*IMF warns on China's corporate debt:
IMF deputy chief David Lipton warned that China's corporate debt at 145% of GDP is very high by any measure and if the authorities fail to tackle the problem it could spark a bigger crisis. Highlighted that the problem is growing after rapid increase in credit and continued high rates of investment. Lipton said state-owned enterprises were responsible for 55% of the corporate debt pile despite representing 22% of economic output. Recent reports have made parallels between the level of non-performing loans at China banks and the build-up in US bank credit prior to the subprime crisis. Deutsche Bank research recently said unproductive China debt eclipsed levels seen in US before financial crisis.
*China’s fixed asset investment (FAI) growth slowest since 2000:
Some mixed May activity data out of China. Industrial production growth remained unchanged in May from April at 6.0%, in line with consensus. Retail sales growth also largely in line at 10.0%. Big concern revolved around FAI growth, which slowed to 9.6% y/y in Jan-May period from 10.5% in Jan-Apr, which was also the consensus. Marked slowest FAI growth since 2000. Analysts noted slowdown was led by private sector, where FAI growth fell to 3.9% from 5.2%. Barclays specifically flagged the slowdown in private manufacturing investment in “overcapacity” industries such as coal and ferrous metals amid supply-side reform and capacity reduction initiatives. NBS official flagged lack of confidence in government reforms and difficulties obtaining credit in private sector. However, added it should not hurt economy too much and remain about same in Q2 and 2H.
*VIX hits thee-month high:
Lot of headlines surrounding recent spike in volatility. CBOE Volatility Index, or VIX, jumped above 20 level today for first time since early March. On track for biggest one-day spike since early January. Recent traction surrounding global risk off theme the widely cited driver. Usual suspects in focus in terms of heightened Brexit risks, growth fears, dampened central bank policy confidence, China devaluation worries. However, also some focus on perceived resilience of US stocks. According to Bespoke Investment Group, while VIX has surged 30%+ over last two sessions, accompanying decline in S&P 500 the smallest over the last ten years. Nothing specific behind this dynamic, though some focus on relative outperformance of US economy and dollar/oil reprieve for 2H and 2017 earnings.
*Brexit fears drive global risk-off theme:
Some spillover of the risk-off theme that prevailed last Friday with Brexit fears getting most of the blame. Sterling fell over 1% on Friday after ORB poll for the Independent newspaper showed "Leave" camp with a 10-point lead over "Remain" at 55%-45%. Betfair subsequently noted implied probability of a vote to stay in EU fell as low 64%, down from 78% last Thursday. Latest ICM poll for Guardian newspaper on Monday showed "Leave" with 53% support vs 47% for "Remain" when excluding "don't knows". Compared to 52%-48% split reported by ICM two weeks ago. Guardian said average "poll of polls" has "Leave" at 52% and Remain at 48%. Note Opinium and YouGov polls over the weekend suggested a much closer contest.
*All sectors end lower:
All sectors ended lower. Defensives mixed after last week's outperformance on lower rate backdrop. Utilities and telecom held up better. Consumer staples largely in line. Materials worst performer on weakness in packaging and chemicals. Precious metals firmer. Energy a relative outperformer. Some cushion for E&Ps from sector upgrade at Morgan Stanley. Industrials lagged. Airlines a drag following Florida attack. However, gun names SWHCUS and RGR-US stronger. GWW-US led distributors lower following May sales update. Tech underperformed. Bogged down by MSFT-US on LNKD-US acquisition (though helped TWTR-US). Citron short call hit FB-US. AAPL-US sluggish around WWDC. However, SYMC-US higher on Blue Coat acquisition. Consumer discretionary a bit better than the tape. Retail weak again, though some pockets of strength in media and restaurants. Financials in line, but banks extended last week’s selloff with group down ~1%.
*Tech M&A tops corporate news with Microsoft to acquire LinkedIn:
MSFT-US to acquire LNKD-US for $196 a share in a deal worth $26.2B (includes LNKD’s cash). Represents a nearly 50% premium to prior close. MSFT expects minimal dilution of ~1% to EPS for remainder of F17 post-closing and for F18, and become accretive in F19, or less than two years post-closing. MSFT reiterated intention to complete existing $40B share buyback authorization by end of 2016. Separately, SYMC-US to acquire Blue Coat for $4.65B in cash. Blue Coat CEO Greg Clarke will take top role at SYMC, which has been vacant since April. Deal to be significantly accretive to EPS and means over 60% of SYMC’s revenue will now come from enterprise security. Bloomberg reported SYMC had been in talks to acquire FEYE-US before deciding to acquire Blue Coat. Noted talks broke down over SYMC’s concerns about FEYE’s growth prospects.
*Treasury market signals generate some debate:
Some debate about signals from latest rally in Treasuries. Big concern at end of last week was that lower rate backdrop largely a function of more credible pickup in growth and corporate profit margin concerns following disappointing May employment data and subsequent upward revision to employee compensation costs. Concerns seemed to be supported by flattening of yield curve to levels not seen since 2007. However, also thoughts May employment report was more noise than signal, leaving external factors to play a more important role in Treasury rally. This fit into ongoing reach-for yield theme that received more attention with headline about $10T+ of global bonds trading with negative yields and strong foreign buying seen at 10- and 30-year auctions last week.
*10-year yield below S&P 500 dividend yield highlights potential pain for Treasuries:
Lot of discussion in press about risks from depressed yield backdrop. Last week, Bill Gross said ultra-low bond yields worldwide a “supernova that will explode one day”. Goldman Sachs also noted that current market pricing looks increasingly stretched and “tails” of asset price distributions are under-priced. According to Bloomberg, yield on 10- year Treasury now ~50 bp below 2.17% dividend yield on S&P 500. Noted that on that basis, Treasuries have now been more expensive than US equities for five months, which has only occurred on two other occasions – in 2008 and 2012. Pointed out that in those two prior instances, Treasuries went on to post their worst returns on record, losing 3.7% in 2009 and 3.4% in 2013.
*Negative rates not helping growth as inflation falls even faster:
Unconventional monetary policy continues to attract a lot of scrutiny/pushback. WSJ discussed how negative rates have failed to help growth. Noted big part of the problem is that falling nominal rates have been accompanied by even bigger declines in inflation, meaning real rates are higher. Pointed out that while the global pool of government bonds with negative real yields hit nearly $14T in February, figure has since contracted by more than half due to the free fall of inflation. Paper said many analysts believe failure of low- and negative-rate policies highlights the shortcomings of fiscal policies across the developed world. They believe growth is being constrained by failure to implement policies designed to address challenges of employment, aging and infrastructure spending.
*Goldman Sachs highlights asymmetric risk/return tradeoff for US stocks:
Goldman Sachs’ 2016 S&P 500 target of 2,100 reflects a flat price return from current level. However, firm pointed out that tactically, risk of a 5%-10% drawdown to 1900-2000 remains a near-term concern. Noted potential catalyst include a tightening Fed, US presidential election uncertainty, seasonal buyback deceleration, and a starting point of elevated valuation. Argued that collectively, these factors create an asymmetric risk/return tradeoff. In terms of Fed, pointed out futures imply a 18% likelihood of a July hike, while its economists assign a 35% probability. Added that by the end of next week, ~50% of S&P 500 stocks will be in a blackout period and 75% will be on sidelines by 20-Jun, just ahead of 23-Jun Brexit vote.
IMF deputy chief David Lipton warned that China's corporate debt at 145% of GDP is very high by any measure and if the authorities fail to tackle the problem it could spark a bigger crisis. Highlighted that the problem is growing after rapid increase in credit and continued high rates of investment. Lipton said state-owned enterprises were responsible for 55% of the corporate debt pile despite representing 22% of economic output. Recent reports have made parallels between the level of non-performing loans at China banks and the build-up in US bank credit prior to the subprime crisis. Deutsche Bank research recently said unproductive China debt eclipsed levels seen in US before financial crisis.
*China’s fixed asset investment (FAI) growth slowest since 2000:
Some mixed May activity data out of China. Industrial production growth remained unchanged in May from April at 6.0%, in line with consensus. Retail sales growth also largely in line at 10.0%. Big concern revolved around FAI growth, which slowed to 9.6% y/y in Jan-May period from 10.5% in Jan-Apr, which was also the consensus. Marked slowest FAI growth since 2000. Analysts noted slowdown was led by private sector, where FAI growth fell to 3.9% from 5.2%. Barclays specifically flagged the slowdown in private manufacturing investment in “overcapacity” industries such as coal and ferrous metals amid supply-side reform and capacity reduction initiatives. NBS official flagged lack of confidence in government reforms and difficulties obtaining credit in private sector. However, added it should not hurt economy too much and remain about same in Q2 and 2H.
*VIX hits thee-month high:
Lot of headlines surrounding recent spike in volatility. CBOE Volatility Index, or VIX, jumped above 20 level today for first time since early March. On track for biggest one-day spike since early January. Recent traction surrounding global risk off theme the widely cited driver. Usual suspects in focus in terms of heightened Brexit risks, growth fears, dampened central bank policy confidence, China devaluation worries. However, also some focus on perceived resilience of US stocks. According to Bespoke Investment Group, while VIX has surged 30%+ over last two sessions, accompanying decline in S&P 500 the smallest over the last ten years. Nothing specific behind this dynamic, though some focus on relative outperformance of US economy and dollar/oil reprieve for 2H and 2017 earnings.
*Brexit fears drive global risk-off theme:
Some spillover of the risk-off theme that prevailed last Friday with Brexit fears getting most of the blame. Sterling fell over 1% on Friday after ORB poll for the Independent newspaper showed "Leave" camp with a 10-point lead over "Remain" at 55%-45%. Betfair subsequently noted implied probability of a vote to stay in EU fell as low 64%, down from 78% last Thursday. Latest ICM poll for Guardian newspaper on Monday showed "Leave" with 53% support vs 47% for "Remain" when excluding "don't knows". Compared to 52%-48% split reported by ICM two weeks ago. Guardian said average "poll of polls" has "Leave" at 52% and Remain at 48%. Note Opinium and YouGov polls over the weekend suggested a much closer contest.
*All sectors end lower:
All sectors ended lower. Defensives mixed after last week's outperformance on lower rate backdrop. Utilities and telecom held up better. Consumer staples largely in line. Materials worst performer on weakness in packaging and chemicals. Precious metals firmer. Energy a relative outperformer. Some cushion for E&Ps from sector upgrade at Morgan Stanley. Industrials lagged. Airlines a drag following Florida attack. However, gun names SWHCUS and RGR-US stronger. GWW-US led distributors lower following May sales update. Tech underperformed. Bogged down by MSFT-US on LNKD-US acquisition (though helped TWTR-US). Citron short call hit FB-US. AAPL-US sluggish around WWDC. However, SYMC-US higher on Blue Coat acquisition. Consumer discretionary a bit better than the tape. Retail weak again, though some pockets of strength in media and restaurants. Financials in line, but banks extended last week’s selloff with group down ~1%.
*Tech M&A tops corporate news with Microsoft to acquire LinkedIn:
MSFT-US to acquire LNKD-US for $196 a share in a deal worth $26.2B (includes LNKD’s cash). Represents a nearly 50% premium to prior close. MSFT expects minimal dilution of ~1% to EPS for remainder of F17 post-closing and for F18, and become accretive in F19, or less than two years post-closing. MSFT reiterated intention to complete existing $40B share buyback authorization by end of 2016. Separately, SYMC-US to acquire Blue Coat for $4.65B in cash. Blue Coat CEO Greg Clarke will take top role at SYMC, which has been vacant since April. Deal to be significantly accretive to EPS and means over 60% of SYMC’s revenue will now come from enterprise security. Bloomberg reported SYMC had been in talks to acquire FEYE-US before deciding to acquire Blue Coat. Noted talks broke down over SYMC’s concerns about FEYE’s growth prospects.
*Treasury market signals generate some debate:
Some debate about signals from latest rally in Treasuries. Big concern at end of last week was that lower rate backdrop largely a function of more credible pickup in growth and corporate profit margin concerns following disappointing May employment data and subsequent upward revision to employee compensation costs. Concerns seemed to be supported by flattening of yield curve to levels not seen since 2007. However, also thoughts May employment report was more noise than signal, leaving external factors to play a more important role in Treasury rally. This fit into ongoing reach-for yield theme that received more attention with headline about $10T+ of global bonds trading with negative yields and strong foreign buying seen at 10- and 30-year auctions last week.
*10-year yield below S&P 500 dividend yield highlights potential pain for Treasuries:
Lot of discussion in press about risks from depressed yield backdrop. Last week, Bill Gross said ultra-low bond yields worldwide a “supernova that will explode one day”. Goldman Sachs also noted that current market pricing looks increasingly stretched and “tails” of asset price distributions are under-priced. According to Bloomberg, yield on 10- year Treasury now ~50 bp below 2.17% dividend yield on S&P 500. Noted that on that basis, Treasuries have now been more expensive than US equities for five months, which has only occurred on two other occasions – in 2008 and 2012. Pointed out that in those two prior instances, Treasuries went on to post their worst returns on record, losing 3.7% in 2009 and 3.4% in 2013.
*Negative rates not helping growth as inflation falls even faster:
Unconventional monetary policy continues to attract a lot of scrutiny/pushback. WSJ discussed how negative rates have failed to help growth. Noted big part of the problem is that falling nominal rates have been accompanied by even bigger declines in inflation, meaning real rates are higher. Pointed out that while the global pool of government bonds with negative real yields hit nearly $14T in February, figure has since contracted by more than half due to the free fall of inflation. Paper said many analysts believe failure of low- and negative-rate policies highlights the shortcomings of fiscal policies across the developed world. They believe growth is being constrained by failure to implement policies designed to address challenges of employment, aging and infrastructure spending.
*Goldman Sachs highlights asymmetric risk/return tradeoff for US stocks:
Goldman Sachs’ 2016 S&P 500 target of 2,100 reflects a flat price return from current level. However, firm pointed out that tactically, risk of a 5%-10% drawdown to 1900-2000 remains a near-term concern. Noted potential catalyst include a tightening Fed, US presidential election uncertainty, seasonal buyback deceleration, and a starting point of elevated valuation. Argued that collectively, these factors create an asymmetric risk/return tradeoff. In terms of Fed, pointed out futures imply a 18% likelihood of a July hike, while its economists assign a 35% probability. Added that by the end of next week, ~50% of S&P 500 stocks will be in a blackout period and 75% will be on sidelines by 20-Jun, just ahead of 23-Jun Brexit vote.
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