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Financial Insights(02-June-2016)

Australia
2016-06-02 17:09

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*Chinese PMI data mixed:

Some mixed PMI data out of China overnight. Market impact fairly minimal as China stabilization theme still largely intact. However, economists also continue to flag dampened growth momentum on the back of Beijing’s widely discussed dialing back of some policy support amid concerns about credit excesses and overcapacity. Official manufacturing PMI unchanged at 50.1 in May, slightly better than 50.0 consensus. Details mixed. Production inched up to 52.3 from 52.2, while new orders fell again to 50.7 from 51.0. In addition, new export orders slipped to 50.0 from 50.1. Employment up to 48.2 from 47.8, but still in contraction. Separately, Caixin Manufacturing PMI fell to 49.2 in May from 49.4 in April, below 49.3 consensus. Decline followed two months of relative improvement. Both production and new orders moderated in May from April.

*PBoC continues string of weaker yuan fixes:

Yuan weakness one of the bigger global market themes right now. PBoC fixed yuan at weakest level since February 2011 for a third consecutive session. However, spillover still limited as analysts have highlighted orderly nature of the decline amid recent bout of dollar strength stemming from some re-pricing of near-term policy normalization path. Some credit has gone to WSJ article from last week noting Beijing’s flip-flop on yuan policy in favor of stability. While mainland press has said that China is sticking with goal of making yuan more market-oriented, it has also highlighted Beijing’s mantra about keeping the currency basically stable at a reasonable and balanced level. Crackdown on capital outflows flagged as supportive, as has refinancing wave of dollar-denominated debt. However, FT article today said Chinese companies resuming offshore borrowing.

*Sector performance mixed:

Consumer staples the best performer today. WFM-USupgrade helped grocers. Healthcare outperformed with help from pharma. VRX-US confirmed its earnings call for next week and said it expects to file its 10-Q on or before 10-Jun. Financials also stronger. Banks mostly higher, reversing earlier weakness. Consumer discretionary underperformed, with several auto names selling off on disappointing May sales reports. Also pockets of weakness in retail, with UA-US and NKE-US hit.Industrials underperformed. Transports weighed on the sector, particularly road and rails. Tech another laggard, with networking and communication names a drag. Software in focus with DWREUS agreeing to be acquired by CRM-US in a deal valued at ~$2.8B. Telecom the worst performer, off more than 1%.

*May ISM manufacturing index stronger:

May manufacturing ISM came in at 51.3, up from last month’s 50.8 reading and well above consensus for 50.4. Marks third straight month of expansion following five months of contraction. Report something of a surprise given consistently negative readings from regional manufacturing surveys in May. Twelve industries reported growth in the month vs six reporting contraction. New orders only slightly slower at 55.7 vs April 55.8. Employment index unchanged at 49.2, in contraction for sixth consecutive month. Raw-materials inventories also in contraction at 45 vs April’s 45.5 reading, while customer inventory index up 0.5 to 50.0 in May. May prices index at 63.5 vs April’s 59.0, with 34% of respondents reporting higher raw material prices. Few notable takeaways from respondent commentary, with a wide range of outlooks reported.

*Auto sales could beat April levels:

Light-vehicle sales for May could settle close to a 17.4M SAAR according to WardsAuto, potentially topping April's similar level. Forecasts had been for 17.3-17.4M, and earlier releases suggested the possibility of a slowdown emerging after several years of strong sales growth. GM-US reported an 18% sales decline for the month, noting that demand, particularly for newly launched products, had been strong but that Japanese earthquakes had disrupted production at three manufacturing facilities. Some analysts noted that May's environment was less promotional, and observed that the Memorial Day holiday typically signals the start end-of-model-year clearance campaigns, and that many dealers have been building inventory in anticipation of a wave of demand.

*Japanese Prime Minister Abe confirms sales tax hike delay; yen stronger:

As widely expected, Japanese Prime Minister Abe confirmed plans to delay second phase of a sales tax increase (to 10% from 8%) from April 2017 to October 2019. Cited risks to spending and potential for Japanese economy to fall back into deflation. Reiterated the concerns he expressed at recent G7 meeting about meaningful risks to global economy. Also highlighted need to increase escape velocity for Japanese economy. Said government will take bold economic steps in the fall, in line with recent speculation about fiscal stimulus. Stressed importance of structural reform to promote sustainable growth and flagged labor market reform as biggest challenge. Government to introduce equal pay for equal work. However, still talked up traction behind Abenomics. Yen strength today partly attributed to concerns about Japanese policy failure.

*Final Eurozone manufacturing PMI falls in May, but unchanged from flash reading:

The final Eurozone manufacturing PMI fell to a three-month low of 51.5 in May from 51.7 in April, but was in line with the flash reading. Survey compiler Markit said that six out of eight nations covered by the survey expanded, but downturns continued in France and Greece. Slowdown in pace of expansion was due to a fall in inflows of new business from domestic and export markets. Only Germany and the Netherlands saw a pickup in the rate of expansion. Germany registered a four-month high of 52.1, yet off the 52.4 flash reading. Netherlands hit a two-month high of 52.7. Markit economist Chris Williamson described Eurozone manufacturing as a state of near stagnation.

*Bets on rising rates hit highest level since 2014:

Biggest story in the market continues to be some re-pricing of near-term Fed policy normalization expectations. Move largely driven by Fed commentary, including from Yellen last week. Noted rate hike would “probably” be appropriate in the coming months. WSJ noted that according to TD Securities, value of net shorts in eurodollar futures market hit $730B in week-ended 24-May, highest since December 2014. Paper also pointed out that while expectations of a June rate hike have fallen to 23% from 34% earlier last month, fed-funds futures pricing in a 58% probability of a move at July meeting, up from 28% a month ago. However, still some uncertainty as paper noted that according to BofA Merrill Lynch, Fed has not raised rates unless market assigned at least 60% odds to such a move via near-term fed-funds futures contract day before a rate increase.

*No coordinated action expected from OPEC:

OPEC meeting on Thursday largely seen as a non-event. Widely expected to refrain from taking any coordinated action. Preview commentary has continued to highlight divisions between Saudi Arabia and Iran. Back in April, Saudi Arabia scuppered an expected finalization of a production freeze deal between OPEC and non-OPEC producers (ie Russia) due to its insistence that despite a widely telegraphed plan to ramp production to pre-sanctions levels, Iran must participate in the agreement. However, bigger area of focus has been on dampened need for any coordinated action due to rising oil prices, which have nearly doubled since hitting 13-year lows in January. Rally has also provided some semblance of vindication for Saudi Arabia’s decision to prioritize market share in the face of structural imbalances from the presence of US shale.

*OECD says global economy stuck in low-growth trap:

In its latest Global Economic Outlook, OECD said global economy stuck in a low-growth trap that will require more coordinated and comprehensive use of fiscal, monetary and structural policies. Noted weak trade growth, sluggish investment, subdued wages and slower activity in key emerging markets will all contribute to modest global GDP growth of 3% in 2016, essentially same level as 2016. Global recovery expected to improve to only 3.3% in 2017. Outlook also flagged a number of downside risks, the most immediate one of which is a UK vote to leave the EU. Like the recent G7 communique, also cautioned against overreliance on monetary policy. Pointed out that additional easing could be less effective than in the past, and even counterproductive in some circumstances. Went on to highlight need for collective action on fiscal stimulus.

*Merkel’s ruling government sees support dip below 50%:

The FT cited an opinion poll published in Germany’s Bild newspaper, which revealed that support for Chancellor Merkel’s ruling conservative bloc and her Social Democrat coalition partners has dropped below 50% for the first time since the country’s reunification. Article attributed this to the rise of the rightwing anti-immigration Alternative for Germany party and a recovery in the liberal FDP. On left side, the Greens and the Left party held onto their own, showing a fragmented political landscape ahead of 2017 elections. FT added that the risks are increasing that a future government might need three coalition partners instead of two, which have run virtually every administration since the war. Noted the latest decline is largely caused by public anger over the influx of refugees.

*Shari Redstone says investors want new management at Viacom:

VIAB-US saga continues to dominate press. In a statement, Shari Redstone said she has no desire to manage the company nor chair its board. However, did note that shareholders have “have already spoken” and “want new management at the top”. Comments followed recent criticism from independent board members that Shari Redstone was the driving force behind Sumner Redstone’s recent surprise decision to remove VIAB CEO Philippe Dauman and board member George Abrams and directors of the Sumner Redstone family trust and from the National Amusements board. National Amusements controls 80% of the voting stock of both VIAB and CBS. Independent directors said changes were inconsistent with Sumner Redstone’s “stated judgment for many years that his daughter, Shari, should not control VIAB or his other companies.”

*Under Armour lowers guidance on The Sports Authority liquidation:

UA-US reduced its Q2 and F16 guidance in the wake of the recent bankruptcy developments surrounding The Sports Authority (“TSA”). Initially, company expected a restructuring or sale of TSA. However, TSA now moving towards a full liquidation after failing to find a bidder that would keep the chain open. UA now expects to realize $43M in revenues from TSA in F16, down from $163M previously. Only reduced its F16 revenue guidance by $75M to $4.925B (FactSet consensus is $5.03B), as analysts noted expectations for some sales to be picked up elsewhere. UA will also take a $23M impairment charge in Q2 related to TSA. However, company did note it continues to expect Q2 revenue growth of in the high 20s percent range. No shift in sentiment surrounding stock following updated guidance. Broader athletic apparel and competitive fallout from TSA bankruptcy already widely discussed.

 
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