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Financial Insights(2016-06-29)

Australia
2016-06-29 10:19

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*PBoC talks yuan stability, but currency still under scrutiny:
 
PBoC said in a statement today that yuan had remained basically stable against the currency basket in the wake of Brexit. Added that market expectations for the yuan are “stable”. In addition, set yuan midpoint firmer than expected prior to market open (though still 0.2% weaker than Monday, which was weakest since December 2010). However, exchange rate policy has come under renewed scrutiny in recent days amid post-Brexit vote concerns about economic weakness in Europe, dollar strength and associated risks of capital outflows. Bloomberg noted that Brexit is forcing deviation from officials’ strategy of maintaining limited gains against dollar to buoy confidence in currency stability, while also guiding depreciation against currencies of other trading partners to support exports.
 
*Goldman Sachs doubts Brexit fears as meaningful as China fears:
 
While global markets have lost a record $3T in past two trading sessions following Brexit vote, still a lot of debate about the economic fallout. In its Global Markets Daily note today, Goldman Sachs said it continues to believe that – seen through the lens of fundamentals – the immediate repercussions for global economy are limited. Cited relatively small size of UK economy; protracted time horizon for Brexit negotiations; and a relatively conciliatory message from German Chancellor Merkel. Noted its bias is that SPX should not sell as much as it did on China fears in August of 2015 or early this year (10%+). Added that risk appetite should stabilize ahead, a dynamic that will lead to the resumption of the downtrend trend in EUR/USD.
 
*Oversold conditions, pension rebalancing cited as supportive for US stocks:
Oversold conditions the go-to excuse for today’s move, though bounce has also attracted a lot of scrutiny given worries no end to the logistical, political and economic uncertainty surrounding Brexit anytime soon. According to Bespoke Investment Group, market has quickly moved to extreme oversold readings. Noted that after Monday close, S&P 500 more than three standard deviations below its 50-DMA and at most oversold level since January. Added four other S&P 500 sectors – Consumer Discretionary, Financials, Industrials and Materials – also more than three standard deviations below their 50-DMAs (while defensives like Utilities and Telecom overbought). Credit Suisse also highlighted support from monthly and quarterly rebalancing by pension funds. Noted they would likely be underweight due to recent drop in US equities.
 
*Cyclicals and higher-beta outperform, defensives lag:
 
Largely a reversal of post-Brexit risk-off trade. Energy best performer on oil bounce (dollar weakness, potential Norway strike). Bank bounce the focus in financials. Semis, HDDs and Internet and social media boosted tech. Specialty pharma and biotech rebound boosted healthcare. ENDP-US big gainer on patent and potential asset sale news. Builders and apparel/accessories (have been hit due to European exposure) bright spots in consumer discretionary. Industrials higher, but slightly trailed tape. Transports outperformed. Materials lagged despite strength in most industrial metals. Precious metals weaker, while downgrades weighed on DD-US and DOW-US in chemicals. Defensive sectors underperformed.
 
*Brexit backlash heats up:
 
Brexit backlash continues to build in various forms. Some have called for another referendum. There have also been thoughts that Britain should never invoke Article 50 and push fresh new concessions. UK Health Secretary Jeremy Hunt, who backed EU membership, said in a Telegraph editorial that Britain should have a second referendum on the terms of leaving the EU if it can secure a new deal to control its borders. He believes the new prime minister should be allowed to negotiate a deal with Brussels and put it to the people either by calling a general election or another referendum. FT's Gideon Rachman also floated this idea yesterday if issue of immigration can be resolved. However, EU leaders remain firm in their position that no negotiations can take place until Britain invokes Article 50.
 
*Merkel says UK cannot cherry-pick in Brexit negotiations:
 
German Chancellor Merkel warned that the UK cannot cherry-pick in its negotiations to exit the EU. In a speech to Germany’s Bundestag, she said it “must and will make a noticeable difference whether a country wants to be a member of the family of the European Union or not”. She added that countries that want access to the single market must accept the principles and obligations that go with them, including free immigration of European people. She specifically pointed out that while Norway, which is not an EU member, had free access to the single market, it accepts free migration from EU. Note that some UK politicians, including Boris Johnson have argued that the UK could maintain single market access in Brexit negotiations without having to agree to all of its rules.
 
*Draghi calls for more policy coordination; says Brexit could hit Eurozone growth by up to 0.5%:
 
ECB President Draghi talked up heightened importance of increasing global policy coordination. Also said central banks would be able to achieve goals quicker if there was support from fiscal and structural policies. Comments come amid some hope that Brexit fears put the onus on policymakers to provide more fiscal support with central banks running out of ammunition. Note South Korea surprised with stimulus package overnight, while headlines out of Japan have suggested upside to risk widely expected extra budget. Draghi also warned that Brexit could cut Eurozone GDP by as much as 0.5%. Added he is concerned that Brexit could drive competitive currency devaluations. In addition, noted Eurozone has to fix bank vulnerabilities.
 
*Italy eyes €40B bank rescue to shore up financial system:
 
Telegraph reported that Italy is preparing a €40B rescue of its financial system. Noted Italian government task force is watching events hour by hour, pledging all steps necessary to ensure stability. Added Italian officials are studying a direct state recapitalization of the banks, to be funded by a special bond issue. Also want a moratorium of so-called ‘bail-in’ rules and bondholder write-downs, though these steps are impossible under EU laws. Reuters added officials preparing measures to counter any speculative attack by hedge funds on Italian banks, including a government guarantee. However, separate article by Reuters cited comments from Prime Minister Renzi, who said Italian banks currently do not need any help (though noted European institutions ready to protect people’s savings if necessary).
 
*Brexit complicating central banks’ efforts to drive growth; could further undermine policy confidence:
 
Complications for global monetary policy from Brexit vote continue to dominate the headlines. Fed has received bulk of the attention in terms of worries about the tightening of financial conditions and expectations for a shallower policy normalization path. WSJ latest to discuss this dynamic, including from the perspective of the headwind for US corporate earnings from dollar strength, but really did not break any new ground. Also highlighted the recent strength in the Swiss franc and Japanese yen. Noted the big problem is that all currencies cannot weaken at once. Added that with central bankers unable to get much traction behind their stimulus efforts, there is the risk that investors start to lose confidence in monetary policy. This was a concern flagged over the weekend by the BIS.
 
*Mispricing between VIX and S&P 500 hints at upside for stocks:
 
Some focus yesterday on the 2+ point decline in the VIX vs another selloff in US equities on Monday. Seemed to partly fit with thoughts that selling pressure has been fairly orderly. Bespoke Investment Group noted that with such a decline in the VIX, a nearly 2% rally in stocks would be expected. Firm noted that when looking back over the last five years, there have only been two times when the S&P 500 and VIX futures change was “mispriced”. Added that a sharp rally followed both occurrences. Also looked at what happens when VIX is down on the day and S&P sells off over 1%. Noted they tend to come during large turning points in market and recent history has seen them occur more recently around market bottoms.
 
*Big dollar demand at BoJ auction:
 
BoJ’s first dollar-supplying operation since Brexit vote attracted offers of $1.47B. Nikkei noted this dwarfed the $1M-$2M of bids seen at recent auctions and was largest since December 2014 when central bank supplied $1.528B of 10-day dollar funds. While quarter-end dynamics received some attention, much bigger focus on market volatility following unexpected vote by Britain to leave the EU. BoJ official said Japan has no problem meeting its institutions foreign currency needs. Reuters also pointed out demand was still less than the tens of billions of dollars that BoJ supplied in operations after collapse of Leman Brothers in 2008. Despite extent of selling pressure in global markets in recent days, Credit Suisse pointed out yesterday that funding markets have not shown signs of stress.
 
*NATIONAL AUSTRALIA BANK LIMITED (NAB):
 
National Australia Bank must harness the hunger of start-up companies if it is to fend off competition from technology-based rivals, chief executive Andrew Thorburn says. Amid predictions the banking sector will face intense disruption from digital businesses, Mr Thorburn on Tuesday said fintech firms were attracting more and more funding in a world of ultralow returns. Big banks have a reputation for being bureaucratic institutions, and Mr Thorburn said NAB needed to emulate some of the traits of its smaller start-up rivals. ‘‘I actually think we are a fintech company ourselves,’’ he said. ‘‘We have to have the mindset of a fintech company, and I actually think we’ve got a lot of the assets of a fintech company.’’ Smaller fintech firms tended to be ‘‘hungry’’ and they aggressively pursued opportunities, he said, and NAB wanted to adopta similar approach. ‘‘That’s the sort of hunger we need inside our own company.’’
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