Central banks nearing limits of ability to stimulate growth - OECD
The world's central banks are "pretty close" to the limits of their ability to stimulate economies, Angel Gurria, head of the Organization for Economic Co-operation and Development (OECD), said on Saturday.
In the absence of "breakthrough, collective" policies, global growth is likely to remain weak, Gurria said in an interview with Reuters ahead of a meeting of leaders of the world's 20 biggest economies, the G20, in the eastern Chinese city of Hangzhou.
"We have left our good central bankers to do all the heavy lifting," said Gurria.
"It has to be like a relay. Continued accommodative monetary policy, and then you get to the second relay like in the four-by-100s and the baton passes.
"Now you need to get it to the finance ministers, to the economy ministers, to the trade ministers, to the technology ministers, the science ministers, the education ministers, the competition ministers. Now is the big time for structural change."
Echoing remarks by China's vice finance minister on Friday, Gurria emphasized that a combination of coordinated monetary, fiscal and structural adjustment policies are now necessary to revive growth worldwide, including in China.
Nonetheless, he was relatively upbeat on the outlook for China's growth, despite a rising debt burden and mixed progress on tackling low efficiency and overcapacity in key state-owned sectors.
Gurria said that China likely could continue growing at around 6.5 to 7 percent during its current five-year plan period (to 2020) without major distortions in the structure of the economy.
In separate remarks to Reuters, Pascal Saint-Amans, the director of the OECD's Centre for Tax Policy and Administration, addressed the thorny issue of multinational corporate tax liability, which the European Commission's recent decision against Apple Inc (AAPL.O) has brought back into sharp relief.
The European Commission said this week that Apple owed up to 13 billion euros ($14.50 billion) of back taxes to Ireland based on existing regulations, a decision that both Apple and Ireland, which relies on low taxes to attract investment, have vowed to fight.
Apple employs a hybrid tax structure in Ireland for its overseas profits, Saint-Amans said, which enables it to dramatically reduce its tax burden by avoiding full tax residency in either the U.S. or Ireland. Many other multinationals use similar strategies to reduce their global taxation.
“You end up having hundreds of billions of profits in the middle of the Atlantic,” said Saint-Amans.
“This type of aggressive tax planning is outrageous and it’s precisely because of this type of planning that we launched BEPS.” BEPS refers to tax “base erosion and profit sharing,” and the OECD has launched an aggressive initiative to crack down on it.
U.S. lawmakers have also raised concerns that the case represents an attempt by Europe to encroach on the potential U.S. tax base.
Nonetheless Saint-Amans, a leading force behind the OECD's push to rationalize international tax policy, said that he did not believe the case was likely to serve as a precedent for tax treatment of future multinational profits.
Those, he said, would likely be regulated under OECD's emerging framework for cracking down on corporate tax evasion, which both the European Union and the U.S. have been a party to.
Closing Market Summary: Stocks Gain Following August Jobs ReportThe stock market ended the week on a modestly higher note as an inconclusive reading of the Employment Situation Report for August left fed funds rate hike expectations up in the air. The S&P 500 (+0.4%) finished in-line with the Nasdaq Composite (+0.4%) and the Dow Jones Industrial Average (+0.4%). The three indices ended the week higher between 0.5% and 0.6%.
Today's session began on a higher note as weaker-than-expected headline figures from the August employment report spurred buying interest in the broader market. The report indicated that 151,000 nonfarm payrolls were added in August (consensus 180,000) while the July number was revised to 275,000 (from 255,000). Separately, average hourly earnings came in cooler-than-expected, rising 0.1% (consensus 0.2%). The implied probability of an interest rate hike at the September Fed meeting fell to 18.0% shortly after the release of the report.
Participants walked back the knee-jerk reaction throughout the session, eyeing the longer-term trend in labor market data. The monthly nonfarm reading missed consensus estimates, but job growth has still averaged 232,000 over the past three months. Separately, remarks from the likes of Bill Gross and Richmond Fed President (a non-FOMC voter) Jeffrey Lacker worked to keep the possibility of a rate hike in play. The implied probability for a rate hike at the September meeting rebounded to 21.0% by the end of the session, slipping from the prior session estimate of 24.0%.
The S&P 500 (+0.4%) settled off its best level of the day, testing technical support near the 2173/2176 price level. All ten sectors ended in the green with materials (+0.8%), energy (+0.8%), and utilities (+1.2%) leading the pack. Conversely, countercyclical health care (+0.1%) and telecom services (+0.1%) finished with the slimmest gains. Other focal points impacting today's trade included a rebound in crude oil and sector leadership from heavily-weighted financials (+0.5%).
The economically-sensitive financial sector (+0.5%) ended ahead of the benchmark index, extending this week's gain to 2.0%. Money center banks rebounded in the space as investors responded to a steepening yield curve and a reversal in rate hike expectations. JPMorgan Chase (JPM 67.49, +0.28) and Citigroup (C 47.51, +0.15) finished higher by 0.4% apiece.
The Dow Jones Transportation Average (+0.4%) ended in-line with the broader market as shipping names and airlines outperformed. The U.S. Global Jets ETF (JETS 22.75, +0.27) ended higher by 1.4% as investors mulled August operational results from Delta Air Lines (DAL 37.17, +0.35) and Alaska Air (ALK 68.21, +0.95). The broader transportation index ended the week higher by 1.6%.
In the consumer discretionary sector (+0.2%), lululemon athletica (LULU 68.57, -8.09) weighed on the retail sub-group, sinking 10.6%. The name reported in-line quarterly results, but issued full-year guidance that was a bit light relative to expectations. Separately, Gap (GPS 23.92, -0.63) ended lower by 2.6% after reporting that same-store sales fell 3.0% in August. This compares to last August's decline of 2.0%.
The heavily-weighted health care sector (+0.1%) finished near its flat line as biotechnology underperformed. The iShares Nasdaq Biotechnology ETF (IBB 280.61,- 0.83) was under pressure after Democratic Presidential nominee Hillary Clinton unveiled plans to combat "unjustified price hikes" in the pharmaceutical industry. The plan includes making alternative medications available and fining drug makers for excessive price increases for long-standing treatments.
Treasuries ended on a lower note with the long end of the curve demonstrating relative weakness. The yield on the 2-yr note ended higher by one basis point (0.79%) while the yield on the 10-yr note settled higher by three basis points (1.60%).
Today's participation was below the recent average as fewer than 782 million shares changed hands on the NYSE floor.
Today's economic data included the Employment Situation Report for August, the Trade Balance for July, and Factory Orders for July:
- The August employment report showed a deceleration in the labor market from recent months.
- Nonfarm payrolls increased by 151,000 (consensus 180,000). Over the past three months, job gains have averaged 232,000 per month.
- July nonfarm payrolls revised to 275,000 from 255,000
- Private sector payrolls increased by 126,000 (consensus 175,000)
- July private sector payrolls revised to 225,000 from 217,000
- Unemployment rate was 4.9% (consensus 4.8%) versus 4.9% in July
- Persons unemployed for 27 weeks or more accounted for 26.1% of the unemployed versus 26.6% in July
- August average hourly earnings were up 0.1% (consensus 0.2%) after being up 0.3% in July
- Over the last 12 months, average hourly earnings have risen 2.4% versus 2.6% for the 12-month period ending in July
- The average workweek was 34.3 hours (consensus 34.5) versus 34.4 hours in July
- The labor force participation rate was 62.8% versus 62.8% in July
- The July Trade Balance Report showed a narrowing in the trade deficit to $39.5 billion (consensus -$43.0 billion) from a downwardly revised $44.7 billion deficit (from -$44.5 billion) for June.
- Net exports will provide a positive contribution to third quarter GDP as the real trade deficit of $58.3 billion for July was 4.3% less than the second quarter average.
- New orders for manufactured goods increased 1.9% in July (consensus +2.0%) following a downwardly revised 1.8% decline (from -1.5%) for June. Excluding transportation, orders were up 0.2% after a 0.4% increase for June.
- Transportation equipment orders (and particularly nondefense aircraft and parts orders ) drove much of the strength in July factory orders.
For further details on these economic releases, be sure to visit Economic Calendar page.
Bond and equity markets will be closed on Monday in observance of Labor Day. Tuesday's economic data will be limited to ISM Services for August (consensus 54.7), which will cross the wires at 10:00 ET.
- Russell 2000: +10.0% YTD
- S&P 500: +6.7% YTD
- Dow Jones: +6.1% YTD
- Nasdaq Composite: +4.8% YTD
This week's biggest % gainers/losers
The following are this week's top 20 percentage gainers and top 20 percentage losers, categorized by sectors (over $300 mln market cap and 100K average daily volume).
This week's top 20 % gainersThis week's top 20 % losers
- Healthcare: PAHC (25.86 +24.87%), ADMS (14.76 +12.59%)
- Materials: CSTM (7.87 +48.49%), MTL (2.14 +18.89%), SXCP (14.47 +16.13%), BAK (15.08 +14.33%), POT (17.99 +12.16%)
- Industrials: RBA (35.08 +23.26%), AIR (29.03 +18.78%), MATX (42.04 +15.59%), GOL (21.34 +12.97%)
- Consumer Discretionary: VRA (16.39 +13.11%), OXM (71.18 +12.25%)
- Information Technology: BZUN (14.61 +30.21%), MOMO (24.48 +13.33%), BLOX (22.74 +12.57%), OCLR (8.39 +12.02%)
- Energy: AMID (14.28 +19%), MTRX (18.49 +12.54%)
- Telecommunication Services: NIHD (3.01 +29.74%)
- Healthcare: DVAX (10.91 -32.95%), CYTK (10.36 -15.29%), EDIT (16.11 -12.11%), JUNO (28.44 -11.84%)
- Materials: DRD (5.47 -13.04%)
- Industrials: SCTY (18.48 -16.19%), AVAV (24.83 -15.83%), NCS (15.02 -12.57%)
- Consumer Discretionary: GCO (49.04 -32.43%), ANF (17.02 -24.76%), GIII (32.88 -19.84%), CZR (6.15 -18.33%), CORE (38.61 -14.41%), FRED (11.05 -13.06%), LULU (68.57 -12.3%)
- Information Technology: SCSC (35.79 -15.21%), PAY (16.81 -13.79%)
- Energy: DO (16.28 -13.4%), SDLP (3.35 -12.99%), FRO (7.23 -12.36%)
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Valeo Revs Higher, Even as Car Sales Slow
The French auto-parts company has powered up sales with innovative products. The result: The stock could rise by 30%.
Automotive supplier Valeo has the right components to deliver outsize returns to shareholders.
Sales could grow faster than expected, and profits could get a boost, thanks to the company’s strength in two of the industry’s hottest sectors. If that happens, Valeo shares (ticker: FR.France) could jump more than 25% in the next 12 months.
That would be welcomed by the company’s shareholders, particularly because the stock has been idling this year. On Friday, it closed at 48.32 euros ($53.92)—almost flat since Jan. 1, although that’s substantially better than the 12% decline in the Stoxx Europe 600 automobiles and parts subsector over the same period. The Paris-based company also has American depositary receipts that trade in New York under the symbol VLEEY. Each ADR, which ended Friday at $26.89, is equivalent to half of an ordinary share.
Valeo has a market capitalization of €11.33 billion and trades at 11.7 times estimated earnings for 2017, in line with rivals such as Continental (CON.Germany) at a multiple of 11.4, but cheaper than U.S. competitors, such as Visteon (VC) at more than 15 times.
Valeo manufactures products ranging from combustion engines and transmission systems to windshield wipers and lighting technologies, for car makers such as France’s Renault (RNO.France) and Peugeot (UG.France), and Germany’s Volkswagen (VOW.Germany). Valeo has 134 production facilities and operates in 30 countries.
Original-equipment manufacturers face head winds, including higher costs for regulation, investment in emissions reduction, and the shift to electric cars. On top of that, fundamentals are weakening in some markets: North America shows signs of slowing; China is losing momentum, and its currency is weakening; and the effect of the United Kingdom’s departure from the European Union is causing uncertainty.
Last year, Valeo reported sales of €14.54 billion, with 87% of that from original equipment and the remaining 13% from aftermarket sales. Almost half of its sales of original equipment are in Europe, where new-car sales leaped 9.3% in 2015 and continue to roar ahead in 2016, although volumes remain below levels prior to the global financial crisis.
Valeo’s strategy focuses on reducing carbon emissions and on intuitive driving, two of the industry’s most dynamic segments. Its technologies include the development of an electric supercharger to improve engine performance without increasing fuel consumption, and driving-assistance systems that detect obstacles and help with parking.
Its products are clearly in demand: Sales in 2016’s first six months were up 11%, year on year, to €8.1 billion, and order intake jumped 20%, to €12.8 billion. The impressive performance has analysts poring over forecasts. Valeo estimates annual organic growth in order intake at 8%, but some analysts reckon it could be as much as 12%.
Order intake measures all offers for goods and services processed by a company within a certain period. When it rises, so does profitability because order intake is driven by sales of innovative technologies, or components less than three years old, which fetch higher prices than older ones.
That should help Valeo’s profit margins, which have been improving over the past few years, aided by higher volumes and tighter cost controls. Its operating margin, 6.2% in 2012, hit 7.7% last year. Valeo aims to raise it to 8% in 2017.
Valeo is expected to report 2016 net income of €861 million, or €3.59 a share, up from €729 million, or €3.10, last year. In 2017, net likely will be €977 million, or €4.06.
DESPITE THE COMPANY’S robust first-half performance, management seems reluctant to raise expectations, even though it says it can “confidently confirm” its full-year guidance. That guidance “includes another year of strong sales growth, with market-beating performances in the main production regions.”
Nonetheless, the strong order intake and improved profitability it implies could lead to a rerating of the stock.
Valeo’s balance sheet is sound. Net debt on June 30 was €739 million—equal to less than 0.4 times earnings before interest, tax, depreciation, and amortization. There is scope for the company to make acquisitions, but if no suitable target is found, the parts maker could return cash to shareholders. Currently, the shares offer a 2.1% dividend yield, but that could rise to 3% or more in the next year or two.
“Should there not be any bolt-on acquisition opportunities, we estimate Valeo has scope to repurchase about 22% of its outstanding shares,” notes UBS analyst David Lesne, who calculates the company’s free cash flow potential at about €1 billion, a 10% yield. On a depreciated cash flow basis, he estimates the stock could be worth €62 a share, more than 28% above Friday’s close in Paris.
UK could end up taking £6bn Hinkley Point stake, say EDF
EDF executives say the British government could have to take a stake of up to £6bn in the Hinkley Point nuclear power station to avoid a “disaster” if the Chinese decide to withdraw from the project.
Theresa May, UK prime minister, threw the £18bn project into turmoil soon after taking office when she put it on hold just hours after the French energy company said it would go ahead with the much-delayed scheme.
Mrs May is understood to be concerned about the wider deal, under which the Chinese would invest in Hinkley Point C in return for winning the right to use their own nuclear technology to build a new station at Bradwell in Essex. The prime minister is thought to be trying to decouple Bradwell from the Hinkley deal to allow more time to consider the security implications for the Essex site, over fears of the potential level of Chinese influence over Britain’s energy supply.
The issue will be prominent when the prime minister meets Xi Jinping, China’s president, in bilateral talks during the G20 meeting at the weekend. Liu Xiaoming, China’s ambassador to the UK, has warned that stalling the nuclear project could jeopardise relations between the two countries.
The UK government has not set out a fallback option if the Chinese refuse to separate the Bradwell project from the overall deal and abandon their proposed investments in Britain. In public, Beijing remains committed to the deal.
However, there has been growing speculation in the nuclear industry that Mrs May is prepared to invest billions of pounds into Hinkley Point if it becomes necessary. “If the Chinese pull out, the UK government itself will raise the money,” said one industry source.
Downing Street and the Department for Business, Energy and Industrial Strategy both refused to comment on whether the government would be prepared to take a stake. But one of Mrs May’s first statements as new leader was to pledge to use infrastructure bonds — or public borrowing — to finance new projects.
One senior EDF figure said: “If the Chinese pull out, there is no way that EDF will be able to pay for the rest itself. We would need the British or someone else to step in.” Another said it would be a “disaster” for the project if the Chinese withdrew, but that the company would “wait and see” what happened before assuming it was dead.
The idea of the UK government taking stakes in new nuclear power stations was raised this week by the new boss of Horizon, the Hitachi-owned consortium that plans to build stations at Wylfa, on Anglesey, and Oldbury-on-Severn, in Gloucestershire.
Duncan Hawthorne, chief executive of Horizon, said Hitachi could seek an equity stake from the British and Japanese governments. Hitachi could even end up merely as a contractor to Whitehall, Mr Hawthorne told the Sunday Times. “I don’t know how far the UK government might be prepared to go but it’s a question of how best to protect the ratepayer,” he said.
Investing directly in new nuclear power stations would mark a strategic shift for the British government but frustration is growing after years of delays to the Hinkley programme as fears rise that the UK is facing energy shortages. “The sooner the government comes to accept that it has to take a strategic investment in energy infrastructure, the better,” said one industry figure.
An industry source said civil servants were instinctively opposed to any direct investment in new nuclear reactors but that Conservative advisers had been more open-minded in recent months.
Barry Gardiner, shadow energy secretary, said that because government borrowing had never been cheaper, it could make sense for Hinkley — and other infrastructure — to be built with new low-interest debt raised by the government.
But Mr Gardiner, who is also chair of the All-Party Parliamentary Chinese in Britain Group, said Mrs May’s decision would have wider consequences for trade relations between the two countries. “In China, face is very important,” he said.
Mr Liu warned this summer that “right now, the China-UK relationship is at a crucial historical juncture . . . I hope the UK will keep its door open to China.”
Any cancellation of the Hinkley deal would be likely to jeopardise other planned Chinese investments in the UK, according to Chinese officials.
Noting that, during the past five years, Chinese companies had invested more in the UK than in Germany, France and Italy combined, Mr Liu said trust and respect needed to be “treasured even more” as the UK made its decision about Hinkley.
But Richard Graham, who chairs the All-Party Parliamentary Group on China, said: “Ambassador Liu would be best focused on working quietly behind the scenes to understand the priorities of our new government and how China can best engage with them rather than trying to negotiate through the media.”
Gapping down
In reaction to disappointing earnings/guidance:
In reaction to disappointing earnings/guidance:
- PAY -16.2%, LULU -8%, CGI -4.6%, TAX -3.6%, AMBA -3.2%, COO -2.4%, (also CFO Gregory W. Matz announces plan to retire in early 2017)
- GPS -2.2%, (Gap reports August same store sales -3% vs -2% year ago and -4% last month ), AVGO -1.2%, SWHC -1.1%
Select EU financial related names showing weakness:
- BBVA -1.4%, SAN -1.1%, ING -0.7%, LYG -0.6%, CS -0.5%
Other news:
- XCOM -10.6% (after closing the day up nearly 60%)
- CCXI -10.2% (ChemoCentryx announces initial 12 week overall response rate results from an ongoing open label, single arm Phase Ib clinical trial with CCX872 in patients with advanced pancreatic cancer )
- PQ -4.4% (elects to not make semi-annual interest payment on its outstanding 10% Senior Notes due 2017)
- ZYNE -0.8% (files for $150 mln mixed securities shelf offering; enters into open market sale agreement under which it may issue and sell up to $30 mln in shares of common stock)
Analyst comments:
- CCL -4.4% (downgraded to Underweight from Equal-Weight at Morgan Stanley)
- STM -4% (downgraded to Underperform from Neutral at BofA/Merrill)
- GCO -1.6% (downgraded to Neutral at Robert W. Baird)
- CIEN -1.4% (downgraded to Hold from Buy at Drexel Hamilton)
- GEF -0.8% (downgraded to Neutral at DA Davidson)
Gapping up
In reaction to strong earnings/guidance: SEAC +6.9%
Select EU bellwethers showing strength with EU indices outperforming this morning:
In reaction to strong earnings/guidance: SEAC +6.9%
Select EU bellwethers showing strength with EU indices outperforming this morning:
- UN +2.2%, SNN +1.9%, GSK +1.7%, NGG +1.6%, SNY +1.4%, AZN +1.3%, VOD +1.1%
Select oil/gas related names showing strength:
- SDRL +2.1%, STO +1.6%, DO +1.3%, WLL +1%, CHK +1%, MRO +0.9%
Other news:
- ATEC +21.1% (Alphatec completes previously announced sale of its international operations and distribution channel to Globus Medical (GMED) and announces new capital structure)
- CPRX +12.5% (granted orphan designation by the FDA for amifampridine phosphate for the treatment of myasthenia gravis)
- MGT +7.8% (light volume, MGT Capital Investments files to withdraw registration statement on Form S-3 filed September 24, 2015 )
- VGZ +3.4% (Vista Gold confirms officers and directors increase ownership positions )
- BIIB +1.9% (Aducanumab was granted Fast Track designation by the FDA)
- UPS +0.8% (UPS announces its U.S. Ground service Daily rate will increase by an average net 4.9%, effective December 26)
- TSLA +0.8% (Elon Musk confirms is 'finishing Autopilot blog postponed to end of weekend')
Analyst comments:
- AMFW +2.9% (upgraded to Buy at BofA/Merrill)
- TEVA +1.4% (upgraded to Outperform at Oppenheimer)
Performance – Relatively Quiet Summer
This summer has been quiet as S&P stayed rangebound but there were key moves within asset classes, with EM equities up 2.5% in total returns, US HY posting another solid 2.9%, EM credit up 2.6% and Global Financials up 3.5%, the best performing sector across regions. Oil also bounced back last month, with Brent up 10.8%. Post Jackson Hole, the market probability of a Fed hike by yearend has risen but markets are still pricing in a relatively gradual pace of hikes. USD stayed largely unchanged in August.
Technicals – EM Net Issuance Going Strong
EM issuance continued to rise in August, with gross issuance up by 21% YoY. DM IG issuance remained relatively stable, with gross issuance up 6% YoY. Unlike their peers, DM sovereigns and HY issuance, both gross and net, continued their downward trend.
Sentiment – Market Fear Stays Low
Measures of market fear remained low last month. VIX, currently at ~13%, stayed range-bound throughout the month. Similarly, the MS Global Risk Demand Index* stayed around 1 before declining to a current level of 0.4.