*More talk of yuan stabilization:
Yuan stabilization theme continues to gain some traction. Chinese currency snapped six-week losing streak this week after weakening on Monday above 6.7 level to the dollar for first time since 2010. Multiple reports have noted support from heightened PBoC intervention. Some thoughts it wants to demonstrate yuan stability ahead of this weekend’s G20 meeting in China. MNI also flagged another G20 meeting in September and October’s inclusion in the IMF’s SDR basket. Separately, Premier Li reiterated that his government would keep the yuan exchange rate stable around a reasonable and balanced level and would not engage in a currency or trade war. China’s Vice Finance Minister Zhu Guangyao told CNBC that Beijing has no reason to devalue yuan as economic fundamentals remain strong.
*Discord between top China leaders spilling out into open:
China’s reform push/economic rebalancing under some heightened scrutiny. WSJ highlighted the increasingly conflicting messages coming from President Xi and Premier Li surrounding the reform of state-owned enterprises (SOEs). Noted that earlier this month, Xi called for “stronger, better, bigger” state juggernauts, with a key role for Beijing in their management. However, Li’s comments emphasized need to “slim down” SOEs and “follow market rules” in remaking them. Paper said divergent views adding another layer of uncertainty to promised restructuring of Chinese economy, which increasingly appears at a standstill. Also highlighted Xi’s seeming power grab and pushback against Li’s focus on using traditional role of credit to underpin growth. At the same time, Li in a difficult position given need for growth to give China breathing room on reform.
*IMF reiterates call for coordinated fiscal policy support:
IMF said on Thursday that coordinated fiscal policy support would be beneficial should global outlook weaken materially. Comments came ahead of G20 meeting of finance officials in China. Fit with ongoing mantra that more fiscal stimulus is needed at a time when central bankers are increasingly running out of ammunition (and have faced some backlash with their foray into negative interest rate policies). WSJ discussed how some countries have already stepped up to the plate or are on the verge of doing more. However, also highlighted some pushback from US Treasury Secretary Lew, who said he does not think this is a moment for the kind of coordinated action that occurred during the great recession. While not mentioned in article, Germany has also resisted calls to do more to boost demand.
*All sectors finish higher:
Defensive sectors led the market higher today, with utilities in the lead. Financials outperformed. Banks led the sector with limited pockets of weakness among regionals. Credit card names mixed with COF-US missing on higherthan-expected credit costs. V-US stronger after reporting. Beverages outperformed in consumer stapleson SAMUS earnings beat; depletion trends better than analyst expectations. Restaurants better for consumer discretionary. CMG-US up despite a Q2 earnings miss. Semis the big story in tech with SWKS-US notably lower despite better results and guidance; inventory the concern. Packaging outperformed in materials, but chemicals lagged. Healthcare trailed the tape. Energy off earlier strength. E&Ps generally down with oil lower, but SWN-US a standout after in-line results and raised production/capex guidance. Multis (HON-US and GE-US) weighed on industrials, though road and rail group better with SWFT-US a big gainer.
*Flow data highlights reach for yield; interest in banks:
Big theme in recent flow data continues to be a reach for yield with flocking to emerging market debt. EPFR data showed emerging market debt attracted $4.9B of inflows in latest week, eclipsing weekly record set earlier this month. CLSA’s Greed & fear report recently discussed this trend, noting that it makes complete sense given that a premium should be paid for those government bond markets where monetary policy is still orthodox. Added emerging market debt set for a boom as long as G7 central banks do not lose credibility. BofA Merrill Lynch’s weekly Flow Showreport noted emerging market equities also saw strongest inflows in a year. Also flagged a notable pain trade, with largest financials inflows since 2015 and largest outflows from Treasuries in 15 weeks.
*Oil heading for weekly decline:
Oil lower again today after dropping more than 2% on Thursday. No straightforward catalyst but ongoing scrutiny on glut in refined products, particularly gasoline, with Wednesday’s EIA data showing US stockpiles rising 900K barrels following a 1.2M barrel rise in prior week. Gasoline in storage reportedly near 25-year highs for this time of year (summer driving season). Reuters report today suggested few US refiners making run cutbacks, with large Midwest refining region actually increasing its throughput. Follows Thursday news that China’s gasoline exports hit an all-time high. Other factors potentially at play for crude, with oil exports from Iraq (OPEC’s second-largest producer) set to rise in July and BakerHughes data showing fourth consecutive weekly increase in active US drilling rigs.
*UK PMI hits seven-year low after Brexit vote:
UK PMI fell sharply after Brexit vote, with flash composite reading hitting an 87-month low of 47.7 vs 52.4 in June. Services sector reading, representing more than 75% of UK economy, fell to an 88-month low of 47.4 vs 52.3. Manufacturing hit a 41-month low of 49.1 vs 52.1. Markit said output and new orders fell for first time since end of 2012, while service providers' optimism about coming 12 months hit seven-and-half year lows. Pointed out composite output registered steepest drop in series history, along with the fall in services business expectations. No evidence of price pressures, with a rise in input prices offset by subdued wage growth. The one bright spot was an improvement in manufacturing export growth to best level in two years (weak sterling impact). Markit said data suggest economy likely to contract 0.4% in August.
*Eurozone PMI beats post-Brexit:
Eurozone flash composite PMI slipped to 52.9 in July from 53.1 in June, an 18-month low. However, still beat the 52.5 consensus. Manufacturing fell to 51.9 from 52.8, a two-month low, but largely in line. While an 18-month low, services only slipped to 52.7 from 52.8. In addition, it was ahead of the 52.3 consensus. At the country-specific level, German composite reading improved to 55.3 from 54.4, ahead of the 53.7 consensus and highest level of the year. Services drove upside momentum. French composite pushed up to 50.0 from 49.6, better than the 49.2 consensus. Manufacturing remained in contraction, but services pushed into expansion. Markit highlighted surprising resilience in face of Brexit and terrorist attack in France. Talked up employment growth and capacity boost, but did highlight uncertainty.
*Upside surprise from July US manufacturing PMI:
Markit flash US manufacturing PMI for July came in at 52.9, better than June 51.3 level and consensus for 51.5. Sharpest rise since November 2015. Release noted faster rises in output, new orders, and employment, which outweighed drag from sustained inventory cutbacks. Production growth driven by robust rise in new business volumes, at fastest pace in nine months and close to post-crisis average. New export orders rose at weaker pace than overall new business, suggesting domestic markets remained main driver for growth. Report noted improved demand conditions and greater production volumes sparked solid upturn in employment numbers, with highest increase in manufacturing payroll numbers for the past 12 months. Release presents more upbeat manufacturing picture than recent Empire and Philadelphia Fed surveys, which both posted below-consensus results for July.
*Merkel and Draghi show some flexibility over Italian bank rescue plan:
Some signs of movement in the Italian bank rescue saga. Bloomberg reported that German Chancellor Merkel is prepared to support a flexible reading of EU rules on bank rescues to help Italian Prime Minister Renzi. Story said this could mean accepting some form of Italian government compensation for retail investors to limit any political fallout ahead of key constitutional reform referendum this fall. Merkel’s remarks came after ECB President Draghi yesterday backed state-funded backstop for banks under exceptional circumstances, echoing a similar statement last week by Vice President Constancio. Draghi argued such a measure could be “very useful” while stressing that European rules on resolution and recovery of banks should be honoured. However, he did not give any details on how this should be done and said it is responsibility of the European Commission.
*Japan fiscal stimulus hopes overdone?:
Some thoughts that headlines about an increasingly larger fiscal stimulus package in Japan seem overdone. While government originally envisaged a ~¥10T+ plan, recent reports have talked up the likelihood of a more aggressive package in the range of ¥20-30T. However, a Nikkei report cited critics who said headline figure is easy to inflate given includes government guarantees and other off-budget measures. Noted Finance Ministry recently proposed ¥3T in direct outlays to help boost GDP, while supplementary budget proposal to be submitted to parliament this fall may only amount to ~¥2T. Added that in addition to a small budget passed for earlier earthquake relief, economists at BNP estimated this would only boost GDP by ~0.1%. JPMorgan was also with a skeptical analysis on Thursday.
*AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED (ANZ) and WESTPAC BANKING CORPORATION (WBC):
The corporate regulator has expanded its legal case against ANZ Banking Group and Westpac Banking Corp, filing an amended statement of claim in the Federal Court on Friday afternoon that points to a broader number of possible victims. Sources close to the case said the revised wording of one part of the unconscionable conduct claim against both banks better reflects the harm the regulator alleges was caused to customers and counterparties of the banks. The Australian Securities and Investments Commission is now arguing that losses were sustained by various ‘‘at risk counterparties’’ who made payments to the banks or other counterparties referencing the bank bill swap rate (BBSW).
*COMMONWEALTH BANK OF AUSTRALIA (CBA):
Highly regarded Commonwealth Bank of Australia analyst Ben Brownette will boost the Northern Trust Capital Markets’ shift Down Under, after being appointed to help cover Australia for the group. Brownette, who built a strong reputation at CBA for out-ofconsensus calls on the likes of Downer EDI, Lendlease and Leighton Holdings, is the first Australian hire Northern Trust has made since its subsidiary Northern Trust Securities acquired institutional broking business Aviate Global in May this year. Equities brokerage Aviate, which was founded by Guy Gibson and Gary Paulin, had offices in London, New York, Hong Kong and Sydney and built a strong presence across Europe, North America and Asia. The Northern Trust deal was designed to drive the expansion of the former Aviate, boosting its Sydney team and giving Northern Trust a second Australian office.
*BHP BILLITON LIMITED (BHP):
Investors and analysts say they will support BHP Billiton if it succeeds in securing Anglo American’s Queensland coal assets, which are tipped to fetch around $US1.5 billion ($2 billion). BHP, as part of its BHP Mitsubishi Alliance coal joint venture with Japanese giant Mitsubishi, is the last remaining bidder in the auction process for the Anglo assets, which include the Moranbah North and Grosvenor metallurgical coal mines, as revealed by The Australian Financial Review last week. BHP appears to have seen off potential bidders including Glencore, AMCI, Yancoal, private equity group Apollo and coal exporter XCoal. Investors and analysts say they will support BHP Billiton if it succeeds in securing Anglo American’s Queensland coal assets, which are tipped to fetch around $US1.5 billion ($2 billion).
Declining production was the norm across BHP Billiton’s most important divisions during fiscal 2016, but that didn’t stop booming production in some of the company’s lower profile product groups. The miner’s production of gold, for example, soared 21 per cent higher than the previous year to 226,682 ounces, with about 20 per cent of that owned by joint venture partners. That was BHP’s biggest haul of the lustrous metal since it produced 286,971 ounces in the 2002 financial year. BHP does not own any gold mines per se, but produces gold as a byproduct at two mines better known for their copper; Escondida in Chile and Olympic Dam in South Australia. The 12 per cent rise in gold production at Olympic Dam was timely, given the Australian denominated gold price has traded near record highs during the past six months, and it coincided with increased production of copper at the mine.
Yuan stabilization theme continues to gain some traction. Chinese currency snapped six-week losing streak this week after weakening on Monday above 6.7 level to the dollar for first time since 2010. Multiple reports have noted support from heightened PBoC intervention. Some thoughts it wants to demonstrate yuan stability ahead of this weekend’s G20 meeting in China. MNI also flagged another G20 meeting in September and October’s inclusion in the IMF’s SDR basket. Separately, Premier Li reiterated that his government would keep the yuan exchange rate stable around a reasonable and balanced level and would not engage in a currency or trade war. China’s Vice Finance Minister Zhu Guangyao told CNBC that Beijing has no reason to devalue yuan as economic fundamentals remain strong.
*Discord between top China leaders spilling out into open:
China’s reform push/economic rebalancing under some heightened scrutiny. WSJ highlighted the increasingly conflicting messages coming from President Xi and Premier Li surrounding the reform of state-owned enterprises (SOEs). Noted that earlier this month, Xi called for “stronger, better, bigger” state juggernauts, with a key role for Beijing in their management. However, Li’s comments emphasized need to “slim down” SOEs and “follow market rules” in remaking them. Paper said divergent views adding another layer of uncertainty to promised restructuring of Chinese economy, which increasingly appears at a standstill. Also highlighted Xi’s seeming power grab and pushback against Li’s focus on using traditional role of credit to underpin growth. At the same time, Li in a difficult position given need for growth to give China breathing room on reform.
*IMF reiterates call for coordinated fiscal policy support:
IMF said on Thursday that coordinated fiscal policy support would be beneficial should global outlook weaken materially. Comments came ahead of G20 meeting of finance officials in China. Fit with ongoing mantra that more fiscal stimulus is needed at a time when central bankers are increasingly running out of ammunition (and have faced some backlash with their foray into negative interest rate policies). WSJ discussed how some countries have already stepped up to the plate or are on the verge of doing more. However, also highlighted some pushback from US Treasury Secretary Lew, who said he does not think this is a moment for the kind of coordinated action that occurred during the great recession. While not mentioned in article, Germany has also resisted calls to do more to boost demand.
*All sectors finish higher:
Defensive sectors led the market higher today, with utilities in the lead. Financials outperformed. Banks led the sector with limited pockets of weakness among regionals. Credit card names mixed with COF-US missing on higherthan-expected credit costs. V-US stronger after reporting. Beverages outperformed in consumer stapleson SAMUS earnings beat; depletion trends better than analyst expectations. Restaurants better for consumer discretionary. CMG-US up despite a Q2 earnings miss. Semis the big story in tech with SWKS-US notably lower despite better results and guidance; inventory the concern. Packaging outperformed in materials, but chemicals lagged. Healthcare trailed the tape. Energy off earlier strength. E&Ps generally down with oil lower, but SWN-US a standout after in-line results and raised production/capex guidance. Multis (HON-US and GE-US) weighed on industrials, though road and rail group better with SWFT-US a big gainer.
*Flow data highlights reach for yield; interest in banks:
Big theme in recent flow data continues to be a reach for yield with flocking to emerging market debt. EPFR data showed emerging market debt attracted $4.9B of inflows in latest week, eclipsing weekly record set earlier this month. CLSA’s Greed & fear report recently discussed this trend, noting that it makes complete sense given that a premium should be paid for those government bond markets where monetary policy is still orthodox. Added emerging market debt set for a boom as long as G7 central banks do not lose credibility. BofA Merrill Lynch’s weekly Flow Showreport noted emerging market equities also saw strongest inflows in a year. Also flagged a notable pain trade, with largest financials inflows since 2015 and largest outflows from Treasuries in 15 weeks.
*Oil heading for weekly decline:
Oil lower again today after dropping more than 2% on Thursday. No straightforward catalyst but ongoing scrutiny on glut in refined products, particularly gasoline, with Wednesday’s EIA data showing US stockpiles rising 900K barrels following a 1.2M barrel rise in prior week. Gasoline in storage reportedly near 25-year highs for this time of year (summer driving season). Reuters report today suggested few US refiners making run cutbacks, with large Midwest refining region actually increasing its throughput. Follows Thursday news that China’s gasoline exports hit an all-time high. Other factors potentially at play for crude, with oil exports from Iraq (OPEC’s second-largest producer) set to rise in July and BakerHughes data showing fourth consecutive weekly increase in active US drilling rigs.
*UK PMI hits seven-year low after Brexit vote:
UK PMI fell sharply after Brexit vote, with flash composite reading hitting an 87-month low of 47.7 vs 52.4 in June. Services sector reading, representing more than 75% of UK economy, fell to an 88-month low of 47.4 vs 52.3. Manufacturing hit a 41-month low of 49.1 vs 52.1. Markit said output and new orders fell for first time since end of 2012, while service providers' optimism about coming 12 months hit seven-and-half year lows. Pointed out composite output registered steepest drop in series history, along with the fall in services business expectations. No evidence of price pressures, with a rise in input prices offset by subdued wage growth. The one bright spot was an improvement in manufacturing export growth to best level in two years (weak sterling impact). Markit said data suggest economy likely to contract 0.4% in August.
*Eurozone PMI beats post-Brexit:
Eurozone flash composite PMI slipped to 52.9 in July from 53.1 in June, an 18-month low. However, still beat the 52.5 consensus. Manufacturing fell to 51.9 from 52.8, a two-month low, but largely in line. While an 18-month low, services only slipped to 52.7 from 52.8. In addition, it was ahead of the 52.3 consensus. At the country-specific level, German composite reading improved to 55.3 from 54.4, ahead of the 53.7 consensus and highest level of the year. Services drove upside momentum. French composite pushed up to 50.0 from 49.6, better than the 49.2 consensus. Manufacturing remained in contraction, but services pushed into expansion. Markit highlighted surprising resilience in face of Brexit and terrorist attack in France. Talked up employment growth and capacity boost, but did highlight uncertainty.
*Upside surprise from July US manufacturing PMI:
Markit flash US manufacturing PMI for July came in at 52.9, better than June 51.3 level and consensus for 51.5. Sharpest rise since November 2015. Release noted faster rises in output, new orders, and employment, which outweighed drag from sustained inventory cutbacks. Production growth driven by robust rise in new business volumes, at fastest pace in nine months and close to post-crisis average. New export orders rose at weaker pace than overall new business, suggesting domestic markets remained main driver for growth. Report noted improved demand conditions and greater production volumes sparked solid upturn in employment numbers, with highest increase in manufacturing payroll numbers for the past 12 months. Release presents more upbeat manufacturing picture than recent Empire and Philadelphia Fed surveys, which both posted below-consensus results for July.
*Merkel and Draghi show some flexibility over Italian bank rescue plan:
Some signs of movement in the Italian bank rescue saga. Bloomberg reported that German Chancellor Merkel is prepared to support a flexible reading of EU rules on bank rescues to help Italian Prime Minister Renzi. Story said this could mean accepting some form of Italian government compensation for retail investors to limit any political fallout ahead of key constitutional reform referendum this fall. Merkel’s remarks came after ECB President Draghi yesterday backed state-funded backstop for banks under exceptional circumstances, echoing a similar statement last week by Vice President Constancio. Draghi argued such a measure could be “very useful” while stressing that European rules on resolution and recovery of banks should be honoured. However, he did not give any details on how this should be done and said it is responsibility of the European Commission.
*Japan fiscal stimulus hopes overdone?:
Some thoughts that headlines about an increasingly larger fiscal stimulus package in Japan seem overdone. While government originally envisaged a ~¥10T+ plan, recent reports have talked up the likelihood of a more aggressive package in the range of ¥20-30T. However, a Nikkei report cited critics who said headline figure is easy to inflate given includes government guarantees and other off-budget measures. Noted Finance Ministry recently proposed ¥3T in direct outlays to help boost GDP, while supplementary budget proposal to be submitted to parliament this fall may only amount to ~¥2T. Added that in addition to a small budget passed for earlier earthquake relief, economists at BNP estimated this would only boost GDP by ~0.1%. JPMorgan was also with a skeptical analysis on Thursday.
*AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED (ANZ) and WESTPAC BANKING CORPORATION (WBC):
The corporate regulator has expanded its legal case against ANZ Banking Group and Westpac Banking Corp, filing an amended statement of claim in the Federal Court on Friday afternoon that points to a broader number of possible victims. Sources close to the case said the revised wording of one part of the unconscionable conduct claim against both banks better reflects the harm the regulator alleges was caused to customers and counterparties of the banks. The Australian Securities and Investments Commission is now arguing that losses were sustained by various ‘‘at risk counterparties’’ who made payments to the banks or other counterparties referencing the bank bill swap rate (BBSW).
*COMMONWEALTH BANK OF AUSTRALIA (CBA):
Highly regarded Commonwealth Bank of Australia analyst Ben Brownette will boost the Northern Trust Capital Markets’ shift Down Under, after being appointed to help cover Australia for the group. Brownette, who built a strong reputation at CBA for out-ofconsensus calls on the likes of Downer EDI, Lendlease and Leighton Holdings, is the first Australian hire Northern Trust has made since its subsidiary Northern Trust Securities acquired institutional broking business Aviate Global in May this year. Equities brokerage Aviate, which was founded by Guy Gibson and Gary Paulin, had offices in London, New York, Hong Kong and Sydney and built a strong presence across Europe, North America and Asia. The Northern Trust deal was designed to drive the expansion of the former Aviate, boosting its Sydney team and giving Northern Trust a second Australian office.
*BHP BILLITON LIMITED (BHP):
Investors and analysts say they will support BHP Billiton if it succeeds in securing Anglo American’s Queensland coal assets, which are tipped to fetch around $US1.5 billion ($2 billion). BHP, as part of its BHP Mitsubishi Alliance coal joint venture with Japanese giant Mitsubishi, is the last remaining bidder in the auction process for the Anglo assets, which include the Moranbah North and Grosvenor metallurgical coal mines, as revealed by The Australian Financial Review last week. BHP appears to have seen off potential bidders including Glencore, AMCI, Yancoal, private equity group Apollo and coal exporter XCoal. Investors and analysts say they will support BHP Billiton if it succeeds in securing Anglo American’s Queensland coal assets, which are tipped to fetch around $US1.5 billion ($2 billion).
Declining production was the norm across BHP Billiton’s most important divisions during fiscal 2016, but that didn’t stop booming production in some of the company’s lower profile product groups. The miner’s production of gold, for example, soared 21 per cent higher than the previous year to 226,682 ounces, with about 20 per cent of that owned by joint venture partners. That was BHP’s biggest haul of the lustrous metal since it produced 286,971 ounces in the 2002 financial year. BHP does not own any gold mines per se, but produces gold as a byproduct at two mines better known for their copper; Escondida in Chile and Olympic Dam in South Australia. The 12 per cent rise in gold production at Olympic Dam was timely, given the Australian denominated gold price has traded near record highs during the past six months, and it coincided with increased production of copper at the mine.
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