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Financial Insights(07-June-2016)

Australia
2016-06-07 14:52

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*PBoC has ample room for policy adjustment via traditional tools:

China Securities Journal reports comments from PBoC assistant governor Ying Yong at a forum that there is room for China to adjust monetary policy via traditional policy tools, including changes to interest rates and the reserve requirement ratio. Ying suggests relative strength of the Chinese economy does not necessitate unconventional policy tools implemented in other economies. Ying notes prudent monetary policy is an accurate description of the current form of policy in China, and calls for better policy coordination to address the country's various challenges. PBoC rhetoric continues to emphasize prudent monetary policy in recent months.

*Chinese stocks remain expensively valued but analysts see more upside:

Chinese valuations remain world’s most expensive. Bloomberg noted A-share valuations remain three times as expensive as other major markets, trading on median P/E of 59x. Yet piece noted even as earnings at Shanghai Composite companies have fallen 13% since last June, share-price targets compiled by Bloomberg signal 13% rally over following 12 months. Article cited analysts who see limited downside due to potential for government intervention. Meanwhile others argue in favor of an aggregate measure of valuation that gives more influence to index’s largest companies. Bloomberg noted on this basis Shanghai trades at 16x, cheaper than S&P 500’s P/E of 19x.

*No timing hints from Yellen's speech:

Fed Chair Janet Yellen, speaking before the World Affairs Council in Philadelphia, reiterated that the Fed’s hiking path is not preset, but should be data dependent. She remarked that news from the labor market has been generally good, though recent signs of a slowdown in job creation bear watching. She noted that if incoming data are consistent with labor-market improvement and the Fed’s 2% inflation objective, gradual rate increases may be warranted. Regarding Friday’s payroll report, she noted that one should not attach too much weight to a single report. She focused on some positive elements, including the fact that average hourly earnings increased ~2.5% over the past 12 months. Yellen did note that global economic developments have restrained US growth, but that she is optimistic these headwinds are now fading (though Brexit remains an uncertainty). Her speech offered little sense of the timing of future rate increases, though she spoke for herself saying positive forces may outweigh negative ones.

*Energy the best performing sector:

Energy the best performer today, catching a bid amid the crude oil rally. A number of outsized gainers in the oil services and E&Ps. DVN-US entered into agreement to monetize ~$1B in non-core upstream assets in Texas. WPX-US filed at 45M secondary offering. Materials and financials also outperformed. The former supported by another rally in the industrial metals. Rate-sensitive financials outperformed following Friday's selloff on the repricing of interest rates outlook. Consumer sectors lagged the tape. Retail little changed, reversed some earlier weakness. WMT-US upgraded at Jefferies. TPUB-US a standout on report GCI-US not giving up on its fight to acquire the company. Food names weighed on the staples. TSN-US downgraded at BMO Capital Markets on valuation.

*Oil stronger, production outages remain in focus:

Oil was stronger today with Brent settling above $50/barrel. Global production outages remain in focus. Nigeria the center of focus, with militants bombing two pipelines on Friday. WSJ noted Piper Jaffray estimates Nigerian production is down about 1M bpd from 1.8M earlier this year. Bank said it appears Nigeria's Forcados export terminal won't reopen in June and the country's production is more likely to come in below estimates this year, making it more likely global inventories will start to decline in H2. Article added that Nigerian and Canadian outages combined have removed more than 3M bpd from the global market in recent weeks. Citigroup said the supply/demand imbalances likely to keep Brent above $50 in Q3.

*Fed officials split on outlook following jobs report:

A number of Fed officials have spoken since Friday's jobs report. Boston Fed President Rosengren (voter) said it will be important to see whether weakness in the report is an anomaly or reflects a broader slowing in labor markets. Added the case for normalizing monetary policy still stands, in part because the 4.7% unemployment rate may signal full employment. Cleveland Fed President Mester (voter) told reporters on Saturday she still believed gradual rate hikes were appropriate and policy path should be data dependent. Mester downplayed jobs results, saying too much shouldn’t be read into one number and it hadn’t fundamentally changed her economic outlook. Fed Governor Brainard on Friday argued there are benefits to waiting for stronger data before raising rates. Atlanta Fed's Lockhart (non voter) said the jobs number and Brexit concerns justify patience at next week's meeting. However, he added that he still expects two rate hikes this year.

*Re-pricing of Fed outlook drives bond markets:

The re-pricing of the Fed rate outlook has been the catalyst for a large rally in bond markets. However, US 10-year yields up ~1bps at -US~1.72%, having dropped 16bps last week. Bulk of move followed disappointing US jobs data. Also triggered notable shift in European bond markets. UK Gilt yields ~1bp lower at ~1.27% after falling 20bps last week. Increasing risk of Brexit also a factor. In Eurozone, German Bund yields at ~0.08%, levels from April 2015, and on course to retest last year's record lows at ~0.05%. Eurozone peripheral bonds reflect recent deterioration in risk appetite, with Italian, Spanish and Portuguese benchmarks ~2bps higher overall. Subdued growth outlook and weak fiscal positions offset ECB largesse.

*Sterling falls as new Brexit polls show "leave" camp with lead:

Sterling under pressure. Move follows latest Brexit polls which show “leave” campaign holding slender lead over “remain” camp. TNS poll showed “leave” with two point lead, 43-41%. Secondary Yougov poll for ITV’s Good Morning Britain showed leave with slightly stronger lead at 45-41%. Polls fit with recent trend showing notable increase in support for "leave" camp. Recall Reuters article on Friday cited poll of FX strategists who forecast ~9% fall in pound versus US dollar in immediate aftermath of Brexit vote victory. Polls come amid reports officials are preparing for Brexit scenario. Reuters cited ECB’s Villeroy, who added central banks would need to step in to counter turmoil. Messaggero noted Friday BoE and ECB were coordinating on contingency plan.

*UK MPs could use majority to keep Britain in EU:

The BBC said pro-EU MPs are considering using their Commons majority to keep Britain inside the EU even if there is a vote for Brexit. Said within the Commons there is majority of 454 to 147 in favor of EU membership. Issue is reportedly being discussed right along the political spectrum, not just among pro-European Conservative MPs. Justification for MPs using their voting power would be to protect the economic benefits of the single market and the "Leave" campaign's refusal to spell out the trading relationship it wants the UK to have with EU. MPs reportedly claiming that post-Brexit government could argue there is no popular mandate for a particular model if it has not been addressed.

*Eurozone sentiment improves despite global risks:

Latest Eurozone economic sentiment reading (Sentix) increased to 9.9 in June vs consensus 7 and prior 6.2. The aggregate reading for the euro area is now at the highest since December. Furthermore, the investors' expectations reading for the next six months jumped 5.5 points to +10. Sentix said June readings demonstrates that other world regions can gain along with positive developments in central Europe. Added that investors are especially optimistic over the prospects for the US and improvement is seen in Asia compared with previous quarter. Highlighted that the sentix global index also increased by 4.1 points to the highest reading since December. Broad improvement in sentiment comes despite ongoing narrative related to risks to global growth outlook.

*Barron's says Brexit casts shadow over UK stocks:

Barron’s in a piece over the weekend notes that getting past the Brexit referendum, whatever the outcome, will remove the uncertainty, and the FTSE 100 should hold up, even in the event of Brexit, since most of its constituents are multinational companies with limited domestic exposure. The column adds however that in the event that the UK decides to remain, investment professionals could return to the stock market, and domestically focused stocks could be the biggest beneficiaries. It cites food retailer WM Morrison (MRW-GB). It adds that one sector that could take a hit from Brexit would be UK real state as demand erodes, particularly in London. It notes REITs that could suffer include British Land (BLND-GB), Land Securities (LAND.LN) and Great Portland Estates (GPOR-GB).
 
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