TheChek News Flow

Asian Market Update: China's trade surplus hits a 5-year high as imports contract; Japan Q1 GDP revised up on much higher CAPEX

***Economic Data*** - (CN) CHINA MAY TRADE BALANCE: $35.9B V $23BE (5-YEAR HIGH, 3rd month of surplus) - (JP) JAPAN Q1 FINAL GDP Q/Q: 1.6% V 1.4%E; ANNUALIZED GDP: 6.7% V 5.6%E; NOMINAL GDP: 1.4% V 1.2%E - (JP) JAPAN APR BOP CURRENT ACCOUNT BALANCE: ¥187B V ¥288BE; BOP ADJUSTED CURRENT ACCOUNT: ¥131B (1st surplus in 4 months) V ¥233BE - (JP) JAPAN APR TRADE BALANCE BOP BASIS: -¥780B V -¥640BE - (JP) JAPAN MAY BANK LENDING INCL TRUSTS Y/Y: 2.3% (4-month high) V 2.1% PRIOR; BANK LENDING EX-TRUST Y/Y: 2.4% V 2.1%E

Market Snapshot (as of 03:30 GMT): - Nikkei225 +0.5%, S&P/ASX closes, Kospi -0.1%, Shanghai Composite +0.3%, Hang Seng +0.8%, Jun S&P500 flat at 1,949, Aug gold flat at $1,252, Jul crude oil +0.2% at $102.82/brl

***Highlights/Observations/Insights*** - China trade data released over the weekend painted a mixed picture despite the impressive 5-year surplus beat on the headline. Exports were particularly impressive with a 7% y/y rise - shipments to EU were up 13% and those to US up 6%. Imports component surprisingly contracted however, shrinking by 1.6% against a 6% expected rise. Iron ore, copper, and crude oil imports all fell sequentially, as ANZ analysts noted the declines were due to recent crackdown by Chinese regulators on the use of commodities as collateral to finance deals. RBS research team remarked that they do not expect May trade figures to change the policy stance significantly, noting the "import data may keep the pressure up for initiatives to support growth."

- Japan Q1 final GDP was revised higher despite expectations of lower than initially reported growth. Q/Q final GDP stood at 1.6% vs 1.5% prelim and annualized was up 6.7% v 5.9% prelim. Corporate CAPEX component revision stood out with a whopping 7.6% rise - above 4.9% prelim and 4.6% estimate - while all other components were generally in line with the initial prints. USD/JPY hit a high of 102.64 on the release before retreating to 102.50, and Nikkei225 reached a 3-month high above 15,200. Also of note out of Japan, BOJ Gov Kuroda over the weekend said that while stimulus policies have achieved the goal of boosting the real economy and ending deflation, the official 2% inflation target may take more than the initially projected 2-year timeframe to be reached sustainably.

- Ukraine President-elect Poroshenko was formally sworn in this weekend and swiftly proceeded to outline a 1-week timeframe to end all fighting in the eastern part of the country. Poroshenko also welcomed dialogue with the separatist forces but noted the govt will not negotiate with bandits. Local rebel leaders dismissed those comments as rhetoric, indicating they do not expected Ukraine military to pull out of the contested areas. - European Commission meanwhile is planning to host another round of trilateral talks between Ukraine, Russia, and EU leaders on Monday. Also of note, an FT note citing sources reported that some large Russian companies are preparing to switch settlement contracts to CNY and other Asian currencies amid concerns over western sanctions.

***Speakers/Political/In the Papers*** - (CN) Some large Russian companies said to be preparing to switch contracts to CNY and other Asian currencies - FT - (CN) China Premier Li Keqiang: China economic growth within reasonable range; China has relatively large downward pressure. - (CN) China Stats Bureau researcher Pan Jiancheng: Excessive concern over China's slowdown may pose risks - People's Daily - (CN) China should cut banks' RRR across the board and adopt expansionary monetary policy to match growth - Chinese press - (CN) As of May 31st, China iron ore port inventory at 115.9Mt (record), +2.9% m/m, +61.3% y/y - Chinese press - (JP) Japan BOJ Gov Kuroda: Stimulus launched last year achieved its goal of boosting the real economy and ending deflation; 2% inflation target may take more than 2 years to reach - financial press - (KR) South Korea Ministry of Strategy official: Govt is analyzing economic activity for H1; Considering revising its 3.7% 2014 GDP target lower due to Sewol disaster - Korean press - (EU) ECB's Coeure: ECB's latest move wanted to indicate that monetary conditions will diverge between the euro zone and US/UK for several years - French press - (UR) European Commission planning to host another round of trilateral talks between Ukraine, Russia, and EU leaders on June 9th in Brussels - financial press

***Fixed Income/Commodities/Currencies*** - (JP) BOJ offers to buy ¥1.5T in T-bills - (KR) South Korea sells KRW1.85T in 5-yr government bonds at 3.065% v 3.115% prior, bid to cover: 4.2x v 4.6x prior - OPEC expected to maintain its output ceiling at 30M bpd when it meets later this week - financial press - USD/CNY: (CN) PBoC sets yuan mid point at 6.1485 v 6.1623 prior setting (strongest Yuan setting since March 27th)

***Equities*** US markets: - FDO: Icahn discloses 9.4% stake; intends to talk to management and may seek board seats - 13D filing; Fox's Gasparino: Icahn tells us that he will push for FDO to look for merger, possibly with DG - tweet; Issues Statement Regarding Icahn Schedule 13D Filing; board open to dialogue with all shareholders - KRFT: Raise prices on its coffee brands by 10% - press - HSH: Tyson Foods nearing deal for Company; To offer more than $60/shr for Hillshire (total deal value above $7.36B) - financial press

Notable movers by sector: - Consumer Discretionary: Wuxi Little Swan 000418.CN +10.1%, Midea Group 000333.CN +0.8% (Midea offers for 20% stake in Little Swan); Skyworth Digital 751.HK -1.6% (May sales results); 361 Degrees International 1361.HK +3.4% (expects sales growth in 2014) - Financials: Haitong Securities 6837.HK +0.9% (May results); CITIC Securities 6030.HK +1.2% (May results); Evergrande Real Estate Group 3333.HK +0.6% (May sales results); Gemdale Corp 600383.CN +1.2% (May sales results) - Industrials: Great Wall Motor 2333.HK -5.5% (May production results) - Technology: MediaTek Inc 2454.TW +2.4% (May results); Sony Corp 6758.JP +1.4% (PS4 leads console sales in current FY) - Telecom: Softbank 9984.JP +0.6% (cut rates in Japan)

Nestle wants bigger piece of high-end chocolate

ZURICH/LONDON (Reuters) - Nestle's chief executive, who oversees a sprawling empire stretching from baby food to wrinkle treatment, admits to finding one of its oldest businesses, chocolate, a source of frustration.

Nestle is one of many consumer goods companies trying to tap interest in high-end, natural, artisan, exclusive or organic goods to augment packaged food sales that have been sluggish in Europe and North America since the global recession.

Its Nespresso brand enjoys a comfortable position at the high end of the coffee market, helped by exclusive distribution, break-through technology and ads with George Clooney. But the company has not done the same in chocolate.

"Premium chocolate is my small intimate frustration," Chief Executive Paul Bulcke told investors at a conference in Boston on June 4 where he also discussed the company's shrinking appetite for underperforming brands.

His revelation prompted renewed speculation the company, known for mass-market chocolate, may seek to buy its way into a bigger role in the premium sector, particularly in the United States. A Nestle spokesman declined to comment on any plans.

"I think there will be some sort of premium chocolate initiative on a global basis for the company over coming months and quarters," said Kepler Cheuvreux analyst Jon Cox. "And to be honest, about time too."

Nestle sold about 7.5 billion Swiss francs ($8.39 billion) of chocolate in 2013, accounting for about 8 percent of group sales. Its confectionery business is No. 3 behind Mondelez International and Mars in a global market with more than $196 billion in retail sales, according to Euromonitor International.

Over the last seven years, Nestle's confectionery business has grown at an average rate of 5.7 percent, below the group average of 6.3 percent, according to Vontobel analysts.

Gourmet chocolate, often made with higher cacao content and exotic flavors such as chilli or ginger, is still a small part of the market and boasts a range of independent players such as La Maison du Chocolat and Vosges.

But multinationals are increasingly present. Mondelez owns Green & Black's, Korea's Lotte owns Belgium's Guylian, Mars owns Pure Dark and Hershey Co owns Scharffen Berger.

Nestle also sells premium brands -- Switzerland's Cailler and Italy's Baci Perugina -- but the vast majority of sales come from mainstream brands such as Kit Kat, Aero, Crunch and Butterfinger.

"We're trying to answer that. It's going to be a long-term journey but we do have the quality in chocolate, we do have the knowledge, we do have the 'metier'. We just have to do it," Bulcke said, noting that part of the problem was the company's decentralized structure.

"Super-premium luxury chocolate brands should be monolithic worldwide, like Nespresso is. That goes against the DNA of our organisation, so we're going to have to find ways to go around that," he said.

TO BUILD OR BUY

The easiest way for Nestle to move upmarket in chocolate would be an acquisition, and rumors of its interest in Switzerland's Lindt & Spruengli and Italy's Ferrero have recurred over the years.

"What's interesting about both Lindt and Ferrero is both of those companies would fit beautifully into any of the other four big players," said Andrew Cosgrove, lead analyst at EY's global consumer products practice, referring to Mondelez, Mars, Nestle and Hershey. "But neither asset looks affordable or available in the short term."

Any buyer of Lindt, the maker of Lindor and Ghirardelli chocolates, would have to offer a hefty premium to its current market value of $12.8 billion, paying for the luxury positioning that lets Lindt generate high single-digit sales growth in developed markets, where mainstream peers see flat or low single-digit increases.

In October, Italian media said Nestle had offered to buy Ferrero, the family-controlled maker of Kinder chocolate, which bankers value at more than 10 billion euros ($13.5 billion). Ferrero denied the report.

Yet Bulcke's comments this week led some analysts to believe that acquisitions may be back on the agenda.

"Management appeared to acknowledge that an acquisition may eventually be needed in order for them to achieve scale and relevance (in the U.S. confectionery market)," Jefferies wrote in a note. Nestle remains open to bolt-on acquisitions, announcing a $1.4 billion deal last month to expand in injectible wrinkle treatments.

Other targets in chocolate could possibly include Godiva, though its owner, Turkish conglomerate Yildiz Holdings, in October sold a 20 percent stake of its food business Ulker Biskuvi.

Meanwhile Russell Stover, known for its boxed chocolates, is reportedly running a takeover auction that reports say has attracted interest from suitors including Hershey, Yildiz and private equity firms.

Hershey Chief Executive John P Bilbrey recognises the growth of the premium segment but explained in a February interview that mass brands still account for 85 percent of all chocolate sold, with the remainder evenly split between "super-premium" and "mass-premium" brands, which people trade up to in good economic times and down from in tough times.

"People ask me all the time 'what are you doing in premium, what are you doing in premium?'," Bilbrey said. "And I always reorient them. I say: 'I'm growing well in the biggest part of the market'

UK ‘would not be freer’ after leaving EU

The tussle between David Cameron, UK prime minister, and his allies over the leadership of the European Commission has triggered new questions over Britain’s future in the EU – with President Barack Obama warning last week against a UK exit. The complex choices that would surround any divorce will be set forth this month by a commission set up by the Centre for European Reform. For British proponents of an exit from Europe, the report will make unwelcome reading. Not only does the 92-page analysis argue that EU membership has been a "boon" for the UK economy, lifting its goods trade with other members by 55 per cent, generating increased inward investment and boosting the City of London, but it finds that many of the purported benefits of leaving are "illusory". Even within the rule-bound EU, Britain has managed to preserve the second most lightly regulated product market in the developed world, as well as levels of employment protection that are only marginally more restrictive than in the US or Canada – and well below those in France or Spain. Some of the most controversial EU rules – such as the working time directive – have had only a "marginal" effect on the labour market, according to its analysis, while in other areas, notably financial regulation, Britain has voluntarily gone further than EU minimum standards. "A bonfire of European rules would not transform Britain’s economic prospects," according to the report. "The idea that the UK would be freer outside the EU is based on a series of misconceptions". The CER, a think-tank that aims to make the EU more open and effective, drew on the contributions of 22 commissioners for its report. They included Sir Nigel Wicks, chairman of the British Bankers’ Association, Lord Monks, former general secretary of the Trades Union Congress, Sir Richard Lambert, a former CBI chief and FT editor, and Lord Mandelson, the Labour peer and former EU commissioner. In Britain, although some polls have tilted in favour of continued EU membership, the eurosceptic UK Independence party nearly doubled its seats in the EU parliamentary elections. Matthew Elliott, CEO of Businesses for Britain, a lobby group seeking renegotiation of the UK’s pact with the EU, said that "unwavering deference" to the idea that Britain must stay in the union was making it harder to secure a better arrangement. "The constant assumption that Brexit would be doom and apocalypse is ignoring the opportunity that we have to negotiate a radically more competitive deal," he said. However, the CER report highlights what it calls an "invidious choice" facing the negotiators of any split with Europe. If Britain seeks to benefit from the single market from outside the EU it will have to play by many of the rules it is seeking to escape – while having less influence over them. The flipside would be freedom from those rules, with loss of access to the single market. If Britain does leave, its options would include a Swiss-style deal based on bilateral agreements with the EU; a customs union of the kind Turkey has with the EU; or, like Norway, membership of the European Economic Area. However, the UK would still have to comply with the club’s rule book without having power to influence it. And it could find itself continuing to pay into the EU budget; a Norwegian-style deal would lower net contributions by only 9 per cent, while a Swiss arrangement would cut contributions by 55 per cent. The paper concludes that the only option that would make sense would be for Britain to go for as deep a free-trade agreement as possible with the EU and sign as many bilateral trade agreements with non-EU partners as can be secured. However, an FTA would still not leave Britain with complete regulatory freedom, as the EU would make demands on labour market rules, health and safety and competition policy, as well as product standards. Including Britain’s services sector in any FTA would be difficult, given the UK’s large trade surplus in services with the rest of the EU.

Draghi Sparks Utility Stocks

A guy called Mario helping the Italians isn't the most startling proposition. But this one, Mr. Draghi who runs the European Central Bank, is also helping the Spanish, though; the Germans, not so much.

This concerns utilities in particular. The ECB's monetary-easing efforts, unveiled Thursday, should ensure that euro-zone interest rates remain very low and keep the door open to further measures, including quantitative easing.

That will provide an added boost to Italian utility Enel ENEL.MI +0.80% as well as Spain's Endesa, ELE.MC +0.68% which remains listed but is 92%-owned by Enel.

The ECB's effort to anchor interest rates near zero helps these companies in two ways. First, it will keep the pressure on Mediterranean countries' bond yields, giving their debt-laden governments more breathing room and thereby keeping a lid on sovereign risk. The fairly steady fall in the Italian benchmark bond yield since the summer of 2012, to less than 3% from over 6%, has coincided with a doubling of that country's stock market. Enel's stock has more than doubled.

Second, with interest rates suppressed amid ongoing unease about Europe's economic prospects, investors like dividend yields supported by the regulated utility business model. Enel's and Endesa's stocks both yield about 3.4% based on forward dividend estimates.

The switcheroo on U.S. Treasury yields, which have surprised by falling this year rather than rising, has worked wonders for American regulated utility stocks. Having spent much of 2013 treading water as expectations of tighter U.S. monetary policy increased, the sector is up more than 9% this year, nearly double the S&P 500's performance.

The shadow over all this is the euro zone itself. Electricity consumption peaked there in 2007 and, after a recovery in 2010, fell again. Italian and Spanish power demand peaked in 2007 and 2008, respectively. Besides moribund economies, renewable energy targets in European countries encourage the development of wind and solar power, which tend to depress electricity prices.

Yet on this front, Italy and Spain may be through the worst of the upheaval. This is why the ECB's move may still offer a tailwind to their utilities, but not to Germany's. Renewable energy already accounts for 32.5% and 36% of electricity output in Italy and Spain, respectively, according to Société Générale. That is well above their targets for 2020. In contrast, renewable energy's share of German power output is only about 23%, against a 2020 target of 35%.

The upshot is that Germany's energy mix is still evolving, which will put further pressure on demand from traditional power plants and pricing there in the years ahead.

Tellingly, estimates of forward earnings per share for Enel and Endesa, after falling steadily for two years, have bottomed out and started rising again.

Meanwhile, estimates for Germany's E.ON EOAN.XE +0.59% and RWE continue to decline. Their stocks will struggle to gain much traction from the ECB's new stance, while it should spark renewed momentum for their southern rivals.