*Yuan continues to decline; Beijing backing away from intervention?:
Yuan down for a fifth straight week. Chinese currency has weakened ~2% against the dollar over that period. Some focus today on a front-page Securities Times commentary noting increase in June FX reserves despite continued yuan depreciation a sign PBoC has stopped regular intervention. Big theme surrounding recent yuan weakness has been lack of spillover effects for global risk assets with credit going to improved communications from PBoC, better transparency surrounding fixing mechanism, market confidence that any depreciation will be gradual, tighter restrictions on capital flows and a narrower onshore-offshore spread. However, Telegraph’s Ambrose Evans-Pritchard discussed today how China has abandoned pledge to keep yuan stable and carrying out systematic devaluation that threatens to unleash a powerful deflationary shock.
*NDRC says China may have to cut rates; PBoC queries on MLF demand:
China’s National Development and Reform Commission believes an interest rate cut cannot be ruled out. Reuters, citing an article in Shanghai Securities News, reported NDRC researchers argue a rate cut remains a possibility should Q2 economic data fall short of expectations. Researchers said reserve requirement ratio for banks likely to remain stable due to sufficient liquidity. Note Chinese Q2 GDP and other activity data is due for release on 15-Jul. PBoC often states monetary policy will remain prudent while it has previously sought to dial back expectations of a firm easing bias. China Securities Journal recently said PBoC may rely more on OMOs to ensure sufficient liquidity. Separate Reuters piece today noted PBoC queried some banks on their demand for medium term lending facility (MLF) loans.
*Large risk of Chinese bond defaults in H2:
More scrutiny on tail risks from China’s excessive corporate leverage. Front-page China Securities Journalcommentary warned large risk of defaults in H2 may cause serious economic damage. Piece cited WIND data showing CNY5.3T of non-financial company debt is due to mature in 2016, up 35% from 2015. Moreover CNY1.41T and CNY1.35T of debt is due to mature in Q3 and Q4 respectively. Also pointed out amount of AA or lower-rated debt due to mature this year was at a record high. According to WIND, ~CNY470B of debt was refinanced in Q2, representing only 33% of amount refinanced in Q1. Piece noted defaults spreading from state-owned firms to private enterprises. Said solvency being threatened by deteriorating profits and cash flow, and wasn’t optimistic these trends will reverse soon.
*Materials, industrials sectors led market higher:
Materials outperformed, industrial metals led. CF-US a standout of the chemicals on an upgrade; CC-US better on a smaller-than-expected punitive judgment against DD-US. Industrials outperformed, with transports up big. HA-US a standout among the airlines after it raised Q2 RASM guidance and lowered midpoint of CASM guidance. Gun manufacturers RGR-US and SWHC-US rallied on Dallas shooting. Financials stronger today. Banks up almost 2%. Front-end Treasuries weaker in reaction to strong jobs report. CMA-US upgraded at Wells Fargo. Retail andhomebuilders drove upside in consumer discretionary.GPS-US comps beat expectations. Tech beating the tape n broad-based strength. Semis caught a bid as a cyclical play. Healthcare capped by biotech. Scrutiny surrounding cellular therapies in focus as JUNO-US sold off after FDA halted phase 2 study of JCAR015 for certain leukemias following patient deaths. Defensive sectors lagged, but still higher.
*June payrolls surprise to the upside:
Nonfarm payrolls increased 287K in June, well ahead of consensus expectations for a 180K gain. (biggest beat since December 2009). However, May growth revised down to 11K from originally reported 38K. Unemployment rate increased to 4.9% from 4.7%, ahead of the 4.7% consensus. Note labor force participation rate ticked up to 62.7% from 62.6%. Average hourly earnings disappointed, increasing 0.1% m/m and 2.6% y/y vs expectations for a 0.2% m/m and 2.7% y/y gain. Average workweek in line at 34.4 hours. Heading into report, some thoughts takeaways could be complicated by lingering post-Brexit vote uncertainty, heightened Fed uncertainty, perceived complacency surrounding policy normalization expectations and outsized external influences on risk sentiment and rates.
*No major reset in Fed policy normalization expectations:
Big beat in June payrolls has not had a meaningful impact on policy normalization expectations. Reuters article pointed out Fed funds futures now see a 24% chance of a rate hike, up from 19% before the report, while probability of a tightening by June 2017 moved up to 35% from 27%. Several factors seem to be at work. Biggest issue seems to the economic, financial and political uncertainty from the Brexit vote, which has yet to be reflected in the data. Fed also worried about other external issues, including China. In addition, despite the outsized strength in June, employment growth trend continues to slow. MKM Partners noted six-month moving average has fallen to 172K from the 260K level in late 2014/early 2015. Structural headwinds on neutral rate another major complication for policy normalization.
*Flight to quality, reach for yield:
Flight to quality and reach for yield continue to be big themes highlighted by flow data. Latest Flow Show report from BofA Merrill Lynch noted precious metals funds attracted $4.1B, largest inflows on record. Emerging market debt funds attracted $3.4B, also the largest inflows on record. HY bond inflows of $2.8B were biggest in 16 weeks. Treasuries saw their largest inflows in 24 weeks, while total bond inflows of $14.4B were largest since February 2015. While it did not quantify inflows, report also pointed out REITs, utility and staples stocks have all just hit record highs At the other end of the spectrum, $4.4B left European equities, marking a 22 nd straight week of outflows. UK equity funds lost $1.1B, the most since January 2015. Financials continued to be shunned amid the depressed rate backdrop. Sector saw largest outflows in 21 weeks.
*UK consumer sentiment deteriorates after Brexit vote:
Attention on more timely UK economic updates since the Brexit vote. GfK consumer confidence carried out a special post-referendum survey showing consumer confidence fell to -9 from -1 in its previous regular monthly survey. Said it was the lowest level since December 2013 and the biggest fall since December 1994. Accountancy firm BDO's latest UK high street sales tracker also fell 3.6% y/y last month in the worst June reading in ten years. Latest survey from the Employment Confederation showed the number of permanent staff hired via recruitment firms fell for the first time since September 2012. Today's updates followed yesterday's GDP growth estimates from think tank NIESR. Showed a 0.6% increase in three months to end of June. However, it warned data was distorted by a strong April number. Said all sectors except for agriculture and services fell in June.
*ECB officials say use of public money to help Italian banks should be considered:
Italy and EU still at odds over bank rescue plan. While Renzi government wants to use public funds to recapitalize banking sector, EU not backing down from its new rules requiring bail-in of private creditors, which in the case of Italy, would harm retail investors. However, a couple of ECB officials have hinted at the need for flexibility. ECB Vice President Constacio said in a speech on Thursday that given the decline in stock prices following Brexit vote, there needs to be a “deep reflection about the offsetting of some market failures with small public support to markedly improve the stability of some banking sectors”. In addition, ECB member Visco, who is also head of Bank of Italy, noted current situation “full of risks” for financial stability and public money to help banks cannot be ruled out.
*Monte Paschi rescue package tentative, but no panacea for Italian banking sector outlook:
Sole24Ore reported Monte Paschi (BMPS-IT) is planning a quick €10B sale of NPLs in next two weeks, which could· involve the Atlante bank fund or a new bank fund. JPMorgan said package likely to involve more than doubling Atlante's NPL buying capacity to ~€5B, followed by precautionary capital injection of €3-5B into BMPS.IM using flexibility provided by the resolution framework. Noted while measures likely to be welcomed, they would be a short-term fix and Italian financial system would remain vulnerable until asset quality issue is dealt with. Added without a more systemic solution involving larger markdowns and recaps, asset quality likely to weigh on share performance with downside also to expectations on top line from the low rate environment. Firm remains cautious on Italian lenders.
*More concerns about post-Brexit global outlook:
Financial leaders continue to voice concern about post-Brexit outlook. Speaking to FT, IMF Managing Director Lagarde said unlikely fund will upgrade its global growth forecast of 3.2% due to uncertainty unleashed by Brexit. Added assessment of Brexit’s impact on UK depended on a Norway-type deal that would leave economy only 1.5% worse off by 2019. However, a deal that instead led to UK being subjected to WTO-type tariffs would detract growth by 4.5%. Lagarde also warned of impact of protectionist policies. Separate WSJ piece cited former BoE Governor King, who argued global imbalances need to be addressed via changes in real exchange rates and fundamental economic overhauls. Also flagged possibility of Eurozone breakup, arguing that its survival hinged on forging a tighter political union.
*Benefits of weak sterling may be offset by policy vacuum:
Reuters discussed impact on UK exporters from weaker sterling. Highlighted that manufacturing only accounts for 10% of UK output, but employ 2.7M people and create ~45% of country's exports, half of which went to the EU last year. Against this backdrop, article noted benefits of a weaker currency for exports. However, it also pointed out that for some manufacturers weaker currency drives up costs of raw inputs. It also touched on anecdotal reports of firms not engaging in investment or trade due to lack of clarity from future trade relationship with EU. Meanwhile, other recent reports have highlighted that in 2008 when sterling fell sharply lack of global demand dampened appetite for exports. Some thoughts also that consumers and producers often respond slowly to changes in exchange rates. Foreign exporters may also defend market share offsetting potential benefits to UK exporters.
*Japan nominal wages unexpectedly post first decline in 11 months:
May nominal wages fell 0.2% y/y, well short of consensus 0.5% rise and follows 0.0% in April. Reflected broadly based deceleration in both regular and overtime payments. Real wage growth slowed to 0.2% from 0.4% in April. Underlying driver was hours worked, which posted declines in both regular and overtime shifts. Outcome reinforces doubts about policy effectiveness as recent reports highlighted lack of results from three years of massive monetary stimulus in stoking inflation. Abenomics being widely criticized as 3% wage growth target proving elusive. Keidanren's final report on Spring wage negotiations showed FY16 average pay raises were 2.27% marking first pare-back in four years. Follows 17-year high 2.52% growth in FY15.
*Australia and New Zealand Banking Group (ANZ) & Lendlease Group (LLC):
Property giant Lendlease is in negotiations with ANZ Bank over a massive tenancy requirement that would spur the development of a $300 million commercial tower in Melbourne’s Docklands. The progress of talks between the two listed companies has prompted industry speculation that a deal may not be far off, although both players are keeping a tight lid on the proposal. The development involves a new campus-style building on 839 Collins Street, a plot of land adjacent to ANZ’s corporate headquarters in Docklands. The global construction and development heavyweight is also the dominant developer along that strip of the Collins Street extension into Docklands, an area known as Victoria Harbour. Four years ago the developer won approval for a 21-level tower at 839 Collins Street. The site, known as Y3 in Lendlease’s Docklands development pipeline, is almost 4000 square metres. The approval was for a building with 39,000 sq m of office space. Last year a prospective anchor tenant for the building emerged with News Corp’s Herald & Weekly Times. ANZ was subsequently touted as a potential resident as well.
Yuan down for a fifth straight week. Chinese currency has weakened ~2% against the dollar over that period. Some focus today on a front-page Securities Times commentary noting increase in June FX reserves despite continued yuan depreciation a sign PBoC has stopped regular intervention. Big theme surrounding recent yuan weakness has been lack of spillover effects for global risk assets with credit going to improved communications from PBoC, better transparency surrounding fixing mechanism, market confidence that any depreciation will be gradual, tighter restrictions on capital flows and a narrower onshore-offshore spread. However, Telegraph’s Ambrose Evans-Pritchard discussed today how China has abandoned pledge to keep yuan stable and carrying out systematic devaluation that threatens to unleash a powerful deflationary shock.
*NDRC says China may have to cut rates; PBoC queries on MLF demand:
China’s National Development and Reform Commission believes an interest rate cut cannot be ruled out. Reuters, citing an article in Shanghai Securities News, reported NDRC researchers argue a rate cut remains a possibility should Q2 economic data fall short of expectations. Researchers said reserve requirement ratio for banks likely to remain stable due to sufficient liquidity. Note Chinese Q2 GDP and other activity data is due for release on 15-Jul. PBoC often states monetary policy will remain prudent while it has previously sought to dial back expectations of a firm easing bias. China Securities Journal recently said PBoC may rely more on OMOs to ensure sufficient liquidity. Separate Reuters piece today noted PBoC queried some banks on their demand for medium term lending facility (MLF) loans.
*Large risk of Chinese bond defaults in H2:
More scrutiny on tail risks from China’s excessive corporate leverage. Front-page China Securities Journalcommentary warned large risk of defaults in H2 may cause serious economic damage. Piece cited WIND data showing CNY5.3T of non-financial company debt is due to mature in 2016, up 35% from 2015. Moreover CNY1.41T and CNY1.35T of debt is due to mature in Q3 and Q4 respectively. Also pointed out amount of AA or lower-rated debt due to mature this year was at a record high. According to WIND, ~CNY470B of debt was refinanced in Q2, representing only 33% of amount refinanced in Q1. Piece noted defaults spreading from state-owned firms to private enterprises. Said solvency being threatened by deteriorating profits and cash flow, and wasn’t optimistic these trends will reverse soon.
*Materials, industrials sectors led market higher:
Materials outperformed, industrial metals led. CF-US a standout of the chemicals on an upgrade; CC-US better on a smaller-than-expected punitive judgment against DD-US. Industrials outperformed, with transports up big. HA-US a standout among the airlines after it raised Q2 RASM guidance and lowered midpoint of CASM guidance. Gun manufacturers RGR-US and SWHC-US rallied on Dallas shooting. Financials stronger today. Banks up almost 2%. Front-end Treasuries weaker in reaction to strong jobs report. CMA-US upgraded at Wells Fargo. Retail andhomebuilders drove upside in consumer discretionary.GPS-US comps beat expectations. Tech beating the tape n broad-based strength. Semis caught a bid as a cyclical play. Healthcare capped by biotech. Scrutiny surrounding cellular therapies in focus as JUNO-US sold off after FDA halted phase 2 study of JCAR015 for certain leukemias following patient deaths. Defensive sectors lagged, but still higher.
*June payrolls surprise to the upside:
Nonfarm payrolls increased 287K in June, well ahead of consensus expectations for a 180K gain. (biggest beat since December 2009). However, May growth revised down to 11K from originally reported 38K. Unemployment rate increased to 4.9% from 4.7%, ahead of the 4.7% consensus. Note labor force participation rate ticked up to 62.7% from 62.6%. Average hourly earnings disappointed, increasing 0.1% m/m and 2.6% y/y vs expectations for a 0.2% m/m and 2.7% y/y gain. Average workweek in line at 34.4 hours. Heading into report, some thoughts takeaways could be complicated by lingering post-Brexit vote uncertainty, heightened Fed uncertainty, perceived complacency surrounding policy normalization expectations and outsized external influences on risk sentiment and rates.
*No major reset in Fed policy normalization expectations:
Big beat in June payrolls has not had a meaningful impact on policy normalization expectations. Reuters article pointed out Fed funds futures now see a 24% chance of a rate hike, up from 19% before the report, while probability of a tightening by June 2017 moved up to 35% from 27%. Several factors seem to be at work. Biggest issue seems to the economic, financial and political uncertainty from the Brexit vote, which has yet to be reflected in the data. Fed also worried about other external issues, including China. In addition, despite the outsized strength in June, employment growth trend continues to slow. MKM Partners noted six-month moving average has fallen to 172K from the 260K level in late 2014/early 2015. Structural headwinds on neutral rate another major complication for policy normalization.
*Flight to quality, reach for yield:
Flight to quality and reach for yield continue to be big themes highlighted by flow data. Latest Flow Show report from BofA Merrill Lynch noted precious metals funds attracted $4.1B, largest inflows on record. Emerging market debt funds attracted $3.4B, also the largest inflows on record. HY bond inflows of $2.8B were biggest in 16 weeks. Treasuries saw their largest inflows in 24 weeks, while total bond inflows of $14.4B were largest since February 2015. While it did not quantify inflows, report also pointed out REITs, utility and staples stocks have all just hit record highs At the other end of the spectrum, $4.4B left European equities, marking a 22 nd straight week of outflows. UK equity funds lost $1.1B, the most since January 2015. Financials continued to be shunned amid the depressed rate backdrop. Sector saw largest outflows in 21 weeks.
*UK consumer sentiment deteriorates after Brexit vote:
Attention on more timely UK economic updates since the Brexit vote. GfK consumer confidence carried out a special post-referendum survey showing consumer confidence fell to -9 from -1 in its previous regular monthly survey. Said it was the lowest level since December 2013 and the biggest fall since December 1994. Accountancy firm BDO's latest UK high street sales tracker also fell 3.6% y/y last month in the worst June reading in ten years. Latest survey from the Employment Confederation showed the number of permanent staff hired via recruitment firms fell for the first time since September 2012. Today's updates followed yesterday's GDP growth estimates from think tank NIESR. Showed a 0.6% increase in three months to end of June. However, it warned data was distorted by a strong April number. Said all sectors except for agriculture and services fell in June.
*ECB officials say use of public money to help Italian banks should be considered:
Italy and EU still at odds over bank rescue plan. While Renzi government wants to use public funds to recapitalize banking sector, EU not backing down from its new rules requiring bail-in of private creditors, which in the case of Italy, would harm retail investors. However, a couple of ECB officials have hinted at the need for flexibility. ECB Vice President Constacio said in a speech on Thursday that given the decline in stock prices following Brexit vote, there needs to be a “deep reflection about the offsetting of some market failures with small public support to markedly improve the stability of some banking sectors”. In addition, ECB member Visco, who is also head of Bank of Italy, noted current situation “full of risks” for financial stability and public money to help banks cannot be ruled out.
*Monte Paschi rescue package tentative, but no panacea for Italian banking sector outlook:
Sole24Ore reported Monte Paschi (BMPS-IT) is planning a quick €10B sale of NPLs in next two weeks, which could· involve the Atlante bank fund or a new bank fund. JPMorgan said package likely to involve more than doubling Atlante's NPL buying capacity to ~€5B, followed by precautionary capital injection of €3-5B into BMPS.IM using flexibility provided by the resolution framework. Noted while measures likely to be welcomed, they would be a short-term fix and Italian financial system would remain vulnerable until asset quality issue is dealt with. Added without a more systemic solution involving larger markdowns and recaps, asset quality likely to weigh on share performance with downside also to expectations on top line from the low rate environment. Firm remains cautious on Italian lenders.
*More concerns about post-Brexit global outlook:
Financial leaders continue to voice concern about post-Brexit outlook. Speaking to FT, IMF Managing Director Lagarde said unlikely fund will upgrade its global growth forecast of 3.2% due to uncertainty unleashed by Brexit. Added assessment of Brexit’s impact on UK depended on a Norway-type deal that would leave economy only 1.5% worse off by 2019. However, a deal that instead led to UK being subjected to WTO-type tariffs would detract growth by 4.5%. Lagarde also warned of impact of protectionist policies. Separate WSJ piece cited former BoE Governor King, who argued global imbalances need to be addressed via changes in real exchange rates and fundamental economic overhauls. Also flagged possibility of Eurozone breakup, arguing that its survival hinged on forging a tighter political union.
*Benefits of weak sterling may be offset by policy vacuum:
Reuters discussed impact on UK exporters from weaker sterling. Highlighted that manufacturing only accounts for 10% of UK output, but employ 2.7M people and create ~45% of country's exports, half of which went to the EU last year. Against this backdrop, article noted benefits of a weaker currency for exports. However, it also pointed out that for some manufacturers weaker currency drives up costs of raw inputs. It also touched on anecdotal reports of firms not engaging in investment or trade due to lack of clarity from future trade relationship with EU. Meanwhile, other recent reports have highlighted that in 2008 when sterling fell sharply lack of global demand dampened appetite for exports. Some thoughts also that consumers and producers often respond slowly to changes in exchange rates. Foreign exporters may also defend market share offsetting potential benefits to UK exporters.
*Japan nominal wages unexpectedly post first decline in 11 months:
May nominal wages fell 0.2% y/y, well short of consensus 0.5% rise and follows 0.0% in April. Reflected broadly based deceleration in both regular and overtime payments. Real wage growth slowed to 0.2% from 0.4% in April. Underlying driver was hours worked, which posted declines in both regular and overtime shifts. Outcome reinforces doubts about policy effectiveness as recent reports highlighted lack of results from three years of massive monetary stimulus in stoking inflation. Abenomics being widely criticized as 3% wage growth target proving elusive. Keidanren's final report on Spring wage negotiations showed FY16 average pay raises were 2.27% marking first pare-back in four years. Follows 17-year high 2.52% growth in FY15.
*Australia and New Zealand Banking Group (ANZ) & Lendlease Group (LLC):
Property giant Lendlease is in negotiations with ANZ Bank over a massive tenancy requirement that would spur the development of a $300 million commercial tower in Melbourne’s Docklands. The progress of talks between the two listed companies has prompted industry speculation that a deal may not be far off, although both players are keeping a tight lid on the proposal. The development involves a new campus-style building on 839 Collins Street, a plot of land adjacent to ANZ’s corporate headquarters in Docklands. The global construction and development heavyweight is also the dominant developer along that strip of the Collins Street extension into Docklands, an area known as Victoria Harbour. Four years ago the developer won approval for a 21-level tower at 839 Collins Street. The site, known as Y3 in Lendlease’s Docklands development pipeline, is almost 4000 square metres. The approval was for a building with 39,000 sq m of office space. Last year a prospective anchor tenant for the building emerged with News Corp’s Herald & Weekly Times. ANZ was subsequently touted as a potential resident as well.
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