Asia Mid-Session Market Update: Asia bond market strain continues while US TIC flows see record foreign outflows
***US Session Highlights***
- EUR/USD: *EURO MOVES BELOW $1.0460 FOR ITS LOWEST LEVEL SINCE JAN 2003
- (US) DEC EMPIRE MANUFACTURING: 9.0 V 4.0E; new orders and 6-month conditions jump
- (US) NOV CPI M/M: 0.2% V 0.2%E; CPI EX FOOD AND ENERGY M/M: 0.2% V 0.2%E; CPI INDEX NSA: 241.353 V 241.413E
- (US) INITIAL JOBLESS CLAIMS: 254K V 255KE; CONTINUING CLAIMS: 2.02M V 2.00ME
- (US) DEC PHILADELPHIA FED BUSINESS OUTLOOK: 21.5 V 9.1E (highest since Nov 2014)
- (US) DEC PRELIMINARY MARKIT MANUFACTURING PMI: 54.2 V 54.5E (highest since March 2015)
- (US) DEC NAHB HOUSING MARKET INDEX: 70 V 63E (largest one month gain in 20 years)
***US markets on close: Dow +0.3%, S&P500 +0.4%, Nasdaq +0.4%***
- Best Sector in S&P500: Healthcare
- Worst Sector in S&P500: Industrials
- Biggest gainers: UHS +6.9%, XLNX +6.1%, LLY +5.5%, ILMN +5.2%, MDLZ +4.4%
- Biggest losers: YHOO -6.1%, PVH -6.1%, RL -4.7%, COH -3.7%, R -3.3%
- At the close: VIX 12.8 (-0.4pts); Treasuries: 2-yr 1.27% (flat), 10-yr 2.58% (+5bps), 30-yr 3.15% (flat)
***US movers afterhours***
- JBL: Reports Q1 $0.69 v $0.64e, R$5.1B v $4.93Be; +10.5% afterhours
- GILD: Merck wins $2.54B judgement against Gilead over Hep C patents; -2.1% afterhours
- ORCL: Reports Q2 $0.61 v $0.61e, R$9.07B v $9.11Be; -2.2% afterhours
- AGIO: Withdrew AG-519 investigational new drug application; global Phase 2 study AG-348 to continue for pyruvate kinase (PK) deficiency treatment; -19.4% afterhours
***Asia Key economic data:***
- (NZ) NEW ZEALAND DEC ANZ CONSUMER CONFIDENCE INDEX: 124.5 V 127.2 PRIOR; M/M: -2.1% V +3.5% PRIOR
- (SG) SINGAPORE NOV NON-OIL DOMESTIC EXPORTS M/M: +13.1% V -1.5%E; Y/Y: +11.5% V -2.7%E
- (US) OCT TOTAL NET TIC FLOWS: +$18.8B V -$152.9B PRIOR; NET LONG-TERM TIC FLOWS: +$9.4B V -$26.2B PRIOR
- (US) NORTH AMERICA NOV SEMI BOOK/BILL RATIO: 0.96 V 0.91 PRIOR; 2nd straight month below parity
- (US) NPD: Nov Video Games Sales -24% y/y at $2.0B
- (PE) PERU CENTRAL BANK (BCRP) LEAVES REFERENCE RATE UNCHANGED AT 4.25%; AS EXPECTED
***Asia Session Notable Observations, Speakers and Press***
- Unintended and far-reaching consequences of a more hawkish than anticipated outcome from yesterday's FOMC policy decision have produced a sizable ripple in the bond and currency markets, even if equities appear to have pared their losses. EUR/USD is consolidating its drop around the 14-year low but back above $1.04 handle, while USD/JPY is off its highs though still above the 118 handle breached overnight. Asia-Pacific currencies, however, continued their swift decline against king dollar - Yuan fix was set at the weakest level since May 2008 and HKD is down sharply for the 3rd straight day, with USD/HKD at a 6-month high of HK$7.763.
- Bond market turbulence, as evidenced by China halting its futures trading overnight on limit-down moves, was more persistent and required some attention from officials. Ahead of next week's BOJ meeting, 10-yr JGB yield hit an 11-month high of 0.1% in early trade before retreating to 0.08%. In China, the CSRC called for brokerage to continue trading despite a liquidity crunch without setting restrictions on counter parties. Separately, the PBoC has stepped in with a CNY394B MLF liquidity operation, up from last week's CNY339B. Hong Kong's 3-month HIBOR was also indicative of a strain with a 14th consecutive day of increase.
- US October TIC data, while lagging, have also underscored the negative bias in govt bonds and the implied need for liquidity. Foreign central banks sold $403B in US Treasuries - a record high. China operations were especially notable - Beijing sold US bonds for the 5th straight month in a largest sale since June, taking its holdings to the lowest level since June 2010. Also of note, Japan's holdings of US debt now top those of China for the first time in years.
- Focus turns to next week's release of Australia's MYEFO budget update on Monday and potentially immediate sovereign credit rating review. BOJ decision and the anticipated upgrade in Japan's economic assessment are expected on Tuesday.
China
- (CN) China to support funding demand for steel sector - financial press
- (CN) Bank of China economist: China bond yields to continue to rise in 2017 but at a slower pace - press
- (CN) China CSRC ordered market-making brokerages to continue trading amid market volatility - financial press
- (CN) Former researcher at Chinese Academy of Social Sciences (CASS), Yi Xianrong: FOMC hike may lead to more capital outflows from China, with large impact in stock and property markets - Chinese press
- (CN) China govt editorial says the US Fed rate hike will create some downward pressure on the yuan, but not 'huge' pressure - China People's Daily
Japan
- (JP) Japan Chief Cabinet Sec Suga: Reports of Trump-Abe talks in January are false; Talks with Russia's Putin were meaningful and included peace treaty - press
Australia:
- (AU) Australia Fin Min Cormann confirms A$43.6B cash deficit for FY15/16 v deficit of A$37.6B in FY14/15
- (AU) Analysts' consensus for Australia's upcoming MYEFO projections for FY16/17 is for deficit of A$37.1B - press
- (AU) Capital Economics: Even if rating agencies take away Australia's AAA rating after Monday's MYEFO report, "we doubt it would rattle economy or markets" - press
***Asian Equity Indices/Futures (23:30ET)***
- Nikkei +0.7%, Hang Seng +0.1%, Shanghai Composite flat, ASX200 -0.4%, Kospi +0.2%
- Equity Futures: S&P500 flat; Nasdaq flat, Dax -0.1%, FTSE100 -0.1%
***FX ranges/Commodities/Fixed Income (23:30ET)***
- EUR 1.0405-1.0435; JPY 117.95-118.40; AUD 0.7350-0.7370; NZD 0.7015-0.7050
- Feb Gold +0.2% at 1,132/oz; Jan Crude Oil +0.7% at $51.23/brl; Mar Copper flat at $2.60/lb
- GLD: SPDR Gold Trust ETF daily holdings fall 7.1 tonnes to 842.3 tonnes; 20th straight decline; lowest since May 11th
- SLV: iShares Silver Trust ETF daily holdings fall to 10,534 tonnes from 10,608 tonnes prior; 10th straight decline; lowest since July 5th
- USD/CNY: (CN) PBOC SETS YUAN MID POINT AT 6.9508 V 6.9289 PRIOR; weakest Yuan setting since May 2008
- (CN) PBOC to inject CNY105B in 7-day reverse repos, CNY35B in 14-day reverse repos, and CNY40B in 28-day reverse repos; Injects net CNY150B this week v drained CNY130B prior
- (CN) China MOF sells 91-day bonds, avg yield 2,8991%; sells 182-day bonds, avg yield 2.9565%
- (JP) BOJ offers to buy ¥70B in JGBs with maturity less than 1-yr, ¥200B in 10-25yr JGBs and ¥120B in JGBs with maturity over 25-yr
- (AU) Australia Finance Ministry (AOFM) sells A$600M in 5.75% 2021 bonds; avg yield 2.1935%; bid-to-cover 4.125x
***Asia equities / Notables / movers by sector***
- Consumer discretionary: Crown Resorts CWN.AU +1.4% (block offering); FAW Car Co 000800.CN +4.7%, Tianjin FAW Xiali Automobile Co 000927.CN +10.0%, Dongfeng Motor 489.HK +1.8% (merger speculation); Surfstitch Group SRF.AU +12.1% (completes sale); PMP PMP.AU -6.6% (guidance)
- Consumer staples: China Huishan Dairy Holdings Co 6863.HK -2.1% (Muddy Waters report)
- Financials: Far East Horizon 3360.HK -1.7% (asset disposal); Dai-Ichi Mutual Life Insurance 8750.JP +2.0% (JPMorgan raised to overweight); Dai-Ichi Mutual Life Insurance 8750.JP +2.0% (JPMorgan raised to overweight)
- Industrials: Nippon Paint Co 4612.JP -3.1% (acquisition)
- Technology: Nintendo Co. 7974.JP -4.1% (Super Mario Run smartphone game debuts)
- Materials: Orora ORA.AU +6.8% (Credit Suisse sees acquisitions provides further diversification); Orocobre ORE.AU +8.9% (Citi raised to neutral); Newcrest Mining NCM.AU -6.9%, Saracen Minerals SAR.AU -8.6% (gold prices fall); Fortescue Metals Group FMG.AU +0.6% (CEO comment)
- Energy: Caltex Australia CTX.AU -3.4% (JPMorgan cuts to underweight)
- Healthcare: Takara Bio 4974.JP +5.5% (sells HF10 rights to Otsuka); Mayne Pharma MYX.AU -10.2% (update on DOJ investigation)
Steinhoff/Shoprite: Hoff we go
The pitch is simple: a discount retailer wants exposure to the sector that accounts for the chunkiest portion of its customers’ wallets — food. Such is the rationale behind the merger discussions this week between furniture retailer Steinhoff and Shoprite. But investors in both companies are rightly cautious.
No official offer has been made, so the terms are not yet known. But the companies envisage a deal whereby Shoprite would take control of Steinhoff’s African assets. In return, Steinhoff would gain a large (possibly a majority) stake in the enlarged entity. The transaction would effectively separate Steinhoff’s African operations from its European ones, keeping its listing in Frankfurt for the latter.
It is clear why Christo Wiese, the South African businessman who is the chairman and biggest shareholder of both companies, might find this attractive. Steinhoff derives a third of sales from Africa, and the shares trade at around 13 times forward earnings. That is a discount to peers in emerging markets, which average around 18 times. A stake in a separately quoted African retail business should attract a premium and make Steinhoff’s own shares much easier to value.
The operational benefits might include logistics and rental savings from food and clothing customers buying under one roof. The often steep up-front costs of establishing outlets in frontier markets could be spread across a larger business. But if the logic in creating an African “retail champion” is clear, so are the pitfalls. Economies of scale in general merchandise do necessarily not translate into food: the logistics of dry goods are different from those of perishables.
Whitey Basson, Shoprite’s retiring chief executive, was thought to be opposed to the deal. Shoprite’s shareholders seem at odds too; the shares fell almost 3 per cent on Thursday.
Mr Wiese needs to justify the operational as well as the financial logic behind such a combination.
Sanofi is in advanced talks to buy Actelion for about $275 a share, or $29.6 billion, people familiar said. Actelion closed at 197.50 Swiss francs ($191.77) yesterday. The price may include a payout for Actelion shareholders contingent on the future performance of certain pipeline drugs. The Swiss drugmaker had earlier received an offer of $250 a share from Johnson & Johnson, which walked away on Tuesday. A deal could be announced as soon as next week.
After Hours Summary: JBL +10%, ADBE +0.5% following earnings/guidance... DAC -13%, ORCL -2% following earnings/guidanceAfter Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: JBL +10.1%, ADBE +0.5%
Companies trading higher in after hours in reaction to news: EVOK +48.6% (receives positive NDA submission guidance from us FDA for Gimoti), EGLE +6.8% (light volume; Oaktree Capital Management & Goldentree Asset Management filed amended 13D's), IBM +0.9% (attributed to activist related chatter)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: DAC -13.1%, ORCL -2.3%, CNC -1.3% (reaffirms FY16 guidance, provides FY17 outlook ahead of tomorrow's investor day)
Companies trading lower in after hours in reaction to news: AGIO -19.1% (is no longer developing its second pyruvate kinase-R activator, AG-519, and withdrew its investigational new drug application yesterday following a verbal notification of a clinical hold from the FDA), FNSR -6.6% ( announces private placement of $450 mln of convertible senior notes due 2036), UBSI -2.9% (commenced 4.33 mln share common stock offering ), GLF -2.6% (increases total consideration and extends expiration date for tender offer for up to $300 mln in Senior Notes; co also amended terms of proposed new revolver), VCEL -2.9% (intends to offer and sell shares of common stock in underwritten public offering pursuant to shelf registration statement), GILD -2% (negative hepatitis royalties ruling), ADXS -2% (ticking lower; Chief Business Officer Gregory T. Mayes resigns in order to pursue another business opportunity)
Sky shareholder acceptance threshold was overriding issue for independent board
Sky’s [LON:SKY] independent board was set on any takeover offer by 21st Century Fox [NASDAQ:FOXA] being conditional on the majority of Sky’s minority shareholders tendering in the event the deal is switched from a scheme to a takeover offer, a source close to the deal said.
The shareholder threshold, specifically for the switch, was the overriding outstanding condition for Sky’s independent board members in talks between the approach announcement on 9 December and the agreement today (15 December), the source said.
The announcement states that “under no circumstances can the Acquisition close without the approval of at least a majority of the Unaffiliated Sky Shareholders, unless the Independent Committee otherwise agrees”.
Other terms under discussion since the 9 December include break fee (set at GBP 200m according to today’s announcement), the source said.
The potential need for mitigating measures to achieve regulatory approval also featured in discussions, this source and a second close to the deal said. Fox has a very clear idea of what may be required to get the deal done, the sources said.
For this reason it is expected filing with the European Commission will not take as long as with BSkyB/News Corp [NASDAQ:NWSA] (2010), the sources said. In the previous deal, the parties filed with the EC around five months after announcing the transaction, which lapsed the following year due to political outcry.
The parties see the current political environment as more receptive to a transaction, the first source said.
Nevertheless, Fox is prepared to consider remedies if they are put forward by regulators, the sources said. It will not propose spinning-off Sky News in a filing with the EC, but will discuss the option if it is recommended by UK telecoms regulator Ofcom, the second source said.
Ofcom is expected to receive a DCMS (Department of Culture, Media and Sport) request to examine the implications of the deal for media plurality, as reported. In BSkyB/News Corp the telecoms regulator recommended Sky News be spun-off.
Sky did not respond to a request for comment. Fox could not immediately be reached for comment.
Closing Market Summary: Stocks Advance Despite Persistent Dollar StrengthThe stock market avoided its second consecutive decline, but not before seeing some afternoon selling that may have startled investors who have gotten accustomed to the near-daily ascent to new record highs. The S&P 500 gained 0.4%, erasing roughly half of its post-FOMC decline.
Equities started Thursday on an upbeat note with heavily-weighted sectors like financials (+1.0%), technology (+0.4%), and health care (+0.6%) pacing the opening move. The three largest sectors by weight started in the green and their strength helped most other groups erase their opening losses. The S&P 500 hit a session high shortly before 10:30 ET and spent the early afternoon in a slow retreat from that mark. The retreat accelerated as the session wore on, but the S&P 500 still registered an eight-point gain. Small caps had a strong showing after a couple days of underperformance, evidenced by a 0.8% gain in the Russell 2000.
The focus may remain on the small cap index in the upcoming days, considering one school of thought would suggest that if the overall market pulls back, the index which has paced the rally should be at the forefront of the selling. However, another line of thinking could fuel an argument that domestically-oriented small caps are poised to outperform as participants shift into those names from large multinational corporations whose earnings prospects will be hampered by the latest wave of dollar strength.
The dollar rallied after yesterday's rate hike, continuing its advance into today's session. Greenback strength sent the euro (1.0410) and the Dollar Index (103.12, +1.35) to levels not seen since early 2003.
Nine sectors registered gains with financials (+1.0%) spending the day in the lead. The sector returned to little changed for the week, extending its December gain to 5.3%. Bank shares rallied even though the Federal Reserve said that top U.S. banks have a $70 billion total loss absorbing capacity shortfall. The market took solace in the fact that this is down from a 2015 estimate of $120 billion and banks have been given time until 2019 to address the situation. Bank of America (BAC 23.16, +0.49) was a standout among the majors, jumping 2.2%.
Two other top-weighted sectors—technology (+0.4%) and health care (+0.6%)—registered gains as strength in high-beta names overshadowed a mixed showing from larger components. Health care received a boost from biotechnology as the iShares Nasdaq Biotechnology ETF (IBB 271.94, +2.52) climbed 0.9%. For its part, the tech space was underpinned by chipmakers, sending the PHLX Semiconductor Index higher by 1.8%. The industry group benefited from broad strength with Xilinx (XLNX 60.18, +3.45) pacing the rally after receiving an upgrade. As for sector heavyweights, Apple (AAPL 115.82, +0.63) gained 0.6%, Microsoft (MSFT 62.58, -0.10) shed 0.2%, and Oracle (ORCL 40.86, -0.02) slipped 0.1% ahead of its quarterly report.
Another influential group—industrials (unch)—slipped into the close, masking strength among transport stocks. The Dow Jones Transportation Average gained 0.4% thanks to strength in airlines after Delta Airlines (DAL 50.50, +0.68) boosted its fourth-quarter guidance. The stock gained 1.4% while Alaska Air (ALK 90.12, +3.74) led with a 4.3% spike.
Treasuries began the day in mixed fashion and ended on a similar note. The 30-yr bond and the 2-yr note posted gains while the 5- and 10-yr notes retreated. The benchmark 10-yr yield rose two basis points to 2.59% while the 5-yr yield increased four basis points to 2.09%. The 2-yr yield slipped two basis points to 1.26% and the 30-yr yield fell three basis points to 3.15%.
Today's participation was above average as nearly 1.2 billion shares changed hands at the NYSE floor.
Economic data included initial claims, CPI, Philadelphia Fed, Empire Manufacturing, Current Account Balance, and NAHB Housing Market Index:
- Initial claims for the week ending December 10 decreased by 4,000 to 254,000 (consensus 256,000), marking the 93rd consecutive week that claims have been below 300,000
- Continuing claims for the week ending December 3 increased by 11,000 to 2.018 million from an upwardly revised 2.007 million (from 2.005 mln) in the prior week.
- Total CPI increased 0.2% in November and so did core CPI, which excludes food and energy. Those increases were in-line with the consensus estimates
- The Philadelphia Fed Index checked in at 21.5 (consensus 9.0) for December, up sharply from the 7.6 reading registered in November
- The December Empire Manufacturing report increased to 9.0 from 1.5 that was reported in November (consensus 3.5)
- The December NAHB Housing Market Index rose to 70 from 63 (consensus 63)
- The Current Account deficit for the third quarter narrowed to $113.00 billion from $118.30 billion in the second quarter, while the consensus expected a deficit of $111.60 billion
Tomorrow's economic data will be limited to the 8:30 ET release of November Housing Starts (consensus 1225K) and Building Permits (consensus 1236K).
- Russell 2000 +20.2% YTD
- Dow Jones Industrial Average +13.9% YTD
- S&P 500 +10.7% YTD
- Nasdaq Composite +9.0% YTD
*ALLERGAN REMOVED FROM CONVICTION BUY LIST AT GOLDMAN SACHS