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Financial Insights(2016-06-24)

Australia
2016-06-24 15:16

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*Latest Brexit polls show better support for “Remain”:
 
Global risk assets boosted by latest Brexit polls highlighting better support for “Remain”. YouGov poll had Remain at 51%, ahead of Leave at 49%. ComRes poll showed support for Remain at 48% vs 42% for Leave. Poll this morning from Ipsos MORI put Remain at 52% vs Leave at 48%. Latest Brexit poll tracker from FT also shows a two point lead for Remain at 47%-45%. While polls still suggest vote too close to call, betting markets continue to highlight a much higher probability that Britain will vote to stay in the EU. Latest Betfair odds show likelihood of a Remain vote have jumped to 92%. However, some recent discussion about influence from outsized Remain bets (vs higher number of Leave bets) and tendency of undecided voters to go with status quo.
 
*Questions remain over China's supply-side reform push:
 
Amid questions over China’s commitment to implementing supply-side reforms, Vice chairman of China NPC’s Financial and Economic Affairs Committee gave Nikkeifive- to-10 year timeframe for SOE reforms to bear fruit. Shao acknowledged difficulties in executing reforms, recalling 10M workers went unemployed due to reforms implemented in 1990s. Noted difficulty of task ahead amid strong downward pressures facing economy. Added transition to market economy proceeded well in Shanghai and Zhejian, but other regions lagging and still heavily dependent on SOEs. Comments come as China’s State Council announced late Wednesday efforts to boost private investment. While largely repeating existing policy directives. Meeting outlined focus on addressing discriminatory investment environment and promoting fair competition.
 
*China bankruptcies surge as government targets zombie enterprises:
 
Bankruptcy courts increasingly being recruited into China's supply-side reform push. FT, citing Supreme People's Court, noted China bankruptcies surged 52.5% y/y in Q1 to 1,028 cases. This compared to just under 20,000 cases accepted between 2008 and 2015. Story noted modern bankruptcy law was little used since its approval in 2007, as debt disputes were often handled through backroom negotiations involving local governments. However FT highlighted concerns the bankruptcy law will allow zombie firms to continue operating given courts’ inclination to use M&A rather than liquidation where possible to allow zombie firms to remain a going concern. Developments come amid calls for tougher stance on zombie firms given their role in hampering progress in reducing China’s overcapacity.
 
*Financials lead market higher:
 
Financials best performer as banks bounced big into DFAST results after close and Brexit vote announcement tomorrow morning. Energy up with oil bounce. Materials another standout with broader risk-on trade. Industrial metals saw outsized gains. Ag chemicals helped by report of potential cooperation between Belarus and Uralkali. Tech helped by semi (MUUS upgrades) and HDD outperformance, though strength broad based. AAPL-US lagged (JPMorgan said iPhone builds unchanged, still tracking below Street estimates). RHT-US weak following mixed results/guidance. Biotech strong again in healthcare (IPAB reprieve yesterday has helped).Industrials a slight laggard. Machinery a standout. Rental equipment names (URI-US, HEES-US) fared well (UBS survey showed sequential improvement in rates). Most multis beat. CACI-US big decliner in A&D on disappointing guidance. Good day for retail, though dept. stores lost a bit of momentum (still up over 1%). M-US announced succession plan. BBBY-US rebounded from earlier weakness that followed its miss. Auto names up big. Defensives lagged, but still higher.
 
*Jobless claims decline, new-home sales down:
 
Overshadowed by the anticipation about the Brexit referendum, initial jobless claims fell to 259K for week ending 18-Jun, down from prior week’s 277K level and better than consensus for 270K. Level the lowest since April, and report logs the 68th consecutive week with initial claims below 300K. Four-week average declined to 267K from last week’s 269.25K. Continuing claims for came in at 2142K vs consensus for 2151K. Release the second consecutive report since disappointing May payrolls without a spike in claim numbers. Elsewhere, May new home sales fell to 551K SAAR, down sharply from April's downwardly revised 586K reading (was 619K, an unusually large surge) and below consensus for 560K. March also revised down to 522K from 531K. May rate 8.7% higher y/y.
 
*Germany still leading momentum in Eurozone economy:
 
Eurozone flash PMIs mixed, with June manufacturing at 52.6 vs consensus 51.4 and prior 51.5. Services dipped to 52.4 vs prior 53.3, below 53.3 forecasts. Upside still being driven by Germany, with manufacturing PMI at 54.4 vs consensus 52.0 and prior 51.1. Services missed at 53.2 vs consensus 55.0 and prior 55.2, leaving composite PMI at 54.1 vs prior 54.5. Resilience of German economy in the face of global risks has been a highlight of late. Commentary has talked up increase in domestic demand. In contrast, French manufacturing and services sectors contracting again, with readings at 47.9 and 49.9, respectively. French business confidence also weak, with manufacturing confidence at 102 vs prior 104 and production outlook at 1 vs 5. Recovery continues to be hampered by slow pace of structural reforms.
 
*S&P 500 buybacks set new records:
 
More focus on support for stocks from corporate buybacks amid the exodus from institutional and retail investors. WSJ pointed out S&P 500 buybacks hit $1614.4B in Q1, up 12% y/y and the second-highest on record. Also noted that for the twelve months ended March 2016, S&P 500 companies spent a record $589.4B on buybacks. In terms of buyback support, paper highlighted the usual suspects such as record cash levels, low borrowing rates and activist pressure. Limited organic growth opportunities have been flagged as another driver. Paper also noted widely discussed buyback backlash driven by concerns that an unwillingness to boost capex threatens future growth and productivity. Latest BofA Merrill Lynch Global Fund Manager Survey showed 51% want companies to increase capex, up from 46% two months ago (and well ahead of 24% who want more cash returned).
 
*Energy stock sales hit record:
 
NA oil and gas companies have sold more than $20B of stock thus far this year, according to the WSJ. Paper said this tops record ~$19B raised for all of last year via secondary offerings. Added that the share-sale activity that has accompanied the rebound in oil highlights investors’ faith crude prices will not come under renewed pressure. Also pointed out that many companies selling shares are using funds to acquire acreage and drive growth. Focused on Permian basin, where companies can drill profitably in a lower price environment. Discussed how this year’s capital moves stand in contrast to last year when companies largely sold stock to boost cash and pay down debt, ultimately burning a lot of shareholders as oil prices kept falling.
 
*BoJ's Kiuchi pessimistic on reaching inflation target:
 
More signs some BoJ officials becoming more pessimistic on inflation outlook. Speaking earlier, BoJ member Kiuchi reiterated his estimate inflation will not reach 2% by FY18. Also reinforced his stance as a dissenter, calling for reduction in QE and noting problems caused by negative rates. However emphasized conditions remain stable. Said he didn’t believe subdued inflation was causing problems for current economic activity, arguing rates haven’t deviated widely from firms' and households' inflation expectations. In his frequent dissents at BoJ policy meetings, Kiuchi has long proposed reducing annual JGB purchases to ¥45T from the current ¥80T and a +0.1% interest rate on current account balances.
 
*Commonwealth Bank of Australia (CBA):
 
Warwick Bryan, who is well known to fund managers after spending a decade as Commonwealth Bank of Australia’s head of investor relations, is making a move into capital markets advisory, as revealed by Street Talk on Thursday. Bryan will team up with former Goldman Sachs bankers Michael Everett, Rob Penney and Lidia Ranieri at independent corporate advisory boutique Reunion Capital Partners. With 30 years experience under his belt, Bryan has been brought on board to provide strategic investor relations and communications advice to Reunion’s clients
 
*Macquarie Group Limited (MQG):
 
Macquarie Group will be forced to pay up to $1 million after admitting the bank failed to properly oversee the now-collapsed van Eyk Blueprint fund management business. The Australian Securities and Investments Commission has filed a lawsuit in the NSW Supreme Court against Macquarie, after Macquarie agreed it had failed to address the risks associated with van Eyk fund’s decision to make three investments in the Cayman Island-based Artefact fund in 2012. Macquarie has also admitted it allowed investors to redeem or withdraw units from the van Eyk fund in 2013 when it was illiquid, in breach of corporations laws. In addition, Macquarie failed to question why Artefact did not pay a full redemption to van Eyk fund in 2014, the bank has admitted.
 
The collapse of fund manager van Eyk and its Cayman Islands investments have come back to haunt Macquarie Group at the worst possible time. Macquarie has admitted it breached company law and did not exercise sufficient care four years ago when a van Eyk entity it was responsible for invested $30 million on behalf of clients into a Cayman Islands-based fund. The admission comes as part of a legal settlement between Macquarie and the Australian Securities and Investments Commission (ASIC). The matter is now heading to court to determine the penalties Macquarie will have to pay. The fine will not make much of a dent in Macquarie’s coffers but ASIC’s public announcement around the court proceeding means the reputation of a big bank is in the headlights once again,
 
*Global finance officials expected to respond to Brexit vote:
 
Global finance officials widely perceived to be prepared to address market volatility following a potential decision by Britain to leave the EU. Reuters said G7 will issue a statement following a Brexit vote highlighting readiness to take all necessary steps to calm markets. Noted statement will reconfirm an agreement among G7 nations that “excess volatility and disorderly currency moves are undesirable”. Added Japanese Finance Minister Aso may also issue separate statement intended to prevent a Brexit vote from unleashing excessive yen strength. Separately, Nikkei discussed possibility of emergency BoJ neeting. In line with other reports, Reuters noted major central banks ready to use existing swap arrangements to deliver emergency liquidity in the case of any dollar funding shortages.
 
*Positioning light into Brexit vote:
 
More discussion about how hedge funds and asset managers have moved to the sidelines ahead of the Brexit vote. FT said some of the world’s biggest funds instead have built up large cash positions in anticipation of big trading opportunities in immediate aftermath of the UK vote. However, also noted a lot of uncertainty surrounding how markets will ultimately react. Sell-side research has highlighted the asymmetric risk surrounding the vote. Brexit vote widely expected to unleash contagion given interconnectedness of global markets, heightened euro breakup risks and negative rate headwinds for banking sector. However, some firms have noted upside from decision to stay likely to be limited by extent of recent bounce and existing overhangs such as global growth slowdown, policy fatigue and valuation.
 
*Lots of complications for bonds no matter what the Brexit vote:
 
Several reports have highlighted potential for illiquid trading conditions regardless of EU vote outcome. Consensus is for bond yields to fall sharply on Brexit, while a "Remain" vote will drive a rate backup. Liquidity concerns may be partly related to complications on both sides of the vote/trade. A Brexit vote has obvious contagion implications, though some of the fallout could be limited by a coordinated policy response. A vote to stay in the EU should drive some flight-toquality unwinding. However, a lot of debate about potential extent of the backup in yields. Some thoughts backup will be limited by ECB/BoJ easing dynamics and lingering growth concerns. At the other end of spectrum are worries about taper tantrum/flash crash type price action given crowded positions, negative rates, reach for yield and higher Fed tightening odds.
 
*SocGen expects Brexit to fuel big global risk aversion:
 
SocGen said Brexit would lead to global risk aversion. In equities, expects FTSE 250 and Euro STOXX 50 to lose most, while S&P500 a relative safe haven. In bonds, sees 10-year German Bund yield falling to (0.25%)-(0.45%) and 10-year Treasuries down to 1.25%-1.40% area. Added European peripheral assets, whether in sovereigns or credit, might suffer spread widening. In FX, expects GBP/USD to fall below 1.30 and EUR/USD to weaken in coming weeks. Also sees EUR/CHF lower and CHF/NOK and CHF/SEK higher on contagion risks. In EM, expects pressure on the complex with initial flight-to-quality seeing high yielders such as ZAR and TRY under pressure. Also expects MXN to suffer as mostliquid EM proxy. In commodities, expects gold volatility to increase significantly and copper to underperform. Added front of the forward curve in oil may weaken, but only temporarily.
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