World

Financial Insights(2016-07-12)

Australia
2016-07-12 10:18

Already collect

*Chinese consumer inflation slows in June:
 
Chinese consumer inflation softened in June. CPI growth fell to 1.9% y/y from 2.0% in May. Consensus was 1.8%. PPI deflation narrowed to 2.6% from 2.8%, the smallest decline since late 2014. Consensus was 2.6%. Food price inflation fell to 4.6% from 5.9%, driving the overall decline in CPI growth. No real surprise given officials had flagged pork price pressures likely to subside. Non-food inflation rose to 1.2% from May’s 1.1%. Press reports and sell-side takeaways highlighted potential for near-term upside in CPI due to recent flooding. Also the usual suggestions officials will respond with further policy support. No surprise there as NDRC researchers said late last week another interest rate cut may be needed in 2H.
 
*Cyclicals outperform most defensives:
 
Cylicals largely outperformed defensives, underpinned by combination of dampened growth fears and lack of a meaningful accompanying reset in policy normalization expectations. Semis provided upside leadership for tech. Some positive sellside commentary helped. Activismalso in focus with ValueAct stake in ADS-US. Good day for industrials with airlines and machinery the standouts.Industrial metals the tailwind for materials. Iron ore andcopper plays outperformed. Retail mostly higher inconsumer discretionary despite continued discounting concerns. Gaming names WYNNUS and LVS-US rallied on Macau comments out of Telsey Advisory Group. Bankbounce helped financials. Earnings concerns already widely hashed out. Utilities and telecom lagged with rate backup and overbought conditions. More scrutiny onmanaged care M&A (HUM-US and CI-US both weak) the drag on healthcare.
 
*Big win in upper house election for Abe’s LDP; fiscal stimulus talk ramps up:
 
Ruling coalition won landslide victory in Japan's upper house election Sunday. LDP secured 56 out of the 121 contested seats, while coalition partner Komeito won 14 seats. With help of some opposition parties, Prime Minister Abe now has two-thirds majority required to amend constitution. Abe has long advocated a change to the US-drafted pacifist constitution imposed after World War II. However, this remains a longer term goal with Asahi poll showing split public support. However, Abe said near-term focus on fiscal stimulus. Noted that he will instruct ministers tomorrow to begin compiling stimulus package, though did not provide any color on size. Some press reports in recent weeks have highlighted upside risk to widely speculated ¥10T package, though funding remains an issue.
 
*Theresa May to become next UK prime minister; lawyers say parliament should decide whether Britain leaves EU:
 
Another busy day of Brexit headlines. In terms of politics, Theresa May to become next prime minister on Wednesday after Andrea Leadsom pulled out of the race. On the other side of the aisle, opposition Labour MP Angela Eagle launched bid to take over leadership of party from Jeremy Corbyn, who was recently hit with no-confidence motion. Logistics still a big area of uncertainty.Reuters noted more than 1K British letters wrote in a letter to David Cameron that Brexit vote was advisory, meaning that parliament should decide whether Britain leaves the EU. Added lawmakers should have free vote in parliament before any British leader triggers Article 50 of the Lisbon treaty.
 
*Earnings season kicks off this week:
 
This week marks unofficial start of Q2 earnings season. Earnings recession theme in the headlines. According to latest Earnings Insight report from FactSet, Street looking for S&P 500 EPS to decline 5.6% y/y in Q2, marking first time index has seen five straight quarters of contraction since Q3 2008 through Q3 2009. However, nothing really incremental in recent press or sell-side commentary. Usual headwinds such as commodity price weakness, dollar strength and low rates continue to get most of the attention. Some thoughts directional takeaways for market from earnings may come down to outlook commentary surrounding Brexit. However, also unlikely companies will be able to provide much additional color at this point given the multiple layers of uncertainty that are unlikely to be resolved anytime soon.
 
*What’s next for US equities?:
 
Some discussion in weekend press about what’s next for US equities. Valuation a key area of focus. WSJ said that while there are widespread concerns that stocks are overpriced and due for a pullback, they may actually have more room to run when using valuation methods that include depressed bond yields. Also highlighted thoughts that low yields reflect easy global monetary policy as much as perceptions about economy. In addition, pointed out 2.2% dividend yield on S&P 500 well ahead of yield on 10-year Treasury note that is below 1.4%. However,Barron’s said that while equity risk premium of 4.6%, near highest level in 15 years, provides some comfort stocks, investors should not become complacent. Noted equity risk premium can go even higher. Pointed out when yields are low, risk premium is usually high.
 
*Deutsche Bank chief economist calls for €150B bailout of European banks:
 
European banks remain in the spotlight. Deutsche Bank’s chief economist David Folkerts-Landau suggested to Welt am Sonntag that injection of fresh capital required to help save banks. Pegged amount needed to recapitalize at €150B. Said Europe needs to address existing problems very quickly or face an accident. Pointed out that Italian banks seemed particularly problematic, though does not expect a second crisis like in 2008. Over the weekend, Italian press covered developments over rescue plans for the country’s banking sector. Bulk of the focus continued to revolve around Monte Paschi (BMPS-IT) and whether the Atlante bank fund will assist in reducing its NPLs. Il Sole24Ore suggested state lender CDP and Treasury investment vehicle SGA could contribute another €500M each as original bank contributors don’t want to add more cash.
 
*UK regulators consider emergency measures for property funds:
 
More headlines surrounding UK property funds following last week’s announcements regarding redemption halts. The Telegraph said regulators considering a raft of emergency measures to stem flood of outflows from UK property funds. Without citing sources, article claimed BoE considering introduction of enforced notice periods before redemptions, slashing price for investors who rush for the exits, and additional liquidity requirements for funds. Redemption halts drew some comparisons to gating and liquidation of two Bear Stearns hedge funds in the summer of 2007 that helped expose the problems in the housing market. However, bigger issue revolves around structural design problems of the funds, which offer daily liquidity against an asset base that takes much longer to be monetized.
 
*Japan core machinery orders weak:
 
Japan core machinery orders (private sector, excluding orders for ships and from electric power companies) fell 1.4% m/m in May following an 11% contraction in April. Much worse than consensus expectations for a 3.2% gain. In terms of details, orders from manufacturing sector fell 6.4% m/m following the 13.3% decline in April. Orders from non-manufacturing sector fell 0.3% following the 3.9% decline in April. Barclays noted Cabinet Office revised down its assessment for first time in nine months. Noted orders are stalling after maintaining since last October that “recovery movements” can be seen. Nomura said May values indicative of weak outlook for capex. Noted risks stemming from uncertainty over slowdown in emerging economies and yen’s appreciation since the start of 2016.
 
*Humana/Aetna deal faces “uphill battle”:
 
M&A headlines have been fairly resilient in wake of Brexit vote. However, one area of concern has been the regulatory scrutiny surrounding proposed consolidation in managed care space. Biggest worry has revolved around proposed $48B acquisition of CIUS by ANTM-US. Reports have noted that Justice Department is skeptical that its concerns could be addressed through concessions offered by the companies. WSJ said proposed $34B acquisition of HUM-US by AET-US also faces an uphill battle. Noted concerns seem to focus on how deal could reduce competitors in market for private Medicare coverage. Combined entity would be largest seller of Medicare Advantage plans. Companies met with government officials on Friday to highlight public benefits of the deal and argue concerns could be addressed through asset sales.
 
*Goldman Sachs believes positioning driven post-Brexit rally in equities likely to fade:
 
Goldman Sachs said in its latest Global Opportunity Asset Locator report that market is increasingly treating Brexit as a negative local growth shock, but a positive global rate shock, which will drive easier monetary policy. Added more intense search for yield and lack of positioning causing investors to take more risk, helping risky assets recover large part of their drawdown. However, firm still believes equities are stick in a “fat and flat” range with little return potential, but potential for drawdowns. Believes positioning-driven recovery in equities post Brexit likely to fade. Highlighted elevated valuations, lack of growth, political uncertainty and risks from financials. Also noted that while global equity risk premium close to new highs, indicating attractive relative valuations, this partly reflects increased global policy uncertainty.
 
*Australia and New Zealand Banking Group (ANZ), National Australia Bank Ltd (NAB), Wesfarmers Ltd (WES) & Westpac Banking Corp (WBC):
 
Ask any shareholder of one of the banks involved in the bank bill swap rates (BBSW) court case being brought by the Australian Securities and Investments Commission and they would sensibly urge a quick settlement. Rapid settlement would protect shareholders from years and years of litigation costs. More importantly, it would protect the shareholders from the possibility that judgement against the banks would trigger other legal actions seeking compensation and damages costing hundreds of millions of dollars. Shareholders can think what they like about the wisdom of settlement. But the decision is in the hands of management at ANZ Banking Group, National Australia Bank and Westpac Banking Corp. The managers at these institutions have a vested interest in protecting their reputations and those of their staff. They do not want to meet ASIC’s demands and admit they were guilty of unconscionable conduct, which occurs when one party knowingly exploits the special disadvantage of another.
Add comments

Latest comments

Latest News
News Most Viewed