*International tribunal says China has no legal claim bulk of South China Sea:
International tribunal in the Hague ruled in favor of Philippines, noting China’s claim to historic rights in most of the South China Sea has no legal basis. Added it contravenes a UN convention on maritime law. Also found that China not entitled to any Exclusive Economic Zones (EEZ), which provides a country with maritime rights to resources within 200 nautical miles of a specific land mass. China quickly responded by saying that it neither accepts nor recognizes the ruling. President Xi noted territorial sovereignty and marine rights will not be affected in any way. While ruling is legally binding, no mechanism to enforce it. Fairly widespread thoughts that ruling could exacerbate already elevated tension that has stemmed from China’s aggressive reclamation push.
*Why are stocks higher?:
Big tailwind for US equities on Tuesday continued to revolve around dampened growth fears coming out last week’s better June payrolls and ISM manufacturing and services data. Lack of meaningful accompanying reset in Fed policy normalization expectations another key positive. Valuation headwinds also seem to be dented by some focus on structurally low rates. Earnings recession theme widely understood, while attention has started to shift to expected 1H trough and thoughts negative analyst sentiment should make it easy for results to clear low bar. Longstanding cautious sentiment/positioning mentioned as a factor in keeping path of least resistance to upside. On macro front, Japan stimulus expectations continue to ramp, UK getting a new prime minister faster-than-expected, hope for a near-term solution for Italian banks, and still no spillover from weaker yuan.
*Cyclicals outperform defensives again:
Energy best performer with big rebound in crude. Some credit went to lower non-OPEC production forecast. Materials stronger with the rip in industrial metals on cyclical rotation. CLF-US helped by positive comments out ofJPMorgan. Financials another standout with help from another big backup in rates. More cautious articles on bank earnings, but nothing new. Tech stronger with positive preannouncement from STX-US. Better PC news another tailwind. However, IMPV-US negatively preannounced on longer sales cycles. Industrials beat tape. Airlines provided upside leadership with better UAL-US guidance and Deutsche Bank upgrades. Good day for machinery, but FASTUS under pressure in distributor group following its miss. Consumer discretionary lagged, though nothing really standing out. Defensives underperformed with better risk sentiment and worries about ove,rbought conditions. WMT-US downgrade a drag on consumer staples. REITs weaker. Utilities worst performer.
*More deal speculation than announcements:
Some interesting M&A headlines today, though more speculation than anything definitive. Multiple reports thatXRX-US is interested in an acquisition of RRD-US. However, talks said to still be at a fairly early stage and any deal would likelytake place after XRX completes previously announced separation. IMPV-US hit by a negative preannouncement, though Bloomberg added to yesterday’s Reuters report company was interviewing investment bankers for help in exploring strategic options. Noted it had retained Qatalyst following expressions of interest. Elsewhere in software, N-US a big gainer today on speculation that ORCL-US is looking acquire the company. Note WSJ said earlier this week that software M&A should pick up due to depressed valuations. Outside of tech, AMC-US agreed to acquire largest cinema group in Europe for ~$650M.
*Still no details on Japan’s fiscal stimulus package; Abe talks to Bernanke:
Expectations for additional policy support in Japan continue to get credit for strength in global risk assets and yen eakness. However, still no firm details on a stimulus package expected to total ¥10T+. Headlines today highlighted meeting between Japanese Prime Minister Abe and former Fed Chairman Bernanke. Top government spokesman said Bernanke told Abe BoJ still has tools available to support economy. Unaware of any talk of “helicopter money”, but did say monetary policy was discussed. Separately, seems to be some comfort that Abe is putting post-election focus on economy rather than changing constitution. Also keeping reform push in the headlines with proposals to shorten time individuals must contribute to national scheme (from 25 years to 10 years) to qualify for payouts.
*Bond market signals are distorted:
Big concern about post-Brexit resilience in risk assets is that it has been accompanied by a continued move lower in interest rates. However, there have also been thoughts that signaling effects from bonds may be distorted. NY Times (Upshot column) discussed this dynamic. Noted there are reasons to believe current bond prices reflecting idiosyncrasies of supply and demand for safe assets, rather than a conviction among global investors that things are going to get much worse. Highlighted inelasticity of the strong demand from institutions, along with pretty much fixed supply (no ramp in deficit spending to increase supply of bonds). Also pointed out that global nature of bond market has allowed US to import depressed rate environment from overseas.
*Italy aims to seal deal to safeguard banks by beginning of August:
Deal to safeguard Italian banks sector said to be in reach. Prime Minister Renzi said Monday agreement will comply with EU rules. Reuters also reported Italian Treasury looking to approve a state guarantee for bank NPLs by start of next month. Real-estate firm Prelios, PwC and JPMorgan all said to be advising unlisted lender Banca Popolare di Bari on sale of €500M NPL portfolio backed with state guarantees, as soon it is approved by Rome. Agreement expected in coming weeks and would potentially be first deal backed by the scheme. Elsewhere, Sole24Ore reported that foreign investors might be attracted to Italian banks NPLs if Rome can set up a new vehicle, financed by Italy's CDP and subsequently Atlante, that will allow them to invest in a ~€12B junior tranche.
*Incoming UK PM Theresa May to decide on new cabinet:
UK press digesting yesterday's news that Theresa May will become the new prime minister from Wednesday. Focus now on likely make-up of the new cabinet, which is expected to feature pro-Brexit MPs and those backing continued EU membership. Foreign Secretary Philip Hammond is tipped as new chancellor. Has a background of a fiscal hawk, though May has already flagged that government will abandon goal of a balanced budget by 2020. Additionally, government could feature a new Brexit minister, who will oversee the process of EU exit. Other contentious issues include whether Michael Gove and Boris Johnson will feature in the new team. Andream Leasom is widely expected to get a promotion and May's chief campaigner and pro-Brexit MP Chris Grayling is tipped to get a key position.
*Long gap between record highs tends to be a good indicator for stocks:
Lot of discussion about how S&P 500 hit a new record high of 2137.16 on Monday. Came nearly 14 months after the previous record high. Bespoke Investment Group noted that there have been 14 prior occasions on which the S&P has made a new all-time high following at least 52 weeks below the old record. It said the pattern tends to follow the business cycle and is much more common before large bull runs than at major tops for the equity market. Average gains over next three, six and twelve months stand out 3.75%, 7.76% and 12.28%, respectively. Median gains even a bit better for six and twelve-month periods at 9.96% and 12.30%, respectively. Also pointed out that median drawdown (one-year period) is just 2.7%.
*Obama calls for public option in Affordable Care Act, rails against drug companies on pricing:
President Obama defended signature health law in a “special communication” article in the Journal of the American Medical Association. Called on Congress and his successor to add a public insurance option to Affordable Care Act and boost financial assistance for people to buy coverage. Also railed against pharmaceutical industry, arguing it opposed any change to drug pricing, no matter how justifiable and modest, because it believes it threatens profits. Added Congress also to blame for not doing more and reiterated proposals such as forcing drug makers to reveal manufacturing and R&D costs; increasing rebates companies must pay for drugs prescribed for certain Medicare and Medicaid beneficiaries; and giving government more power to negotiate prices for some drugs.
*IMF downgrades Italy's growth outlook:
IMF revises Italy’s 2016 growth estimate to just under 1% (from 1.1% previously) and 2017’s estimate to ~1% (from 1.25% previously). Said growth path would imply return to pre-crisis 2007 output levels only by mid-2020s, implying two lost decades. IMF’s Article IV consultation paper also noted risks tilted to downside, including from financial market volatility, refugee surge, and headwinds from global trade slowdown. Warned if downside risks materialize then regional and global spillovers could be significant. Authorities needed to address low productivity, high public debt, and bank balance sheet vulnerabilities. Recommended focus on deepening structural reforms with pro-growth fiscal policy mix, accelerate financial sector repair via material reduction in NPLs, and strengthen fiscal buffers. Also noted concerns around bail-in rules should be dealt with expeditiously.
*Recovery in UK assets may run out of steam:
UK markets experience a positive reaction to news that Theresa May will be the new prime minister from Wednesday. Sterling rallied from ~$1.2875 Monday and pushes above $1.3100 region today. UK equity markets steady to higher after positive performance yesterday, with FTSE 100 up 1.4% and domestic-leaning FTSE 250 rallied 3.3%. The FT said investors may conclude that sterling now represents good value at current levels. In particular, it noted that good property in the UK has now become available with discounts of up to 20% due to currency effects. That said, several sell-side commentators still arguing that expectations for BoE stimulus favors further sterling weakness. Additionally, UK economic indicators coming through from July onwards likely to highlight the extend of the slowdown due to Brexit vote.
*Westpac Banking Corporation (WBC):
The Reserve Bank of Australia has been drawn into the corporate regulator’s massive rate rigging case against Westpac Banking Corp. A senior RBA official, Matthew Boge, is on the other side of a taped telephone conversation with Westpac’s chief trader, Colin Roden. The conversation, which occurred on June 9, 2010, is being used by the Australian Securities and Investments Commission to support its civil penalty proceedings against Westpac for alleged market manipulation and unconscionable conduct.
*National Australia Bank LIMITED (NAB):
Businesses have shrugged off post-Brexit market volatility and pre-election doubts to report some of the best conditions since the global financial crisis, according to the latest National Australia Bank monthly survey. Respondents were also confident about the business outlook, despite being surveyed during the turbulent days immediately after Britain’s historic decision to leave the European Union. NAB’s business conditions index rose two points, to 12, in June, while the confidence index was ahead three points, to six, over the month. The trading index held steady at 18 points, while profitability crept up one point, to 12.
International tribunal in the Hague ruled in favor of Philippines, noting China’s claim to historic rights in most of the South China Sea has no legal basis. Added it contravenes a UN convention on maritime law. Also found that China not entitled to any Exclusive Economic Zones (EEZ), which provides a country with maritime rights to resources within 200 nautical miles of a specific land mass. China quickly responded by saying that it neither accepts nor recognizes the ruling. President Xi noted territorial sovereignty and marine rights will not be affected in any way. While ruling is legally binding, no mechanism to enforce it. Fairly widespread thoughts that ruling could exacerbate already elevated tension that has stemmed from China’s aggressive reclamation push.
*Why are stocks higher?:
Big tailwind for US equities on Tuesday continued to revolve around dampened growth fears coming out last week’s better June payrolls and ISM manufacturing and services data. Lack of meaningful accompanying reset in Fed policy normalization expectations another key positive. Valuation headwinds also seem to be dented by some focus on structurally low rates. Earnings recession theme widely understood, while attention has started to shift to expected 1H trough and thoughts negative analyst sentiment should make it easy for results to clear low bar. Longstanding cautious sentiment/positioning mentioned as a factor in keeping path of least resistance to upside. On macro front, Japan stimulus expectations continue to ramp, UK getting a new prime minister faster-than-expected, hope for a near-term solution for Italian banks, and still no spillover from weaker yuan.
*Cyclicals outperform defensives again:
Energy best performer with big rebound in crude. Some credit went to lower non-OPEC production forecast. Materials stronger with the rip in industrial metals on cyclical rotation. CLF-US helped by positive comments out ofJPMorgan. Financials another standout with help from another big backup in rates. More cautious articles on bank earnings, but nothing new. Tech stronger with positive preannouncement from STX-US. Better PC news another tailwind. However, IMPV-US negatively preannounced on longer sales cycles. Industrials beat tape. Airlines provided upside leadership with better UAL-US guidance and Deutsche Bank upgrades. Good day for machinery, but FASTUS under pressure in distributor group following its miss. Consumer discretionary lagged, though nothing really standing out. Defensives underperformed with better risk sentiment and worries about ove,rbought conditions. WMT-US downgrade a drag on consumer staples. REITs weaker. Utilities worst performer.
*More deal speculation than announcements:
Some interesting M&A headlines today, though more speculation than anything definitive. Multiple reports thatXRX-US is interested in an acquisition of RRD-US. However, talks said to still be at a fairly early stage and any deal would likelytake place after XRX completes previously announced separation. IMPV-US hit by a negative preannouncement, though Bloomberg added to yesterday’s Reuters report company was interviewing investment bankers for help in exploring strategic options. Noted it had retained Qatalyst following expressions of interest. Elsewhere in software, N-US a big gainer today on speculation that ORCL-US is looking acquire the company. Note WSJ said earlier this week that software M&A should pick up due to depressed valuations. Outside of tech, AMC-US agreed to acquire largest cinema group in Europe for ~$650M.
*Still no details on Japan’s fiscal stimulus package; Abe talks to Bernanke:
Expectations for additional policy support in Japan continue to get credit for strength in global risk assets and yen eakness. However, still no firm details on a stimulus package expected to total ¥10T+. Headlines today highlighted meeting between Japanese Prime Minister Abe and former Fed Chairman Bernanke. Top government spokesman said Bernanke told Abe BoJ still has tools available to support economy. Unaware of any talk of “helicopter money”, but did say monetary policy was discussed. Separately, seems to be some comfort that Abe is putting post-election focus on economy rather than changing constitution. Also keeping reform push in the headlines with proposals to shorten time individuals must contribute to national scheme (from 25 years to 10 years) to qualify for payouts.
*Bond market signals are distorted:
Big concern about post-Brexit resilience in risk assets is that it has been accompanied by a continued move lower in interest rates. However, there have also been thoughts that signaling effects from bonds may be distorted. NY Times (Upshot column) discussed this dynamic. Noted there are reasons to believe current bond prices reflecting idiosyncrasies of supply and demand for safe assets, rather than a conviction among global investors that things are going to get much worse. Highlighted inelasticity of the strong demand from institutions, along with pretty much fixed supply (no ramp in deficit spending to increase supply of bonds). Also pointed out that global nature of bond market has allowed US to import depressed rate environment from overseas.
*Italy aims to seal deal to safeguard banks by beginning of August:
Deal to safeguard Italian banks sector said to be in reach. Prime Minister Renzi said Monday agreement will comply with EU rules. Reuters also reported Italian Treasury looking to approve a state guarantee for bank NPLs by start of next month. Real-estate firm Prelios, PwC and JPMorgan all said to be advising unlisted lender Banca Popolare di Bari on sale of €500M NPL portfolio backed with state guarantees, as soon it is approved by Rome. Agreement expected in coming weeks and would potentially be first deal backed by the scheme. Elsewhere, Sole24Ore reported that foreign investors might be attracted to Italian banks NPLs if Rome can set up a new vehicle, financed by Italy's CDP and subsequently Atlante, that will allow them to invest in a ~€12B junior tranche.
*Incoming UK PM Theresa May to decide on new cabinet:
UK press digesting yesterday's news that Theresa May will become the new prime minister from Wednesday. Focus now on likely make-up of the new cabinet, which is expected to feature pro-Brexit MPs and those backing continued EU membership. Foreign Secretary Philip Hammond is tipped as new chancellor. Has a background of a fiscal hawk, though May has already flagged that government will abandon goal of a balanced budget by 2020. Additionally, government could feature a new Brexit minister, who will oversee the process of EU exit. Other contentious issues include whether Michael Gove and Boris Johnson will feature in the new team. Andream Leasom is widely expected to get a promotion and May's chief campaigner and pro-Brexit MP Chris Grayling is tipped to get a key position.
*Long gap between record highs tends to be a good indicator for stocks:
Lot of discussion about how S&P 500 hit a new record high of 2137.16 on Monday. Came nearly 14 months after the previous record high. Bespoke Investment Group noted that there have been 14 prior occasions on which the S&P has made a new all-time high following at least 52 weeks below the old record. It said the pattern tends to follow the business cycle and is much more common before large bull runs than at major tops for the equity market. Average gains over next three, six and twelve months stand out 3.75%, 7.76% and 12.28%, respectively. Median gains even a bit better for six and twelve-month periods at 9.96% and 12.30%, respectively. Also pointed out that median drawdown (one-year period) is just 2.7%.
*Obama calls for public option in Affordable Care Act, rails against drug companies on pricing:
President Obama defended signature health law in a “special communication” article in the Journal of the American Medical Association. Called on Congress and his successor to add a public insurance option to Affordable Care Act and boost financial assistance for people to buy coverage. Also railed against pharmaceutical industry, arguing it opposed any change to drug pricing, no matter how justifiable and modest, because it believes it threatens profits. Added Congress also to blame for not doing more and reiterated proposals such as forcing drug makers to reveal manufacturing and R&D costs; increasing rebates companies must pay for drugs prescribed for certain Medicare and Medicaid beneficiaries; and giving government more power to negotiate prices for some drugs.
*IMF downgrades Italy's growth outlook:
IMF revises Italy’s 2016 growth estimate to just under 1% (from 1.1% previously) and 2017’s estimate to ~1% (from 1.25% previously). Said growth path would imply return to pre-crisis 2007 output levels only by mid-2020s, implying two lost decades. IMF’s Article IV consultation paper also noted risks tilted to downside, including from financial market volatility, refugee surge, and headwinds from global trade slowdown. Warned if downside risks materialize then regional and global spillovers could be significant. Authorities needed to address low productivity, high public debt, and bank balance sheet vulnerabilities. Recommended focus on deepening structural reforms with pro-growth fiscal policy mix, accelerate financial sector repair via material reduction in NPLs, and strengthen fiscal buffers. Also noted concerns around bail-in rules should be dealt with expeditiously.
*Recovery in UK assets may run out of steam:
UK markets experience a positive reaction to news that Theresa May will be the new prime minister from Wednesday. Sterling rallied from ~$1.2875 Monday and pushes above $1.3100 region today. UK equity markets steady to higher after positive performance yesterday, with FTSE 100 up 1.4% and domestic-leaning FTSE 250 rallied 3.3%. The FT said investors may conclude that sterling now represents good value at current levels. In particular, it noted that good property in the UK has now become available with discounts of up to 20% due to currency effects. That said, several sell-side commentators still arguing that expectations for BoE stimulus favors further sterling weakness. Additionally, UK economic indicators coming through from July onwards likely to highlight the extend of the slowdown due to Brexit vote.
*Westpac Banking Corporation (WBC):
The Reserve Bank of Australia has been drawn into the corporate regulator’s massive rate rigging case against Westpac Banking Corp. A senior RBA official, Matthew Boge, is on the other side of a taped telephone conversation with Westpac’s chief trader, Colin Roden. The conversation, which occurred on June 9, 2010, is being used by the Australian Securities and Investments Commission to support its civil penalty proceedings against Westpac for alleged market manipulation and unconscionable conduct.
*National Australia Bank LIMITED (NAB):
Businesses have shrugged off post-Brexit market volatility and pre-election doubts to report some of the best conditions since the global financial crisis, according to the latest National Australia Bank monthly survey. Respondents were also confident about the business outlook, despite being surveyed during the turbulent days immediately after Britain’s historic decision to leave the European Union. NAB’s business conditions index rose two points, to 12, in June, while the confidence index was ahead three points, to six, over the month. The trading index held steady at 18 points, while profitability crept up one point, to 12.
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