*Yen surges on earlier risk-off; Finland's finance minister says Brexit could be Europe's 'Lehman moment':
Yen surged to strongest level vs the dollar in nearly two years (though well off best levels in afternoon trading). Move followed BoJ’s decision to leave policy unchanged. Decision not a surprise, but yen strength fits with recent broader pickup in risk aversion on heightened Brexit risks. Finland's finance minister said today Brexit could be Europe's "Lehman moment". Japanese officials not surprisingly stepped up their verbal intervention overnight. Chief cabinet secretary Suga said recent FX moves have been rapid and speculative in nature and are undesirable. Added Japan will pay even closer attention than usual and act if needed. Separately, BoJ Governor Kuroda said that is not favorable that the yen rises and volatility increases without reflecting economic fundamentals. Added it will carefully watch and pay attention to international financial market, including FX.
*British MP killed:
Jo Cox, a Labour MP, died on Thursday after she was shot and stabbed as she met with constituents in her district in northern England. Her attacker, a 52-year old male, has been arrested. There were initial reports that the man had shouted “Britain First” just before the attack, the name of an anti-immigration group in favor of Britain leaving the EU. This triggered speculation the attack was related to the upcoming Brexit vote, though there have been conflicting reports about witnesses may or may not have heard. Note that Jo Cox was in favor of Britain remaining in the EU. Britain First denied any involvement, while both the “Leave” and “Remain” camps suspended their campaigning for the day. The news had an impact on financial markets, with sterling and US equities off worst levels on very loose speculation the Brexit vote could be delayed. However, analysts suggest such a delay would be close to impossible to implement.
*Polls continue to show Brexit in the lead:
Brexit fears remain elevated ahead of next week’s vote as polls continue to show momentum behind “Leave” camp. Ipsos MORI poll out today showed 53% now want to leave and 47% want to stay. In May poll by Ipsos MORI, 37% wanted to leave vs 55% who wanted to stay. Evening Standard noted this marked first time since Cameron pledged referendum in January that Leave was ahead in this monthly survey. Pointed out that immigration has overtaken economy as most important issue on how public will vote. Ipsos MORI CEO did tell Reuters that status quo may triumph at last minute, but it looks very close. Betfair said odds of likelihood of a Remain vote fell to 60% from 65% before the survey. Separately, Survation poll for IG showed 45% would vote to leave the EU, while 42% would vote to remain.
*More calls for sterling slump on Brexit:
More bearish commentary on impact of Brexit. Goldman Sachs said sterling could slump 11% on a trade-weighted basis against basket of major developed market currencies if Brexit happens. Firm also expects euro to drop 4% in reaction (note more talk lately that Brexit could pave way for some Eurozone countries to push to leave EU). Added perceived safe haven currencies likely to see big inflows in response, projecting yen to appreciate by 14%. Sees increase in Swiss franc to lesser extent, followed by Norwegian krone. Citi also discussed potential post-vote moves. Warned Brexit could see sterling fall faster and further than market thinks due to lack of liquidity. Anticipates a rally on Remain vote, but unlikely to be as powerful a driver in terms of market reaction function. Thinks Brexit is the pain trade.
*SNB maintains policies but cautious ahead of Brexit vote:
As expected, SNB kept its deposit rate at a historical low of (0.75%) and 3-month Libor target between (0.25%) percent and (1.25%). Reiterated willingness to intervene in FX market and said that together with negative rates, this stance is intended to make Swiss franc investments less attractive. Recall, Swiss franc ~2.2% higher vs the euro MTD. SNB’s statement highlighted it continues to see the Swiss franc as significantly overvalued and that current policy measures are aimed at easing pressure on the currency. Noted that expansionary monetary policy aimed at stabilizing price developments and supporting economic activity. Warned on global economic risks, particularly Brexit vote. Expects 2016 GDP at 1% to 1.5% - unchanged from previous estimates. Also, 2016 CPI seen at (0.4%), 2017 seen at 0.3% and 2018 seen at 0.9%.
*China's State Council to tackle metals industry overcapacity:
China in new drive to resolve overcapacity in metals industry. Economic Information Daily, citing State Council directive, noted measures will include improving electricity and land policies, increasing fiscal and financial support, and assisting with employee relocation. Aluminum industry a focus with firms ordered to balance new construction projects with equal amount of capacity reduction. There will also be tighter compliance monitoring and greater use of M&A. Financial firms also encouraged to support non-ferrous firms in boosting government and commercial reserves. In explaining reasons behind persistent overcapacity, one unnamed local government noted lack of guidance from top officials and cited issues around debt levels, unemployment and old capacity being too slow to exit the market.
*China sells US equities at faster pace than global investors:
China stepping pace of its US equity selling just as it selling of Treasuries moderates. Bloomberg cited Treasury Department data showing China’s US equity stockpile fell 38%，or $126B, between the end of July 2015 and the end of March. At the same Treasury holdings had fallen just 2%, or $26B. China’s US equity sales significantly outpaced investors globally, with their holdings falling 9%. Article argues while amount of equities sold by China represents fraction of $23T US market, it remained significant compared to holdings of other investors such as Vanguard’s Total Stock Market Index Fund, which overseas ~$373B. Analysts note sale allows China to raise amount needed to finance its reserves drawdown. Also allowed PBoC to retain holdings of more liquid Treasuries it can offload in times of crisis.
*Defensives outperform:
Sectors ended fairly bunched with afternoon bounce. Defensive plays like telecom, utilities, staples and REITs still fared best. However, precious metals came under pressure. Consumer discretionary a slight outperformer. Media a standout. VIAB-US boosted by CEO/board ouster. Select chemicals and steel names helped materials. Financials largely in line despite regional bank weakness. Managed care boosted healthcare. Bernstein had some positive comments. Tech a slight laggard. Lot of moving pieces and nothing really stood out. Industrials also lagged. Airlines weak, though a number of multis were higher. Energy only sector negative as oil fell for sixth straight session.
*BoE reiterates Brexit warning:
Nothing groundbreaking from latest BoE policy update. Comes one week before Brexit vote and follows detailed discussion in May Inflation Report. BoE reiterated growth and inflation would be materially impacted by Brexit and sterling likely to fall sharply. Also warns of adverse spillover to global economy and notes uncertainty has also affected non-sterling assets. Still maintains central assumption of higher rates by end of forecast horizon, but admitted referendum is making interpretation of data difficult. Highlighted that it has the stability tools to protect banks and will take whatever action is needed to ensure inflation expectations remain well anchored. Market consensus is for rate cut, QE/credit expansion and liquidity injections on Brexit.
*BoJ leaves policy unchanged:
BoJ left policy unchanged. Move was expected as Bloomberg survey ahead of the meeting showed more than 70% of economists believed central bank would stand pat. BoJ seen needing more time to assess impact of additional measures announced in late January. Also did not want to move ahead of upcoming Brexit vote. Other dynamic in play seemed to be desire to save few remaining stimulus bullets. Policy statement maintained current economic assessment, noting economy has continued with its moderate recovery. However, continued to flag headwinds from slowdown in emerging economies. Also downgraded inflation language, noting CPI likely to be slightly negative or 0% for time being. Kuroda defended policy and recovery traction. Also reiterated inflation will hit 2% target by March 2018.
*Fed highlights policy uncertainty:
Still a lot of reverberations from Wednesday’s Fed announcements. No real surprises from the policy statement as Fed noted slower job growth, but said it expects labor market indicators to improve and also upgraded consumer spending language. More interesting takeaways came from dot plot and Yellen. Six officials now expect just a single rate hike this year, up from one in March. A number of economists noted that group likely includes at least one member of Fed leadership. Projections for 2017 and 2018 came down more than expected, while longer-run rate outlook continued to drift lower, falling to 3% from 3.25%. Yellen attributed downward drift to assessment of a lower neutral rate (widely discussed topic in press). Noted factors depressing rate, including low productivity growth, could be part of a new normal.
*US economic data mixed:
May headline CPI missed, increasing 0.2% vs April’s 0.4% rise and consensus for 0.3%. Rose 1.0% y/y vs last month’s 1.1% gain. Core prices rose 0.2%, matching consensus and April reading. Release noted food index fell, while shelter index rose 0.4%. May Philly Fed index registered +4.7 vs last month’s (1.8) and consensus +1.0. Follows on May Empire survey flipping positive after a string of weak April regional Fed readings. Internals weaker however. Labor market indicators suggest continued weak employment conditions, prices paid index rose for fourth consecutive month, and respondents’ future growth expectations softened. Finally, initial claims came in at 277K, a 13K rise from last week’s reading and ahead of consensus for 268K. Continues 67-week streak of sub-300K readings despite weak May payrolls report. Four-week average dropped slightly to 269.25k.
*M&A in healthcare services, semiconductors:
AMSG-US and EVHC-US agreed to combine in an all-stock deal that creates one of the largest healthcare service providers with a $10B pro-forma market cap and $15B EV. Merged entity offerings will span pre-hospital, acute and outpatient care to postacutecare. Deal expected to be accretive to the two companies’ combined adj. EPS in 2017 and double-digit accretive in 2018. Expected to result in annual synergies of $100M within three years after it closes at end of 2016. More consolidation in semi space. ASML-US, world’s biggest chipmaking equipment supplier, to acquire Taiwan’s Hermes Microvision for ~$3.1B in cash. In addition, CAVM-US announced a deal to acquire QLGC-US for ~$1.4B in cash and stock. Deal will be accretive to QLIK’s 2017 EPS. Companies said it provides significant opportunities for growth in data center and storage markets QLIK’s 2017 EPS. Companies said it provides significant opportunities for growth in data center and storage markets.
*Credit concerns overdone?:
Big concern earlier this week revolved around credit after SYF-US said its NCO ratio expected to increase 20-30 bp over next 12 months Cited softness in late-stage delinquent consumers. Stock fell 13% on the news, which also weighed heavily on credit card names, along with banks and a number of the department stores. However, some thoughts the selloff in SYF and spillover effects overdone. Morgan Stanley, discussing some of the takeaways from its Financials Conference, noted it looks like SYF’s higher losses are idiosyncratic as DFS-US released flat delinquencies and declining NCOs, while lenders spanning from USB-US to BAC-US noted stability in credit card losses. Also pointed out that ALLY-US, COF-US and RF-US all reiterated continued health of consumer and kept their loss guidance unchanged.
*OPEC issues could leave oil market undersupplied next year:
Oil has been under pressure in recent sessions with traction behind global risk-off theme, unexpected stockpile builds in the latest inventory data and concerns that the $50 a barrel is both too low to attract fresh bullish buying and too high to force more production offline (this was recently discussed by Reuters). However, not all bad news this week as IEA said supply and demand will be fairly balanced in 2017 after several years of oversupply. In addition, Bloomberg pointed out that for that to happen, OPEC countries will have to produce an extra 650K bpd next year. It added that the IEA may be overly optimistic given that such a jump in output would require solutions to militant attacks in Nigeria, meaningful political divisions in Libya or an economic crisis in Venezuela.
Yen surged to strongest level vs the dollar in nearly two years (though well off best levels in afternoon trading). Move followed BoJ’s decision to leave policy unchanged. Decision not a surprise, but yen strength fits with recent broader pickup in risk aversion on heightened Brexit risks. Finland's finance minister said today Brexit could be Europe's "Lehman moment". Japanese officials not surprisingly stepped up their verbal intervention overnight. Chief cabinet secretary Suga said recent FX moves have been rapid and speculative in nature and are undesirable. Added Japan will pay even closer attention than usual and act if needed. Separately, BoJ Governor Kuroda said that is not favorable that the yen rises and volatility increases without reflecting economic fundamentals. Added it will carefully watch and pay attention to international financial market, including FX.
*British MP killed:
Jo Cox, a Labour MP, died on Thursday after she was shot and stabbed as she met with constituents in her district in northern England. Her attacker, a 52-year old male, has been arrested. There were initial reports that the man had shouted “Britain First” just before the attack, the name of an anti-immigration group in favor of Britain leaving the EU. This triggered speculation the attack was related to the upcoming Brexit vote, though there have been conflicting reports about witnesses may or may not have heard. Note that Jo Cox was in favor of Britain remaining in the EU. Britain First denied any involvement, while both the “Leave” and “Remain” camps suspended their campaigning for the day. The news had an impact on financial markets, with sterling and US equities off worst levels on very loose speculation the Brexit vote could be delayed. However, analysts suggest such a delay would be close to impossible to implement.
*Polls continue to show Brexit in the lead:
Brexit fears remain elevated ahead of next week’s vote as polls continue to show momentum behind “Leave” camp. Ipsos MORI poll out today showed 53% now want to leave and 47% want to stay. In May poll by Ipsos MORI, 37% wanted to leave vs 55% who wanted to stay. Evening Standard noted this marked first time since Cameron pledged referendum in January that Leave was ahead in this monthly survey. Pointed out that immigration has overtaken economy as most important issue on how public will vote. Ipsos MORI CEO did tell Reuters that status quo may triumph at last minute, but it looks very close. Betfair said odds of likelihood of a Remain vote fell to 60% from 65% before the survey. Separately, Survation poll for IG showed 45% would vote to leave the EU, while 42% would vote to remain.
*More calls for sterling slump on Brexit:
More bearish commentary on impact of Brexit. Goldman Sachs said sterling could slump 11% on a trade-weighted basis against basket of major developed market currencies if Brexit happens. Firm also expects euro to drop 4% in reaction (note more talk lately that Brexit could pave way for some Eurozone countries to push to leave EU). Added perceived safe haven currencies likely to see big inflows in response, projecting yen to appreciate by 14%. Sees increase in Swiss franc to lesser extent, followed by Norwegian krone. Citi also discussed potential post-vote moves. Warned Brexit could see sterling fall faster and further than market thinks due to lack of liquidity. Anticipates a rally on Remain vote, but unlikely to be as powerful a driver in terms of market reaction function. Thinks Brexit is the pain trade.
*SNB maintains policies but cautious ahead of Brexit vote:
As expected, SNB kept its deposit rate at a historical low of (0.75%) and 3-month Libor target between (0.25%) percent and (1.25%). Reiterated willingness to intervene in FX market and said that together with negative rates, this stance is intended to make Swiss franc investments less attractive. Recall, Swiss franc ~2.2% higher vs the euro MTD. SNB’s statement highlighted it continues to see the Swiss franc as significantly overvalued and that current policy measures are aimed at easing pressure on the currency. Noted that expansionary monetary policy aimed at stabilizing price developments and supporting economic activity. Warned on global economic risks, particularly Brexit vote. Expects 2016 GDP at 1% to 1.5% - unchanged from previous estimates. Also, 2016 CPI seen at (0.4%), 2017 seen at 0.3% and 2018 seen at 0.9%.
*China's State Council to tackle metals industry overcapacity:
China in new drive to resolve overcapacity in metals industry. Economic Information Daily, citing State Council directive, noted measures will include improving electricity and land policies, increasing fiscal and financial support, and assisting with employee relocation. Aluminum industry a focus with firms ordered to balance new construction projects with equal amount of capacity reduction. There will also be tighter compliance monitoring and greater use of M&A. Financial firms also encouraged to support non-ferrous firms in boosting government and commercial reserves. In explaining reasons behind persistent overcapacity, one unnamed local government noted lack of guidance from top officials and cited issues around debt levels, unemployment and old capacity being too slow to exit the market.
*China sells US equities at faster pace than global investors:
China stepping pace of its US equity selling just as it selling of Treasuries moderates. Bloomberg cited Treasury Department data showing China’s US equity stockpile fell 38%，or $126B, between the end of July 2015 and the end of March. At the same Treasury holdings had fallen just 2%, or $26B. China’s US equity sales significantly outpaced investors globally, with their holdings falling 9%. Article argues while amount of equities sold by China represents fraction of $23T US market, it remained significant compared to holdings of other investors such as Vanguard’s Total Stock Market Index Fund, which overseas ~$373B. Analysts note sale allows China to raise amount needed to finance its reserves drawdown. Also allowed PBoC to retain holdings of more liquid Treasuries it can offload in times of crisis.
*Defensives outperform:
Sectors ended fairly bunched with afternoon bounce. Defensive plays like telecom, utilities, staples and REITs still fared best. However, precious metals came under pressure. Consumer discretionary a slight outperformer. Media a standout. VIAB-US boosted by CEO/board ouster. Select chemicals and steel names helped materials. Financials largely in line despite regional bank weakness. Managed care boosted healthcare. Bernstein had some positive comments. Tech a slight laggard. Lot of moving pieces and nothing really stood out. Industrials also lagged. Airlines weak, though a number of multis were higher. Energy only sector negative as oil fell for sixth straight session.
*BoE reiterates Brexit warning:
Nothing groundbreaking from latest BoE policy update. Comes one week before Brexit vote and follows detailed discussion in May Inflation Report. BoE reiterated growth and inflation would be materially impacted by Brexit and sterling likely to fall sharply. Also warns of adverse spillover to global economy and notes uncertainty has also affected non-sterling assets. Still maintains central assumption of higher rates by end of forecast horizon, but admitted referendum is making interpretation of data difficult. Highlighted that it has the stability tools to protect banks and will take whatever action is needed to ensure inflation expectations remain well anchored. Market consensus is for rate cut, QE/credit expansion and liquidity injections on Brexit.
*BoJ leaves policy unchanged:
BoJ left policy unchanged. Move was expected as Bloomberg survey ahead of the meeting showed more than 70% of economists believed central bank would stand pat. BoJ seen needing more time to assess impact of additional measures announced in late January. Also did not want to move ahead of upcoming Brexit vote. Other dynamic in play seemed to be desire to save few remaining stimulus bullets. Policy statement maintained current economic assessment, noting economy has continued with its moderate recovery. However, continued to flag headwinds from slowdown in emerging economies. Also downgraded inflation language, noting CPI likely to be slightly negative or 0% for time being. Kuroda defended policy and recovery traction. Also reiterated inflation will hit 2% target by March 2018.
*Fed highlights policy uncertainty:
Still a lot of reverberations from Wednesday’s Fed announcements. No real surprises from the policy statement as Fed noted slower job growth, but said it expects labor market indicators to improve and also upgraded consumer spending language. More interesting takeaways came from dot plot and Yellen. Six officials now expect just a single rate hike this year, up from one in March. A number of economists noted that group likely includes at least one member of Fed leadership. Projections for 2017 and 2018 came down more than expected, while longer-run rate outlook continued to drift lower, falling to 3% from 3.25%. Yellen attributed downward drift to assessment of a lower neutral rate (widely discussed topic in press). Noted factors depressing rate, including low productivity growth, could be part of a new normal.
*US economic data mixed:
May headline CPI missed, increasing 0.2% vs April’s 0.4% rise and consensus for 0.3%. Rose 1.0% y/y vs last month’s 1.1% gain. Core prices rose 0.2%, matching consensus and April reading. Release noted food index fell, while shelter index rose 0.4%. May Philly Fed index registered +4.7 vs last month’s (1.8) and consensus +1.0. Follows on May Empire survey flipping positive after a string of weak April regional Fed readings. Internals weaker however. Labor market indicators suggest continued weak employment conditions, prices paid index rose for fourth consecutive month, and respondents’ future growth expectations softened. Finally, initial claims came in at 277K, a 13K rise from last week’s reading and ahead of consensus for 268K. Continues 67-week streak of sub-300K readings despite weak May payrolls report. Four-week average dropped slightly to 269.25k.
*M&A in healthcare services, semiconductors:
AMSG-US and EVHC-US agreed to combine in an all-stock deal that creates one of the largest healthcare service providers with a $10B pro-forma market cap and $15B EV. Merged entity offerings will span pre-hospital, acute and outpatient care to postacutecare. Deal expected to be accretive to the two companies’ combined adj. EPS in 2017 and double-digit accretive in 2018. Expected to result in annual synergies of $100M within three years after it closes at end of 2016. More consolidation in semi space. ASML-US, world’s biggest chipmaking equipment supplier, to acquire Taiwan’s Hermes Microvision for ~$3.1B in cash. In addition, CAVM-US announced a deal to acquire QLGC-US for ~$1.4B in cash and stock. Deal will be accretive to QLIK’s 2017 EPS. Companies said it provides significant opportunities for growth in data center and storage markets QLIK’s 2017 EPS. Companies said it provides significant opportunities for growth in data center and storage markets.
*Credit concerns overdone?:
Big concern earlier this week revolved around credit after SYF-US said its NCO ratio expected to increase 20-30 bp over next 12 months Cited softness in late-stage delinquent consumers. Stock fell 13% on the news, which also weighed heavily on credit card names, along with banks and a number of the department stores. However, some thoughts the selloff in SYF and spillover effects overdone. Morgan Stanley, discussing some of the takeaways from its Financials Conference, noted it looks like SYF’s higher losses are idiosyncratic as DFS-US released flat delinquencies and declining NCOs, while lenders spanning from USB-US to BAC-US noted stability in credit card losses. Also pointed out that ALLY-US, COF-US and RF-US all reiterated continued health of consumer and kept their loss guidance unchanged.
*OPEC issues could leave oil market undersupplied next year:
Oil has been under pressure in recent sessions with traction behind global risk-off theme, unexpected stockpile builds in the latest inventory data and concerns that the $50 a barrel is both too low to attract fresh bullish buying and too high to force more production offline (this was recently discussed by Reuters). However, not all bad news this week as IEA said supply and demand will be fairly balanced in 2017 after several years of oversupply. In addition, Bloomberg pointed out that for that to happen, OPEC countries will have to produce an extra 650K bpd next year. It added that the IEA may be overly optimistic given that such a jump in output would require solutions to militant attacks in Nigeria, meaningful political divisions in Libya or an economic crisis in Venezuela.
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