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Financial Insights(216-07-27)

Australia
2016-07-27 10:24

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*Better sentiment surrounding retail sector:
 
Some focus on recent retail outperformance. Cyclical rotation a widely discussed theme. In addition, NRF out last week with a call for back-to-school (BTS) spending to grow 11% this year. Today, it upgraded its 2016 retail sales growth forecast to 3.4% from 3.1%. Several sell-side firms out with positive comments in recent days. Miller Tabak reiterated its bullish retail call yesterday. Cited upcoming comp compares, more seasonal weather and NRF calendar anomaly of 53 rd week in 2017. Stifel out with a cautiously optimistic BTS preview, anticipating more broad-based consumer acceptance of fashion trends to fuel sales as consumers update their wardrobes. Deutsche Bank seeing renewed interest in dept. store group. Cited cheap valuation and noted opportunity for favorable 2H set-up vs easy compares if weather is more favorable and retailers can exit Q2 with clean inventories.
 
*Cautious Morgan Stanley call on oil getting attention:
 
Oil weakness getting more and more attention. A number of different drivers cited for the quick retreat from the earlyJune push through the $50 a barrel level. Some focus on a note out Monday from Morgan Stanley. Noted risks remain skewed to the downside in 2H as fundamental headwinds are growing, offsetting any recent positives. Noted return of oversupply as disruptions resolve (recall earlier support from disruptions in Nigeria, Canada, Libya and Venezuela). Also pointed out that refined products are severely oversupplied (the gasoline oversupply dynamic has received a lot of attention in recent weeks). Added crude demand is falling well short of product demand, while key product demand is decelerating. Also expressed concern about firm’s revised below-consensus GDP outlook, macro risks and longer positioning in oil market.
 
*JPMorgan says sell consumer staples, buy healthcare:
 
Latest US Portfolio Strategy report from JPMorgan reiterated concerns about rich valuations/crowded positions in low volatility, quality and sustainable income stocks (ie consumer staples, telecom and utilities). Pointed out they are outright expensive to value and growth (ie healthcare and technology). Highlighted the decoupling between staples and healthcare in recent quarters. Upgraded healthcare to overweight and downgraded staples to underweight as a sector convergence trade. Cited expectations for recoupling in valuations within defensive sectors; style rotation to favor sustainable growth opportunities over low volatility; and investors to refocus on attractive long-term fundamentals. Also said that during four prior periods of staples outperformance since 1980, relative valuation has never been this stretched.
 
*Restaurant group under pressure:
 
Restaurant group under pressure today on a combination of disappointing results and some very cautious sell-side commentary. MCD-US reported a slowdown in Q2 comp growth from recent trends. NDLS-US negatively preannounced and said its CEO is stepping down. Jefferies called top of restaurant cycle and said incremental caution required. Noted it believes industry has at least 18 months of challenges in terms of softer comps and higher labor costs. Stifel adopted bearish outlook for restaurants. Believes that 150-200 bp deceleration of restaurant industry comps across all categories during Q2 reflects start of a US restaurant recession. Added it may also represent a harbinger to a US recession in early 2017. Firm downgraded a slew of name in its coverage universe, including CHUY-US,DFRG-US, LOCO-US, PLAYUS, TXRH-US (also downgraded at Telsey Advisory Group), ZOES-US, BJRI-US, CAKE-US, CMG-US, DRIUS and PNRA-US.
 
*Defensive sectors weaker, cyclicals outperform:
 
Defensive sectors among worst performers despite largely unchanged rate backdrop. Overbought conditions/crowded trades continue to get a lot of attention. Telecom (VZ-US earnings drag added to pain) and utilities fared worst. JPMorgan downgraded consumer staples. Food names led move lower. RAIUS latest tobacco name to disappoint. REITs trailed tape, but financials higher on decent strength in bank group. Consumer discretionary lagged despite continued retail strength. Restaurants under pressure on very cautious sell-side commentary. Materials best performer. Both industrial (AKS-US and ATI-US earnings in steel) and precious metals rallied. CC-US helped by positive Greenlight mention. Industrials also a standout. Much better earnings/guidance takeaways following recent disappointments. CAT-US, CNHI-US, UTX-US, AOS-US,BEAV-US, CRUS, JBLU-US and MAS-US the standouts. Tech helped by another semi rally on strong results from TXN-US and further consolidation (LLTC-US to be acquired by ADI-US).
 
*Defensive plays hold up despite cyclical rotation:
 
Firmer batch of US economic data over last few weeks has helped to dampen growth fears and been partly responsible for a rotation into some of the more cyclical pockets of the market. Better earnings sentiment another widely cited tailwind for this dynamic, particularly in terms of better-than-feared results/guidance from banking sector. However, WSJ also discussed how what looks like a classic cyclical rotation is happening without a rotation out of defensives, triggering a market melt-up. Noted recent dip buying in defensives may be a function of secular stagnation concerns that has driven investors to look for yield outside of the traditional haven of government bonds. Added contradiction in market cannot last, as if growth is confirmed and inflation returns, it will not work out well for bonds and crowded defensives. If growth hopes fail to materialize (again), defensive interest will dominate (again).
 
*Few changes expected to Fed statement:
 
Few changes expected to FOMC statement out Wednesday at 14 ET. No updated SEP or Yellen press conference at this meeting. Fed expected upgrade current economic assessment by highlighting rebound in June payrolls. No change expected in language surrounding consumer spending, housing, exports or capex. Inflation commentary also unlikely to differ much from recent statements. Despite post-Brexit resilience, economists do not seem to be looking for Fed to reintroduce balance of risks assessment. Expected to largely reiterate that it continues to closely monitor inflation indicators and global economic and financial developments. No change in forward guidance expected as Fed will want to stress data dependency given number of economic releases between July and September meetings (and Yellen’s late-August appearance in Jackson Hole). Consensus still seems to revolve around December tightening.
 
*Eurozone bond yields expected to remain low:
 
Reuters said strategists expect Eurozone bond yields to remain low until at least the end of the year as ECB bond purchases outstrip new Eurozone supply. Noted Rabobank estimates showing ECB purchases will be much larger than net supply, the longest such trend since the start of QE in March 2015. Rabobank strategist Lyn Graham-Taylor pointed out that the strength of the QE impact is increasing because of falling debt issuance. Note that falling issuance comes against a backdrop of increasing expectations for an eventual QE expansion. Added ABN Amro expects ECB to announce an increase in monthly bond purchases to €100B a month and will extend program beyond March 2017. Widely thought that ECB will need to adjust technical parameters of program in order to fulfill bond-buying commitment and give it scope to expand policy further.
 
*Yen rallies on concerns about policy disappointment:
 
Big rally in the yen today. Largely attributed to recent ramp in concerns about a policy disappointment in the face of extremely elevated expectations. No help from Nikkei article that government plans to inject ¥6T in direct fiscal outlays into economy over next few years, double the amount initially planned. Talk of some focus on smaller ~¥2T supplementary budget for F16, while analysts have recently discussed extent to which overall fiscal stimulus package figures seem inflated given that they bake in loans and loan guarantees. Also concerns going into BoJ policy announcement on Friday. While ~85% of economists expect more stimulus, recent reports have noted some officials concerned about tapping into remaining policy options. Also worried policy increasingly pushing on a string.
 
*Pain trade higher:
 
When it comes to post-Brexit resilience in stocks, the notion of cautious sentiment/positioning keep the pain trade to the upside has received a lot of attention. Recent investor surveys have highlighted elevated cash levels (highest since 2001 according to BofA) and low hedge fund leverage. WSJ discussed how investors are getting pulled back into the market for fear of missing out on further upside, despite lingering concerns about the economic headwinds from Brexit and an increasingly uncertain geopolitical backdrop. Highlighted the influence of central banks and their tendency to ramp up policy support in the face of market uncertainty. However, also noted that while risk assets have been resilient, there has not been any let-up in demand for safe-haven plays like government bonds and gold.
 
*BoE's Weale turns dovish, favors more stimulus:
 
Interview with BoE’s Weale in the FT adding some pressure on sterling in Asia. Weale told the FT that he has changed his position from neutral to dove, favoring an immediate increase in stimulus. Said his turn was shaped by last week’s UK PMI reading (business activity dropping to lowest level since spring 2009), which was far worse than what he had anticipated. Recall, as recently as last week, Weale said that more evidence was needed before changing policy. In the FT interview this morning, Weale also made it clear monetary policy would not boost the economy straight away, so any action would not save the UK from a recession if growth is beginning to shrink. While a BoE survey did not show an immediate weakening in the economic outlook, Weale added that he was concerned by pre-referendum data on wage growth, which was weaker than he had expected.
 
*Citi outlines opposing dynamics feeding skepticism over equity rally:
 
Notion of hated rally has received a lot of attention recently amid linger skepticism over its sustainability. Citi highlighted opposing dynamics feeding this skepticism in its Monday Morning Musings reports. Positives included Panic/Euphoria Model showing ~97% probability S&P500 will be higher in a years’ time while ISM new orders auguring well for industrial production. Noted normalized earnings yield gap of more than two standard deviations below average historically ends with a higher index. Also pointed to tightening credit spreads, while viewing constant equity outflows and underleveraged hedge funds as a possible prelude to “chase the tape” scenario. Bearish factors included flattening NFIB hiring intentions, soft Chicago Fed National Activity Index, tightening in credit standards and surge in buybacks. Overall, Citi concluded the high degree of S&P500 intra-stock correlation suggested possibility of overshooting.
 
*Italian government calls on investors to top up Atlante fund for bank rescue:
 
Italian Prime Minister Renzi’s government stepping up efforts to safeguard banking sector ahead of stress tests. Repubblica reported Renzi asked financial institutions and pension bodies of local trades to invest more in the "Atlante 2" fund. Reuters cited AdEPP pension chairman, who said government had asked its members to invest, with sources pointing to €500M investment, with equivalent contributions from state-lender CDP and Treasury controlled vehicle SGA. Repubblica said Intesa Sanpaolo (ISP-IT) and UniCredit (UCG-IT) rumored to be ready to invest €160M each, topping the list of investors after investing €840M each in Atlante 1. Elsewhere, FTcited senior bankers and EU officials, who said Italy is racing to secure a privately-backed bailout of BMPS.IM, which include it seeking to raise €5B of additional capital.
 
*ASX LIMITED (ASX):
 
ASX reverses poor start to finish higher Shares posted a small gain on Tuesday despite spending most of the day in the red, dragged by weakness in energy stocks and a retreat from Woolworths after its blockbuster Monday. Despite falling below 5500 points in early trade, the S&P/ASX 200 managed to claw back all its losses by close of trade, crossing into positive territory just before close and ending 4 points higher to 5537.5. The broader All Ordinaries index finished up 0.1 per cent or 5 points to 5612.6. Biggest mover among the heavyweights was Woolworths, which fell 3.3 per cent a day after its strongest session in almost 20 years after announcement of its strategic review. The energy sector was the biggest drag on the index, down 1.5 per cent, with Santos, Woodside and Origin Energy among the laggers after Brent crude oil fell 2.1 per cent in US trade on renewed fears of a supply glut. The financials was the strongest sector, up 0.6 per cent, with the big four banks up between 0.5 and 0.8 per cent.
 
*AMP LIMITED (AMP):
 
AMP Capital’s infrastructure team has issued a blunt message to investors, launching a $300 million equity raising for upcoming ports, transport and student accommodation sector deals. Street Talk can reveal AMP Capital has gone to investors seeking the $300 million equity injection as part of a wider restructure aimed at readying its unlisted infrastructure investment arm for the future. It’s understood AMP Capital’s 20-year old local Infrastructure Equity Fund, which holds stakes in the likes of Melbourne Airport and Powerco New Zealand, will be renamed the AMP Capital Diversified Infrastructure Trust and will be allowed to buy controlling stakes in assets as part of the changes.
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