*China needs policy coordination to address liquidity trap:
Chinese central bank officials see scope for accommodative policy. China Business News noted PBoC head of statistics Sheng Songcheng told weekend forum that proactive fiscal policy should be coordinated with monetary policy to address liquidity trap. Noting growing divergence between acceleration in M1 money and relative stability of M2, Sheng argued China could increase government bond issuance and raise fiscal deficit ratio to 3-5% to allow reduced tax burden for businesses. Sheng’s comments follow pickup in speculation of additional monetary easing. NDRC researchers have said a 2H interest rate cut cannot be ruled out while local brokers and analysts say to look for possible RRR cut in Q4. Calls have come amid skepticism over efficacy of PBoC's efforts to supply abundant liquidity via open market operations.
*China home price growth slows again:
Lot of discussion in press about recent sequential slowdown in China home prices. MNI noted property price gains decelerated for second month in a row and rebound since second half of last year has lost steam, particularly in smaller cities. Cited latest data from the National Bureau of Statistics that showed average property prices for new homes in 35 large cities rose 1.4% m/m in June, down from the 1.6% increase in May and 2.0% gain in April. Added that NBS said in accompanying statement that its own calculations found prices for new homes in 70 large cities rose 1.8% m/m in June, down from the 1.9% increase in May. Note that on a y/y basis, prices in China’s 70 major cities rose 7.3%, up from a 6.9% increase in May.
*BofA beats:
BAC beat on Q2 EPS. Core results looked even better when excluding a number of noisy items. Lower expenses and better trading among the bright spots. As was case with JPM last week, FICC (core +27% y/y) a key upside driver in trading. However, firms did express some skepticism regarding sustainability. Equities largely in line. NIM compression (down 7 bp q/q) worse than expected, though this has been an early theme surrounding bank earnings season. Goldman Sachs said core NII of $10.4B was better than it was looking for, though like other firms, noted thoughts this number likely to be under pressure if rates stay at current levels Analysts noted some positive takeaways from credit with no reserve build for energy, while consumer losses lower due to smaller auto and card losses.
*Oil weak:
Oil under pressure today. WTI cruse lost 1.6% to settle at $45.24 a barrel. Several different factors cited for the pullback, including lack of impact from failed coup attempt in Turkey last weekend. In addition, Reuters noted Genscape reported a 26K+ barrel build at Cushing in w/e 15-Jul. A number of press reports have also put some blame on cautious comments from Morgan Stanley. WSJ noted firm said oversupplied products markets, particularly gasoline, means refiners will dial back crude purchases, particularly with maintenance season only two months away. Recall big selloff last Wednesday a function of larger than expected builds in both gasoline and distillates inventories. Also a number of headlines questioning rebalancing theme.
*Softbank to acquire ARM Holdings for $32B:
ARM Holdings (ARMH-US) agreed to be acquired by Japan’s Softbank (9984-JP) for 1,700 pence in cash per share, representing a 43% premium to prior close. Deal valued at £24.3B, or $32B. Marks biggest takeover a British company since late-June vote to leave the EU. Also follows marked weakening in sterling. Softbank said ARM’s headquarters and leadership to remain in Cambridge. Also promised to double employee headcount in UK over next five years. Note ARM did not conduct an auction process, fueling speculation that a counter-offer could be likely. Some thoughts that Samsung (005930-KR) or Intel (INTC-US) could be interested. Also some concerns about how deal will be received by new UK Prime Minister Theresa May, who has taken a cautious stance on foreign takeovers of leading UK companies.
*Tech leads with help from semis:
Tech led the market today with help from semis. ARMH-US the big gainer after agreeing to be acquired by Softbank for ~$32B. 3D printing names weighed onhardware following downgrades at Piper Jaffray.Materials outperformed, though there seemed to be a number of moving pieces. Select steel, precious metal, ag and TiO2 chemical names were among the standouts.Banking group was mixed, but higher overall, helpingfinancials. BAC-US beat on FICC strength and lower expenses. Retailers led in consumer discretionary, with strength from both specialty and multiline names. RH-USwas a notable gainer after CEO share purchase. Positive preannouncement from BURL-US. HAS-US down despite a beat on some concerns about Boys trends. Industrialslagged with multis underperforming. JBHT-US a notable decliner in the trucking space after cutting guidance.Energy underperformed. Oil was on the defensive as unrest in Turkey had little effect on crude pipelines or cargo shipments. Consumer staples trailed the market.MNST-US lagged the beverage space following a downgrade.
*US equity debate:
Good deal of debate about direction for US equities. Valuation still a widely cited stumbling block with FactSet showing 12-month forward P/E ratio at 17.1x. well above five- and ten-year averages of 14.6x and 14.3x, respectively. However, some reprieve surrounding a heightened focus on relative valuation with structural headwinds on yields (including lower for longer Fed). Theme held last week despite rate backup. Also thoughts an elevated equity risk premium can trend lower. Earnings recession a concern, bar may have been sufficiently lowered. Better sentiment surrounding 2017 earnings, though some worries about Brexit impact (particularly from a dollar standpoint) and potential for another downturn in oil. Political uncertainty a widely discussed headwind. However, both candidates have talked up fiscal stimulus.
*UK Brexit minister pushing for ‘generous’ deal:
David Davis, UK’s Brexit minister, told Sky News Sunday Britain should begin formal process of leaving EU by triggering Article 50 in early 2017. Said he wanted a generous deal for Britons living in UK and for Europeans living in Britain. However, Reuters noted he declined to fully guarantee rights of UK citizens. Reiterated Britain’s goal of maintaining tarifffree access to the single market. Last week, Davis said continued free access to EU single market is the “most likely” outcome from the negotiations and “once the European nations realize that we are not going to budge on control of our borders, they will want to talk, in their own interest”. However, EU officials, including German Chancellor Merkel, have argued that that continued single market access cannot be maintained with also accepting free migration from the EU.
*Coordinated policy support expectations in Japan remain elevated:
Yen under heavy pressure again today, providing another tailwind for global risk sentiment. FT article out this weekend noted that while government has been quick to push back against helicopter money speculation, there are many ways to define this policy. Noted no doubt BoJ now monetizing much of the increase in government debt needed to fund the ¥10T+ fiscal stimulus package planned by the government. Added since market fully expects BoJ’s debt purchases to be permanent, it is helicopter money by any other name. However, given negative connotation surrounding helicopter money, next official move will likely be a "fudge". Government likely to expand fiscal policy temporarily, while officially reiterating primary budget balance by 2020. BoJ would likely simultaneously choose to finance the temporary stimulus by increasing asset purchases again.
*Italy and EU still at odds over bank bailout:
Italy still working on a major recapitalization plan for its beleaguered banking sector. Telegraph discussed some of the latest developments over the weekend. Reported it has learned that government working on plans to set up a €50B bad bank. Added that €10B would be used to buy bad loans at 20 cents on the euro, removing assets with a face value of €50B from banks’ balance sheets. Bad bank would then worth through the loans to either sell them to investors, hold them to maturity if there is a chance of borrowers paying them back, or offer debt relief. Paper said that the scheme, which is being put together by JPMorgan, could help clean up the banks, but also continues to put authorities on a collision course with Brussels, which does not want taxpayers bailout out banks before private investors take a hit.
*Early Q2 earnings season metrics fairly lackluster…:
While still very early in Q2 earnings season, key metrics have been fairly lackluster. According to FactSet’s latestEarnings Insight report, the blended growth rate for Q2 S&P 500 earnings stands at (5.5%), unchanged from the end of June. The blended revenue growth rate is (0.6%), slightly better than the (0.8%) at the end of the quarter. Of the 7% of S&P 500 companies that have reported results for Q2, 66% have beat consensus EPS estimates, below the oneyear average of 70%. However, 51% have surpassed consensus sales expectations, just ahead of the 49% average over the last year. In the aggregate, companies reporting earnings that are 3.9% above expectations, below the 4.2% oneyear average.
*Mixed rhetoric from BoE policymakers on future easing:
Following last week's decision by the BoE to leave policy on hold, some mixed takeaways from BoE's Vlieghe and Weale. Vlieghe, who voted for a rate cut last Thursday, said in the FT the fact that inflation and growth remained subdued despite low rates justified further easing after EU vote. Weale said he sees uncertainty in either direction and thinks BoE should wait for firmer evidence before easing. Noted consumer confidence and business investment had fallen. However, also pointed out that short-term outlook likely to be more influenced by politics than UK's long-term trade arrangements. Said earlier appointment of UK Prime Minister might influence consumer demand for the better and could also leave businesses more confident than they were immediately after vote. Note, Weale is due to leave the BoE MPC after August.
*...but last week’s results better received:
While early Q2 earnings season metrics have not been impressive, the corporate calendar was still seen as a bright spot for sentiment last week. JPM-US kicked bank earnings season off on a fairly upbeat note with trading (FICC) a widely cited bright spot. Mortgage revenue, loan growth and credit stabilization among the other positive takeaways from the broader batch of bank earnings week. Strength in its upstream primary aluminum segment drove big beat at AA-US. In addition, CSX-US lower operating expenses and largely unchanged outlook commentary boosted AA-US. DAL-US beat, while better guidance fromAAL-US and UAL-US was also well received. YUM-UShighlighted some improvement in China. STX-US was latest HDD name to offer a positive preannouncement for Q2.
*Limited EM spillover seen from failed Turkish coup:
Lots of reaction to the failed Turkish coup. Analysts noted spillover to EM assets limited as long as political stability maintained. FX strategists said Turkish lira should now regain some, but not all, of its losses as risk premium will be higher than otherwise. That said, many analysts point to easy loss of confidence in lira as Turkey has second largest current account deficit as a percent of GDP in major EMs and also the second worst basic balance (current account plus FDI). Said portfolio outflows are the first and most immediate threat to the lira. Added banks are also vulnerable to higher funding costs and reliance on external funding is a concern. Commentary also pointed to President Erdogan in much stronger position and likely to push agenda for a new constitution and executive presidency (previously put on hold until September amid flagging popular support). Turkish central bank expected to retain dovish stance.
*Attention on when Britain will trigger Article 50:
Several reports focused on when Britain will invoke Article 50 to start formal process to exit the EU. Remarks by Scottish First Minister Nicola Stugeon after Friday's meeting with UK PM Theresa May were interpreted as a potential veto on triggering Article 50 after May said she wanted a UK-wide approach. Sturgeon was not explicit on veto, but said Scotland is in a strong position. Brexit chief David Davis reiterated expectations that Britain will invoke Article 50 early next year and dismissed Scottish veto talk. Meanwhile, Bloomberg said some EU countries have started to look at whether it would be feasible to invoke Article 7 of the Lisbon Treaty, which suspends Britain's voting rights. Move aimed at putting pressure on May, but would also mean arguing that the UK is no longer cooperating in good faith and some think this approach would be too heavy-handed.
*Clinton leads Trump in latest polls:
Clinton holding her lead over Donald Trump in latest general election polls. According to RCP poll average, Clinton leading Trump by 3.2 points. Latest individual polls showed Clinton with larger leads. WSJ/NBC poll had Clinton ahead 46-41%, unchanged from June. WaPo/ABC poll showed Clinton’s lead shrinking to 47-43% (down from 12 points previously). Another Reuters poll showed her leading by 12 points. Latest RCP battleground polls also showed Clinton with slender leads in most key states. Notably, Clinton’s lead was less than 2 points in Ohio (19 electoral votes) and Florida (29 electoral votes). Ahead of this week’s Republican convention, reports noted Trump’s second-guessing over his selection of Indiana Governor Mike Pence as his VP. NBC said Trump’s preferred pick of Chris Christie was opposed by his family members.
*Australian and New Zealand Banking Group (ANZ):
Westpac, ANZ defences delayed for ASIC The corporate regulator has been forced to amend its claims against Westpac Banking Corp and ANZ Banking Group, which will delay the lodging of the banks’ defences to allegations they acted unconscionably and manipulated the market when setting the bank bill swap rate. Westpac and ANZ were planning on filing defences to the Australian Securities and Investment Commission’s allegations on Wednesday. This would have provided their first opportunity to respond formally to ASIC’s allegations that the banks breached the Corporations Act when their traders set the key benchmark interest rate between 2010 and 2012. In a case management hearing last month, Federal Court judge Jonathan Beach pushed back on ASIC’s request for the case against ANZ to be heard first, which could have created a legal precedent to put pressure on the other banks to settle. Another case management hearing is due to be held on August 22.
*Commonwealth Bank of Australia (CBA):
The filing of ASIC’s newly drafted claims against Westpac and ANZ may coincide with the regulator launching a similar case against Commonwealth Bank of Australia, the only one of the big four banks not to have been sued over the allegations in the Federal Court. ASIC refused to comment on the timing of any case against CBA. The bank is expecting a claim will be filed later this week. It is understood CBA has no interest in settling with the regulator so long as it is required to provide an admission of unconscionable conduct. All of the banks are concerned such as admission will expose them to damages claims through class actions, after plaintiff law firm Maurice Blackburn said last month it was investigating such actions. The Federal Court has set a provisional trial date for the cases of August 1 next year. Another case management hearing is due to be held on August 22.
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