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Financial Insights(2016-06-30)

Australia
2016-06-30 14:34

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*Stability the focus for yuan:

Yuan a topic of discussion in mainland media following PBoC statement on Tuesday that currency will remain stable and retain its fixing mechanism. Front-page China Securities Journal article parroted this view. Noted yuan faces stable market expectations despite recent falls against the dollar, and is showing rational behavior. Pointed out risk aversion easing in the short-term. Shanghai Securities News said mood in both onshore and offshore market basically stable with no signs of panic selling. PBOC-run Financial News highlighted likelihood of gradual yuan fluctuations post-Brexit given unchanged economic fundamentals. Bloomberg noted Chinese authorities intervened to support offshore yuan in morning trading in an effort to maintain stability, though Reuterssaid PBoC appeared to have stayed on the sidelines. 

*Financials lead market higher:

Sector performance fairly bunched with risk-on theme, though defensives lagged again. Financials best performer withbanks extending bounce into CCAR results. Late-day backup in yields helped. Other rate-sensitive names also stronger. Energy helped by another oil bounce (inventory data bullish). Healthcare beat tape again on broad-based strength. Pharma, biotech, distributors (MCK-US guidance) and med-tech all standouts. Industrials in line. Machinery, transports and energy-leveraged names best performers. HON-USlagged in multis on CEO succession news. Tech largely in line. HDDs ripped again, while high-beta software another big gainer. Semis also better. Consumer discretionary up with the tape. Retail, apparel/accessories and lodging all fared well. NKE-US strong despite some initial disappointment (Street still likes long-term story). Precious metals boosted materials. Aluminum names underperformed (Reuters said China smelters coming back online). 

*Why are stocks higher?:

Equities extending Tuesday’s bounce. No great explanation for the move. Oversold conditions continue to get some attention. Several firms also talking about near-term support from big month- and quarter-end pension rebalancing. Recent volatility collapse may also be dampening post-Brexit worries about ramp in selling from systematic funds. Fairly healthy dose of “Lehman moment” skepticism another positive. Supported by stable funding conditions and central bank assurances to provide liquidity. Sentiment and positioning already flagged as cautious going into Brexit vote (though some debate on this front). No signs of Brexit-driven paralysis as M&A continues to make headlines. Finally, while no letup to Brexit uncertainty, some (though some have argued misguided) hope for a watered down version (or even no Brexit at all.) 

*Why are safe haven plays hanging in?:

Safe haven plays fairly resilient despite recent bounce in global risk appetite (though bond yields backed up this afternoon). Fits with concerns that uncertainties surrounding Brexit not going to be resolved anytime soon. EU quick to push back against the kind of deal Britain wants (single market access with control over borders). Brexit-driven reset in Fed policy normalization expectations another key area of focus and providing additional support for Treasuries. Fed Governor Powell out with some dovish comments today. Pointed out policy only moderately stimulative, while market now pricing in some probability of a near-term easing. While central banks have received some recent credit for promising to provide sufficient liquidity, Brexit has also put more focus on their limited firepower and heightened exposure to a loss in investor confidence. 

*Inventory data helps oil:

Oil extending yesterday’s 3%+ bounce. Inventory data big area of focus today. DOE data revealed 4.1M barrel draw in crude stockpiles. This was bigger than the 3.9M draw reported by API, while consensus was for a 2.4M barrel decline. Several other dynamics in focus over last couple of sessions. Global risk assets supported by pickup in sentiment following initial contagion concerns surrounding Brexit. Softer dollar another tailwind for commodity complex. Also some recent concerns about a potential near-term strike in Norway. Reuters said five fields will be shut if no agreement on wage deal by 2-Jul. Separately, it also noted output pressure in Venezuela from power outages and call from Standard Chartered for oil to quickly return to $50 a barrel due to limited demand impact from Brexit 

*Uncertainty still the big post-Brexit vote theme:

Brexit continues to dominate the headlines, with uncertainty still the big theme. Recent focus has been on Britain’s desire to maintain single market access, but also gain better control of its borders. However, there has already been some meaningful pushback from the EU on this front. German Chancellor Merkel warned yesterday that UK cannot cherry-pick in its negotiations to exit the EU. She and other officials stressed no single market access without acceptance of free migration from EU. Elsewhere, while there continues to be some semblance hope for another referendum, it seems to be conditioned on the terms of a negotiated exit package with the EU. However, EU leaders have repeatedly stated that they will not engage in any negotiations until Britain triggers Article 50. 

*Fed's Powell said risks have shifted further to downside:

Largely dovish comments from Fed Governor Powell. Noted monetary policy needs to remain supportive of growth as global risks have shifted further to downside following Brexit. Highlighted tighter financial conditions, but also said markets have been functioning in an orderly manner and too early to judge effects of the vote. Pointed out that monetary policy is only moderately stimulative, focusing on the decline in the neutral rate (one of the higher-profile topics surrounding Fed policy as of late). Added that while impossible to observe, neutral rate has likely fallen to about zero. Also expressed concern about the decline in productivity and the risk that US and many other economies could fall into a post-financial crisis state where both potential output and growth are permanently reduced. 

*ECB officials try to calm Brexit fears:

Comments from a couple of ECB officials getting some attention. CNBC cited the ECB’s Constancio, who said that despite the sharp selloff, the Brexit vote has not triggered a “Lehman moment” in the financial markets. Added market should start to stabilize now, but will need to wait a few days and developments. Also said he does not expect Brexit to trigger a Eurozone recession. Elsewhere,Bloomberg cited comments from ECB’s Nowotny, who said Brexit could take heavy toll on Eurozone’s fragile recovery, but markets calmer and more balanced since last week. Recall ECB President Draghi was in focus yesterday with comments about need for further policy coordination and better support from fiscal and structural policies. Also warned Brexit could hit Eurozone GDP by up to 0.5%. 

*Market not pricing in full rate hike until Q4 of 2018:

One of the biggest post-Brexit developments has been another significant shift in Fed policy normalization expectations. Bloomberg pointed out that money market derivatives currently do not assign more than a 50% chance of a rate hike until beginning of 2018, and do not price in a full rate hike until Q4 of that year. Added market even pricing in some probability of rate hike over the next couple of months. Pointed out that options on Eurodollar futures imply a 25% chance of a rate cut by September, a reversal from just two months ago, when prices suggested a rate hike by year end was likely a done deal. Went on to discuss the potential for a repeat of 1998, when Greenspan-led Fed began cutting rates in September due to market turmoil, before resuming tightening the following June. 

*Japaness Prime Minister Abe tells BoJ Governor Kuroda to ensure sufficient liquidity:

No new developments in latest meeting between Japanese Prime Minister Abe and BoJ Governor Kuroda. In line with similar post-Brexit meetings, focus revolved around maintaining sufficient liquidity. Kuroda said Japanese banks have not had any problems with FX funding, adding BoJ can add liquidity to market as needed. Reuters cited a source who said BoJ prefers to maintain wait-and-see approach on expanding stimulus, gauging first whether market turmoil lasts long enough to threaten Japan’s recovery. However, also concerns that BoJ really does not have much of a choice but to stay on the sidelines at this point given the perception that it is increasingly pushing on a string from a policy perspective. Still some talk of upside risk to widely expected fiscal stimulus. 

*Nike disappoints, but not all bad news ad stock higher:

Largely disappointing report from NKE-US after the close on Tuesday, even though fiscal Q4 EPS of $0.49 beat by a penny. Analysts focused on slowdown in NA, where revenues came in flat vs consensus for a 7%+ increase, marking worst performance since November 2009. In addition NA futures growth of 6% represented a slowdown from 10% in Q3 and came in below consensus for a 7.5% increase. Inventories flagged as a concern and played a role in softer gross margin performance. Also a lot of discussion about competition, particularly in basketball. Q1 guidance disappointed, though not all bad news as management largely maintained F17 outlook and talked up product pipeline. Analysts also still positive on innovation, pricing power, DTC mix shift and international. 

*European bank credit holding up amid equity selloff:

Notion of Brexit being equivalent to a “Lehman moment” continues to generate a lot of skepticism. Doubts also fueled by focus on stable bank funding conditions, whileWSJ discussed credit market resilience. Noted while STOXX Europe 600 banks index down 19% since the vote, riskiest type of convertible debt trading only ~7% lower. Added yields on sterlingdenominated bank debt have actually fallen since the vote. Pointed out unlike previous crises, central banks have kept funding and liquidity lines open, while UK banks completed much of their refinancing requirements earlier in 2016. In addition, main focus areas of solvency and capital remain in good shape, while equity weakness exacerbated by more cautious earnings and dividend outlooks. 

*Germany's Schaeuble wants to reform EU after Brexit vote:

Handelsblatt said German Finance Minister Schaeuble wants a series of reforms to be introduced to the EU after the UK voted to leave the bloc. Article cited an internal paper, which lists measures such as a possible veto for national budgets that violate EU stability and debt rules. Also wants an independent body that oversees member state budget policy instead of an EU Commission member. Other proposals include independent European banking supervision separated from the ECB and the European Stability Mechanism would also gain more prominence in the new framework. Report fits in with recent reports that focused on a German-French roadmap for further Eurozone integration on issues such as defense, migration, tax and fiscal oversight. Under the Schaueble plan, changes would not come into place until after the UK leaves the bloc. 

*Asian demand for UK and European assets likely to remain despite Brexit:

Some skepticism over extent of potential drop in demand for UK assets following Brexit. WSJ cited analysts who estimate London could lose 100,000 jobs to Europe, bringing London office values down 15-20% over 18 months. Still, Shanghai real estate website Juwai.com reported leads from Chinese buyers for UK properties last week doubled from week prior. Moreover analysts point out Chinese entities ranked behind only US in acquisitions of London commercial property from beginning of 2014 to the end of Q1 2016. WSJ also noted Asian interest in other UK and European assets, citing Dealogic data showing Asian M&A in Europe has risen 68% y/y to record $102.3B so far in 2016. Chinese buyers accounted for 21.8% of acquisitions. Meanwhile bankers argue Asian buyers looking to bring assets back home likely won’t be deterred by Brexit.

*Austrilia and New Zealand Banking Group(ANZ):

Like all the big banks, ANZ Banking Group is experimenting and investing in blockchain technologies, but don’t expect it to adopt a public ledger any time soon.The recent hack of the Decentralised Autonomous Organisation (DAO), a cryptocurrency experiment built on the Ethereum blockchain network that raised more than $US150 million worth of cryptocurrency, served as further proof for the bank that public blockchains were still too risky for adoption, and would likely remain so for the forseeable future.‘‘The point about who controls a public blockchain is slightly worrying and what happened with Ethereum two weeks ago is a great test case,’’ ANZ group strategy executive manager Nicholas Groves said at the Blockchain Summit in Melbourne on Wednesday.

*Austrilia and New Zealand Banking Group(ANZ):

National Australia Bank Ltd (NAB); ANZ Banking Group’s preferred exit option, if it pulls the trigger, is understood to be a complete divestment of its wealth and life insurance operations. The bank is immersed in a review of its wealth division but sources told Street Talk the lender was leaning toward a clean exit rather than following in the footsteps of National Australia Bank’s life deal. If ANZ were to opt out of wealth and life insurance the local market would digest a hefty $5 billion to $6 billion deal.Last year, NAB sold 80 per cent of its life business to Japan’s Nippon Life although has thus far left its broader wealth operations untouched. ANZ is said to be looking at entering distribution arrangements without maintaining minority stakes.
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