>>> What to look at today - 11th of April 2017

Dow +0.07% S&P +0.07% Nasdaq +0.05% Russell +0.18%
US Market closed slightly +ve, Geopolitic & Oil continue to be the main catalyst before US banks kick of of Q1 earnings this week.  stock market dipped into negative territory around midday on rumors that China deployed about 150,000 troops in two groups to its border with North Korea. Equities recovered shortly thereafter, but never quite made it back to their best levels of the day. This rumor of Chinese troop movement has been gaining traction with Asian media in recent days, and it has been noticed by U.S. investors during an abbreviated week, which is likely to see reduced participation. That was the case on Monday with only 794.0 million shares changing hands at the NYSE floor (200-day average: 1.1 billion).  energy group (+0.8%) finished atop the day's leaderboard thanks to a solid performance from crude oil. The commodity finished 1.6% higher at $53.06/bbl following further production complications in Libya. The country's largest oilfield was shut down on Sunday after a group blocked a pipeline linking it to an oil terminal. consumer discretionary (+0.4%), industrials (+0.2%), consumer staples (+0.3%), real estate (+0.7%), and utilities (+0.2%) sectors also outperformed the broader market.  financials (-0.3%) and telecom services (-0.3%) groups settled at the bottom of the day's leaderboard while the health care (-0.2%) and technology (-0.2%) groups performed only modestly better. US After Hours SALE +49% on buyout news, MXWL +40% on SDIC equity investment. Asian equity markets are largely lower, led by near 1% drop in Hong Kong where sentiment soured on energy, tech, and gaming sectors. Australia is resilient with a modest gain, as most mining and financials names turned higher. US and European futures are also lower, while FX majors appear to be succumbing to renewed risk-off flows - USD/JPY is down over 30pips from the highs below 110.60, while AUD and NZD were slightly lower against the greenback late in the day. Traders tuned in to Fed Chair Yellen's discussion at University of Michigan mostly to hear familiar rhetoric. Yellen said the Fed's estimate of neutral fed funds rate is not very high, reiterating intentions to continue to gradually raise interest rates.

Nikkei -0.27% Hang Seng -0.79% CSI -0.06% Shanghai +0.22%

eur$ 1.0584 CNH 6.9052 CNY 6.9016 JPY 110.59 GBP 1.2416 CHF 1.0091 RUB 57.1183 WTI$ 52.87 -0.40%

S&P -0.15% EuroStoxx -0.73% FTSE -0.19% Dax -0.51% SMI -0.35%

Macro :
- Yellen Says Fed’s Focus Has Shifted to Sustaining Economic Gains
- Lower Corporate French Tax Rate Could Benefit Legrand: Citi

Keep an eye on :
- AKZA NA : PPG Offer for Akzo Nobel Is ‘Unacceptable’, FD Cites Akzo CEO
- ATC NA : Altice USA May Aim at Raising Up to $2b in IPO: Echos
- ENEL IM : Enel CEO Starace, Chair Grieco Top Treasury’s Board Nominee List
- ENI IM : Saudi Said to Weigh Gas Ventures With BP, Chevron, Eni: Reuters
- GIVN VX : Givaudan 1Q Revenue Beat Company-Compiled Consensus: Liberum
- DEC FP : JCDecaux Appeals on Velib Loss to Paris Administrative Court
- MC FP : LVMH 1Q Sales Beat Estimates; Rev. Organic Growth 13%
- MC FP : LVMH Rally May Have More Room to Go Following Sales Beat: RBC
- MAU FP : Maurel & Prom Says Henin Resigned From Role as Board Chairman
- PNRA US : 3G Capital Said to Weigh Rival Bid for Panera Bread: NYP
- REP SM : Repsol 1Q Est. Upstream Production 694 Kbep/D: Filing
- SIKA VX : Sika 1Q Sales CHF1.39b, Up 9% in Swiss Francs
- WFM US : Whole Foods Surges as Much as 12%, Option Volume Spikes, Jana Reports 8.3% stake

>>> Europe : Brokers Upgrades & Downgrades - 11th of April 2017

>>> Up
*Gjensidige Raised to Buy at Berenberg, PT NOK146
*Italgas Raised to Buy at Jefferies
*Kone Raised to Hold at HSBC, PT EU41
*Lufthansa Raised to Outperform at Exane, PT EU18
*Puma Raised to Outperform at Macquarie, PT EU385
*Sanofi Raised to Neutral at JPMorgan, PT EU87
*SSE Raised to Buy at Berenberg, PT 1,650p
*TDC Raised to Buy at Berenberg, PT DKK42

>>> Down
*ABB Cut to Sell at UBS, PT CHF21
*AMS Cut to Neutral at UBS, PT CHF60
*Atos Cut to Neutral at MainFirst, PT EU120
*Carrefour Cut to Equal-weight at Barclays
*Dialog Semi Cut to Sell at Bankhaus Lampe
*Lundbeck Cut to Hold at Jefferies
*Lonmin Cut to Underperform at Macquarie, PT ZAR22
*PSP Swiss Cut to Neutral at Kempen & Co, PT CHF90
*Red Electrica Cut to Hold at Jefferies
*Stora Enso Cut to Hold at Pareto Securities, PT EU12
*Terna Cut to Hold at Jefferies
*Tryg Cut to Hold at Berenberg, PT DKK136
*United Utilities Cut to Neutral at Macquarie, PT 1,040p

>>>> Initiation
*CNH Industrial New Hold at Stifel
*Norwegian Air New Underperform at Exane, PT NOK180
*Wizz Air New Neutral at Exane, PT GBP17

>>> Call
>> Stock
*ASTRAZENECA REMOVED FROM TOP MACRO-TO-MICRO STOCKS AT UBS
*LVMH, TESCO ADDED TO TOP MACRO-TO-MICRO STOCKS AT UBS
>> Sector
*EUROPE GENERAL RETAIL CUT TO UNDERWEIGHT VS NEUTRAL AT UBS
*EUROPE CONSUMER DURABLES RAISED TO OVERWEIGHT VS NEUTRAL AT UBS

>>> Asian Update

Asia Mid-Session Market Update: North Korea saber-rattling, Russian role in Syria continue to spook investors

***US Session Highlights***
- (CA) CANADA MAR ANNUALIZED HOUSING STARTS: 253.7K V 215.5KE
- (MX) Mexico Mar Nominal Wages Y/Y: 4.7% v 4.6% prior
- (US) Mar Labor Market Conditions Index Change: 0.4 v 1.0e
- Equities started the week with the same sentiment as they finished the last, with stocks trending mostly sideways and major indices closing flat to slightly higher. Markets are still treading cautious ground. Higher crude prices helped the S&P, with energy the best performing sector, gaining 0.9% on the day.

***US markets on close: Dow flat, S&P500 +0.1%, Nasdaq +0.1%***
- Best Sector in S&P500: Energy
- Worst Sector in S&P500: Telecom
- Biggest gainers: WFM +10.0%; FSLR +4.3%; HES +4.0%
- Biggest losers: MU -3.1%; NVDA -2.6%; INCY -2.3%
- At the close: VIX 14.1 (+1.2pts); Treasuries: 2-yr 1.26% (-1bps), 10-yr 2.36% (-1bps), 30-yr 2.99% (-1bps)

***US movers afterhours***
- SALE: Acquired for $11.60/shr in cash by Harland Clarke Holdings; +49.0% afterhours
- SVU: To acquire Unified Grocers for $384M in cash and stock deal; +9.8% afterhours
- SEAC: Reports Q4 -$0.06 v -$0.05e, R$23.8M v $23.1Me; -3.3% afterhours

***Politics***
- (US) Alabama Gov Bentley (R) resigns after pleading guilty to campaign finance violations - press
- (US) Full Virginia Court to hear Pres Trump's appeal of his overturned travel ban executive order - press
- (FR) France IFOP daily presidential poll: Second round poll: Macron 58% (-1.0pts), Le Pen 42% (+1pts)

***Key economic data***
- (AU) AUSTRALIA MAR NAB BUSINESS CONFIDENCE: :6 V 7 PRIOR; CONDITIONS: 14 V 9 PRIOR
- (NZ) NEW ZEALAND MAR CARD SPENDING M/M: -0.3% V +0.5%E (2nd consecutive decline); TOTAL M/M: +0.5% V -0.7% PRIOR

***Asia Session Notable Observations, Speakers and Press***
- Asian equity markets are largely lower, led by near 1% drop in Hong Kong where sentiment soured on energy, tech, and gaming sectors. Australia is resilient with a modest gain, as most mining and financials names turned higher. US and European futures are also lower, while FX majors appear to be succumbing to renewed risk-off flows - USD/JPY is down over 30pips from the highs below 110.60, while AUD and NZD were slightly lower against the greenback late in the day.
- In the absence of regional catalysts, renewed profit-taking has been attributed to ongoing geopolitical uncertainty on the Korean peninsula and in the Middle East. In North Korea, Kim Jong Un said to have vowed the "toughest" counteraction against the United States in response to US dispatching USS Carl Vinson aircraft carrier over the weekend. In Syria, there is chatter that Russia may have known about Assad's intentions to carry out a chemical attack against the rebels. Note that US State Sec Tillerson is set to travel to Moscow this week, but will only meet with his counterpart since Putin did not extend his audience to US official
- Traders tuned in to Fed Chair Yellen's discussion at University of Michigan mostly to hear familiar rhetoric. Yellen said the Fed's estimate of neutral fed funds rate is not very high, reiterating intentions to continue to gradually raise interest rates. Fed chair added that unemployment of 4.5% is now below where most of her colleagues would consider to be full employment. On inflation she said she would prefer that it does not linger above or below the 2% target, adding that it is close to objective.
- Ahead of Australia's critical employment report later this week, NAB Business Conditions data hit post-GFC highs, briefly sending AUD/USD about 0.75. NAB economist said "Conditions have improved almost across the board to levels that suggest a strong economy in the near term."

China
- (CN) China Premier Li: China hopes for progress in investment treaty negotiations with US - Xinhua
- (CN) China Q1 railway cargo volume +15.3% y/y
- (CN) US may punish China companies that are involved with North Korea weapons

Japan
- (JP) Bank of Japan (BOJ) Gov Kuroda: Japan is out of the deflationary situation of falling prices
- (JP) Japan Fin Min Aso: Need to create economic conditions to allow sales tax hike

Australia/New Zealand
- (NZ) New Zealand opposition Labour party's finance spokesman Robertson: Expanding RBNZ focus to inflation and employment would bring New Zealand in line with Australia and US - NZ Press

Korea
- (KR) North Korea vows to take the "toughest" counteraction against the United States; We will hold the US wholly accountable for the catastrophic consequences to be entailed by its outrageous actions
- (KR) South Korea acting President Hwang: Have asked military to expand monitoring over North Korea
- (KR) US, South Korean and Japanese envoys to hold six-party talks - Japanese press


***Asian Equity Indices/Futures (00:00ET)***
- Nikkei -0.6%, Hang Seng -0.8%, Shanghai Composite -0.5%, ASX200 +0.4%, Kospi -0.6%
- Equity Futures: S&P500 -0.1%; Nasdaq -0.1%, Dax -0.2%, FTSE100 -0.1%

***FX ranges/Commodities/Fixed Income (00:00ET)***
- EUR 1.0580-1.0605; JPY 110.60-110.90; AUD 0.7495-0.7515; NZD 0.6940-0.6970
- June Gold +0.3% at 1,257/oz; May Crude Oil flat at $53.09/brl; May Copper +0.2% at $2.61/lb
- SPDR Gold Trust ETF daily holdings rise 1.8 tonnes to 838.3 tonnes; highest since Mar 15th
- (CN) PBoC skips open market operations for 12th straight session; drains net CNY20B
- (CN) PBOC SETS YUAN MID POINT AT 6.8957 V 6.9042 PRIOR; first stronger setting in 4 sessions
- (JP) Japan MoF sells 10-yr 0.1% inflation linked bonds; bid-to-cover 3.64x v 2.61x prior
- (AU) Australia MoF (AOFM) sells A$150M in 3.0% 2025 Bonds; avg yield: 0.5408%; bid-to-cover: 3.00x

***Asia equities / Notables / movers***
Australia
- AHY.AU Asaleo Care -8.0% (Credit Suisse downgrades)
- SAR.AU Saracen Mineral Holdings -4.5% (Q3 result)
- AAD.AUArdent Leisure Group -1.7% (UBS downgrades)
- VLA.AU Viralytics +2.3% (Q3 result)
- CDV.AU Cardinal Resources +1.7% (Namdini Gold Project)

Japan
- 6502.JP Toshiba -2.5% (may release earnings this week w/out auditor approval)
- 3769.JP GMO Payment Gateway -5.5% (Goldman Sachs downgrades)
- 6758.JP Sony -1.0% (To split off battery operations to Murata)
- 4631.JP DIC Corp -2.4% (Q1 results speculation)

Hong Kong
- 489.HK Dongfeng Motor -0.7% (Mar result)
- 1238.HK Powerlong Real Estate Holding -1.3% (Mar result)
- 568.HK Shandong Molong Petroleum Machinery +6.3% (to cut costs)
- 2611.HK Guotai Junan Securities Co -1.2% (H share debut)

China
- 300104.CN Leshi Technology -2.4% (to cut US jobs)
- 000725.CN BOE Technology Group Co -2.4% (annual result)

>>> After Hours Summary: SALE +49% on buyout news, MXWL +40% on SDI

After Hours Summary: SALE +49% on buyout news, MXWL +40% on SDIC equity investment,

After Hours Gainers:

Companies trading higher in after hours in reaction to news: SALE +49% (RetailMeNot to be acquired by Harland Clarke Holdings for $11.60 per share in cash), MXWL +40.4% (signs stock purchase agreement with SDIC Fund - purchase price is $6.32/share and is anticipated to represent approx 19.9% of co's common stock; also Maxwell Tech and Viex Capital enter cooperation agreement), QUOT +10.6% (SALE sympathy), AUPH +4.4% (initiated with a Overweight at Cantor Fitzgerald; tgt $14), SVU +2.6% (Supervalu to acquire Unified Grocers for approx $375 mln; expected to be accretive to EPS in the first full fiscal year following closing)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: SLP -8.2%, MTSC -4.1%, SEAC -3.3% (light volume)

Companies trading lower in after hours in reaction to news: CYTX -23.8% (commences common stock offering), UNFI -0.9% (continued weakness following JANA / WFM news), FRO -0.9% (files for $300 mln mixed securities shelf offering), UAL -0.8% (reports March traffic, DOT concerns may also be attributed to modest pullback), VRX -0.8% (schedules annual meeting for May 2)

>>> US Close Dow +0.07% S&P +0.07% Nasdaq +0.05% Russell +0.18%

Closing Market Summary: Equities Eke Out Win To Kick Off the Week

The stock market opened the week with a win, but concerns over heightened geopolitical tensions held gains in check throughout the session. The S&P 500 and the Nasdaq settled with slim gains of 0.1% apiece, while the Dow finished flat.

Investors started the day with optimism, moving the major averages modestly higher, but there was no doubt that last week's missile strike in Syria weighed on the positive sentiment. In addition, the U.S. Navy ordered the Carl Vinson Strike group to begin moving towards the Korean peninsula over the weekend. With those concerns playing in the background, the stock market dipped into negative territory around midday on rumors that China deployed about 150,000 troops in two groups to its border with North Korea. Equities recovered shortly thereafter, but never quite made it back to their best levels of the day.

This rumor of Chinese troop movement has been gaining traction with Asian media in recent days, and it has been noticed by U.S. investors during an abbreviated week, which is likely to see reduced participation. That was the case on Monday with only 794.0 million shares changing hands at the NYSE floor (200-day average: 1.1 billion).

For sector standings, the energy group (+0.8%) finished atop the day's leaderboard thanks to a solid performance from crude oil. The commodity finished 1.6% higher at $53.06/bbl following further production complications in Libya. The country's largest oilfield was shut down on Sunday after a group blocked a pipeline linking it to an oil terminal.

The consumer discretionary (+0.4%), industrials (+0.2%), consumer staples (+0.3%), real estate (+0.7%), and utilities (+0.2%) sectors also outperformed the broader market. Retailers helped the consumer discretionary sector in its advance, evidenced by the 1.5% increase in the SPDR S&P Retail ETF (XRT 42.11, +0.60). One of the XRT's top-performers was Amazon (AMZN 907.04, +12.16), which added 1.4% in another solid performance.

On the flip side, the financials (-0.3%) and telecom services (-0.3%) groups settled at the bottom of the day's leaderboard while the health care (-0.2%) and technology (-0.2%) groups performed only modestly better. The top-weighted technology sector suffered from a lackluster performance from its top component by market cap, Apple (AAPL 143.14, -0.20), and selling pressure within the semiconductor industry; the PHLX Semiconductor Index closed lower by 0.8%.

In the Treasury market, the main event, Fed Chair Janet Yellen's speech at the University of Michigan, has yet to occur. Ms. Yellen will participate in a question-and-answer session with the public shortly at 16:10 ET. The benchmark 10-yr yield settled two basis points lower at 2.36%.

Investors did not receive any economic data on Monday. The first report of the week--February JOLTS--will cross the wires tomorrow at 10:00 ET.

  • Nasdaq Composite +9.3% YTD
  • S&P 500 +5.3% YTD
  • Dow Jones Industrial Average +4.5% YTD
  • Russell 2000 +0.7% YTD

NYT : When Warren Met Jorge Paulo: Buffett and Lemann Recall Their First Deal

When Warren Met Jorge Paulo: Buffett and Lemann Recall Their First Deal

The billionaire investors Warren Buffett and Jorge Paulo Lemann have teamed up to engineer some of the biggest and boldest mergers and acquisitions in recent years, but they have rarely appeared in public together.
On Saturday night, however, the two appeared on a stage in Cambridge, Mass., to be interviewed by the dean of the Harvard Business School, Nitin Nohria. They were speaking at the Brazil Conference 2017, an annual event that Mr. Lemann formed and is organized by Brazilian students at Harvard and the Massachusetts Institute of Technology.
In their comments, the two investors offered a strong defense of open markets, free trade and the United States as a great place to do business.
“I’m all in favor of free trade and globalization,” said Mr. Lemann, who was one of the founders of the Brazilian investment firm 3G Capital, which owns such well-known brands as Burger King, Anheuser-Busch and Heinz.
“I think if you look back in history, countries that have engaged in commerce have benefited enormously,” he said.
Mr. Lemann and Mr. Buffett got to know each other when both were on the board of Gillette.
Around that time, Mr. Lemann was selling Banco de Investimentos Garantia, an investment bank of which he was a founder in Brazil. Mr. Buffett asked him if he was happy to sell his bank and why.
Mr. Lemann told him he was and that he did not want to end up being somebody running a Goldman Sachs-type operation. He said he would rather be like Mr. Buffett.
He said he told Mr. Buffett: “You have better control of your time, you have a better sense of humor, and you are much richer.”
But it was not until 2013 that they first did a deal together.
Then, Mr. Lemann’s 3G Capital and Mr. Buffett’s Berkshire Hathaway teamed up to acquire H.J. Heinz for $23 billion. Two years later, 3G Capital, again together with Mr. Buffett, merged Heinz with Kraft Foods.
“I consider it one of the largest mistakes in my life that we didn’t really team up as partners until considerably later,” Mr. Buffett acknowledged Saturday night, but that since doing deals together, “he and I are on the same wavelength.”
Before the Heinz deal in 2013, the two were in Colorado together at a retreat. Mr. Buffett said that as they were leaving there, “Jorge Paulo brought up Heinz and I said, ‘It sounds good to me.’”
“And a little later, he sent one page of financial terms and one page of governance terms, and just as would have been the case if I was doing something with my partner Charlie Munger, basically I did not have to change a word,” Mr. Buffett said.
For Mr. Lemann’s part, he was initially taken aback by how quickly things progressed with Berkshire Hathaway.
“We sent him a short memorandum. I called him up and I said, ‘Warren, are you interested?’ And he said, ‘Yeah I’m interested.’ And I said, ‘Would you like us to come by and explain in greater detail the transaction?’ And he said, ‘How much money do you need?’ and I said, ‘$14 billion,’ and he said, ‘O.K.’”
“So that sort of shook me up, and then I said, ‘How about governance?’ and he said, ‘Well, send me a memo and if it’s O.K., it’s O.K.,’ and so that’s it. We got an answer from him right away,” Mr. Lemann said.
It is that simplicity that has brought them together as partners. Of Berkshire Hathaway, Mr. Lemann said, “They are very clear and they are very objective.”
They also have in common what they look for in companies, like large, well-known consumer brands that are attractive over the long term.
“In the end, we’re running things for the long run and building companies that will last forever if possible,” Mr. Lemann said.

(ZH) Prominent Short Seller Crushed After AT&T Buys Straight Path For 160% Premi

Prominent Short Seller Crushed After AT&T Buys Straight Path For 160% Premium

In an announcement that caught many by surprise, on Monday morning, AT&T said it would acquire Straight Path Communications, a holder of licenses to wireless spectrum, for $1.25 billion in an all-stock deal. The No.2 U.S. carrier said it would offer $95.63 per share, a whopping premium of 162.1% to Straight Path's Friday close just above $36. This morning, Straight Path's shares traded as high as $93.26 premarket, up over 150%. .
In some ways the announcement should have been expected: Straight Path, one of the largest holders of 28 GHz and 39 GHz millimeter wave spectrum used in mobile communications, said in January it was hiring investment bank Evercore Partners to help explore strategic alternatives, including a sale of assets. The company had also agreed in January to pay the U.S. Federal Communications Commission (FCC) $15 million to settle a federal probe of claims that Straight Path had submitted false data to renew airwave licenses.
And yet, as the chart of short interest in STRP shows, there were hunders if not thousands of shorts who thought the sale process was a sham. Alas, it was not, and as this morning they are nursing unprecedented pain, not to mention overeager margin clerks.

The short euphoria in the stock was largely due to an ongoing short campaign by prominent short seller, Kerrisdale Capital, which had been waging a long-running campaign against the company, and reiterated as recently as January that it continued to be short. This is what it said in the recent report.


We are short shares of Straight Path Communications, a disgraced “5G” hype vehicle whose stock price surged last week for an unusual reason: the announcement of a harsh regulatory crackdown. After a pseudonymous short seller in 2015 accused Straight Path of “fraud,” the FCC opened its own investigation into whether the company had violated its legal duty to actually provide service rather than merely hoard spectrum for the sake of speculation. To end this investigation, Straight Path agreed to pay up to $100 million over time, surrender many of its licenses, and sell its entire remaining spectrum portfolio, with 20% of the sale proceeds going to the FCC.

The market greeted this news joyously, apparently relieved that Straight Path had avoided an even more draconian penalty and convinced that a spectrum sale would be fast and lucrative. This optimism is badly misplaced. Straight Path’s spectrum is worth far less than the company’s current half-billion-dollar market cap. Indeed, as we discuss below, Verizon is set to buy a similar amount of higher-quality spectrum from a sophisticated, deep-pocketed seller – Carl Icahn – for just $200 million, 61% lower than where Straight Path trades, implying massive downside for its stock price even before taking into account the harsh FCC penalties. Adjusting for these penalties and the lower quality of Straight Path’s spectrum, we believe the true downside exceeds 70%. The notion that a company that holds less than $10 million in cash, burns $7 million a year, and must pay out $15 million in fines in the next nine months will drive a drastically harder bargain than Carl Icahn – in a government-mandated fire sale – is beyond absurd. Yet to own Straight Path at this price, that’s what one must believe.
Even without today's news, it had been a bad year for Kerrisdale, and its "up and coming" founder Sahm Adrangi, who last August was busted in the Hamptons for a DUI and Cocaine possession.

FT : Please continue to not mind the Chinese M1-M2 gap

Please continue to not mind the Chinese M1-M2 gap
China’s money supply growth narrows and widens… much as the seasons change and the tides turn.
But for those who seek insight in any of those things, here’s a tale in a few brief paragraphs of why differences between narrow and broader money supply growth in China still don’t tell us very much, from Bank of America Merrill Lynch analysts.
As they say, the M1-M2 growth gap — M1 is basically cash plus demand deposits, while M2 equals M1 plus a broader array of deposits such as time deposits — in China has widened and narrowed over the past but that hasn’t actually supplied any predictive power:

After much debate about the widening gap of M1-M2 growth in 1H2016, the story shifts to this gap narrowing again since last July.
  • 1H2016: When the M1-M2 gap widened since Mar 2015, many argued it indicated more funding was moving into short-term investment, likely to push up the domestic A-share equity market instantly. Some believed it was a sign of severe liquidity trap, and, as a result, monetary expansion would fail to reflate the economy.
  • 2H2016-2017: After the gap peaked in July 2016, a new theory emerged, claiming the narrowing gap was due to capital being channeled into the real economy, which would lead to an imminent investment boom.
Limited prediction power on growth or stock market
In our view, the M1-M2 growth gap has shown limited prediction power over future investment demand and equity market performance.
  • Despite the widening in M1-M2 growth gap in 1H16, there is no evidence of a liquidity trap or an A-share rally afterward. Government bond yields rose notably since August, and our BofAML China ACT index rebounded in March and improved slightly by July 2016. The SHCOMP index first corrected 28% to 2,688 in Feb 2016), and then came back by 11% to 2,979 in July 2016.
  • The narrowing M1-M2 growth gap since 2H2016 did not lead to an investment boom either. FAI growth only picked up to 8.9% yoy in January-February from 7.8% in 4Q and 7.0% in 3Q16, due to higher infrastructure investment.
Now, back in 2016 the assumption was that the widening gap between the two measures was down to the deleveraging mindset of private corporates. So, what’s behind the narrowing gap this time? From BofAML again:
  1. Slower home sales growth: Home purchases effectively shift money from households’ deposits (part of M2, but not M1), into home presale proceeds in developers’ demand deposit. As home sales growth slowed down from peak levels in spring 2016 due to tighter property policies and a higher comparison base, it becomes much less supportive for M1 growth.
  2. Potentially a small improvement in capex demand in some areas: Real borrowing costs for some up-to-mid stream corporates came down with a rapid rise in PPI inflation, while expected investment-returns may rebound on better growth expectation and supply-side reform. As such, capex demand may be encouraged in some areas even though an overall boom is absent. [The idea here being that when M1 growth starts to decline and M2 growth rises, it means some cash has found its way into some specific projects and is no longer housed in demand deposits account waiting for immediate financial transactions.]
  3. Tapered fiscal easing: In our view, the strong fiscal easing from 2015 to early 2016 mobilized funds from time to demand deposits at public organizations (POs), ready for spending. But as funds were allocated to projects while fiscal easing tapered, POs’ demand deposit growth has started to ease gradually.
All of which suggests that the gap could continue to narrow, even if, to repeat a repeated point, that doesn’t actually tell you very much about future investment demand or stock market performance:
It’s all more nuanced than that.