Asia Mid-Session Update: 10-yr bond yields decline as risk aversion spreads on China slowdown, Germany govt weakness and continued uncertainty on US tax reform
***Headlines/Economic Data***
Japan
-Weakness in the financial sector: Mega banks decline; Topix Securities brokers index -1%
- (JP) Japan’s government may seek to cut corporate tax rate to ~25% vs ~30% currently for companies that increase wages by 3% and make capital expenditures – Japanese Press
- (JP) Japan PM Abe: Reiterates desirable for BoJ to continue 'super easy' policy, Japan no longer in deflation and excessive Yen strength has been corrected
-Drug companies, Shionogi and Chugai, decline: Japan’s Health Ministry released its reform plan which seeks to gradually lower prices for off-patent drugs.
-Steel makers trade generally higher: Tokyo Steel to raise steel prices amid strong demand and higher raw materials costs.
-Japan exports rise for 11th straight month in Oct: JAPAN OCT TRADE BALANCE: ¥285.4B V ¥330.0BE; ADJ ¥322.9B V ¥206.7BE; Exports y/y: 14.0% v 15.7%e; Exports to China +26% y/y, EU +15.8% y/y, US +7.1%; Asia +18.9%
Korea
-Kospi opened +0.1%; Market has since reversed gains
-Weakness in Chip Sector: Samsung -0.6%, Hynix -0.6%
-Korean Won declines by over 0.4% (first drop in 4 sessions)
- South Korea Q3 average daily FX transaction volume $51.6B (highest since Q1 2016) v $50.8B q/q – Bank of Korea
- South Korea sold 20-yr bonds at 2.56%
- SOUTH KOREA OCT PPI M/M: 0.0% V 0.5% PRIOR; Y/Y: 3.5% V 3.8% PRIOR
-Politics: South Korea and China foreign ministers to hold meeting this week - Korean press
- South Korea President Moon approval rating rises after Southeast Asia trip
- (KR) Bank of Korea (BOK) sells KRW400B in 6-month monetary stabilization bonds at 1.68%
China/Hong Kong
-Equity markets are currently lower as of the time of writing. Volatility seen in small cap Chinext index.
- Hang Seng Materials Index -0.8%; Hang Seng Energy Index -0.8%, Hang Seng Utilities Index -0.7%, Hang Seng Information Technology Index % (Tencent +1%)
-Hypermart company Sun Art Retail Group declines by over 8% after received HK$62.0B bid from Alibaba unit’s which valued company at discount to prior close
- On Friday, the PBoC said that it would ban financial companies from the capital pool business. As part of the rules, ‘highly indebted’ companies will not be allowed to invest in asset management products.
-China will more quickly establish a regulatory framework for financial holding companies, according to the PBoC’s Quarterly Monetary Policy Report.
- (CN) CHINA OCT PROPERTY PRICES M/M: RISES IN 50 OUT OF 70 CITIES V 44 PRIOR; Y/Y RISE IN 60 CITIES OUT OF 70 CITIES V 67 PRIOR
- (CN) China PBOC Q3 monetary policy implementation report: Will maintain a prudent and neutral monetary policy and keep liquidity conditions stable, to fend off systemic risks
- 6808.HK Alibaba forms strategic alliance with Auchan Retail and Ruentex Group to acquire 36.16% stake in Sun Art for HK$22.4B
- (CN) PBoC OMO: Injects CNY100B v CNY30B injected in 7,14 and 63-day reverse repos prior; Net injects CNY20B v CNY10B drain prior
- USD/CNY (CN) PBoC sets yuan reference rate at 6.6271 v 6.6277 prior
Australia/New Zealand
- ASX Consumer Discretionary Index -0.5% Financials Index -0.4%; Energy Index +0.5%
- (AU) Australia Liberal National Party Senator Barry O’Sullivan drafting a bill for a parliamentary commission of inquiry into the nation’s banking sector, covering superannuation, insurance, banks, financial services, protections for small business and the rural sector
- (AU) Reserve Bank of Australia (RBA) head of financial stability Kearns: Australia banks have tightened lending conditions for commercial property in recent years
- (AU) IMF Article IV Mission Statement: Low wage growth to weigh on Australia household incomes; economic growth pickup likely to be modest; RBA may keep rates on hold for another year
-NetWealth Group (investment management firm) rises over 35% in share debut
- (NZ) New Zealand Oct food prices m/m: -1.1% v -0.2% prior
- (AU) Australia buys back A$400M in March 2019 and Oct 2019 Bonds, bid-to-cover 2.71x
- (AU) Australia sells A$400M v A$400M indicated in 3.25% April 2029 Bonds, avg yield 2.6437%, bid to cover 4.98x
- MRM.AU Placement raises $22.4M, institutional component of rights offer raises further A$15.7M at A$0.20/shr; +22%
- PMP.AU CEO Peter George to retire and Kevin Slaven to be interim CEO; Cuts FY18 adj EBITDA A$50-55M (prior 70-75M); -31%
-RBA in focus for Tuesday’s session: Reserve Bank of Australia to release Nov Meeting Minutes and Gov Lowe to comment on ‘Evolving Themes’ in annual year-end speech before economists
Other Asia
- (TH) Thailand Q3 GDP q/q: 1.0% v 0.6%e; y/y: 4.3% v 3.9%e (fastest pace since 2013); Thai Baht (THB) -0.1%
- (TH) Thailand Central Bank Porametee comments following release of Q3 GDP data: No need to rush into hike in key interest rate; reiterates monetary and fiscal policies to stay accommodative
-Malaysia Central Bank (Bank Negara): Intervention is not to manage MYR level; Offshore ringgit trading is illegal; Short selling framework being extended to Islamic govt bonds; To introduce interbank bills in MYR and foreign currency.
North America
- (US) According to Committee for a Responsible Federal Budget tax bill will cost $2.2T instead of the $1.41T indicated if all temp changes in the bill were made permanent - US financial press
- M&A: Semiconductor processor company Cavium said to receive ~$6.0B or at least $80/share offer from Marvell Technology (at least ~5.5% premium)
-Politics: US Special Prosecutor Mueller said to send request for documents to DoJ related to Russia probe , according to US media report: The directive was issued within the past month and the action is the first request for records that Mueller has made of the DoJ, says the report.
-Tax Reform: US Senator Susan Collins (ME-R) said does not believe the repeal of Obamacare’s individual mandate should be part of the tax bill.
-OMB Director Mulvaney said President Trump would agreement to removing the repeal of Obamacare mandate from the Senate tax bill if it becomes an impediment to passage
- The health care mandate is not a ‘bargaining chip’ in the Senate tax bill, said US Treasury Sec Mnuchin.
-Mexican Peso and Canadian dollar open the week lower: Mexico is thought to see US idea on NAFTA auto agreement as ‘unworkable’
Europe
- (DE) Germany Free Democrats Party said to be breaking off coalition talks with Merkel; Merkel could avoid a snap election if she convinces reluctant Social Dems to enter coalition - German Press; EUR/USD fell 0.6% to 1.1722 on the report
- (DE) German Chancellor Merkel: no stone left unturned to form 4-party coalition; regrets no common solution for parties - speaking to reporters
- (UK) UK Fin Min Hammond: we are on the brink of serious progress in Brexit talks; UK to make proposals to EU in time for the December council meeting - BBC interview
-Dutch telcom Altice SA says not preparing equity raise
***Levels as of 00:00ET***
- Nikkei -0.5%, Hang Seng -0.3%; Shanghai Composite -0.8%; ASX200 -0.2%, Kospi -0.1%
- Equity Futures: S&P500 -0.2%; Nasdaq100 -0.2%, Dax -0.4%; FTSE100 -0.1%
- EUR 1.1797-1.1723; JPY 112.20-111.89; AUD 0.7571-0.7550;NZD 0.6819-0.6794
- Dec Gold -0.3% at $1,292/oz; Dec Crude Oil -0.2% at $56.62/brl; Dec Copper -0.4% at $3.06/lb
Weekly Performance
Dow -0.27% S&P -0.13% Nasdaq +0.47% Russell +1.19% EuroStoxx -1.29% FTSE -0.70% CAC -1.14% Dax -1.02% Ibex -0.82% MIB -2.07% SMI +0.54% Nikkei -1.25% Hang Seng +0.27% CSI +0.22% Shanghai -1.45% Shenzen -4.16%
Investors continued to keep an eye on Capitol Hill, where Republican lawmakers are trying to implement the biggest tax overhaul in more than 30 years. The House passed its version of a tax reform bill on Thursday, while the Senate continued to make changes to its version, which will now includes a provision to repeal the Affordable Care Act's individual mandate. Retailers dominated this week's batch of earnings--one of the final batches of the third quarter earnings season. Shares of Wal-Mart (WMT) jumped 10.9% to a new all-time high on Thursday after the world's largest retailer reported better-than-expected earnings and revenues for the third quarter and issued upbeat profit guidance for fiscal year 2018. Conversely, shares of Target (TGT) tumbled 9.9% on Wednesday after the company issued a disappointing earnings forecast for the holiday season. Ross Stores (ROST), Gap (GPS), Advance Auto (AAP), Foot Locker (FL), Abercrombie & Fitch(ANF), Buckle (BKE), Shoe Carnival (SCVL), and Hibbett Sports (HIBB) all soared after beating quarterly profit estimates. Most also beat sales estimates, and many provided upbeat guidance. Unsurprisingly, the S&P 500's consumer discretionary (+1.3%) and consumer staples (+1.0%) sectors, which house retailers, finished near the top of the week's sector standings. The telecom services (+0.8%) group also outperformed, trimming its November loss to 2.1%. On the flip side, the energy sector (-3.4%) struggled, giving back the prior week's advance and then some. The price of crude oil decreased at the beginning of the week--which didn't bode well for the energy group--but the commodity bounced back on Friday to end the week little changed; West Texas Intermediate crude futures slipped 0.1% to $56.71 per barrel.Industrial shares also underperformed after General Electric (GE) cut its dividend by half and dialed back its profit forecast for 2018. GE shares ended the week lower by 11.1%, extending their year-to-date decline to 42.4%. The S&P 500's industrial sector lost 1.1% for the week.
In the bond market, U.S. Treasuries moved in a curve-flattening trade, sending the 2yr-10yr spread to its lowest level since 2007. The yield on the benchmark 10-yr Treasury note dropped five basis points to 2.35%, while the 2-yr yield climbed six basis points to 1.72%.
Following this week's events, investors still strongly believe that the Fed will raise rates next month, with the CME FedWatch Tool placing the chances of a December rate hike at 100.0%.
Macro :
- Mugabe Said to Agree to Stand Down as Zimbabwean President
- Merkel Bid for New Coalition Hangs by Thread in Party Talks
Keep an eye on :
- ADS GY : Adidas Is Said to Plan Moving IT Dept. From HK to Shanghai: SCMP
- ALV GY : Allianz ‘Well Protected’ Against Takeovers: CFO Wemmer to BZ
- ALO FP : GE Must Keep Commitments on Alstom, France’s Le Maire Says
- ALT NA : Le Maire Says He’s Watching Altice Situation Carefully
- BAYN GY : Monsanto Hearings on Whether Roundup Causes Cancer Delayed
- CRG IM : Carige Capital Increase to Go Ahead as Investors Pledge Support
- COFIB BB : Cofinimmo Contemplates Divesting Egmont I, Egmont II Offices
- CVAL IM : Creval CEO Says Subordinated Bond Conversion Not on Table: Sole
- IGY GY : RWE Is Said to Have Held Talks With Enel on Innogy: Reuters
- DEC FP : APN Outdoor takeover speculation stoked by JCDecaux chair visiting Australia - report
- OR FP : L’Oreal CEO Agon Sees ‘Record’ 18% FY Operating Margin: Investir
- LSE LN : LSE Board Is Said to Weigh Publishing Dossier on Rolet: FT
- MAP SM : Mapfre to Make Every Effort to Maintain Dividend: El Economista
- PSM GY : PROSIEBENSAT.1 Says Thomas Ebeling to Leave Co. by End Feb. ’18
- RR/ LN : Rolls-Royce Seeks to Sell Diesel Parts Maker: Sunday Times
- RWE GY : RWE Is Said to Have Held Talks With Enel on Innogy: Reuters
- TSLA US : Tesla’s Electric Truck Reveal Weighs on Peers: Industrials Wrap
- 6502 JP : Toshiba Seeks $5.4 Billion Cash Injection to Avoid Delisting (1)
- TLW LN : Tullow’s Jubilee Field Off Ghana to Halt Twice in 2018: Citi FM
- YAR NO : Yara to Buy Vale Cubatão Fertilizantes Complex in Brazil
- DG FP : French Highway Cos. to Increase Tolls by 1.03-2.04% in Feb: JDD
- WG/ LN : Wood Group Top 10 Shareholder to Reject CEO’s Pay: Sunday Times
Cabinet ready to back May’s increased Brexit bill offer
UK prime minister keen to break deadlock at next month’s EU Council meeting
UK prime minister Theresa May is expected to get the green light from ministers on Monday to increase her Brexit “divorce bill” offer, narrowing the gap with the EU’s €60bn estimate in a bid to break the deadlock in talks with Brussels.
Eurosceptic cabinet ministers, including foreign secretary Boris Johnson, have indicated they are prepared to accept, with conditions, an increase to the €20bn offer that the UK has already made. One minister predicted the offer would rise to more than €40bn.
Chancellor Philip Hammond told the BBC’s Andrew Marr programme on Sunday: “I think we are on the brink of making some serious movement forward in our negotiations with the EU, and starting to unlock that logjam so that people can start to see clarity about the future.”
Mrs May will on Monday convene her new Brexit “inner cabinet” to discuss tactics ahead of December’s European Council meeting. Ministers are expected to consider the controversial issue of how to flesh out what “commitments” Britain is prepared to honour as it leaves the EU.
The British prime minister wants to persuade EU leaders to allow Brexit talks to move on to a second phase, including discussions of a future trade deal; she also wants them to agree, in principle, a transition deal after Britain leaves in March 2019.
Mrs May will be backed at the 10-strong Brexit negotiation subcommittee by five pro-Europeans: Mr Hammond; first secretary Damian Green; home secretary Amber Rudd; business secretary Greg Clark; and defence secretary Gavin Williamson.
But the four pro-Leave ministers — foreign secretary Mr Johnson; Brexit secretary David Davis; environment secretary Michael Gove; and trade secretary Liam Fox — have also indicated they would support a higher exit payment, with strings attached.
“Everyone wants to move on to break the deadlock and move on to phase two of the talks,” said one ally of the prime minister.
Mr Davis, who is leading talks in Brussels, is insisting that Mrs May keeps some money in reserve to use as a bargaining chip when Britain negotiates a final trade deal with the EU next year, a view shared by Mr Johnson.
However, the foreign secretary’s allies denied suggestions he had drawn a “red line” on money or that he would fight to stop Mrs May handing over more than the €20bn she has already offered to cover transition payments in 2019 and 2020.
“Boris’s point is that if we are handing over increasing amounts of taxpayer’s money, we should have a better idea of what we are getting in return,” said one ally. Both Mr Gove and Mr Fox have taken a nuanced stance on the exit bill.
Mrs May is expected to give more details of her willingness to honour Britain’s share of the EU’s outstanding but unpaid commitments. She will not give a figure, but — according to how it is calculated — it could add between €20bn and €30bn to the bill. Pensions and other liabilities could add another €10bn.
All four Eurosceptic ministers are saving their political capital for the fight over Britain’s future relationship with the EU and are pressing Mrs May to resolve the government’s policy as soon as possible.
Although the discussion will be deeply divisive, Mr Hammond also believes Mrs May should formulate Britain’s position soon, rather than let the EU set the terms of a deal when it draws up its own guidelines for a future trade relationship.
The EU is expected to say that unless Britain accepts all the rules of the single market — a Norway-style relationship that would include free movement — it would have to accept a Canada-style free trade deal, focused mainly on goods, not services.
In a leaked memo to Mrs May obtained by the Mail on Sunday, Mr Johnson and Mr Gove said the prime minister should negotiate a trade deal that allowed Britain “a wide degree of regulatory freedom”.
Mr Hammond is among those who wants to keep Britain as close as possible to the single market and customs union; the more the UK diverges from European regulatory standards, the less market access it is likely to enjoy.
The painful grind to a stronger eurozone
A tighter banking union is more likely than fiscal centralisation
As the panic in the eurozone has happily receded — even Greece is likely to exit its rescue lending programme next year — so space has opened up for a constructive debate about fixing the single currency’s manifest flaws.
There is undoubtedly a sense of “never again” after the banking and sovereign debt crises that engulfed the eurozone from 2010. But the problem is one that has dogged the euro since its launch 18 years ago: a fundamental disagreement about how the currency should work and what it is for.
It may be possible to achieve limited compromises on a somewhat larger eurozone budget — as long as it does not constitute full-blown fiscal stabilisation — and a presumption of writing down sovereign debt of crisis-hit countries — as long as it is not part of a punitive rescue mechanism. Beyond that, the best prospects for a change involve a slow grind forwards, trying to complete the banking and capital markets unions in the face of reluctance from recalcitrant member states.
The debate has been elevated by Emmanuel Macron’s forthright intervention since his election as France’s president, calling for a much larger eurozone budget to help with the role of stabilisation hitherto undertaken by national governments. While potentially useful, the likelihood of this happening on a meaningful scale in the medium term is nil. Germany’s vision of the euro included its acting as a discipline on national fiscal deficits, not elevating a transfer union to a supranational scale.
To that end, German official thinking has unhelpfully focused on the possibility of using eurozone-wide institutions to enforce the fiscal rules that have been weakly monitored by the European Commission. The problem with this is that, for the most part, fiscal laxity as such did not cause the eurozone crisis so much as did private bank lending booms that went sour and required national banking rescues, and subsequent international bailouts of indebted sovereigns.
A solution for this, touted in Germany, involves turning the current eurozone rescue lending arrangements into a full-blown European Monetary Fund (EMF), with bailouts requiring automatic writedowns of sovereign debt in private hands. This, however, is unacceptable to France and other countries that fear invasive stringency being entrenched at eurozone level.
In theory there could be some compromise with a limited debt restructuring mechanism outside the context of an EMF, in tandem with a eurozone budget modestly increased from its current size. That would, however, involve both sides crossing their red lines in a spirit of compromise that has been sadly lacking in eurozone governance over the past decade.
In the absence of such reform, the best way to break the loop between troubled banks and indebted sovereigns is to push ahead with the banking union. This involves overcoming resistance in member states, particularly Italy, that regard banks and their owners as sacrosanct and want to bail them out whenever needed.
In reality, if another crisis arises, too much is likely to depend on the European Central Bank reissuing its promise to do whatever it takes. This in turn relies on a president as savvy as Mario Draghi being in charge and commanding a majority on the board. This is by no means guaranteed.
The single currency needs deep change. But divisions among member states mean that any improvement is likely to be incremental. There is little reason to hope that a fully fledged response mechanism will be in place when the next crisis comes along.
Natixis unveils plans to lift profitability targets
French investment bank targets further growth in insurance and asset management
Natixis launched new targets for its strategic plan on Sunday, with the French investment bank looking to take advantage of the strides it has made restructuring its business since the financial crisis.
“The philosophy of our new plan is similar to the last,” said Laurent Mignon, chief executive, as he looks to push ahead in core areas of corporate and investment banking, insurance and asset management.
The bank is setting tougher profitability targets under its “new direction”. It wants to lift its return on tangible equity to between 13 per cent and 14.5 per cent by 2020.
That compares with a previous target of 11.5 to 13 per cent under the old strategic plan. It is also aiming at revenue growth of about 5 per cent a year. Natixis is also pushing its “shareholder-friendly distribution policy”, which will result in up to €4bn being paid out in dividends by 2020, with a minimum payout of 60 per cent every year, up from 50 per cent in the previous plan.
Natixis wants to differentiate the bank from its competitors and make the same sector-wide digital push.
“Differentiation is very important because Natixis cannot aim at being one of the number one of the banks of the world . . . but in the sectors we are in, we want to be viewed as the number one,” Mr Mignon said.
Natixis, which is majority owned by French retail banking group BPCE, was hit particularly hard by the financial crisis and needed a rescue capital raising from its parent in 2008.
That, said Mr Mignon, forced the bank to restructure and adapt at a rapid pace: “We suffered more than many and we refocused quickly.”
“We don't underestimate competition. It’s going to be strong, other banks have either now finished or coming through their restructuring,” Mr Mignon added.
“Of the $4bn in capital we generate throughout the plan, we plan to give €3bn to shareholders,” he said. “We will allow ourselves to do €1bn of acquisitions over the period . . . If we don’t find an acquisition that makes sense we will give back more.”
Those acquisitions may well be in asset management where Natixis aims to push its perceived advantage.
Thomas Buberl, Axa’s chief executive, has recently poured cold water on a move for its asset management business even if many believe consolidation will occur in the industry in the near term.
Natixis’s corporate and investment banking division weathered the decline in trading activity better than many of its peers in the third quarter, even as the bank’s overall result was propped up by its asset management and insurance businesses.
Lorraine Quoirez, an analyst with UBS, said: “After having well implemented the de-risking strategy between 2008-12 and successfully transformed the business model into an asset light one since 2013, we believe management has now gained significant credibility among investors.”
The bank is targeting a 2 per cent growth in risk-weighted assets per year in its CIB division by 2020 and an increase in revenues of 3 per cent a year. It is aiming to increase insurance revenues by 7 per cent during the same period.
In asset management, Natixis is targeting more than €100bn of net inflows that will boost assets under management to near €1tn by the end of 2020.
“We really want to become one of the world’s leading active asset management companies,” Mr Mignon said.
“The more the world goes to passive with no brain behind it . . . the more business chances there will be active management,” he added.
Barrons weekend summary: positive features on IBM and select big box retailers
* Cover story: Initial public offerings were once a goal for so-called unicorns, companies worth more than $1B, but these startups are taking longer to go public; “The maturation of IPOs has generally been a good thing, taking the risk out of the system,” but it also reduces potential investor rewards; Leading mutual funds aren’t waiting for IPOs, and are investing in private markets.
* Features: 1) Positive on IBM: The unloved company could be the next slumbering giant to fetch a higher valuation as its large investments in analytic and cloud products increasingly win over customers; 2) Positive on M, WMT, TGT: Retailers have long taken a hit from online rivals, especially AMZN, but experts believe the shopping rush that starts on Black Friday will be the first in which their online arms begin to gain ground.
* Tech Trader: Cautious on CSCO: Tech giant’s fixation on its own balance sheet doesn’t bode well for its competitiveness in years to come, and chief Chuck Robbins has failed to articulate how the company can gain ground in the Internet of Things and the cloud.
* Trader: Higher volatility, instead of scaring investors away from the stock market, could be bringing them in, a situation that would lead to a longer bull market; GE may be giving up on BHI, but investors shouldn’t, though without GE the company “requires a different narrative”; “While the Nafta discussions aren’t due to be settled for months, they have the potential to upend sectors of the market—and make life miserable for investors.”
* Profile: Michael Grant, manager of the Calamos Phineus Long/Short fund, uses “risk regime,” or the kind of hand the market is dealing, as the starting point for investment decisions (top 10 long stocks: AAPL, GS, JPM, MS, PYPL, C, JNJ, RDN, BAC, UBS).
* Interview: Ajay Kapur, Asia-Pacific and emerging markets strategist at Bank of America Merrill Lynch, became bullish on Asia ex-Japan and emerging markets in February after being bearish for five years.
* ETF Special Report: Exchange traded fund experts David Nadig, Barry Ritholtz, Corey Hoffstein, and Ben Fulton discuss innovation in the sector and other topics. Follow-Up: The battle over Nelson Peltz’s bid for a PG board seat continues, and a win for the activist investor would be good for the stock.
* European Trader: Cautious on Vestas Wind Systems: The U.S. market, a key one for the company, “is at risk of turning into a turkey, depending on how Washington’s tax-reform plan plays out.”
* Asian Trader: Positive on LG Chem, Samsung SDI, Panasonic: The three companies, which make batteries for electric vehicles, trail rivals in the sector, but continue to merit investor attention.
* Emerging Markets: Venezuela may muddle through its debt crisis with help from Russian and China, so nervous bondholders aren’t likely to band together and seek accelerated bond repayments.
* Commodities: The shutdown of the world’s largest uranium mine, owned by Cameco, has rallied prices and could help revive the market.
* Streetwise: Universities pay steep fees to outside managers, but have balked at allocating money to Warren Buffett’s Berkshire Hathaway, the world’s most successful inves