*SOE reform, policy support dominate China headlines:
China stocks outperformed Tuesday. SOE reform hopes cited as a tailwind. President Xi talked about boosting competitiveness and efficiency of SOEs. Premier Li also said more should be done to advance structural adjustment and innovation necessary to let SOEs play a leading role in supply side reforms. China Securities Journal commentary also highlighted potential for further PBoC policy fine tuning in 2H. Argued constraints on monetary policy have been lifted amid persistent downward economic pressures. Suggested PBoC may make greater use of medium-term lending facility, reverse repos, and targeted RRR cuts. Recall PBoC recently said it will employ such tools to keep liquidity ample. It has also previously vowed to maintain prudent monetary policy; not too lose and not too tight.
*“All clear” signal may be premature:
Magnitude of last week’s bounce attracted lots of skepticism, particularly given accompanying outperformance of safe-haven and defensive plays. Valuation headwinds flagged by several firms. JPMorgan (quant strategist Marko Kolanovic) said equity markets face elevated risks going forward. Maintained view market has not seen highs of VIX due to Brexit and related risks such as an increase of market realized volatility, the upcoming earnings season and geopolitical consequences, including a shift in US election polls. .A few firms also pointed out last week there is significant room for short interest to ramp higher. Another big concern revolved around limited firepower of the world’s leading central banks. In addition, multiple layers of Brexit uncertainty unlikely to be resolved anytime soon.
*Cyclicals weak, defensives outperform:
Cyclicals weak with some renewed traction behind risk-off theme. Energy worst performer with biggest oil selloff since February. Materials came under broad-based pressure outside of the precious metals group. Financials weak as rates remained the big headwind for banks. Continued to overshadow stronger balance sheets. Industrials a slight laggard. Machinery came under outsized pressure. A few airlines weak, including DAL-US following its update. Consumer discretionary weighed down by apparel/accessories and autos. June vehicle sales out last Friday disappointed. HOGUS gave back some of Friday’s takeover speculation rally. Tech largely in line. Semis weak with some cautious sell-side and press commentary on iPhone supply chain. SWKS-US and CRUS-US downgraded. Utilities and consumer staplesonly sectors to finish higher. REITs rallied.
*Italian banking sector in the crosshairs:
Troubled Italian banking sector attracting outsized attention. FT reported Monday that after being rebuffed by Brussels and Germany on several intervention ideas, Italian Prime Minister Renzi willing to act unilaterally and pump ~€40B into banking sector if it comes under severe systemic stress. Amid an already meaningfully charged political atmosphere following Brexit vote, such a move would defy new EU banking rules that require that shareholders and junior creditors first be bailed-in before public funds can be used. Other big piece of news Monday was disclosure by Banca Monte dei Paschi of notice from ECB requiring it to meet certain NPL requirements. Separately, WSJ pointed out 17% of Italian bank loans bad, nearly 10x level in US, where even at worst of financial crisis, it was only 5%.
*Standard Life, Aviva and M&G suspend trading in UK property funds：
Fund manager SL-GB suspended trading to stop retail investors selling out of its £2.9B commercial property fund, the third largest UK open-ended property fund for retail investors. Fund will need to sell real estate in order to raise cash before any money can be redeemed. Decision will be reviewed every 28 days. Note AV-GB and M&G subsequently suspended trading in their property funds as well. FT said last property crash in 2007 was preceded by a wave of similar decisions by funds struggling to meet investor demands for cash, which led to property sales that added pressure to an already falling market. News follows yesterday's weakest construction PMI since June 2009 at 46.0, which added pressure on London home construction stocks and real estate names.
*Oil under pressure:
Oil under pressure today. Both WTI and Brent down over 4% and back below their 50-day moving averages. Several dynamics in play, including broader risk-off theme following surprising post-Brexit resilience in global risk assets last week. Reported Genscape comments about a 230K build in Cushing stockpiles flagged as another high-profile headwind. Some mixed headlines elsewhere. Vitol CEO said he does not see a big move higher in crude over next year and half. Noted lot of supply in the system that will take time to work off. While ceasefire between Niger Delta Avengers and government was quickly broken, Bloomberg OPEC survey showed group's production rose by 240K bpd in June to 32.88M as Nigerian output increased following infrastructure repairs. In addition, Norway managed to avoid a strike.
*BoE cuts counter-cyclical capital buffer for UK banks:
BoE cut counter-cyclical capital buffer for banks to zero from 0.5% with the release of its Financial Stability Report. Said decision will lower capital buffers by £7.5B, increasing banks' lending capacity by £150B. Move, which was not a surprise, marks first easing of policy by BoE since Brexit vote. Report highlighted that prolonged uncertainty could impact Eurozone and global economies. Sees risks of decline in capital inflows, which would see further downward pressure on sterling if persistent. Added it is ready to take further action if needed to support the financial system. Advised banks not to increase dividends and other distributions in current environment. However, did note that bank funding costs lower than previous period of sharp share price falls.
*Uncertainty the big takeaway for European companies following Brexit vote:
Uncertainty continues to be the big post-Brexit vote theme.WSJ discussed the fallout for European companies. Noted exit and timing so uncertain, few companies had any meaningful contingency plans to either cushion the fallout or take advantage of the opportunity. Pointed out that nearly 70% of German firms surveyed by Federation of German Industries (BDI) ahead of the vote said they did not know how they would react to a decision by Britain to leave the EU. Added that in the short term, Brexit uncertainty has paralyzed planning and investment in boardrooms across Europe. Also pointed out companies unable to provide investors any color (while not mentioned in article, this should be a big theme during earnings season). Highlighted outsized pain for airline sector.
*Earnings recession lingers on:
Earnings recession theme in the headlines as Q2 earnings season gets underway in next couple of weeks. Recent FT article discussed this dynamic. Highlighted usual headwinds such as commodity (particularly energy) weakness, stronger dollar and low interest rate environment (banks). According to latest Earnings Insightreport from FactSet, S&P 500 earnings expected to decline 5.3% y/y in Q2. Would mark first time index has recorded five consecutive quarters of y/y declines in earnings since Q3 2008 through Q3 2009. Over course of Q2, bottom-up S&P 500 estimate dropped by 2.6% to $28.65 from $29.43. Compares to average decline of 4.7% over last four quarters (also less severe than five- and ten-year average declines of 4.4% and 5.5%).
*Eurozone services PMI better, UK worse:
Some mixed takeaways from June services PMIs out of Europe. Eurozone reading fell to 52.8 from 54.4 in May, however was above the flash reading of 52.4, which was also the consensus. Germany, Italy and Spain all surprised to upside, while France was in line (and remained in slight contraction). In UK, services PMI fell to 52.3 in June from 53.5 in May. Below 52.8 consensus. Note Markit said 89% of responses came in before Brexit vote. In terms of highlights, slowest employment growth since August 2013 and weakest reading expectations component since December 2012. Markit also pointed out PMU surveys indicate pace of UK economic growth slowed to just 0.2% in Q2, with further loss of momentum in June as Brexit anxiety intensified. Added further slowing and possible contraction highly likely in coming months.
*Britain may not trigger Article 50 until September 2017:
Handelsblatt cited people close to the European Commission, who said Britain is not expected to trigger Article 50 until September 2017 at the earliest, following German and French elections. Follows recent reports noting that law firm Mishcon de Reya is taking legal steps on behalf of an anonymous group of clients to ensure Article 50 is not triggered without an Act of Parliament. Note, 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 carrying out the democratic will of the people. However, the majority of MPs in Westminster are firmly in favor of continued EU membership. Meanwhile, other reports note that UK has not negotiated a complex trade deal since 1973 and only has 20 negotiators compared with 600 specialists in Brussels.
*RBA leaves cash rate unchanged at 1.75%, as expected:
Few surprises in policy statement. Key focus was on forward guidance with RBA highlighting importance of upcoming data in refining its growth and inflation outlook, and whether any policy adjustment may be required. Reference was on Q2 CPI, due for release on 27-Jul. RBA noted markets have continued to function effectively since Brexit despite initial volatility. Said any effects on global economy from Brexit remain to be seen and may be hard to discern outside of UK. Also pointed out domestic financial institutions are in a position to lend. Slight change in jobs assessment with RBA noting labour market indicators consistent with moderate (rather than continued) pace of expansion in near-term employment. Reiterated higher A$ could complicate economy’s adjustment and pointed to incoming apartment supply after noting appreciation in house prices.
*Barron’s says depressed financial sector could represent one of best values in market:
Some positive comments on beleaguered financial sector from Barron's, which it said could represent one of best values in the market. Highlighted cheap valuations in the banking group. Pointed out P/E of big banks is just 60% of S&P 500’s P/E, below historical average of 75%. Also noted depressed price/book ratios, with names like BAC-US, C-US, GSUS and MS-US all trading below tangible book. Discussed thoughts market focusing too much on lack of catalysts and earnings headwinds from low-rate backdrop, and not enough on balance sheet strength and capital returns. Added asset-management stocks like BLK-US, IVZ-US, BEN-US and TROW-US look inexpensive, as do the likes of AXPUS and USB-US.
*Commonwealth Bank of Australia (CBA):
Commonwealth Bank, the “gorilla” in the $1.5 trillion mortgage market, is starting to beat its chest after a period of shedding market share, placing pressure on rivals. In a briefing to Deutsche Bank’s traders on Friday, Westpac head of investor relations Andrew Bowden suggested its biggest rival, CBA, had recently become more competitive in the home loan market, according to a summary of the meeting. CBA is the nation’s biggest home loan lender with about $400 billion of the high-returning assets, followed by Westpac. “Andrew (Bowden) acknowledged that the mortgage market had changed because of various Australian Prudential Regulation Authority measures. However, it was still fairly rational,” Deutsche traders told clients.
China stocks outperformed Tuesday. SOE reform hopes cited as a tailwind. President Xi talked about boosting competitiveness and efficiency of SOEs. Premier Li also said more should be done to advance structural adjustment and innovation necessary to let SOEs play a leading role in supply side reforms. China Securities Journal commentary also highlighted potential for further PBoC policy fine tuning in 2H. Argued constraints on monetary policy have been lifted amid persistent downward economic pressures. Suggested PBoC may make greater use of medium-term lending facility, reverse repos, and targeted RRR cuts. Recall PBoC recently said it will employ such tools to keep liquidity ample. It has also previously vowed to maintain prudent monetary policy; not too lose and not too tight.
*“All clear” signal may be premature:
Magnitude of last week’s bounce attracted lots of skepticism, particularly given accompanying outperformance of safe-haven and defensive plays. Valuation headwinds flagged by several firms. JPMorgan (quant strategist Marko Kolanovic) said equity markets face elevated risks going forward. Maintained view market has not seen highs of VIX due to Brexit and related risks such as an increase of market realized volatility, the upcoming earnings season and geopolitical consequences, including a shift in US election polls. .A few firms also pointed out last week there is significant room for short interest to ramp higher. Another big concern revolved around limited firepower of the world’s leading central banks. In addition, multiple layers of Brexit uncertainty unlikely to be resolved anytime soon.
*Cyclicals weak, defensives outperform:
Cyclicals weak with some renewed traction behind risk-off theme. Energy worst performer with biggest oil selloff since February. Materials came under broad-based pressure outside of the precious metals group. Financials weak as rates remained the big headwind for banks. Continued to overshadow stronger balance sheets. Industrials a slight laggard. Machinery came under outsized pressure. A few airlines weak, including DAL-US following its update. Consumer discretionary weighed down by apparel/accessories and autos. June vehicle sales out last Friday disappointed. HOGUS gave back some of Friday’s takeover speculation rally. Tech largely in line. Semis weak with some cautious sell-side and press commentary on iPhone supply chain. SWKS-US and CRUS-US downgraded. Utilities and consumer staplesonly sectors to finish higher. REITs rallied.
*Italian banking sector in the crosshairs:
Troubled Italian banking sector attracting outsized attention. FT reported Monday that after being rebuffed by Brussels and Germany on several intervention ideas, Italian Prime Minister Renzi willing to act unilaterally and pump ~€40B into banking sector if it comes under severe systemic stress. Amid an already meaningfully charged political atmosphere following Brexit vote, such a move would defy new EU banking rules that require that shareholders and junior creditors first be bailed-in before public funds can be used. Other big piece of news Monday was disclosure by Banca Monte dei Paschi of notice from ECB requiring it to meet certain NPL requirements. Separately, WSJ pointed out 17% of Italian bank loans bad, nearly 10x level in US, where even at worst of financial crisis, it was only 5%.
*Standard Life, Aviva and M&G suspend trading in UK property funds：
Fund manager SL-GB suspended trading to stop retail investors selling out of its £2.9B commercial property fund, the third largest UK open-ended property fund for retail investors. Fund will need to sell real estate in order to raise cash before any money can be redeemed. Decision will be reviewed every 28 days. Note AV-GB and M&G subsequently suspended trading in their property funds as well. FT said last property crash in 2007 was preceded by a wave of similar decisions by funds struggling to meet investor demands for cash, which led to property sales that added pressure to an already falling market. News follows yesterday's weakest construction PMI since June 2009 at 46.0, which added pressure on London home construction stocks and real estate names.
*Oil under pressure:
Oil under pressure today. Both WTI and Brent down over 4% and back below their 50-day moving averages. Several dynamics in play, including broader risk-off theme following surprising post-Brexit resilience in global risk assets last week. Reported Genscape comments about a 230K build in Cushing stockpiles flagged as another high-profile headwind. Some mixed headlines elsewhere. Vitol CEO said he does not see a big move higher in crude over next year and half. Noted lot of supply in the system that will take time to work off. While ceasefire between Niger Delta Avengers and government was quickly broken, Bloomberg OPEC survey showed group's production rose by 240K bpd in June to 32.88M as Nigerian output increased following infrastructure repairs. In addition, Norway managed to avoid a strike.
*BoE cuts counter-cyclical capital buffer for UK banks:
BoE cut counter-cyclical capital buffer for banks to zero from 0.5% with the release of its Financial Stability Report. Said decision will lower capital buffers by £7.5B, increasing banks' lending capacity by £150B. Move, which was not a surprise, marks first easing of policy by BoE since Brexit vote. Report highlighted that prolonged uncertainty could impact Eurozone and global economies. Sees risks of decline in capital inflows, which would see further downward pressure on sterling if persistent. Added it is ready to take further action if needed to support the financial system. Advised banks not to increase dividends and other distributions in current environment. However, did note that bank funding costs lower than previous period of sharp share price falls.
*Uncertainty the big takeaway for European companies following Brexit vote:
Uncertainty continues to be the big post-Brexit vote theme.WSJ discussed the fallout for European companies. Noted exit and timing so uncertain, few companies had any meaningful contingency plans to either cushion the fallout or take advantage of the opportunity. Pointed out that nearly 70% of German firms surveyed by Federation of German Industries (BDI) ahead of the vote said they did not know how they would react to a decision by Britain to leave the EU. Added that in the short term, Brexit uncertainty has paralyzed planning and investment in boardrooms across Europe. Also pointed out companies unable to provide investors any color (while not mentioned in article, this should be a big theme during earnings season). Highlighted outsized pain for airline sector.
*Earnings recession lingers on:
Earnings recession theme in the headlines as Q2 earnings season gets underway in next couple of weeks. Recent FT article discussed this dynamic. Highlighted usual headwinds such as commodity (particularly energy) weakness, stronger dollar and low interest rate environment (banks). According to latest Earnings Insightreport from FactSet, S&P 500 earnings expected to decline 5.3% y/y in Q2. Would mark first time index has recorded five consecutive quarters of y/y declines in earnings since Q3 2008 through Q3 2009. Over course of Q2, bottom-up S&P 500 estimate dropped by 2.6% to $28.65 from $29.43. Compares to average decline of 4.7% over last four quarters (also less severe than five- and ten-year average declines of 4.4% and 5.5%).
*Eurozone services PMI better, UK worse:
Some mixed takeaways from June services PMIs out of Europe. Eurozone reading fell to 52.8 from 54.4 in May, however was above the flash reading of 52.4, which was also the consensus. Germany, Italy and Spain all surprised to upside, while France was in line (and remained in slight contraction). In UK, services PMI fell to 52.3 in June from 53.5 in May. Below 52.8 consensus. Note Markit said 89% of responses came in before Brexit vote. In terms of highlights, slowest employment growth since August 2013 and weakest reading expectations component since December 2012. Markit also pointed out PMU surveys indicate pace of UK economic growth slowed to just 0.2% in Q2, with further loss of momentum in June as Brexit anxiety intensified. Added further slowing and possible contraction highly likely in coming months.
*Britain may not trigger Article 50 until September 2017:
Handelsblatt cited people close to the European Commission, who said Britain is not expected to trigger Article 50 until September 2017 at the earliest, following German and French elections. Follows recent reports noting that law firm Mishcon de Reya is taking legal steps on behalf of an anonymous group of clients to ensure Article 50 is not triggered without an Act of Parliament. Note, 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 carrying out the democratic will of the people. However, the majority of MPs in Westminster are firmly in favor of continued EU membership. Meanwhile, other reports note that UK has not negotiated a complex trade deal since 1973 and only has 20 negotiators compared with 600 specialists in Brussels.
*RBA leaves cash rate unchanged at 1.75%, as expected:
Few surprises in policy statement. Key focus was on forward guidance with RBA highlighting importance of upcoming data in refining its growth and inflation outlook, and whether any policy adjustment may be required. Reference was on Q2 CPI, due for release on 27-Jul. RBA noted markets have continued to function effectively since Brexit despite initial volatility. Said any effects on global economy from Brexit remain to be seen and may be hard to discern outside of UK. Also pointed out domestic financial institutions are in a position to lend. Slight change in jobs assessment with RBA noting labour market indicators consistent with moderate (rather than continued) pace of expansion in near-term employment. Reiterated higher A$ could complicate economy’s adjustment and pointed to incoming apartment supply after noting appreciation in house prices.
*Barron’s says depressed financial sector could represent one of best values in market:
Some positive comments on beleaguered financial sector from Barron's, which it said could represent one of best values in the market. Highlighted cheap valuations in the banking group. Pointed out P/E of big banks is just 60% of S&P 500’s P/E, below historical average of 75%. Also noted depressed price/book ratios, with names like BAC-US, C-US, GSUS and MS-US all trading below tangible book. Discussed thoughts market focusing too much on lack of catalysts and earnings headwinds from low-rate backdrop, and not enough on balance sheet strength and capital returns. Added asset-management stocks like BLK-US, IVZ-US, BEN-US and TROW-US look inexpensive, as do the likes of AXPUS and USB-US.
*Commonwealth Bank of Australia (CBA):
Commonwealth Bank, the “gorilla” in the $1.5 trillion mortgage market, is starting to beat its chest after a period of shedding market share, placing pressure on rivals. In a briefing to Deutsche Bank’s traders on Friday, Westpac head of investor relations Andrew Bowden suggested its biggest rival, CBA, had recently become more competitive in the home loan market, according to a summary of the meeting. CBA is the nation’s biggest home loan lender with about $400 billion of the high-returning assets, followed by Westpac. “Andrew (Bowden) acknowledged that the mortgage market had changed because of various Australian Prudential Regulation Authority measures. However, it was still fairly rational,” Deutsche traders told clients.
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