Asian Market Update: Japan merchandise trade deficit widens again; Geneva agreement on Ukraine dented by Sunday shootout
***Economic Data***
- (JP) JAPAN MAR MERCHANDISE TRADE BALANCE: -¥1.45T V -¥1.08TE; ADJUSTED TRADE BALANCE: -¥1.71T V -¥1.43TE
Market Snapshot (as of 03:30 GMT):
- Nikkei225 +0.6%, S&P/ASX closed, Kospi -0.4%, Shanghai Composite -0.2%, Hang Seng closed, Jun S&P500 +0.1% at 1,860, Jun gold -0.6% at $1,286, May crude oil -0.2% at $104.11/brl
***Highlights/Observations/Insights***
- Nikkei225 is up for the 4th consecutive session, outperforming among the key regional indices in the wake of fresh round of selling in Japanese yen. Investors are treating the latest disappointment in merchandise trade balance as fodder for more speculation over the Bank of Japan turning less neutral in favor of more easing. Note that the BOJ policy statement on Apr 30th will also feature the release of semiannual outlook on price and economy. March trade deficit for March was wider than expected, and for the fiscal year, a deficit of $14B was up 4 times from the prior year. March exports showed a negligible rise of 1.8% y/y - well below 6.5% consensus - while imports spiked up by 18.1% y/y thanks to another double-digit rise in shipments of crude oil. Separately of note in Japan, local press survey saw 66% of respondents stating they have not altered their spending as a result of higher sales tax.
- Situation in Ukraine continues to be precarious despite the unexpected 4-party agreement in Geneva last week as well as Kiev govt suspending its "anti-terrorist" campaign in observance of the holiday weekend. Early on Sunday, a checkpoint controlled by pro-Russian separatists north of the eastern town of Slaviansk came under fire from an unmarked car, resulting in at least 3 deaths. Separatists claimed the gunmen are affiliated with the nationalist Right Sector from the west and pleaded for Russia's Pres Putin to send in "peace-keeping" troops. Right Sector denied involvement, alleging it was actually Russian agents that stoked violence to further justify a military intervention. Urkaine interim PM Yatsenyuk appeared on NBC "Meet the Press" program, claiming Russia is undermining global stability and poses a threat to global nuclear nonproliferation efforts. Also of note, German foreign min Steinmeier said he would prefer more diplomacy efforts with Russia, as the west has "already exhaustively discussed the sanctions issue." US VP Biden is travelling to Ukraine for a meeting with Kiev govt on Tuesday.
- UK press speculated AstraZeneca was approached by Pfizer with a bid worth as much as $100B. Subsequent financial press report alluded to the talks between the two pharma giants as having taken place several months ago, having since gone dormant.
- Beijing Auto Show presented an opportunity for comments from top global automakers on their plans regarding China. Daimler-BYD joint venture announced plans for an all-electric vehicle for China called DENZA, which could be available for sale as soon as September. GM China president said GM would invest as much as $12B in China in 2014-17 and also targeted sales of Cadillacs in China estimated at 100K vehicles by 2015. Overall, GM sees China auto market growth slowing to about an 8-10% rate. Toyota announced it will bring as many as 15 new models to China by 2017, aiming to double China vehicle sales to 2M units over the long run.
- Elsewhere in China, premier Li announced clean-energy related construction plans that would focus on nuclear and hydropower projects. Also of note in Chinese press, China Securities Regulatory Commission (CSRC) unveiled new rules on issuance of preferred shares by banks that allow for banks that currently meet CSRC's Tier 1 (core) capital requirements to issue preferred stock. Local reports noted that the first batch of preferred shares including ICBC, ABC, BOC, CCB and Pudong Development Bank totaled CNY370B.
***Fixed Income/Commodities/Currencies***
- (KR) South Korea govt (MOF) sells KRW1.96T in 10-yr govt bonds; avg yield: 3.560%; bid-to-cover: 3.77x
- (CN) PBoC sets yuan mid point at 6.1591 v 6.1586 prior setting (weakest setting since Sept 11th)
- USD majors largely remained in narrow holiday ranges. USD/JPY was the most notable mover, rising to a 2-week high above ¥102.60 after wider than expected trade deficit in Japan. NZD/USD spiked up about 30 pips to $0.86 in the early going but has since reversed all of those early gains. AUD/USD traded in a 25pip range, matching Friday highs of $0.9340 in the morning session before retreating to $0.9315. Note the latest CFTC positioning data saw net longs in both AUD and NZD currencies hit 11-month highs. Gold is volatile in the early going, rising above $1,300 before falling back below $1,290.
***Equities***
- AZN: Pfizer said to be considering a £60B ($100B) for AstraZeneca - UK press
- TEVA: Announces Supreme Court Denial of Request for Interim Relief to Stay Court of Appeals Ruling for COPAXONEPatent Due to the Potential for the Company to Recover Patent Infringement Damages
- GM: North America chief Batey: April may be a strong month for US vehicle sales - financial press
- CMCSA: Comcast and Time Warner Cable said to be in early-stage talks with Charter Communications on potential sale of assets; Deal may be valued at up to $20B - FT
- VIP: Starts strategic partnership with Global Telecom Holding for the sale of GTH's 51% stake in Orascom Telecom Algerie SpA for $2.64B to the Fonds National d'Investissement, the Algerian National Investment Fund
Notable movers by sector:
- Consumer Discretionary: Daiken 7905.JP -3.4% (cuts FY13/14 guidance); People.cn 603000.CN -2.1% (FY13 results)
- Financials: Changjiang Securities 000783.CN +6.5% (FY13 results)
- Materials: China Minmetal Rare Earth 000831.CN -0.7% (Q1 results); Tokyo Steel Mfg 5423.JP -6.3% (exec comments on steel market)
- Industrials: Sufa Technology Industry 000777.CN +2.6%, Dongfang Electric 600875.CN +1.0%, Shenzhen Woer Heat-Shrinkable Material 002130.CN +5.5% (Premier Li comments on nuclear plants); Mitsui Osk Lines 9104.JP -0.8% (Shanghai govt seized ship related to a wartime contractual dispute); Mazda Motor 7261.JP +2.4% (speculation on FY15/16 results); BYD 002594.CN +0.9% (launches DENZA)
- Healthcare: Shinva Medical Instrument 600587.CN -10.0% (announces acquisition)
Minority shareholders’ rights to be beefed up
The Financial Conduct Authority is to strengthen minority shareholders’ rights in an attempt to protect London’s reputation as an international financial centre, after a series of high-profile takeover battles involving natural resources companies.
Under a new proposal, controlling shareholders will have to seek the approval of a majority of independent shareholders in order to delist a company. If approved, the rule will come into force on May 16, and will be implemented by FCA subsidiary the UK Listing Authority.
Under the current rule, three-quarters of a company’s shareholders must consent to any proposal to delist from the stock exchange. This leaves smaller shareholders powerless when one person or company owns more than 75 per cent of a company’s shares.
The new rule will apply in addition to the current rule, rather than replacing it.
In the past year, several London-listed natural resources companies have been involved in high-profile conflicts over minority shareholders’ rights.
This month, independent directors of London listed company Essar Energy urged small shareholders to resist a plan by its majority owner to take the Indian oil refinery and power group private in a hostile takeover. They said that the offer undervalued the business.
Last year, Kazakh mining company the Eurasian National Resources Corporation (ENRC) delisted from the London Stock Exchange while under investigation by the Serious Fraud Office, prompting criticism of the FCA for allowing it to come to the market.
The rule change was first mooted by the FCA in a discussion paper published last November, and will be introduced as part of a wider package of reforms that had already been announced and aim to toughen up the listing regime.
The reforms are also intended to boost minority shareholders’ control over directors’ appointments and operational oversight.
Some investors have argued that the rule changes should go further, giving regulators the power to fine majority shareholders who exercise undue influence.
The UKLA has rejected a suggestion that it should raise the minimum free float level above 25 per cent of a company’s shares.
China premier Li: Planning to soon start construction on a series of major energy projects, including nuclear and hydropower plants - financial press
- Says China should "in a timely manner" launch important nuclear power projects along the east coast that employ the highest international safety standards, while building new hydropower plants while protecting the environment.
Barclays to wind down commodities trading
Barclays, one of the world’s biggest commodities traders, is planning to exit large parts of its metals, agricultural and energy business in a move expected to be announced this week.
The shake-up comes as commodity trading suffers a sharp slide in revenues and attracts greater scrutiny from regulators, which has already led to the withdrawal of several big banks from the area.
Chief executive Antony Jenkins is preparing a strategic update for investors on May 8 and is expected to slash several thousand jobs by cutting Barclays’ exposure to areas that do not generate returns above their cost of capital. These are likely to be moved into an internal “bad bank” and either sold or closed down.
But the retreat from parts of its commodities business is due to be announced on Tuesday. Barclays declined to comment.
Precious metals trading is likely to move into the bank’s foreign exchange trading business. There are expected to be heavy job cuts among the 160 staff in its global commodities trading, sales and research operations, many of them in London.
Barclays is one of the top five banks in commodities – which together controlled about 70 per cent of the commodities trading pot last year. But several are shrinking or disposing of these businesses, including Morgan Stanley, Deutsche Bank, UBS and Royal Bank of Scotland.
The retreat is being driven by tighter regulation, fresh capital constraints and lower profitability due to stable prices for oil and other commodities. Coalition, a consultancy, estimates the revenues of the top 10 banks in commodities fell last year to $4.5bn from a record $14.1bn in 2008.
In the most prominent example to date, Mercuria, a Geneva-based trading house founded a decade ago by two former Goldman Sachs traders, agreed to buy JPMorgan Chase’s physical commodities business for $3.5bn.
Only Goldman Sachs, one of the first banks to enter commodities markets 30 years ago, seems to be strategically committed to the sector, this year deeming it “too important to clients to exit”.
Regulators, including the US Federal Reserve, are reviewing whether to curb banks’ commodities trading operations after they were accused of manipulating markets for electricity, aluminium and other materials for their own profit.
Barclays closed its US and European power trading operations in February after it was fined a record $470m for allegedly manipulating power prices by the US Federal Energy Regulatory Commission. Barclays has refused to pay the fine, shifting the dispute to a federal court.
Separately, Barclays is combining its equities and bond trading units, in a radical departure from the traditional way investment banks organise trading businesses.
In a first step, the bank will merge responsibilities for global equities and credit trading under the helm of Joe Corcoran, previously head of equities, according to an internal memorandum sent out last Thursday and seen by the Financial Times.
The reshuffle presages cuts across a range of trading units by bringing them closer together and creating shared infrastructures.
“The intent is to drive efficiencies and synergies between the businesses,” one person close to the decision said. “You have to break down the silos.”
Mr Jenkins has come under pressure to fix the investment bank after he angered investors with a rise in staff bonuses despite falling profits. The unit failed to meet its cost of capital last year with a return on equity of 8.2 per cent.
At a shareholder meeting this week, Mr Jenkins faces the prospect of a protest vote over the bank’s bonus increase last year.
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Uber’s ‘hustler wonks’ defend taxi app
Uber Technologies Inc. signage stands inside the company's office prior to Senator Marco Rubio, a Republican from Florida, speaking in Washington, D.C., U.S., on Monday, March 24, 2014. Rubio addressed the need to adapt antiquated government regulations to increase economic opportunities for the 21st century and outdated regulations limit consumer choice. Photographer: Andrew Harrer/Bloomberg©Bloomberg
When Uber hits a regulatory roadblock, it sends in the “hustler wonks”.
Fuelled by last summer’s $258m investment from Google Ventures and TPG, Uber operates in almost 100 cities, twice as many as six months ago. But throughout the driver-hailing app’s rapid expansion, it has faced court challenges from taxi unions, fines from local governments and even threats of violence against its drivers.
That’s when Uber’s public-policy team is flown in, as it was last week to Berlin and Brussels. Corey Owens, the former Facebook manager who heads Uber’s public policy unit, calls his 12-person team “scrappy and lean”.
“The reason we look for hustler wonks is that transportation policy intersects with a lot of legal regimes,” he says. “You need someone thinking about the future of cities: a wonk. The reason we hire hustlers is the taxi industry has existed for more than 300 years . . . The only way to disrupt that industry is to think creatively and aggressively.”
Yet Uber’s mission to become “everyone’s private driver” is itself being disrupted by the establishment.
Last week Uber drivers in Brussels were threatened with €10,000 fines for carrying private passengers. The order was branded “outrageous” by Neelie Kroes, the European Union’s digital commissioner. But two days later, a Berlin court sided with the local taxi association against Uber in ruling that its drivers are in effect rental car businesses rather than taxis.
That classification of Uber’s service, which can hail professional limos or part-time “ride-sharing” drivers but does not employ either directly, is a familiar challenge to Mr Owens – and often trickier to handle than the tough-but-clear rules in New York and London.
“What you’re seeing in Berlin or Brussels is a repeat of what we saw in Dallas or Boston,” he says.
The San Francisco start-up and rivals such as Lyft continue to operate in Dallas and Boston despite long-running inquiries by the city halls there that have so far failed to produce clear new rules. “If the trajectory in Asia and Europe is the same as we’ve seen in the US, those cities that start with ambiguity and try to move into aggressively protectionist camps – that doesn’t tend to end well for the cities.”
Whatever happens, after being valued last year at more than $3bn, Uber cannot afford to slow down.
Lyft, its chief Silicon Valley rival, recently received a $250m investment that puts the ride-sharing start-up’s total funding ahead of Uber’s. Other rivals include the Alibaba-backed Kuaidi Dache in China or London’s Hailo.
However, all these strongly funded rivals face a common competitor in the law and the traditional taxi business.
“You can’t regulate them like taxis because they’re not. This is something fundamentally new,” says Nicole Shanahan, a lawyer-turned-tech entrepreneur.
“If other countries are too hasty about taking ride-sharing out, they risk being perceived as unfriendly to innovation,” says Ms Shanahan, editor at the Santa Clara High Tech Law Journal and chair of a recent Silicon Valley event on regulation and the sharing economy.
Last September, California became the first in the US to regulate ride-sharing companies, creating a new category of “transportation network companies” that are required to train drivers, run background checks and provide insurance.
Uber initially challenged the Californian rules, but Mr Owens now hails it as a “full embrace of innovation in transportation”.
But as new battles begin abroad, Uber – which has been hit by calls in Miami and Paris for minimum fares and wait times – faces fresh problems on its home front.
On New Year’s eve, an Uber driver killed a six year-old girl in San Francisco. Uber has denied responsibility, because the driver was not carrying a passenger at the time of the accident. The child’s family has sued the company. In the wake of the incident, the Californian Public Utilities Commission has reopened its inquiry into ride-sharing.
So Uber has done what it does best: hustled. It updated its $1m insurance policy last month to add commercial liability coverage between trips. Last week it added a new $1 “safe rides fee” for some rides to cover increased costs associated with future development of safety initiatives. So, even as it fights the minimum fares imposed by some cities, it has added one of its own.
Despite these challenges at home and abroad, Uber is confident that even the likes of Berlin and Brussels will eventually come around to its point of view.
“The arc of history is long, but it bends towards Uber,” says Mr Owens. “We are seeing that globally.”
China’s crackdown on the “erotic sector” as part of an official anti-extravagance drive is posing a serious threat to the cognac industry, as Beijing closes karaoke and hostess bars where European drinks companies make a large chunk of their mainland profits.
Drinks analysts say the Chinese government’s crackdown on prostitution, betting and drugs – launched in February in the southern city of Dongguan – has already had a major impact on sales of high-end imported spirits.
China Market Research Group in Shanghai estimates that as much as 30 per cent of cognac sales overall in China are made to karaoke clubs, bath houses, hostess bars and other erotic sector venues. The researchers say those sales may have taken a hit of as much as 50 per cent since the launch of the latest anti-prostitution campaign.
Pernod, which derives around 12 per cent of its €8.6bn annual net sales from China, says about one-fifth of this China business goes through karaoke bars, wh – and sales through these venues, known as KTVs, are in “double-digit decline” in the year to date.
Cognac is popular with China’s rich private sector businessmen, who often entertain at venues where female companionship is also available. More than 2,400 such venues have been closed in the latest campaign, according to figures from the Chinese public security ministry.
“This latest clampdown is significant for the cognac sector because . . . it started in southern China where cognac consumption is highest,” say drinks analysts Trevor Stirling and Nicole Thain in a recent Bernstein Research note. “It is focused on private consumption and business entertainment, which is much more oriented towards western-style spirits and especially high-end cognac.” They estimate that the so-called “yellow” sector is “the most profitable channel for the cognac houses” in China.
Cognac sales in China totalled more than 27m litres in 2012, according to Euromonitor, more than double the level of 2007 and well above the 21m litres of whisky sales. Ninety-five per cent of this market is split between LVMH, Pernod Ricard and Rémy Cointreau.
Pernod Ricard, in a recent analyst presentation in Asia, highlighted the increasing impact of China’s anti-corruption campaigns – including what it called “recent action” on KTVs. “We’re in the process of expanding our activities with new offerings and geographic footprints,” it said.
It was a similar story at Rémy Cointreau, which makes $2,000-per-bottle Louis XIII cognac and controls 20 per cent of the cognac market in China, according to Euromonitor. The French distiller’s Chinese sales fell by a third year-on-year in its most recent quarter.
Previous government crackdowns have hit drinks consumption hard, slashing sales of high-end Chinese white liquor or “baijiu” – the preferred tipple of government officials. The impact has been so severe that it has forced the baijiu industry to go downmarket to target new consumers.
“This austerity policy is not going to decline,” says Luca Marotta, chief financial officer at Rémy Cointreau. “On the contrary, the government is stepping up its actions this year.”
China’s growing wealth and population means it remains a prominent market for premium drinks groups. Rémy Cointreau already derives 60 per cent of its cognac revenues from Asia and the rest of the world.
“Market growth will not come from one product or another,” says Mr Marotta. “It will come from demographic developments in China.”
But the heady days for $2,000 bottles of liquor in China could be over, says Ian Shackleton, an analyst at Nomura.
The spirits market will continue to grow in the medium term, he says, but “we feel that the ultra premium is not coming back in the same way. If you are Remy and focusing on the top end of the market, you will struggle.”
Huang Wei, Shenzhen-based food and beverage analyst with Citic Securities, says the impact will depend on how long the crackdown lasts. It is affecting other high-end liquors such as whisky, he adds. “People who go to those kinds of places prefer cocktails, and baijiu is not good for mixing in cocktails,” he notes.
“It is possible that many of these bars will ultimately reopen and/or that business shifts to other bars that are not tainted by the ‘yellow’ sector,” say the Bernstein authors.
But Mr Huang thinks the end result could be a more broadly based cognac industry in China that works to develop demand among the middle class as well as big spenders.
Investors eye more Apple share buybacks
Wall Street is betting that Apple will offer investors tens of billions of dollars in new share buybacks this week, as long-awaited product launches remain locked inside its Cupertino labs.
Apple will also reveal the impact of iPhone sales through China Mobile when it reports second-quarter earnings on Wednesday, with an overall dip in revenues forecast in what is often a fallow period for the mobile phone market.
The earnings report will also mark a year since Apple began its programme of returning more cash to shareholders. Apple said it would increase its share buybacks and dividends to $100bn by the end of 2015, and it had completed more than half of this programme by February.
Tim Cook, Apple’s chief executive, promised to review its plans for its remaining $159bn cash pile by the end of this month, after coming under pressure from activist investor Carl Icahn this year to return $50bn more to shareholders.
Mr Cook fended off Mr Icahn’s demands but also promised that Apple would enter new product categories in 2014. However, few observers expect any new TV device or wearable “iWatch” to be revealed before June’s annual worldwide developer conference.
In the absence of such a catalyst, analysts forecast that Apple will dip once again into its cash reserves, which have continued to grow despite the payouts to shareholders over the past two years, thanks to steady cash flows and last year’s $17bn bond sale.
Bernstein Research has suggested Apple could authorise another $30bn in buybacks, running until December 2015, and others agree some increase is likely. Analysts at Barclays said: “We believe revenue guidance for June may be a few billion below [expectations] given seasonal weakness in the iPhone and delays in customer purchases ahead of the iPhone 6 launch cycle in the fall . . . We look for Apple to compensate for the lack of imminent product catalysts with a higher buyback programme.”
Mr Cook is under growing pressure to reveal a new blockbuster product, following the successes of the iPod, iPhone and iPad. In the meantime, investors have become accustomed to a slowing growth rate and forward guidance that has come in lower than they had hoped in four of the past five quarters.
While many on Wall Street are bracing themselves for a tepid set of results this week, analysts at Barclays and Morgan Stanley have said Chinese demand and a new cheaper 8GB iPhone 5c model could push sales of Apple’s flagship smartphone ahead of market forecasts of 38m.
However, weakness in iPads sales could counterbalance that, putting total revenues 1 per cent lower than a year ago at around $43.5bn, according to Wall Street’s consensus estimates.
Earnings can decline when Apple launches a new product, as shown with the introduction of the lower-margin iPad mini two years ago. Some analysts have suggested that Apple might try to raise the price of the iPhone 6, which is expected to offer a bigger screen in a much thinner casing, to offset the costs of switching to a new form factor for the first time in two years.
This week will mark Luca Maestri’s first appearance as Apple’s newly appointed chief financial officer. Mr Maestri, who formally takes over from the retiring Peter Oppenheimer at the end of September, has been seen as favourable to a boosted cash return scheme.
Fund managers adopt smart approach
Fund managers have found a new way to make money as many of them tap into smart beta, one of the fastest growing investment products in recent years.
The product, also known as strategic beta, tracks certain stocks or assets in an index rather than the entire market like a passive or beta fund. It has expanded sharply as it often delivers market beating returns.
Total net smart beta assets have increased sixfold in Europe to €12.2bn over the past five years and fourfold in the US to $315bn, according to data provider Morningstar. It has continued to grow this year, expanding by 5.4 per in Europe so far in 2014 and by 4.1 per cent in the US.
Passive tracker and exchange traded beta funds are growing more slowly but are much bigger at €608bn in Europe and $3.6tn in the US, says Morningstar.
Tim Gardener, head of the institutional client group at Axa Investment Managers, says: “Interest in smart beta strategies has grown significantly. I don’t believe it is a passing trend; it is firmly entrenched and will continue to be attractive to investors.”
It is called smart because in theory it produces better returns than passive or beta funds by picking out parts of the market that outperform, such as small company stocks or undervalued stocks.
Some active management groups have developed the product as it has become harder to produce so-called alpha returns that beat the market. These groups say smart beta offers a winning combination of active and passive management approaches.
It is also popular with a wide cross-section of investors from private banks to rich individuals to some of the world’s biggest institutions. Japan’s Government Pension Investment Fund announced this month that it would be moving some of its money from active funds to smart beta funds.
However, critics warn it is not the holy grail and is similar to active management, which involves a choice in terms of stock or asset selection. This means it has similar risks, they say.
David Lloyd, head of institutional portfolio management at M&G Investments, says: “As an active manager, I am paid to select assets for my portfolio. I think you either choose to go passive and track the market or pick an active manager.”
It is also typically more expensive to buy smart beta products than those of passive funds, where fees have been cut to the bone.
Ursula Marchioni, head of exchange-traded products research for iShares at BlackRock, insists it is still a beta product, but one that provides the opportunity to replicate the best parts of the market. “Passive funds are linked to market cap, which is not always the best way to replicate a market.”
It is not a panacea, she says, but she insists it offers another option for investors seeking higher and more consistent returns.