*More signs of yuan stabilization:
PBoC fixed yuan at strongest level vs dollar in three weeks overnight. Bloomberg pointed out Thursday marked second day in a row that central bank has raised fixing against a rising US currency, boosting speculation that it is not adhering to its stated policy of following direction of market. However, this policy has actually been under scrutiny for a while and actually flagged as supportive in terms of dampening the spillover effects of the post-Brexit weakness in the yuan on global risk assets. SAFE, China’s FX regulator, specifically talked up the stabilization dynamic today, noting that expectations of yuan depreciation have weakened. Noted Brexit likely to slow Fed normalization process, while also noting it has not seen any big impact on China capital flows from Brexit.
*Turkish lira recovers from record lows after state-of-emergency declared by Ankara:
Turkish lira (TRY) recovering from record lows following credit downgrade by S&P yesterday with commentators pointing to some stability after Ankara declared a three-month state of emergency late Wednesday. Sell-side however warn that the move could be President Erdogan’s first step towards Executive Presidency via an unprecedented centralization of power after Friday’s failed military coup. SocGen said shift toward more autocratic rule likely to entail erosion of rule of law, along with deterioration in the strength of Turkey’s independent institutions, its economic policymaking, and its progress on planned reforms. Added shift likely to wreak severe damage on market confidence, dampen private investment, and ultimately weigh on Turkey’s growth prospects, forcing more credit downgrades. Recall, over 60K public sector officials have been purged so far by the Erdogan administration.
*Earnings metrics continue to improve:
Better sentiment surrounding early Q2 earnings season supported by continued improvement in key Q2 earnings metrics. According to FactSet, blended growth rate for S&P 500 EPS is (4.1%), better than (5.5%) at end of last week and end of June. Of the 20% S&P 500 that has now reported, 68% have beat consensus EPS expectations, up from 66% last week and just below the 70% one-year average. In the aggregate, companies beating earnings by 6.5%, above the 3.9% positive surprise rate at the end of last week and the one-year average of 4.2%. Blended revenue growth rate now (0.3%), while 54% of companies have beat consensus revenue expectations, better than the 51% at the end of last week and 49% average over last year. In the aggregate, companies beating consensus revenue expectations by 1.8%, up from the 0.4% beat rate at end of last week and the one-year average of 0.0%.
*Why are stocks lower?:
Nothing specific behind equity weakness Monday. Consolidation a go-to excuse following nine-day Dow winning streak. In addition, while a number of technical strategists have been out with positive comments as of late, they have also flagged signs of near-term overbought conditions. While earnings season takeaways have remained fairly upbeat, low bar has also helped. Policy support dynamic under a bit more scrutiny today. No surprise that BoJ’s Kuroda pushed back against helicopter money, but both Reuters and Bloomberg had articles highlighting concerns about potential disappoint given elevated level of expectations for additional monetary stimulus next week. Also thoughts ¥20T fiscal stimulus package headlines exaggerated. While ECB takeaways largely in line, Draghi not as dovish as expected. Recent dollar strength and potential market complacency on Fed tightening/rates some other areas of concern as of late.
*Industrials lead market lower:
Industrials worst performer despite machinery strength on JOY-US takeover and URI-US higher rental rate guidance. LUV-US guidance hit airlines. Materials dragged down by weakness select chemical and steel names on earnings (SHW-US, RS-US, NUE-US). Energy weaker with sluggish crude. Tech trailed. Semis in focus as INTCUS lagged on slower DCG growth, while QCOM-US guidance better than feared. EBAY-US rallied on better GMV growth. Financials a slight laggard. BK-US and AXP-US weak on earnings. Banks largely in line. BX-US up one earnings. Consumer discretionary held up better. Autos a bright spot with help from big GM-US beat and raise, JCIUS results/M&A and positive Baird comments on KMX-US. Defensives largely outperformed. REITs, precious metals and utilities all higher. Health care stronger. Biotech helped by acquisition of RLYP-US and BIIBUS earnings. Managed care shook off antirust news, while HUM-US also guided higher.
*BoJ’s Kuroda rules out helicopter money; press speculates on potential BoJ disappointment:
BoJ Governor Kuroda told BBC radio that there is no need and no possibility for helicopter money in Japan (though interview old and Kuroda has pushed back on helicopter money before). Stressed that Japan has benefited from clear separation between fiscal and monetary institutions. However, did reiterate central bank mantra that it has a very powerful policy framework and does not envisage any significant limitation of further easing of monetary conditions in Japan, if necessary. Separately, a couple of press reports today have highlighted some potential for BoJ to disappoint against extremely elevated expectations for further near-term policy support Bloomberg said increasing number of BoJ officials concerned about sustainability of current framework for massive monetary stimulus. Reuters noted recent yen weakness and a government fiscal stimulus package could take some pressure off the BoJ to ramp up its monetary easing.
*ECB on hold and no discussion of shifting QE rules:
ECB policies on hold, as expected. President Draghi highlighted the resilience of Eurozone markets in the wake of Brexit uncertainty due to policies in place. Talked up the ability to act if needed, but wanted to evaluate incoming data to asset underlying conditions. Draghi made notable emphasis on the importance of bank equity prices on ECB policy. Said weak prices impact cost of capital and bank lending channel. Pointed out that level of NPLs needed to be addressed as it undermines ability to lend. Backed in principle the idea of a government backstop in exceptional circumstances in order to avoid fire sale of bank stocks. Called for combination of supervisory approach, full functioning NPL market and government action to enforce it. Pointed out that banks were still in a better state than 2009 despite NPL problem. On QE, confirmed no discussions on changing rules of plan.
*Claims at three-month low; Philly Fed misses on headline, but details better; existing home sales rise:
Initial claims fell 1K to a three-month low of 253K in w/e 16-Jul, below 265K consensus. Labor Department said nothing unusual in data and no states estimated claims. However, more talk of volatility this time of year related to auto plant shutdowns. Philadelphia Fed manufacturing index fell to (2.9) in July from +4.7 in June, below the +4.5 consensus. Details better than the headline as new orders rose to +11.8 from (3.0). Shipments also increased to +6.3 from (2.1). Employment improved to (1.6) from (10.9), while workweek not as bad at (3.6) vs (13.1) in June. In addition, diffusion index for future general activity improved to 33.7 from 29.4, just below 35.9 five-year average. Existing home sales for June rose 1.1% to a 5.57M saar, ahead of 5.50M consensus. Sales up 3% y/y and the strongest since February 2007. Tight inventory a concern, with supply down 5.8% y/y. Median price up 4.8% y/y to $247,700. Share of first-time buyers rose to 33%, the largest in four years. Investors made up only 11% of sales, the lowest since 2009.
*Intel lags high-profile tech earnings; Qualcomm and eBay better:
A few high-profile earnings out of tech space last night.INTC-US the laggard with focus on Data Center Group deceleration. While, Q3 was guidance was above the Street and normal seasonality, some analysts skeptical about implied magnitude of recovery DCG. QCOM-US a standout as it beat on fiscal Q3 with QTL a bright spot. Catch-up payments in focus and as highlighted meaningful progress on China licensees. In QCT, MSM shipments above high end of the Street. Also guided above Street despite expectations for a miss. EBAY-USanother standout as GMV growth accelerated to 6% y/y and analysts talked up traction from structured data initiatives. Also boosted guidance and announced an additional $2.5B share buyback authorization. FFIV-USearnings beat on in-line revenue. Noted some strength in Americas and APAC, but highlighted Brexit impact on EMEA. Guidance better.
*Joy Global to be acquired by Komatsu:
Joy Global (JOY-US) agreed to be acquired by Japan’s Komatsu (630.1-JP) for $28.30 a share in cash in a deal valued at $3.7B, including debt. Represents a 20% premium to prior close. Deal expected to be completed in mid-2017. FT noted acquisition gives Komatsu exposure to surface and underground mining equipment, which it currently does not have. Companies also said their products are highly complementary and combined entity will focus on safety, productivity and life cycle cost improvement for customers. Komatsu said it plans to leverage both companies’ leading technologies to pursue product and service innovation to enhance mine safety and productivity. No recent takeover speculation surrounding JOY, though in recent years, Komatsu has been rumored as a suitor. Back in July of 2012, Komatsu specifically ruled out an acquisition.
*Relypsa to be acquired by Galencia:
Relypsa (RLYP-US) agreed to be acquired by Swiss healthcare group Galencia (GALN-CH) for $32 a share in cash in a deal valued at ~$1.53B. Represents a 59% premium to prior close. Deal expected to close in Q3. Note that back in April, Reuters reported Relypsa working with Centerview Partners to review offers from potential buyers. Relypsa makes Veltasa, a drug for the treatment of hyperkalemia, or excessive levels of potassium in the blood. Hyperkalemia affects ~3M people in the US. with late-stage chronic kidney disease or heart failure. Note Galencia’s Vifor Pharma unit already has right to Veltasa outside US and Japan. Multiple press reports discussed how Veltasa will likely soon face competition from AstraZeneca’s (AZN-US) ZS-9, which is awaiting FDA approval.
*Hedge fund outflows slowed in Q2 as quant funds outperformed:
Bloomberg cited Hedge Fund Research data, which showed the indutry saw net outflows of $8.2B in Q2 vs ~$15.1B, or about 46% less in Q1. Data however pointed out that global hedge fund assets increased by $42.1B in Q2 to nearly $2.9T, the third-highest quarterly total on record. Also showed asset growth was the strongest since the Q1 of 2015, boosted by a 2% return for the HFRI Fund Weighted Composite Index. Data showed the asset increase was driven by strong quantitative CTA advance on the day after the Brexit vote and broad-based industry-wide gains across equity, commodity and currency markets pursuant to the Brexit dislocations. Cited Renaissance Technologies (oversees $32B) seeing its quantitative equity hedge fund gaining 4.6% in June and ~14% in H1 and also P/E Investments’s quant currency fund surged 6.4% the day after the Brexit vote, mostly from betting against the euro.
*Spain one step closer to having a government:
Some attention back on Spain after acting Prime Minister Rajoy, leader of the conservative party, managed to secure the support of centrists Ciudadanos for the election of PP Public Works minister Ana Pastor to the post of Parliament Speaker. Spain’s King now expected to give mandate to Rajoy to form a government, with conjecture pointing to Ciudadanos for support. HSBC said while this is likely, there remain obstacles such as Ciudadanos's unwillingness to join forces with the nationalist regional parties, and the resistance of Socialist leader Sanchez who still has some hopes of becoming prime minister. Added that fiscal challenges facing Spain, with deficit remaining stubbornly high and Brussels threatening to impose fines, could play in favor of Rajoy. Inability to quickly form a government could mean bigger cuts to politically-sensitive areas for the Socialists, such as regional spending.
*RBNZ's economic update says more easing easing seems likely:
Kiwi dollar lower after RBNZ signaled stronger likelihood of an August rate cut. RBNZ’s economic update said more easing seemed likely to ensure inflation settles near middle of its target range. Seemed most concerned about persistent kiwi dollar strength. Noted trade-weighted exchange rate 6% higher than assumed in June statement, implying inflation outlook had weakened since then. Also cautioned higher currency was adding pressure to beleaguered dairy and manufacturing sectors. While noting house price inflation remains excessive, RBNZ said it was consulting on stronger macro-prudential rules to mitigate financial stability risks. Market-implied odds of August cut had ramped up following subdued Q2 inflation print and RBNZ’s consultation paper that proposed tightening lending restrictions. Next RBNZ meeting scheduled for 11-Aug.
*Japan eyeing more aggressive fiscal stimulus:
While fiscal stimulus in Japan has long been expected, there has been a meaningful ramp in speculation about a more aggressive package following the ruling coalition's landslide victory in the recent upper house elections. Report Wednesday from Kyodo said government now considering a stimulus package of at least ¥20T. Article pointed out that while government initially envisaged a package worth more than ¥10T, the size is likely to double given that it will now include projects for 2017 and beyond, and boost "zaito" low-interest government loans by ¥6T. In terms of details, big chunk of the package expected to go to infrastructure investment. Report said government will also provide ¥3T from FX reserves to the state-run Japan Bank for International Cooperation, which will then extend low cost funds to Japanese companies.
*Australia and New Zealand Banking Group (ANZ) and Commonwealth Bank of Australia (CBA) and National Australia Bank Ltd (NAB) and Westpac Banking Corp Fully Paid Ord. Shrs (WBC) and Perpetual Limited(PPT):
One of Perpetual’s leading fund managers says the level of big-bank dividends is ‘‘simply unsustainable’’ and has warned investors banks may be forced to slash their payouts in response to weaker earnings and moves by regulators to lift capital. Anthony Aboud, the co-manager of Perpetual’s Pure Equity Alpha Fund, said some investors have forgotten banks are cyclical businesses and their provisions for bad debts are likely to increase sharply in a weakening market, reducing earnings. While many are drawn to banks’ fully franked dividend yields, which average 6 per cent, ‘‘in our view, the Australian banks are now nowhere as attractive as their dividends make them look’’, he wrote in a strongly worded note published on Perpetual’s website on Wednesday. National Australia Bank, Commonwealth Bank of Australia and Westpac Banking Corp are paying out more in dividends than they are generating in organic capital, he noted, meaning their dividend policies are eating into their capital base, a position that is unsustainable. ANZ Banking Group surprised the market by cutting its interim dividend in May, the first time it had done so since the financial crisis, while NAB and Westpac kept dividends flat. CBA reports its full-year results on August 10. It was ‘‘extremely likely’’ that the prudential regulator will require banks to hold more equity capital, Mr Aboud said, through both higher-risk weightings on assets and lifting the minimum common equity tier 1 ratio, currently set at 8 per cent. Banks could respond by issuing more shares, as they did in 2015, or by cutting dividends. ‘‘In my view, the Australian Prudential Regulation Authority (APRA) will require banks to increase the amount of capital they hold – this should reduce their capacity to keep up future dividend payments,’’ Mr Aboud said. Shareholders receive about $20 billion a year in dividends from the banks. Big banks’ shares were stronger on Wednesday – the majors were up between 0.35 per cent and 1 per cent – helping to lift the S&P/ASX200 to close above 5500, but remain well below their level at the start of the year.
PBoC fixed yuan at strongest level vs dollar in three weeks overnight. Bloomberg pointed out Thursday marked second day in a row that central bank has raised fixing against a rising US currency, boosting speculation that it is not adhering to its stated policy of following direction of market. However, this policy has actually been under scrutiny for a while and actually flagged as supportive in terms of dampening the spillover effects of the post-Brexit weakness in the yuan on global risk assets. SAFE, China’s FX regulator, specifically talked up the stabilization dynamic today, noting that expectations of yuan depreciation have weakened. Noted Brexit likely to slow Fed normalization process, while also noting it has not seen any big impact on China capital flows from Brexit.
*Turkish lira recovers from record lows after state-of-emergency declared by Ankara:
Turkish lira (TRY) recovering from record lows following credit downgrade by S&P yesterday with commentators pointing to some stability after Ankara declared a three-month state of emergency late Wednesday. Sell-side however warn that the move could be President Erdogan’s first step towards Executive Presidency via an unprecedented centralization of power after Friday’s failed military coup. SocGen said shift toward more autocratic rule likely to entail erosion of rule of law, along with deterioration in the strength of Turkey’s independent institutions, its economic policymaking, and its progress on planned reforms. Added shift likely to wreak severe damage on market confidence, dampen private investment, and ultimately weigh on Turkey’s growth prospects, forcing more credit downgrades. Recall, over 60K public sector officials have been purged so far by the Erdogan administration.
*Earnings metrics continue to improve:
Better sentiment surrounding early Q2 earnings season supported by continued improvement in key Q2 earnings metrics. According to FactSet, blended growth rate for S&P 500 EPS is (4.1%), better than (5.5%) at end of last week and end of June. Of the 20% S&P 500 that has now reported, 68% have beat consensus EPS expectations, up from 66% last week and just below the 70% one-year average. In the aggregate, companies beating earnings by 6.5%, above the 3.9% positive surprise rate at the end of last week and the one-year average of 4.2%. Blended revenue growth rate now (0.3%), while 54% of companies have beat consensus revenue expectations, better than the 51% at the end of last week and 49% average over last year. In the aggregate, companies beating consensus revenue expectations by 1.8%, up from the 0.4% beat rate at end of last week and the one-year average of 0.0%.
*Why are stocks lower?:
Nothing specific behind equity weakness Monday. Consolidation a go-to excuse following nine-day Dow winning streak. In addition, while a number of technical strategists have been out with positive comments as of late, they have also flagged signs of near-term overbought conditions. While earnings season takeaways have remained fairly upbeat, low bar has also helped. Policy support dynamic under a bit more scrutiny today. No surprise that BoJ’s Kuroda pushed back against helicopter money, but both Reuters and Bloomberg had articles highlighting concerns about potential disappoint given elevated level of expectations for additional monetary stimulus next week. Also thoughts ¥20T fiscal stimulus package headlines exaggerated. While ECB takeaways largely in line, Draghi not as dovish as expected. Recent dollar strength and potential market complacency on Fed tightening/rates some other areas of concern as of late.
*Industrials lead market lower:
Industrials worst performer despite machinery strength on JOY-US takeover and URI-US higher rental rate guidance. LUV-US guidance hit airlines. Materials dragged down by weakness select chemical and steel names on earnings (SHW-US, RS-US, NUE-US). Energy weaker with sluggish crude. Tech trailed. Semis in focus as INTCUS lagged on slower DCG growth, while QCOM-US guidance better than feared. EBAY-US rallied on better GMV growth. Financials a slight laggard. BK-US and AXP-US weak on earnings. Banks largely in line. BX-US up one earnings. Consumer discretionary held up better. Autos a bright spot with help from big GM-US beat and raise, JCIUS results/M&A and positive Baird comments on KMX-US. Defensives largely outperformed. REITs, precious metals and utilities all higher. Health care stronger. Biotech helped by acquisition of RLYP-US and BIIBUS earnings. Managed care shook off antirust news, while HUM-US also guided higher.
*BoJ’s Kuroda rules out helicopter money; press speculates on potential BoJ disappointment:
BoJ Governor Kuroda told BBC radio that there is no need and no possibility for helicopter money in Japan (though interview old and Kuroda has pushed back on helicopter money before). Stressed that Japan has benefited from clear separation between fiscal and monetary institutions. However, did reiterate central bank mantra that it has a very powerful policy framework and does not envisage any significant limitation of further easing of monetary conditions in Japan, if necessary. Separately, a couple of press reports today have highlighted some potential for BoJ to disappoint against extremely elevated expectations for further near-term policy support Bloomberg said increasing number of BoJ officials concerned about sustainability of current framework for massive monetary stimulus. Reuters noted recent yen weakness and a government fiscal stimulus package could take some pressure off the BoJ to ramp up its monetary easing.
*ECB on hold and no discussion of shifting QE rules:
ECB policies on hold, as expected. President Draghi highlighted the resilience of Eurozone markets in the wake of Brexit uncertainty due to policies in place. Talked up the ability to act if needed, but wanted to evaluate incoming data to asset underlying conditions. Draghi made notable emphasis on the importance of bank equity prices on ECB policy. Said weak prices impact cost of capital and bank lending channel. Pointed out that level of NPLs needed to be addressed as it undermines ability to lend. Backed in principle the idea of a government backstop in exceptional circumstances in order to avoid fire sale of bank stocks. Called for combination of supervisory approach, full functioning NPL market and government action to enforce it. Pointed out that banks were still in a better state than 2009 despite NPL problem. On QE, confirmed no discussions on changing rules of plan.
*Claims at three-month low; Philly Fed misses on headline, but details better; existing home sales rise:
Initial claims fell 1K to a three-month low of 253K in w/e 16-Jul, below 265K consensus. Labor Department said nothing unusual in data and no states estimated claims. However, more talk of volatility this time of year related to auto plant shutdowns. Philadelphia Fed manufacturing index fell to (2.9) in July from +4.7 in June, below the +4.5 consensus. Details better than the headline as new orders rose to +11.8 from (3.0). Shipments also increased to +6.3 from (2.1). Employment improved to (1.6) from (10.9), while workweek not as bad at (3.6) vs (13.1) in June. In addition, diffusion index for future general activity improved to 33.7 from 29.4, just below 35.9 five-year average. Existing home sales for June rose 1.1% to a 5.57M saar, ahead of 5.50M consensus. Sales up 3% y/y and the strongest since February 2007. Tight inventory a concern, with supply down 5.8% y/y. Median price up 4.8% y/y to $247,700. Share of first-time buyers rose to 33%, the largest in four years. Investors made up only 11% of sales, the lowest since 2009.
*Intel lags high-profile tech earnings; Qualcomm and eBay better:
A few high-profile earnings out of tech space last night.INTC-US the laggard with focus on Data Center Group deceleration. While, Q3 was guidance was above the Street and normal seasonality, some analysts skeptical about implied magnitude of recovery DCG. QCOM-US a standout as it beat on fiscal Q3 with QTL a bright spot. Catch-up payments in focus and as highlighted meaningful progress on China licensees. In QCT, MSM shipments above high end of the Street. Also guided above Street despite expectations for a miss. EBAY-USanother standout as GMV growth accelerated to 6% y/y and analysts talked up traction from structured data initiatives. Also boosted guidance and announced an additional $2.5B share buyback authorization. FFIV-USearnings beat on in-line revenue. Noted some strength in Americas and APAC, but highlighted Brexit impact on EMEA. Guidance better.
*Joy Global to be acquired by Komatsu:
Joy Global (JOY-US) agreed to be acquired by Japan’s Komatsu (630.1-JP) for $28.30 a share in cash in a deal valued at $3.7B, including debt. Represents a 20% premium to prior close. Deal expected to be completed in mid-2017. FT noted acquisition gives Komatsu exposure to surface and underground mining equipment, which it currently does not have. Companies also said their products are highly complementary and combined entity will focus on safety, productivity and life cycle cost improvement for customers. Komatsu said it plans to leverage both companies’ leading technologies to pursue product and service innovation to enhance mine safety and productivity. No recent takeover speculation surrounding JOY, though in recent years, Komatsu has been rumored as a suitor. Back in July of 2012, Komatsu specifically ruled out an acquisition.
*Relypsa to be acquired by Galencia:
Relypsa (RLYP-US) agreed to be acquired by Swiss healthcare group Galencia (GALN-CH) for $32 a share in cash in a deal valued at ~$1.53B. Represents a 59% premium to prior close. Deal expected to close in Q3. Note that back in April, Reuters reported Relypsa working with Centerview Partners to review offers from potential buyers. Relypsa makes Veltasa, a drug for the treatment of hyperkalemia, or excessive levels of potassium in the blood. Hyperkalemia affects ~3M people in the US. with late-stage chronic kidney disease or heart failure. Note Galencia’s Vifor Pharma unit already has right to Veltasa outside US and Japan. Multiple press reports discussed how Veltasa will likely soon face competition from AstraZeneca’s (AZN-US) ZS-9, which is awaiting FDA approval.
*Hedge fund outflows slowed in Q2 as quant funds outperformed:
Bloomberg cited Hedge Fund Research data, which showed the indutry saw net outflows of $8.2B in Q2 vs ~$15.1B, or about 46% less in Q1. Data however pointed out that global hedge fund assets increased by $42.1B in Q2 to nearly $2.9T, the third-highest quarterly total on record. Also showed asset growth was the strongest since the Q1 of 2015, boosted by a 2% return for the HFRI Fund Weighted Composite Index. Data showed the asset increase was driven by strong quantitative CTA advance on the day after the Brexit vote and broad-based industry-wide gains across equity, commodity and currency markets pursuant to the Brexit dislocations. Cited Renaissance Technologies (oversees $32B) seeing its quantitative equity hedge fund gaining 4.6% in June and ~14% in H1 and also P/E Investments’s quant currency fund surged 6.4% the day after the Brexit vote, mostly from betting against the euro.
*Spain one step closer to having a government:
Some attention back on Spain after acting Prime Minister Rajoy, leader of the conservative party, managed to secure the support of centrists Ciudadanos for the election of PP Public Works minister Ana Pastor to the post of Parliament Speaker. Spain’s King now expected to give mandate to Rajoy to form a government, with conjecture pointing to Ciudadanos for support. HSBC said while this is likely, there remain obstacles such as Ciudadanos's unwillingness to join forces with the nationalist regional parties, and the resistance of Socialist leader Sanchez who still has some hopes of becoming prime minister. Added that fiscal challenges facing Spain, with deficit remaining stubbornly high and Brussels threatening to impose fines, could play in favor of Rajoy. Inability to quickly form a government could mean bigger cuts to politically-sensitive areas for the Socialists, such as regional spending.
*RBNZ's economic update says more easing easing seems likely:
Kiwi dollar lower after RBNZ signaled stronger likelihood of an August rate cut. RBNZ’s economic update said more easing seemed likely to ensure inflation settles near middle of its target range. Seemed most concerned about persistent kiwi dollar strength. Noted trade-weighted exchange rate 6% higher than assumed in June statement, implying inflation outlook had weakened since then. Also cautioned higher currency was adding pressure to beleaguered dairy and manufacturing sectors. While noting house price inflation remains excessive, RBNZ said it was consulting on stronger macro-prudential rules to mitigate financial stability risks. Market-implied odds of August cut had ramped up following subdued Q2 inflation print and RBNZ’s consultation paper that proposed tightening lending restrictions. Next RBNZ meeting scheduled for 11-Aug.
*Japan eyeing more aggressive fiscal stimulus:
While fiscal stimulus in Japan has long been expected, there has been a meaningful ramp in speculation about a more aggressive package following the ruling coalition's landslide victory in the recent upper house elections. Report Wednesday from Kyodo said government now considering a stimulus package of at least ¥20T. Article pointed out that while government initially envisaged a package worth more than ¥10T, the size is likely to double given that it will now include projects for 2017 and beyond, and boost "zaito" low-interest government loans by ¥6T. In terms of details, big chunk of the package expected to go to infrastructure investment. Report said government will also provide ¥3T from FX reserves to the state-run Japan Bank for International Cooperation, which will then extend low cost funds to Japanese companies.
*Australia and New Zealand Banking Group (ANZ) and Commonwealth Bank of Australia (CBA) and National Australia Bank Ltd (NAB) and Westpac Banking Corp Fully Paid Ord. Shrs (WBC) and Perpetual Limited(PPT):
One of Perpetual’s leading fund managers says the level of big-bank dividends is ‘‘simply unsustainable’’ and has warned investors banks may be forced to slash their payouts in response to weaker earnings and moves by regulators to lift capital. Anthony Aboud, the co-manager of Perpetual’s Pure Equity Alpha Fund, said some investors have forgotten banks are cyclical businesses and their provisions for bad debts are likely to increase sharply in a weakening market, reducing earnings. While many are drawn to banks’ fully franked dividend yields, which average 6 per cent, ‘‘in our view, the Australian banks are now nowhere as attractive as their dividends make them look’’, he wrote in a strongly worded note published on Perpetual’s website on Wednesday. National Australia Bank, Commonwealth Bank of Australia and Westpac Banking Corp are paying out more in dividends than they are generating in organic capital, he noted, meaning their dividend policies are eating into their capital base, a position that is unsustainable. ANZ Banking Group surprised the market by cutting its interim dividend in May, the first time it had done so since the financial crisis, while NAB and Westpac kept dividends flat. CBA reports its full-year results on August 10. It was ‘‘extremely likely’’ that the prudential regulator will require banks to hold more equity capital, Mr Aboud said, through both higher-risk weightings on assets and lifting the minimum common equity tier 1 ratio, currently set at 8 per cent. Banks could respond by issuing more shares, as they did in 2015, or by cutting dividends. ‘‘In my view, the Australian Prudential Regulation Authority (APRA) will require banks to increase the amount of capital they hold – this should reduce their capacity to keep up future dividend payments,’’ Mr Aboud said. Shareholders receive about $20 billion a year in dividends from the banks. Big banks’ shares were stronger on Wednesday – the majors were up between 0.35 per cent and 1 per cent – helping to lift the S&P/ASX200 to close above 5500, but remain well below their level at the start of the year.
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