*PBoC continues to get credit for lack of yuan spillover; FX reserves better：
Big concern coming out of unexpected Brexit vote was that it could trigger yuan weakness and renew speculation about the need for a meaningful depreciation. However, while yuan has slumped 1.6% over past two weeks to lowest level since November 2010, no signs of the usual contagion for global risk assets. PBoC’s revamped communications strategy continues to get credit for the lack of spillover effects. Central bank has repeatedly stressed factors such as gradualism and stability. Bloomberg had latest article discussing this dynamic. Also pointed out options market putting just a 15.5% probability of yuan falling to 7.0 per dollar by December, down from 30% in January. Separately, FX reserves surprised to upside, rising $20B to $3.21T. Consensus was $3.17T.
*Mixed day for sectors; defensives underperform:
Sector performance mixed. Defensives largely underperformed, with utilities and telecom under pressure. Both sectors in overbought territory. REITs also weak, but financials helped by another rebound in banks. Precious metals under pressure, though materials beat with strength in chemicals. CC-US bounced after big selloff yesterday on litigation news. Consumer staples in line. Food consolidation in focus with BN-FR buying WWAV-US. PEP-US also beat and raised. Energy hit by big reversal in crude following DOE data. Healthcare another underperformer. Big story was in managed care with selloff in HUM-US on antitrust concerns. Industrials outperformed with rebound in airlines. Tech firmer with HDD and semi strength. Positive preannouncements from WDCUS and SIMO-US some tailwinds. Media helped drive consumer discretionary outperformance. VIAB-US helped by John Malone comments stock undervalued.
*Humana/Aetna merger under scrutiny:
HUM-US shares sharply lower after reports that company and prospective acquirer AET-US scheduled to meet with top-level DoJ officials regarding merger proposal. Unconfirmed headlines suggest Justice Department has “significant concerns” about the merger. Recall that one of regulators’ prime concerns about competition regards Medicare Advantage market, with the combined organization to be the largest seller of those plans. AET has argued that competition should be considered broadly, noting it competes not just with other providers, but with Medicare. AET has also reportedly signaled willingness to divest assets worth several billion dollars to mitigate overlap with HUM. Latest DoJ scrutiny comes two weeks after department met with CI-US and ANTM-US regarding their tie-up proposal, suggesting that deal probably can’t be fixed through asset sales.
*ADP private payrolls, initial claims better:
ADP private payrolls increased 172K in June following a downwardly revised 168K gain in May (was +173K). Better than 160K consensus. April growth also revised down to 149K from 166K. Highlighted slower pace of job creation since start of 2016, flagging headwinds from lackluster global growth, low commodity prices and stronger dollar. Also noted added pressure on large multinationals from Brexit vote. However, pointed out job growth remains healthy overall. Separately, initial claims fell to 254K in w/e 2-Jul from upwardly revised 270K (was 268K). Below 270K consensus and just above 248K multi-decade low in mid-April. Note claims can be volatile around holiday periods, while five states estimated their levels. Reports may be on backburner ahead of payrolls tomorrow. Street looking for a 180K increase in nonfarm payrolls following the disappointing 38K gain in May.
*Oil hit after inventory report:
Crude oil sold off today, with WTI settling down 4.8% and Brent settling down 4.9%. Move downward came after the morning's DOE inventory report showing a weaker-than-expected drawdown. Government said crude stockpiles fell 2.2M barrels in the latest week, below the consensus estimate for a 2.5M decline and last night's API report showing a 6.7M draw. However, it was the seventh straight weekly decline. Gasoline stockpiles were also down a less-than-expected 120K after a 3.9M build last week. Distillates down 1.6M barrels after last week's 1.8M draw. Cushing inventories fell 80K to 64.1M barrels. Lower 48 production continued its trend lower, dropping 38K bpd to 8.088M. Refinery utilization down 0.5% to 92.5%, while crude imports were up 808K bpd.
*Seven UK property funds have now suspended redemptions:
Seven UK property funds have now suspended redemptions. These funds represent £18B of the £24B invested in openended property funds. The latest fund to suspend redemptions, Aberdeen, also cut the value of the fund by 17%. The gatings have been driven by a wave of redemptions amid concerns about the headwinds facing the commercial property sector from the Brexit vote and accompanying sterling depreciation. Some have compared the latest developments to the gating and liquidation of two Bear Stearns hedge funds in the summer of 2007 that exposed the problems in the housing market that later manifested in the financial crisis. However, others, including FCA chief Andrew Bailey, have focused on the structural design problems of the funds, which offer daily liquidity on an asset base that takes much longer to be monetized.
*Italy, European Commission still at odds over bank rescue plan:
Troubled Italian banking sector remains one of the biggest areas of concern from a post-Brexit contagion perspective. Bloomberg discussed some of the latest developments, noting talks between Italy and European Commission to recapitalize banks stuck on whether creditors should face losses. While new rules require shareholders and junior creditors to take losses before public money can be used (ie bailed in), Italy is concerned about the hit to retail investors. According to the article, Italy is pushing for a precautionary recapitalization under the EU rules that that allow governments to help banks when capital shortfalls emerge in stress tests. It has argued that no bail-in would be necessary under the premise that the rules do not force burden sharing over hypothetical losses. However, European Commission interprets rules differently.
*Not enough bonds:
Continued collapse in global bond yields has been one of the biggest stories following UK’s unexpected vote to leave the UK. Move driven by heightened political and economic uncertainty, expectations for more policy support from likes of BoJ and ECB, and a shallower Fed tightening cycle. WSJ also discussed scarcity dynamic, even in the $13.4T Treasury market. Noted buying spree by central banks is reducing availability of government debt and exacerbating bidding wars that erupt when investors get nervous. Pointed out that Fed owns nearly 20% of all Treasuries outstanding, BoE owns about 25% of UK government debt, BoJ has purchased more than 33% of JGBs, and ECB owns ~15% Germany’s sovereign debt. Noted some fund managers with more flexibility moving out risk curve to get paper.
*Danone in $12.5B deal to acquire WhiteWave Foods:
More consolidation headlines surrounding food space as Danone (BN-FR) confirmed plans to acquire WhiteWave Foods (WWAVUS) for $56.25 a share in cash in a deal with an EV of $12.5B. Represents a ~24% premium to WhiteWave’s 30-day average closing price. Deal expected to close by end of year and increase Danone’s North American footprint from 12% to 22% of total portfolio. Danone expects $300M of synergies (75% cost and 25% revenue) by 2020, which represents 8% of WhiteWave’s 2015 revenue base. WhiteWave, which was spun out from Dean Foods (DF-US) in 2013, long speculated as a likely takeover candidate given its outsized growth from exposure to natural/organic food and beverage categories. This dynamic has fueled talk company could see other bids.
*Abe adviser calls for ¥20T fiscal stimulus:
While there has not been a specific driver of the surprising post-Brexit vote resilience in global markets, some credit has gone to speculation about more aggressive fiscal policy support. Calls for fiscal policy to do more have also been underpinned by continued concerns that central bankers are running out of ammunition and in some cases, pushing on a string. Japan has been a particular area of focus with recent talk of a ¥10T+ stimulus package, up from earlier reports of a package in the ¥5T and ¥10T range. However, Satoshi Fujii, and adviser to Prime Minister Abe, told Bloomberg Wednesday the government should add ¥20T in fiscal stimulus this year to achieve 2% inflation in F17. He also estimate a total of ¥37T is needed to wipe out deflation.
*BoJ's Kuroda says to keep NIRP for as long as necessary:
No indication of change in stance from BoJ, in spite of deteriorating inflation data and heightened expectations of additional easing to address Brexit fallout. In opening address at BoJ branch managers' meeting, Governor Kuroda largely repeated previous policy meeting statement. Reaffirmed NIRP will continue for as long as necessary to reach 2% price stability target in a stable manner. Also reiterated central bank will continue to assess risk factors pertaining to the economy and prices, and will expand easing through quantity, quality and rates if necessary. Said core CPI is declining moderately and, going forward, is expected to be slightly negative to zero for the time being, though underlying trend is improving. Policy rhetoric remains quiet after regular meetings between government and BoJ in the few days following UK referendum.
*S&P's lowers Australia's AAA outlook to 'negative' from 'stable':
Revision to Australia’s outlook not surprising given agencies had previous flagged concerns around credible fiscal repair plan. S&P’s gave one-in-three chance of AAA cut in next two years if parliament fails to legislate savings or generate sufficient revenue. Gave 6- 12 month timeframe to assess this outcome, adding it could also downgrade with any further weakening of Australia’s external position (including its current account and terms of trade). Believed without more forceful fiscal repair, material government budget deficits may persist for several years and become incompatible with high level of foreign debt. S&P’s also pessimistic about revenue outlook, projecting iron ore price closer to $20t. At state government level, S&P anticipated fiscal deficits to re-widen in next couple of years as states boost infrastructure spending plans.
*Australia and New Zealand Banking Group (ANZ), Westpac Banking Corp Fully Paid Ord. Shrs (WBC), Westpac Banking Corp Fully Paid Ord. Shrs (WBC) and National Australia Bank Ltd. (NAB):
In the early days of the election campaign it was Labor’s push for a royal commission into the banking sector that looked like the biggest political threat to Australia’s financial institutions. Now, just days after Saturday’s poll has failed to deliver a clear winner, a downgrade to the major banks’ prized credit rating has become the industry’s most worrying issue to emerge out of the messy election result. ANZ Banking Group, Westpac, Commonwealth Bank and National Australia Bank have been caught up in the threat to Australia’s prized AAA credit rating after Standard & Poor’s downgraded their outlook from stable to negative. It is a slap in the face for the majors, which are part of an elite global banking club with an AA-rating, and it is the first challenge to their ratings in decades. Despite their relatively robust position, Standard & Poor’s downgraded the major banks’ outlook from stable to negative because their ratings reflect the ability of the Australian government to support them when things go belly up, as they did in the global financial crisis. While the downgrade does not directly affect earnings, it potentially drives up their wholesale funding costs. Banks raise almost a third of their funding by issuing bonds in wholesale markets. They could raise equity to protect their rating but that would be challenging given the majors have already been down that road to help fund higher capital requirements. The news came just hours after the downgrade to Australia’s sovereign AAA credit rating outlook earlier in the day but after the market closed. Shares in all the majors, except NAB, closed in positive territory but off their highs earlier in the day.
Big concern coming out of unexpected Brexit vote was that it could trigger yuan weakness and renew speculation about the need for a meaningful depreciation. However, while yuan has slumped 1.6% over past two weeks to lowest level since November 2010, no signs of the usual contagion for global risk assets. PBoC’s revamped communications strategy continues to get credit for the lack of spillover effects. Central bank has repeatedly stressed factors such as gradualism and stability. Bloomberg had latest article discussing this dynamic. Also pointed out options market putting just a 15.5% probability of yuan falling to 7.0 per dollar by December, down from 30% in January. Separately, FX reserves surprised to upside, rising $20B to $3.21T. Consensus was $3.17T.
*Mixed day for sectors; defensives underperform:
Sector performance mixed. Defensives largely underperformed, with utilities and telecom under pressure. Both sectors in overbought territory. REITs also weak, but financials helped by another rebound in banks. Precious metals under pressure, though materials beat with strength in chemicals. CC-US bounced after big selloff yesterday on litigation news. Consumer staples in line. Food consolidation in focus with BN-FR buying WWAV-US. PEP-US also beat and raised. Energy hit by big reversal in crude following DOE data. Healthcare another underperformer. Big story was in managed care with selloff in HUM-US on antitrust concerns. Industrials outperformed with rebound in airlines. Tech firmer with HDD and semi strength. Positive preannouncements from WDCUS and SIMO-US some tailwinds. Media helped drive consumer discretionary outperformance. VIAB-US helped by John Malone comments stock undervalued.
*Humana/Aetna merger under scrutiny:
HUM-US shares sharply lower after reports that company and prospective acquirer AET-US scheduled to meet with top-level DoJ officials regarding merger proposal. Unconfirmed headlines suggest Justice Department has “significant concerns” about the merger. Recall that one of regulators’ prime concerns about competition regards Medicare Advantage market, with the combined organization to be the largest seller of those plans. AET has argued that competition should be considered broadly, noting it competes not just with other providers, but with Medicare. AET has also reportedly signaled willingness to divest assets worth several billion dollars to mitigate overlap with HUM. Latest DoJ scrutiny comes two weeks after department met with CI-US and ANTM-US regarding their tie-up proposal, suggesting that deal probably can’t be fixed through asset sales.
*ADP private payrolls, initial claims better:
ADP private payrolls increased 172K in June following a downwardly revised 168K gain in May (was +173K). Better than 160K consensus. April growth also revised down to 149K from 166K. Highlighted slower pace of job creation since start of 2016, flagging headwinds from lackluster global growth, low commodity prices and stronger dollar. Also noted added pressure on large multinationals from Brexit vote. However, pointed out job growth remains healthy overall. Separately, initial claims fell to 254K in w/e 2-Jul from upwardly revised 270K (was 268K). Below 270K consensus and just above 248K multi-decade low in mid-April. Note claims can be volatile around holiday periods, while five states estimated their levels. Reports may be on backburner ahead of payrolls tomorrow. Street looking for a 180K increase in nonfarm payrolls following the disappointing 38K gain in May.
*Oil hit after inventory report:
Crude oil sold off today, with WTI settling down 4.8% and Brent settling down 4.9%. Move downward came after the morning's DOE inventory report showing a weaker-than-expected drawdown. Government said crude stockpiles fell 2.2M barrels in the latest week, below the consensus estimate for a 2.5M decline and last night's API report showing a 6.7M draw. However, it was the seventh straight weekly decline. Gasoline stockpiles were also down a less-than-expected 120K after a 3.9M build last week. Distillates down 1.6M barrels after last week's 1.8M draw. Cushing inventories fell 80K to 64.1M barrels. Lower 48 production continued its trend lower, dropping 38K bpd to 8.088M. Refinery utilization down 0.5% to 92.5%, while crude imports were up 808K bpd.
*Seven UK property funds have now suspended redemptions:
Seven UK property funds have now suspended redemptions. These funds represent £18B of the £24B invested in openended property funds. The latest fund to suspend redemptions, Aberdeen, also cut the value of the fund by 17%. The gatings have been driven by a wave of redemptions amid concerns about the headwinds facing the commercial property sector from the Brexit vote and accompanying sterling depreciation. Some have compared the latest developments to the gating and liquidation of two Bear Stearns hedge funds in the summer of 2007 that exposed the problems in the housing market that later manifested in the financial crisis. However, others, including FCA chief Andrew Bailey, have focused on the structural design problems of the funds, which offer daily liquidity on an asset base that takes much longer to be monetized.
*Italy, European Commission still at odds over bank rescue plan:
Troubled Italian banking sector remains one of the biggest areas of concern from a post-Brexit contagion perspective. Bloomberg discussed some of the latest developments, noting talks between Italy and European Commission to recapitalize banks stuck on whether creditors should face losses. While new rules require shareholders and junior creditors to take losses before public money can be used (ie bailed in), Italy is concerned about the hit to retail investors. According to the article, Italy is pushing for a precautionary recapitalization under the EU rules that that allow governments to help banks when capital shortfalls emerge in stress tests. It has argued that no bail-in would be necessary under the premise that the rules do not force burden sharing over hypothetical losses. However, European Commission interprets rules differently.
*Not enough bonds:
Continued collapse in global bond yields has been one of the biggest stories following UK’s unexpected vote to leave the UK. Move driven by heightened political and economic uncertainty, expectations for more policy support from likes of BoJ and ECB, and a shallower Fed tightening cycle. WSJ also discussed scarcity dynamic, even in the $13.4T Treasury market. Noted buying spree by central banks is reducing availability of government debt and exacerbating bidding wars that erupt when investors get nervous. Pointed out that Fed owns nearly 20% of all Treasuries outstanding, BoE owns about 25% of UK government debt, BoJ has purchased more than 33% of JGBs, and ECB owns ~15% Germany’s sovereign debt. Noted some fund managers with more flexibility moving out risk curve to get paper.
*Danone in $12.5B deal to acquire WhiteWave Foods:
More consolidation headlines surrounding food space as Danone (BN-FR) confirmed plans to acquire WhiteWave Foods (WWAVUS) for $56.25 a share in cash in a deal with an EV of $12.5B. Represents a ~24% premium to WhiteWave’s 30-day average closing price. Deal expected to close by end of year and increase Danone’s North American footprint from 12% to 22% of total portfolio. Danone expects $300M of synergies (75% cost and 25% revenue) by 2020, which represents 8% of WhiteWave’s 2015 revenue base. WhiteWave, which was spun out from Dean Foods (DF-US) in 2013, long speculated as a likely takeover candidate given its outsized growth from exposure to natural/organic food and beverage categories. This dynamic has fueled talk company could see other bids.
*Abe adviser calls for ¥20T fiscal stimulus:
While there has not been a specific driver of the surprising post-Brexit vote resilience in global markets, some credit has gone to speculation about more aggressive fiscal policy support. Calls for fiscal policy to do more have also been underpinned by continued concerns that central bankers are running out of ammunition and in some cases, pushing on a string. Japan has been a particular area of focus with recent talk of a ¥10T+ stimulus package, up from earlier reports of a package in the ¥5T and ¥10T range. However, Satoshi Fujii, and adviser to Prime Minister Abe, told Bloomberg Wednesday the government should add ¥20T in fiscal stimulus this year to achieve 2% inflation in F17. He also estimate a total of ¥37T is needed to wipe out deflation.
*BoJ's Kuroda says to keep NIRP for as long as necessary:
No indication of change in stance from BoJ, in spite of deteriorating inflation data and heightened expectations of additional easing to address Brexit fallout. In opening address at BoJ branch managers' meeting, Governor Kuroda largely repeated previous policy meeting statement. Reaffirmed NIRP will continue for as long as necessary to reach 2% price stability target in a stable manner. Also reiterated central bank will continue to assess risk factors pertaining to the economy and prices, and will expand easing through quantity, quality and rates if necessary. Said core CPI is declining moderately and, going forward, is expected to be slightly negative to zero for the time being, though underlying trend is improving. Policy rhetoric remains quiet after regular meetings between government and BoJ in the few days following UK referendum.
*S&P's lowers Australia's AAA outlook to 'negative' from 'stable':
Revision to Australia’s outlook not surprising given agencies had previous flagged concerns around credible fiscal repair plan. S&P’s gave one-in-three chance of AAA cut in next two years if parliament fails to legislate savings or generate sufficient revenue. Gave 6- 12 month timeframe to assess this outcome, adding it could also downgrade with any further weakening of Australia’s external position (including its current account and terms of trade). Believed without more forceful fiscal repair, material government budget deficits may persist for several years and become incompatible with high level of foreign debt. S&P’s also pessimistic about revenue outlook, projecting iron ore price closer to $20t. At state government level, S&P anticipated fiscal deficits to re-widen in next couple of years as states boost infrastructure spending plans.
*Australia and New Zealand Banking Group (ANZ), Westpac Banking Corp Fully Paid Ord. Shrs (WBC), Westpac Banking Corp Fully Paid Ord. Shrs (WBC) and National Australia Bank Ltd. (NAB):
In the early days of the election campaign it was Labor’s push for a royal commission into the banking sector that looked like the biggest political threat to Australia’s financial institutions. Now, just days after Saturday’s poll has failed to deliver a clear winner, a downgrade to the major banks’ prized credit rating has become the industry’s most worrying issue to emerge out of the messy election result. ANZ Banking Group, Westpac, Commonwealth Bank and National Australia Bank have been caught up in the threat to Australia’s prized AAA credit rating after Standard & Poor’s downgraded their outlook from stable to negative. It is a slap in the face for the majors, which are part of an elite global banking club with an AA-rating, and it is the first challenge to their ratings in decades. Despite their relatively robust position, Standard & Poor’s downgraded the major banks’ outlook from stable to negative because their ratings reflect the ability of the Australian government to support them when things go belly up, as they did in the global financial crisis. While the downgrade does not directly affect earnings, it potentially drives up their wholesale funding costs. Banks raise almost a third of their funding by issuing bonds in wholesale markets. They could raise equity to protect their rating but that would be challenging given the majors have already been down that road to help fund higher capital requirements. The news came just hours after the downgrade to Australia’s sovereign AAA credit rating outlook earlier in the day but after the market closed. Shares in all the majors, except NAB, closed in positive territory but off their highs earlier in the day.
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