Asia equity markets are mixed after modest gain on Wall St on Friday, as investor focus turns from central bank statements last week to US policy under Pres Trump. The White House is heading for a busy week, with anticipated House health care legislation coming to the floor and the Senate starting hearings on Supreme Court nominee Gorsuch. In the mean time, there was tension at Trump's meeting with German Chancellor Merkel over the weekend as US leader claimed Germany "owes vast sums of money to NATO", to which German Defense Min replied "There is no debit account in NATO". Beijing raised the downpayment requirement for buyers of 2nd homes from 50% to 60%. PBoC Gov Zhou: China's growth prospects have improved and we are focused on structural adjustment of the economy - G20 meeting.
Nikkei -0.35% Hang Seng +0.66% CSI -0.10% Shanghai +0.13%
Eur$ 1.0769 CNH 6.8909 CNY 6.9049 JPY 112.64 GBP 1.2392 CHF 0.9963 RUB 57.3275 WTI$ 48.91 -0.79%
S&P -0.20% EuroStoxx -0.09% Dax -0.21% FTSE SMI -0.07%
Macro :
- China, U.S. Agree Korea Tensions at Dangerous Level: Tillerson
- U.S. Banks Fall to February Lows as Market Reverses Gains
- G-20 Nations Renew Commitment to Global Bank-Capital Overhaul
- Germany Social Democrats (SPD) officially elected Martin Schulz as their leader and challenger to Chancellor Angela Merkel for the national election in September
Keep an eye on :
- ADS GY : Adidas Sues Asics Over Patents for Fitness Tracking
- AZA IM : Alitalia’s Bank Investors in Talks on State Guarantee: Corriere
- AKZA NA : Elliott Said to Urge Akzo Nobel to Engage With PPG in Deal Talks
- AKZA NA : AkzoNobel could eye large-scale takeover or series of smaller acquisitions - telegraaf.nl
- ATC NA : Teads in talks with News Corp after rejecting offer from Altice
- AMGN US : Amgen’s Repatha Doesn’t Hurt Mental Ability, Study Shows
- AAL LN : Volcan Plans to Raise $2.4b Via Bond Sale for Anglo Stake: ET
- AAPL US : Apple’s Cook: Worst Thing We Can Do Is Say Globalization Bad
- MT NA : ArcelorMittal, Marcegaglia Said Offering EU1.6b for Ilva:Reuters
- ARYN VX : Aryzta to Cut Debt by EU1B, Chairman Tells Sunday Times
- AZN LN : AstraZeneca May Reduce U.K. Drug Research Program (by 2bil) : Sunday Times
- AV/ LN : Aviva Said to Pursue Sale of Friends Life’s Asian Operations
- BMPS IM : ECB Agrees to Paschi Extended Restructuring Plan: Messaggero
- BVN LN : Bovis bidder Redrow weighs revised offer; Galliard decides against bid - reports
- BLVN LN : BowLeven Chairman Seeking Offers for Company, Sunday Times Says
- KO US : Indian State Bans Sale of Coca-Cola Zero at McDonald’s: Times
- CSGN VX : Credit Suisse Said to Decide in April on Swiss Bank IPO: Reuters
- CRST LN : Crest Nicholson Bonuses Said to Be Opposed by ISS: Telegraph
- DBK GY : Deutsche Bank Review by ECB Shows Risk Management Weakness: Sole
- DBK GY : Deutsche Bank TERP ~EU15.79 Based on March 17 Price, Sale Terms
- DBK GY : Deutsche Bank to Raise $8.6 Billion After Pricing Share Sale
- DTE GY : T-Mobile Polish Unit CEO Sawicki to Leave This Week: Parkiet
- DIS US : Disney Sees ‘Beauty and the Beast’ 3-Day Sales of $155m-$165m
- ELI BB : Elia Rises, Sofina Declines Ahead of BEL20 Index Reshuffle
- ENI IM : Eni CEO at Photovoltaic Plant Foundation Stone Laying in Algeria
- XOM US : Point Resources, the Norwegian oil company, controlled by the PE firm, Hitecvision, is in final talks to acquire Texas-based ExxonMobil's Norwegian offshore oil operations - to Dagens Naeringsliv.
- GXI GY : Gerresheimer Makes Preliminary Offer for Bormioli Rocco: Il Sole
- GBLB BB : GBL Raises Dividend 2.4%; Asset Rotation Cuts Cash Earnings 4.6%
- GKN LN : GKN May Issue GBP250m Bonds to Plug Pension Gap: Sunday Times
- Hengdeli (3389 HK) : -4.24% in HK
- LDO IM : Profumo Named Leonardo CEO as Italy Reshuffles State-Owned Firms
- MONC IM : Moncler to Focus on Commercial Network, Strengthen Retail: Sole
- PARG SW : Pargesa Swings to Loss on Engie Disposal, GBL Impairement
- PHIA NA : PHILIPS RECLASSIFIED TO STOXX EUROPE 600 HEALTH CARE INDEX
- PUB FP : PUBLICIS BOUGHT BACK EU36.5M OF STOCK MARCH 14-17
- RIO LN : Rio CEO Says Key Iron Ore Uncertainty Is Chinese Capacity: CNBC
- SFQ GY : SAF-Holland Looking at 1-2 Takeover Targets, Borghardt Tells BZ
- SIE GY : Siemens Boosts Commitment to U.S. After Meeting With Trump
- SNAP US : Snap’s Inclusion in FTSE Indexes Said Opposed by U.K. Investors
- SL/ LN : Standard Life CEO Defends Aberdeen Deal in Telegraph Interview
- SFM US : Sprout Farmers Market Climbs for Second Day; Upside Calls Active
- UHR VX : Swatch’s Tissot Aims to Double Stores in Japan: Nikkei
- SREN VX : Swiss Re rumoured to be eyeing UK acquisitions
- TESB BB : Picanol Unit Buys Additional EU0.39m of Tessenderlo Chemie Stock
- FP FP : Seeking a 50% stake in a $4B project in Iran's giant South Pars gas field - filing
- TWTR US : CEO Dorsey said to be under pressure to resign after a report last week that estimated 15% of its 319M users were robots - UK press
- UBSG VX : UBS ‘Very Pessimistic’ About Settling Tax Case in France: JDD
- UNA NA : Unilever could divest spreads arm at approximate brand value; CD&R, CVC and Bain work on bids
- UNA NA : Unilever Said to Call on Investors to Increase Stake, FD Says
- VIV FP : Vivendi CEO to Speak to Italy’s Agcom on March 23: Corriere
- VIV FP : Vivendi CEO Says Mediaset Misled Company During Talks: FT
- VOw3 GY : Volkswagen Seeks U.S. Market Share Gains: Automobilwoche
- VOW3 GY : Piech Sale of Porsche Stake May Be Finalized in April: Bild
- WG/ LN : Wood, Amec Assets Attract Possible Bids After Merger Deal: FT
- ZC FP : TCI steps up campaign to block Zodiac takeover
>>> Up
*AB Foods Raised to Buy at Goldman
*Aryzta Raised to Buy at Berenberg, PT CHF45
*EDF Raised to Neutral at Goldman
*Maisons France Confort Raised to Buy at SocGen, PT EU60
*National Grid Raised to Hold at SocGen
*Volvo Raised to Buy at UBS, PT SEK140
>>> Down
*ASOS Cut to Neutral at Goldman, PT 5800p
*Casino Guichard Cut to Neutral at Credit Suisse
*Forbo Cut to Hold at Kepler Cheuvreux, PT CHF1620
*G4S Cut to Reduce at HSBC, PT GBP2.59
*H&M Cut to Sell at Goldman
*Investec Cut to Neutral at UBS, PT 610p
*Kering Cut to Market Perform at Bernstein, PT EU255
*SRP Groupe Cut to Neutral at Goldman, PT EU25
>>> Initiation
>>> Call
>> Index
*S&P 500 MID-YEAR TARGET UPPED FROM 2,350 TO 2,400 AT CREDIT SUISSE
*S&P 500 YEAR-END TARGET UPPED FROM 2,300 TO 2,500 AT CREDIT SUISSE
*EURO STOXX 50 YEAR-END TARGET UPPED FROM 3,450 TO 3,700 AT CREDIT SUISSE
**FTSE 100 YEAR-END TARGET UPPED FROM 7,000 TO 7,500 AT CREDIT SUISSE
>> Stock
*TOTAL, SANTANDER ENTER BARCLAYS EUROPEAN RECOMMENDED PORTFOLIO
*LUXOTTICA, NORDEA EXIT BARCLAYS EUROPEAN RECOMMENDED PORTFOLIO
Asia Mid-Session Market Update: China property prices edge up despite curbs; G20 communique retreats on pledge to fight protectionism
***Friday US markets on close: Dow +0.2%, S&P500 +0.3%, Nasdaq +0.4%***
- Best Sector in S&P500: Financials
- Worst Sector in S&P500: Utilities
- Biggest gainers: CTAS +4.7%; ADBE +3.8%; WYNN +3.8%
- Biggest losers: AMGN -6.4%; IVZ -4.4%; BEN -3.9%
- At the close: VIX 11.3 (+0.1pts); Treasuries: 2-yr 1.32% (flat), 10-yr 2.50% (-2bps), 30-yr 3.11% (-2bps)
***Politics***
- (DE) Pres Trump tweets about meeting with Germany Chancellor Merkel, says Germany "owes vast sums of money to NATO"
- (DE) German Defense Min von der Leyen: "There is no debit account in NATO" - press
- (US) House Speaker Ryan: Feel confident about health bill passing the House this week after changes made provided more assistance to people in their 50s and 60's - press
- (US) Pres Trump: Meetings on health care bill are going well; North Korea is "acting very badly" - speaking from Air Force One
***Weekend US/EU Corporate Headlines***
- MBLY: May seek higher offers from other companies - NY Post citing analyst
- SFM: Said to have held preliminary merger talks with Albertsons - press
- DDC: Confirms Washington Companies discloses all-cash proposal to acquire Dominion Diamond Corporation for $13.50/shr
***Key economic data:***
- (CN) CHINA FEB PROPERTY PRICES M/M: RISE IN 56 OUT OF 70 CITIES VS 45 PRIOR; Y/Y: RISE IN 67 OUT OF 70 CITIES V 66 PRIOR; China avg all-70 new home prices m/m: 0.3% v 0.2% prior; y/y: 11.8% v 12.2% prior
- (NZ) NEW ZEALAND Q1 WESTPAC CONSUMER CONFIDENCE: 111.9 V 113.1 PRIOR
- (NZ) New Zealand Feb Performance Service Index: 58.8 v 59.5 prior
- (KR) SOUTH KOREA FEB PPI M/M: 0.3% V 1.4% PRIOR; Y/Y: 4.2% (5-year high) V 3.9% PRIOR
***Asia Session Notable Observations, Speakers and Press***
- Asia equity markets are mixed after modest gain on Wall St on Friday, as investor focus turns from central bank statements last week to US policy under Pres Trump. The White House is heading for a busy week, with anticipated House health care legislation coming to the floor and the Senate starting hearings on Supreme Court nominee Gorsuch. In the mean time, there was tension at Trump's meeting with German Chancellor Merkel over the weekend as US leader claimed Germany "owes vast sums of money to NATO", to which German Defense Min replied "There is no debit account in NATO".
- Economic nationalism was also on display at G20, with official Communique affirming commitment against competitive devaluation but also omitting language on promoting free trade thanks to recent threats of more protectionism from US govt. US Treasury Sec Mnuchin urged not to read into the omission, but also maintained that US is now move interested in reducing trade deficits and is prepared to re-examine certain agreements as it transitions to move "fair" trade policies. Elsewhere, US State Sec Tillerson held talks with China on his trip to Asia, discussing North Korea, Taiwan and bilateral trade. Tillerson and Trump remained scornful of North Korea's more aggressive posturing, though China called for restraint and "cool-headed" decisions.
- Economic calendar was very light to start the week, with key data coming from China property sector. House prices rose m/m in 56 out of 70 cities - up from 45 last month - as markets appeared to stabilize in the wake of policy curbing excessive rise of property inflation. Across China's 70 top cities, prices rose 0.3% m/m v 0.2% prior, while y/y rise was comparable at 11.8% v 12.2% prior. China govt continues to make targeted adjustments, particularly in the first tier cities, as regulators raised the downpayment requirement for buyers of 2nd homes in Beijing from 50% to 60% on Friday.
China
- (CN) Beijing raised the downpayment requirement for buyers of 2nd homes from 50% to 60% - Chinese press
- (CN) China Financial News: PBoC's increase of reverse repurchase and mid-term lending facility interest rates had the effect of “targeted” measures to prevent property sector risks as developers with high debt are more sensitive to rate hikes
- (CN) PBoC Gov Zhou: China's growth prospects have improved and we are focused on structural adjustment of the economy - G20 meeting
- (CN) US Sec State Tillerson: US and China discussed safeguarding stability in Asia Pacific; agreed North Korea must be convinced to choose a better path
Japan
- (JP) Japan PM Abe: Germany and Japan should continue as free trade champions; countries are signing "Hanover Declaration"
Australia
- (AU) Goldman Sachs strategist: Expect RBA to raise rates in Nov 2017 - Australian press
Korea
- (KR) South Korea Dep PM Yoo: Govt to consider ways to communicate with China about its retaliatory measures in response to THAAD deployment - Korean press
- (KR) South Korea Fin Min Yoo: See the need for preemptive moves on household debt
- (KR) South Korea Defense Ministry spokesperson: North Korea likely made "meaningful" progress in rocket engine test - press
***Asian Equity Indices/Futures (00:00ET)***
- Nikkei closed, Hang Seng +0.6%, Shanghai Composite +0.1%, ASX200 -0.5%, Kospi -0.5%
- Equity Futures: S&P500 -0.3%; Nasdaq -0.2%, Dax -0.2%, FTSE100 flat
***FX ranges/Commodities/Fixed Income (00:00ET)***
- EUR 1.0735-1.0765; JPY 112.45-112.75; AUD 0.7690-0.7725; NZD 0.7010-0.7040; GBP 1.2380-1.2395
- Apr Gold +0.3% at 1,234/oz; Apr Crude Oil -0.8% at $48.94/brl; May Copper -0.7% at $2.67/lb
- (SA) China and Saudi Arabia agree to increase cooperation in the oil sector, including Saudi oil exports to China - press
- SPDR Gold Trust ETF daily holdings fall 3.0 tonnes to 834.1 tonnes; 2nd straight decline
- (CN) PBOC SETS YUAN MID POINT AT 6.8998 V 6.8873 PRIOR; 2nd straight weaker setting
- (CN) PBOC to inject combined CNY100B v CNY60B prior in 7,14, and 28-day reverse repos
- (KR) South Korea sells 10-yr bonds at 2.215%
***Asia equities / Notables / movers***
Australia
- Wesfarmers WES.AU -0.7%; Coles in Western Australia under investigation for asking workers to work for pizza instead of money on a Sunday - NZ press
- Fletcher Building FBU.NZ -10.2%; Cuts FY17 EBIT NZ$610-650M (prior NZ$720-760M); construction division to report an EBIT loss
Hong Kong
- 1088.HK China Shenhua Energy Company Limited +16.0%; Reports FY16 CNY32.0B v CNY25.0B y/y; Rev CNY183.1B v CNY177.1B y/y
- 1184.HK S.A.S. Dragon Holdings Limited +10.3%; Guides FY16 Net +114% y/y or more
- 2488.HK Launch Tech Company Limited +9.0%; Reports FY16 Net profit CNY21.4M v loss CNY93.9M y/y, Rev CNY835M v CNY698M y/y
- 1530.HK 3SBio Inc +4.9%; Reports FY16 Net CNY714.3M v CNY526.2M y/y, Rev CNY2.80B v CNY1.67B y/y
- 819.HK Tianneng Power International +4.0%; Guides FY16 Net +40% y/y or more
- 732.HK Truly International Holdings -3.0%; Reports FY16 Net HK$581.7M v HK$845.4M y/y, Rev HK$22.1B v HK$19.4B y/y
- 1368.HK Xtep International Holdings Limited -9.7%; Reports FY16 Net CNY527.9M v CNY622.6M y/y; Rev CNY5.40B v CNY5.30B y/y
Chinese steel vulnerable to housing market slowdown Premium
Finance constraints mean infrastructure investment may not take up the slack
Government-directed infrastructure investment will not be enough to compensate for an anticipated slowdown in real estate investment growth in 2017.
Infrastructure’s already-large share of fixed-asset investment implies that the central government would need to engineer a large and difficult increase in financing if it wanted to counter a housing market slowdown.
Local government investment plans mostly point to a flat or even reduced pace of spending this year.
Infrastructure investment will not grow enough this year to offset an anticipated slowdown in real estate investment growth. That will leave demand for steel, which has helped drive a price rally in recent months, looking vulnerable (see chart).
Recovering real estate investment was the main driver of steel demand in 2016, while prices were also buoyed by government-mandated capacity cuts and another round of stimulus that increased inflows into commodities futures markets. But the housing market will slow this year and financial constraints suggest central and local governments will be unable to fill that breach with a meaningful infrastructure investment boost.
Real estate as driver of steel demand
Investment activity was a highlight of January-February data from the National Bureau of Statistics. Investment in real estate grew 8.9 per cent year-on-year, its fastest pace in two years, while infrastructure investment rose 21.3 per cent.
We do not expect the recovery in real estate investment to last. Under its new maxim that “a home is for living in, not for speculation”, the government has signalled its intent to continue clamping down on the real estate sector this year.
Investment activity may remain supported for now by robust housing sales but local governments are continuing to restrict developers and buyers in accordance with the centre’s policy goals. The People’s Bank of China said its most recent increase in the cost of funding to institutions in the interbank market was in part aimed at the rapid increase in house prices. We expect the cumulative impact of central and local government policy moves to drag real estate investment growth to 3-4 per cent.
The new swing factor
Real estate and infrastructure together account for about 61 per cent of Chinese steel demand (see chart). But infrastructure investment this year will not be enough to take up the slack of a housing market slowdown given how quickly housing is already growing.
Real estate investment grew 6.9 per cent last year from just 1 per cent in 2015 while infrastructure investment growth ticked down to 15.7 per cent from 17.3 per cent (see chart).
Real estate investment has been falling as a proportion of overall fixed-asset investment, to 17.2 per cent last year from 19.7 per cent in 2013, while the share of infrastructure investment has risen to 25.5 per cent from 21.5 per cent (see chart).
These shifts indicate that a longstanding relationship between infrastructure investment activity and steel output has broken down. Previously, they were highly correlated — rising infrastructure investment was a driver of steel output — but even as output rebounded last year, infrastructure investment growth remained relatively stable (see chart).
Instead, real estate investment growth has become the swing factor for steel output. The scale of overall investment is less important to steel output than changes in growth rates. In absolute terms, infrastructure investment has been a key and consistent driver of steel demand, but the upturn in steel prices last year was in direct response to a turnaround in the housing market (see chart).
No repeat of last year’s funding frenzy
Given infrastructure’s already large share of overall investment activity in China, the government would need to provide massive funding support to increase growth significantly from current levels. It has neither the appetite nor the ability to do so. In its work report to the National People’s Congress, the government said it is targeting total fixed-asset investment growth of 9 per cent this year, less than last year’s 10.5 per cent target but more than the 8.1 per cent increase recorded.
The central government’s policy banks have been the main vehicles for financing infrastructure construction. The amount of money lent by the People’s Bank of China to such banks doubled last year to an outstanding Rmb2.05tn ($297bn) while their bond issuance rose 30 per cent to Rmb3.35tn.
Local governments issued Rmb8.5tn in bonds last year, either directly or via companies under their control, up 51 per cent on the total in 2015. We do not think the scale of these funding activities can be replicated in 2017, particularly with the bond market no longer a source of ultra-cheap credit.
The public-private partnership (PPP) model that is currently favoured by officials is a more viable channel for financing but progress here is too slow to make a meaningful contribution to overall infrastructure investment. Just Rmb2.2tn of the Rmb13.5tn in PPP projects registered so far has actually been invested.
The crimped ambitions of local governments
Local governments have demonstrated little appetite for a big ramp-up in investment growth this year. Of the 22 local authorities that have announced investment growth targets for 2017, only five are looking to increase investment growth (see chart). These include the government of the Xinjiang Uighur Autonomous Region, which has raised its investment target by 50 per cent this year to Rmb1.5tn because investment fell in the western region in 2016. Of the remainder, seven are aiming for lower investment growth this year and the remaining ten have kept their growth targets unchanged.
Furthermore, our analysis shows local governments constantly fail to hit their targets. Last year, 14 of 24 local governments missed their investment targets while 14 of 26 missed in 2015 and 18 fell short in 2014.
Don’t rule out an upside surprise
Investment activity has underpinned economic growth at the start of 2017. A continuation of this would provide support for steel demand, helping to justify the steel and iron ore price action of recent months.
The official GDP growth target for this year has been lowered to “around 6.5 per cent” from 6.5-7 per cent. However, the government added a qualifier that growth greater than 6.5 per cent should be sought “if possible in practice”. If the investment activity seen in the first two months carries through the year then above-target growth is achievable.
However, this would presume that, in defiance of the central government’s stated policy goals, speculation will be allowed to continue running rampant in housing markets and that massive volumes of debt will continue to flow to the state sector in pursuit of greater infrastructure investment.
We do not think this is likely, but would never rule out the possibility that long-term reform goals are again sacrificed at the altar of short-term growth.
FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and Southeast Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.