Asia Mid-Session Market Update: China data weaker than expected; Aussie employment much stronger than expected; China calls out Trump for protectionism
***Asia Summary***
- Asian equity markets opened slightly lower, before swinging into muted gains, then back again. The onshore yuan fell for a 5th consecutive day, while the PBOC weakened the yuan daily reference rate for the 3rd consecutive day. China again used 7, 14 and 28 day reverse repos with a CNY100B injection. China MOFCOM expressed its displeasure with President Trump for blocking deal between Lattice Semi and Canyon Bridge Capital.
- There was a deluge of data out of China, with fixed assets ex rural and industrial production coming in lower than expected. After the data National Bureau of Stats spokesperson said yuan appreciation shows steady China economy and China will help companies enhance ability to weather FX fluctuations. NBS also indicated that the base effect has inflated PPI. Analysts picked up on this and warned that this when washed through will be disappointing and possibly dampen global growth outlook. Australia again reported a significant jump in employment change, +54.2K, much higher than the 20K expected, both part time and full time employment saw growth. The A$ jumped about 40 pips on the news, before slightly falling on the weaker China data.
***Key economic data***
- (AU) AUSTRALIA AUG EMPLOYMENT CHANGE: 54.2KE V 20.0KE; UNEMPLOYMENT RATE: 5.6% V 5.6%E
- (CN) CHINA AUG RETAIL SALES Y/Y: 10.1% V 10.5%E; YTD Y/Y: 10.4% V 10.4%E
- (CN) CHINA AUG FIXED ASSETS EX RURAL YTD Y/Y: 7.8% V 8.3% PRIOR
- (CN) CHINA AUG INDUSTRIAL PRODUCTION Y/Y: 6.0% V 6.6%E; YTD Y/Y: 6.7% V 6.8%E
- (CN) CHINA AUG YTD FOREIGN DIRECT INVESTMENT (FDI) YUAN-DENOMINATED TERMS Y/Y: -0.2% V -1.2% PRIOR
- (AU) Australia Sept Consumer Inflation Expectation Survey: 3.8% v 4.2% prior
- (NZ) New Zealand Sept ANZ Consumer Confidence Index: 129.9 v 126.2 prior; M/M: 2.9% v 0.6% prior
***Speakers and Press***
China/Hong Kong
- (CN) China National Stats Bureau (NBS): Yuan appreciation shows steady China economy; Will help companies enhance ability to weather FX fluctuations; base effect has inflated PPI
- (CN) China MOFCOM: Very concerned by Trump's blocking of China deal; security checks shouldn't be used as a protectionism tool
Korea
- (KR) South Korea said to be considering aid to North Korea through international organization - Korean press
- (KR) S&P affirms not considering South Korea sovereign rating downgrade due to N. Korea; sees a low risk of war
- (KR) China may have halted North Korea textile trading before the recently announced UN sanctions – Japanese Press
Australia/New Zealand
- (NZ) New Zealand Labour Party (opposition): Will not introduce new taxes before 2021; alters tax working group plans before Sept 23rd elections
- (AU) Australia Port of Newcastle Aug Coal Exports 12.5Mt, -11.9% m/m
Other
- (US) President Trump: "China has a business tax rate of 15%. We should do everything possible to match them in order to win with our economy. Jobs and wages!" - tweet
***Asian Equity Indices/Futures (00:00ET)***
- Nikkei -0.3%, Hang Seng -0.5%; Shanghai Composite -0.2%, ASX200 -0.2%, Kospi +0.2%
- Equity Futures: S&P500 -0.1%; Nasdaq100 -0.1%, Dax -0.1%, FTSE100 -0.1%
***FX ranges/Commodities/Fixed Income (00:00ET)***
- EUR 1.1894-1.1871; JPY 110.73-110.41; AUD 0.8016-0.7973; NZD 0.7263-0.7239
- Dec Gold -0.1% at $1,326/oz; Oct Crude Oil -0.1% at $49.23/brl; Sept Copper -0.1% at $2.98/lb
- (US) DOE CRUDE: +5.9M V +3.5ME; GASOLINE: -8.4M V -3ME; DISTILLATE: -3.2M V -1.5ME (biggest gasoline inventory drop since at least 1990)
- (CN) China Govt preparing to sell $2B in bonds this month - financial press citing sources in Hong Kong
- USD/CNY *(CN) PBOC SETS YUAN REFERENCE RATE AT: 6.5465 V 6.5382 PRIOR (3rd consecutive weaker setting)
- (CN) PBOC injects combined CNY100B in 7,14 and 28-day reverse repos v injects CNY70B prior
- (NZ) New Zealand sells NZ$100M v NZ$100M indicated in 2.5% 2040 I/L Bonds; avg yield 2.3569%
- (JP) Japan MoF sells ¥3.65T in 3-month bills; avg yield -0.1394%
- (JP) Japan MoF sells ¥803.9B v ¥1.0T indicated in 0.6% 20-yr JGBS; avg yield 0.5600%; bid-to-cover 4.15x
***Equities notable movers***
Australia/New Zealand
- MQA.AU To exercise a pre-emptive right to acquire an additional 4.86% indirect interest in APRR for €440M, launches A$450M capital raising
- MYR.AU Reports FY17 (A$) adj Net 67.9M v 69.4M y/y; EBITDA 198.1m v 204.2M y/y; Rev 3.20B v 3.25B y/y; +2.4%
Hong Kong/China
- 700.HK Exec: Have made creators of WeChat groups responsible for managing information within their forums and the behaviour of members; new regulations pose challenge for firm to hook users ; +1.1%
- 1398.HK China Official: hopes Spain handles proceedings against ICBC Europe in money-laundering case in a fair way; -1%
Japan
- 3105.JP, BLDP Collaborated with Nisshinbo Holdings to offer PEM Fuel Cell product using non-precious metal catalyst; +25%
After Hours Summary: THC +11.9% on potential sale / activist engagement (boosting hospital peers), LSCC -1.6% blocked acquisition news is weighing on MGI / GNWAfter Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: UNFI +6.5%, PCYG +5.5% (ticking higher), LAKE +4.3% (light volume)
Companies trading higher in after hours in reaction to news: THC +11.9% (WSJ reporting the company is considering sale; Glenview confirms plans to engage with the Board in connection with the CEO transition and search/Board refreshment), VSTM +6.7% / ELF +5.1% / MAIN +3.8% (unusual after hours movers - still checking), RETA +3.9% (confirms it received orphan drug designation for omaveloxolone for the treatment of malignant melanoma), SALT +3.6% (authorized the repurchase of up to $50.0 million of common stock), AAC +3% (ticking higher-to increase payor and geographic diversification with agreement to acquire AdCare in New England), RDUS +1.7% (slightly higher after 10% owner Biotech Growth disclosed purchase of another 50K shares), BLDP +1.1% (accepted Letter of Intent to provide FCveloCity-HD 100-kilowatt fuel cell engines to power 8 ExquiCity tram-buses being built by Van Hool NV during the second half of 2019)
Hospital names are higher with THC: CYH +3.1%, HCA +1.3%, UHS +0.5%After Hours Losers:
Companies trading lower in after hours in reaction to news: CRIS -25% (to offer and sell up to 20 mln shares of its common stock), SMMT -14.8% (proposed public offering of $15.0 million of American Depositary Shares), ARRY -8.8% (commences $175 mln common stock offering; files mixed securities shelf offering), BVXV -6.8% (to offer for sale its ADS), VNDA -5.9% (Tradipitant was shown to improve the intensity of the worst itch patients experienced, as well as atopic dermatitis disease severity), MGI -4.3% (following Canyon / LSCC news - deal with BABA / Ant may also be scrutinized), EPZM -4.1% (to offer $120 mln shares of common stock), KONA -3.6% (modestly ulling back), USFD -2.7% (confirms offering of 40 mln shares of common stock by investment funds associated with Clayton, Dubilier & Rice and Kohlberg Kravis Roberts), GNW -2.5% (also lower following Canyon / LSCC news - overseas deal may also be scrutinized), LSCC -1.6% (Press Secretary confirmed President Donald J. Trump issued order prohibiting the acquisition of Lattice Semiconductor Corporation), WLH -1.3% (proposed secondary offering of 3,322,666 shares of Class A common stock offered by Paulson & Co), TIF -1.1% (indicated lower on block trade pricing), EFX -1% (continued weakness; House Representative Bob Latta confirmed in letter that Equifax CEO agreed to testify on October 3 at Subcommittee on Digital Commerce Consumer Protection hearing), BABA -0.5% (Jack Ma affiliated entities adopted pre-arranged share sales plan for the sale of up to 16 million shares of the Company over a 12-month period commencing in October 2017; also Ant/MGI related weakness)
Closing Market Summary: Bulls Peter Out, But Still Get the WinThe week's bullish momentum petered out on Wednesday, but, thanks to a late-afternoon rally, the S&P 500 (+0.1%), the Nasdaq (+0.1%), and the Dow (+0.2%) still managed to register new record-high closes. The major averages hovered near their flat lines throughout Wednesday's session as investors lacked conviction amid a shortage of market-moving catalysts.
Traders kept an eye on Apple (AAPL 159.65, -1.21) throughout the midweek session, looking to see how the tech giant would respond to yesterday's product event--in which the company unveiled a trio of iPhones, including the much-anticipated iPhone X. AAPL shares were weak throughout the session and eventually ended the day with a sizable loss of 0.8%.
The company's Wednesday decline, which was preceded by a 0.4% drop on Tuesday, was attributed by some to the iPhone X's later-than-expected release date (November 3), but profit taking on the heels of a major event was also a likely contributing factor considering Apple has made a massive run this year (+37.8% YTD).
Nonetheless, the broader market held up relatively well as investors rotated into some of the sectors that have struggled so far this year--including the energy sector, which settled at the top of the day's leaderboard (+1.2%). The energy space benefited from a rally within the crude oil futures market that sent the price of WTI crude to $49.30/bbl, a one-day increase of 2.2%.
The commodity was underpinned by the International Energy Agency's prediction that global oil demand is set to accelerate at its fastest pace in two years and the weekly EIA inventory report, which showed a much greater-than-expected decline in gasoline inventories (8.4 million actual vs 2.1 million consensus)--a positive sign for future crude demand.
However, it's important to note that hurricane-related factors were also at play in this week's EIA inventory report, which also showed a larger than expected build of crude stockpiles (5.9 million barrels actual vs 3.2 million consensus).
Like energy, the telecom services sector bucked its bearish year-to-date trend, climbing higher by 0.8%, to finish roughly in line with the consumer discretionary space (+0.7%) near the top of the leaderboard. Retailers helped underpin the consumer discretionary group's positive performance, evidenced by the SPDR S&P Retail ETF (XRT 41.38, +0.43), which advanced 1.1%.
Within the retail space, Nordstrom (JWN 47.74, +2.69) showed notable strength, jumping 6.0%, following reports that the company is nearing a deal with private equity firm Leonard Green that would help the high-end retailer go private. Target (TGT 59.51, +1.62) also outperformed, adding 2.8%, after announcing plans to hire around 100,000 employees for the upcoming holiday season.
The heavily-weighted financial sector (+0.2%) also finished in the green, marking its third-straight victory, as did the consumer staples group (+0.1%). On the flip side, six groups finished in the red--industrials (-0.1%), materials (unch), technology (-0.2%), health care (-0.4%), utilities (-0.5%), and real estate (-0.4%)--but losses were modest for the most part.
In the bond market, Treasuries slipped once again, sending yields higher for the third session in a row. The benchmark 10-yr yield climbed three basis points to 2.20%, which marks its best level of the month. Meanwhile, the U.S. Dollar Index (92.42, +0.53) jumped 0.6% to register its third-consecutive advance.
Reviewing Wednesday's economic data, which was limited to the Producer Price Index for August, the Treasury Budget for August, and the weekly MBA Mortgage Applications Index:
- Producer prices rose 0.2% in August, while the consensus expected an increase of 0.3%. Meanwhile, core producer prices rose 0.1%, which is below the 0.2% increase that the consensus expected. Year-over-year, core producer prices are up 2.0%.
- The key takeaway from the report is that producer prices picked up in August without any full-scale impact from Hurricane Harvey, which will presumably help drive up producer prices in September along with Hurricane Irma. The question, though, is what kind of pass-through effect might there be on consumer prices?
- The Treasury Budget for August showed a deficit of $107.7 billion versus a deficit of $107.1 billion for August 2016.
- The Treasury Budget data is not seasonally adjusted, so the August deficit cannot be compared to the $42.9 billion deficit registered in July.
- The weekly MBA Mortgage Applications Index increased 9.9% to follow last week's 3.3% rise.
On Thursday, investors will receive two pieces of economic data--the Consumer Price Index for August (consensus +0.3%) and the Weekly Initial Claims Report (consensus 310K). Both reports will be released at 8:30 ET.
- Nasdaq Composite +19.9% YTD
- Dow Jones Industrial Average +12.0% YTD
- S&P 500 +11.5% YTD
- Russell 2000 +5.3% YTD
Davide Campari mandates Rabobank to sell its soft drinks division – sources
Davide Campari [BIT:CPR], the Italian producer of branded beverages, has mandated Rabobank to sell its soft drinks division, according to a source familiar with the situation and three sources briefed on the matter.
This sale kicked off recently, with documentation already dispatched to a selected number of industry counterparts, the sources explained.
Preliminary offers are expected by the last week of September, the first source briefed disclosed, without specifying the exact deadline. This source described the dossier as very appealing, as the sale involves market leading soft drink brands such as Lemonsoda, Oransoda, Pelmosoda, Mojito Soda, Pinacolada Soda and Crodo.
Before launching the auction, Campari also sounded out market interest with pre-emptive approaches, and attracted the interest of a couple of undisclosed counterparts, the first source briefed said. This effort ended without results and the alternative was to organize the structured sale process currently on-going, this source said.
International food companies that have exposure to the Italian beverage market and offer a portfolio of complementary products are among the potential acquirers, the second source briefed noted.
The list of such potential bidders could include Danone [EPA:BN], Nestle Waters, PepsiCo [NYSE:PEP] and The Coca-Cola Company [NYSE:KO], as well as domestic producers of water such as Italian mineral water group Acqua Sant’Anna, this source said.
None of the sources suggested a potential valuation. A sector analyst familiar with Campari’s management said the company could seek a 2x revenue multiple for the carbonated drinks business, disclosing that the soft drinks business had 2014 sales of approximately EUR 40m.
A Campari spokesperson said the company does not comment on market rumors. Rabobank did not return requests for comment.
Oclaro's role as independent company unclear in consolidating sector (MergerMarket)
- Finisar, Lumentum seen as strongest buyers
- Buyers wait for valuations to drop following China weakness
- VIEX Capital discloses position in June quarter
Oclaro [NASDAQ:OCLR] is regarded as a seller amid rising calls for the optical components industry to consolidate, according to the company’s CEO and three sector analysts.
The San Jose, California-based company has long been rumored to be a target for its larger rival Finisar[NASDAQ:FNSR], and the prospect of such a combination is now growing as the industry heads into a trough caused by oversupply, said analysts Richard Shannon of Craig-Hallum, Mark Kelleher of D.A. Davidson, and Michael Genovese of MKM Partners.
Another potential buyer of Oclaro is Lumentum [NASDAQ:LITE], they said.
Activist investor VIEX Capital Advisors disclosed a 1.4m share position in its June quarter 13F filing.
An acquisition of Oclaro could also now solve Finisar’s search for new leadership. Finisar announced on 6 September that CEO Jerry Rawls will retire at the end of 2018 and Greg Dougherty, Oclaro’s well-regarded CEO, could serve as the combined entity’s new chief executive, said Genovese and Shannon.
Genovese said he believes Finisar and Oclaro held discussions about a potential merger several months ago but that talks broke down when they could not agree on price.
Oclaro’s shares traded midday Wednesday at USD 8.57— giving it a market capitalization of USD 1.45bn — but in the last year they have traded as much as USD 11.30, a high reached in February. Finisar’s market cap is USD 2.48bn.
Oclaro is seen as a good fit for Finisar because of Oclaro’s leading position in analog coherent optical (ACO) components, in particular those that are used for sending signals over long distances – known in the industry as CFP2 ACO, said Kelleher and Shannon. If Finisar wanted to strengthen that area it would make sense to acquire Oclaro, added Kelleher.
Also, their China exposure is complementary: Oclaro is focused on serving the telecom market there, while Finisar’s focus is on the enterprise data center market there, added Kelleher.
But with Oclaro wanting a “nice premium” and neither Finisar nor Lumentum willing to pay “a peak price”, the buyers are expected to wait for Oclaro to stumble, Genovese said.
Before making any bid, Finisar and Lumentum will wait to see how far Oclaro’s stock falls due to weakness in China – where 2017 orders have slowed as telecom network companies Huawei and ZTE work through excessive inventory, said Kelleher. About 32% of Oclaro’s 4Q17 sales went to China.
“Finisar is picky on price. They’re waiting for smaller [optical component companies] to get comfortable with their valuations at lower levels, so that when they offer a premium they will be more receptive,” said Kelleher.
Oclaro’s CEO has previously spoken about the need for consolidation in the optical components industry. At a Roth conference in March, Dougherty told investors, “We think consolidation is an important part of this industry. The largest player has 20% market share. Most have 10%. Given the need for scale, for R&D and design, the need [for consolidation is clear].”
Asked by this news service to clarify those remarks afterwards, Dougherty said Oclaro could either be a buyer or a seller.
“Consolidation is the right thing for the space. We have been saying that for the last three years. The key point is that scale is important and the idea of getting stronger by getting together is a good thing,” he told this news service. Asked if that meant a company such as Finisar could buy Oclaro, Dougherty said that it could.
All three analysts said they viewed Oclaro as a more likely seller than a buyer.
Dougherty’s comments have been “consistent” with what the company has long said, said an Oclaro spokesperson for this article. “Consolidation would be healthy for the industry and I think others would agree,” said the spokesperson.
Finisar did not respond to a request for comment.
The case for consolidation
All three analysts argued in favor of consolidation in the optical components industry. “There are too many competitors making the same product in this industry right now,” said Genovese.
Demand for one fast-growing Oclaro product — called QSFP28, which is a 100Gb optical transceiver bought by Google, Facebook and Amazon for their data centers — is currently ahead of supply, meaning margins are very high, said Genovese. But with several competitors adding more capacity in this area, Genovese said supply and demand will come into balance in the next two-to-four quarters, which will lead to downward pressure on pricing and margins. It could potentially focus Oclaro’s mind on striking a deal before then, according to Genovese.
This cycle — whereby leaders of a new product category do well for a while before competitors jump in and create oversupply and push margins down — happens “over and over again” in the optical components industry, said Genovese.
“The optical industry has gone through boom and bust several times. If there were fewer vendors we could get a more organized pricing environment,” said Kelleher. Optical components vendors have for a while looked at the benefits of consolidation — and have cast their eye on the mergers in the DRAM industry, which previously had also suffered from similar boom-and-bust cycles — but so far no one has pulled the trigger, he added.
As supply begins to exceed demand and the pendulum swings away from optical vendors and back towards their customers, Oclaro and its peers will see gross margins and revenue growth slow, and that should create an environment where companies become more willing to merge, said Craig-Hallum’s Shannon. As a result, in the next six-to-12 months consolidation will become more likely than before, he predicted.
If Finisar does buy Oclaro, then that could spur more consolidation in the industry, with NeoPhotonics[NYSE:NPTN] and Applied OptoElectronics [NASDAQ:AAOI] seen as other targets for Lumentum or Finisar, said Genovese.
Oclaro is itself the product of historical consolidation: it formed in January 2009 after Bookham acquired Avanex. It then acquired Opnext in March 2012. The company then experienced a period of distress, launching an asset disposal program in early 2013 that led to the sale of two business lines to II-VI[NASDAQ:IIVI] in late 2013 and a smaller business line in August 2014. Dougherty was appointed CEO in June 2013 to fix Oclaro.A