IMF warns ECB against premature bond tapering
The International Monetary Fund has delivered a warning to eurozone monetary policymakers looking to wind down their bond buying spree, uring the ECB to keep its extraordinary stimulus in place until there is more evidence of inflationary pressures.
The European Central Bank is on the cusp of cutting back its €60bn-a-month quantitative easing programme in response to a stronger-than-expected economic recovery in the single currency area. A decision on slowing its bond purchases likely to come in October and apply from the beginning of 2018.
The central bank has already tweaked its message on its willingness to provide support to the economy – dubbed “forward guidance” – in June, removing a commitment to cut rates should the outlook worsen on signs that the region’s economy was growing well.
However, while growth in a region viewed as an economic laggard is now outpacing the US and the UK, inflation remains weak — registering 1.3 per cent in the year to June, below the ECB’s target of just under 2 per cent. Despite falls in unemployment, wage growth is weak, signalling that price pressures are unlikely to re-emerge in the real economy any time soon.
In its annual review of the eurozone economy, the IMF said that “monetary policy should remain firmly accommodative until there is a sustained rise in the inflation path” toward the target of 2 per cent:
The ECB’s forward guidance should remain unchanged until justified by actual inflation or by substantial evidence that the inflation outlook has improved.
Officials at the Washington-based institute also called on European governments to speed up efforts to fix the region’s banks, several of which have high volumes of non-performing loans and low profitability.
“[IMF directors] encouraged the European Commission to provide a blueprint for national asset management companies and clarity on State Aid requirements, which could help develop markets for distressed debt,” said the fund.
“Restructuring and consolidation in the banking sector should be incentivised by a firm approach to closing failing banks.”
Completing the banking union—with common deposit insurance and a common fiscal backstop— was “essential” to making banks safer.
The fund added that stronger European economies, such as Germany, Austria and the Netherlands, would need to tolerate inflation in excess of the central bank’s 2 per cent target to ensure that price pressures throughout the region remained broadly on track.
While that might seem like a statement of the obvious, higher inflation in the region’s core would almost certainly trigger pressure on the ECB to begin to tighten its monetary policies.
Despite this year’s surprisingly strong recovery, the IMF sounded gloomy on the region’s longer-term prospects:
Some high-debt countries could experience rising borrowing costs in the face of tighter global financial conditions or reduced monetary accommodation.
Structural weaknesses in the European banking system in the form of weak profitability and pockets of high non-performing loans could trigger financial distress. Moreover, political support for further European integration may be eroded by persistent external imbalances and lack of real income convergence.
Autos & Shared Mobility
Diesel denial? Hopes rest on another government solution on Aug 2nd
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Europe
Industry View In-Line
Harald C Hendrikse, Victoria A Greer
July 25, 2017
OEMs are reportedly in talks with the German government to fix Euro 5 diesel emissions to avert outright driving bans. We think sales figures show the consumer knows better. Now, collusion allegations will make it harder for the government to support OEMs. We think the OEMs are in denial on diesel.
Automakers self-report collusion spanning 25 years, according to Der Spiegel: According to a 100-page filing seen by Der Spiegel in Germany, the five German OEMs (Daimler, VW, BMW, Audi, Porsche) are alleged to have met over 1,000 times in 60 committees spanning 25 years to discuss all manner of automotive content, suppliers, supplier costs, and even emissions technology. Der Spiegel highlights papers suggesting that these committees agreed to limit SCR AdBlue tanks to 8L, rather than the required 30-35L to meet emissions standards - saving the OEMs approx. €80 per car. Given the self-reporting, and the level of detail in the articles, we believe that on-going investigations by the German and EU cartel offices will remain a drag on the sector for some time - Der Spiegel claims that this could become one of the largest cartel cases in German corporate history. BMW, the only German OEM to comment on the report, denied any wrong-doing.
Three key risks from the collusion allegations: We see three key risks if the OEMs are found to have illegally colluded: 1) Significant fines - under EU cartel law, companies found guilty of collusion can be fined up to 10% of Group revenues (which would amount to €10-€20bn for the big three German OEMs) - in a worst case scenario, we think this would mean that some OEMs would have to raise new equity to maintain balance sheet strength, and that provisions could threaten dividend payments; 2) Loss of government support - against a backdrop of diesel risks, and European lawsuits, the OEMs have benefitted from German government support - if illegal collusion is proven, that political support may be at risk into the German election; and 3) collusion on fixing emissions systems, if proven, could change the debate on liabilities for Euro 5 and Euro 6 cars that don’t meet legal emission standards - previously, OEMs could simply point to their meeting the old European test standard.
German politicians coming to the aid of their auto industry supporting €100 software recall? To counter the risk of a Stuttgart Court diesel driving ban, OEMs have started to announce "voluntary" software recalls. Daimler last week said it would recall 3m cars across Europe (over 90% of affected Mercedes cars) at a cost of €220m, whilst Audi has announced a recall of 850k 3L and 4L TDI cars. Initial Stuttgart Court reaction was sceptical of the proposed solution, but a final decision is due Friday 28th July. After that, German Transport Minister Alexander Dobrindt has organised a Berlin conference on 2 August with OEMs to address the issue. This minister was quoted by Reuters last week as saying "driving bans are an ineffective tool for reducing pollution".
Proposed software fixes will be ineffective in improving Air Quality: In fact, with Stuttgart air pollution over twice the European legal average, and with ICCT quoting an average NOx emission for Euro 5 cars of over 1,110 mg/km vs a Euro 5 limit of 180 mg (now 80 mg), we think software fixes reducing emissions up to 20% are even less effective - with real world driving emissions remaining significantly above legal limits. With the cost of a software recall up to €100/car, and hardware fixes costing up to €1,500 per car, we are not surprised at the direction of car industry lobbying. 102m cars were sold in Europe in the 2009-2016 period, of which we estimate 55m-60m were Euro 5 and Euro 6 diesel cars with real world driving emissions well over legal limits.
Porsche joins Volvo in questioning the future of diesel at all: In contrast with the other German OEMs, Porsche CEO Blume was reported by Reuters last week as saying "Porsche's latest generation of diesel engines could be its last". This contrasts with recent statements from all the other German OEMs maintaining their diesel engine strategies, and further questions diesel residuals for consumers from here. On 12th July, Volvo cars CEO Hakan Samuelsson was reported by Reuters to have laid out a future for Volvo cars with no new combustion engine-only models post 2019, and an ambitious new BEV strategy. See Autos & Shared Mobility: Electric car - Volvo gets it (07 Jul 2017) . Clearly, Porsche and Volvo have a view on the limited future of diesel from here.
Consumers are not persuaded - diesel sales falling sharply, residuals also lower: Potential driving bans, diesel congestion charges and statements from Volvo and Porsche raise questions on diesel's future. European diesel sales have fallen very sharply in recent months, with German passenger car market share down at 38.8% in June 2017, and falling 500bps yoy across Europe's largest markets. A €3k greater diesel residual decline could lead to almost €100 higher monthly lease payments, or 30%. Why would consumers buy (highly monthly payment) cars that they know will be phased out after 2019 by many OEMs? When will OEMs reflect likely diesel residuals declines? (see -European Automotive Sector - European Diesel Compendium (05 Jul 2017)).
China NEV investments, Germany is stuck on diesel? China's NEV focus contrasts sharply with the latest German government efforts to avert diesel driving bans. See Autos & Shared Mobility: China NEV risks rising (17 Jul 2017). OEMs such as Daimler, VW, and Toyota have recently announced large investments in NEV capacity in China to allow them to meet NEV targets - building a large lead for China in next-generation auto technology. Meanwhile, in trying to save automotive employment, the German government is spending its time trying to save a technology that some OEMs are already abandoning. We question whether a better solution would be in Germany proposing an industry-friendly BEV technology development policy.
BEVs face a much lower hurdle without cheap combustion engine competition: Volvo's move also moves the goal posts for BEVs - instead of competing on cost with a cheap petrol alternative, BEVs will only compete with much more expensive hybrids. This could remove one of the many obstacles to BEV penetration that continues to haunt these products - further clearing the way for BEV penetration to move higher – see Autos & Shared Mobility: One billion BEVs by 2050? (05 May 2017). Previously, we highlighted advances in power chip technology that will improve BEV performance significantly. Our Indian auto analyst, Binay Singh, recently upgraded his India BEV penetration forecasts, raising our global BEV forecast in the largest future auto growth market, as further scepticism fades - India Autos & Shared Mobility: India EVs: Ripples for Now, Signals an Upcoming Wave (05 Jul 2017).
Conclusion - a long list of unknown liabilities: European OEMs are trading on low valuation multiples, and recent news again highlights the regulatory risks they face. Until such regulatory and structural issues can be addressed, and the costs of such changes can be assessed, we believe it will be unlikely for valuations to bounce sharply. We highlighted this last month - Daimler: Need to focus on Auto 2.0 (14 Jun 2017) . By recognising the scope of the necessary change, we believe Volvo's statement marks a large step in that direction. In the meantime, our only Overweight rated names are Autoliv and Michelin - both, in our view, well insulated from the structural and tech disruption risks.
European Environment Agency estimate of European premature deaths due to PM2.5 and NO2 - 432k and 75k people affected each year
Source: European Environment Agency, Morgan Stanley Research
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Authors
Morgan Stanley & Co. International plc
Harald C Hendrikse
+44 20 7425-6240 EMAIL
Morgan Stanley & Co. International plc
Victoria A Greer
+44 20 7425-7944 EMAIL
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Gapping down
In reaction to disappointing earnings/guidance:
In reaction to disappointing earnings/guidance:
- TISI -20.8%, (reports prelim Q2 results, finalizes negotiations of credit facility amendment and terminates At-the-Market equity offering program), STX -14.8%, MDR -12.6%, SANM -9.9%, CLB -6.1%, LOGI-6.1%, CRY -4.6%, EDU -4.3%, PCRX -4%, HSII -2.9%, GOOG -2.8%, APC-2.7%, MMM -2.4%, LPL -1.9%, LLY -1.5%, HXL -1.4%, CVLT -1.2%, DPZ-0.9%, WWD -0.6%
Other news:
- NVAX -19.2% (announces'positive' topline data from its Phase 2 safety and immunogenicity trial of the RSV F Vaccine in older adults, new data on RSV F vaccine, and additional findings from prior phase 2 and 3 studies of E201 and E301)
- FTI -7.7% (restates financial information due to calculations of foreign currency effects )
- INCY -3.1% (Incyte and Eli Lilly (LLY) announces the resubmission to the FDA of the NDA for baricitinib)
- WDC -2.9% (in sympathy with STX)
- MU -2.3% (in sympathy with STX)
- SLNO -1.2% (sells one of its non-strategic subsidiaries, NeoForce, Inc., which manufacturers and promotes a range of innovative pulmonary resuscitation solutions in the neonatal market, to Flexicare; terms not disclosed)
- MBRX -1.1% (files for $75 mln mixed securities shelf offering)
- SRPT -1.1% (prices 7.65 mln shares of common stock at $42.50 per share)
Analyst comments:
- UAA -2.6% (downgraded to Sell at Deutsche Bank)
Gapping up
In reaction to strong earnings/guidance:
In reaction to strong earnings/guidance:
- DCIX +20.7%, PCAR +7%, CNC +5.7%, CAT +4.5%, BIIB +3.7%, JBLU +3%,RMBS +2.8%, CDNS +2.7%, ATI +2.7%, MCC +2.7%, PHM +2.4%, ST+2.1%, SWFT +1.9%, GM +1.9%, FCX +1.9%, MC +1.8%, VEDL +1.6%,UTX +1%, KMB +1%, NEM +0.9%, DD +0.8%, SVU +0.6%
M&A news:
- KORS +3% (Michael Kors to acquire Jimmy Choo for $1.35 bln)
Other news:
- GNCA +8.6% (continued strength)
- CYRX +7.1% (CryoPort announces Novartis (NVS) has signed an agreement contracting Cryoport over an initial three-year term for cryogenic logistics support of CTL019/CD19 CAR-T cell therapy)
- CGEN +5.9% (has been issued a U.S. patent for COM701)
- CLLS +5.2% (granted patent for CRISPR use in CAR T-cells)
- MDCO +4.8% (announces randomization in the TANGO-2 trial of its meropenem-vaborbactaml was stopped early, following a recommendation by the DSMB)
- BCLI +2.5% (signs agreement with the University of California Irvine Medical Center to enroll patients in the planned Phase 3 clinical trial of NurOwn in ALS, pending FDA and Institutional Review Board approvals)
- TEAR +2.1% (continued volatility in pre-mkt)
- JCP +1.8% (announced that Jeffrey Davis is joining as EVP/CFO effective today)
- JD +1.1% (s Walmart (WMT) and JD.com (JD) are expanding their cooperation to further integrate their platforms, supply chains and customer resources in China)
- HAS +1% (CEO featured on Monday's Mad Money)
- GRFS +0.8% (announces the acquisition of additional 40% stake in Kiro)
Analyst comments:
- TNTR +7.1% (initiated with a Buy at BofA/Merrill, among others)
- PLUG +2.1% ( target raised to $3.50 from $3 at FBR & Co)
Buyout firms spread load in £6bn Unilever bid
CD&R and Bain Capital have formed a consortium to make an offer for the unit which holds Flora margarine, Sky News learns.
Two of the world’s biggest private equity groups have joined forces to assemble a knockout takeover bid for the £6bn Unilever division which houses the Flora margarine brand.
Sky News has learnt that Clayton Dubilier & Rice and Bain Capital have begun working together on an offer for the Anglo-Dutch consumer goods group's spreads business, which it has outlined plans to offload.
CD&R and Bain's partnership is the first significant bidding group to emerge after months of speculation about the likely participants in an auction of the unit, which also holds the I Can't Believe It's Not Butter brand.
Sources said that CD&R's interest would lean heavily on Vindi Banga, a former Unilever foods executive, and Sir Terry Leahy, the former boss of Tesco - both of whom are already closely involved with the buyout firm.
Bain, meanwhile, has significant experience of carving out complex business units from large multinationals, having reaped huge gains from its role in acquiring Worldpay, the payments business, from Royal Bank of Scotland.
Other consortia are expected to form over the summer as Unilever gets ready to sell the business, although it could opt to dispose of it through a demerger to its existing shareholders if offers are not sufficiently attractive.
Announcing half-year results last week, Paul Polman, Unilever's chief executive, said preparations for an auction were "well underway".
The intention to sell or demerge the spreads division came two months after Unilever was the subject of an unsolicited £115bn takeover approach from Kraft Heinz, the US-headquartered food giant.
The move from Kraft Heinz sparked a hostile reaction from the Unilever board and rang alarm bells in Downing Street, where Theresa May had vowed to clamp down on unwanted foreign takeovers.
Mr Polman, who said last week that Unilever was becoming a "more resilient, more competitive and more profitable" company, had called for a "level playing field" in response to the Kraft Heinz approach.
He later insisted that he was not calling for the Anglo-Dutch fast-moving consumer goods group to receive special protection from the Government.
In recent months, Unilever has been linked to a bid for the £3bn food unit of Reckitt Benckiser, which it agreed to sell last week to McCormick's of the US.
Mr Polman has also turned to faster-growing categories for takeover opportunities, snapping up the online-based Dollar Shave Club for $1bn last year.
The spreads category has been in long-term decline as increasingly health-conscious consumers have turned to butter-based products.
That trend reinforces the likelihood that
McDonald's beats by $0.11, beats on revs (151.85)
- Reports Q2 (Jun) earnings of $1.73 per share, $0.11 better than the Capital IQ Consensus of $1.62; revenues fell 3.4% year/year to $6.05 bln vs the $5.96 bln Capital IQ Consensus.
- Global comparable sales increased 6.6% [vs. ests near +4%], reflecting positive guest counts in all segments
- In the U.S., second quarter comparable sales increased 3.9%, reflecting the national cold beverage value promotion and the launch of the Signature Crafted premium sandwich platform. The U.S. continues to build momentum as it executes strategies to enhance convenience, strengthen value and innovate around the menu to bring more customers to McDonald's more often. Operating income for the quarter increased 5%, reflecting higher sales-driven franchised margin dollars, G&A savings and higher gains on sales of restaurants.
- Comparable sales for the International Lead segment increased 6.3% for the quarter, led by continued momentum in the U.K., strong performance in Canada and Germany and positive results across all other markets. The segment's operating income increased 8% (13% in constant currencies), fueled primarily by sales-driven improvements in franchised margin dollars.
- In the High Growth segment, second quarter comparable sales increased 7.0%, led by strong performance in China and positive results across the entire segment. The segment's operating income rose 28% (28% in constant currencies), with about half of the increase resulting from lower depreciation expense due to the accounting treatment related to the pending sale of the China and Hong Kong businesses.
- In the Foundational Markets & Corporate segment, second quarter comparable sales rose 13.0% and operating income increased significantly, led by very strong performance in Japan as well as strong results across the segment's other geographic regions. The segment also benefited from comparison to the prior year's strategic charges.