*PBoC says some yuan volatility unavoidable amid reform push:
Financial News, a paper owned by China’s central, seemed fairly sanguine on risks surrounding yuan in a commentary on Monday. Reiterated no basis for longer-term yuan depreciation given China’s growth rate. However, also said some two-way volatility unavoidable amid reform push. Pointed out that loosening capital account controls gradually as US rates increase will likely cause capital outflows. However, stressed that these kind of outflows are not a concern given that they are driven by economic forces, rather than nervous investors fleeing the country. Also discussed how while opening up of China’s capital account and allowing greater yuan flexibility increase demands on domestic financial system, they should catalyze other financial reforms as well.
*Chinese property prices accelerate in May:
More signs China’s property market is heating up. Reuters calculation showed new home prices accelerated 6.9% y/y in May from a 6.2% increase in April. Prices rose in 50 cities compared to 46 in April. Shenzhen outperformed with prices up 53.2%, though growth slowed from April’s 62.4%. Shanghai growth of 27.7% also lower than April’s 28%. More second-tier cities recorded outsized gains, with Xiamen posting growth of 28%. Reuters noted spillover from firsttier cities fuels speculation second-tier cities will follow in tightening property purchase restrictions. Slowdown in Shenzhen and Shanghai property growth comes after both cities recently raised downpayment requirements for second homes and tightened eligibility requirements for non-residents. May’s price surge also seen increasing difficulty for policymakers to support economy without inflating bubbles.
*“Remain” camp regains some momentum in Brexit polls:
Big story over the weekend was the renewed momentum in the polls for the “Remain” camp ahead of Thursday’s Brexit vote. YouGov poll for Sunday Times showed support for Britain staying in EU at 44%, back out in front of "Leave" at 43%. While poll was conducted on Thursday and Friday, paper said shift did not reflect fatal attack on Labor MP Jo Cox, but instead a function of growing concern among voters about economic impact of a Brexit. Poll conducted Friday and Saturday by Survation showed "Remain" at 45% vs 42% for "Leave". Last Survation poll on Thursday had "Leave" ahead by three points. Opinium survey showed both sides at 44%. However of the 10% undecided, 36% inclined towards remaining and 28% towards leaving. Betfair said probability of “Remain” up to 72% from 60-67% Friday.
*Brexit vote has meaningful contagion risks for global markets and economy:
No shortage of discussion in press about meaningful contagion risks surrounding a vote by Britain to leave EU. Reuters focused on interconnectedness of global markets, a global economic cycle it described as "already very long in the tooth", and limited remaining policy options for central bankers. Also flagged worries about impact of another leg lower in rates on banking sector, along with potential dollar funding pressures. Bloomberg noted that thus far, central bankers have said all the right things in terms of trying to dampen market concerns about liquidity and capital flight from sterling. However, pointed out that amid all the focus on the market fallout, another big concern is potential for a major shock to an already slowing economy. Like Reuters article, noted global central bankers running out support measures.
*JPMorgan says Brexit is wildcard but yield compression drives caution:
Latest JPMorgan equity strategy note pointed out that UK this week averting an exit from EU would undoubtedly result in short-term market rebound, but even if the Brexit tail-risk passes without lasting damage, the medium term macro backdrop of subdued and possible further dropping bond yields will not alter materially. Firm expects bond yields stay low in 2016, yield curve keeps flattening and inflation forwards move further down. Highlighted this is one of the drivers behind its cautious equities stance for this year, in addition to poor growth-policy tradeoff, earnings downturn, stretched valuation multiples, and a number of important event risks. Argued Eurozone equities cheaper vs US on P/E relative. Added in case of Brexit, Eurozone equities likely to underperform UK, whose relative performance would be helped by GBP weakness.
*Cyclicals outperform, defensives lag:
Sector performance fairly bunched with risk-on driven by dampened Brexit fears. Cyclicals largely outperformed, while defensives lagged. Industrials fared best. Trucking, airlines and energy leveraged multis among standouts. Auto names helped drive upside in consumer discretionary. Energy underpinned by oil bounce. Healthcare stronger, though CI-US a laggard in managed care on M&A concerns. Sell-side commentary boosted CNC-US. Banks bounced, but group largely in line with tape. Tech a slight laggard. Internet/social media and semis stronger, but AAPL-US lagged again. Materials helped by industrial metals, though sector upside capped by precious metals sluggishness. Utilities only sector to finish negative. Rate backup and valuation and crowded trade concerns the likely headwinds.
*Regulators concerned about Anthem’s proposed acquisition of Cigna:
More talk of antitrust concerns surrounding ANTM-US’s $48B proposed acquisition of CI-US. However, not a surprise to market given shares of CI have hovered ~35% below value of ANTM’s cash and stock offer. WSJ said government officials outlined worries about a combination at a meeting with company representatives earlier this month. Paper said national employer market a major concern. Added market for individual insurance plans, the coverage sold on exchanges that are at the heart of Obamacare, another area of concern. Also worries about the influence a combined entity would carry with healthcare providers. Noted hospital and doctor groups strongly opposed to deal. Pointed out that regulators doubt potential concessions offered by the companies would be enough to get deal done.
*US economy, Treasuries sending warning signs on recession?:
Some debate in press over potential growth signals from both economy and Treasury market. WSJ discussed concerns about a slowdown in hiring, softer auto sales and a decline in business investment. Added manufacturing sector weaker and corporate profits under pressure. Paper said all are classic signs of recession. Pointed out JPMorgan said its model showing a 34% of recession within 12 months, up from 21% back in January. Separately, Bloomberg highlighted growth concerns surrounding depressed Treasury yields. However, article said economic signals from bond market muddied by external developments (Brexit, negative yields). Noted core CPI up 2.2% y/y in May, while Atlanta Fed said Friday its model for GDP is projecting 2.8% growth in Q2, up from the 0.8% expansion in Q1.
*Morgan Stanley says S&P bottom-up earnings estimates are too low; positive on financials:
Morgan Stanley’s latest US Equity Strategy note said bottom-up earnings estimates are too low. Pointed out that while unusual for bottom-up numbers to be too pessimistic, believes estimates could be low overall and in energy sector. Noted S&P 500 energy earnings went from ~$15 in 2014 to expectation closer to $2 this year. However, sees potential for sector to earn $3-$5 than is currently in bottom-up estimates. Added dollar strength that began in fall of 2014 has now abated and should not be a headwind to y/y earnings in Q2. Firm also continues to see multiple compelling reasons for financial sector outperformance. Noted multiple contraction not supported by deteriorating fundamentals, sector continues to have a compelling yield, positioning remains light, and FX not a factor.
*Republican delegates in new anti-Trump push:
Reports Republican delegates plotting against Trump ahead of next month’s convention. Washington Post noted latest push organized by convention rulemakers as opposed to media figures. Anti-Trump delegates said to be banding together to change rules to allow delegates to vote for whom they like regardless of who won primaries/caucuses. Report said new push is to prevent Trump from securing nomination and not to nominate a specific alternative. Comes as top Republicans tone down their support for Trump amid his controversial remarks following Orlando shooting. Paul Ryan said only that House Republicans should vote with their conscience. Trump’s poll numbers have turned lower with RCP average showing Clinton widening her general election lead to 5.8 pts after being tied a month ago.
*RBI Governor Rajan to step down:
RBI Governor Rajan announced in weekend letter he will not seek an extension to his term when it expires in September. Decision said to have taken PM Modi’s government by surprise, though Finance Minister Jaitley nonetheless said successor will be announced shortly. Rajan appeared on shaky ground given opposition against him by government officials. Subramanian Swamy, an influential member of Modi’s Bharatiya Janata Party, had urged Rajan’s dismissal in late May. Rajan said to have been disappointed at lack of government support for his reappointment. Bloomberg and Reuters listed potential replacement candidates, including RBI Deputy Governor Patel, State Bank of India head Bhattacharya (500112.IN) and finance ministry officials Das and Sbramanian. Instability Rajan's successor expected to continue central bank’s focus on bad debt cleanup.
*US shale industry surprises with its resilience:
Saudi Arabia’s shift in focus to market share over price was expected wreak havoc on US shale. However, Reuters discussed how industry has proved surprisingly resilient. No major producer that pumps more than 100K bpd has gone bankrupt. Added survival of partly explains why overall US production has retreated only ~10% since peaking at 9.69M bpd. Also pointed out how ability to slash costs in half while leveraging new techniques to procure more oil from each new well is now allowing industry to cautiously focus on growth again. This time around however, producers more focused on capital returns, having scrapped culture of maximizing production regardless of costs. Went on to discuss how many producers have said recent oil price rebound still not enough to drive output increases.
*Spanish left bloc leading election polls:
Spain’s 26-Jun repeat elections generating some political risk as three polls over the weekend show left-bloc of parties in lead, threatening the status-quo of conservative pro-austerity government. Reuters noted three separate polls found that thanks to strong backing among Spain's crisis-hit poor, anti-austerity Unidos Podemos (UP) and the Socialists (PSOE) would together come a lot closer than they did in the December vote to reaching the absolute majority of 176 seats. Polls showed UP would garner between 24.6-26% of the vote and between 84 and 95. PP expected to win the most support, with between 20% and 30.5% of the vote and 113 to 129 seats but unlikely to gain a majority again unless PSOE help, though both have refused a coalition deal before. Centrist Cuidadanos in fourth place, on track to gain between 35 and 40 seats.
*Italian PM Renzi suffers from populist backlash in local election:
Italian PM Renzi under pressure after anti-establishment party 5-Star Movement won local elections in Rome and Turin. 5-Star's Virginia Raggi became Rome's first woman mayor, with ~67% of the vote. Defeat for Renzi's has been expected in Rome, but in Turin 5-Star's Chiara Appendino overturned an 11-point gap in first round to win 55% of the vote. Renzi's centre-left Democratic Party (PD) held on to power in Milan and Bologna. Several reports highlighted that the results may make it difficult for Renzi to rally support for October's referendum on constitutional reform. Renzi has pledged his future on the vote, vowing to step down if he does receive backing to make constitutional changes. Renzi wants to reduce the size of the Italian senate and strip its legislative power, which would make it easier to pass reforms and ensure more stable governments.
*BHP Billiton Limited(BHP):
BHP Billiton and Vale’s Brazilian mining joint venture is exploring ways to restructure about $US1.6 billion ($2.1 billion) in loans months after a deadly accident halted output and crimped cash flow, people with knowledge of the matter said. Iron ore miner Samarco hired JP Morgan as it discusses restructuring debt with banks, three of the people said, asking not to be identified because the early-stage talks are private. BHP hired Rothschild, Vale is getting advice from Moelis, while the banks are working with FTI Consulting, the people said. While Samarco’s dollar denominated bonds don’t start maturing until 2022, the mine probably won’t be able to service all of its obligations as it grapples to resume operations after a November 5 tailings dam collapse killed as many as 19 people, the people said. So far, it hasn’t missed any payments, they said. The mining company, known formally as Samarco Mineracao, and its owners declined to comment, as did JPMorgan, Moelis and Rothschild. FTI didn’t respond to emails and calls seeking comment.
Financial News, a paper owned by China’s central, seemed fairly sanguine on risks surrounding yuan in a commentary on Monday. Reiterated no basis for longer-term yuan depreciation given China’s growth rate. However, also said some two-way volatility unavoidable amid reform push. Pointed out that loosening capital account controls gradually as US rates increase will likely cause capital outflows. However, stressed that these kind of outflows are not a concern given that they are driven by economic forces, rather than nervous investors fleeing the country. Also discussed how while opening up of China’s capital account and allowing greater yuan flexibility increase demands on domestic financial system, they should catalyze other financial reforms as well.
*Chinese property prices accelerate in May:
More signs China’s property market is heating up. Reuters calculation showed new home prices accelerated 6.9% y/y in May from a 6.2% increase in April. Prices rose in 50 cities compared to 46 in April. Shenzhen outperformed with prices up 53.2%, though growth slowed from April’s 62.4%. Shanghai growth of 27.7% also lower than April’s 28%. More second-tier cities recorded outsized gains, with Xiamen posting growth of 28%. Reuters noted spillover from firsttier cities fuels speculation second-tier cities will follow in tightening property purchase restrictions. Slowdown in Shenzhen and Shanghai property growth comes after both cities recently raised downpayment requirements for second homes and tightened eligibility requirements for non-residents. May’s price surge also seen increasing difficulty for policymakers to support economy without inflating bubbles.
*“Remain” camp regains some momentum in Brexit polls:
Big story over the weekend was the renewed momentum in the polls for the “Remain” camp ahead of Thursday’s Brexit vote. YouGov poll for Sunday Times showed support for Britain staying in EU at 44%, back out in front of "Leave" at 43%. While poll was conducted on Thursday and Friday, paper said shift did not reflect fatal attack on Labor MP Jo Cox, but instead a function of growing concern among voters about economic impact of a Brexit. Poll conducted Friday and Saturday by Survation showed "Remain" at 45% vs 42% for "Leave". Last Survation poll on Thursday had "Leave" ahead by three points. Opinium survey showed both sides at 44%. However of the 10% undecided, 36% inclined towards remaining and 28% towards leaving. Betfair said probability of “Remain” up to 72% from 60-67% Friday.
*Brexit vote has meaningful contagion risks for global markets and economy:
No shortage of discussion in press about meaningful contagion risks surrounding a vote by Britain to leave EU. Reuters focused on interconnectedness of global markets, a global economic cycle it described as "already very long in the tooth", and limited remaining policy options for central bankers. Also flagged worries about impact of another leg lower in rates on banking sector, along with potential dollar funding pressures. Bloomberg noted that thus far, central bankers have said all the right things in terms of trying to dampen market concerns about liquidity and capital flight from sterling. However, pointed out that amid all the focus on the market fallout, another big concern is potential for a major shock to an already slowing economy. Like Reuters article, noted global central bankers running out support measures.
*JPMorgan says Brexit is wildcard but yield compression drives caution:
Latest JPMorgan equity strategy note pointed out that UK this week averting an exit from EU would undoubtedly result in short-term market rebound, but even if the Brexit tail-risk passes without lasting damage, the medium term macro backdrop of subdued and possible further dropping bond yields will not alter materially. Firm expects bond yields stay low in 2016, yield curve keeps flattening and inflation forwards move further down. Highlighted this is one of the drivers behind its cautious equities stance for this year, in addition to poor growth-policy tradeoff, earnings downturn, stretched valuation multiples, and a number of important event risks. Argued Eurozone equities cheaper vs US on P/E relative. Added in case of Brexit, Eurozone equities likely to underperform UK, whose relative performance would be helped by GBP weakness.
*Cyclicals outperform, defensives lag:
Sector performance fairly bunched with risk-on driven by dampened Brexit fears. Cyclicals largely outperformed, while defensives lagged. Industrials fared best. Trucking, airlines and energy leveraged multis among standouts. Auto names helped drive upside in consumer discretionary. Energy underpinned by oil bounce. Healthcare stronger, though CI-US a laggard in managed care on M&A concerns. Sell-side commentary boosted CNC-US. Banks bounced, but group largely in line with tape. Tech a slight laggard. Internet/social media and semis stronger, but AAPL-US lagged again. Materials helped by industrial metals, though sector upside capped by precious metals sluggishness. Utilities only sector to finish negative. Rate backup and valuation and crowded trade concerns the likely headwinds.
*Regulators concerned about Anthem’s proposed acquisition of Cigna:
More talk of antitrust concerns surrounding ANTM-US’s $48B proposed acquisition of CI-US. However, not a surprise to market given shares of CI have hovered ~35% below value of ANTM’s cash and stock offer. WSJ said government officials outlined worries about a combination at a meeting with company representatives earlier this month. Paper said national employer market a major concern. Added market for individual insurance plans, the coverage sold on exchanges that are at the heart of Obamacare, another area of concern. Also worries about the influence a combined entity would carry with healthcare providers. Noted hospital and doctor groups strongly opposed to deal. Pointed out that regulators doubt potential concessions offered by the companies would be enough to get deal done.
*US economy, Treasuries sending warning signs on recession?:
Some debate in press over potential growth signals from both economy and Treasury market. WSJ discussed concerns about a slowdown in hiring, softer auto sales and a decline in business investment. Added manufacturing sector weaker and corporate profits under pressure. Paper said all are classic signs of recession. Pointed out JPMorgan said its model showing a 34% of recession within 12 months, up from 21% back in January. Separately, Bloomberg highlighted growth concerns surrounding depressed Treasury yields. However, article said economic signals from bond market muddied by external developments (Brexit, negative yields). Noted core CPI up 2.2% y/y in May, while Atlanta Fed said Friday its model for GDP is projecting 2.8% growth in Q2, up from the 0.8% expansion in Q1.
*Morgan Stanley says S&P bottom-up earnings estimates are too low; positive on financials:
Morgan Stanley’s latest US Equity Strategy note said bottom-up earnings estimates are too low. Pointed out that while unusual for bottom-up numbers to be too pessimistic, believes estimates could be low overall and in energy sector. Noted S&P 500 energy earnings went from ~$15 in 2014 to expectation closer to $2 this year. However, sees potential for sector to earn $3-$5 than is currently in bottom-up estimates. Added dollar strength that began in fall of 2014 has now abated and should not be a headwind to y/y earnings in Q2. Firm also continues to see multiple compelling reasons for financial sector outperformance. Noted multiple contraction not supported by deteriorating fundamentals, sector continues to have a compelling yield, positioning remains light, and FX not a factor.
*Republican delegates in new anti-Trump push:
Reports Republican delegates plotting against Trump ahead of next month’s convention. Washington Post noted latest push organized by convention rulemakers as opposed to media figures. Anti-Trump delegates said to be banding together to change rules to allow delegates to vote for whom they like regardless of who won primaries/caucuses. Report said new push is to prevent Trump from securing nomination and not to nominate a specific alternative. Comes as top Republicans tone down their support for Trump amid his controversial remarks following Orlando shooting. Paul Ryan said only that House Republicans should vote with their conscience. Trump’s poll numbers have turned lower with RCP average showing Clinton widening her general election lead to 5.8 pts after being tied a month ago.
*RBI Governor Rajan to step down:
RBI Governor Rajan announced in weekend letter he will not seek an extension to his term when it expires in September. Decision said to have taken PM Modi’s government by surprise, though Finance Minister Jaitley nonetheless said successor will be announced shortly. Rajan appeared on shaky ground given opposition against him by government officials. Subramanian Swamy, an influential member of Modi’s Bharatiya Janata Party, had urged Rajan’s dismissal in late May. Rajan said to have been disappointed at lack of government support for his reappointment. Bloomberg and Reuters listed potential replacement candidates, including RBI Deputy Governor Patel, State Bank of India head Bhattacharya (500112.IN) and finance ministry officials Das and Sbramanian. Instability Rajan's successor expected to continue central bank’s focus on bad debt cleanup.
*US shale industry surprises with its resilience:
Saudi Arabia’s shift in focus to market share over price was expected wreak havoc on US shale. However, Reuters discussed how industry has proved surprisingly resilient. No major producer that pumps more than 100K bpd has gone bankrupt. Added survival of partly explains why overall US production has retreated only ~10% since peaking at 9.69M bpd. Also pointed out how ability to slash costs in half while leveraging new techniques to procure more oil from each new well is now allowing industry to cautiously focus on growth again. This time around however, producers more focused on capital returns, having scrapped culture of maximizing production regardless of costs. Went on to discuss how many producers have said recent oil price rebound still not enough to drive output increases.
*Spanish left bloc leading election polls:
Spain’s 26-Jun repeat elections generating some political risk as three polls over the weekend show left-bloc of parties in lead, threatening the status-quo of conservative pro-austerity government. Reuters noted three separate polls found that thanks to strong backing among Spain's crisis-hit poor, anti-austerity Unidos Podemos (UP) and the Socialists (PSOE) would together come a lot closer than they did in the December vote to reaching the absolute majority of 176 seats. Polls showed UP would garner between 24.6-26% of the vote and between 84 and 95. PP expected to win the most support, with between 20% and 30.5% of the vote and 113 to 129 seats but unlikely to gain a majority again unless PSOE help, though both have refused a coalition deal before. Centrist Cuidadanos in fourth place, on track to gain between 35 and 40 seats.
*Italian PM Renzi suffers from populist backlash in local election:
Italian PM Renzi under pressure after anti-establishment party 5-Star Movement won local elections in Rome and Turin. 5-Star's Virginia Raggi became Rome's first woman mayor, with ~67% of the vote. Defeat for Renzi's has been expected in Rome, but in Turin 5-Star's Chiara Appendino overturned an 11-point gap in first round to win 55% of the vote. Renzi's centre-left Democratic Party (PD) held on to power in Milan and Bologna. Several reports highlighted that the results may make it difficult for Renzi to rally support for October's referendum on constitutional reform. Renzi has pledged his future on the vote, vowing to step down if he does receive backing to make constitutional changes. Renzi wants to reduce the size of the Italian senate and strip its legislative power, which would make it easier to pass reforms and ensure more stable governments.
*BHP Billiton Limited(BHP):
BHP Billiton and Vale’s Brazilian mining joint venture is exploring ways to restructure about $US1.6 billion ($2.1 billion) in loans months after a deadly accident halted output and crimped cash flow, people with knowledge of the matter said. Iron ore miner Samarco hired JP Morgan as it discusses restructuring debt with banks, three of the people said, asking not to be identified because the early-stage talks are private. BHP hired Rothschild, Vale is getting advice from Moelis, while the banks are working with FTI Consulting, the people said. While Samarco’s dollar denominated bonds don’t start maturing until 2022, the mine probably won’t be able to service all of its obligations as it grapples to resume operations after a November 5 tailings dam collapse killed as many as 19 people, the people said. So far, it hasn’t missed any payments, they said. The mining company, known formally as Samarco Mineracao, and its owners declined to comment, as did JPMorgan, Moelis and Rothschild. FTI didn’t respond to emails and calls seeking comment.
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