside OPEC to decline most since 1992 this year. Added that according to EIA, US output has fallen for 11 weeks to lowest since September 2014, and will be down by 8.5% on average this year vs 2015.
*Stronger dollar trips up some hedge funds:
More scrutiny surrounding hedge fund performance in the press. WSJ discussed how a 3%+ rebound in the dollar since early May has tripped up computer-driven funds that switched their positions on the greenback from bullish to bearish earlier this year on the back of the signals from global market weakness that helped dampen policy divergence trades. Paper said that according to Hedge Fund Research, these funds were down 3.4% on average this month through Monday. Noted that the pain was exacerbated by the fact that funds had ramped up the size of their bearish bets on the dollar to the highest level in five years. Added that the dollar’s rebound has also impacted other assets, hampering funds that have bet on higher bond and commodity prices.
*Japan expected to delay sales tax hike:
Despite some recent volatility in the headlines surrounding Japan’s plans for the second phase of a sales tax increase currently scheduled for April 2017, it looks increasingly likely as if it will be delayed. Prime Minister Abe said today a final decision will be announced before upper house elections expected in July. However, he seemed to be aggressively seeking cover for a delay at the G7 meeting, issuing the most vocal warnings about global growth risks, the importance of global cooperation to keep a crisis from erupting and the need for Japan to do its part by reigniting Abenomics. In addition, press reports, citing government sources, continued to say that a decision to delay the sales tax increase has already been made. Some reports noted that the delay could be for as long as three years.
*May Tokyo CPI slows, while corporate Japan skeptical about end to deflation:
Japan’s core CPI fell 0.3% y/y in April, a bit better than the 0.4% decline expected by consensus, but unchanged from March. The core-core CPI, which excludes both food and energy, was also unchanged in April, up 0.7% y/y. However, the Tokyo core CPI, a leading indicator the national reading, fell 0.5% y/y in May, accelerating from a 0.3% decline in April. This marked the biggest decline since March 2013. Deflation concerns also received some attention in a Reuters poll. It noted that 70% of Japanese companies see no decisive escape from deflation in the foreseeable future, up from 48% in January. It added that 79% expressed concern that consumer prices could return to deflation either this year or next.
Global pushback against Chinese steel exports being met with increased rhetoric from China’s Ministry of Commerce. In statement, ministry deflected blame for fueling steel overcapacity, adding China will encourage its firms to leverage WTO rules to safeguard their interests. Recall US recently imposed punitive duties on Chinese steel imports, while US international Trade Commission said it is investigating claims by US Steel (X-US) China stole trade secrets. Separate Bloomberg report noted G7 leaders specifically discussed steel with European Commission Juncker seeing China’s steel overcapacity as a problem for Europe. Article noted China has previously pushed back against such criticism, pointing to 90M tons of steel capacity it has cut over past five years.
*Yellen’s Harvard appearance uneventful:
Honored at Harvard’s annual Radcliffe Day, Fed Chair Yellen spoke at some length but broke no new ground. Despite• high level of anticipation, she mostly reiterated points regularly raised in recent Fed statements. Noted both stronger recent economic growth and labor-market improvement. Said further labor gains are possible, suggesting number of PT workers looking for FT positions unusually high and indicative of some slack. Voiced some concern over “miserable” pace of recent productivity growth. When pressed for rate comments, Yellen said economic growth appears to be picking up; if that continues and contingent on risks to the outlook, it might be appropriate to cautiously and gradually raise interest rates “in the coming months.” The market may get more guidance from her 6-Jun speech in Philadelphia, particularly as she will have had a look at May employment data by that point.
*Most sectors trading higher:
Financials outperforming on consumer finance names; banks lagging. Consumer discretionary outperforming as retail earnings provide a lift. ULTA and BIG the post-earnings standouts. The former posted strong comps, and analysts pleased with ability to beat elevated bar. Techhigher, but focus on some weak software earnings. PANW hit by weaker product revenue. SPLK another post-earnings laggard. Healthcare outperforming today, with pharma leading the sector. M&A in focus with VRX reportedly receiving takeover interest. Industrials weighed down by machinery. Materials underperforming as metals sell off. Precious metals getting hit particularly hard.Energy the worst performer on broad-based weakness.
*Q1 GDP revised higher, profits better, sentiment up:
US real Q1 GDP revised up to 0.8% SAAR from 0.5%, in line with consensus. Personal consumption expenditures were unrevised. Spending on residential structures was stronger than first estimate, rising 17.1% in Q1 vs advance estimate for a 14.8% rise. Trade deficit also smaller, with net exports revised up and imports revised down. Business inventories were revised upward. Disposable personal income saw upward revisions to both Q1 and Q4’15 levels. Savings rate revised to 5.7% from 5.2%, hitting its highest level since Q4’12. Release also reported that preliminary estimates show after-tax US corporate profits rose 1.9% in Q1 following two quarters of declines. However, level still 3.6% below Q1’15 report. Elsewhere, final May reading for U Mich consumer sentiment came in at 94.7, down from preliminary 95.8 but still sharply higher than April’s final 89.0 reading. Release noted political uncertainty largest factor on consumers’ horizon, spurring emphasis on precautionary saving.
*No surprises from G7:
No surprises from G7 communique released following leaders’ summit. Flagged rising risks to global economy and highlighted commitment to strengthening policy responses in a cooperative manner to support global economy. As expected however, no mention of fiscal policy coordination despite an aggressive push by Japan. Also reiterated commitment to use all policy tools - monetary, fiscal and structural – individually and collectively. This balanced approach was widely telegraphed in previews ahead of meeting. Cautioned against relying too much on monetary policy and reaffirmed that it should not be used for competitive currency devaluations. Also reiterated desire to avoid excessive volatility in the foreign exchange market. In addition, G7 warned that a British exit from EU would be a serious risk to global growth.
*At depths of crisis, Valeant received takeover offer:
VRX-US saga continues to generate some interesting headlines. WSJ reported that a month or two ago, when VRX was engulfed by an accounting scandal, concerns about its debt load and looking for a replacement for Michael Pearson as CEO, it received a takeover approach from Japan’s Takeda Pharmaceutical and PE firm TPG. Paper said there was never a formal offer, while no talks are currently taking place and board wants to give new CEO Joseph Papa time to turn the company around. According to article, Takeda was interested in the Salix Pharmaceuticals business, while TPG would take the bulk of the rest of the company. In line with one of the takeaways from the report, early analyst commentary noted offer highlights underlying value of company’s assets despite all controversies.
*Flow data highlights continuation of risk-off theme:
Risk-off theme again the big takeaway from the latest BofA Merrill Lynch Flow Show report. Another $9.2B left global equities, marking the seventh straight week of outflows. Bonds attracted $2.6B, and have now seen inflows in 12 of the last 13 weeks. Of interest, $2.1B left high yield bonds, the largest outflow in 15 weeks, while Treasuries saw first inflows in 14 weeks. Money markets also saw $12.2B of inflows. However, report did note that firm’s Global Flow Trading Rule very close to generating a contrarian buy signal with four-week outflows from equity and high yield funds at 0.9% of AUM (1% required for buy signal). In terms of other interesting themes, report noted Fed rate hikes starting to get discounted with financials seeing biggest inflows in five months and first outflows from REITs in 14 weeks.
*OPEC tensions ease as Saudi strategy gains traction:
OPEC’s 2-Jun meeting widely expected to be a non-event in the wake of last month’s inability to finalize a production freeze deal with Russia. Bloomberg also discussed the likelihood of a less contentious meeting than last one in December, when Saudi Arabia’s market share strategy drew public criticism from fellow members Venezuela and Iran. Noted that Saudis now able to highlight some traction behind their strategy of squeezing high-cost rival producers, which has almost eradicated global oversupply, helping drive an 80% rally in crude since January to above $50 a barrel. Pointed out that IEA expects production outside OPEC to decline most since 1992 this year. Added that according to EIA, US output has fallen for 11 weeks to lowest since September 2014, and will be down by 8.5% on average this year vs 2015.
*Stronger dollar trips up some hedge funds:
More scrutiny surrounding hedge fund performance in the press. WSJ discussed how a 3%+ rebound in the dollar since early May has tripped up computer-driven funds that switched their positions on the greenback from bullish to bearish earlier this year on the back of the signals from global market weakness that helped dampen policy divergence trades. Paper said that according to Hedge Fund Research, these funds were down 3.4% on average this month through Monday. Noted that the pain was exacerbated by the fact that funds had ramped up the size of their bearish bets on the dollar to the highest level in five years. Added that the dollar’s rebound has also impacted other assets, hampering funds that have bet on higher bond and commodity prices.
*Japan expected to delay sales tax hike:
Despite some recent volatility in the headlines surrounding Japan’s plans for the second phase of a sales tax increase currently scheduled for April 2017, it looks increasingly likely as if it will be delayed. Prime Minister Abe said today a final decision will be announced before upper house elections expected in July. However, he seemed to be aggressively seeking cover for a delay at the G7 meeting, issuing the most vocal warnings about global growth risks, the importance of global cooperation to keep a crisis from erupting and the need for Japan to do its part by reigniting Abenomics. In addition, press reports, citing government sources, continued to say that a decision to delay the sales tax increase has already been made. Some reports noted that the delay could be for as long as three years.
*May Tokyo CPI slows, while corporate Japan skeptical about end to deflation:
Japan’s core CPI fell 0.3% y/y in April, a bit better than the 0.4% decline expected by consensus, but unchanged from March. The core-core CPI, which excludes both food and energy, was also unchanged in April, up 0.7% y/y. However, the Tokyo core CPI, a leading indicator the national reading, fell 0.5% y/y in May, accelerating from a 0.3% decline in April. This marked the biggest decline since March 2013. Deflation concerns also received some attention in a Reuters poll. It noted that 70% of Japanese companies see no decisive escape from deflation in the foreseeable future, up from 48% in January. It added that 79% expressed concern that consumer prices could return to deflation either this year or next.
Latest comments