Financial Insights
Friday, July 01, 2016
*China willing to allow gradual yuan depreciation this year:
China’s yuan policy continues to get outsized attention in the wake of the Brexit vote given renewed concerns about potential for a devaluation that could unleash a wave of deflation across global markets. PBoC said earlier this week currency will remain stable and maintain its fixing mechanism. Followed by a wave commentary from mainland press echoing the stability theme. However,Reuters cited sources today who said PBoC willing to let yuan weaken to 6.8 to the dollar this year. Noted this would be equivalent to last year’s 4.5% decline. While article has grabbed a lot of attention, also doubts it represents a shift in policy. Flagged central bank concerns that yuan weakness must be gradual given that an outsized move could trigger capital outflows and backlash from trading partners.
*China Beige Book shows widespread improvement in Q2:
China’s economy saw widespread improvement in Q2 according to latest China Beige Book from CBB International. Services helped drive recovery to moderate growth. Hiring picked up with 37% of firms boosting headcount, up slightly from a year earlier. Construction another positive where 43% of residential builders reported higher revenue growth, compared to 33% a year earlier. CBB anticipated boost in private investment, with 47% of private firms logging faster capex growth compared to 32% in Q1. Negatives included weaker new domestic orders, receivables and payables. Moreover CBB noted skepticism whether trends will last owing to government efforts in tackling overcapacity. While Brexit posed significant downside risk, CBB added implications will take time to filter through.
*Busy day of M&A headlines:
Brexit uncertainty not slowing down M&A headlines. Big development today has been reports that MDLZ-US made a $107/share cash and stock bid for HSY-US. Bid was unanimously rejected by HSY board, which said it provided no basis for further discussion. Elsewhere,STRZA-US agreed to be acquired by LGF-US for ~$4.4B in cash and stock. LGF expects deal, which had been rumored, to be highly accretive. IOC-US received announced receipt of unsolicited acquisition proposal from third party. However, did not provide any details. Agreed to be acquired back in May by Australia’s Oil Search for $2.2B. Blackboard to acquire ONE-US for $260M in cash.CRCM-US up big on Google Capital investment. More regulatory scrutiny in managed care, but nothing surprising in Bloomberg report about Justice Department doubts their concerns about CI-US/ANTM-US deal can be remedied by asset sales.
*Defensive sectors among standouts:
Defensive sectors among best performers Consumer staples boosted by food names, with HSY-US a big gainer after receiving a $107/sh bid from MDLZ-US; board later rejected the offer. Utilities another standout with help from rates. Good day for industrials with multis,machinery and aerospace leading move. Regional banks drove outperformance in financials on better capital return takeaways. Both industrial and precious metals drove materials rally. Tech trailed tape, though still up 1% and semis strong. A few specialty pharma andmanaged care (more M&A concerns) names dampened healthcare rally. Energy higher, but underperformed on oil selloff. Select auto and restaurant names cappedconsumer discretionary upside.
*Gaming also weaker. ECB considering loosening QE rules:
Policy support headlines getting some credit for market strength today. While not a big driver of the initial post-Brexit bounce, recent promises to maintain sufficient liquidity have helped drive skepticism about Brexit being a “Lehman moment”. Bloomberg said ECB considering rules for loosening bond purchases following Brexit vote. Noted central bank concerned about extent to which pool of eligible securities has contracted amid flight to quality push. Added some Governing Councilmembers now favor changing allocation of bond purchases away from size of a country’s economy toward level of outstanding debt. However, also highlighted potential backlash from Bundesbank about a deviation from the capital key structure. Earlier today, FT noted amount of government debt yielding less than zero increased $1.3T over June to $11.7T.
*Carney says policy stimulus likely to be needed over summer:
Dovish comments from BoE Governor Carney getting a lot of attention. Noted that given the deterioration in the economic outlook, some monetary policy stimulus likely to be needed over the summer following surprise vote by UK to leave the EU. Follows his prior warning that Brexit vote could drive economy into recession. Added that central bank will announce initial assessment at next policy meeting on 14-Jul. Also noted a full assessment will come on 4-Aug when bank updates forecasts on economy. Carney said that at August meeting, BoE will also have further discussions about range of instruments at its disposal. Pointed out that policy easing not just about bank rate, while measures from last crisis not the only available options. Sterling hit hard on the comments, though they seem generally supportive of recent bounce in sentiment surrounding risk assets.
*Boris Johnson not running for UK prime minister:
Race to succeed Cameron as prime minister underway in Conservative Party. Big shock today has been announcement from Boris Johnson that he will not be running. Made the decision after meeting with colleagues. Noted this is a chance to reunite the party and society. News followed another surprise development that leading pro-Brexit campaigner Michael Gove would run for leadership. Had been expected to get nod for chancellor role under Johnson. UK Home Secretary Theresa May the frontrunner to become next prime minister. She ruled out a general election before 2020 and will not trigger Article 50 until end of year. Said Brexit means Brexit and ruled out second referendum or any attempts to rejoin EU through back door. Will no longer seek to reduce budget deficit by end of parliament.
*Claims in line, Chicago Fed PMI beats:
Claims up 10K to 268K in w/e 25-Jun, in line with expectations. Series has been a bit choppy in recent weeks, though still seems to fit with thoughts recent worries about labor market momentum overdone. Less-volatile four-week moving average unchanged at 267K. Four-week moving average of continuing claims (for prior week) fell 13K to 2.134M, a new cycle low. On the manufacturing front, Chicago PMI jumped to 56.8 in June from 49.3 in May. Ahead of 50.6 consensus. Highest since January 2015. Forward-looking new orders component improved to best level since October 2014. Production improved to best levels since January. Inventories bounced from a 6 ½ year low in May. Order backlogs highest since March 2011. However, employment contracted at fastest pace since 2009.
*Few surprises, but positive takeaways for banking group from CCAR results:
Fed released results from round two of its stress tests, the Comprehensive Capital Analysis and Review (CCAR). This test evaluates a bank holding company’s (BHC) capital adequacy, capital planning process and planned capital distributions. Fed had no objection to 30 of 33 capital return plans. DBK-DE and DBK-DE rejected for qualitative reasons, while MS-US received a conditional approval. Must resubmit by 29-Dec to correct weaknesses in capital planning process (though buyback bigger than expected). No real surprises, but analysts takeaways fairly positive. May help to dampen some of the negative sentiment surrounding rates. Capital deployments slightly better than expected in the aggregate (Deutsche Bank said +34% vs last year) and no qualitative surprises for US names.
*More talk of regulatory pushback against Anthem’s proposed acquisition of Cigna:
Regulatory scrutiny still a big theme in M&A, particularly when it comes to ANTM-US’s proposed $48B acquisition of CIUS. Bloomberg said Justice Department recently told ANTM that deal threatens competition. Added that while regulators remain open to hearing about proposals to resolve the problems, they have doubts their concerns can be remedied by asset sales. Official decision expected by mid-July. Article said one of Justice Department’s key concerns is that deal would reduce options for large employers that depend on insurers with national scale. Other press reports have flagged similar high-profile concerns. Recent WSJ article noted regulators also worried about influence a combined entity would carry with healthcare providers, while hospital and doctor groups strongly opposed.
*M&A activity slows due to uncertain outlook:
In spite of the recent M&A headlines, there are several reports highlighting the decline in global M&A activity due to the uncertain outlook. Reuters noted that the value of global M&A dropped by a third in Q2 2016 as a wave of transactions were abandoned in the wake of concerns over regulatory and tax risks or national security. In addition, the FT pointed out that uncertainty over Europe and fears of a Donald Trump US presidency are set to further slow deal making after global deal volumes fall by 23% in the first half of the year. Said many believe theLSE-GB and DB1-DE could collapse after the Brexit vote. Other headwinds include the regulatory environment, interest rate risk and US elections. FT cited Thomson Reuters data showing M&A volumes in UK collapsed 70% ahead of Brexit vote, while in Europe and US they fell 18% and 27%, respectively.
*More BoJ scrutiny; Japanese industrial production misses:
A few notable developments surrounding Japan. More scrutiny surrounding BoJ policy. Reuters said more BoJ members calling for central bank to scrap its inflation target. Added some of the internal backlash casting doubts on credibility of BoJ Governor Kuroda and his broader program. Cited a source familiar with central bank who said there is a growing sense it is running out of ammunition. Also some disappointing economic data out of Japan as industrial production fell 2.3% m/m in May following a 0.5% gain in April. Worse than consensus expectations for a 0.1% decline and lowest level in nearly three years. While METI maintained assessment output is tracking sideways, it did upgrade June forecast. Now looking for a 1.7% m/m increase in industrial output vs prior outlook for a 0.3% gain.
*US sees Brexit as buying opportunity for European stocks:
European stocks attracting interest from US investors in Brexit aftermath. FT noted Oppenheimer Funds viewed selloff as a “a wholesale overreaction”, while Fidelity Overseas fund found bargains in EU banking space.. Added together with falling shares in local currency terms, US buyers were attracted by falls in GBP and EUR, which made European assets suddenly cheaper. Fits with broad-based global equity market rebound over last couple of sessions. However, other funds still cautious. Concerned that while valuations may be attractive, downside risks given weak earnings and uncertain macro/political environments. Heading into Brexit vote last week, European equities had seen 20 straight weeks of investor outflows.
*Australia and New Zealand Banking Group Limited (ANZ) :
ANZ Banking Group has created a point-of-sale payment terminal that is smaller, lighter and more mobile than the Commonwealth Bank of Australia’s popular Albert machine. About the size of a smartphone, Blade runs Android software and has a touch-screen and GPS. Built with South African tech company ThumbzUp, ANZ is pitching the device to retailers and other companies that want staff to get away from the till and onto the floor to serve customers. Rivalry between ANZ Banking Group and Commonwealth Bank of Australia over mobile point-of-sale payment devices is intensifying, with ANZ preparing to launch Blade – a smaller, lighter and more mobile competitor to CBA’s Albert. Built in partnership with South African tech company ThumbzUp, ANZ says Blade should appeal to retailers and other companies who want staff to get away from sitting behind a desk holding the till and on to the floor where customers are circulating.
Friday, July 01, 2016
*China willing to allow gradual yuan depreciation this year:
China’s yuan policy continues to get outsized attention in the wake of the Brexit vote given renewed concerns about potential for a devaluation that could unleash a wave of deflation across global markets. PBoC said earlier this week currency will remain stable and maintain its fixing mechanism. Followed by a wave commentary from mainland press echoing the stability theme. However,Reuters cited sources today who said PBoC willing to let yuan weaken to 6.8 to the dollar this year. Noted this would be equivalent to last year’s 4.5% decline. While article has grabbed a lot of attention, also doubts it represents a shift in policy. Flagged central bank concerns that yuan weakness must be gradual given that an outsized move could trigger capital outflows and backlash from trading partners.
*China Beige Book shows widespread improvement in Q2:
China’s economy saw widespread improvement in Q2 according to latest China Beige Book from CBB International. Services helped drive recovery to moderate growth. Hiring picked up with 37% of firms boosting headcount, up slightly from a year earlier. Construction another positive where 43% of residential builders reported higher revenue growth, compared to 33% a year earlier. CBB anticipated boost in private investment, with 47% of private firms logging faster capex growth compared to 32% in Q1. Negatives included weaker new domestic orders, receivables and payables. Moreover CBB noted skepticism whether trends will last owing to government efforts in tackling overcapacity. While Brexit posed significant downside risk, CBB added implications will take time to filter through.
*Busy day of M&A headlines:
Brexit uncertainty not slowing down M&A headlines. Big development today has been reports that MDLZ-US made a $107/share cash and stock bid for HSY-US. Bid was unanimously rejected by HSY board, which said it provided no basis for further discussion. Elsewhere,STRZA-US agreed to be acquired by LGF-US for ~$4.4B in cash and stock. LGF expects deal, which had been rumored, to be highly accretive. IOC-US received announced receipt of unsolicited acquisition proposal from third party. However, did not provide any details. Agreed to be acquired back in May by Australia’s Oil Search for $2.2B. Blackboard to acquire ONE-US for $260M in cash.CRCM-US up big on Google Capital investment. More regulatory scrutiny in managed care, but nothing surprising in Bloomberg report about Justice Department doubts their concerns about CI-US/ANTM-US deal can be remedied by asset sales.
*Defensive sectors among standouts:
Defensive sectors among best performers Consumer staples boosted by food names, with HSY-US a big gainer after receiving a $107/sh bid from MDLZ-US; board later rejected the offer. Utilities another standout with help from rates. Good day for industrials with multis,machinery and aerospace leading move. Regional banks drove outperformance in financials on better capital return takeaways. Both industrial and precious metals drove materials rally. Tech trailed tape, though still up 1% and semis strong. A few specialty pharma andmanaged care (more M&A concerns) names dampened healthcare rally. Energy higher, but underperformed on oil selloff. Select auto and restaurant names cappedconsumer discretionary upside.
*Gaming also weaker. ECB considering loosening QE rules:
Policy support headlines getting some credit for market strength today. While not a big driver of the initial post-Brexit bounce, recent promises to maintain sufficient liquidity have helped drive skepticism about Brexit being a “Lehman moment”. Bloomberg said ECB considering rules for loosening bond purchases following Brexit vote. Noted central bank concerned about extent to which pool of eligible securities has contracted amid flight to quality push. Added some Governing Councilmembers now favor changing allocation of bond purchases away from size of a country’s economy toward level of outstanding debt. However, also highlighted potential backlash from Bundesbank about a deviation from the capital key structure. Earlier today, FT noted amount of government debt yielding less than zero increased $1.3T over June to $11.7T.
*Carney says policy stimulus likely to be needed over summer:
Dovish comments from BoE Governor Carney getting a lot of attention. Noted that given the deterioration in the economic outlook, some monetary policy stimulus likely to be needed over the summer following surprise vote by UK to leave the EU. Follows his prior warning that Brexit vote could drive economy into recession. Added that central bank will announce initial assessment at next policy meeting on 14-Jul. Also noted a full assessment will come on 4-Aug when bank updates forecasts on economy. Carney said that at August meeting, BoE will also have further discussions about range of instruments at its disposal. Pointed out that policy easing not just about bank rate, while measures from last crisis not the only available options. Sterling hit hard on the comments, though they seem generally supportive of recent bounce in sentiment surrounding risk assets.
*Boris Johnson not running for UK prime minister:
Race to succeed Cameron as prime minister underway in Conservative Party. Big shock today has been announcement from Boris Johnson that he will not be running. Made the decision after meeting with colleagues. Noted this is a chance to reunite the party and society. News followed another surprise development that leading pro-Brexit campaigner Michael Gove would run for leadership. Had been expected to get nod for chancellor role under Johnson. UK Home Secretary Theresa May the frontrunner to become next prime minister. She ruled out a general election before 2020 and will not trigger Article 50 until end of year. Said Brexit means Brexit and ruled out second referendum or any attempts to rejoin EU through back door. Will no longer seek to reduce budget deficit by end of parliament.
*Claims in line, Chicago Fed PMI beats:
Claims up 10K to 268K in w/e 25-Jun, in line with expectations. Series has been a bit choppy in recent weeks, though still seems to fit with thoughts recent worries about labor market momentum overdone. Less-volatile four-week moving average unchanged at 267K. Four-week moving average of continuing claims (for prior week) fell 13K to 2.134M, a new cycle low. On the manufacturing front, Chicago PMI jumped to 56.8 in June from 49.3 in May. Ahead of 50.6 consensus. Highest since January 2015. Forward-looking new orders component improved to best level since October 2014. Production improved to best levels since January. Inventories bounced from a 6 ½ year low in May. Order backlogs highest since March 2011. However, employment contracted at fastest pace since 2009.
*Few surprises, but positive takeaways for banking group from CCAR results:
Fed released results from round two of its stress tests, the Comprehensive Capital Analysis and Review (CCAR). This test evaluates a bank holding company’s (BHC) capital adequacy, capital planning process and planned capital distributions. Fed had no objection to 30 of 33 capital return plans. DBK-DE and DBK-DE rejected for qualitative reasons, while MS-US received a conditional approval. Must resubmit by 29-Dec to correct weaknesses in capital planning process (though buyback bigger than expected). No real surprises, but analysts takeaways fairly positive. May help to dampen some of the negative sentiment surrounding rates. Capital deployments slightly better than expected in the aggregate (Deutsche Bank said +34% vs last year) and no qualitative surprises for US names.
*More talk of regulatory pushback against Anthem’s proposed acquisition of Cigna:
Regulatory scrutiny still a big theme in M&A, particularly when it comes to ANTM-US’s proposed $48B acquisition of CIUS. Bloomberg said Justice Department recently told ANTM that deal threatens competition. Added that while regulators remain open to hearing about proposals to resolve the problems, they have doubts their concerns can be remedied by asset sales. Official decision expected by mid-July. Article said one of Justice Department’s key concerns is that deal would reduce options for large employers that depend on insurers with national scale. Other press reports have flagged similar high-profile concerns. Recent WSJ article noted regulators also worried about influence a combined entity would carry with healthcare providers, while hospital and doctor groups strongly opposed.
*M&A activity slows due to uncertain outlook:
In spite of the recent M&A headlines, there are several reports highlighting the decline in global M&A activity due to the uncertain outlook. Reuters noted that the value of global M&A dropped by a third in Q2 2016 as a wave of transactions were abandoned in the wake of concerns over regulatory and tax risks or national security. In addition, the FT pointed out that uncertainty over Europe and fears of a Donald Trump US presidency are set to further slow deal making after global deal volumes fall by 23% in the first half of the year. Said many believe theLSE-GB and DB1-DE could collapse after the Brexit vote. Other headwinds include the regulatory environment, interest rate risk and US elections. FT cited Thomson Reuters data showing M&A volumes in UK collapsed 70% ahead of Brexit vote, while in Europe and US they fell 18% and 27%, respectively.
*More BoJ scrutiny; Japanese industrial production misses:
A few notable developments surrounding Japan. More scrutiny surrounding BoJ policy. Reuters said more BoJ members calling for central bank to scrap its inflation target. Added some of the internal backlash casting doubts on credibility of BoJ Governor Kuroda and his broader program. Cited a source familiar with central bank who said there is a growing sense it is running out of ammunition. Also some disappointing economic data out of Japan as industrial production fell 2.3% m/m in May following a 0.5% gain in April. Worse than consensus expectations for a 0.1% decline and lowest level in nearly three years. While METI maintained assessment output is tracking sideways, it did upgrade June forecast. Now looking for a 1.7% m/m increase in industrial output vs prior outlook for a 0.3% gain.
*US sees Brexit as buying opportunity for European stocks:
European stocks attracting interest from US investors in Brexit aftermath. FT noted Oppenheimer Funds viewed selloff as a “a wholesale overreaction”, while Fidelity Overseas fund found bargains in EU banking space.. Added together with falling shares in local currency terms, US buyers were attracted by falls in GBP and EUR, which made European assets suddenly cheaper. Fits with broad-based global equity market rebound over last couple of sessions. However, other funds still cautious. Concerned that while valuations may be attractive, downside risks given weak earnings and uncertain macro/political environments. Heading into Brexit vote last week, European equities had seen 20 straight weeks of investor outflows.
*Australia and New Zealand Banking Group Limited (ANZ) :
ANZ Banking Group has created a point-of-sale payment terminal that is smaller, lighter and more mobile than the Commonwealth Bank of Australia’s popular Albert machine. About the size of a smartphone, Blade runs Android software and has a touch-screen and GPS. Built with South African tech company ThumbzUp, ANZ is pitching the device to retailers and other companies that want staff to get away from the till and onto the floor to serve customers. Rivalry between ANZ Banking Group and Commonwealth Bank of Australia over mobile point-of-sale payment devices is intensifying, with ANZ preparing to launch Blade – a smaller, lighter and more mobile competitor to CBA’s Albert. Built in partnership with South African tech company ThumbzUp, ANZ says Blade should appeal to retailers and other companies who want staff to get away from sitting behind a desk holding the till and on to the floor where customers are circulating.
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