*Inconclusive outcome from Australian election:
ASX volatile early Monday after inconclusive Australian election on Saturday. Swing against ruling Coalition party significantly reduced its lower house majority and increased likelihood of a minority government. Tracking by the Australian had Labor Party leading 67 seats to Coalitions’ 65, with latter expected to fall just short of 76 required for majority. Voting set to resume Tuesday but outcome may not be known for weeks. Fallout centered on ensuing uncertainty where reform hopes appear remote with Senate composition to include greater influence of minor parties. Ratings agencies have previously flagged issues with Australia’s deficit, though Moody's reaffirmed AAA rating today. RBA still expected to hold on Tuesday though any impact to consumer and business sentiment from vote seen increasing calls for an August cut, which remains consensus market expectation.
*Stronger recapitalization of Chinese banks needed:
Stronger recapitalization of Chinese banks needed amid buildup in SOE debt. Bloomberg found nine of 15 respondents expect government-funded recapitalization will take place within two years, and may cost more than $500B. Eighty percent argued rescue will weigh on Chinese markets, with story noting NPLs jumped over 40% y/y in March to CNY1.4T. Separate FT article cited study by Chinese academics showing nation’s private sector credit at 35% of assets in 2015 compared to 53% for SOEs. Piece noted SOE investment surged in H1 2016 even as official data showed their profits fell 10% y/y in first five months of 2016. Highlighting difficulties SMEs face in obtaining credit, academics noted they pay interest of up 20% for shadow loans and 60% of such firms relied on informal credit market.
*New economy measurement issues underestimating China's GDP:
Amid skepticism China’s growth being inflated, there are thoughts GDP may actually be understated. China Securities Journal highlighted speech by NBS Deputy Director Xu Xianchun, who announced new methodology being planned to assess economic contribution from new sectors, like biotech and online retail. Xu argued GDP underestimated due to emergence of new economy, pointing out free services by IT firms also contributed to growth. Recall China’s Q1 GDP growth of 6.7% y/y was in line with consensus, but generated skepticism over accuracy given weakness in activity indicators like Caixin PM (in contraction since early 2015). Some analysts have argued the Li Keqiang Index, calculated based on electricity production, railway freight traffic and real loan growth, signals growth closer to 6%.
*Italy's bank recapitalization plan would breach EU rules:
The FT said that Italian PM Renzi is planning to act unilaterally to pump billions of euros into its banking system it if comes under severe systemic distress after several ideas on intervention were rebuffed. The article cited one person familiar with government thinking, who said Rome would only act as a last resort, but European officials are concerned because any Italian action would carry high risks. Article noted that Brussels and Berlin have warned Rome over the need to respect rules and there are fears that if Italy acted alone it could open up a battle over the legality of state support for banks, undermining the bloc's banking union framework. Issue is likely to remain a source of focus ahead of Italy's constitutional referendum in October. Recall that Renzi has pledged to step down if he does not win.
*More policymakers flag support to counter Brexit drag:
More policymakers signal readiness to counter drag from Brexit. Speaking to FT, UK Chancellor George Osborne flags potential cut in corporate tax rate from 20% to below 15%. Piece added rate could be even brought closer towards Ireland’s 12.5%, something which would raise EU’s ire. Osborne also outlined focus on investment from China, ensuring support for bank lending, and maintaining UK’s fiscal credibility. FT noted prior to Brexit Osborne threatened £30B in emergency taxes or spending cuts, however he was now awaiting official forecasts before announcing new measures in Autumn Statement. Separate WSJ article cited ECB’s Coeure, who said at weekend conference that the central bank had instruments to deal with fallout from Brexit, before adding it was too early to decide whether action was needed.
*Legal bid gets underway to stop Brexit without parliamentary approval:
The Telegraph noted that law firm Mishcon de Reya is taking legal steps on behalf of an anonymous group of clients to ensure that Article 50 is not triggered with an Act of Parliament. Said lawyers have been in touch with the government to seek assurances over the process and plan to pursue it through the courts if they are not satisfied. Crux of the issue revolves around the fact that the referendum itself is not legally binding and is an instruction to the government to act. UK PM Cameron and other Conservative leadership hopefuls have highlighted the importance of acting on behalf of the will of the people. However, the majority of MPs in Westminster are firmly in favor of continued EU membership and may complicate voting for an Act of Parliament. Former PM Tony Blair wants UK to leave options open on future EU membership.
*Germany wants to push out European Commission President Juncker:
Weekend UK press reports said that German Chancellor Merkel favors pushing out European Commission President Juncker amid frustrations over his actions since the UK voted to leave the EU. The London Times said Juncker's "gloating" over Britain's EU departure, his decision to meet Scottish first minister Sturgeon and television remarks over Northern Ireland were seen as unnecessarily provocative. Article said two leading German newspapers have called on him to resign. TheTelegraph said the split could offer hope to British negotiators, who wanted to avoid a repeat of February's failed negotiations on EU reforms. Added there is a determination that the negotiations are handled by 27 heads of EU governments rather than the Commission. Note that Germany, France and Italy have said negotiations cannot begin until Article 50 is triggered.
*National Australia Bank Ltd (NAB):
National Australia Bank and its subsidiary MLC have moved a step closer to finalising more than 60,000 square metres of new leases across Australia. In Brisbane NAB signed an agreement to move to Investa Commercial Property Fund’s 259 Queen Street tower – formerly occupied by the Bank of Queensland – where it will take about 4000 square metres. An official announcement on that deal is expected within days. In Sydney, the bank is closing in on two major contracts. There has been speculation that its MLC business in North Sydney might move to DEXUS Property Group and Laing O’Rourke’s 100 Mount Street development. However, that is unlikely and the MLC business looks set to stay as a tenant in Investa’s 105 Miller Street tower.
ASX volatile early Monday after inconclusive Australian election on Saturday. Swing against ruling Coalition party significantly reduced its lower house majority and increased likelihood of a minority government. Tracking by the Australian had Labor Party leading 67 seats to Coalitions’ 65, with latter expected to fall just short of 76 required for majority. Voting set to resume Tuesday but outcome may not be known for weeks. Fallout centered on ensuing uncertainty where reform hopes appear remote with Senate composition to include greater influence of minor parties. Ratings agencies have previously flagged issues with Australia’s deficit, though Moody's reaffirmed AAA rating today. RBA still expected to hold on Tuesday though any impact to consumer and business sentiment from vote seen increasing calls for an August cut, which remains consensus market expectation.
*Stronger recapitalization of Chinese banks needed:
Stronger recapitalization of Chinese banks needed amid buildup in SOE debt. Bloomberg found nine of 15 respondents expect government-funded recapitalization will take place within two years, and may cost more than $500B. Eighty percent argued rescue will weigh on Chinese markets, with story noting NPLs jumped over 40% y/y in March to CNY1.4T. Separate FT article cited study by Chinese academics showing nation’s private sector credit at 35% of assets in 2015 compared to 53% for SOEs. Piece noted SOE investment surged in H1 2016 even as official data showed their profits fell 10% y/y in first five months of 2016. Highlighting difficulties SMEs face in obtaining credit, academics noted they pay interest of up 20% for shadow loans and 60% of such firms relied on informal credit market.
*New economy measurement issues underestimating China's GDP:
Amid skepticism China’s growth being inflated, there are thoughts GDP may actually be understated. China Securities Journal highlighted speech by NBS Deputy Director Xu Xianchun, who announced new methodology being planned to assess economic contribution from new sectors, like biotech and online retail. Xu argued GDP underestimated due to emergence of new economy, pointing out free services by IT firms also contributed to growth. Recall China’s Q1 GDP growth of 6.7% y/y was in line with consensus, but generated skepticism over accuracy given weakness in activity indicators like Caixin PM (in contraction since early 2015). Some analysts have argued the Li Keqiang Index, calculated based on electricity production, railway freight traffic and real loan growth, signals growth closer to 6%.
*Italy's bank recapitalization plan would breach EU rules:
The FT said that Italian PM Renzi is planning to act unilaterally to pump billions of euros into its banking system it if comes under severe systemic distress after several ideas on intervention were rebuffed. The article cited one person familiar with government thinking, who said Rome would only act as a last resort, but European officials are concerned because any Italian action would carry high risks. Article noted that Brussels and Berlin have warned Rome over the need to respect rules and there are fears that if Italy acted alone it could open up a battle over the legality of state support for banks, undermining the bloc's banking union framework. Issue is likely to remain a source of focus ahead of Italy's constitutional referendum in October. Recall that Renzi has pledged to step down if he does not win.
*More policymakers flag support to counter Brexit drag:
More policymakers signal readiness to counter drag from Brexit. Speaking to FT, UK Chancellor George Osborne flags potential cut in corporate tax rate from 20% to below 15%. Piece added rate could be even brought closer towards Ireland’s 12.5%, something which would raise EU’s ire. Osborne also outlined focus on investment from China, ensuring support for bank lending, and maintaining UK’s fiscal credibility. FT noted prior to Brexit Osborne threatened £30B in emergency taxes or spending cuts, however he was now awaiting official forecasts before announcing new measures in Autumn Statement. Separate WSJ article cited ECB’s Coeure, who said at weekend conference that the central bank had instruments to deal with fallout from Brexit, before adding it was too early to decide whether action was needed.
*Legal bid gets underway to stop Brexit without parliamentary approval:
The Telegraph noted that law firm Mishcon de Reya is taking legal steps on behalf of an anonymous group of clients to ensure that Article 50 is not triggered with an Act of Parliament. Said lawyers have been in touch with the government to seek assurances over the process and plan to pursue it through the courts if they are not satisfied. Crux of the issue revolves around the fact that the referendum itself is not legally binding and is an instruction to the government to act. UK PM Cameron and other Conservative leadership hopefuls have highlighted the importance of acting on behalf of the will of the people. However, the majority of MPs in Westminster are firmly in favor of continued EU membership and may complicate voting for an Act of Parliament. Former PM Tony Blair wants UK to leave options open on future EU membership.
*Germany wants to push out European Commission President Juncker:
Weekend UK press reports said that German Chancellor Merkel favors pushing out European Commission President Juncker amid frustrations over his actions since the UK voted to leave the EU. The London Times said Juncker's "gloating" over Britain's EU departure, his decision to meet Scottish first minister Sturgeon and television remarks over Northern Ireland were seen as unnecessarily provocative. Article said two leading German newspapers have called on him to resign. TheTelegraph said the split could offer hope to British negotiators, who wanted to avoid a repeat of February's failed negotiations on EU reforms. Added there is a determination that the negotiations are handled by 27 heads of EU governments rather than the Commission. Note that Germany, France and Italy have said negotiations cannot begin until Article 50 is triggered.
*National Australia Bank Ltd (NAB):
National Australia Bank and its subsidiary MLC have moved a step closer to finalising more than 60,000 square metres of new leases across Australia. In Brisbane NAB signed an agreement to move to Investa Commercial Property Fund’s 259 Queen Street tower – formerly occupied by the Bank of Queensland – where it will take about 4000 square metres. An official announcement on that deal is expected within days. In Sydney, the bank is closing in on two major contracts. There has been speculation that its MLC business in North Sydney might move to DEXUS Property Group and Laing O’Rourke’s 100 Mount Street development. However, that is unlikely and the MLC business looks set to stay as a tenant in Investa’s 105 Miller Street tower.
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