>>> US Gapping up

Gapping up
In reaction to strong earnings/guidance:

  • LX +5.4%, MANU +2.5%

Select China related names showing strength:

  • CMCM +3.6%, JD +1.2%, BIDU +1%, BABA +0.9%, WB +0.8%

Other news:

  • KRTX +83.5% (announces results from Phase 2 clinical trial of KarXT for the treatment of acute psychosis in patients with schizophrenia)
  • MTEM +13.5% (Molecular Templates & Vertex Pharmaceuticals (VRTX) enter into strategic research collaboration)
  • DRNA +8.8% (Dicerna Pharmaceuticals and Novo Nordisk (NVO) announce agreement to discover and develop novel therapies for the treatment of liver-related cardio-metabolic diseases using Dicerna's proprietary GalXC RNAi platform technology.)
  • YNDX +6% (authorizes repurchase of up to $300 mln worth of Class A shares)
  • EIDX +5.4% (Eidos Therapeutics and BridgeBio Pharma (BBIO) report Phase 2 Open Label Extension suggesting long-term tolerability of AG10)
  • AXGT +2.1% (FDA has granted orphan drug designation for the Company's investigational gene therapy, AXO-AAV-GM1, for the treatment of GM1 gangliosidosis)
  • F +1.3% (Announces electric Mustang SUV)

Analyst comments:

  • N/A

>>> US Early premarket gappers

Early premarket gappers

  • Gapping up:
    • YNDX +5.8%, BLDP +5.5%, LX +4.8%, XNET +4.3%, QGEN +4.1%, SPLK +3.4%, WRK +3%, CMCM +2.7%, PLUG +2.6%, VIPS +2.6%, MANU +2.5%, STM +1.7%, MU +1.4%, JD +1.3%, SNN +1.3%, F +1.2%, TEVA +0.9%, WB +0.8%, BABA +0.8%, OXY +0.5%
  • Gapping down:
    • QD -4.5%, HPQ -2.1%, EL -1.6%, ORAN -1.4%, SBGL -1.2%, BTG -1.1%, SLV -0.9%, NEM -0.9%, AEM -0.9%, GDX -0.9%, GOLD -0.8%, ALV -0.8%, GLD -0.5%

FT : Clearing conundrum, The EU financial sector is still worrying about the con

Clearing conundrum
The EU financial sector is still worrying about the consequences of a no-deal Brexit

Neither Boris Johnson nor Jeremy Corbyn wants a no-deal Brexit, but the EU financial sector is still worrying about the consequences of one. And that means Brussels has to worry too.

The European Commission bowed to the inevitable on Friday, confirming that it will take the necessary steps to make sure EU banks, fund managers and companies are not cut off from vital infrastructure in the City of London soon after a no-deal exit.

It did so after months of mounting pressure from the financial sector, which warned that measures put in place by the commission last year would expire too quickly if Britain crashes out of the EU on February 1 — its scheduled departure day — without a deal.

On paper, such a scenario is unlikely. Should he win a majority in next month’s general election, the UK prime minister plans to ratify his Brexit deal with Brussels, meaning Britain would leave with an agreement, and with a transition period. Mr Corbyn, the Labour leader, would instead seek to negotiate his own deal and put it to referendum, a plan which is bound to require a delay to Britain’s leaving date.

But Brussels had to act nonetheless. London is the dominant force in the global €640tn market for swaps clearing. Clearing houses, such as London’s LCH, ICE Clear Europe and LME Clear, are some of the most critical institutions in the financial system, acting as middlemen for trades in derivatives contracts and other securities.

Both the Bank of England and the European Central Bank have warned of risks to the stability of the financial system unless access to clearing is ensured in the event of a no-deal Brexit. But EU regulations ban European companies from using clearing houses outside the bloc, unless Brussels has specifically recognised them as being properly regulated and supervised — a decision known in EU jargon as “granting equivalence”.

The commission last year agreed to safeguard access until March 30, 2020, but the industry has been reticent to change its practices, waiting to see how Brexit unfolds. The situation was becoming urgent, as from the start of next year clearing houses would have needed to begin the process of cutting ties with member banks based in the EU.

Valdis Dombrovskis, the commission vice-president for financial services, noted on Friday that “the risk to financial stability has not yet been fully removed, because industry has not so far fully prepared”. He confirmed that the commission is preparing an extension of the no-deal safeguards beyond March.

Mr Dombrovskis did not specify what the new date will be, but the expectation is that Brussels will extend the measure by an extra year, meaning market access would be guaranteed until end March 2021.

At a time when concepts such as economic and financial sovereignty are very much in vogue with EU policymakers, this situation leaves some interesting food for thought. EU officials note that, once the fate of Brexit is clear, broader reflection will be needed on what kind of financial system the EU27 wants to build: how far governments want to replicate the essential services that London provides, and to what extent the EU will need to interact with other jurisdictions.

Much of this discussion will take place in the context of the Capital Markets Union, a project conceived several years ago to break down barriers to cross-border investment in the EU, but that has increasingly mutated into a quest for independence from foreign financial services providers and infrastructure.

For the time being, Brussels simply doesn’t have many options. It is EU banks that stand to get hurt if they are cut off from London-based clearing houses. Clearing is a rare example of a sector that is so critical that the EU simply cannot take the risk that ties with the UK are severed, even for a short period.

FT : Three banks in America have gone bust within the past month

Three banks in America have gone bust within the past month
Failed lenders are small but watch out for more US banks piling up on the scrap heap

Three banks in America have collapsed over the past month, bringing the total number of failures this year to four. In a country with some 4,700 federally insured lenders, that is a small number. But given that the total last year was zero, the trend is worth watching.

The banks — City National Bank of New Jersey, Resolute Bank of Ohio and Louisa Community Bank of Kentucky — hit trouble for different reasons. In the case of City National and Resolute, it was a result of “unsafe and unsound practices”, the Office of the Comptroller of the Currency said. The Kentucky Department of Financial Institutions, meanwhile, said that “operating losses had started to erode capital” at Louisa Community.

That suggests there is no problem with a particular class of assets, as there was in 2007-2008, when the housing market froze. Johannes Palsson of Angel Oak Capital, which invests in the debt of small banks, notes that there have been some “idiosyncratic issues” in energy and agriculture, but “overall credit is great”.

But many banks are struggling anyway, in an era of low interest rates and hot competition. Scott Hildenbrand, analyst at Sandler O’Neill, estimates that new commercial real estate loans, for example, have an average interest rate of 4.2 per cent, down more than a full percentage point from a year before.

The more margins stay low, the more likely banks are to move into unsuitable areas to boost them. Many companies are already carrying more debt than they can handle, while households are showing signs of strain, too. The latest survey carried out by the New York Federal Reserve, released last week, showed record-high consumer loan balances and worsening delinquency trends in car loans, student loans and mortgages.

Granted, the three bust banks are small canaries in the coal mine: between them they had less than $200m in assets and five branches. But the last time there were zero US-bank failures was 2006. In 2007 there were three. The year after that? No one needs reminding.

FT : SoftBank signs $30bn deal between Yahoo Japan and Line

SoftBank signs $30bn deal between Yahoo Japan and Line
Tie-up aimed at creating a south-east Asia powerhouse in data and AI

SoftBank-backed Yahoo Japan and messaging app Line have agreed to merge as Masayoshi Son seeks to create a south-east Asian powerhouse in data and artificial intelligence worth ¥3.3tn ($30bn).

The deal follows years of courting by Mr Son, SoftBank’s founder, who has long pitched the merger as a way to compete against rivals in China and Silicon Valley, according to people familiar with the discussions. 

Under the framework announced on Monday, Line will first be taken private through a tender offer at a proposed price of ¥5,200 per share, which represents a 13 per cent premium to Line’s share price on November 13 before news of the talks broke last week. 

Z Holdings, a subsidiary of SoftBank’s telecoms arm formerly known as Yahoo Japan, and Naver, the South Korean internet search group that owns 73 per cent of Line, plan to each spend ¥170bn on the tender offer.

The merger, which is expected to be completed in October 2020, values Line at ¥1.3tn, creating a group with a combined market value of ¥3.3tn. The group’s $11bn in combined revenue would put it above domestic rival Rakuten with access to a growing number of mobile users in south-east Asia. 

The multi-tiered tie-up will involve SoftBank’s telecoms arm, which owns a 45 per cent stake in Z Holdings, creating a 50-50 joint venture with Naver. The complex scheme will allow the South Korean group to maintain control over Line. Following the merger, Z Holdings will remain a listed entity, which will become a consolidated subsidiary of SoftBank’s telecoms arm. 

Analysts have often called for the two groups to combine, saying a deal would give Line and Yahoo Japan access to a bigger pool of data and stronger negotiating power with its advertisers. 

It also strengthens Yahoo Japan’s presence in the mobile space by giving it access to Line’s 164m monthly active users in Japan, Taiwan, Thailand and Indonesia.

For WhatsApp rival Line, the merger allows it to join SoftBank’s ecosystem and benefit from its massive investment capability in AI and other technologies through the $100bn Vision Fund. 

“It makes perfect sense for all the parties involved with immediate synergies in search, payment, advertising, ecommerce and content,” CLSA analysts said after merger talks were reported last week. 

Following a surge last week, shares in Z Holdings briefly climbed 5 per cent on Monday morning after the deal was formally announced, while Line rose 3.2 per cent. Shares in SoftBank’s telecoms arm fell 0.5 per cent and Naver gained 0.9 per cent.