*China's fiscal policy to become more forceful in H2:
Amid warnings of increasing downward economic pressures, Chinese officials seen relying more on fiscal policy to support growth in H2. China Securities Journal commentary warned China’s economy is being buffeted by a lack of demand and supply imbalances, superimposed by the relatively limited effects of monetary policy. Argued fiscal policy will become more forceful in H2, with a particular focus on reducing taxes. Article noted difficulty in envisaging a significant rebound in private investment. While believing monetary policy should be geared towards easing access to credit, fiscal policy should be aimed at lowering businesses’ cost burden. Recall there has been a pickup in discussions that China is facing a liquidity trap. PBoC head of statistics Sheng Songcheng discussed this scenario recently, where he advocated tax cuts to take preference over interest rate cuts.
*Most sectors higher:
Defensive sectors outperformed today with telecom leading the market. Beverages stronger in consumer staples. Grocers continue to struggle. Energy outperformed, with oil finishing up after early session weakness. Healthcare roughly in line with biotech better. Managed care continued to weigh on the sector, with CI-US down following big miss and guidance reset. Tech was in line with the tape. Internet and social media space in focus with GOOGL-US beating on most key metrics and talking up tailwind from mobile. Hardware lagged despite an afternoon surge in HPE-US on buyout rumors. Consumer discretionary lagged. Autos recovered from yesterday’s slide, with suppliers largely better on a series of beats. Homebuilders weaker. Airlines weaker in industrials. Materials trailed the market with ag chemicals and packaging firms weaker.
*Q2 growth disappoints; Q1 revised lower:
Q2 GDP up 1.2% q/q annualized, below consensus expectations for a 2.6% increase. In addition, final GDP growth for Q1 revised down to 0.8% from 1.1%. In terms of Q2, positive contributions came from personal consumption and exports, though they were partly offse by headwinds from private inventory investment, nonresidential fixed investment, and government spending. Personal consumption increased 4.2%, the biggest gain since Q4 of 2014. Added just over 280 bp to growth. However, consensus was a bit more aggressive with expectations for a 4.4% increase. Inventories a drag, subtracting nearly 120 bp from growth. Fixed investment fell 3.2%, the third straight decline and biggest contraction in seven years. Fixed investment subtracted 52 bp from the headline. Government spending was 16 bp drag.
*BoJ disappoints, but fallout limited to yen strength:
BoJ under-delivered with Friday’s policy decision. Nearly doubled annual ETF purchase target to ¥6T from ¥3.3T and expanded dollar lending program to $24B from $12B. However, maintained current pace of other asset purchases and decided against pushing rates further into negative territory. Noted in accompanying statement that it conduct a “comprehensive assessment” of its policy tools ahead of next policy meeting in September. BoJ Governor Kuroda said review of QQE not intended to telegraph intentions to ease policy. However, did reiterate willingness to do more if needed (including on negative rates and JGB purchases), ruled out helicopter money. Argued today’s policy steps and government fiscal stimulus will provide synergy effects for economy. Added BoJ did not feel any pressure from government before today’s decision. Also said central bank has no plans to scrap its 2% inflation target.
*Chicago PMI beats, details mixed:
Chicago PMI slipped to 55.8 in July from 56.8 in June. However, ahead of 54.0 consensus. Details mixed. New orders fell to 59.3 from 63.2. Smaller declines seen in production and backlogs. However, employment improved to 52.2 from 45.0, hitting best level since March 2016. Followed three straight months of contraction that had left indicator at lowest level since November 2009. In terms of special question, 66% said they would expect financial impact of Brexit on their companies to be “negligible”. Report noted demand output softened in July following solid showing in June, but still outperformed very weak results from earlier this year. Added July marked first time since January 2015 all five barometer components were above 50. Also said employment rebound could be a tentative sign of growing business confidence about economic growth ahead.
*Amazon, Alphabet post better results:
Good week of earnings for high-profile tech names continued after close on Thursday. Alphabet (GOOGL-US) reported gross revenue growth of ~21%, 500 bp above the Street. Driven by 19.5% advertising growth at Google, fastest pace in four years and ~300 bp above consensus. Company said growth fueled by increased use of mobile search by customers. Also talked up continued strength in YouTube and programmatic. Amazon (AMZN-US) another standout with Q2 revenue growth accelerating nearly 300 bp q/q to 31% y/y, while CSOI of $2.1B was ~17% above high end of company’s guidance range. AWS a widely cited bright spot despite growth slowing to just over 58% y/y from nearly 64% y/y in Q1. However, CSOI margin approached 30%. Unit growth saw a slight sequential acceleration to 31%. Q3 CSOI guidance below, but not a surprise given meaningful investment cycle (and still seen as conservative).
*Investors continue to flock to emerging markets, exit Europe:
Reach for yield dynamic continues to show up in weekly flow data. Latest Flow Show report form BofA Merrill Lynch noted EM bond funds recorded $3.4B of inflows. Space has now attracted $14B in last four weeks, the largest on record. In addition, EM equities saw a fourth week of inflows. Getting back to fixed income, HY bond funds saw $700M of inflows, attracting capital for a fourth straight week despite oil bear market. IG bond funds have now recorded inflows in 20 of the last 21 weeks. However, government/Treasury bond funds have seen outflows in four of the past five weeks. Capital continued to leave European equities, where worries about Brexit spillover (both political and economic), the Italian banking sector and ECB policy effectiveness have been big areas of concern. Europe saw $4.2B of outflows, marking 25thstraight week of outflows.
*All eyes on European bank stress tests:
European banks in focus following decent Q2s from BARC-GB, UBSG-CH, BBVA-ES, CABK-ES and KN-FR. Attention squarely on 20:00 GMT release of EBA bank stress tests of 51 lenders with a minimum of €30B in assets involved, covering ~70% of the sector. No explicit pass or fail mark with methodology based on two scenarios – baseline and adverse – using EU’s macro forecasts to calculate capital over 3-year period to end-2018. Test looks at lenders’ credit risk and securitization, market risk, sovereign risk, funding risk and operational and conduct risks. Capital the main focus. Italian banks most at risk, especially BMPS-IT, which is reportedly seeking a private sector deal before the results are published. Other risks include weakened capital positions at German banks, exposure to housing debt for Scandi/Nordic banks and shipping loans exposure for other lenders.
*ECB's Coeure says ECB still far away from physical lower bound:
ECB's Coeure said in a speech on Thursday that the ECB is still far away from the physical lower bound, but warned that central bankers must be mindful of a potential "economic lower bound". Said this is when further rate cuts no longer provide aggregate stimulus to the economy and the detrimental effects of low rates on the banking sector outweigh the benefits. Highlighted that current conditions in financial intermediation suggest economic lower bound in euro area still safely below current deposit rate. Added impact of negative rates, combined with asset purchase program and forward guidance has been a net positive. Said it is difficult to know how long low rates will persistent, but seems possible they remain low for quite some time.
*Questions over UK trade minister role:
The FT said there are questions over the extent of the new UK trade minister role, which Liam Fox currently holds. It noted that Fox was given the responsibility by UK PM May to travel the world to seek opportunities for Britain. However, when he raised the issue of the UK exiting the EU customs union, May dismissed the remarks, saying nothing had been decided. Article highlighted that Brussels negotiates global trade deals and sets common external tariffs and trade roles. It argued that if the UK does not exit then the role of international trade minister makes no sense. It is also added May's office has made it clear that Fox will not be leading talks on Britain's future trade relationship with the EU and this will fall on David Davis's new Brexit department.
*Monte dei Paschi in last minute alternative talks before stress test results:
Ahead of the EBA stress test results at 20:00 GMT today, Monte dei Paschi (BMPS-IT) is reportedly racing to secure private deal. Reuters reported yesterday that three banks - MS-US, UCG-IT and ISP-IT - have rebuffed BMPS.IM’s proposal for a €5B capital hike call. FT discussed how former Italian industry minister Corrado Passera teamed up with UBS (UBSG-CH) to present a last-ditch alternative rescue proposal to BMPS.IM today, before stress test results. BMPS.IM said it received two letters, one from Passera and one from UBS, and had promptly “arranged the analysis of the content of these letters, and has already requested clarifications, additional data and information which it deems necessary to fully assess the terms and conditions of the proposals. Upon completion of this activity, the bank will promptly inform the market.”
*Japan's deflationary pressures intensify as households hold back purchases:
Deflationary pressures intensified in Japan with core CPI falling 0.5% y/y in June after a 0.4% drop in May (also consensus). Core CPI (ex food and energy) grew 0.4% y/y, smaller than May’s 0.6% and 0.5% consensus. While BoJ Governor Kuroda said recently he sees near-term inflation at slightly negative to zero, officials have stressed urgency to eradicate deflationary mindset. Other data showed a tightening labor market is failing to translate into increased spending. Unemployment rate fell to 3.1% in June from May’s 3.2% amid 470K increase in jobs. However household spending contracted 2.2% y/y compared to 1.1% drop in May and consensus for 0.3% decline. Bright spots included 0.2% m/m rebound in June retail sales after a 0.1% decline in May. Signs of momentum in industrial production, which recovered 1.9% m/m after May’s 2.6% decline. METI also upgraded July’s forecast.
*UBS earnings beat expectations:
UBSG-CH H1 earnings beat expectations, with EPS at CHF 0.27 vs consensus CHF 0.18%. Revenue also better at CHF 7.40B vs consensus CHF 7.03B and adjusted pre-tax income of CHF 1.48B vs forecast of CHF 1.42B. CEO Sergio Ermotti said it had profited from its focus on wealth management and helping clients navigate continued difficult market conditions. Outlook remained cautious though. Bank said sustained market volatility, underlying macroeconomic uncertainty and heightened geopolitical tensions, exacerbated by the Brexit vote, continue to contribute to client risk aversion and unlikely to change in the foreseeable future. UBS's Q2 return on tangible equity was at 10.1% vs 8.5%. Better numbers from UBS also follows the surprise profit from Credit Suisse on Thursday.
*Vanguard forced to push back against reach for yield:
Reach for yield in a depressed rate environment that Credit Suisse recently said clients now view as “lower forever” rather than “lower for longer” continues to get a lot of attention in the press. WSJ reported yesterday that Vanguard has stopped accepting new accounts in its $30B Dividend Growth Fund. Vanguard said move designed to slow strong cash flows to help ensure that advisor’s ability to product competitive long-term returns is not compromised. Paper pointed out that investors have poured $3B into the fund over past six months, while assets under management have nearly doubled in past three years. Also discussed have dividend-paying stocks have surged this year, with S&P High Yield Dividend Aristocrats Index up ~17%. Note reach for yield in bond proxies has driven worries about overbought conditions in a number of defensive-leaning sectors.
*Commonwealth Bank of Australia (CBA):
Commonwealth Bank of Australia frontline staff will soon have the option of wearing grey hijab and Optus staff teal and purple hijab as some employers roll out corporate-branded hijab despite fear of customer backlash. After nearly a year of consultation with employees, the Commonwealth Bank has introduced grey hijab with a CBA logo as part of its uniform. So far about 300 employees have ordered the CBA-branded hijab. ‘‘It’s a signal to our customers and staff that we are proud of our employees from different cultures,’’ said CBA executive manager Malini Raj, who drove the initiative. ‘‘We have a lot of Muslim employees and our customers are very diverse, so it’s important to make them feel supported and included.
Amid warnings of increasing downward economic pressures, Chinese officials seen relying more on fiscal policy to support growth in H2. China Securities Journal commentary warned China’s economy is being buffeted by a lack of demand and supply imbalances, superimposed by the relatively limited effects of monetary policy. Argued fiscal policy will become more forceful in H2, with a particular focus on reducing taxes. Article noted difficulty in envisaging a significant rebound in private investment. While believing monetary policy should be geared towards easing access to credit, fiscal policy should be aimed at lowering businesses’ cost burden. Recall there has been a pickup in discussions that China is facing a liquidity trap. PBoC head of statistics Sheng Songcheng discussed this scenario recently, where he advocated tax cuts to take preference over interest rate cuts.
*Most sectors higher:
Defensive sectors outperformed today with telecom leading the market. Beverages stronger in consumer staples. Grocers continue to struggle. Energy outperformed, with oil finishing up after early session weakness. Healthcare roughly in line with biotech better. Managed care continued to weigh on the sector, with CI-US down following big miss and guidance reset. Tech was in line with the tape. Internet and social media space in focus with GOOGL-US beating on most key metrics and talking up tailwind from mobile. Hardware lagged despite an afternoon surge in HPE-US on buyout rumors. Consumer discretionary lagged. Autos recovered from yesterday’s slide, with suppliers largely better on a series of beats. Homebuilders weaker. Airlines weaker in industrials. Materials trailed the market with ag chemicals and packaging firms weaker.
*Q2 growth disappoints; Q1 revised lower:
Q2 GDP up 1.2% q/q annualized, below consensus expectations for a 2.6% increase. In addition, final GDP growth for Q1 revised down to 0.8% from 1.1%. In terms of Q2, positive contributions came from personal consumption and exports, though they were partly offse by headwinds from private inventory investment, nonresidential fixed investment, and government spending. Personal consumption increased 4.2%, the biggest gain since Q4 of 2014. Added just over 280 bp to growth. However, consensus was a bit more aggressive with expectations for a 4.4% increase. Inventories a drag, subtracting nearly 120 bp from growth. Fixed investment fell 3.2%, the third straight decline and biggest contraction in seven years. Fixed investment subtracted 52 bp from the headline. Government spending was 16 bp drag.
*BoJ disappoints, but fallout limited to yen strength:
BoJ under-delivered with Friday’s policy decision. Nearly doubled annual ETF purchase target to ¥6T from ¥3.3T and expanded dollar lending program to $24B from $12B. However, maintained current pace of other asset purchases and decided against pushing rates further into negative territory. Noted in accompanying statement that it conduct a “comprehensive assessment” of its policy tools ahead of next policy meeting in September. BoJ Governor Kuroda said review of QQE not intended to telegraph intentions to ease policy. However, did reiterate willingness to do more if needed (including on negative rates and JGB purchases), ruled out helicopter money. Argued today’s policy steps and government fiscal stimulus will provide synergy effects for economy. Added BoJ did not feel any pressure from government before today’s decision. Also said central bank has no plans to scrap its 2% inflation target.
*Chicago PMI beats, details mixed:
Chicago PMI slipped to 55.8 in July from 56.8 in June. However, ahead of 54.0 consensus. Details mixed. New orders fell to 59.3 from 63.2. Smaller declines seen in production and backlogs. However, employment improved to 52.2 from 45.0, hitting best level since March 2016. Followed three straight months of contraction that had left indicator at lowest level since November 2009. In terms of special question, 66% said they would expect financial impact of Brexit on their companies to be “negligible”. Report noted demand output softened in July following solid showing in June, but still outperformed very weak results from earlier this year. Added July marked first time since January 2015 all five barometer components were above 50. Also said employment rebound could be a tentative sign of growing business confidence about economic growth ahead.
*Amazon, Alphabet post better results:
Good week of earnings for high-profile tech names continued after close on Thursday. Alphabet (GOOGL-US) reported gross revenue growth of ~21%, 500 bp above the Street. Driven by 19.5% advertising growth at Google, fastest pace in four years and ~300 bp above consensus. Company said growth fueled by increased use of mobile search by customers. Also talked up continued strength in YouTube and programmatic. Amazon (AMZN-US) another standout with Q2 revenue growth accelerating nearly 300 bp q/q to 31% y/y, while CSOI of $2.1B was ~17% above high end of company’s guidance range. AWS a widely cited bright spot despite growth slowing to just over 58% y/y from nearly 64% y/y in Q1. However, CSOI margin approached 30%. Unit growth saw a slight sequential acceleration to 31%. Q3 CSOI guidance below, but not a surprise given meaningful investment cycle (and still seen as conservative).
*Investors continue to flock to emerging markets, exit Europe:
Reach for yield dynamic continues to show up in weekly flow data. Latest Flow Show report form BofA Merrill Lynch noted EM bond funds recorded $3.4B of inflows. Space has now attracted $14B in last four weeks, the largest on record. In addition, EM equities saw a fourth week of inflows. Getting back to fixed income, HY bond funds saw $700M of inflows, attracting capital for a fourth straight week despite oil bear market. IG bond funds have now recorded inflows in 20 of the last 21 weeks. However, government/Treasury bond funds have seen outflows in four of the past five weeks. Capital continued to leave European equities, where worries about Brexit spillover (both political and economic), the Italian banking sector and ECB policy effectiveness have been big areas of concern. Europe saw $4.2B of outflows, marking 25thstraight week of outflows.
*All eyes on European bank stress tests:
European banks in focus following decent Q2s from BARC-GB, UBSG-CH, BBVA-ES, CABK-ES and KN-FR. Attention squarely on 20:00 GMT release of EBA bank stress tests of 51 lenders with a minimum of €30B in assets involved, covering ~70% of the sector. No explicit pass or fail mark with methodology based on two scenarios – baseline and adverse – using EU’s macro forecasts to calculate capital over 3-year period to end-2018. Test looks at lenders’ credit risk and securitization, market risk, sovereign risk, funding risk and operational and conduct risks. Capital the main focus. Italian banks most at risk, especially BMPS-IT, which is reportedly seeking a private sector deal before the results are published. Other risks include weakened capital positions at German banks, exposure to housing debt for Scandi/Nordic banks and shipping loans exposure for other lenders.
*ECB's Coeure says ECB still far away from physical lower bound:
ECB's Coeure said in a speech on Thursday that the ECB is still far away from the physical lower bound, but warned that central bankers must be mindful of a potential "economic lower bound". Said this is when further rate cuts no longer provide aggregate stimulus to the economy and the detrimental effects of low rates on the banking sector outweigh the benefits. Highlighted that current conditions in financial intermediation suggest economic lower bound in euro area still safely below current deposit rate. Added impact of negative rates, combined with asset purchase program and forward guidance has been a net positive. Said it is difficult to know how long low rates will persistent, but seems possible they remain low for quite some time.
*Questions over UK trade minister role:
The FT said there are questions over the extent of the new UK trade minister role, which Liam Fox currently holds. It noted that Fox was given the responsibility by UK PM May to travel the world to seek opportunities for Britain. However, when he raised the issue of the UK exiting the EU customs union, May dismissed the remarks, saying nothing had been decided. Article highlighted that Brussels negotiates global trade deals and sets common external tariffs and trade roles. It argued that if the UK does not exit then the role of international trade minister makes no sense. It is also added May's office has made it clear that Fox will not be leading talks on Britain's future trade relationship with the EU and this will fall on David Davis's new Brexit department.
*Monte dei Paschi in last minute alternative talks before stress test results:
Ahead of the EBA stress test results at 20:00 GMT today, Monte dei Paschi (BMPS-IT) is reportedly racing to secure private deal. Reuters reported yesterday that three banks - MS-US, UCG-IT and ISP-IT - have rebuffed BMPS.IM’s proposal for a €5B capital hike call. FT discussed how former Italian industry minister Corrado Passera teamed up with UBS (UBSG-CH) to present a last-ditch alternative rescue proposal to BMPS.IM today, before stress test results. BMPS.IM said it received two letters, one from Passera and one from UBS, and had promptly “arranged the analysis of the content of these letters, and has already requested clarifications, additional data and information which it deems necessary to fully assess the terms and conditions of the proposals. Upon completion of this activity, the bank will promptly inform the market.”
*Japan's deflationary pressures intensify as households hold back purchases:
Deflationary pressures intensified in Japan with core CPI falling 0.5% y/y in June after a 0.4% drop in May (also consensus). Core CPI (ex food and energy) grew 0.4% y/y, smaller than May’s 0.6% and 0.5% consensus. While BoJ Governor Kuroda said recently he sees near-term inflation at slightly negative to zero, officials have stressed urgency to eradicate deflationary mindset. Other data showed a tightening labor market is failing to translate into increased spending. Unemployment rate fell to 3.1% in June from May’s 3.2% amid 470K increase in jobs. However household spending contracted 2.2% y/y compared to 1.1% drop in May and consensus for 0.3% decline. Bright spots included 0.2% m/m rebound in June retail sales after a 0.1% decline in May. Signs of momentum in industrial production, which recovered 1.9% m/m after May’s 2.6% decline. METI also upgraded July’s forecast.
*UBS earnings beat expectations:
UBSG-CH H1 earnings beat expectations, with EPS at CHF 0.27 vs consensus CHF 0.18%. Revenue also better at CHF 7.40B vs consensus CHF 7.03B and adjusted pre-tax income of CHF 1.48B vs forecast of CHF 1.42B. CEO Sergio Ermotti said it had profited from its focus on wealth management and helping clients navigate continued difficult market conditions. Outlook remained cautious though. Bank said sustained market volatility, underlying macroeconomic uncertainty and heightened geopolitical tensions, exacerbated by the Brexit vote, continue to contribute to client risk aversion and unlikely to change in the foreseeable future. UBS's Q2 return on tangible equity was at 10.1% vs 8.5%. Better numbers from UBS also follows the surprise profit from Credit Suisse on Thursday.
*Vanguard forced to push back against reach for yield:
Reach for yield in a depressed rate environment that Credit Suisse recently said clients now view as “lower forever” rather than “lower for longer” continues to get a lot of attention in the press. WSJ reported yesterday that Vanguard has stopped accepting new accounts in its $30B Dividend Growth Fund. Vanguard said move designed to slow strong cash flows to help ensure that advisor’s ability to product competitive long-term returns is not compromised. Paper pointed out that investors have poured $3B into the fund over past six months, while assets under management have nearly doubled in past three years. Also discussed have dividend-paying stocks have surged this year, with S&P High Yield Dividend Aristocrats Index up ~17%. Note reach for yield in bond proxies has driven worries about overbought conditions in a number of defensive-leaning sectors.
*Commonwealth Bank of Australia (CBA):
Commonwealth Bank of Australia frontline staff will soon have the option of wearing grey hijab and Optus staff teal and purple hijab as some employers roll out corporate-branded hijab despite fear of customer backlash. After nearly a year of consultation with employees, the Commonwealth Bank has introduced grey hijab with a CBA logo as part of its uniform. So far about 300 employees have ordered the CBA-branded hijab. ‘‘It’s a signal to our customers and staff that we are proud of our employees from different cultures,’’ said CBA executive manager Malini Raj, who drove the initiative. ‘‘We have a lot of Muslim employees and our customers are very diverse, so it’s important to make them feel supported and included.
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