*China continues to defend yuan policy:
PBoC reiterated in a statement that it has no intention of depreciating yuan to boost trade competitiveness and that there is no basis for long-term yuan depreciation given China’s economic fundamentals. Recall PBoC said earlier this week currency will remain stable and maintain its fixing mechanism. Latest comments defending FX regime came in a response to a Reuters report out yesterday that said BoC 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 grabbed a lot of attention, it did not generate much concern despite the post-Brexit pickup in concerns about the devaluation pressure on the yuan from a stronger dollar. This seemed to largely be a function of the market’s comfort with the PBoC’s focus on gradualism.
*China recovery momentum slows:
More signs of waning recovery momentum in China from June manufacturing PMIs. Official manufacturing PMI slipped to 50.0 from 50.1 in May, in line with consensus. Details largely disappointed. While output ticked up to 52.5 from 52.3, new orders fell to 50.5 from 50.7 and new export orders declined to 49.6 from 50.0, highlighting some headwinds. Also more signs of destocking. Some focus on underperformance of small- and medium-sized enterprises, which both contracted. Seemed to be supported by the Caixin manufacturing PMI, which was also out today. It fell to 49.2 from 48.6. Nothing really stood out in the economist or press commentary. Some discussion about expectations for more monetary policy support.
*Size of UK economy, global financial system confidence dampen Brexit contagion:
Limited contagion from Brexit the big theme in global markets this week. Multiple factors cited for this dynamic. Goldman Sachs noted on Friday that price action has supported its view that Brexit is a local, not a global shock. Reiterated that while China concerns roiled global markets last August and earlier this year, that was because China’s economy is largest contributor to global GDP growth. However, UK economy too small and growing too slowly to adversely impact global growth by much. Like others, firm flagged support from confidence in solvency and funding stability of global financial system, which it said will be key to success for limited contagion view. Added that most importantly, markets appear convinced that the risk from a collapse in short-term funding has been contained.
*ISM manufacturing tops expectations, construction weak:
June ISM manufacturing index came in at 53.2, up from last month’s 51.3 and better than consensus for 51.4. New orders at 57.0, better than May 55.7 level and higher for sixth consecutive month. Production rose to 54.7 from 52.6 in the prior month. Inventories came in at 48.5, higher than May’s 45.0 but still in contractionary territory. Employment component in expansion, registering 50.4 vs last month’s contractionary 49.2 reading. Thirteen industries reported growth in June, while only three (electrical equipment, transportation equipment, plastics and rubber products) reported contraction. Respondent commentary generally upbeat, with several citing steady or improving business conditions and robust demand. Elsewhere, construction spending came in at (0.8%) for May, better than the downwardly revised (2.0%) rate for April but below consensus for 0.5% growth. Spending up 4.5% y/y.
*Sector performance bunched:
Financials trailed the market with banks notably weaker; note global bond yields touched historic lows earlier Friday. Consumer staples lagged the tape. Beverages were weaker; in the food space HSY-US pulled back after Thursday's M&A-inspired rise. Packaging names weighed on materials, though precious-metals companies much stronger. Internet and social-media names better for tech, though semis were weaker. Transports helped industrials. Biotech led healthcare. Sector also boosted by select specialty pharma companies. Note this group has been very volatile of late. Consumer discretionary led the market Friday. Auto manufacturers were in focus as June sales data was reported. HOGUS also gave group a lift on takeover speculation.
*Bond yields hit historic lows:
Global government bonds touched historic lows earlier today. Yield on the US 30Y fell as much as 10bp to an unprecedented 2.1871%, while 10y yield fell to 1.3784%, lowest point since July 2012. However, well off best levels with better manufacturing data and continued strength in stocks. In UK, 10Y gilt dropped to record low of 0.81%. Other EU countries also seeing drops, with some French and Dutch bonds hitting all-time lows, and Spanish and Italian benchmark rates falling to their lowest in a year. Constant easing speculation in focus. BoE’s Carney noted yesterday a rate cut may be necessary to help ease Brexit fallout. Report yesterday ECB could scrap capital key on QE (though Reuters said no). US Treasuries underpinned by flight-to-yield, with futures data suggesting rate-hike expectations pushed well into the future. Also some support from skepticism of current equity-market bounce.
*ECB may not scrap capital key, but still seen doing more:
Potential ECB policy adjustments following Brexit vote continue to get a lot of attention. Despite continued concerns central bankers running out of ammunition, policy support headlines/speculation have been flagged as a tailwind for risk assets this week. Big story yesterday was from Bloomberg, which said ECB considering abandoning capital key for QE given extent to which pool of eligible securities has contracted amid flight to quality push. Potential shift to purchases based on a country’s outstanding debt pile flagged as particularly supportive for periphery. However, Reuters said today ECB not currently considering abandoning capital key. It did note that central bank would first consider raising limit of purchases on each bond issue not protected by collective actions, or amending rules about which assets it can buy to expand eligible pool.
*Eurozone manufacturing PMI at six-month highs:
Final Eurozone manufacturing PMI registered a six-month high of 52.8 in June, up from 51.5 in May and better than the 52.6 flash reading. Growth led by Germany, with final PMI at a 28-month high of 54.5 vs flash 54.4 and prior 52.1. Italian number also at two-month high of 53.5 vs consensus 52.2 and prior 52.4. Spanish outturn also at highest in two-months at 52.2 vs consensus 52.0 and prior 51.8. French reading continues to lag at two-month low of 48.3. This was down slightly from 48.4 in May, but marked an improvement from flash reading of 47.9. Markit noted that new orders and exports rose at faster rates across euro-area and there was a further easing in price deflationary pressures, with input and output costs only down marginally.
*Despite Brexit bounce, big outflows from equities this week:
Big bounce over last three sessions not enough to counter initial outflows from Brexit vote. BofA Merrill Lynch Flow Show report noted equities saw $20.7B of outflows in latest reporting period, biggest since August 2015 (China devaluation). Equities have now seen outflows in 11 of 12 last weeks. Note despite press reports of bargain hunting by big US funds, outflows from Europe were largest since October 2014. The $11.6B of outflows from US equities was largest in eight weeks. Biggest outflows came from healthcare, consumer and tech, while utilities saw biggest inflows in 20 weeks. Flight to quality as precious metals attracted $2.1B, highest since February 2016. In addition, $3.4B left highyield bond funds, the largest since January. Junk has now seen outflows in eight of the last nine weeks.
*June BoJ Tankan business confidence stable despite yen gains:
Headline June BoJ Tankan large manufacturers' business confidence remained steady at +6, above the consensus forecast of +4, with September survey projection also at +6. Large non-manufacturers and small firms saw some deterioration. Highlight was FY16 yen forecasts, which were revised to 111.41 per dollar following 117.46 in March, reflecting recent yen strength. Not a major surprise given previous reports that some Japanese firms had adjusted currency forecasts to 105.00 for FY ending March 2017, yet profit outlook deteriorating with FY16 earnings seen falling 7.2% y/y. In contrast, positive implications from capex growth, which was revised up to +6.2% for large firms from (0.9%) in March and compares with consensus forecast of +5.3%. BoJ clarified the results do not reflect Brexit impact with 70% of responses collected by 13-Jun.
*Japan May data breaks little new ground, underlying inflation continues to moderate:
Month-end May data releases were broadly in line with expectations. Unemployment rate was steady at 3.2%, though ongoing uptrend in job-offers-to-applicants ratio suggests further labor market tightening. Household spending still anemic, down 1.5% m/m after edging up 0.2% in April. Nationwide core CPI declined 0.4% y/y following 0.3% fall in April. Ex-food & energy series also slowed to 0.6% rise following 0.7% in April. BoJ's CPI ex-fresh food & energy was up 0.8% y/y in May after 0.9% rise in April. BoJ policy board members had previously declared they were at half-way mark to achieving its 2% inflation target, though momentum is now fading. Some speculation in immediate Brexit aftermath that worse CPI data could tip scale toward further easing, though still no indications yet if the BoJ will convene for an extraordinary policy meeting.
*Rio Tinto Limited (RIO) and BHP Billiton Limited (BHP):
It would be easy to see Jean-Sebastien Jacques as the fresh new French face of the same $140 billion mining machine that is Rio Tinto. Certainly a shift from the theatreloving, milk jug-collecting Sam Walsh to the champagneloving, opera buff Jacques (or ‘‘JS’’ as he is known throughout the mining world) suggests a degree of continuity. And Jacques has worked hard to stress that we shouldn’t expect big changes to Rio’s current austerity drive, which is centred around keeping the balance sheet strong, keeping costs as low as possible and giving shareholders back as much as possible. But the question remains: If Walsh was the safe pair of hands brought in to right the Rio ship as it sailed into the commodities downturn, what will define Jacques’ time in the top seat? Will it be an even tighter focus on costs? A switch to counter-cyclical growth? A move to offload or restructure some of the arms of the Rio empire that aren’t delivering? Day one is, of course, far too early for answers. But two things are certain. Jacques will be given time to work out his grand vision for Rio, and in the meantime he’s going to drive the miner hard – perhaps harder than it has been for decades.
*Australia and New Zealand Banking Group (ANZ):
Boutique Flagstaff Partners is in pole position to secure a sell-side mandate for ANZ Banking Group’s online broking unit, sources told Street Talk. This column understands Melbourne-based Flagstaff has embarked on preliminary work for the sale of the now rebranded E*TRADE Australia. Flagstaff is chaired by former ANZ chairman Charles Goode and run by banker Tony Burgess. The unit is expected to be the first asset cut loose from a broader divestment drive within the local operations under chief executive Shayne Elliott, who took the helm in January. Street Talk revealed in April that E*TRADE would be rebadged ANZ Share Investing after a licence agreement with US-listed E*TRADE Financial came to an end. This column also foreshadowed the division would be offloaded by the bank. An ANZ spokesman declined to comment. ASX-listed Bell Financial Group has already expressed interest in buying ANZ’s online broking operations, according to sources.
PBoC reiterated in a statement that it has no intention of depreciating yuan to boost trade competitiveness and that there is no basis for long-term yuan depreciation given China’s economic fundamentals. Recall PBoC said earlier this week currency will remain stable and maintain its fixing mechanism. Latest comments defending FX regime came in a response to a Reuters report out yesterday that said BoC 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 grabbed a lot of attention, it did not generate much concern despite the post-Brexit pickup in concerns about the devaluation pressure on the yuan from a stronger dollar. This seemed to largely be a function of the market’s comfort with the PBoC’s focus on gradualism.
*China recovery momentum slows:
More signs of waning recovery momentum in China from June manufacturing PMIs. Official manufacturing PMI slipped to 50.0 from 50.1 in May, in line with consensus. Details largely disappointed. While output ticked up to 52.5 from 52.3, new orders fell to 50.5 from 50.7 and new export orders declined to 49.6 from 50.0, highlighting some headwinds. Also more signs of destocking. Some focus on underperformance of small- and medium-sized enterprises, which both contracted. Seemed to be supported by the Caixin manufacturing PMI, which was also out today. It fell to 49.2 from 48.6. Nothing really stood out in the economist or press commentary. Some discussion about expectations for more monetary policy support.
*Size of UK economy, global financial system confidence dampen Brexit contagion:
Limited contagion from Brexit the big theme in global markets this week. Multiple factors cited for this dynamic. Goldman Sachs noted on Friday that price action has supported its view that Brexit is a local, not a global shock. Reiterated that while China concerns roiled global markets last August and earlier this year, that was because China’s economy is largest contributor to global GDP growth. However, UK economy too small and growing too slowly to adversely impact global growth by much. Like others, firm flagged support from confidence in solvency and funding stability of global financial system, which it said will be key to success for limited contagion view. Added that most importantly, markets appear convinced that the risk from a collapse in short-term funding has been contained.
*ISM manufacturing tops expectations, construction weak:
June ISM manufacturing index came in at 53.2, up from last month’s 51.3 and better than consensus for 51.4. New orders at 57.0, better than May 55.7 level and higher for sixth consecutive month. Production rose to 54.7 from 52.6 in the prior month. Inventories came in at 48.5, higher than May’s 45.0 but still in contractionary territory. Employment component in expansion, registering 50.4 vs last month’s contractionary 49.2 reading. Thirteen industries reported growth in June, while only three (electrical equipment, transportation equipment, plastics and rubber products) reported contraction. Respondent commentary generally upbeat, with several citing steady or improving business conditions and robust demand. Elsewhere, construction spending came in at (0.8%) for May, better than the downwardly revised (2.0%) rate for April but below consensus for 0.5% growth. Spending up 4.5% y/y.
*Sector performance bunched:
Financials trailed the market with banks notably weaker; note global bond yields touched historic lows earlier Friday. Consumer staples lagged the tape. Beverages were weaker; in the food space HSY-US pulled back after Thursday's M&A-inspired rise. Packaging names weighed on materials, though precious-metals companies much stronger. Internet and social-media names better for tech, though semis were weaker. Transports helped industrials. Biotech led healthcare. Sector also boosted by select specialty pharma companies. Note this group has been very volatile of late. Consumer discretionary led the market Friday. Auto manufacturers were in focus as June sales data was reported. HOGUS also gave group a lift on takeover speculation.
*Bond yields hit historic lows:
Global government bonds touched historic lows earlier today. Yield on the US 30Y fell as much as 10bp to an unprecedented 2.1871%, while 10y yield fell to 1.3784%, lowest point since July 2012. However, well off best levels with better manufacturing data and continued strength in stocks. In UK, 10Y gilt dropped to record low of 0.81%. Other EU countries also seeing drops, with some French and Dutch bonds hitting all-time lows, and Spanish and Italian benchmark rates falling to their lowest in a year. Constant easing speculation in focus. BoE’s Carney noted yesterday a rate cut may be necessary to help ease Brexit fallout. Report yesterday ECB could scrap capital key on QE (though Reuters said no). US Treasuries underpinned by flight-to-yield, with futures data suggesting rate-hike expectations pushed well into the future. Also some support from skepticism of current equity-market bounce.
*ECB may not scrap capital key, but still seen doing more:
Potential ECB policy adjustments following Brexit vote continue to get a lot of attention. Despite continued concerns central bankers running out of ammunition, policy support headlines/speculation have been flagged as a tailwind for risk assets this week. Big story yesterday was from Bloomberg, which said ECB considering abandoning capital key for QE given extent to which pool of eligible securities has contracted amid flight to quality push. Potential shift to purchases based on a country’s outstanding debt pile flagged as particularly supportive for periphery. However, Reuters said today ECB not currently considering abandoning capital key. It did note that central bank would first consider raising limit of purchases on each bond issue not protected by collective actions, or amending rules about which assets it can buy to expand eligible pool.
*Eurozone manufacturing PMI at six-month highs:
Final Eurozone manufacturing PMI registered a six-month high of 52.8 in June, up from 51.5 in May and better than the 52.6 flash reading. Growth led by Germany, with final PMI at a 28-month high of 54.5 vs flash 54.4 and prior 52.1. Italian number also at two-month high of 53.5 vs consensus 52.2 and prior 52.4. Spanish outturn also at highest in two-months at 52.2 vs consensus 52.0 and prior 51.8. French reading continues to lag at two-month low of 48.3. This was down slightly from 48.4 in May, but marked an improvement from flash reading of 47.9. Markit noted that new orders and exports rose at faster rates across euro-area and there was a further easing in price deflationary pressures, with input and output costs only down marginally.
*Despite Brexit bounce, big outflows from equities this week:
Big bounce over last three sessions not enough to counter initial outflows from Brexit vote. BofA Merrill Lynch Flow Show report noted equities saw $20.7B of outflows in latest reporting period, biggest since August 2015 (China devaluation). Equities have now seen outflows in 11 of 12 last weeks. Note despite press reports of bargain hunting by big US funds, outflows from Europe were largest since October 2014. The $11.6B of outflows from US equities was largest in eight weeks. Biggest outflows came from healthcare, consumer and tech, while utilities saw biggest inflows in 20 weeks. Flight to quality as precious metals attracted $2.1B, highest since February 2016. In addition, $3.4B left highyield bond funds, the largest since January. Junk has now seen outflows in eight of the last nine weeks.
*June BoJ Tankan business confidence stable despite yen gains:
Headline June BoJ Tankan large manufacturers' business confidence remained steady at +6, above the consensus forecast of +4, with September survey projection also at +6. Large non-manufacturers and small firms saw some deterioration. Highlight was FY16 yen forecasts, which were revised to 111.41 per dollar following 117.46 in March, reflecting recent yen strength. Not a major surprise given previous reports that some Japanese firms had adjusted currency forecasts to 105.00 for FY ending March 2017, yet profit outlook deteriorating with FY16 earnings seen falling 7.2% y/y. In contrast, positive implications from capex growth, which was revised up to +6.2% for large firms from (0.9%) in March and compares with consensus forecast of +5.3%. BoJ clarified the results do not reflect Brexit impact with 70% of responses collected by 13-Jun.
*Japan May data breaks little new ground, underlying inflation continues to moderate:
Month-end May data releases were broadly in line with expectations. Unemployment rate was steady at 3.2%, though ongoing uptrend in job-offers-to-applicants ratio suggests further labor market tightening. Household spending still anemic, down 1.5% m/m after edging up 0.2% in April. Nationwide core CPI declined 0.4% y/y following 0.3% fall in April. Ex-food & energy series also slowed to 0.6% rise following 0.7% in April. BoJ's CPI ex-fresh food & energy was up 0.8% y/y in May after 0.9% rise in April. BoJ policy board members had previously declared they were at half-way mark to achieving its 2% inflation target, though momentum is now fading. Some speculation in immediate Brexit aftermath that worse CPI data could tip scale toward further easing, though still no indications yet if the BoJ will convene for an extraordinary policy meeting.
*Rio Tinto Limited (RIO) and BHP Billiton Limited (BHP):
It would be easy to see Jean-Sebastien Jacques as the fresh new French face of the same $140 billion mining machine that is Rio Tinto. Certainly a shift from the theatreloving, milk jug-collecting Sam Walsh to the champagneloving, opera buff Jacques (or ‘‘JS’’ as he is known throughout the mining world) suggests a degree of continuity. And Jacques has worked hard to stress that we shouldn’t expect big changes to Rio’s current austerity drive, which is centred around keeping the balance sheet strong, keeping costs as low as possible and giving shareholders back as much as possible. But the question remains: If Walsh was the safe pair of hands brought in to right the Rio ship as it sailed into the commodities downturn, what will define Jacques’ time in the top seat? Will it be an even tighter focus on costs? A switch to counter-cyclical growth? A move to offload or restructure some of the arms of the Rio empire that aren’t delivering? Day one is, of course, far too early for answers. But two things are certain. Jacques will be given time to work out his grand vision for Rio, and in the meantime he’s going to drive the miner hard – perhaps harder than it has been for decades.
*Australia and New Zealand Banking Group (ANZ):
Boutique Flagstaff Partners is in pole position to secure a sell-side mandate for ANZ Banking Group’s online broking unit, sources told Street Talk. This column understands Melbourne-based Flagstaff has embarked on preliminary work for the sale of the now rebranded E*TRADE Australia. Flagstaff is chaired by former ANZ chairman Charles Goode and run by banker Tony Burgess. The unit is expected to be the first asset cut loose from a broader divestment drive within the local operations under chief executive Shayne Elliott, who took the helm in January. Street Talk revealed in April that E*TRADE would be rebadged ANZ Share Investing after a licence agreement with US-listed E*TRADE Financial came to an end. This column also foreshadowed the division would be offloaded by the bank. An ANZ spokesman declined to comment. ASX-listed Bell Financial Group has already expressed interest in buying ANZ’s online broking operations, according to sources.
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