*Mixed takeaways from China manufacturing PMIs:
Mixed takeaways from latest Chinese manufacturing and services data. Official July manufacturing PMI fell to 49.9 from 50.0 in June, which was also the consensus. First time reading fell below 50 in five months. Driven by lower new export orders, which fell to 49.0 from 49.6. Output fell to 52.1 from 52.5, while new orders slipped to 50.4 from 50.5. CFLP said data confirmed downward pressures on the economy. Flooding also a widely discussed headwind. Separately, Caixin’s PMI rose to 50.6 from June’s 48.6, ahead of 48.8 consensus. Output, new orders and purchasing activity all returned to growth. Increased raw material costs also led to higher input and output prices. However, employment showed further contraction amid company urgency to cut costs. More evidence of economic rebalancing with official July services PMI rising to 53.9 from June’s 53.7.
*Oil settles in bear-market territory:
Oil extended recent weakness today and finished in bear-market territory. WTI settled down 3.7% today to $40.06, 21.8% below 52-week high of $51.23 on 8-Jun. Supply resumptions, product oversupply (particularly gasoline) and softer than expected crude and product demand the widely discussed headwinds as of late. Also some concerns about broader macro risks. In terms of more recent headlines, a few more bearish sell-side calls. Baker Hughes reported on Friday afternoon that rig count rose for a fifth consecutive week. Reuters also said OPEC output likely rose to record high in July. Some focus on reports that three Libyan terminals reopened after being blockaded since late 2014. Bloomberg noted hedge funds recently boosted bearish bets by the most since at least 2006. Also said Saudi Arabia lowered pricing terms to Asia in continued price war with Iraq.
*Energy under pressure; healthcare and tech outperform:
Energy worst performer with oil in bear market territory. Industrial metals drove weakness in materials following outsized strength last week. Some blame chalked up to softer China official manufacturing PMI. Precious metals stronger. Defensives mixed amid rate backup. Telecom down nearly 1%, but utilities little changed. Consumer staples higher on strength in HPC and select food names. REITs higher despite rates, while banks weak. Last Friday's release of European bank stress test results failed to remove an overhang. Industrials down with the tape. Oil-leveraged names lagged, but crude selloff helped airlines. Consumer discretionary higher, but nothing really stood out. Some pockets of strength in restaurants. Tech a standout on continued post-earnings AAPL-US strength. Barron's positive on the name, as well as YHOO-US. FDC-US earnings another bright spot. Healthcare best performer on biotech rally fueled by IONSUS and BIIB-US on positive trial data.
*Goldman Sachs downgrades equities to underweight over 3-months:
Goldman Sachs downgraded equities to underweight over 3-months but maintained 12-month neutral rating. Viewed recent risk appetite reversal in markets as too pro-cyclical. Pointed out rally in risk assets over past few weeks has seen a broad-based cyclical outperformance, been driven by a combination of light positioning into Brexit vote and search for yield amid expectations of central bank easing. Added that given market remains expensive and earnings growth is poor, equities now just at upper end of their ‘fat and flat’ range. Firm said own risk appetite indicator near neutral levels and positive momentum has faded, suggesting positioning will give less support. Noted better macro fundamentals or stimulus needed to keep the risk rally going, but stressed market expectations are already dovish and growth pick-up should take time.
*GDP vs jobs:
jobs: Firmer US economic data, particularly the 287K jump in June nonfarm payrolls, has been a driver of post-Brexit strength· for US equities. However, growth theme took a bit of a hit last week as GDP increased at just a 1.2% annual rate in Q2, below consensus expectations for a 2.5% expansion. WSJ discussed tried to identify the drivers of the divergence between a strong labor market and weak overall growth. Noted one explanation is that economy’s productivity problem may be even worse than thought. Added that under this view, years of weak investment have cut companies’ efficiency gains, meaning even slight increases in demand force them to higher and pay up for workers they need. Added another explanation of GDP-labor divide may be related to backdrop of decent domestic demand in US economy vs very weak global economy.
*ISM manufacturing down slightly in July; construction spending weaker:
ISM manufacturing index slipped to 52.6 in July from 53.2 in June, just below 53.0 consensus. Forward-looking new orders inched down to 56.9 from 57.0, while inventories pushed up to 49.5 from 48.5. Production improved to 55.4 from 54.7. Employment back in contraction, falling one point to 49.4. Release noted 12 of 18 industries saw increases in new orders last month, unchanged from June, while nine reported an increase in production, down from 12 in June. Respondent commentary somewhat mixed. Some uncertainty surrounding going forward with regards to Brexit and US election. Construction spending fell 0.6% m/m in June, missing expectations for a 0.6% increase. Marked third straight monthly decline. However, May decline revised to 0.1% from originally reported 0.8% contraction. Private and public construction both down 0.6%.
*Fed survey finds tightening of C&I and CRE loan standards:
The Fed's Senior Loan Officer Survey for July found banks tightened their standards on C&I and CRE loans over Q2. Recall regulators have raised concerns about credit risks in CRE and have stepped up oversight. It noted demand for C&I loans was little changed over the quarter (analysts have expressed concern about the slowdown in C&I loan demand), while CRE loan demand strengthened. On household loans, banks reported standards on all categories of residential mortgages were little changed, and that demand for most types of those loans had increased. A modest net fraction of banks eased lending standards on credit cards (FT reported rising concerns about $18B surge in credit card debt during Q2), and a modest net fraction reported tightening lending on auto loans.
*Fed’s Dudley warns on rate hike complacency, but comments lean dovish:
NY Fed President Dudley said futures market seems complacent in its outlook for just one rate hike by end of 2017. Added premature to rule out further monetary policy tightening this year, including before the election. Market currently assigning a ~30% chance to a December tightening, down from ~50% early last week. However, comments still seemed fairly dovish overall. Noted he would rather see Fed move too late and have to raise rates more aggressively that move too soon and derail recovery. Also pointed out medium-term risks to US economic growth skewed to the downside. Noted that some headwinds from financial crisis have not fully dissipated and in some cases, proving more persistent. Warned that stronger dollar could unleash an undesired tightening of financial conditions. Also said US monetary currently only moderately accommodative.
*Big debate about what’s next for BoJ:
Lot of debate about what’s next for BoJ after it said it say will conduct a comprehensive assessment of current policies and their effect on the underlying economy for the next policy meeting. Some thoughts this plays into widely reported concerns on the part of some officials regarding limits of unconventional policy and adverse side effects. However, Reuters said review has revived expectations it could adopt some form of “helicopter money”. Discussed thoughts government could issue 50-year bonds with BoJ committing to hold them for a very long time. Added another option would be for BoJ to commit to buying municipal bonds or debt issued by state-backed entities. Noted it could also create a special account at BoJ government could always borrow from, commit to hold a certain percentage of outstanding government debt or buying government bonds.
*Few surprises from European bank stress tests:
Few surprises from European bank stress test results after close on Friday. No explicit pass or test mark with unofficial CET1 capital ratio limit set at ~5.5%. Results showed 51 banks in aggregate had CET1 ratio of 13.2% by end-2015 – a notable improvement of capital base and 200bp higher than in the 2014 test and 400bp higher than the 2011 test. In adverse scenario, CET1 ratio drops on aggregate 380bp, thereby lowering ratio to 9.4% vs (vs 8.6% 2-yrs ago) at the end-2018. ECB said 37 banks in comfortable capital position while rest, including BMPS-ITtested worryingly in the adverse scenario. BMPS.IM, as expected, showed CET1 of (2.4%). Other Italian lenders fared better. Lenders below 7% CET1 included POP-ES at 6.6%, BIR-IE at 6.1% and RBI-AT at 6.1%. Early sell-side takeaways note that global investment banks (DBK.GR, GLE.FP and BARC.LN) also need further capital build.
*UK manufacturing shrinks at fastest pace in over three years after Brexit vote:
UK manufacturing July PMI fell to 48.2 from 49.1 flash reading and 52.4 in June. Biggest drop in more than three years following Brexit vote. Domestic market hit by pre- and post-referendum uncertainty. Levels of production and incoming new orders both contracted, as impact of increased business uncertainty on domestic market offset weaker sterling tailwind for export order growth. Output index fell to 47.8 in July from 53.6 in June, marking steepest decline since October 2012. Contractions seen across consumer, intermediate and investment goods sectors. Markit said weakening order book trend and upswing in cost inflation point to further near-term pain for manufacturers. Commentators say data likely to hasten BoE’s resolve this week to cut rates and growth forecasts.
*Eurozone manufacturing growth edges lower at start of Q3:
Headline July Eurozone manufacturing PMI at 52.0, just ahead of 51.9 flash reading, but down from June’s six-month high of 52.8.Main factor in weaker reading was softer positive contribution from new order growth. Rate of job creation also ticked lower, but remained among fastest registered over the past five years. Markit said report reflected further solid growth in production volumes, which held steady at June’s six-month peak, and a further accumulation of backlogs of work. Inflows of new export business also improved during the latest survey month, albeit at a marginally slower pace, partly aided by weak euro exchange rate. Added downside of weaker currency an increase in import costs that, alongside higher oil prices, led to first increase in average purchase prices for a year.
*Q2 revenue turns positive; Q3 sentiment better:
According to latest Earnings Insight report from FactSet, blended S&P 500 earnings decline now stands at (3.8%), better than the (5.5% ) expected at end of Q2. Of the 319 S&P 500 companies that have reported, 71% have beat consensus, just ahead of 70% one-year average. In the aggregate, companies beating earnings consensus by 4.4%, better than 4.2% one-year average. Top-line metrics even more upbeat. Blended revenue growth rate is +0.1%, marked improvement decline of (3.8%) at end of quarter. In addition, 57% have beat consensus, nicely above 49% one-year average. In the aggregate, companies reporting revenues 1.2% ahead of expectations, much better than 0.0% one-year average. 64% of companies that have provided an outlook for Q3 have guided EPS below the consensus, better than the five-year average of 74%.
*Monte dei Paschi gets rescue package:
BMPS-IT the early focus after showing worst performance in Friday’s EBA stress tests. Group managed to ink a private sector-backed rescue blueprint ahead of the stress test numbers, in which it will raise fresh capital and sell bad loans. Bankers expect the €5B cash call to be completed by the end of the year with global investment banks having made a preliminary agreement to underwrite the rights, subject to conditions, including disposal of €9.2B of nonperforming loans. Loans will be securitized, with a senior tranche of €6B benefiting from an Italian government guarantee, €1.6B mezzanine tranche being purchased by the Atlante fund and the riskiest or junior portion left with BMPS.IM shareholders. ECB approved the plan. BMPS.IM stock best performer in STOXX Europe 600 banks index.
*Positive trend in Japanese and Australian manufacturing:
Japanese manufacturing contracted at a smaller pace. July final PMI of 49.3 above flash read of 49.0. Also well up on June’s 48.1. Markit pointed out both production and new orders declined at a narrower pace and employment growth picked up. Mixed impact from the yen’s appreciation, with manufacturers seeing sharp drop in new export orders but benefiting from reduced raw material prices. Elsewhere, Australian manufacturing growth accelerated in July. AIG PMI rose to 56.4 from 51.8 in June. Underpinned by stronger exports owing to a weaker exchange rate. Data also showed large increases in new orders, employment and supplier deliveries. Separately, Aussie new home sales surged 8.2% m/m in June, reversing May’s 4.4% decline and fitting with a sharp rise in property prices. Deflationary pressures persisted with July’s MI inflation gauge at (0.3%) m/m compared to June’s +0.6%.
Australia and New Zealand Banking Group (ANZ), Bendigo and Adelaide Bank Ltd (BEN), Commonwealth Bank of Australia (CBA), National Australia Bank Ltd (NAB) & Westpac Banking Corp (WBC):
Australian banks are being hypocritical and are unlikely to succeed in trying to force Apple to open up its iPhones and let their digital wallets make tap-and-go payments, tech industry experts and fintech start-up rivals say. Four of Australia’s largest banks made headlines around the world last week when they sought permission from the Australian Competition and Consumer Commission to give them permission to collectively negotiate with Apple, and make it allow them the same access to its phones’ hardware as its own Apple Pay service. The competition watchdog is deciding how to respond to the request of Commonwealth Bank of Australia, National Australia Bank, Westpac Banking Corp, and Bendigo and Adelaide Bank, but tech industry watchers said the world’s largest company had a long history of stubbornly refusing to let outsiders inside its iTunes eco-system, and was unlikely to change its attitudes to appease Australian banks.
Mixed takeaways from latest Chinese manufacturing and services data. Official July manufacturing PMI fell to 49.9 from 50.0 in June, which was also the consensus. First time reading fell below 50 in five months. Driven by lower new export orders, which fell to 49.0 from 49.6. Output fell to 52.1 from 52.5, while new orders slipped to 50.4 from 50.5. CFLP said data confirmed downward pressures on the economy. Flooding also a widely discussed headwind. Separately, Caixin’s PMI rose to 50.6 from June’s 48.6, ahead of 48.8 consensus. Output, new orders and purchasing activity all returned to growth. Increased raw material costs also led to higher input and output prices. However, employment showed further contraction amid company urgency to cut costs. More evidence of economic rebalancing with official July services PMI rising to 53.9 from June’s 53.7.
*Oil settles in bear-market territory:
Oil extended recent weakness today and finished in bear-market territory. WTI settled down 3.7% today to $40.06, 21.8% below 52-week high of $51.23 on 8-Jun. Supply resumptions, product oversupply (particularly gasoline) and softer than expected crude and product demand the widely discussed headwinds as of late. Also some concerns about broader macro risks. In terms of more recent headlines, a few more bearish sell-side calls. Baker Hughes reported on Friday afternoon that rig count rose for a fifth consecutive week. Reuters also said OPEC output likely rose to record high in July. Some focus on reports that three Libyan terminals reopened after being blockaded since late 2014. Bloomberg noted hedge funds recently boosted bearish bets by the most since at least 2006. Also said Saudi Arabia lowered pricing terms to Asia in continued price war with Iraq.
*Energy under pressure; healthcare and tech outperform:
Energy worst performer with oil in bear market territory. Industrial metals drove weakness in materials following outsized strength last week. Some blame chalked up to softer China official manufacturing PMI. Precious metals stronger. Defensives mixed amid rate backup. Telecom down nearly 1%, but utilities little changed. Consumer staples higher on strength in HPC and select food names. REITs higher despite rates, while banks weak. Last Friday's release of European bank stress test results failed to remove an overhang. Industrials down with the tape. Oil-leveraged names lagged, but crude selloff helped airlines. Consumer discretionary higher, but nothing really stood out. Some pockets of strength in restaurants. Tech a standout on continued post-earnings AAPL-US strength. Barron's positive on the name, as well as YHOO-US. FDC-US earnings another bright spot. Healthcare best performer on biotech rally fueled by IONSUS and BIIB-US on positive trial data.
*Goldman Sachs downgrades equities to underweight over 3-months:
Goldman Sachs downgraded equities to underweight over 3-months but maintained 12-month neutral rating. Viewed recent risk appetite reversal in markets as too pro-cyclical. Pointed out rally in risk assets over past few weeks has seen a broad-based cyclical outperformance, been driven by a combination of light positioning into Brexit vote and search for yield amid expectations of central bank easing. Added that given market remains expensive and earnings growth is poor, equities now just at upper end of their ‘fat and flat’ range. Firm said own risk appetite indicator near neutral levels and positive momentum has faded, suggesting positioning will give less support. Noted better macro fundamentals or stimulus needed to keep the risk rally going, but stressed market expectations are already dovish and growth pick-up should take time.
*GDP vs jobs:
jobs: Firmer US economic data, particularly the 287K jump in June nonfarm payrolls, has been a driver of post-Brexit strength· for US equities. However, growth theme took a bit of a hit last week as GDP increased at just a 1.2% annual rate in Q2, below consensus expectations for a 2.5% expansion. WSJ discussed tried to identify the drivers of the divergence between a strong labor market and weak overall growth. Noted one explanation is that economy’s productivity problem may be even worse than thought. Added that under this view, years of weak investment have cut companies’ efficiency gains, meaning even slight increases in demand force them to higher and pay up for workers they need. Added another explanation of GDP-labor divide may be related to backdrop of decent domestic demand in US economy vs very weak global economy.
*ISM manufacturing down slightly in July; construction spending weaker:
ISM manufacturing index slipped to 52.6 in July from 53.2 in June, just below 53.0 consensus. Forward-looking new orders inched down to 56.9 from 57.0, while inventories pushed up to 49.5 from 48.5. Production improved to 55.4 from 54.7. Employment back in contraction, falling one point to 49.4. Release noted 12 of 18 industries saw increases in new orders last month, unchanged from June, while nine reported an increase in production, down from 12 in June. Respondent commentary somewhat mixed. Some uncertainty surrounding going forward with regards to Brexit and US election. Construction spending fell 0.6% m/m in June, missing expectations for a 0.6% increase. Marked third straight monthly decline. However, May decline revised to 0.1% from originally reported 0.8% contraction. Private and public construction both down 0.6%.
*Fed survey finds tightening of C&I and CRE loan standards:
The Fed's Senior Loan Officer Survey for July found banks tightened their standards on C&I and CRE loans over Q2. Recall regulators have raised concerns about credit risks in CRE and have stepped up oversight. It noted demand for C&I loans was little changed over the quarter (analysts have expressed concern about the slowdown in C&I loan demand), while CRE loan demand strengthened. On household loans, banks reported standards on all categories of residential mortgages were little changed, and that demand for most types of those loans had increased. A modest net fraction of banks eased lending standards on credit cards (FT reported rising concerns about $18B surge in credit card debt during Q2), and a modest net fraction reported tightening lending on auto loans.
*Fed’s Dudley warns on rate hike complacency, but comments lean dovish:
NY Fed President Dudley said futures market seems complacent in its outlook for just one rate hike by end of 2017. Added premature to rule out further monetary policy tightening this year, including before the election. Market currently assigning a ~30% chance to a December tightening, down from ~50% early last week. However, comments still seemed fairly dovish overall. Noted he would rather see Fed move too late and have to raise rates more aggressively that move too soon and derail recovery. Also pointed out medium-term risks to US economic growth skewed to the downside. Noted that some headwinds from financial crisis have not fully dissipated and in some cases, proving more persistent. Warned that stronger dollar could unleash an undesired tightening of financial conditions. Also said US monetary currently only moderately accommodative.
*Big debate about what’s next for BoJ:
Lot of debate about what’s next for BoJ after it said it say will conduct a comprehensive assessment of current policies and their effect on the underlying economy for the next policy meeting. Some thoughts this plays into widely reported concerns on the part of some officials regarding limits of unconventional policy and adverse side effects. However, Reuters said review has revived expectations it could adopt some form of “helicopter money”. Discussed thoughts government could issue 50-year bonds with BoJ committing to hold them for a very long time. Added another option would be for BoJ to commit to buying municipal bonds or debt issued by state-backed entities. Noted it could also create a special account at BoJ government could always borrow from, commit to hold a certain percentage of outstanding government debt or buying government bonds.
*Few surprises from European bank stress tests:
Few surprises from European bank stress test results after close on Friday. No explicit pass or test mark with unofficial CET1 capital ratio limit set at ~5.5%. Results showed 51 banks in aggregate had CET1 ratio of 13.2% by end-2015 – a notable improvement of capital base and 200bp higher than in the 2014 test and 400bp higher than the 2011 test. In adverse scenario, CET1 ratio drops on aggregate 380bp, thereby lowering ratio to 9.4% vs (vs 8.6% 2-yrs ago) at the end-2018. ECB said 37 banks in comfortable capital position while rest, including BMPS-ITtested worryingly in the adverse scenario. BMPS.IM, as expected, showed CET1 of (2.4%). Other Italian lenders fared better. Lenders below 7% CET1 included POP-ES at 6.6%, BIR-IE at 6.1% and RBI-AT at 6.1%. Early sell-side takeaways note that global investment banks (DBK.GR, GLE.FP and BARC.LN) also need further capital build.
*UK manufacturing shrinks at fastest pace in over three years after Brexit vote:
UK manufacturing July PMI fell to 48.2 from 49.1 flash reading and 52.4 in June. Biggest drop in more than three years following Brexit vote. Domestic market hit by pre- and post-referendum uncertainty. Levels of production and incoming new orders both contracted, as impact of increased business uncertainty on domestic market offset weaker sterling tailwind for export order growth. Output index fell to 47.8 in July from 53.6 in June, marking steepest decline since October 2012. Contractions seen across consumer, intermediate and investment goods sectors. Markit said weakening order book trend and upswing in cost inflation point to further near-term pain for manufacturers. Commentators say data likely to hasten BoE’s resolve this week to cut rates and growth forecasts.
*Eurozone manufacturing growth edges lower at start of Q3:
Headline July Eurozone manufacturing PMI at 52.0, just ahead of 51.9 flash reading, but down from June’s six-month high of 52.8.Main factor in weaker reading was softer positive contribution from new order growth. Rate of job creation also ticked lower, but remained among fastest registered over the past five years. Markit said report reflected further solid growth in production volumes, which held steady at June’s six-month peak, and a further accumulation of backlogs of work. Inflows of new export business also improved during the latest survey month, albeit at a marginally slower pace, partly aided by weak euro exchange rate. Added downside of weaker currency an increase in import costs that, alongside higher oil prices, led to first increase in average purchase prices for a year.
*Q2 revenue turns positive; Q3 sentiment better:
According to latest Earnings Insight report from FactSet, blended S&P 500 earnings decline now stands at (3.8%), better than the (5.5% ) expected at end of Q2. Of the 319 S&P 500 companies that have reported, 71% have beat consensus, just ahead of 70% one-year average. In the aggregate, companies beating earnings consensus by 4.4%, better than 4.2% one-year average. Top-line metrics even more upbeat. Blended revenue growth rate is +0.1%, marked improvement decline of (3.8%) at end of quarter. In addition, 57% have beat consensus, nicely above 49% one-year average. In the aggregate, companies reporting revenues 1.2% ahead of expectations, much better than 0.0% one-year average. 64% of companies that have provided an outlook for Q3 have guided EPS below the consensus, better than the five-year average of 74%.
*Monte dei Paschi gets rescue package:
BMPS-IT the early focus after showing worst performance in Friday’s EBA stress tests. Group managed to ink a private sector-backed rescue blueprint ahead of the stress test numbers, in which it will raise fresh capital and sell bad loans. Bankers expect the €5B cash call to be completed by the end of the year with global investment banks having made a preliminary agreement to underwrite the rights, subject to conditions, including disposal of €9.2B of nonperforming loans. Loans will be securitized, with a senior tranche of €6B benefiting from an Italian government guarantee, €1.6B mezzanine tranche being purchased by the Atlante fund and the riskiest or junior portion left with BMPS.IM shareholders. ECB approved the plan. BMPS.IM stock best performer in STOXX Europe 600 banks index.
*Positive trend in Japanese and Australian manufacturing:
Japanese manufacturing contracted at a smaller pace. July final PMI of 49.3 above flash read of 49.0. Also well up on June’s 48.1. Markit pointed out both production and new orders declined at a narrower pace and employment growth picked up. Mixed impact from the yen’s appreciation, with manufacturers seeing sharp drop in new export orders but benefiting from reduced raw material prices. Elsewhere, Australian manufacturing growth accelerated in July. AIG PMI rose to 56.4 from 51.8 in June. Underpinned by stronger exports owing to a weaker exchange rate. Data also showed large increases in new orders, employment and supplier deliveries. Separately, Aussie new home sales surged 8.2% m/m in June, reversing May’s 4.4% decline and fitting with a sharp rise in property prices. Deflationary pressures persisted with July’s MI inflation gauge at (0.3%) m/m compared to June’s +0.6%.
Australia and New Zealand Banking Group (ANZ), Bendigo and Adelaide Bank Ltd (BEN), Commonwealth Bank of Australia (CBA), National Australia Bank Ltd (NAB) & Westpac Banking Corp (WBC):
Australian banks are being hypocritical and are unlikely to succeed in trying to force Apple to open up its iPhones and let their digital wallets make tap-and-go payments, tech industry experts and fintech start-up rivals say. Four of Australia’s largest banks made headlines around the world last week when they sought permission from the Australian Competition and Consumer Commission to give them permission to collectively negotiate with Apple, and make it allow them the same access to its phones’ hardware as its own Apple Pay service. The competition watchdog is deciding how to respond to the request of Commonwealth Bank of Australia, National Australia Bank, Westpac Banking Corp, and Bendigo and Adelaide Bank, but tech industry watchers said the world’s largest company had a long history of stubbornly refusing to let outsiders inside its iTunes eco-system, and was unlikely to change its attitudes to appease Australian banks.
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