>>> Europe : Brokers Upgrades & Downgrades - 4th of July 2016

>>> Up
*CAIRN ENERGY RAISED TO BUY VS NEUTRAL AT CITI
*HARGREAVES LANSDOWN RAISED TO MARKET PERFORM AT BERNSTEIN
*MARSTON’S RAISED TO OVERWEIGHT AT JPMORGAN
*SAMPO OYJ RAISED TO NEUTRAL VS SELL AT UBS
*STAGECOACH RAISED TO HOLD VS SELL AT LIBERUM
*WAERTSILAE RAISED TO BUY AT KEPLER CHEUVREUX

>>> Down
*ATRESMEDIA CORPORACION CUT TO EQUALWEIGHT AT BARCLAYS
*COVESTRO AG CUT TO UNDERPERFORM AT MAIN FIRST BANK AG
*ELUMEO CUT TO SELL VS HOLD AT SOCIETE GENERALE
*GEMFIELDS CUT TO NEUTRAL AT JPMORGAN
*MEDIASET ESPANA CUT TO UNDERWEIGHT AT BARCLAYS
*MITCHELLS & BUTLERS CUT TO NEUTRAL AT JPMORGAN
*MONEYSUPERMARKET.COM CUT TO EQUALWEIGHT AT BARCLAYS
*RIGHTMOVE CUT TO UNDERWEIGHT AT BARCLAYS
*RTL GROUP CUT TO UNDERWEIGHT AT BARCLAYS
*SERCO CUT TO UNDERPERFORM AT RBC CAPITAL
*ZENITH BANK CUT TO HOLD AT HSBC

>>> PT Change


>>> Initiation
*MONDI RATED NEW BUY AT RENAISSANCE CAPITAL; PT ZAR360

>>> Call

>>> Asian Update (4th of July - US holidays)

Asian Mid-session Market Update: Australia elections too close to call; Ratings agencies assess the impact of political deadlock

***Economic Data***
- (AU) AUSTRALIA MAY BUILDING APPROVALS M/M: -5.2% V -3.5%E; Y/Y: -9.1% V -6.4%E
- (AU) AUSTRALIA JUNE ANZ JOB ADVERTISEMENTS M/M: +0.5% V +2.2% PRIOR; 2nd straight increase
- (AU) AUSTRALIA JUNE MELBOURNE INSTITUTE INFLATION M/M: +0.6% (2 1/2 year high) V -0.2% PRIOR; Y/Y: 1.5% V 1.0% PRIOR
- (JP) JAPAN JUNE MONETARY BASE Y/Y: 25.4% v 25.5% PRIOR; MONETARY BASE END OF PERIOD: ¥403.9T v ¥386.7T PRIOR
- (JP) BOJ Tankan Q2 CPI Survey: Japan Firms Expect 1 yr CPI 0.7% vs 0.8% Prior; 3 yr CPI 1.1% vs 1.1% Prior; 5 yr CPI 1.1% vs 1.2% Prior

***Index Snapshot (as of 04:00 GMT)***
- Nikkei225 +0.4%, S&P/ASX +0.4%, Kospi +0.4%, Shanghai Composite +1.8%, Hang Seng +1.6%, Sep S&P500 +0.1% at 2,098

***Commodities/Fixed Income***
- Aug gold +0.8% at $1,349/oz, Aug crude oil flat at $49.01/brl, Sep copper +0.6% at $2.23/lb
- USD/CNY: (CN) PBOC SETS YUAN MID POINT AT 6.6472 V 6.6496 PRIOR
- (CN) PBOC to inject CNY90B in 7-day reverse repos
- (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 MoF (AOFM) sells A$400M in 2.75% 2035 Bonds; avg yield: 2.5142%; bid-to-cover: 2.34x

***Market Focal Points/FX***
- Asian equity markets continue to rally, taking cue from another strong session of gains in the US on Friday. With 4 straight session of gains, US markets have now erased the 2-day plunge that followed the surprise UK Brexit vote. Political uncertainty - this time in Australia - has again contributed to volatility to start the US holiday-thinned week. Labor Party has mounted a surprisingly strong challenge to the Conservative coalition on Saturday, and the results are deemed to be inconclusive until the absentee ballots are counted this week. AUD/USD fell over 50pips below 0.7450, though it has since pared most of those declines after credit ratings agencies commentary soothed concerns that Australia may lose its AAA rating on budget deadlock. In other FX majors, USD/JPY traded in a 40pip range below 102.80, NZD/USD was little changed around 0.7170, and GBP/USD initially fell 30pips below 1.3240 but then rose above 1.33. Precious metals - particularly silver, which rose 5% above $20 for the first time in nearly 2 years - also extended their gains.

- Australia Opposition leader Shorten said the one clear message from the weekend elections is that the Labor Party is back. Early reports suggested that Ruling Coalition is on track to win at least 74 seats and Labor to win at least 66 sets, but 76 seats are needed in the 150-seat parliament to form a majority. Moody's was the first to weigh in on the result and speculation that Australia's AAA could come under stress if another minority govt is forced to wade into the country's contentious fiscal negotiations, stating the political uncertainty in Australia has limited implications. Moody's added sovereign rating would be affected by the indecisive polls only if govt priorities changes. Later in the day, Fitch also remarked that Australia credit profile is still consistent with AAA rating, but acknowledged that a "close contest could mean a fiscal outlook and set of policies significantly different to those set out in the FY2017 Budget."

- Outside Australia elections, a HK press report citing a senior China stats bureau official noted China is evaluating new methodologies to more accurately measure GDP. NBS added that govt researchers are struggling to track scale of new economy including e-commerce and internet finance, which underestimates true GDP growth. In Japan, local press reported the BOJ would consider cutting its core CPI for FY16/17 from 0.5% to a range of 0% to 0.5% at its late July policy meeting. A BOJ Tankan survey also saw a 0.1pt reduction in Q2 CPI survey of companies to 0.7% for 1-year and 1.1% for 5-year forecasts, while 3-year CPI estimates remained at 1.1%.

- Outside Asia, FT reported that UK Fin Min Osborne intends to cut corporate tax rate from 20% to 15% to help support business investment in the economy post-Brexit, which would make UK rate the smallest in the G20. ECB's Coeure said it was too early to say if monetary policy will be affected by Brexit amid expectations of inevitable further easing to make up for anticipated growth hit from UK departure. In Germany, Bundesbank's Weidmann however called for fiscal vigilance in spite of Brexit decision, stating it should not be a factor that softens budget rules.

***Equities***
US equities / ADRs:
- TSLA: Reports Q2 vehicle production 18.3K, below 20K prior forecast (May 4th), +20% q/q; Delivered 14.4K, below 17K prior forecast; Exited Q2 with production capacity of just under 2K per week
- SPLS: Said to consider pulling out of UK market after failed merger bid with ODP - UK press
- IOC: Follow-up: Non-binding 3rd party offer said to have come from Exxon - Australian press
- RIO: Said to have cancelled its $20B Simandou iron ore project in Guinea; Project is too expensive - UK press

Notable movers by sector:
- Consumer discretionary: Treasury Wine Estates TWE.AU +3.0% (divestment, confirms guidance); Toray Industries 3402.JP +2.7% (Q1 result speculation); Ryohin Keikaku Co. 7453.JP -5.7% (Q1 result); L'Occitane 973.HK +0.6% (annual result)
- Consumer staples: Yashili International Holdings 1230.HK +0.6% (H1 guidance)
- Financials: SRE Group 1207.HK +2.5% (H1 guidance); China Vanke Co 000002.CN -10.0%, 2202.HK +7.6% (resume A-share trading after 6-month halt)
- Industrials: Austal ASB.AU -9.1% (guidance); Takata Corp.7312.JP +4.3% (costs cut)
- Technology: Truly International Holdings 732.HK % (spin-off); NEC Corp 6701.JP +1.7% (said to cut stake in JV with Lenovo)
- Materials: West China Cement 2233.HK -23.4%, Anhui Conch Cement 600585.CN +3.3% (acquisition deal fails); Evolution Mining EVN.AU +6.0%, Independence Group IGO.AU +9.5%, Northern Star Resources NST.AU +5.4% (gold price rises); Rio Tinto RIO.AU +3.9% (Guinea project)

WSJ : Too Early to Decide How ECB Should Respond to Brexit, Cœuré Says

Too Early to Decide How ECB Should Respond to Brexit, Cœuré Says

ECB executive board member urges U.K. to clarify timing and method of its exit

AIX-EN-PROVENCE, France—European Central Bank executive board member Benoît Coeuré said Sunday it was too early to decide how to respond to Britain’s vote to leave the European Union given the current economic and political uncertainty.

The comments, at the Rencontres Économiques conference in South of France, indicate that the ECB will take time to gauge how eurozone banks and businesses are reacting to the shock before unleashing any fresh stimulus measures. Economists have been speculating that the ECB could act as soon as September to bolster the bloc’s economy.

“There are things that we can do but it is too early to decide whether Brexit calls for action from the central bank,” Mr. Coeuré said.

Last week’s surprise referendum result sent global equity markets sprawling, with European bank stocks coming under particular pressure. The pound has tumbled against the dollar and other currencies, and the euro has also lost ground.


Mr. Coeuré urged the U.K. and the European Union to work together to clarify the time frame and exact terms of Britain’s exit, while French economy minister Emmanuel Macron, speaking on the sidelines of the conference, called for a referendum across the EU on a new road map for bloc.

“Rather than national debates, let’s organize a referendum across Europe to ensure that citizens agree with the new road map,” said Mr. Macron.

Also at the conference was Bank of France Governor François Villeroy de Galhau, who warned that the city of London was at risk of losing its EU “passport” and clearing houses, unless it can quickly find an agreement with the EU.

The EU passport enables a firm established in one EU country to operate in the others without having to undergo separate regulatory oversight.

Many U.S. and other non-European institutions run their EU operations out of London. Following the British vote on June 23 to leave the union, it is believed some banks may move at least part of their operations to another country to secure their EU passport.

Mr. Villeroy de Galhau, who also sits on the European Central Bank governing council, said it was “desirable” for U.K. to secure access to the single market in its exits talks.

“If such an agreement isn’t found, there will be no financial passport for the city, and the clearing houses won’t stay in the U.K.,” Mr. Villeroy de Galhau said.

In the short term, the U.K. also faces a risk of inflation and economic recession, he added.

FT : Young Saudis on the spot as prince plans to expand private sector

Young Saudis on the spot as prince plans to expand private sector

For decades, young Saudis have grown accustomed to walking into easy public sector jobs, cushioned by decent salaries and benefits paid for by the kingdom’s petrodollars.
It is a phenomenon that has bred a reluctance to take on private sector work, which entails longer hours and fewer perks. The result is that expatriates — who account for a third of Saudi Arabia’s 30m population — fill about 85 per cent of private sector jobs.

But Mohammed bin Salman, the ambitious deputy crown prince, wants that to change. If he succeeds, millions of Saudis face a rude wake-up as the young prince attempts to implement a bold transformation plan that envisages shrinking the civil service and having half of all Saudis seeking work in the private sector by 2020.
While analysts agree that radical reform is needed to modernise the sclerotic, oil-dependent economy, the risk is it that forging ahead with social change could spark popular resentment.
“This is the point at which the commitment of the leadership to the adjustment process will be really tested,” said Simon Williams, HSBC’s chief economist for the Middle East. “The resistance to change this implies is likely to increase before it recedes as social and economic losses accumulate and reform fatigue sets in.”
A central tenet of Prince Mohammed’s “National Transformation Plan,” which was unveiled last month, is to reduce unemployment from 11.7 per cent down to 9 per cent by 2020 and 7 per cent over the following decade. Estimates of youth unemployment run as high as 30 per cent.
Policymakers are mindful that young men with little to do are easy prey for radicalisation by extremist Islamist groups, such as Isis, as footsoldiers for domestic attacks or recruitment to the battlefields of Syria and Yemen.
To tackle the issues, the NTP has the ambitious target of creating 450,000 private sector jobs by 2020 through the expansion of non-oil sectors, such as mining and tourism. But at the same time it plans to decrease the civil service by 20 per cent, as part of its aim of reducing the dominant role of the state.
Steffen Herthog, an associate professor at the London School of Economics, said that implies an “unprecedented reduction of government employment” at a time when the private sector job market is struggling in the wake of the slump in oil prices.
“While the working age Saudi population continues to grow at a fast clip, such a reduction (in the civil service) would be politically quite difficult,” Mr Herthog said.
Abdullah al-Alami, a Saudi writer, says the government will need to legislate to improve working conditions for Saudis and make the private sector more conducive to nationals.
Previous proposals have included shortening the hours worked in the private sector, mandatory two-day weekends, and earlier closing times for retail outlets to allow Saudi workers to spend more time in the evening at home.
“This is definitely a big challenge because Saudis have grown accustomed to working in the more ‘relaxed’ public sector,” Mr Alami said. “Let’s be realistic, in order for Saudis to accept this move into private sector, we need to change the work ‘culture’.”
The labour ministry is also studying implementing a new version of nitaqat — the labour regulations that have introduced effective penalties and incentives for businesses to hire more Saudis.
But businesses say they are already struggling with these closely-monitored national employment quotas.

One foreign financial services company, which employs seven executives, including three Saudis, needs to hire another seven Saudis as it expands to keep in line with current regulations.
“It is a hell of a tax on operations,” said the company’s manager, who declined to be identified.
“The real issue is finding qualified Saudis, and then working to keep them, because any with marketable skills know they can jump ship at the drop of a hat,” he said. “If they have any quarrel, even something small, then they will just go.”
While some Saudis are keen to join the private sector, especially white-collar jobs, many lack the skills needed to compete with cheaper foreign workers.
The conservative kingdom’s education system has been dominated by religious learning for decades.
Saudi Arabia’s human development indicators, spanning factors such as health and education, lag far behind other emerging markets such as Zambia and Ghana, according to the World Bank’s human capital index.
And in the short term unemployment could rise as public sector job creation plateaus, with wages stalling and the cost of living rising as subsidies are cut, according to HSBC.
“If there should really be substantial reductions in the public sector, one key political question would be how the losers in this process would be compensated,” said Mr Herthog.

FT : Q&A: Could Hershey Trust be amenable to Mondelez deal?

Q&A: Could Hershey Trust be amenable to Mondelez deal?

It started with a kiss — a Hershey’s Kiss. And from there the eponymous company grew into one of the world’s best-known manufacturers of chocolate. But founder Milton Hershey did not leave a legacy based only on confectionery.
The entrepreneur-cum-philanthropist built an entire town — also called Hershey — for his factory employees and most importantly, a school for underprivileged children. The Hershey Trust Company is the trustee of the school and administers the funds dedicated to it.

More than a century on, Mondelez, rival snack maker and owner of Cadbury’s, is attempting to buy Hershey, bringing the trust and its operations into sharp focus.
With 81 per cent of the Hershey company’s voting rights, the trust will play a pivotal role in deciding whether to embrace Mondelez’s advances. The group has rebuffed one proposal but analysts are betting a higher offer is to come.
But the international attention garnered by Mondelez’s courtship has shone a spotlight on an organisation in upheaval, which some speculate may render the trust more willing to sell than in the past.
When and why was the Hershey Trust established?
Milton Hershey and his wife Catherine set up the trust in 1905, not long after the businessman built his first chocolate factory near Derry Church, Pennsylvania. The trust initially functioned as a bank for the community. But when the Hersheys established the Hershey Industrial School for orphaned boys in 1909, the trust was appointed control of its finances.
The deed outlined the Hershey’s wishes to ensure that the school, now called Milton Hershey School and expanded to include underprivileged girls, would have access to sustainable financial resources in perpetuity. In 1918 Hershey bequeathed the trust his chocolate group and all the auxiliary companies he had also started to handle the supply chain including his then Cuban investments, the town’s utilities and department store among others.
How is it organised, who is in charge and what are its objectives?
The Hershey Trust has $12bn in assets, double from a decade ago, putting it among the largest educational endowments in the US.
Through the ownership of Class B shares the trust controls about 80 per cent of the company’s voting rights. It also owns roughly 8 per cent of the group’s common shares and three of its directors sit on the Hershey company’s board.
In addition to the Milton Hershey school, the trust also serves as a trustee to the MS Hershey Foundation Trust, which supports the local park and museum, and the Hershey Cemetery Trust. It is served by 10 directors. The trust is supervised by the Pennsylvania attorney-general’s office, which has to sign off on any sale of its controlling stake.
Has Hershey received a takeover offer before?
Yes. In 2002, in an effort to diversify its portfolio, the trust put the Hershey company up for auction. It received two bids, one from Wrigley (since bought by Mars) and a joint offer from Nestlé and Cadbury Schweppes.
Wrigley’s $12.5bn bid, had — similar to Mondelez’s offer last week — been packaged with pledges to retain jobs. But that did not allay the local community’s fears.
The state attorney-general’s office blocked the deal on grounds that it would harm the community. A court backed this decision and the trust abandoned the plan. New rules were put in place to make it more difficult to sell the company.
Hershey and Cadbury executives had also reportedly flirted with a combination in 2007, but it was ultimately thwarted because of a tussle between the trust and the company’s board. Mondelez now owns Cadbury.
Jonathan Klick, a professor at the University of Pennsylvania Law School, writing in a paper about the deal estimated that rather than improving the welfare of the school’s students, who are the main beneficiaries of the trust, the court’s decision to stymie the deal had destroyed $2.7bn in shareholder value.
Why has the attorney-general’s office raised concerns over the trust?
The state attorney-general’s office is scrutinising the organisation over issues including alleged overpayment of directors, conflicts of interest and expenses. It is also seeking the resignation of three longstanding board members.
The trust said that policies regarding pay, travel and expenses were being “scrupulously followed”. The boards meet regularly to conduct proper oversight of the trust and the school, it said.
“We expect to appropriately resolve outstanding concerns the attorney-general’s office has,” it said. “The boards believe they continue to be in regulatory compliance and continue to have appropriate discussions with the attorney-general’s office.”
The attorney-general’s office did not respond to several requests for comment.
In April, the trust fired John Estey, an executive vice-president, after he entered into a plea agreement with the US attorney’s office in Harrisburg, Pennsylvania, to one count of wire fraud. Mr Estey’s wrongdoing was unrelated to the trust, it said.
The fresh concerns come a couple of years after a two-year investigation into the trust by the attorney-general’s office resulted in an agreement stipulating new rules on pay, expenses, property transactions and conflicts of interest. The office, which had reportedly been concerned over the trust’s purchase of a golf course, did not find that it had breached its fiduciary duty.
How are the overtures from Mondelez expected to play out?
Given the upheaval at the trust and the potential for three new board members on top of three others appointed earlier this year, some analysts say there is a chance that the trust could be more amenable to a sale of the confectioner.
Also while Hershey is a key employer in the area, it closed the original chocolate factory in 2013 it consolidated production and shifted some manufacturing to Mexico.
Others, however, are less certain. Prof Klick said: “It is politically difficult since the central Pennsylvania voters do not want to see Hershey controlled by outsiders.”

FT : Lagarde says Brexit will give EU more freedom for reform

Lagarde says Brexit will give EU more freedom for reform
Christine Lagarde, the head of International Monetary Fund, has expressed optimism that Europe will emerge from the Brexit crisis “on top”, saying Britain’s exit from the EU could leave the bloc with more freedom to implement decisions.
Ms Lagarde suggested the UK’s vote last month to leave the EU left European leaders with greater flexibility to carry out reforms and move ahead with projects the UK had previously opposed.

“I have heard European commissioners, one after the other, say, ‘this is so complicated, we can’t do it because of the British’,” she said. “Maybe there are things that one should consider doing now that the British aren’t going to be sitting at the table.”
“I believe Europeans will come out of Brexit on top,” she added
Ms Lagarde’s comments, made at a business conference in Aix-en-Provence, come as European leaders, policymakers and business executives called for a clear road map for Britain’s exit from the EU to mitigate the effects on the European economy.
The IMF has previously warned that Brexit could trigger a “prolonged period of uncertainty,” and called on the UK and EU to work towards a “smooth and predictable transition”.
Benoit Coeure, a French board member of the European Central Bank [ECB], said of Brexit: “The method and the calendar must be clear,” though not necessarily quick, in order to reduce the negative economic effects of Britain’s vote.
He said that Brexit created a short-term financial risk as well as a longer-term economic one.
“We [the ECB] have instruments that we are ready to use. Thank God we didn’t have to use them so far, but we are ready to do so,” Mr Coeure said.
He added that it was “too early to decide” whether any action from the ECB was required.
Paul Tucker, a former deputy governor of the Bank of England, said it was vital that Europe’s response to Brexit was to “flourish to ensure that it maintains its place at the top table”.
He said that France, Germany and other members should do so “not with one arm tied behind its back” but rather with “a temporary setback”.
Mr Tucker also urged European leaders to elevate the importance, visibility and accountability of the Council of Ministers, which represents the governments of European members.
Calling for its meetings to be televised, he said: “We don’t talk enough about the Council of Ministers . . . why is the UN Security Council open to the public and the Council of Ministers not?”
Mr Tucker told the Financial Times on the sidelines of the conference that making the body open to the public was “a basic democratic demand”.
In a sign of German politicians’ desire to reach out to young Britons living on the continent, Sigmar Gabriel, the vice-chancellor, has suggested offering dual citizenship to UK nationals living in other EU countries, once the UK leaves.
“We shouldn’t pull up the drawbridge in front of them,” he told a party political conference over the weekend.
He noted that the majority of Britons under 25 who voted, wanted to stay in the bloc, and claimed that they were “smarter than their odd political elite”.
Germany rarely grants dual citizenship to non-EU nationals.
“Let’s offer [dual citizenship] to young Britons living in Germany, Italy or France so that they can remain EU citizens,” Mr Gabriel said. “We should do everything we can so that young people on both sides of the channel stay in touch”.

FT : George Osborne tries to strike positive tone on Brexit

George Osborne tries to strike positive tone on Brexit
George Osborne was crushed on the morning of Friday June 24, his economic plan and his personal ambitions wrecked by the national vote to leave the EU. “I have had better mornings,” he told aides, as dawn broke on Brexit Britain.
Ten days on, Mr Osborne is back on his feet and ready for a new fight. His dream of becoming prime minister may be shattered, but he believes he can still play a vital role in restoring stability and confidence to the British economy.

In his first newspaper interview since the referendum, Mr Osborne told the Financial Times: “What’s done is done. The British public has spoken. We should accept their verdict instead of moping around or trying to unpick it.
“We have now got to be part of a supreme national effort to make it work for the British people. I’m going to do my best over the next coming months, then it’s up to the next Tory leader whoever he or she may be.”
The chancellor admits the country faces “very challenging times” and adds: “I don’t resile from the warnings I made about the impact — including a recession.” But after a week of shock, Mr Osborne insists he is looking confidently to a new horizon.
“I don’t think we should feel sorry for ourselves as a country,” he says. “We’ve got to pick ourselves up and make the best of it and make the most of it. I don’t sit here feeling sorry for myself, feeling somehow that it is all going to unravel. Quite the reverse.”
Mr Osborne says he has not decided who to back in the Tory leadership contest “at the moment”, although he will, as a political chess player, be gauging who is most likely to win and most likely to give him a role in shaping this new era for Britain.
Allies such as cabinet office minister Matt Hancock have already backed home secretary Theresa May, although relations between her and the chancellor are scratchy at best. She has refused to offer jobs to any of her potential backers.
Mr Osborne is said by senior Treasury officials to regard Mrs May’s pro-Brexit rival Andrea Leadsom as “hard working with strong views”, even if the two have crossed swords in the past. Treasury civil servants are less obliging about her talents.

In the short term he wants to make sure the Brexit shock does not produce a repeat of the credit crunch of 2007-08 and is meeting the banks and talking to the Bank of England to make sure lending does not seize up.
“It’s their judgment how they do that but they’ve got the tools at their disposal,” he says of the BoE’s Financial Policy Committee.
While BoE governor Mark Carney has talked about monetary loosening, Mr Osborne says he will do his bit by abandoning his threat of further post-Brexit fiscal tightening, although he will stick with measures already announced.
“I’m being realistic looking at the independent forecasts now for UK growth in the coming year or two,” he says. “We are unlikely to hit our surplus targets. But that doesn’t mean we abandon fiscal credibility.”
Stephen Crabb, the work and pensions secretary, will say on Monday that the government would borrow up to £20bn a year to spend on infrastructure projects, if he is elected Tory leader.
Mrs May pre-empted Mr Osborne by 24 hours in announcing that she would scrap the 2020 surplus target to avoid further austerity, suggesting that the two are on the same page on the public finances.
They are also striking very similar notes about the need for Britain to maximise access to the single market — including for services and financial services — while at the same time respecting the will of the British populace to restrict the free movement of people.
“The priority is getting our new relationship with Europe in place and right and that means putting the greatest emphasis on having the best possible trade in goods and in services including financial services,” the chancellor says.
Mr Osborne wants to pay the smallest possible economic price for the ability for Britain to control its own borders, but says: “Clearly you can’t have all the benefits of EU membership without any of the costs or obligations. There’s going to have to be reform of free movement of people because to ignore that would be, I think, to ignore one of the clear verdicts of the referendum.
“But we’ve got to make sure we’re as close as possible to our European allies and that they remain not just key friends and strategic partners but also a crucial export market.”
Mr Osborne, who has tried to make Britain China’s best friend in the west, plans to step up the courting of Beijing. “We’ve got to get on a plane and sell Britain to the world,” he says. “And for me that means putting more effort still into our relationship with China.” He will lead another trade visit later this year.

FT : Renzi ready to defy Brussels and bail out Italy’s troubled banks

Renzi ready to defy Brussels and bail out Italy’s troubled banks

Italy is prepared to defy the EU and unilaterally pump billions of euros into its troubled banking system if it comes under severe systemic distress, a last-resort move that would smash through the bloc’s nascent regime for handling ailing banks.
Matteo Renzi, the Italian prime minister, is determined to intervene with public funds if necessary despite warnings from Brussels and Berlin over the need to respect rules that make creditors rather than taxpayers fund bank rescues, according to several officials and bankers familiar with their plans.

The threat has raised alarm among Europe’s regulators, who fear such a brazen intervention would devastate the credibility of the union’s newly implemented banking rule book during its first real test. In the race to find workable solutions, Margrethe Vestager, the EU’s competition chief, has laid out options for Rome to address its banking problems without breaking the bail-in principles of Europe’s banking union.
Italy is the eurozone’s biggest vulnerability following the shock outcome of the UK vote to leave the EU, with bank stocks plunging by a third. Concerns are building before the outcome of bank stress test results due this month and a constitutional referendum in Italy in early October, on which Mr Renzi has wagered his job. Citi has described the referendum as “probably the single biggest risk on the European political landscape this year outside the UK”.
After several of its ideas on intervention were rebuffed, Rome is considering whether to act alone. “We are willing to do whatever is necessary [to defend the banks], and do not rule out acting unilaterally, although that would only be as a last resort,” said one person familiar with the government’s thinking. European officials fear any Italian intervention would carry high risks, opening a battle over illegal state support that would put off private investors.
Angela Merkel, German chancellor , last week rebuffed Italy’s request for a suspension of state aid and bail-in rules in order to recapitalise its banks. Benoit Coeure, a senior European Central Bank official, has said any suspension of bail-in rules would spell the end of the banking union “as we know it”.
Mr Renzi has bristled at suggestions he is ignoring rules, saying he will not be “lectured by the school teacher”.
Rome is considering measures such as boosting the size of a state-sponsored privately backed fund called Atlante used to backstop capital increases at two failing banks, say senior bankers. Atlante will also launch a fund focused on non-performing loans within days aimed at buying bad loans built up during Italy’s three-year recession to avoid widespread writedowns.
It will first target bad loans at Monte dei Paschi di Siena, Italy’s biggest problem bank, according to senior bankers. Italy is also discussing the use of funds from Treasury-owned Cassa Depositi e Prestiti and state pension funds to recapitalise banks.
Brussels and Berlin have resisted any options that overpay banks for bad loans, or sidestep the need for creditors bail-in.
The Commission is open to Italy softening the blow on retail investors, either through converting their junior debt to equity on generous terms, or through later compensation to vulnerable households.
The restructuring options currently under discussion do not require the full resolution of any Italian banks, but debt-to-equity conversions. Rome should “stop pretending that there are no solutions other than setting the rules aside”, said one European official familiar with the discussions.
Brussels last week signed off €150bn worth of precautionary measures allowing Italy to help banks with short-term liquidity problems. But of greater concern is pressure on capital, say analysts. Stress test results are due on July 31 and senior bankers consider Italy’s weaker banks — including its third largest Monte dei Paschi — may be found to be undercapitalised.
Italy’s business lobby, Confindustria, on Friday warned of “political chaos” should Mr Renzi lose October’s referendum. Under such a scenario, Italy would re-enter recession, spreads on Italian debt would widen and there would be capital flight from Italy, Confindustria argued. Italian gross domestic product would fall 0.7 per cent in 2017 and drop a further 1.2 per cent in 2018, it added.

FT : Funds mark down commercial UK property 5% in wake of Brexit

Funds mark down commercial UK property 5% in wake of Brexit

Fund managers handling more than £10bn in UK commercial property assets have marked down the value of the buildings they own by 5 per cent in the wake of the UK’s vote to leave the EU.
The writedowns are an indicator of property investors’ pessimism about the impact of the vote on their assets.

UK property funds run by Henderson, M&G Investments, Standard Life Investments, Aberdeen, Legal & General and Kames Capital have all reduced the value of their property portfolios by between 4.5 to 5 per cent using a so-called “fair value adjustment” on the advice of valuers.
“We believe that properties coming to market now are unlikely to achieve recent valuations in terms of sale price — at least for the time being,” said a spokesperson for Aberdeen, adding that there was “evidence of buyers avoiding the current market uncertainty”.
The devaluations come after three years of double-digit returns from UK property investments, according to the IPD index.
They were mostly carried out by open-ended funds that are open to retail investors who can demand their money back at short notice, adding urgency to the question of correct pricing. However, one — the Standard Life Pooled Pension Property product — is aimed at institutions.
“In these circumstances, there is a risk that investors who redeem will receive too high a value for their shares at the expense of those who stay in the fund,” said M&G in a note to its investors.
Managers are also seeking to head off problems like those experienced in the 2008 crisis, when a rush by investors to cash out of property funds forced many to sell buildings at fire-sale prices and others to suspend redemptions, some for a period of years.
“[The price cuts] reflect where they think confidence is right now and its influence on pricing,” said Adrian Benedict, investment director for real estate at Fidelity International in London. Fidelity, which runs institutional funds, has not so far adjusted its pricing.
“The industry is trying to make sure we don’t repeat the mistakes of 2008 and 2009, when we saw an imbalance in flows,” he added.
A series of commercial property transactions fell through in the wake of the referendum, while Cushman & Wakefield, the property advisers, expect that those that go ahead will undergo “pricing adjustments”. A handful of deals have proceeded, including a Surrey office block sold to residential developers, but agents report a quiet market since the vote.
Equity market investors have meanwhile sold off real estate investment trusts, especially those exposed to the London office market, which is expected to suffer from financial services companies relocating some staff elsewhere in Europe.
More broadly, there are concerns that commercial property will suffer from companies delaying decisions about office space and from slower economic growth.
The two largest real estate investment trusts, Land Securities and British Land, have fallen 13 per cent and 20 per cent respectively, while smaller property companies focused on London such as Great Portland and Derwent London have dropped 20 per cent or more.

Telegraph : O2 to offer customers shares in £10bn float

O2 to offer customers shares in £10bn float

O2 customers could be offered the chance to buy shares in the mobile operator as its Spanish owner Telefonica looks to develop plans for a £10bn stock market float despite market uncertainty in the wake of the EU referendum.

Senior executives are understood to be exploring a customer share offering that would extend the O2 Priority loyalty scheme into the equity market. It normally provides them early access to concert ticket sales, among other benefits.

Following the referendum, Telefonica does not expect to float O2 until around the end of the year, two sources familiar with its thinking said.

It remains possible that O2, which is led by chief executive Ronan Dunne, will be sold to a private equity buyer after an attempt to sell Britain’s number two mobile operator to CK Hutchison, the owner of rival Three, collapsed in May.

The European Commission blocked the merger on concerns it would disadvantage rivals and raise prices. Telefonica is said to favour a stock market float as the route most likely to secure a valuation close to the £10.25bn Hutchison agreed to pay.

The discussions are focused on listing a minority stake that would raise billions to pay down burdensome group debt but allow Spain’s former state monopoly to retain control and significant exposure to the British market. It signalled its intentions last week when it told Spanish investors that the O2 cash flows would be reintegrated with the rest of the group.

O2’s finances had been separated in preparation for a full disposal and the move was also seen in the City as a demonstration to private equity firms that there will be no quick retreat from the UK following the referendum.

Prior to the referendum, more than half a dozen private equity firms had made informal approaches over a potential buy-out of O2, with CVC and Apax Partners seen as the most keenly interested.

The buy-out firms were also courting Sky, which is due to launch a mobile service this year based on the O2 network, in hope of forming a partnership that could allow them to bid more for O2.

“The work going on now is less about ways of selling the business and more exploring the strategic ways to build value in it,” said a source familiar with current discussions around O2.

“Telefonica does not feel there is any short-term need to do anything.

“Selling shares to customers could be a good way of getting them to buy into the O2 brand even more.”

It is understood that Telefonica could seek to bring one or more of the sovereign wealth funds that had planned to invest £3bn in the merger of Three and O2 on board as cornerstone investors in a float. A City source said informal conversations had taken place and at least one of the funds appeared likely to offer to invest, if O2 comes to market.

The original list of funds was made up of Canada Pension Plan, Singapore’s GIC, Caisse de depot et placement du Quebec, a subsidiary of the Abu Dhabi Investment Authority, and the Brazilian investment bank BTG Pactual.

In the meantime, Britain’s decision to leave the EU has created a cloud of uncertainty over day-to-day business in the telecoms industry, particularly as the bloc plays a key role in regulation.

However, subscriptions to mobile and broadband services are seen by investors as providing protection from a potential downturn in consumer spending. O2 declined to comment.