(ZH) Chinese 10Y Bond Yields Set For Biggest Monthly Jump Since 2010

Chinese 10Y Bond Yields Set For Biggest Monthly Jump Since 2010

China's government bond prices and sovereign bond futures fell sharply on Wednesday as benchmark 10-year government bond futures fell 0.8% to 94.62, as yields on China 10-year bonds rising 6bps to 3.355%,
extending January's climb to 33bps, the biggest monthly increase since
since October 2010, following a surprise move by the central bank to raise interest rates on a type of special emergency liquidity loans to certain financial institutions.
In a surprise announcement late Tuesday, the People's Bank of China said it raised the interest rate on loans to 22 financial institutions via the medium-term lending facility, a new liquidity tool in place since 2014. While the central bank effectively injected another 245.5 billion yuan into markets, it also raised the interest rates on the two sets of loans, which are six months and one year in duration, by 10 basis points to 3.1% and 2.95% respectively.
As the WSJ adds, the move was widely viewed by investors as an effective rate increase intended to aid Beijing's efforts to rein in debt-fueled speculative investments, and according to Goldman, the modest rate hike was a telegraphing of an implicit form of tightening. Still, as the chart below shows it is not exactly clear how making a liquidity facility, which has a record notional outstanding, fractionally more expensive is tightening.
According to Reuters, this was the PBOC's first increase in the MLF interest rate since its debuted the liquidity tool in 2014, and first time it has raised one of its policy interest rates since July 2011. The last time the PBOC adjusted interest rates on MLF loans was in February 2016, when it lowered them.


One trader at a Chinese bank in Shanghai reckoned the rate increase was "bad news" because it raised the cost of funding at a time of seasonally tight liquidity heading into the week-long New Year holiday.

"The MLF loans meet market demand for funds, but the cost is going higher... The central bank is still aiming to reduce leverage at financial institutions," she said.

Economists at ANZ said the PBOC will likely maintain generally supportive liquidity conditions, but at higher rates as it looks to prevent potential financial risks. Earlier on Tuesday, some Chinese media had reported credit growth could surge again in January, after higher-than-expected bank lending growth in December.

"With MLF rates moving higher, the market may view this as a signal that either the PBOC wants to have a steeper curve, or a higher curve across the tenors," ANZ said in a note after the rise increase.
While it is unclear if a 0.1% increase in what is effectively an emergency liquidity loan is equivalent to monetary tightening, for now China's traders are selling first and asking questions later. Should the selloff in the bond sector accelerate, it could have significant implications across all Chinese risk assets, and potentially lead to a slowing in China's debt creation machine which for the past two years has been the primary driver behind the global growth impulse.

WSJ : J.P. Morgan to Become Custodian for $1 Trillion in BlackRock Assets

J.P. Morgan to Become Custodian for $1 Trillion in BlackRock Assets
Bank wins chunk of BlackRock Custodial Asset business from State Street

J.P. Morgan Chase & Co. struck a deal to be the custodian for more than $1 trillion of BlackRock Inc.’s assets, poaching the business from State Street Corp., a person familiar with the matter said.

J.P. Morgan will spend around two years bringing the assets into its existing $20.5 trillion platform, this person said. That may elevate the New York bank to the No. 2 player in the business, second to Bank of New York Mellon Corp., which has about $28 trillion assets under custody, according to recent company filings.

State Street’s assets under custody were $21.7 trillion as of Wednesday when it reported fourth-quarter earnings, though it is unclear if the change was reflected in the most recent quarterly numbers. State Street noted in an earnings slide presentation Wednesday that BlackRock had moved some of its assets “as a result of a decision to diversify service providers,” but remains a client of the bank.


J.P. Morgan is likely to garner roughly tens of millions of dollars in annual fees in one of the largest-ever custody deals. The sticky business is becoming rare in banking where firms have been cutting costs to boost revenues in a low-interest-rate environment. These types of contracts usually don’t come up for bid for years.

The custodian business, where banks hold, administer and provide evaluations of money for money managers and other clients, is one J.P. Morgan has been growing. In the bank’s annual Investor Day presentation, corporate and investment bank chief Daniel Pinto said the custody and fund services business is among the most important—and one he has personally spent a lot of time on.

And it helps the bank with its client relationships. There is a 95% overlap its investment banking and market businesses, Mr. Pinto said during the February presentation. The bank’s assets under custody have grown 18% in the past five years, he said.

“It’s a very good, very stable earning business,” Mr. Pinto said at that time.

>>> Freeport-McMoRan misses by $0.08, reports revs in-line; provides update on d

--> -2.88% 1mil shares traded
Freeport-McMoRan misses by $0.08, reports revs in-line; provides update on debt reduction plan, debt cut by $8.4 bln in 2016
  • Reports Q4 (Dec) earnings of $0.25 per share, excluding non-recurring items, $0.08 worse than the Capital IQ Consensus of $0.33; revenues rose 24.5% year/year to $4.38 bln vs the $4.34 bln Capital IQ Consensus.
  • During Q4, co completed $5.2 bln in asset sale transactions, including the sale of its interest in TF Holdings, through which FCX held an interest in the Tenke mine, and the sales of the Deepwater Gulf of Mexico and onshore California oil and gas properties. During 2016, FCX completed its asset divestment program, which generated $6.6 billion in aggregate proceeds.
  • During 2016, FCX took actions to restore its balance sheet strength through a combination of asset sale transactions, cash flow from operations and capital market transactions. During the year, FCX completed $6.6 bln in asset sale transactions and $1.5 billion in ATM sales of its common stock. Consolidated debt, net of cash, was reduced by $8.4 bln during the year.
  • At year end, consolidated debt totaled $16.0 billion and consolidated cash totaled $4.2 billion, compared with consolidated debt of $20.3 billion and consolidated cash of $177 million at December 31, 2015. FCX had no borrowings and $3.5 billion available under its $3.5 billion revolving credit facility at year-end 2016.
  • Capital expenditures totaled $504 mln in Q4 (including $405 mln for mining operations). For all of 2016, it was $2.8 bln (including $1.6 bln for mining operations). Cap-ex for 2017 is expected to approximate $1.8 bln.

FT : Intesa Sanpaolo/Generali: capital buffa Premium

Intesa Sanpaolo/Generali: capital buffa Premium
Combining the bank and the insurer would increase risks on several fronts

In the Italian tradition of opera buffa, a heart-rending farce normally has a happy ending. Shareholders in Italian banks, who have suffered enough tragicomedy, may hope that Intesa Sanpaolo’s disclosure that it is mulling “possible combinations” with insurer Generali, leads to a just such a jolly conclusion. ISP’s share price, down 8 per cent this week, suggests otherwise.

Italy’s second-biggest bank by assets has been relatively insulated from the tumult that has rocked the wider sector. ISP’s core capital ratios are strong. Its non-performing loans are low. And almost alone among peers, rising profits enabled managers to double its dividend last year and pledge a generous increase this year.

Thanks to cross-shareholding rules, ISP would have to make an offer for Generali as a whole rather than building up a stake. Given Generali’s market capitalisation of €24.5bn and ISP’s estimated 2016 net income of €3.2bn, a bid would have to be predominantly in shares.

There are some attractions. Faced with a long period of low interest rates and subdued demand for credit, ISP wants to boost its share of non-interest income such as commissions and fees (presently 42 per cent of operating income) from insurance and wealth management. Banks with a higher proportion of such recurring income — like wealth manager UBS — tend to trade at higher valuations. Acquiring Generali would roughly double ISP’s assets under management. The lender could also leverage its large branch network in Italy to sell insurance (currently a modest 15 per cent of pre-tax profits) and wealth products.

The risks are equally obvious. The first is regulatory. Combining their shares of life premiums would give them a third of the Italian market. Second is credit risk. ISP has €90bn in Italian government bond exposure; Generali has €69bn. Together, they would account for nearly 8 per cent of outstanding Italian government debt. Thirdly, their combined asset bases would almost certainly merit a “globally systemically important bank” designation, raising capital charges and putting payouts under pressure. Lastly, ISP is currently domestic focused bank. Combined, it would derive 42 per cent of operating profit from outside Italy.

In the past, European bankers were rewarded for ambition. These days, investors are more interested in avoiding tragedy.

>>> Early premarket gappers


Early premarket gappers

Gapping up: ACAT +41.2%, CDTI +23.7%, BOBE +15.7%, LOGI +13.3%, STX +11.4%, WDC +6%, USAP +5%, HK +4.7%, AA +4.1%, FCX +3.5%, AHP +3.4%, QTM +3.3%, CXO +2.8%, SAN +2.7%, MU +2.5%, BBVA +2.5%, AMD +2.5%, CREE +2.5%, TGI +2.4%, CS +2.4%, DB +2.4%, GNW +2.3%, PTEN +2.2%, BLDP +2%, MMP +1.9%, ABB +1.9%, ING +1.9%, UCBI +1.9%, PUK +1.8%, ONVO +1.7%, GM +1.6%, BCS +1.6%, NVS +1.6%, LYG +1.5%, UTX +1.5%, RAD +1.4%, CHK +1.3%, SBGL +1.3%, ISRG +1.3%, RH +1.2%, HSBC +1.2%, ALV +1.2%, CX +1.1%, NVDA +1.1%, GFI +1.1%, SDRL +1%, QGEN +0.9%, BABA +0.8%, MKC +0.7%, ROK +0.7%, TXN +0.5%

Gapping down: HZN -9%, FMBI -6.3%, NCIT -5.9%, NAK -5.7%, MRCY -4.6%, NEWT -4.6%, VOD -2.6%, CA -2.6%, HA -2.5%, VALE -2.3%, MIK -2.2%, AKS -2.1%, RIO -1.5%, OKSB -1.5%, AGN -1.3%, BBL -1.3%, AUY -1.2%, YRCW -1.2%, CLF -1%, SYT -1%, SSI -0.9%, SLV -0.9%, BHP -0.9%, COF -0.9%, DFS -0.9%, TXT -0.8%, ASYS -0.7%, GOLD -0.7%, STLD -0.7%, SC -0.7%, RES -0.7%, ABX -0.6%, HOPE -0.6%, BKU -0.6%, PAA -0.5%, CNI -0.5%

NY Post : Walgreens, Rite Aid to go on with merger if not approved by end of wee

Walgreens, Rite Aid to go on with merger if not approved by end of week



Walgreens and Rite Aid do not expect to terminate their merger agreement Jan. 27 if they fail to get regulatory approval by then, The Post has learned.

“I assume that is correct,” a source with direct knowledge of the situation said on Tuesday.

Back in October 2015, Walgreen reached a $9-a-share deal to buy Rite Aid and has been working for 15 months to get the controversial merger cleared.

Federal Trade Commission Chair Edith Ramirez was expected to approve the deal in the waning days of the Obama administration after Walgreen — led by CEO Stefano Pessina — reached an agreement to sell 865 stores to drugstore chain Fred’s Inc. to ease regulatory concerns.

Still, there have been recent FTC concerns about whether Fred’s has the financial capacity to buy the divested stores, sources said.

Rite Aid’s shares closed up 5 cents, at $6.95, well below the offer price. Its shares could fall below $4 if the deal is blocked, sources said.

>>> Novartis exploring options for Alcon, including separation

Novartis exploring options for Alcon, including separation
25 JAN 2017
Swiss pharma group Novartis [VTX:NOVN] announced on Wednesday that it is considering options for Alcon, its contact lens care company.
In its 2016 financial results, Novartis said the review would consider a range of alternatives, including retaining the business or a separation by way of a spin-off or an initial public offering.
Novartis reported 2016 revenues of USD 48.5bn and core operating income of USD 13bn. Alcon Division net sales were USD 5.8bn.
An excerpt from the announcement follows:
Novartis is considering options for the Alcon Division. The review will explore all options, ranging from retaining the business to separation via a capital markets transaction (e.g. IPO or spin-off), in order to determine how to best maximize value for our shareholders. The review will be conducted during the course of 2017 and in a manner such that Alcon Division associates can fully focus on the unit’s return to growth.
The Alcon Division comprises leading surgical and vision care (contact lens and lens care solution) businesses, both of which are leaders in their respective segments. Novartis believes that the Alcon Division is a highly attractive business, with a strong customer base and led by a strong management team. Novartis is exploring whether there are additional value-maximizing opportunities for the Alcon Division as an independent company or otherwise.
The ophthalmic pharmaceutical portfolio is now fully integrated into our Innovative Medicines Division and will not be part of the review announced today.
Novartis expects to provide a status update on the review towards the end of 2017.

WSJ : Gucci Looks Like Fashionable Pick for Luxury Rebound

Gucci Looks Like Fashionable Pick for Luxury Rebound
Brands can no longer count on store rollouts and timeless appeal to drive growth

Demand for luxury goods is rebounding, but the rising tide may not lift all boats. Investors need to pay more attention to fashion than they used to.
Last year was the luxury industry’s worst since the 2009 crisis: HSBC estimates that sales grew just 1% at constant currencies. Chinese consumers, whose spending accounts for roughly 40% of revenues, much of it outside of China, seem to have been spooked by terrorist attacks in Paris and Brussels as well as a weaker renminbi.
Fortunately, the trend improved as 2016 progressed, with a contraction in the first half followed by a rebound in the third quarter. Early sales updates from Cartier-owner Richemont and Burberry this month have reinforced hopes that the fourth quarter was even stronger than the third.

Stores in mainland China have led the recovery. But investors would be unwise to assume a return to the good old days when China’s appetite for European luxury brands seemed both limitless and indiscriminate. There are two crucial differences between today’s industry and the postcrisis world of 2010-13.
Brands can no longer guarantee growth by opening hundreds of new stores. Most already have retail estates stretching well into the Chinese mainland. Companies are therefore looking to improve the productivity of the stores they already have—a sensible strategy, but one that inevitably pits them against each other more than they are used to.
Second, luxury consumers, including in China, are increasingly choosing innovation over tradition. Burberry reported last week that “fashion” -- or newly designed items—outperformed sales of core products like its famous trench coats in the Christmas quarter. Such is the thirst for novelty that the British brand is experimenting with a “see now, buy now” model, whereby clothes modeled on the fashion-show runway are immediately available for sale.

This trend is a challenge for companies used to selling products on the basis of timeless appeal. It is also a challenge for investors. Barclays has charted social media mentions and “likes” in an effort to assess “brand heat,” but admits it is hard to draw firm conclusions.
An alternative way to gauge fashionability is to look at the share of a brand’s product range that has been recently redesigned. Companies don’t typically advertise data of this kind, but one that has reason to is Gucci, which accounts for three-fifths of operating profits at luxury group Kering. Following a complete product overhaul since the appointment of a new creative director in early 2015, more than 80% of Gucci products for sale in the third quarter were new—up from 50% to 60% in the second quarter. Quarterly sales rocketed 17% year-over-year, suggesting this is having a major impact. In the fourth quarter, some 90% of products were new, which bodes well.

Share prices have risen sharply across the sector since October. Sector bellwether LVMH Moët Hennessy Louis Vuitton now trades at 24 times prospective earnings, well above the 10-year average. With expectations already high, investors need to be careful they don’t buy shares in a company that only participates halfheartedly in the rebound. A clear turnaround story like Gucci may be the best hedge against disappointment.

FT : That Mnuchin guy might have a point…

Where a strong dollar is concerned, at least.
Here he is via Bloomberg yesterday, with our emphasis:
U.S. Treasury Secretary nominee Steven Mnuchin said an “excessively strong dollar” could have a negative short-term effect on the economy.
“The strength of the dollar has historically been tied to the strength of the U.S. economy and the faith that investors have in doing business in America,” Mnuchin said in a written response to a senator’s question about the implications of a hypothetical 25 percent dollar rise. “From time to time, an excessively strong dollar may have negative short-term implications on the economy.”
He’s right. It can indeed have negative short-term implications on the economy. In support of that, here’s some very relevant words from the St. Louis Fed from last week. It’s the imports that matter:

It is clear that a strong dollar is associated with net exports contributing negatively to GDP growth. During the sample period’s two-year span [from the second quarter of 2014 to the first quarter of 2016] trade contributed positively to GDP growth in only one quarter.
The negative impact was particularly strong over the first half of the appreciation period. For example, during the fourth quarter of 2014 and the first quarter of 2015, the contributions to the GDP growth rate from net exports were -1.14 percent and -1.65 percent, respectively. The negative effects diminished by the end of 2015, standing at -0.5 percent despite the dollar’s increase in value of another 10 percent…
In response to the strength of the dollar, the contributions from imports played a much more significant role than that of exports. The cumulative contribution of imports to GDP growth was -4.6 percent, while the cumulative contribution of exports was slightly positive at 0.85 percent. This suggests an asymmetric reaction between exports and imports in response to increases in the dollar’s exchange rate. Thus, it is reasonable to conclude that the slowdown in GDP growth was associated more with the growth of imports rather than the reduction in exports.
In sum, the new episode of appreciation of the dollar that began over the past several months is likely to hurt the current growth rate of GDP through an increase in imports rather than a decrease in exports if the trend from the previous period of appreciation holds.
The chart that goes with those pars is worth spending a bit of time with:
Of course, judging Mnuchin too quickly based just on his words here seems a bit unfair, particularly as, says Simon Derrick from BoNYMellon, “each Treasury Secretary between 2002 and 2011 pledged support for a strong USD, the USD index declined by 39% over the same period.”
Now if only Messrs Trump and Mnuchin could do something about that pesky policy divergence driving the dollar stronger (albeit with a recent dip).
Of course, that divergence, per Beckworth, “comes from the belief that Trump’s policies will spur robust growth. This belief may prove premature, but if it does come to fruition it will only reinforce the policy divergence by pushing interest rates higher.”
Which is awkward