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Financial Insights(2016-07-21)

Australia
2016-07-21 11:48

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*Yuan stabilization:
 
One of biggest positives wake of Britain’s unexpected vote to leave EU late last month has been lack of spillover on global risk assets from weaker yuan. Several factors flagged for this dynamic, including improved communications from PBoC, better transparency surrounding fixing mechanism, market confidence that any depreciation will be gradual, tighter restrictions on capital flows and a narrower onshore-offshore spread. PBoC dynamic in focus overnight as yuan gained most in two weeks. Bloomberg discussed how PBoC strengthened reference rate even as dollar advanced most since 5-Jul. Noted this fueled speculation central bank not sticking to stated policy of following direction of market. Highlighted speculation of heightened intervention in both onshore and offshore markets in recent days.
 
*Dollar index at four-month high:
 
Dollar strength getting some attention. Reuters discussed how dollar index recently hit a four-month high. Usual suspects in focus, including unwinding of Brexit-related safe-haven yen longs, expectations for more policy support from the BoJ (and Kyodo talked about bigger stimulus package today), ECB and BoE, a firmer batch of US economic data and an accompanying pickup in near-term Fed tightening expectations. Article pointed out fed funds futures now pricing in a ~40% probability of a December tightening, up from less than 20% a few weeks ago. Note Hilsenrath article in WSJ yesterday said Fed officials looking more confidently toward rate increase before year-end, possibly as early as September meeting. However, a number of Fed officials have also expressed concern about dollar strength and related negative feedback loops, a dynamic that complicates policy normalization.
 
*Key Q2 earnings metrics improve with latest batch of results:
 
Latest batch of results has helped overall Q2 earnings season metrics. According to FactSet, blended growth for S&P 500 EPS now stands at (4.6%), better than the (5.2%) seen yesterday and (5.5%) at the end of the quarter. With 14% of S&P 500 having now reported, 69% have beat consensus EPS expectations, up from 65% yesterday and just below 70% one-year average. In the aggregate, companies reporting earnings that are 6.1% ahead of expectations, well ahead of the 4.4% yesterday and 4.2% one-year average. Blended revenue growth rate now stands (0.5%), marking slight improvement from yesterday. In addition, 60% of S&P 500 companies that have reported have beat consensus revenue expectations, up from 56% yesterday and nicely ahead of 49% four-quarter average. In the aggregate, companies reporting sales that are 1.1% above expectations, a slight improvement from yesterday and better than one-year average of 0.0%.
 
*Tech, healthcare lead market higher:
 
MSFT-US drove tech rally on positive sentiment surrounding cloud transition (and following disappointing last Q). SAPUS another bright spot in software, while MRVL-US and ASML-US booted semis. Healthcare saw broad-based strength. Med-tech and device space a standout. ISRG-US strong performer on beat and raise. ABT-US results well received. BSX-US settled over Guidant. Biotech and specialty pharma up big. Consumer discretionary in line. . Retail, builders and autos (VOW-DE spillover) all helped. Media lagged (FOXA-US on Ailes and DISUS downgrade). Industrials trailed tape, but still higher. ITW-US beat and raised despite weak industrial backdrop. Building materials stronger with USG-US and EXP-US rallying on wallboard shipments data. Airlines lagged, but UAL-US stronger as buyback and capacity cut offset softer PRASM guidance. Financials underperformed despite well-received results from MS-US. DFS-US trailed with some focus on higher reward rates. Defensive plays mostly weaker with backup in rates and pockets of cyclical rotation. Consumer staples also bogged down by weakness in food space with K-US hit by dampened takeover speculation.
 
*Credit Suisse considers the risk of higher bond yields:
 
Latest Credit Suisse global strategy note discussed risk of higher bond yields, pointing out that a number of macro variables suggest that bond yields should rise a bit, citing ISM new orders and commodity prices both consistent with a rise in yields. Said this is also the case when looking at financial market variables of cyclicality as the ratio of cyclicals vs defensives suggests higher yields as does the performance of equities (the post-Brexit vote advance for the S&P500 against the drop in the US 30-year bond yield). Noted that on top of this, hints of fiscal QE in Japan (2% of GDP) and even the UK are starting to emerge and the market is pricing in a 62bp Fed Funds rate by year end (41% chance of hike). Argued that if bond yields rise, then financials and cyclicals should outperform, while consumer staples and utilities should underperform (similar in both Europe and the US).
 
*Microsoft beats with cloud transition in focus:
 
MSFT-US the highlight on the earnings calendar Tuesday after the close. Company beat consensus revenue on all three segments. EPS also beat, though this was driven by below-the-line items (particularly a lower tax rate) as operating margins came in 30 bp below Street at 27.5% with some drag from elevated opex. Cloud transition seemed to get the bulk of the positive commentary as total cloud revenue pushed above a $12B revenue run rate with growth of 50% (with Azure growing 108%). An improvement in Server Product business and continued Office 365 traction among some of the other bright spots. Sep Q guidance below consensus, but analysts noted not as bad as feared. Also some upbeat takeaways from management commentary that cloud gross margins expected to materially improve in F17.
 
*Architecture Billings Index slips in June:
 
American Institute of Architects' Architecture Billings Index (ABI), a leading indicator of nonresidential construction spending activity, fell to 52.6 in June from 53.1 in May. However, remained in expansion for fifth straight month. New projects inquiry index fell to 58.6 from 60.1. In addition, MNI noted that AIA’s measure of design construction, which is meant to provide an earlier signal of the direction of billings, fell to 49.7 from 52.8 in May, first negative reading since March 2014. Some mixed commentary in the release. Noted that demand for residential projects has surged this year, significantly exceeding pace set in 2015. Added this suggests strong future growth for housing in coming year. However, also said drop in design contracts index was “something of a concern”.
 
*Yield backup suggests limited Brexit fallout:
 
One of the factors cited for the post-Brexit strength in risk assets has revolved around the notion that the economic fallout which will be much more limited than initially feared. Goldman Sachs has touched on this dynamic, noting the UK economy is too small and growing too slowly to adversely impact global growth by much. TheWSJ also highlighted support for such thinking from the recent backup in sovereign bond yields in the US and Germany, while noting that rates have edged up only slightly in the UK. It added that yield curves in the US and Germany have also been steepening, while the curve in the UK remains much flatter than it was before the Brexit vote. The article did not discuss any concerns for US stocks, which have been supported by the relative valuation theme, from the recent backup in yields.
 
*BoE agents' summary sees no evidence of a sharp slowdown for now:
 
The BoE's summary of intelligence from business contacts between late May and late June highlights that there was little change in activity in the run up to the EU referendum and no change in investment or hiring intentions just after the vote. However, report also points out that firms are only just starting to formulate their business strategy in the wake of the UK vote for EU exit and around a third thought there would be some negative impact over the next three months. Businesses anticipate a positive effect on export turnover from sterling depreciation and input costs are expected to rise. Separately, latest UK employment data shows unemployment drop to 4.9% in May vs consensus 5% and prior 5% ONS said employment rate of 74.4% is at the highest level since comparable records began in 1971. However, claimant count shows pace of hiring slowed, with prior reading revised up to increase of 12.2K compared with previously reported 0.4K drop.
 
*BoJ under more scrutiny ahead of next week’s meeting:
 
No shortage of scrutiny surrounding BoJ heading into next week’s meeting, when it is widely expected to announce additional monetary easing. Recall latest survey from Reuters showed 23 of 27 analysts, or ~85%, expect BoJ to do more next week. No consensus on what measures it will implement. Additional asset purchases likely. Also talk it could push rates further into negative territory, though woul have to worry about backlash. Separately,Bloomberg cited comments from former BoJ executive director Hideo Hayakawa, who argued that not only should the central bank bolster its stimulus, it should also come clean on “two big lies” about its monetary policy. Argued it needs to scrap its roughly two-year timeframe for achieving 2% inflation and concede that it will have to start taering bond purchases.
 
*Trump secures GOP nomination, narrows gap with Clinton:
 
Donald Trump officially named Republican Party’s presidential nominee on Tuesday. Secured 1,725 delegates, well ahead of the 1,237 needed for the nomination, though reports continued to highlight some pushback from within the party. However, Trump gaining some traction in the polls. Reuters/Ipsos poll released on Tuesday showed he narrowed his deficit to Democratic rival Hillary Clinton to 7 percentage points (43%-36%)from 15 points late last week. Reuters said Trump’s rise appeared partly fueled by a decline in number of voters who remained on the sidelines. Percentage of voters who supported neither candidate dropped to 12% from 15%. Article also highlighted the usual post-convention boost in polls for candidates. NY Times said its “presidential prediction model” shows Clinton has 76% chance of winning presidency.
 
*Australia and New Zealand Banking Group (ANZ):
 
ANZ boosted revenue by nearly $50 million by changing the furniture in its South Melbourne call centre. Productivity measurably increased after the bank gave staff in the 1400-desk contact centre the ability to hold briefings near their desks to reinforce training, or put together impromptu meeting spaces in response to sudden events or crises, ANZ property general manager Kate Langan says. Over a five-month period the call centre was able to cut repeat calls by 2 per cent and take 500 more calls per day. The number of calls transferred to second operators for resolution fell 10 per cent.
 
*National Australia Bank Ltd. (NAB); QBE Insurance Group Ltd (QBE):
 
A director of National Australia Bank and chief executive of insurer QBE have pledged to help turn around the negative perception Australians have about culture in the financial services sector, after a new Ethics Index published by the Governance Institute rated it poorly. Banking, finance and insurance received the worst score on the Ethics Index of any sector, including the public service. The survey was conducted in May and June by research firm Ipsos with a sample size of 1000. The banking, finance and insurance sectors received a net score on ethics (of -12) and the lowest score on the Ethics Index (of -5). 
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