TheChek News Flow

Faster growth in the US should be a good thing for the global economy. However the benefits for Asian banks may be less pronounced than in the past. Fiscal stimulus in the US is welcome but is dwarfed by the credit creation required to keep China's GDP growing at 6-7% range. After a decade of rapid debt accumulation we also question the ability of many of Asia's most indebted markets to cope with rising domestic rates. If US rates continue to rise, absent tighter capital controls, we would expect liquidity to continue to leak out of Asia's banking systems pressuring not just the traditional current account deficit markets but also eventually Chinese & Australian banks.

Since the introduction of “zero rate policies” as a result of the GFC we have now had 4 periods where the US 10 year government bond yield has risen sharply from lows. Each time Asia’s EM focused banks have significantly under-performed global peers. In this report we look at 4 key metrics that we believe make certain Asian banking markets more vulnerable than others. This includes current account surplus/deficits, net international investment positions, FX reserves & the pace of credit growth into the rate shock. Whilst still vulnerable to short-term portfolio outflows we think Indonesia is in better shape than in 2013, Malaysia however looks vulnerable (as does Australia).

After a decade of rapid debt accumulation we are not sure that many of Asia’s most indebted banking system’s can cope with a rise in rates without triggering a sharp slowdown in domestic growth and/or asset quality problems. If US rates rise and Asian rates do not follow (or rise at a slower rate) we think concerns over capital outflows will remain elevated. The scale of capital flowing across Asia’s borders we believe is already unprecedented with China over the past 12 months seeing cUS$500bn leaving its financial system (vs inflows of US$300-400bn just 2-3 years ago). A key question is where will this capital go? In the short term it is unlikely to replace the rapid withdrawal of “portfolio” flows from western markets. In the medium to long-term however the sheer scale of Chinese ODI has the potential to benefit the banking systems across many of the ASEAN “One belt, one-road” markets.

Looking at the sector on an implied cost of equity basis it now in aggregate looks 8-9% expensive to us relative to its 5 year average. Despite under-performing the MSCI World banks index by c13% since the end of Q3 (when US rates started to rise in this cycle) we remain cautious. We would be particularly cautious on the North Asian banking sectors post their recent moves with those markets that have traditionally enjoyed “positive carry” relative to the US looking increasingly vulnerable if US rates keep rising (China & Australia). We are inclined to see the pull back in Indian private banks and Indonesian banks as an opportunity to build positions given the scarcity of banking systems globally that can offer high RoAs & asset compounding.

Italian prime minister tells voters country will ‘never go anywhere’ if reforms rejected

Matteo Renzi has warned voters that Italy will be doomed to inertia and red tape if they reject his constitutional reforms, as he made a final dash through the struggling south to plead for support ahead of Sunday’s referendum.

At a campaign rally held in a large, Fascist-era convention centre in Naples late on Thursday, the Italian prime minister expressed confidence that his side would prevail but also warned the country would “never go anywhere” if the reforms were rejected.

“This model will lead Italy to live in paralysis, in the swamp, blocked. It has to be clear,” said Mr Renzi, who took office in early 2014 and has threatened to resign if he loses the referendum. “I can go home tomorrow, that’s not a problem. But for the country, if we don’t change now, we won’t change any more,” he added.

According to opinion polls last published on November 18 before a two-week blackout, Mr Renzi’s Yes camp is trailing the No camp by a few percentage points, suggesting he could well lose the fight. But there is still a large share of undecided voters, especially in the south, which he is targeting during the last stretch of the campaign.

As well as Naples, Italy’s third largest city, Mr Renzi is due to stop in Palermo and Reggio Calabria on Friday, before a closing event back in his home town of Florence. Meanwhile, leaders of the opposition to Mr Renzi’s reforms, including Beppe Grillo, the leader of the anti-establishment Five Star Movement, and Matteo Salvini, the head of the anti-euro, anti-immigrant Northern League, are planning competing closing rallies in Turin and Milan respectively.

Opponents have described Mr Renzi’s reforms, which would reduce the powers of the Italian senate and regional governments to ease legislative and administrative gridlock, as a dangerous power grab by the elite.

The Italian referendum may not only determine the political fate of Mr Renzi, but is being closely watched because of its impact on financial markets, amid concerns that a No vote could plunge the country into a new period of political uncertainty and damage efforts by troubled Italian banks to raise capital. Italian shares and bonds have sold off leading up to the vote, with rising jitters regarding the outcome.

At the Neapolitan rally, before a crowd packed with members of Coldiretti, Italy’s main agricultural lobby group, Mr Renzi struck a light-hearted tone, mocking Mr Grillo and Mr Salvini while pushing his supporters to convince their friends and neighbours. “I’m asking you to get to work the next few days, this match is in your hands,” Mr Renzi said. “I’m going ahead with a smile, with the tranquillity and the freedom of knowing that we are presenting a serious proposal,” he added.

Mr Renzi has chosen the South to focus his last efforts because most opinion polls have shown it to be the region where he is trailing the most, amid broad dissatisfaction with the poor state of the economy. Italy’s sluggish recovery from the great recession has barely been felt in many areas of the Mezzogiorno, where unemployment and poverty are high. Outside Mr Renzi’s rally, a small group of protesters confronted police in riot gear with a large red sign saying: “We’re saying no. Go home, Renzi”.

“The south is where the rejection is strongest, but it is also where there are the most undecided voters,” says Franco Pavoncello, a political-science professor and president of John Cabot University in Rome.

Inside the convention centre, Anna Maria Pagano, a 42-year old woman from Terzigno, a small town under Mount Vesuvius, said she still had “faith” that Mr Renzi could pull off a victory. “I want the country to rebound, especially for my two kids,” she said. “I really hope their will be change,” she added.

Mr Renzi has acknowledged that he made a key mistake early in the campaign, by vowing to abandon politics if he were to lose. He has since toned down those claims, suggesting he may still remain at the helm of the Democratic party, and in any case the reforms need to be judged on their merits. But in the past few weeks, Mr Renzi has thrown all his energy into the campaign, appearing on TV, doing Facebook chats with voters and organising rallies across the country.

“He didn’t play it very well: first he defined it very personally — then he shied away and now he is back to having a strong role,” says Mr Pavoncello. “All this hesitation doesn’t help,” he added.

Should Mr Renzi be defeated, Italy’s political future would be in the hands of Sergio Mattarella, the country’s president, who will have to launch talks on the formation of a new government. Mr Mattarella could reappoint Mr Renzi, if he accepts, or look for an alternative. Among the most frequently mentioned names are Pier Carlo Padoan, the finance minister, Dario Franceschini, the culture minister, Graziano Delrio, the transport minister, and Pietro Grasso, the president of the Senate — all of whom come from the ruling PD.

Streaming out of the event in Naples, Lucio Luongo, a 59-year old grain farmer from the nearby province of Avellino, says he would lament Mr Renzi’s departure. “He can really do something, not just for Italy, but even at a European level,” says Mr Luongo. “It’s been a tough campaign. I don’t know what happens if the No wins. Maybe all the opposition should think of forming a government together,” he quips.

Ml

LAIRD - Plans GBP 185m rights issue, intends to pay no final dividend..........

G4S - Positive news on disposals. Sales of G4S Israel for £88m (246.5p).....+2%

VONOVIA - Sees amicable merger with Deutsche Wohnen mid-term; WiWo (29.7)...+1%

DWNI - Merger with Vonovia still a possibility according to VNA CEO (28.3)..+1%

BERKELEY - Op profit 391.4m v 344m. LT outlook looks slightly weaker (2570).+1%

MEDIASET - Netflix acquires Mediaset Premium rights for series on Pope (2.3)+1%

QINETIQ - Awarded GBP1bn UK defense contract amendment to the LTPA (242.9)..u/c

VIVENDI - Maybe some pressure to reach deal with Mediaset Premium (17.99)...u/c

SWISS RE - CMD. Reiterating targets. Says increased focus on R&D (91.7)...-0.5%

BMW - Traded -1% after close last night on poor US SAAR number (79.3).......-1%

SAP - Workday -12% a/h as CEO said that customers are delaying orders (76.8)-1%

MINERS - Copper -0.9%, Iron Ore -5.9% with BHP OZ -2.3 and RIO OZ -1.1%.....-2%

AIXTRON - Obama expected to block the takeover by Chinese Grand Chip (3.8)..-2%

- Equities: small $1.2bn inflows (note $6.3bn ETF inflows vs $5.2bn outflows from mutual funds)

- Bonds: $4.4bn outflows (5 straight weeks = longest streak in 14 months)

- Precious metals: $0.6bn outflows (3 straight weeks)

- Europe: $2.0bn outflows (largest in 11 weeks)

- US: $4.4bn inflows (4 straight weeks)

- EM: ekes out first inflows in 5 weeks (albeit small $0.1bn)

- Japan: small $0.1bn inflows

- By sector: 10 straight weeks of financials inflows ($0.6bn); 4 straight weeks of REITs outflows ($0.1bn)

- 5 straight weeks of outflows from muni bond funds ($1.6bn)

- 4 straight weeks of outflows from IG bond funds ($2.4bn)

- 4 straight weeks of outflows from EM debt funds (albeit small $0.1bn)

- 3 straight weeks of outflows from govt bond funds ($0.7bn)

- First TIPS outflows in 25 weeks ($0.3bn)

- First HY bond inflows in 5 weeks ($0.6bn)

- Inflows to bank loan funds in 20 of past 22 weeks ($0.6bn)

However, we see a down market in H2 2017, hence our year-end 2017 target of 2,300. The second half challenges include the potential negative impact of US bond yields above 3% (3% being the CS view for end-2017); the growing pricing power of US labour squeezing profit margins; and the risk of China refocusing on reform rather than pro-growth policies. We continue to prefer equities to both bonds and gold.

The macro backdrop is one of a modest acceleration in global GDP growth, with upside risks to the CS view of 3.0% global GDP growth in 2017.

Regions: We add to our overweight in continental European equities (Germany remaining our top pick, upgrading France to benchmark, reducing the size of our underweight of Italy) and we remain overweight in Japanese equities. We reduce the size of our overweight in GEM equities (focusing on China, Taiwan and Korea), and downgrade UK equities to underweight from benchmark. We stay underweight the US in a global context as it is the worst performing market when global growth accelerates, the USD strengthens and bond yields rise; and valuations relative to other regions are extreme.

US MArket closed mixed ahead of employment report today. Nasdaq is down by 2.7% this week and settle just below its 50day moving average. The technology sector (-2.3%), which accounts for nearly 21.0% of the S&P 500, was pressured by daylong selling among high-beta chipmakers. The PHLX Semiconductor Index lost 4.9% with Apple (AAPL 109.47, -1.05) suppliers leading the decline after reports that the tech giant was reducing orders for the iPhone 7 due to weak demand. Apple fell 1.0% while Broadcom (AVGO 162.79, -7.70), Cirrus Logic (CRUS 49.32, -5.68), Qualcomm (QCOM 64.16, -3.97), and Skyworks (SWKS 71.78, -5.07) lost between 4.5% and 10.3%. Following today's profit taking, the PHLX Semiconductor Index remains up 26.1% for the year. The real estate sector (-1.6%) extended its fourth-quarter loss to 10.2% while utilities (-0.9%) and consumer staples (-0.7%) struggled as yields remained on the rise. The benchmark 10-yr yield rose six basis points to 2.44% while the 2-yr yield increased two basis points to 1.14%. Volume were above average at 1,1bil shares. US After Hours FIVE +11%, ULTA +6% following earnings/guidance... WDAY -12%,SWHC -6%, AMBA -6%, GPS -1% following earnings/guidance/SSS, SBUX -3.5% on CEO transition news. Asian markets starting to strain under the pressure of rising US Treasury yields. Former PBoC adviser Yu said China should cut intervention in FX market; Should not promote Yuan internationalization too aggressively. Fitch said China residential sales to fall about 15% in 2017. Japan govt preparing to issue more debt-covering bonds due to likely shortfall in tax rev this year.

Macro :

- Gundlach Says Trump Rallies Look to Be ‘Losing Steam’: Reuters

- ECB Said to Weigh Signal on Eventual Asset-Buying End: Reuters

- EU, Italy Discuss Level of State Help for Paschi: Corriere

- Italy Bank Issue May Be Resolved With State Aid, WiWo Reports

Keep an eye on :

- ABG SM : Abengoa Unit’s Reorganization Violates Law, Trustee Says: Rtrs

- BASLN SW : Basilea Expands Oncology Drug Candidate BAL101553 Study

- BKIA SM : Spain Said to Expand Deadline to Privatize Bankia by 2 Yrs: Rtrs

- POP SM : Banco Popular Says Chairman Ron to Be Replaced by Saracho

- DBHN GY : Deutsche Bahn Said to Delay CEO Contract Renewal: Handelsblatt

- DWNI GY : Vonovia Sees Amicable Merger With Deutsche Wohnen Mid-Term: WiWo

- ENI IM : Eni Says Fire at Italy Refinery Under Control, Partly Closed

- LI FP : Klepierre, Unibail Upgraded at Barclays After Underperformance

- LHA GY : Lufthansa Pilot Union Asks for More Detail on New Wage Offer

- NEO FP : Neopost 3Q Rev. EU279m vs EU284m Y/y

- PNL NA : Dutch Govt Took Notice of New Bpost Proposal for PostNL

- SREN VX : Swiss Re Confirms Financial Targets Ahead of Investor Day

- TEF SM : Telefonica Says 70.01% of Holders Accept New Shares as Dividend

- UBI IM : UBI Won’t Need Higher Cap Requirements After SREP: Radiocor

- UL FP : Klepierre, Unibail Upgraded at Barclays After Underperformance

- FR FP : Valeo R&D to Grow While Remaining Constant in Terms of Rev.: CEO

- VIV FP : Vivendi Says Hasn’t Received Subpoena From Harry Shearer

- VNA GY : Vonovia Sees Amicable Merger With Deutsche Wohnen Mid-Term: WiWo

- VOW3 GY : Volkswagen Sees Navistar Stake Buy Closing in 1Q 2017