TheChek News Flow

TCI presses Tokyo to sell its Japan Tobacco stake

UK-based activist hedge fund The Children’s Investment Fund has escalated its campaign against Japan Tobacco, calling for the Japanese government to sell off its remaining stake in the company. In a letter to Shinzo Abe, Japan’s prime minister, ahead of JT’s annual shareholder vote next month, TCI called for a full privatisation of the government’s 33 per cent holding, arguing it would greatly contribute to the performance of the company and help boost the credibility of his economic reforms. TCI, which holds a 1.1 per cent stake, according to last reported figures, has so far met with resistance to a string of proposals to change the way JT’s balance sheet is managed since launching an initial campaign in 2011. "Further privatisations are crucial to the achievement of your economic growth targets, and JT’s full privatisation would provide Japan with a strong boost in confidence from the international investor community," TCI partner Oscar Veldhuijzen wrote in the letter to Mr Abe published on Tuesday. Japan Tobacco declined to comment on the letter. Japan Tobacco has increased dividends and buyback programmes in recent years but has maintained that TCI’s campaign has had very little impact on its decisions. Last month, JT’s board said it would reject all five resolutions from TCI, to be presented at the annual meeting in June. JT said the resolutions – including a higher dividend, a buyback of Y800bn and the cancellation of all existing Treasury shares – were "substantially the same" as those rejected at the company’s AGM in each of the past two years. Significantly higher returns to shareholders would conflict with management principles, it said, because doing so would require additional borrowing, impairing the group’s ability to "make business investments for future profit growth". The escalation in TCI’s long campaign comes as Japan’s government is urging institutional investors to take a more active role in engaging with companies on matters of strategy and capital management. TCI believes the company should be trading at a premium to peers as it has sales and profit growth that is faster than competitors, but argues that the lack of shareholder friendly management of JT’s balance sheet has led to a 30 per cent discount based on its enterprise value to operating profits. In 2011, the Japanese government announced it would sell down 16.3 per cent of JT. When the placement took place last year JT bought up about a third of the shares on offer.

Asian Market Update: BOJ maintains neutral stance with a higher assessment of CAPEX and lower view on public investment

***Economic Data*** - (JP) BANK OF JAPAN (BOJ) POLICY STATEMENT: REITERATES TO INCREASE MONETARY BASE AT ANNUAL PACE OF ¥60-70T (AS EXPECTED); RAISES ASSESSMENT ON CAPITAL EXPENDITURE (CAPEX) - (JP) JAPAN APR MERCHANDISE TRADE BALANCE: -¥808.9B (smallest deficit in 8 months) V -¥646.3BE; ADJUSTED TRADE BALANCE: -¥844.6B V -¥633.0BE - (AU) AUSTRALIA MAY WESTPAC CONSUMER CONFERENCE INDEX: 92.9 V 99.7 PRIOR; M/M: -6.8% (biggest decline in one year) V +0.3% PRIOR - (AU) AUSTRALIA Q1 WAGE COST INDEX Q/Q: 0.7% V 0.7%E; Y/Y: 2.6% V 2.6%E - (AU) AUSTRALIA APR SKILLED VACANCIES M/M: -0.2% V -0.2% PRIOR - (KR) SOUTH KOREA Q1 SHORT-TERM EXTERNAL DEBT: $123.8B V $115.3B PRIOR - (NZ) NEW ZEALAND APR CREDIT CARD SPENDING M/M: -3.2% V +1.3% PRIOR; Y/Y: +3.2% V +8.1% PRIOR - (NZ) NEW ZEALAND APR NET MIGRATION: 4.1K (highest since Feb 2003) V 3.8K PRIOR

Market Snapshot (as of 03:30 GMT): - Nikkei225 -0.3%, S&P/ASX -0.3%, Kospi +0.1%, Shanghai Composite +0.1%, Hang Seng -0.2%, Jun S&P500 flat at 1,867, Jun gold +0.1% at $1,295, Jun crude oil -0.1% at $102.51/brl

***Highlights/Observations/Insights*** - USD/JPY initially rose slightly but then quickly fell to session lows around 101.10 after the Bank of Japan policy statement offered no hints that it was any closer to more easing. For the 10th consecutive decision, the BOJ said domestic economy continued to recover moderately as a trend, maintaining its overall economic assessment. BOJ raised its CAPEX assessment to "investment has become increasingly evident as corporate profits improved" following strong CAPEX component in Q1 GDP and strong machine orders earlier this week, but also lowered its public investment assessment, stating it has leveled off at a high level. Also of note were 3 new separate instances in the statement of BOJ expressing concern that "decline in demand following front-loaded increase prior to consumption tax has been observed", which could tone down the upcoming rhetoric from BOJ Gov Kuroda's press conference after Tokyo market close. - Also out of Japan, April trade deficit was wider than expected but still the smallest in 8 months. In trade data components, exports rose 5.1% (13th consecutive rise), and imports increased 3.4% v 1.2%e (18th consecutive rise). Exports to China rose an impressive 9.8% y/y, while imports of crude oil were surprisingly down 15.4% y/y at 15.9M KLs.

- China indices are little changed after an initial softer open. China State Information Center (SIC) official said Q2 GDP was estimated at 7.4%, but overall economy was still growing within a reasonable range. China Academy of Social Sciences (CASS) researcher said there was still room for growth in China property market despite the recent slowdown in price growth. Later in the day, Moody's revised China property developer outlook to negative on expectation for residential sales growth to slow.

- In notable Korean press, Yonhap citing industry watchers speculating that Samsung Electronics CAPEX may rise to about KRW25T this year from KRW23.8T in 2013 as the company focuses on organic light-emitting diode (OLED) panels. Separately, BOK Gov Lee said KRW appreciation and weakening consumer sentiment due to ferry disaster may pose a problem for businesses, especially those in service sector and self-employed.

***Fixed Income/Commodities/Currencies*** - (AU) Australia MoF (AOFM) sells A$700M in 2026 Bonds; Avg yield: 3.8257%; bid-to-cover: 2.87x - GLD: SPDR Gold Trust ETF daily holdings fall 1.8 tonnes to 780.2 tonnes - (US) API PETROLEUM INVENTORIES: CRUDE: -10.3M (largest draw since Dec 2013) v +1Me, GASOLINE: +135K v 0e, DISTILLATE: +1.36M v +0e - (CN) PBoC sets yuan mid point at 6.1645 v 6.1626 prior setting (weakest Yuan setting since May 14th) - (KR) BOK Gov Lee: KRW appreciation may burden businesses - financial press

***Equities*** US markets: - ADI: Reports Q2 $0.59 v $0.56e, R$695.0M v $670Me; +1.0% afterhours - CRM: Reports Q1 $0.11 v $0.10e, R$1.23B v $1.21Be; +0.7% afterhours - VSAT: Reports Q4 $0.10 v $0.10e, R$343.9M v $350Me; -2.8% afterhours - INTU: Reports Q3 $3.53 v $3.50e, R$2.39B v $2.38Be; -3.9% afterhours

Notable movers by sector: - Consumer Discretionary: Panasonic 6752.JP +0.6% (positive comments on TV operations) - Materials: Zhejiang Haers Vacuum Containers 002615.CN +2.5% (analyst action); Newcrest Mining NCM.AU +0.1% (announces opening of gold mine) - Energy: Woodside Petroleum WPL.AU -0.3% (terminates JV MOU) - Industrials: Chiyoda Corp 6366.JP +2.2% (announces LNG project) - Technology: Chinasoft 600536.CN +10.0% (China bans Windows 8)

After Hours Summary: LQ +2.0%, ADI +1.0%, CRM +0.9%, INTU -3.7%, VSAT -2.8%, DY -1.3% following earnings/guidance

After Hours Gainers: Companies trading higher in after hours in reaction to earnings: LQ +2.0%, ADI +1.0%, CRM +0.9%

Companies trading higher in after hours in reaction to news: HERO +4.4% (announced five year drilling contract for newbuild jackup rig with Maersk Oil; total contract value is approximately $420 mln), ITMN +1.4% (announced additional pirfenidone data in idiopathic pulmonary fibrosis: Long-term Safety Outcomes Published in the Journal of Respirology), ADMS +1.4% (received $25 mln milestone payment from Forest Laboratories), CPF +0.7% (announced $30 mln stock repurchase program), MUR +0.4% (announced $125 mln accelerated share repurchase transaction)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings: INTU -3.7%, VSAT -2.8%, DY -1.3%

Companies trading lower in after hours in reaction to news: MEIL -12.7% (announced proposed public offering of common stock; size not disclosed), IPCI -2.0% (filed for $100 mln mixed securities shelf offering), ST -0.8% (announced offering of 11.5 mln ordinary shares by selling shareholder and repurchase of its ordinary shares)

Closing Market Summary: Stocks Slide Amid Disappointing Retail Earnings

The major averages ended the Tuesday in the red after surrendering their gains from Monday. In fact, the Russell 2000, which led the way on Monday, paced today's retreat after being unable to reclaim its 200-day moving average (1117/1118). The small cap index fell 1.5%, while the S&P 500 lost 0.7% with nine sectors ending in the red.

Equity indices began the day with modest losses amid general weakness in most cyclical sectors. Most notably, retailers pressured the discretionary sector (-0.9%) after Dick's Sporting Goods (DKS 43.60, -9.56), Staples (SPLS 11.71, -1.68), TJX (TJX 53.95, -4.45), and Urban Outfitters (URBN 32.98, -3.19) all reported disappointing earnings.

Similar to the four names, Home Depot (HD 77.96, +1.46) also reported below-consensus earnings, but the Dow component was able to stay out of the red as upbeat comments from the management overshadowed the earnings miss. Despite Home Depot's outperformance, the retail space struggled with the SPDR S&P Retail ETF (XRT 81.83, -2.07) falling 2.5%.

Elsewhere among influential sectors, financials (-0.7%) and industrials (-1.3%) lagged, while technology (-0.5%) and health care (-0.6%) outperformed.

Notably, the second-weakest sector of the month—financials—extended its May loss to 1.3%. In all fairness, the economically-sensitive group has been unable to gain any traction since the start of the year as today's loss widened its year-to-date decline to 0.9%.

Also of note, the health care sector was able to keep pace with the S&P 500 even as biotechnology struggled. The iShares Nasdaq Biotechnology ETF (IBB 228.36, -3.14) lost 1.4%, which contributed to the underperformance of the Nasdaq.

All in all, today's early price action was relatively sloppy, which opened the door to a more pronounced retreat in the afternoon. In addition, the overall sense of caution was heightened by continued yen strength as the dollar/yen pair registered its fifth consecutive decline while testing its 200-day moving average (101.19).

In all likelihood, some will attribute today's retreat to comments from Philadelphia Fed President Charles Plosser, who said he felt the economy is on its firmest footing since the recovery began. However, it is worth noting that equities began sliding ahead of Mr. Plosser's comments and that longer-dated Treasuries actually climbed to highs following the remarks. The 10-yr note advanced nine ticks, pressuring its yield four basis points to 2.51%.

Today's participation marked an improvement from yesterday, but remained below average with less than 650 million shares changing hands at the NYSE.

Tomorrow, the weekly MBA Mortgage Index will be reported at 7:00 ET, while the minutes from the latest FOMC policy meeting will be released at 14:00 ET.

* S&P 500 +1.3% YTD  * Dow Jones Industrial Average -1.2% YTD  * Nasdaq Composite -1.9% YTD * Russell 2000 -5.5% YTD