*Beijing, market seem more comfortable with gradual rate of yuan decline:
Despite initial worries, post-Brexit yuan weakness has not had any meaningful negative spillover effects global risk sentiment. Reprieve chalked up to heightened confidence surrounding PBoC’s emphasis on gradualism. Bloomberglatest to discuss this theme. Noted that with monetary policy options limited, Chinese officials seem to be more comfortable with yuan weakness to help support growth. Added that while investors also still looking for further depreciation, expectations do not seem to be as aggressive as they were earlier this year. This gets back to the PBoC’s efforts to improve its communications with the market, emphasizing stability (and avoiding one-way bets on currency) and repeatedly ruling out a devaluation to help dampen concern about another flurry of capital outflows.
*Mixed day for sectors; consumer staples rebounds:
Consumer staples best performer following recent pressure on earnings and cyclical rotations. Beverages and food the standouts, while grocers lagged on WFM-US earnings. Tech stronger with help from better Internet and social media earnings (FB-US, GRPN-US). M&A in software another bright spot (N-US/ORCL-US), while AAPL-US extended postearnings rally. Big earnings movers in both directions in networking/optical. Utilities beat tape following recent selloff. Financials outperformed despite mixed/sluggish banks. REITs stronger. Restaurants (CAKE-US earnings) and auto parts retailers (ORLY-US earnings) underpinned consumer discretionary. Broader auto space hit by F-US disappointment. Slightly up day for industrials. Transports and select multis best performers, while machinery lagged. Healthcare weaker, but lots of moving pieces with earnings. Energy weaker with another oil selloff. Telecom worst performer.
*Key Q2 metrics continue to improve with over half of S&P 500 having now reported:
Following another busy morning of earnings, over 50% of the S&P 500 has now reported. According to FactSet, the blended earnings decline currently stands at (3.7%), better than the (5.5%) at the end of the quarter. In addition, 72% have beat consensus EPS expectations, above the 70% one-year average. In the aggregate, companies are reporting earnings that are 5.2% above expectations, still nicely above the one- and five-year average of 4.2%. The blended revenue growth rate is now +0.1% (first time it has been positive this earnings season), better than the (0.8%) at the end of the quarter. In addition, 58% have beat consensus revenue expectations, well ahead of the 49% one-year average. In the aggregate, companies are reporting revenues that are 1.5% above expectations, much better than the 0.0% one-year average.
*More software M&A:
Software M&A theme in the headlines again today. Oracle (ORCL-US) agreed to acquire NetSuite (N-US) for $109 a share in cash, representing a 19% premium to prior close (though note NetSuite surged on 12-Jul speculation that Oracle was interested). Implies a transaction value of $9.3B. Expected to be close in 2016 and be accretive to earnings in first full year after closing. Despite recent deal activity in software, another bidder not expected given that Oracle CEO Ellison and his family own ~45% of Netsuite. Early sell-side takeaways somewhat mixed. Some concern about elevated EV/revenue multiple, implied uncertainty about Oracle’s Fusion strategy and the added layer of complication on its product portfolio. More positive commentary revolved around strategic value of cloud assets to legacy vendors.
*Asset prices could collapse again:
Elevated valuations continue to get flagged as potential stumbling block, even with some of the reprieve from the shift in focus to multiple expansion support from structurally depressed rates. WSJ (Greg Ip article) noted that past two recessions were led by a collapse in asset prices, while the risk of a repeat is growing. Pointed out that the US Treasury’s Office of Financial Research noted this week that stocks have reached today’s valuations “only ahead of the three largest equity market declines in the last century.” Added that the arithmetic reality is that when valuations are so high, even justifiably so, only takes a small shift in risk appetite, earnings expectations or interest rates to unleash a major downdraft. Also discussed how the valuation dynamic presents yet another complication for Fed policy normalization.
*Where is global consensus now?
Credit Suisse global strategist trying to gauge where the consensus is now following recent marketing trips in US, UK, EU and South Africa. Firm said its clients are very bearish on equities, not finding valuations attractive enough to compensate for the macro, political, earnings and business model risks. Noted global emerging markets seen in more favorable light but Europe saw capitulation. Added 'lower for longer' bonds now being seen as 'lower forever'. Expects fiscal policy to become looser. Noted Japan seen as close to record foreign selling and policy has to become more stimulative. China was largely off radar screen for the moment. Said clients also see risk of a spike in oil. Also, noted emergence of disruptive technology (i.e. GOOGL-US, AMZN-US, FB-US) seen as a big risk to certain industries.
*Reach for yield drives liquidity, valuation concerns:
More discussion about reach for yield dynamic with ~$12T of global bonds trading at negative rates. Low volatility equity baskets have been a big areas of focus in the US, while there has also been some outsized attention as of late on emerging markets. Last week, EPFR noted emerging market bond funds attracted $4.9B of inflows, eclipsing a weekly record set earlier this month. Reuters pointed out that interest has largely centered around dollar-denominated paper. However, added that new hard currency bond sales have not recovered since latest emerging market shakeout in February, a shortage of paper has driven up prices. Also touched on concerns about regulatory headwinds on liquidity. While the article did not make the specific connection, the combination of liquidity constraints and crowded positions could wreak havoc on market if reach for yield theme comes under scrutiny.
*Weak oil not hitting high yield debt:
Oil down nearly 20% from its early June highs. Widely cited headwinds have revolved around resolution of recent supply disruptions (Nigeria, Canada, Libya and Venezuela), meaningful oversupply of refined products (particularly gasoline), and deceleration in both crude and product demand. However, no spillover to high yield market, where Goldman Sachs noted HY OAS spreads have been rallying tighter since mid-February, moving more or less in lock-step with the rally in WTI oil prices. In terms of the reprieve, firm noted we came into 2016 with HY spreads at levels well above its assessment of fair value. Added that many of the high-cost, high-leverage energy names have already defaulted (leaving behind stronger survivors). Also said riskiest bonds in energy sector have now changed hands from risk-averse investors to those with more risk tolerance and/or specialized energy expertise.
*Surveys show Brexit impact on UK consumers and construction:
Several surveys released overnight showed that the immediate fallout from the Brexit vote was seen in UK consumer confidence and construction. A survey by YouGov and the Centre for Economics and Business Research (CEBR) saw a 5 point fall in consumer confidence to 106.6 - the lowest level in three years - in line with the recent drop in the GfK survey. A RICS poll also showed that construction workloads were expected to rise a modest 1% over the next year compared with 2.8% predicted in Q1. Results mirror recent reports showing Brexit uncertainty had the biggest impact on confidence and investment after the vote. However, in terms of the labour market no signs yet of significant layoffs. Note that despite poor retail spending a poll carried out by the British Retail Consortium showed 93% of retailers intend to keep staff levels unchanged in the next three months vs 83% in Q2 2015.
*Few changes in FOMC statement:
As expected, there were few changes in July FOMC statement out Wednesday. No surprise as Fed upgraded its current assessment, highlighting strengthening in the labor market. Also pointed out payrolls and other labor market indicators point to some increase in utilization in recent months. Key change came in the second paragraph as the Fed inserted the line that “near-term risks to the economic outlook have diminished”. However, reiterated it continues to closely monitor inflation indicators and global and financial developments. As expected, guidance language unchanged to highlight data dependency and continued expectations for a slow policy normalization process. September and December tightening odds slightly lower at end of day. Consensus among economists still seems to be for December move.
*Roughly a quarter of Japan's fiscal stimulus package will represent direct spending:
More details starting to emerge around the new ¥28T fiscal stimulus package highlighted by Prime Minister Abe on Wednesday. Citing sources, both Reuters andBloomberg reported that Japanese government planning direct spending of ~¥7T. Reuters said amount could disappoint given the much more aggressive headline number. However, Bloomberg did point out that the figure is more than the ¥6T in actual spending recently reported by the Nikkei. Neither article discussed the timeframe for the “fresh water” spending, which has been another source of contention in the market. Also no real discussion as of late about structural reforms, the third arrow of Abenomics. Lack of traction on structural reform has been a meaningful disappointment given need for Japan to drive more credible/sustainable long-term growth.
*Japanese government turns up heat on BoJ to ease:
BoJ under meaningful scrutiny heading into Friday’s policy announcement. In line with speculation, Prime Minister Abe’s recent unveiling of plans for a stimulus package worth more than ¥28T has ratcheted up pressure on BoJ to ease further. Reuters report this afternoon noted MoF lobbying hard for BoJ to make a move and has prepared statement it will publish in case the central bank eases. Like other articles, noted BoJ considering specific steps for expanding stimulus. No additional details, though consensus has revolved around taking rates further into negative territory (despite widespread backlash against NIRP) and expanding ETF purchases. Earlier report fromReuters cited comments from Japanese economic minister Nobuteru Ishihara, who said BoJ Governor Kuroda understands "the world is watching" bank's policy response.
*Australia and New Zealand Banking Group (ANZ):
For almost a decade under swashbuckling chief executive Mike Smith, ANZ Banking Group was the most enthusiastic proponent of Australian business engagement with Asia. Smith spent billions building a financial network from Jakarta to Chongqing designed to put the bank at the forefront of Asia’s historic growth spurt. Smith, who was paid $88 million over eight years, was feted by politicians, lauded in the media and travelled the world mixing with the global financial elite. But ANZ’s Asian operations never delivered the profit growth he promised, and the bank’s new chief executive, Shayne Elliott, is pulling back from Asia, reining in its investment bank and toning down the combative internal culture that flourished under Smith. Business leaders, fund managers, analysts and former ANZ executives are stunned at the shift. Officially, ANZ denies it is backtracking. But even chairman David Gonski acknowledges the bank will be more selective about where it does business under its new CEO. ‘‘We are not moving out of Asia ... we are refining our options there,’’ he says in an interview. Now, some in the business community are questioning why Smith was paid so much to implement a strategy that didn’t seem to work. Under the eight years of his watch, ANZ’s market value fell 6 per cent. In the last five, three and one years when Smith was CEO, the bank’s total return to shareholders – share price and dividends – was the worst of the big four banks.
*BHP Billiton Limited (BHP):
BHP Billiton looks set to record more than $US7 billion ($9.4 billion) worth of exceptional items when it reports financial results next month, after the miner revealed more than $US1 billion of further charges on Thursday. BHP Billiton looks set to record more than $US7 billion ($9.4 billion) worth of exceptional items when it reports financial results next month, after the miner revealed more than $US1 billion of further charges on Thursday. The new charges will relate to the Samarco dam disaster in Brazil, and add to the $US6.1 billion of exceptional items reported in the first half of fiscal 2016. The company expects to record a non-cash provision of between $US1.1 billion and $US1.3 billion ($1.46 and $1.73 billion) for its share of contributions to a remediation and reparation ‘‘framework agreement’’ worth 9.2 billion Brazilian Real ($3.76 billion). The provision comes despite Brazil’s Superior Court of Justice suspending the validity of that agreement on June 30. BHP has appealed that decision and chief executive Andrew Mackenzie said the provision was a sign of BHP’s commitment over the next few years. ‘‘The recognition of the provision demonstrates our support for the longterm recovery of the communities and the environment affected by the Samarco tragedy and the belief we have that the agreement is the most appropriate mechanism to do this,’’ he said.
Despite initial worries, post-Brexit yuan weakness has not had any meaningful negative spillover effects global risk sentiment. Reprieve chalked up to heightened confidence surrounding PBoC’s emphasis on gradualism. Bloomberglatest to discuss this theme. Noted that with monetary policy options limited, Chinese officials seem to be more comfortable with yuan weakness to help support growth. Added that while investors also still looking for further depreciation, expectations do not seem to be as aggressive as they were earlier this year. This gets back to the PBoC’s efforts to improve its communications with the market, emphasizing stability (and avoiding one-way bets on currency) and repeatedly ruling out a devaluation to help dampen concern about another flurry of capital outflows.
*Mixed day for sectors; consumer staples rebounds:
Consumer staples best performer following recent pressure on earnings and cyclical rotations. Beverages and food the standouts, while grocers lagged on WFM-US earnings. Tech stronger with help from better Internet and social media earnings (FB-US, GRPN-US). M&A in software another bright spot (N-US/ORCL-US), while AAPL-US extended postearnings rally. Big earnings movers in both directions in networking/optical. Utilities beat tape following recent selloff. Financials outperformed despite mixed/sluggish banks. REITs stronger. Restaurants (CAKE-US earnings) and auto parts retailers (ORLY-US earnings) underpinned consumer discretionary. Broader auto space hit by F-US disappointment. Slightly up day for industrials. Transports and select multis best performers, while machinery lagged. Healthcare weaker, but lots of moving pieces with earnings. Energy weaker with another oil selloff. Telecom worst performer.
*Key Q2 metrics continue to improve with over half of S&P 500 having now reported:
Following another busy morning of earnings, over 50% of the S&P 500 has now reported. According to FactSet, the blended earnings decline currently stands at (3.7%), better than the (5.5%) at the end of the quarter. In addition, 72% have beat consensus EPS expectations, above the 70% one-year average. In the aggregate, companies are reporting earnings that are 5.2% above expectations, still nicely above the one- and five-year average of 4.2%. The blended revenue growth rate is now +0.1% (first time it has been positive this earnings season), better than the (0.8%) at the end of the quarter. In addition, 58% have beat consensus revenue expectations, well ahead of the 49% one-year average. In the aggregate, companies are reporting revenues that are 1.5% above expectations, much better than the 0.0% one-year average.
*More software M&A:
Software M&A theme in the headlines again today. Oracle (ORCL-US) agreed to acquire NetSuite (N-US) for $109 a share in cash, representing a 19% premium to prior close (though note NetSuite surged on 12-Jul speculation that Oracle was interested). Implies a transaction value of $9.3B. Expected to be close in 2016 and be accretive to earnings in first full year after closing. Despite recent deal activity in software, another bidder not expected given that Oracle CEO Ellison and his family own ~45% of Netsuite. Early sell-side takeaways somewhat mixed. Some concern about elevated EV/revenue multiple, implied uncertainty about Oracle’s Fusion strategy and the added layer of complication on its product portfolio. More positive commentary revolved around strategic value of cloud assets to legacy vendors.
*Asset prices could collapse again:
Elevated valuations continue to get flagged as potential stumbling block, even with some of the reprieve from the shift in focus to multiple expansion support from structurally depressed rates. WSJ (Greg Ip article) noted that past two recessions were led by a collapse in asset prices, while the risk of a repeat is growing. Pointed out that the US Treasury’s Office of Financial Research noted this week that stocks have reached today’s valuations “only ahead of the three largest equity market declines in the last century.” Added that the arithmetic reality is that when valuations are so high, even justifiably so, only takes a small shift in risk appetite, earnings expectations or interest rates to unleash a major downdraft. Also discussed how the valuation dynamic presents yet another complication for Fed policy normalization.
*Where is global consensus now?
Credit Suisse global strategist trying to gauge where the consensus is now following recent marketing trips in US, UK, EU and South Africa. Firm said its clients are very bearish on equities, not finding valuations attractive enough to compensate for the macro, political, earnings and business model risks. Noted global emerging markets seen in more favorable light but Europe saw capitulation. Added 'lower for longer' bonds now being seen as 'lower forever'. Expects fiscal policy to become looser. Noted Japan seen as close to record foreign selling and policy has to become more stimulative. China was largely off radar screen for the moment. Said clients also see risk of a spike in oil. Also, noted emergence of disruptive technology (i.e. GOOGL-US, AMZN-US, FB-US) seen as a big risk to certain industries.
*Reach for yield drives liquidity, valuation concerns:
More discussion about reach for yield dynamic with ~$12T of global bonds trading at negative rates. Low volatility equity baskets have been a big areas of focus in the US, while there has also been some outsized attention as of late on emerging markets. Last week, EPFR noted emerging market bond funds attracted $4.9B of inflows, eclipsing a weekly record set earlier this month. Reuters pointed out that interest has largely centered around dollar-denominated paper. However, added that new hard currency bond sales have not recovered since latest emerging market shakeout in February, a shortage of paper has driven up prices. Also touched on concerns about regulatory headwinds on liquidity. While the article did not make the specific connection, the combination of liquidity constraints and crowded positions could wreak havoc on market if reach for yield theme comes under scrutiny.
*Weak oil not hitting high yield debt:
Oil down nearly 20% from its early June highs. Widely cited headwinds have revolved around resolution of recent supply disruptions (Nigeria, Canada, Libya and Venezuela), meaningful oversupply of refined products (particularly gasoline), and deceleration in both crude and product demand. However, no spillover to high yield market, where Goldman Sachs noted HY OAS spreads have been rallying tighter since mid-February, moving more or less in lock-step with the rally in WTI oil prices. In terms of the reprieve, firm noted we came into 2016 with HY spreads at levels well above its assessment of fair value. Added that many of the high-cost, high-leverage energy names have already defaulted (leaving behind stronger survivors). Also said riskiest bonds in energy sector have now changed hands from risk-averse investors to those with more risk tolerance and/or specialized energy expertise.
*Surveys show Brexit impact on UK consumers and construction:
Several surveys released overnight showed that the immediate fallout from the Brexit vote was seen in UK consumer confidence and construction. A survey by YouGov and the Centre for Economics and Business Research (CEBR) saw a 5 point fall in consumer confidence to 106.6 - the lowest level in three years - in line with the recent drop in the GfK survey. A RICS poll also showed that construction workloads were expected to rise a modest 1% over the next year compared with 2.8% predicted in Q1. Results mirror recent reports showing Brexit uncertainty had the biggest impact on confidence and investment after the vote. However, in terms of the labour market no signs yet of significant layoffs. Note that despite poor retail spending a poll carried out by the British Retail Consortium showed 93% of retailers intend to keep staff levels unchanged in the next three months vs 83% in Q2 2015.
*Few changes in FOMC statement:
As expected, there were few changes in July FOMC statement out Wednesday. No surprise as Fed upgraded its current assessment, highlighting strengthening in the labor market. Also pointed out payrolls and other labor market indicators point to some increase in utilization in recent months. Key change came in the second paragraph as the Fed inserted the line that “near-term risks to the economic outlook have diminished”. However, reiterated it continues to closely monitor inflation indicators and global and financial developments. As expected, guidance language unchanged to highlight data dependency and continued expectations for a slow policy normalization process. September and December tightening odds slightly lower at end of day. Consensus among economists still seems to be for December move.
*Roughly a quarter of Japan's fiscal stimulus package will represent direct spending:
More details starting to emerge around the new ¥28T fiscal stimulus package highlighted by Prime Minister Abe on Wednesday. Citing sources, both Reuters andBloomberg reported that Japanese government planning direct spending of ~¥7T. Reuters said amount could disappoint given the much more aggressive headline number. However, Bloomberg did point out that the figure is more than the ¥6T in actual spending recently reported by the Nikkei. Neither article discussed the timeframe for the “fresh water” spending, which has been another source of contention in the market. Also no real discussion as of late about structural reforms, the third arrow of Abenomics. Lack of traction on structural reform has been a meaningful disappointment given need for Japan to drive more credible/sustainable long-term growth.
*Japanese government turns up heat on BoJ to ease:
BoJ under meaningful scrutiny heading into Friday’s policy announcement. In line with speculation, Prime Minister Abe’s recent unveiling of plans for a stimulus package worth more than ¥28T has ratcheted up pressure on BoJ to ease further. Reuters report this afternoon noted MoF lobbying hard for BoJ to make a move and has prepared statement it will publish in case the central bank eases. Like other articles, noted BoJ considering specific steps for expanding stimulus. No additional details, though consensus has revolved around taking rates further into negative territory (despite widespread backlash against NIRP) and expanding ETF purchases. Earlier report fromReuters cited comments from Japanese economic minister Nobuteru Ishihara, who said BoJ Governor Kuroda understands "the world is watching" bank's policy response.
*Australia and New Zealand Banking Group (ANZ):
For almost a decade under swashbuckling chief executive Mike Smith, ANZ Banking Group was the most enthusiastic proponent of Australian business engagement with Asia. Smith spent billions building a financial network from Jakarta to Chongqing designed to put the bank at the forefront of Asia’s historic growth spurt. Smith, who was paid $88 million over eight years, was feted by politicians, lauded in the media and travelled the world mixing with the global financial elite. But ANZ’s Asian operations never delivered the profit growth he promised, and the bank’s new chief executive, Shayne Elliott, is pulling back from Asia, reining in its investment bank and toning down the combative internal culture that flourished under Smith. Business leaders, fund managers, analysts and former ANZ executives are stunned at the shift. Officially, ANZ denies it is backtracking. But even chairman David Gonski acknowledges the bank will be more selective about where it does business under its new CEO. ‘‘We are not moving out of Asia ... we are refining our options there,’’ he says in an interview. Now, some in the business community are questioning why Smith was paid so much to implement a strategy that didn’t seem to work. Under the eight years of his watch, ANZ’s market value fell 6 per cent. In the last five, three and one years when Smith was CEO, the bank’s total return to shareholders – share price and dividends – was the worst of the big four banks.
*BHP Billiton Limited (BHP):
BHP Billiton looks set to record more than $US7 billion ($9.4 billion) worth of exceptional items when it reports financial results next month, after the miner revealed more than $US1 billion of further charges on Thursday. BHP Billiton looks set to record more than $US7 billion ($9.4 billion) worth of exceptional items when it reports financial results next month, after the miner revealed more than $US1 billion of further charges on Thursday. The new charges will relate to the Samarco dam disaster in Brazil, and add to the $US6.1 billion of exceptional items reported in the first half of fiscal 2016. The company expects to record a non-cash provision of between $US1.1 billion and $US1.3 billion ($1.46 and $1.73 billion) for its share of contributions to a remediation and reparation ‘‘framework agreement’’ worth 9.2 billion Brazilian Real ($3.76 billion). The provision comes despite Brazil’s Superior Court of Justice suspending the validity of that agreement on June 30. BHP has appealed that decision and chief executive Andrew Mackenzie said the provision was a sign of BHP’s commitment over the next few years. ‘‘The recognition of the provision demonstrates our support for the longterm recovery of the communities and the environment affected by the Samarco tragedy and the belief we have that the agreement is the most appropriate mechanism to do this,’’ he said.
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