*More M&A speculation:
Some higher-profile M&A speculation in headlines today. WSJ reported Mondelez (MDLZ) could raise it is offer for Hershey (HSY) if it sees an opening Highlighted the scrutiny surrounding charitable trust that controls Hershey. Bloomberg said Monsanto (MON-US) has revived talks with BASF (BAS-DE) after it rejected a $62B takeover by Bayer AG (BAYN-DE). Noted Monsanto exploring various options, including the potential purchase of BASF’s agriculture division. Betaville reported that Cypress Semiconductor (CY-US) is working with Goldman Sachs to explore strategic options after receiving interest from three private equity firms. Noted it rejected a $14 a share offer from Chinese PE firm Summitview Capital. Finally, multiple reports Viacom (VIAB-US) in talks to sell a minority stake to China’s Dalian Wanda Group that value studio at $8-$10B.
*JPMorgan kicks off Q2 earnings season for banks on positive note:
JPM-US kicked off Q2 earnings season for banks on an upbeat note. Q2 EPS beat with help from one-time items though core results still better. Stronger capital markets getting some of the early attention. FICC (+35% y/y) a key upside driver. Fit with talk of upside from late-Q ramp in activity around Brexit. In addition, while NIM contraction was a big worse, NII beat and company reiterated its 2016 guidance of +$2B y/y. Recall that heading into bank earnings season, biggest concern had revolved around risks to 2H consensus from lower rates/flatter curve. Lending another bright spot with core loan growth up 4% q/q and 15% y/y. Reduction in legal reserves also well received. In addition, company reiterated expense guidance. Reserve build in line to a bit higher with O&G and cards the drivers, though no meaningful concerns in early takeaways.
*Initial claims remain low; PPI surprises to upside:
Initial claims unchanged at 254K in w/e 9-Jul. Much better than 265K consensus and just above 248K multi-decade low in mid-April. Claims now below 300K for a 71st straight week, longest stretch since 1973. Labor Department said nothing unusual in data, though claims can be volatile this time of year given Fourth of July holiday and auto-plant shutdowns . Four-week moving average fell to 259K from just under 265K, lowest since late April. On the inflation front, headline PPI up 0.5% m/m in June following a 0.4% gain in May. Ahead of consensus for a 0.3% increase and biggest gain in a year. Pushed y/y rate up to 0.3%, marking first time in positive territory since December 2014. Energy prices up 4.1%, while services prices increased 0.4%. Core PPI up 0.4%, while Street was only looking for 0.1% gain. However, still up just 1.3% y/y.
*Why are stocks higher?:
No single driver of today’s strength. Policy support dynamic still a go-to excuse. While BoE unexpectedly left rates unchanged, signaled likelihood of a combination of easing measures in August. Expectations for coordinated fiscal and monetary stimulus in Japan remain extremely elevated. Also more talk about how ECB may have to abandon capital key. Recent rate backup has not dented recent shift in focus from relative valuation tailwind for stocks (largely given perception of structural headwinds on yields). Dampened growth (and to a lesser extent, Brexit) fears another widely cited driver. Cautious sentiment/positioning (and high cash levels) still seen as keeping path of least resistance higher (some talk earlier this week about macros and CTAs having room to add exposure). Early Q2 earnings also coming in better, while there has been usual shift in focus to lower bar.
*Financials lead market higher:
Financials best performer today with strength in rate-sensitive plays. Banks getting bulk of attention as JPM-US kicked off Q2 earnings season on fairly upbeat note. FICC trading and reiterated NII guidance among bright spots. Industrials helped by renewed cyclical rotation. Airlines and rails among standouts. DAL-US beat and some spillover from CSX-US beat reported before market closed yesterday. HSC-US another standout on guidance. Tech beat tape, though pretty quiet from a news flow perspective. EBAY-US boosted by comments out of M Science. Good day for AAPL-US and iPhone supply chain names. Ag chemicals the standouts in materials. Bayer improved offer for MONUS. Consumer discretionary lagged with upside capped by retail. Defensive pockets underperformed. Utilities, R EITs and precious metals all weaker.
*BoE unexpectedly leaves rates unchanged; August rate cut likely:
BoE left rates unchanged at today’s policy meeting, despite widespread expectations for a 25 bp rate cut. Vote was 8-1, with one member pushing for a 25 bp easing. Minutes cited lack of data to draw on for a July rate cut, but noted most officials expect policy loosening in August. Added extent of additional stimulus will depend on August forecasts. Also said detailed analysis required for all policy options. Central bank committed to taking whatever action needed to support growth and inflation. Reiterated economic activity likely to weaken in wake of Brexit vote. Pointed out that there have already been sharp decline in measures of household and business confidence. However, did note that in the short-run, sterling weakness will help to boost inflation. Sterling sharply higher in the wake of the announcement.
*Abe adviser calls for coordinated policy support:
Japan continues to dominate headlines when it comes to expectations for further policy support. Much of the talking has come from Prime Minister Abe’s advisers. Etsuro Honda (who is also ambassador to Switzerland) told WSJ that Japan should unleash a combination of fresh fiscal and monetary stimulus in the coming weeks to reinvigorate efforts to eradicate deflation. However, like Koichi Hamada, another influential adviser, he said Japan does not yet need to pursue the helicopter money policy option. Stressed authorities can achieve similar results by expanding Abenomics. Highlighted likely effectiveness of an expansion of BoJ’s JGB purchases, in combination with a ramp in fiscal spending. In terms of latter, reports continue to put size of expected package at ~¥10T.
*Bernanke floated idea of perpetual debt to Abe adviser back in April:
Despite recent denial by Japanese government that it is considering helicopter money as a policy option, there has been a barrage of speculation about the potential for coordination between fiscal and monetary stimulus in Japan. Lot of focus today on a Bloomberg report that cited comments from Etsuro Honda, an influential adviser to Prime Minister Abe, who said that former Fed Chairman Bernanke floated the idea of perpetual bonds during earlier discussions in April. According to Honda, Bernanke stressed that helicopter money, in which the government issues non-marketable perpetual bonds with no maturity date that are purchased by the BoJ, could work as the strongest tool to overcome deflation. The comments have been cited as the key driver of the latest pickup in global risk appetite and yen weakness.
*Fed’s Harker sees two rate hikes this year:
Philadelphia Fed President Harker, who is not a current FOMC voter, said two rate hikes may be appropriate this year, which was median in June SEP. Not sure whether next tightening will come in July (market not pricing in any chance). Pointed out he expects fed funds rate to approach 3% by end of 2018 (also in line with SEP). Added that even with a 25 bp increase, policy remains highly accommodative and he continues to see a fairly shallow normalization path. Argued ok for Fed to exceed 2% target, but said Fed officials do not want to get too far behind curve as wage pressures build. In line with commentary from other officials, flagged some relief surrounding rebound in June payrolls, though also conceded there is still some uncertainty about true state of labor market.
*Businesses push back against harsher rules to stop inversions:
Some renewed headlines surrounding the more onerous than expected changes to tax rules related to inversions Treasury released earlier this year. Initial focus revolved around Treasury’s push to go after what “serial inverters” via ew calculation of ownership thresholds in inversion transactions. However, there was also a lot of attention on complaints from multinationals that they were being unfairly caught in the crossfire of President Obama’s campaign to close tax loopholes. Recent Reuters articles touched on this dynamic. Noted that with proposals expected to be finalized in next few months, businesses getting more vocal in their opposition. Particularly concerned that proposal to end deductions by reclassifying debt as equity would disrupt operations and burden businesses with new red tape.
*New UK Chancellor Hammond rules out emergency budget:
New UK Chancellor Philip Hammond said there is no need for an emergency budget and it will have an Autumn statement in the usual way. Added that it will look at the situation carefully over the summer. Note that new PM Theresa May has already abandoned the previous Conservative administration's pledge of hitting a budget surplus by 2020. Highlighted that now was the time to encourage investment and support the economy. Hammond has been widely tipped as a fiscal hawk due to the fact that when he held the position of shadow chancellor he had an influential rule in developing the party's focus on austerity. However, Conservative position at the time came after the financial crisis where taxpayer bailout of banks resulted in marked deterioration in the UK's fiscal position. Hammond is due to meet BoE Governor Carney today to discuss the UK outlook.
*Australia and New Zealand Banking Group (ANZ) and National Australia Bank Ltd (NAB):
For retail investors, owning shares in the big banks has been a favoured source of income. But in the latest dash for yield it appears that bank stocks are being left behind in favour of hybrid securities. The gap in the dividend yield of ANZ and NAB shares versus their listed hybrid securities has blown out from 1.50 per cent in May 2015 to between 4 and 5 per cent – a historically high reward for taking equity risk. This ‘‘wide gap’’, said Michael Saba from the institutional desk at broker Evans & Partners, implies that bank hybrids look ‘‘pricey’’ relative to bank shares, which have been hurt by market volatility and fears that they will be forced to raise billions more in new equity. ‘‘Overall bank hybrid margins still look wide, however on a short-term view they look like they have run ahead of share prices,’’ said Mr Saba, who described the move as unusual. ‘‘Relative to both stock yields and the still high level of bank stock implied volatility, the recent hybrid margin contraction looks a little stretched. To align, bank stocks could rally in price to decrease their yield and volatility.’’ While bank shares have come under pressure during the recent bout of volatility, bank hybrid securities have rallied sharply since the Reserve Bank cut interest rates in May from 2 per cent to 1.75 per cent.
*BHP Billiton Limited (BHP):
BHP Billiton appears to have fallen short of its iron ore export target, with declarations by rival miners suggesting BHP has shipped less than 260 million tonnes from Port Hedland during the 2016 financial year. BHP was supposed to ship 270 million tonnes from Western Australia (including tonnes owned by joint venture partners) during the year to June 30, but the company reduced the target to 260 million tonnes in April because of adverse weather and railway maintenance. The reduced target now also appears to be under threat, after Fortescue Metals Group, Roy Hill and the operator of Port Hedland revealed a range of iron ore export data this week. Roy Hill has shipped at least 6 million tonnes during the year, based on the miner’s 34 shipments so far. Roy Hill’s chief executive Barry Fitzgerald indicated on Wednesday the total was closer to 7 million tonnes. Fortescue disclosed on Wednesday that it had shipped 169.4 million tonnes during the year. Fellow Port Hedland tenants Atlas Iron and Mineral Resources were on track to ship about 15 million and 6 million tonnes for the year respectively. Assuming Atlas and Mineral Resources are close to those targets, BHP’s neighbours at the port would have shipped about 196 million of the 454.2 million tonnes shipped through Port Hedland during the 2016 financial year, leaving BHP’s shipments at about 258 million tonnes. The analyst community is also confident BHP has missed its export target from WA; UBS has estimated the miner shipped 257 million tonnes while Macquarie has predicted 255 million tones.
Some higher-profile M&A speculation in headlines today. WSJ reported Mondelez (MDLZ) could raise it is offer for Hershey (HSY) if it sees an opening Highlighted the scrutiny surrounding charitable trust that controls Hershey. Bloomberg said Monsanto (MON-US) has revived talks with BASF (BAS-DE) after it rejected a $62B takeover by Bayer AG (BAYN-DE). Noted Monsanto exploring various options, including the potential purchase of BASF’s agriculture division. Betaville reported that Cypress Semiconductor (CY-US) is working with Goldman Sachs to explore strategic options after receiving interest from three private equity firms. Noted it rejected a $14 a share offer from Chinese PE firm Summitview Capital. Finally, multiple reports Viacom (VIAB-US) in talks to sell a minority stake to China’s Dalian Wanda Group that value studio at $8-$10B.
*JPMorgan kicks off Q2 earnings season for banks on positive note:
JPM-US kicked off Q2 earnings season for banks on an upbeat note. Q2 EPS beat with help from one-time items though core results still better. Stronger capital markets getting some of the early attention. FICC (+35% y/y) a key upside driver. Fit with talk of upside from late-Q ramp in activity around Brexit. In addition, while NIM contraction was a big worse, NII beat and company reiterated its 2016 guidance of +$2B y/y. Recall that heading into bank earnings season, biggest concern had revolved around risks to 2H consensus from lower rates/flatter curve. Lending another bright spot with core loan growth up 4% q/q and 15% y/y. Reduction in legal reserves also well received. In addition, company reiterated expense guidance. Reserve build in line to a bit higher with O&G and cards the drivers, though no meaningful concerns in early takeaways.
*Initial claims remain low; PPI surprises to upside:
Initial claims unchanged at 254K in w/e 9-Jul. Much better than 265K consensus and just above 248K multi-decade low in mid-April. Claims now below 300K for a 71st straight week, longest stretch since 1973. Labor Department said nothing unusual in data, though claims can be volatile this time of year given Fourth of July holiday and auto-plant shutdowns . Four-week moving average fell to 259K from just under 265K, lowest since late April. On the inflation front, headline PPI up 0.5% m/m in June following a 0.4% gain in May. Ahead of consensus for a 0.3% increase and biggest gain in a year. Pushed y/y rate up to 0.3%, marking first time in positive territory since December 2014. Energy prices up 4.1%, while services prices increased 0.4%. Core PPI up 0.4%, while Street was only looking for 0.1% gain. However, still up just 1.3% y/y.
*Why are stocks higher?:
No single driver of today’s strength. Policy support dynamic still a go-to excuse. While BoE unexpectedly left rates unchanged, signaled likelihood of a combination of easing measures in August. Expectations for coordinated fiscal and monetary stimulus in Japan remain extremely elevated. Also more talk about how ECB may have to abandon capital key. Recent rate backup has not dented recent shift in focus from relative valuation tailwind for stocks (largely given perception of structural headwinds on yields). Dampened growth (and to a lesser extent, Brexit) fears another widely cited driver. Cautious sentiment/positioning (and high cash levels) still seen as keeping path of least resistance higher (some talk earlier this week about macros and CTAs having room to add exposure). Early Q2 earnings also coming in better, while there has been usual shift in focus to lower bar.
*Financials lead market higher:
Financials best performer today with strength in rate-sensitive plays. Banks getting bulk of attention as JPM-US kicked off Q2 earnings season on fairly upbeat note. FICC trading and reiterated NII guidance among bright spots. Industrials helped by renewed cyclical rotation. Airlines and rails among standouts. DAL-US beat and some spillover from CSX-US beat reported before market closed yesterday. HSC-US another standout on guidance. Tech beat tape, though pretty quiet from a news flow perspective. EBAY-US boosted by comments out of M Science. Good day for AAPL-US and iPhone supply chain names. Ag chemicals the standouts in materials. Bayer improved offer for MONUS. Consumer discretionary lagged with upside capped by retail. Defensive pockets underperformed. Utilities, R EITs and precious metals all weaker.
*BoE unexpectedly leaves rates unchanged; August rate cut likely:
BoE left rates unchanged at today’s policy meeting, despite widespread expectations for a 25 bp rate cut. Vote was 8-1, with one member pushing for a 25 bp easing. Minutes cited lack of data to draw on for a July rate cut, but noted most officials expect policy loosening in August. Added extent of additional stimulus will depend on August forecasts. Also said detailed analysis required for all policy options. Central bank committed to taking whatever action needed to support growth and inflation. Reiterated economic activity likely to weaken in wake of Brexit vote. Pointed out that there have already been sharp decline in measures of household and business confidence. However, did note that in the short-run, sterling weakness will help to boost inflation. Sterling sharply higher in the wake of the announcement.
*Abe adviser calls for coordinated policy support:
Japan continues to dominate headlines when it comes to expectations for further policy support. Much of the talking has come from Prime Minister Abe’s advisers. Etsuro Honda (who is also ambassador to Switzerland) told WSJ that Japan should unleash a combination of fresh fiscal and monetary stimulus in the coming weeks to reinvigorate efforts to eradicate deflation. However, like Koichi Hamada, another influential adviser, he said Japan does not yet need to pursue the helicopter money policy option. Stressed authorities can achieve similar results by expanding Abenomics. Highlighted likely effectiveness of an expansion of BoJ’s JGB purchases, in combination with a ramp in fiscal spending. In terms of latter, reports continue to put size of expected package at ~¥10T.
*Bernanke floated idea of perpetual debt to Abe adviser back in April:
Despite recent denial by Japanese government that it is considering helicopter money as a policy option, there has been a barrage of speculation about the potential for coordination between fiscal and monetary stimulus in Japan. Lot of focus today on a Bloomberg report that cited comments from Etsuro Honda, an influential adviser to Prime Minister Abe, who said that former Fed Chairman Bernanke floated the idea of perpetual bonds during earlier discussions in April. According to Honda, Bernanke stressed that helicopter money, in which the government issues non-marketable perpetual bonds with no maturity date that are purchased by the BoJ, could work as the strongest tool to overcome deflation. The comments have been cited as the key driver of the latest pickup in global risk appetite and yen weakness.
*Fed’s Harker sees two rate hikes this year:
Philadelphia Fed President Harker, who is not a current FOMC voter, said two rate hikes may be appropriate this year, which was median in June SEP. Not sure whether next tightening will come in July (market not pricing in any chance). Pointed out he expects fed funds rate to approach 3% by end of 2018 (also in line with SEP). Added that even with a 25 bp increase, policy remains highly accommodative and he continues to see a fairly shallow normalization path. Argued ok for Fed to exceed 2% target, but said Fed officials do not want to get too far behind curve as wage pressures build. In line with commentary from other officials, flagged some relief surrounding rebound in June payrolls, though also conceded there is still some uncertainty about true state of labor market.
*Businesses push back against harsher rules to stop inversions:
Some renewed headlines surrounding the more onerous than expected changes to tax rules related to inversions Treasury released earlier this year. Initial focus revolved around Treasury’s push to go after what “serial inverters” via ew calculation of ownership thresholds in inversion transactions. However, there was also a lot of attention on complaints from multinationals that they were being unfairly caught in the crossfire of President Obama’s campaign to close tax loopholes. Recent Reuters articles touched on this dynamic. Noted that with proposals expected to be finalized in next few months, businesses getting more vocal in their opposition. Particularly concerned that proposal to end deductions by reclassifying debt as equity would disrupt operations and burden businesses with new red tape.
*New UK Chancellor Hammond rules out emergency budget:
New UK Chancellor Philip Hammond said there is no need for an emergency budget and it will have an Autumn statement in the usual way. Added that it will look at the situation carefully over the summer. Note that new PM Theresa May has already abandoned the previous Conservative administration's pledge of hitting a budget surplus by 2020. Highlighted that now was the time to encourage investment and support the economy. Hammond has been widely tipped as a fiscal hawk due to the fact that when he held the position of shadow chancellor he had an influential rule in developing the party's focus on austerity. However, Conservative position at the time came after the financial crisis where taxpayer bailout of banks resulted in marked deterioration in the UK's fiscal position. Hammond is due to meet BoE Governor Carney today to discuss the UK outlook.
*Australia and New Zealand Banking Group (ANZ) and National Australia Bank Ltd (NAB):
For retail investors, owning shares in the big banks has been a favoured source of income. But in the latest dash for yield it appears that bank stocks are being left behind in favour of hybrid securities. The gap in the dividend yield of ANZ and NAB shares versus their listed hybrid securities has blown out from 1.50 per cent in May 2015 to between 4 and 5 per cent – a historically high reward for taking equity risk. This ‘‘wide gap’’, said Michael Saba from the institutional desk at broker Evans & Partners, implies that bank hybrids look ‘‘pricey’’ relative to bank shares, which have been hurt by market volatility and fears that they will be forced to raise billions more in new equity. ‘‘Overall bank hybrid margins still look wide, however on a short-term view they look like they have run ahead of share prices,’’ said Mr Saba, who described the move as unusual. ‘‘Relative to both stock yields and the still high level of bank stock implied volatility, the recent hybrid margin contraction looks a little stretched. To align, bank stocks could rally in price to decrease their yield and volatility.’’ While bank shares have come under pressure during the recent bout of volatility, bank hybrid securities have rallied sharply since the Reserve Bank cut interest rates in May from 2 per cent to 1.75 per cent.
*BHP Billiton Limited (BHP):
BHP Billiton appears to have fallen short of its iron ore export target, with declarations by rival miners suggesting BHP has shipped less than 260 million tonnes from Port Hedland during the 2016 financial year. BHP was supposed to ship 270 million tonnes from Western Australia (including tonnes owned by joint venture partners) during the year to June 30, but the company reduced the target to 260 million tonnes in April because of adverse weather and railway maintenance. The reduced target now also appears to be under threat, after Fortescue Metals Group, Roy Hill and the operator of Port Hedland revealed a range of iron ore export data this week. Roy Hill has shipped at least 6 million tonnes during the year, based on the miner’s 34 shipments so far. Roy Hill’s chief executive Barry Fitzgerald indicated on Wednesday the total was closer to 7 million tonnes. Fortescue disclosed on Wednesday that it had shipped 169.4 million tonnes during the year. Fellow Port Hedland tenants Atlas Iron and Mineral Resources were on track to ship about 15 million and 6 million tonnes for the year respectively. Assuming Atlas and Mineral Resources are close to those targets, BHP’s neighbours at the port would have shipped about 196 million of the 454.2 million tonnes shipped through Port Hedland during the 2016 financial year, leaving BHP’s shipments at about 258 million tonnes. The analyst community is also confident BHP has missed its export target from WA; UBS has estimated the miner shipped 257 million tonnes while Macquarie has predicted 255 million tones.
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