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Financial Insights(2016-07-26)

Australia
2016-07-26 10:39

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*No surprises from G20 meeting:
 
Nothing surprising out of G20 meeting of finance officials held in China over the weekend. Communique reiterated G20's determination to use all policy tools - monetary, fiscal and structural - individually and collectively. Also reiterated pledge to avoid competitive currency devaluations. UK vote to leave EU seemed to be the big topic of discussion at the meeting. G20 stressed need to reduce Brexit-related uncertainty as soon as possible. Communique also pledged to resist all forms of protectionism and highlighted need to develop a collective response to address overcapacity. Usual mixed takeaways on the sidelines from officials regarding need for heightened coordination on fiscal stimulus. US Treasury Secretary Lew pushed back. Noted US economy an economic bright spot.
 
*Why were stocks lower on Monday?:
 
Nothing specific behind today’s pullback in US equities. Easiest excuse seemed to revolve around near-term overbought conditions following four-week winning streak. S&P 500 ended last week up 8.8% from post-Brexit closing low on 27-Jun. Evercore ISI technical strategy note (Rich Ross) noted “terrible” setup for August. Continued weakness in oil received some blame. Also adds another headwind for inflation expectations. Policy support expectations, which have been a widely cited driver of post-Brexit resilience, under some scrutiny. Some worries BoJ could disappoint on Friday. Fed meeting this week expected to be a nonevent, though still the possibility it could use statement (via labor market language upgrade) to address concerns about market complacency on rates. While overall Q2 earnings sentiment better, industrial results continued to disappoint today.
 
*Good day for retail:
 
Retail a standout today after outperforming over the last few weeks. While cyclical rotation has been a recent tailwind, tough to find a specific catalyst for the move. However, some positive sell-side commentary as Miller Tabak reiterated its bullish call. Cited easier upcoming comp compares, more seasonal weather and NRF calendar anomaly of 53rd week in 2017. Also pointed out NRF looking for back-to-school spending to grow 11% this year. Added Nordstrom (JWN-US) began its annual Nordstrom Anniversary Sale last week, which should 200-300 bp of sales into Q3 from Q2. Elsewhere, some loose talk of support from Business Insider story that Kmart employees believe company nearing liquidation. However, parent Sears Holding (SHLD-US) denied.
 
*Energy leads market lower:
 
Sector performance fairly bunched and no great read-throughs for macro narrative. Energy worst performer. Oil hit again on both inventory and demand concerns. Industrials lagged. Select machinery, multis andtransports weighed. WAB-US and ROP-US the latest earnings disappointments. Telecom lagged despite big rally in S-US following earnings. Banking group saw modest pullback in financials. Tech held up better than tape. Semis a standout with MU-US big gainer on positive takeaways from 8-K filing last Friday. YHOO-US lagged on asset sale. Materials a relative outperformer despite big selloff in precious metals. Select chemicals outperformed. Healthcare slightly lower. Biotech stronger. Managed care and PBMs (Barron's cautious) lagged. Consumer discretionary only sector to finish higher on retail rally.
 
*Oil weaker again:
 
WTI crude down 2.4% to $43.13 a barrel. Follows last week’s overall ~4% drop. Few specific developments but fairly bearish headlines of late. Inventory remains in focus, with Genscape today reporting Cushing build of 1.14M barrels. Glut of refined products of particular concern, with high gasoline stocks pressuring refiners’ margins. Bloomberg noted today that while US production sinking low enough to start working down supplies, gasoline demand set to drop off in August and September as summer driving season concludes. WSJ today also noted global crude inventory levels very difficult to estimate, with millions of barrels flowing to locations (including Russia and China) outside the scope of industry trackers. Also discussed ongoing trend of tankers providing floating storage. Friday rig count report showed number of US active rigs up 10% since end of May, with some calling the bottom of the rig count cycle.
 
*More M&A headlines:
 
M&A headlines not limited to Yahoo (YHOO-US) deal. Elsewhere in Internet space, LinkedIn (LNKD-US) higher filing revealed that Salesforce (CRM-US) indicated it would have bid much higher if given a chance. In addition, Outerwall (OUTR-US) agreed to go private in deal valued at ~$1.6B. Carmike Cinemas (CKEC-US) agreed to sweetened $1.2B deal to be acquired by AMC Entertainment (AMC-US). Reuters reported Tesla (TSLA-US) and Solar City (SCTY-US) are close to signing a formal merger agreement. Also noted that if government wins its challenge against the two big deals (HUM-US/AET-US and CI-US/ANTM-US), midsized players like Centene (CNC-US), Molina (MOH-US), or WellCare (WCG-US) could become targets. The WSJ noted that the Hershey Trust settlement could give Mondelez (MDLZ-US) or other potential bidders a new opening to try and acquire Hershey (HSY-US).
 
*Q2 earnings metrics improved last week:
 
Better sentiment surrounding earnings season supported by latest Earnings Insight report from FactSet. Blended S&P 500 earnings decline ended last week at (3.7%), better than the (5.5%) at end of June. Of the 25% of S&P 500 companies that have now reported, 68% have beat consensus EPS estimates, just below 70% four-quarter average. In the aggregate, companies reporting earnings that are 6.7% above expectations, much better than four-quarter (and five-year) average of 4.2%. Blended revenue decline is now (0.3%), smaller than (0.8%) at the end of the quarter. In addition, 51% have beat consensus revenue expectations, better than the 49% one-year average. In the aggregate, companies beating consensus revenue estimates by 1.3%, well ahead of the 0.0% one-year average.
 
*Watered down Brexit deal in the works?:
 
EU reportedly considering a Brexit deal that gives UK seven-year emergency brake on migration and continued single market access. The Guardian cited senior British and EU sources who noted that while plan would prove highly controversial in many member states, it would limit economic shock to EU from Brexit and dampen political contagion arising from complete divorce. Deal would require UK to continue paying into EU budget. UK would also no longer be part of negotiations on determining rules on the single market. However, report does not seem to have gained much traction yet. Note EU’s Juncker reiterated on Monday that Britain would lose unrestricted access to single market if it did not accept free movement of workers. Fits with pushback against notion of British “cherry picking”.
 
*Under pressure to do more, some worries about BoJ disappointment:
 
BoJ under meaningful scrutiny heading into Friday’s policy announcement. Lot of discussion in press about central bank under pressure to expand its monetary stimulus in coordination with an upcoming fiscal stimulus from the government. However, also more talk about some BoJ officials are reluctant to act amid concerns that policy is increasingly pushing on a string. Nikkei article discussed pockets of hesitancy to unleash remaining stimulus options. Noted widespread view within the bank that mechanisms behind inflation are still working properly, while fiscal stimulus should help. WSJhighlighted widely discussed drawbacks surrounding some of BoJ’s options for additional policy support, particularly in terms of pushing rates further into negative territory and buying more JGBs.
 
*Buy the dip:
 
Buy the dip a winning strategy in 2016. Underpinned by a number of disparate drivers, including policy support expectations, shortlived spillover from adverse geopolitical developments, corporate buybacks, and lack of alternatives. Bloomberg discussed this dynamic. Noted from 11% decline in first two months of year to 5.3% drop after Brexit, US stocks quickly able to shake off worries. Pointed out that investing strategy of buying Russell 3000 companies trading at an RSI under 30, and resets basket every week to remove stocks no longer fitting that criteria, has returned 28% this year. Added basket gained 18% by 20-Apr and another 12 percentage points in wake of Brexit vote.
 
*German business confidence surprises to upside despite Brexit:
 
Business confidence index produced by Germany’s Ifo think-tank slipped to 108.3 in July from 108.7 in June, better than the 107.5 consensus and still at second-highest level of the year. Current conditions component ticked up to 114.7 from 114.6, ahead of the 114.7 consensus. Expectations component fell to 102.2 from 103.1, but was still better than the 103.1 consensus. Ifo chief said results further demonstrated resilience of German economy. Recall last week saw some of the first signs of Brexit spillover in the data. Germany’s ZEW Center for European Economic Research said its index of investor and analyst expectations fell to lowest level since November 2012. Noted in a statement that uncertainty about Brexit vote’s consequences for Germany was largely responsible for substantial decline in sentiment.
 
*Japan June trade better than expected, real exports rise:
 
Japan June trade surplus was JPY692.8B versus consensus JPY494.8B, following a deficit of JPY40.6B in May. Main surprise was exports, which fell 7.4% y/y compared to consensus 11.6% drop. Imports declined 18.8% vs consensus 19.7%. Seasonally adjusted exports rose 1.3% m/m after 1.2% decrease in May, while imports expanded 0.6% after 0.9% rise. Regional breakdown showed broad-based moderation in export downtrend. Weakness in nominal figures coming from accelerating deterioration in trade values. In volume terms, exports rose 2.9% y/y for the first increase in four months, while imports posted second straight gain of 0.4%. Finance Ministry also released 1H custom trade currency weightings, showing 51.2% in USD, down from 53.1% in 2H15, while JPY was 37.1% from 35.5%.
 
*Italian officials downplay banking concerns:
 
Seemingly concerted effort by Italian finance officials to downplay concerns surrounding country’s banking sector over the weekend. Italian Finance Minister Padoan said there is no systemic banking problem in Italy, while adding that the group does need a rescue. Also specifically rejected a bail-in of private investors. Separately, Bank of Italy Governor told CNBC on Sunday that it was "totally wrong" to worry the whole banking system in Italy had problems. Also said that a portion of NPLs would be resolved in an orderly fashion. In addition, Il Sole 24 reported preliminary indications of stress tests (out Friday), showed that Intesa Sanpaolo (ISP.IM), Banco Popolare (BP.IM), UBI (UBI.IM), and UniCredit (UCG.IM) all have resilient capital levels under the stressed scenario.
 
*First Italy, now Portuguese banks need taxpayer bailout:
No letup in concerns surrounding European banking sector heading into 29-Jul EBA stress tests. FT reported Portuguese banks are bracing for heavy losses from Lisbon’s so far unsuccessful attempts to sell Novo Banco, which was salvaged from collapse of Banco Espirito Santo. Paper said estimates of the potential bill facing banks, which finance the resolution fund that bailed out Novo Banco in 2014, range from €2.9B to €3.9B. Added bankers doubtful rescued lender will attract any acceptable offers, meaning it may have to break up or liquidate. Also discussed how Lisbon pushing for a systemic solution to deal with more than €30B in bad debts and problem assets.
 
*ECB’s Visco says will find solutions if bond shortages emerge:
 
Bond scarcity remains major talking pointing given concern about policy limitations following unprecedented drop in bond yields after Brexit vote. In an interview with Bloomberg, ECB’s Visco said the central bank will be able to cope with any problems that might emerge in the implementation of QE. Said that so far, there is no evidence of a shortage of government bonds. Asked whether a departure from the capital key would be an option, Visco said: “It depends. We will have to see.” Bloomberg noted there’s been a few options floated by economists on how the ECB can tackle bond scarcity, such as lowering or removing the requirement that bonds only be bought if they have yields at or above the deposit rate, raising the share of debt issues that can be purchased, and shifting away from the requirements that debt be bought roughly in line with the economic size of each member state.
 
*National Australia Bank Ltd (NAB):
 
National Australia Bank could become the only major Australian retail bank with headquarters on Sydney’s financial boulevard, Martin Place. The Melbourne-based banking group is looking fora new Sydney headquarters and has been widely tipped to pre-commit to Brookfield Property Partners’ new Wynyard Place tower above Wynyard Station. But NAB is quietly considering an alternative proposal for a move to the new $300 million tower being developed by Investa and the Gwynvill Group at 60 Martin Place.
 
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