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Financial Insights(2016-07-18)

Australia
2016-07-18 14:04

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*Attack in France results in multiple casualties:

French President Hollande extended the country's state of emergency by three months following the terrorist attack that left more than 80 people dead and multiple injured. A large tractor trailer style truck plowed into crowd celebrating Bastille Day in Nice, France. Driver, who was shot and killed by police, drove into crowd, striking people for 2 kilometers along main street. Police found firearms, explosives and grenades in truck. Attacker -- who reports say has been identified as a resident of Nice -- had also opened fire on crowd. Anti-terrorist prosecutors have taken over investigation. President Obama has condemned attack, while French President Hollande is returning to Paris for emergency talks. No other reports of separate incidents.
 
*China Q2 GDP better; mixed takeaways from China’s June activity data; credit expansion stronger:
 
Deluge of data out of China last night. Q2 GDP expanded 6.7%, unchanged from Q1 and just ahead of the 6.6% consensus. June activity data mixed. Industrial production growth improved to 6.2% y/y from 6.0%, better than the 5.9% consensus. In addition, retail sales growth pushed up to 10.6% y/y from 10.0%, better than the 9.9% consensus. However, FAI growth slowed further to 9.9% y/y ytd from 9.6%, below the 9.4% consensus. Property and manufacturing investment growth slowed, while economists expressed more concerns about private sector slowdown. In terms of credit, aggregate financing (TSF) rose to RMB1.63T from a depressed RMB659.9B, ahead of the RMB1.1T consensus. New RMB loans rose to RMB1.3T from RMB985.5B, better than the RMB1.0T consensus. Several economists noted data do not suggest any pressing near-term need to ramp stimulus.
 
*Consumer discretionary led S&P lower:
 
Consumer discretionary the worst performer today, with restaurants hit. CMG-US downgraded at Morgan Stanley. Some pockets of weakness in retail as well. Financials lagged the market despite another backup in rates. Bank earnings in focus. C-US beat, while WFC-US was in line (though some quality concerns). Asset managers a bright spot. Energy flat, not much action in the sector. Techdragged down by some weakness in the semis and software names. NVDA-US and QCOM-US both downgraded. Defensive sectors outperformed. Materials another bright spot, containerboard names posted solid gains after AF&PA and FBA released June containerboard and box data. Industrials also beat the market. Transports held up well outside of the rails.
 
*Retail sales surprise to the upside:
 
Headline retail sales up 0.6% m/m in June vs for just a 0.1% increase. However, May growth did get revised down to 0.2% from an originally reported 0.5%. Retail sales ex-autos increased 0.7%, better than the consensus for a 0.4% gain. In addition, key core retail sales metric, which feeds into GDP, increased 0.5% for a second straight month, better than expectations for a 0.3% gain. In terms of the details, sales were up in 11 of the 13 major categories. Building materials jumped 3.9% after a downwardly revised 2.5% decline May. The structural shift to online spending remained in focus with a 1.1% increase at nonstore retailers. While department store sales incrased 0.7%, apparel was down 1.0%. Restaurants/bars fell 0.3%. Sales at furniture and home furnishing stores were up 0.5%.
 
*Mixed takeaways from other economic data:
 
Retail sales beat has grabbed most of the headlines, but busy elsewhere on economic calendar. Headline CPI increased 0.2% m/m in June, just below 0.3% consensus. Core CPI up 0.2% m/m, in line. Pushed y/y rate up to 2.3% from 2.2%. Core services prices up 0.3%, while core goods stayed soft, down 0.2%. Industrial production increased 0.6% m/m in June following a 0.3% contraction in May. Better than consensus for a 0.2% gain. Manufacturing production up 0.4%, with a big 5.9% jump in motor vehicle and parts production. Utilities output up 2.4% (weather), while mining output increased 0.2%, up for second straight month. Empire manufacturing survey declined to 0.6 in July from 6.0 in June. Details also disappointed. No color on whether Brexit weighed. Finally, University of Michigan consumer sentiment index fell to 89.5 in preliminary July reading from 93.5 in June, which was also consensus. Global developments flagged by respondents. One-year inflation expectations firmer.
 
*Economy looking better; too much complacency on rates?:
 
Dampened growth fears from a recent batch of firmer US economic data have been a widely cited driver of latest leg up in stocks. WSJ discussed this dynamic, noting Citigroup Economic Surprise Index recently hit highest level since January 2015 after spending much of the last 18 months in negative territory. However, also thoughts that market may be too complacent on rates given the combination of better economic sentiment and record-high stocks. Goldman Sachs recently discussed this dynamic. Noted economy is close the Fed’s mandate, while firm’s financial conditions index has moved to easiest level since July 2015. Wondered why given these dynamics, market only priced for a bit more than one rate hike over next two years. Separate WSJ article discussed heightened concerns about rich valuations in Treasuries and potential for a replay of 2013 “taper tantrum”.
 
*Latest flow data highlights return to equities:
 
“Bear capitulation” the theme of latest Flow Show report from BofA Merrill Lynch. Noted equities attracted $10.8, largest inflows since October 2015. ETFs the big driver with $17B of inflows vs $6B of mutual fund outflows. US equities saw $12.6B of inflows, largest since September 2015. Emerging markets attracted $1.6B, largest since March 2016. Japan saw fifth straight week of inflows. However, Europe experienced 23 rd straight week of outflows, while capital left UK funds for 11 th time in last 12 weeks. Interesting breakdown from a sector perspective a while utilities saw largest outflows since November 2015, REITs, another defensive play, received most in five weeks. Also signs of better risk sentiment with HY bonds seeing biggest inflows since March. Reach for yield continued with anothr strong week of inflows into EM debt.
 
*UK Chancellor Hammond and BoE's Carney coordinate on policy:
 
FT discussed yesterday's remarks by new UK Chancellor Hammond and BoE Governor Carney, which hint at policy coordination to support UK economy. Hammond signaled he would abandon governments procyclical fiscal policy stance and take a pragmatic approach. Also said he would work carefully with BoE and others to prepare for the autumn statement. Article highlighted that UK Prime Minister May has repeatedly called for more Treasury infrastructure project bonds, with additional government guarantees. This has fueled conjecture that any expansion in the BoE's asset purchase program could be allocated to infrastructure. Carney has already emphasized the importance of well targeted policy. Other suggestions include credit easing measures and portfolio rebalancing via selling long-dated Gilts in favor of the short-end, MBS or corporate bonds.
 
*European banks may need an extra €40B in capital:
 
The FT cited research by the Boston Consulting Group (BCG), which said European banks might need an extra €40B in capital at their UK branches as a result of Brexit. Report noted that Brexit could see rise of 8-22% in annual costs for the banks' capital markets divisions and could see some lenders withdraw from some activities. Currently, London branches that European banks use for business do not need their own capital, but this could change if the UK loses its EU passporting rights. BCG said some banks could set up intermediate holding companies similar to those set up in the US, but regulators likely to demand they are robustly capitalized, particularly if they are systemically important. Note, new UK Chancellor Hammond said securing passporting rights for London firms is a priority. Germany's Schaeuble also said that EU access for British financial services firms is a reasonable demand.
 
*ECB's Angeloni says bad debt at Italian banks manageable:
 
II Sole 24 Ore interviewed ECB's Angeloni, a member of the supervisory board, who said the Italian bad debt situation is manageable. Added he did not think it was a specific or country-wide problem. Also pointed out that EU rules explicitly allow public support to banks "in exceptional circumstances and in a controlled manner, and without imposing losses to private investors". Highlighted banks had suffered recently in part due to Brexit turmoil. Confirmed that Rome was in talks with the EU to provide aid to troubled lenders and hoped to shield savers. On Italy's bank rescue fund, Altante, said he did no think it was of a large enough size to deal with the extent of the problem. Note while other ECB officials have also signaled potential for some flexibility on bail-in rules, no signs of any meaningful concessions from Brussels.
 
*Emerging markets benefit in post-Brexit world:
 
Some attention on the latest forecast from the Institute for International Finance (IIF), projecting emerging market economies will see net capital outflows of ~$350B this year. This represents half of the 2015 levels and compared with its early-2016 forecast for a $448B in outflows. IIF said there has been a sustained turnaround in sentiment as investors make renewed effort to search for yield on expectations that developed central banks are likely to turn even more dovish. IIF data showed total inflows into emerging markets from non-resident foreign investors rose to $122B in Q2 2016, up from $48B in Q1. The FT recently discussed the bargain hunting in emerging markets. Cited UBS analysis, which said there is a reason why some emerging markets look cheap. Noted the larger than average number of state-owned enterprises that have a track record of poor ROE.
 
*BlackRock’s CEO says investors afraid:
 
Despite signs of better risk appetite in latest flow data, investor sentiment remains depressed. BLK (largest asset manager) CEO Larry Fink said yesterday investors no longer know where to put the money given combination of depressed interest rates, political and macro uncertainty and elevated market volatility. Said they are “afraid and pulling back”. Highlighted the $55T in bank deposits in US, Japan and China as evidence of investor concern globally. Also discussed how investors who have been sitting on sidelines feel further behind with recent record highs and stocks. Comments fit with widespread discussion lately about cautious sentiment and positioning keep pain trade to upside. Fink also said current rally in stocks may not be justified/sustainable unless earning pick up.
 
*More helicopter money pushback in Japan:
 
When it to risk asset tailwind this week from latest ramp in expectations for additional policy support, Japan has garnered bulk of the attention. However, there continues to be a pushback against speculation surrounding helicopter money, under which the BoJ would underwrite fiscal spending through perpetual bonds. Reuters cited government and central bank officials directly involved in policymaking who said there is no chance Japan will go down this route anytime soon. Noted with BoJ already keeping borrowing costs near zero, no strong push from Abe government to revise law and allow central bank to underwrite debt. Also discussed how influential advisers to Prime Minister Abe have ruled out this option. However, they have still called for better coordination between fiscal and monetary policy.
 
*Rio Tinto Limited (RIO):
 
Rio Tinto may sell $US4 billion ($5.3 billion) of the $US16 billion of non-core assets it owns over the next three years, and its Australian coal, aluminium smelting and diamond businesses are among the unneeded operations, according to analysis by UBS. The analysis comes ahead of the release of Rio’s production report for the June quarter, when all eyes will be on its iron ore business in Western Australia. Iron ore is the most important driver of Rio’s earnings and free cash flow, generating almost three-quarters of the company’s earnings. Analysts believe Rio’s Pilbara division shipped 83.2 million tonnes in the June quarter, while 87.8 million tonnes were shipped when the company’s Canadian iron ore assets were included. Rio has told investors to expect about 350 million tonnes of shipments from its global operations in 2016 (including tonnes owned by joint venture partners) and the company will likely need to perform better in the second half to achieve that goal.
                                                                
*National Australia Bank Ltd. (NAB):
 
Standards for scrutinising property valuations and assessment of buyers’ capacity to repay loans need to be more stringent and will be toughened, according to a confidential internal analysis by National Australia Bank. The 10-page review, produced by Advantedge Financial Services, the nation’s major wholesale funder and distributor of white-label home loans, which are offered by third parties, recommends more than a dozen reforms, including more frequent property valuations. Borrowers will also have to answer much tougher questions about their after-tax expenditure, including how much they spend each week on public transport and cable television. Mortgage brokers and third party providers, who recommend or package the loan products in their own name, have broadly welcomed the reforms as a hedge against negative equity, which is where the market value of a property falls against the outstanding amount of mortgage secured on it.
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