>>> What to look at today - 3rd of November 2016

Dow -0.43% S&P -0.65% Nasdaq -0.93% Russell -1.31%
US Market continue to trade lower as US Election take the lead over FOMC. Oil was also a negative catalyst today, EIA confirmed a larger-than-expected build in crude oil inventorie. The energy component settled lower by 2.9% ($45.31/bbl; -$1.37). FOMC opted to leave the target range for the fed funds rate unchanged at 0.25% to 0.50% while stating that the case for moving rates higher had strengthened. Interestingly enough, only two FOMC members dissented at this meeting as Boston Fed President Eric Rosengren rejoined the majority. Tech under pressure before FB numbers. Volume were above average a 970mil shares. US After Hours ZUMZ +10%, WMGI +5%, WFM +5% following earnings/guidance/SSS, IQNT +34% on acquisition news, MSCC +12% on sale speculation... FIT -30%, DPLO -27%, FB -7%, WYNN -6% following earnings/guidance/SSS. Mexican Peso fall and safe-haven JPY / US Treasuries rise as both Fox News and CNN report citing sources that FBI is considering indictment of Hillary Clinton related to her use of private server; "99% confidence" that server has been hacked by 5 foreign intelligence agencies. China Caixin Services PMI hits a 4-month high and Composite a 3-year high; Rate of employment reduction the slowest in 17 months and input prices rise at fastest rate in over 5 years. Hong Kong PMI falls to 3 month low and remains in contraction for 20 straight months.

Nikkei -1.76% Hang Seng -0.17% CSI +0.92% Shanghai +0.75%

Eur$ 1.1124 CNH 6.7688 CNY 6.7590 JPY 102.61 GBP 1.2355 CHF 0.9697 RUB 63.4938 WTI$ 45.66 +0.71%

S&P -0.25% EuroStoxx -0.17% Dax -0.15% FTSE -0.14% SMI -0.36%

Macro :
- SocGen Aims to Limit Market Risks Ahead of US, European Votes
- Switzerland October Consumer Confidence -13 vs Est. -13
- U.S. Individual Investor Bulls at Lowest Since Brexit Vote: AAII
- Fed Fund Futures Pricing Around 78% Odds of December Rate Hike

Keep an eye on :
- ADS GY : Adidas 3Q Operating Profit In Line With Ests., Confirms Outlook Adidas Confirms Outlook, 3Q FX-Neutral Sales Up 17%
- AF FP : Air France Said to Create New Co. for Long-Haul Flights: Figaro
- SPR GY : Axel Springer 9M Ebitda Rises on Continued Growth in Classifieds
- BMPS IM : Atlas Showed Interest for Paschi in Bank Road Show, MF Reports
- CRG IM : Banca Carige Said to Object to ECB Request on NPL Plan: Il Sole
- CSGN VX : Credit Suisse 3Q Net Revenue Drops 9.8%; GM Revenue Down 14%
- DL NA : Delta Lloyd Asked Adviser to Find Other Bidders: Telegraaf
- DBK GY : Deutsche Bank Seen Hardest-Hit by New Capital Rules: Reuters
- DBK GY : Deutsche Asset Management Said to Seek EU1t AuM: Handelsblatt
- DLG GY : Dialog Semi 4Q Rev. Outlook Midpoint Misses Ests.
- DSM NA : DSM 3Q Ebitda Beats Estimates, 2016 Outlook Maintained
- DUFN VX : Dufry Posts Positive 3Q Organic Sales Growth, Rev. In Line
- DRW3 GY : Draegerwerk Confirms 3Q Pre-Released Results; Posts 3Q Profit
- ENGI FP : Engie to Announce Closure of Australia’s Hazelwood Plant: ABC
- EVK GY : Evonik Faces Increasing Methionine Risk, Cut to Hold: Berenberg
- FRA GY : Fraport 3Q Revenue Beats, Raises FY Ebitda Guidance
- FPE3 GY : Fuchs Petrolub 9-Mo. Sales Rise Y/y; Adjusts Guidance Higher
- GFS LN : G4S Raised to Hold at Deutsche Bank, PT 220p
- GN DC : GN 3Q Net Misses Estimates, Revenue Beats; Outlook Maintained
- RMS FP : Hermes 3Q Total, Leathergoods Sales Growth Beats Estimates
- HOT GY : Hochtief 3Q Operational Profit Rises, Confirms Forecast
- INGA NA : ING 3Q Underlying Profit Beats Ests.; CET1 Ratio Rises
- KCO GY : Kloeckner 9-Month Ebitda Doubles; FY Ebitda Guidance Narrowed
- NOVOB DC : Novo Poised for Competition in Hemophilia Market From Roche
- ORP FP : Orpea 3Q Rev. EU725M; Co. Says Will Exceed FY Growth Forecast, Orpea Says It Will Exceed 2016 Sales Target as 3Q Revenue Gains
- QIA GY : Qiagen Plans Restructuring, Hurting 2016 EPS Guidance
- RBI AV : Raiffeisen Landesbank CEO Declines to Head Merged Unit: Presse
- RHM GY : Rheinmetall Raises FY Sales Forecast, 9-Mo Profit Increases
- GLE FP : SocGen 3Q Net Income Beats, Declines 2.4% Y/y; CET1 Ratio 11.4%
- GLE FP : SocGen Aims to Limit Market Risks Ahead of US, European Votes
- SHP LN : Shire Rises; Bernstein Says Roche Has Adverse Events on ACE910
- SOP FP : Sopra Steria 3Q Organic Growth Up 4.7%; Confirms 2016 Forecast
- SCMN VX : Swisscom 3Q Profit Beats Ests.; Keeps Outlook Unchanged
- SREN VX : Swiss Re 3Q Net Better Than Expected, to Buy Back Up to CHF1b
- VIE FP : Veolia 9-Month Rev. Falls, Sees Stable Revenue for FY 2016
- VONN SW : Vontobel Sells 4% Helvetia Stake to Patria
- VOW3 GY : Volkswagen Financial Services Raises Forecast: Boersen-Zeitung
- VOw3 GY : VW Said to Near Agreement on Cost Savings Plans: Handelsblatt

>>> Europe : Brokers Upgrades & Downgrades - 3rd of November 2016

>>> Up
*BAT Raised to Overweight at Morgan Stanley
*BAE Raised to Overweight at Morgan Stanley, PT 630p
* Dixons Carphone Raised to Equal-Weight at Morgan Stanley
*Imerys Raised to Buy at AlphaValue
* Shell Raised to Overweight at JPMorgan
*Statoil Raised to Overweight at JPMorgan
*SYDBANK RAISED TO BUY AT NORDEA

>>> Down
*Eni Cut to Underweight at JPMorgan
*Galp Cut to Neutral at JPMorgan
*ISS CUT TO HOLD AT NORDEA
*Next Cut to Underperform at Credit Suisse, PT 4600p
* Repsol Cut to Underweight at JPMorgan
* Saras Cut to Equal Weight at Barclays
* Total Cut to Neutral at JPMorgan

>>> PT Change


>>> Initiation
*Cineworld Group Rated New Buy at HSBC, PT 720p
* Nets Rated New Neutral at UBS, PT DKK140
* Nets Rated New Overweight at Morgan Stanley, PT DKK160
* Nets Rated New Buy at Deutsche Bank, PT DKK150

>>> Call
>> Stock
*SHIRE ADDED TO EUROPE 1 LIST AT BOFAML

>>> Asian Update

Asia Mid-Session Market Update: China Caixin Services PMI improves while Hong Kong Composite PMI slumps; Sentiment stressed by reports of expanded FBI investigation of Clinton server


***US Session Highlights***
- (US) Oct ISM New York: 49.2 v 49.6 prior (3rd straight month below 50, in contraction)
- (US) OCT ADP EMPLOYMENT CHANGE: +147K V +165KE; back month revised above 200K
- (US) DOE CRUDE: +14.4M V +1ME; GASOLINE: -2.2M V -1ME; DISTILLATE: -1.8M V -1.5ME (largest crude build on record)
- FOMC holds target rate range at 0.25-0.50%; Statement repeats: case for rate hike has strengthened; near-term risks to economy 'roughly balanced'; **Dec rate hike probability still just under 70%

***US markets on close: Dow -0.4%, S&P500 -0.7%, Nasdaq -0.9%***
- Best Sector in S&P500: Consumer Goods
- Worst Sector in S&P500: Basic Materials
- Biggest gainers: ABC +8.8%, HSIC +6.2%, ZTS +6.1%, MCK +5.1%, DVN +4.9%
- Biggest losers: FTR -13.7%, CERN -7.3%, TGNA -7.2%, NRG -7.0%, EL -5.5%
- At the close: VIX 19.3 (+08pts); Treasuries: 2-yr 0.83% (flat), 10-yr 1.80% (-2bps), 30-yr 2.56% (-1bps)

***US movers afterhours***
- IQNT: Agrees to be Acquired by GTCR for $23/shr cash (37% premium) in $800M deal; 30 day go shop period; +34.1% afterhours
- ZUMZ: Reports Oct SSS +10.2% y/y; Raises Q3 $0.35-0.36 v $0.30e (prior $0.29-0.30); +9.5% afterhours
- TTWO: Reports Q2 $0.45 v $0.29e, R$420.2M v $405Me; +4.8% afterhours
- WFM: Reports Q4 $0.28 v $0.24e, R$3.5B v $3.51Be; Increases dividend; eliminates Co-CEO structure; appoints John Mackey CEO, effective immediately; +3.5% afterhours
- MRO: Reports Q3 -$0.11 (adj) v -$0.19e, R$1.23B v $1.09Be; +1.7% afterhours
- CAR: Reports Q3 $2.47 v $2.34e, R$2.66B v $2.62Be; +1.2% afterhours
- FSLR: Reports Q3 $1.22 v $0.69e, R$688M v $967Me; -0.8% afterhours
- ZNGA: Reports Q3 -$0.05 v $0.01e, R$182.4M v $188Me; Adds $200M buyback (8.5% of market cap); -2.6% afterhours
- WYNN: Reports Q3 $0.75 v $0.79e, R$1.11B v $1.13Be; -6.2% afterhours
- FB: Reports Q3 $1.09 (adj) v $0.98e, R$7.01B v $6.92Be; -7.1% afterhours
- DPLO: Reports Q3 $0.21 v $0.24e, R$1.18B v $1.26Be; -27.4% afterhours
- FIT: Reports Q3 $0.19 v $0.19e, R$503.8M v $504Me; CUTS FY16 guidance; -29.7% afterhours

***Asia Session Notable Observations, Speakers and Press***
- S&P500 futures, Mexican Peso fall and safe-haven JPY / US Treasuries rise as both Fox News and CNN report citing sources that FBI is considering indictment of Hillary Clinton related to her use of private server; "99% confidence" that server has been hacked by 5 foreign intelligence agencies.
- China Caixin Services PMI hits a 4-month high and Composite a 3-year high; Rate of employment reduction the slowest in 17 months and input prices rise at fastest rate in over 5 years; Resident economist urges supportive monetary/fiscal policies to continue so as to sustain the recovery.
- Hong Kong PMI falls to 3 month low and remains in contraction for 20 straight months; rate of decline in new work from mainland China the sharpest in 4 months and staffing costs rise for 2nd month amid lower new business inflows.
- Australia trade balance in deficit for 29th straight month, but deficit the smallest in 20 months; Imports fall 1% m/m while exports rise 2%, as shipments of Coal and value of exports to China rise to 1-year highs.
- ANZ up slightly despite lower Profit and Rev in FY16. NIMs down 4bps, ROE down 160bps, and final dividend reduced by 16% y/y.

***Asia Key economic data:***
- (CN) CHINA OCT CAIXIN CHINA SERVICES PMI: 52.4 V 52.0 PRIOR; 4-month high
- (HK) HONG KONG OCT COMPOSITE PMI: 48.2 V 49.3 PRIOR; 20th consecutive month of contraction; 3-month low
- (SG) SINGAPORE OCT PMI COMPOSITE: 50.5 V 52.9 PRIOR; lowest since May 2016
- (AU) AUSTRALIA SEPT TRADE BALANCE (A$): -1.2B V -1.7BE; 29th consecutive month of deficit, smallest deficit in 20 months
- (AU) AUSTRALIA OCT AIG PERF OF SERVICES INDEX: 50.5 V 48.9 PRIOR; first expansion in 3 months

***Asian Equity Markets (00:30ET)***
- Nikkei -1.8%, Hang Seng -0.1%, Shanghai Composite +0.6%, ASX200 flat, Kospi +0.3%

***FX ranges/Commodities/Futures/Fixed Income (00:30ET):***
- EUR 1.1090-1.1125; JPY 102.55-103.45; AUD 0.7635-0.7685; NZD 0.7280-0.7310
- Dec Gold +0.2% at 1,306/oz; Dec Crude Oil +0.9% at $45.74/brl; Copper +0.1% at $2.22/lb
- SLV: iShares Silver Trust ETF daily holdings fall to 11,148 tonnes from 11,235 tonnes prior ; 2-month low
- Equity Futures: S&P e-mini -0.3%, Dax -0.3%, FTSE100 -0.2%
- USD/CNY: (CN) PBOC SETS YUAN MID POINT AT 6.7491 V 6.7562 PRIOR; 2nd straight firmer setting; strongest Yuan setting since Oct 20th
- (CN) PBOC to inject CNY30B in 7-day reverse repos, CNY20B in 14-day reverse repos, and CNY20B in 28-day reverse repos

***Asia movers***
- Consumer discretionary: Wynn Macau 1128.HK -4.2% (Q3 result); Fairfax Media FXJ.AU -3.7% (guidance); Domino's Pizza DMP.AU +4.3% (Morgan Stanley raises PT); Reliance Worldwide Corp RWC.AU +0.7% (JPMorgan raised to overweight); Nine Entertainment Co Holdings NEC.AU +5.3% (Credit Suisse raised to outperform)
- Consumer staples: Warrnambool Cheese & Butter WCB.AU +5.2% (H1 result)
- Financials: Vanke 000002.CN +0.2% (Oct result); Hong Kong Exchanges & Clearing 388.HK -1.1% (Q3 result); BT Investment BTT.AU +4.5% (FY16 result); Guangzhou R&F 2777.HK +0.4% (Oct result); Scentre Group SCG.AU -0.6% (Q3 result); ANZ Bank ANZ.AU +0.5% (FY16 result)
- Industrials: Geely Automobile Holdings175.HK +0.7% (Oct result); Virgin Australia VAH.AU -1.3% (UBS cuts to sell); CSR CSR.AU +3.6% (Ord Minnett raised to hold); Boral BLD.AU -5.5% (guidance)
- Technology: Xero XRO.AU +2.7% (H1 result)
- Materials: Whitehaven Coal WHC.AU +1.5% (Credit Suisse raised to outperform)
- Energy: Sinopec Shanghai Petrochemical 338.HK -0.8% (JPMorgan cuts to neutral)
- Healthcare: Mayne Pharma MYX.AU +8.2% (starts selling sulfate extended-release tables in US);Unilife Corp UNS.AU -4.8% (Q4 result)

>>> US After Hours Summary: ZUMZ +10%, WMGI +5%, WFM +5% following ear


After Hours Summary: ZUMZ +10%, WMGI +5%, WFM +5% following earnings/guidance/SSS, IQNT +34% on acquisition news, MSCC +12% on sale speculation... FIT -30%, DPLO -27%, FB -7%, WYNN -6% following earnings/guidance/SSS

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance/SSS: AREX +22.2% (also announces strategic alliance and deleveraging transactions), HIIQ +14.7%, XENT +10.8%, KTOS +10.3%, ZUMZ +9.5% (reports October same store sales of +10.2%, raises Q3 EPS guidance), QGEN +7.8% (ticking higher), XPO +6.9%, AMRS +5.8%, AHP +5.6% (also appoints Richard J. Stockton as the CEO effective November 14, 2016), HUBS +5.6%, HDSN +5.6%, WMGI +4.9% (also enters into a Master Settlement Agreement to settle 1,292 specifically identified CONSERVE, DYNASTY or LINEAGE revision claims; final MSA settlement amount), TTWO +4.8%, UVE +4.8% (ticking higher), HBM +4.7%, ALL +4.1% (ticking higher), AVD +4%, WFM +5.2% (also announces changes to the leadership structure, including transitioning from co-Chief Executive Officers to a sole Chief Executive Officer, with co-Founder John Mackey to serve in that capacity), HOLX +3.2%, DVA +3.1%, APTI +3.1%, RIG +2.9%, OME +2.1% (also discloses in 10Q that in October it received a Civil Investigative Demand from the U.S. Department of Justice requesting information in connection with a False Claims Act investigation), KGC +1.8% (ticking higher), MRO +1.7%

Companies trading higher in after hours in reaction to news: TLOG +43.2% (TetraLogic Pharmaceuticals to sell its SMAC mimetic program, including its clinical stage asset birinapant, and its topical HDAC inhibitor, SHAPE, to Medivir for $12 mln in cash as well as future milestones of up to $153 mln), IQNT +34.1% (Inteliquent to be acquired for $23.00/share in cash or approx. $800 mln by an affiliate of GTCR), AUPH +20.2% (plans for a single Phase III clinical trial for voclosporin in the treatment of lupus nephritis), MSCC +12.1% (reports Microsemi has seen interest from Skyworks, may seek other bidders)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: FIT -29.7%, DPLO -27.4%, PLPM -21% (also authorized additional share repurchase), PACB -14.4% (also filed a complaint with the U.S. International Trade Commission against Oxford Nanopore Technologies Ltd. and its affiliates), ALIM -12.9%, RUBI -11.1% (also announces workforce reduction), ACLS -9.3%, TVIA -9.3% (light volume), PEIX -8.7%, FB -7%, FRSH -7%, WYNN -6.2%, TNH -5.8% (thinly traded), UNIS -4.7%, HOS -4.1%, PAGP -3.4%, DWCH -3.4% (earnings and update of strategic review of alternatives process), XEC -2.8%, CF -2.8%, FTK -2.7% (also announced a cooperative agreement with Anton Oilfield Services Group of Hong Kong providing a key entrance in the China and other key Eastern Hemisphere markets), AIG -2.6%, ZNGA -2.6%, GNK -2.6% (thinly traded), CLR -2.4%, GDDY -2.3%, HABT -1.8%

Companies trading lower in after hours in reaction to news: GPRO -5.4% (FIT sympathy), WING -2.5% (announces that a stockholder intends to offer for sale in an underwritten secondary offering 6,765,858 shares of the co's common stock pursuant to the co's shelf registration statement filed with the SEC), GPS -0.7% (announces CFO Sabrina Simmons will be leaving the company at the end of the year), SWKS -0.7% (reports Microsemi has seen interest from Skyworks, may seek other bidders), MRVL -0.5% (announces restructuring actions, including the elimination of approx. 900 positions, that it expects will lower annual operating expenses from a current annualized run rate of $1.08 billion to the $820-840 million range)

Casino/gaming names are under pressure following Wynn Resorts (WYNN) earnings: MGM -1.3%, MPEL -1.2%

>>> US Close Dow -0.43% S&P -0.65% Nasdaq -0.93% Russell -1.31%

Closing Market Summary: Election Jitters Weigh on Stocks

The stock market ended the midweek affair on a lower note as US election jitters overshadowed a largely in-line policy directive from the Federal Reserve. The Nasdaq Composite (-0.9%) finished behind the S&P 500 (-0.7%) and the Dow Jones Industrial Average (-0.4%).

The broader market began the day on a lower note as a downturn in crude oil and a negative bias in global bourses kept risk appetite in check. Participants also opted to move to the sidelines as the US presidential race tightened, according to recent polls.

A joint poll conducted by ABC News and the Washington Post had investors on the defensive yesterday as Republican nominee Donald Trump took a slight edge over Democratic nominee Hillary Clinton. The poll unnerved the broader market as participants had all but priced in a Clinton presidency. Today's read offered little solace as ABC News and the Washington Post indicated that the two candidates were neck-and-neck heading into the final week. Furthermore, an L.A. Times poll added to uncertainty, giving an edge to Mr. Trump. The CBOE Volatility Index (19.10, +0.54, +3.0%) is up roughly three points from last Friday's settlement, showing that volatility expectations are on the rise. 

Safe haven bonds, gold, and currencies gained on the developments as participants attempted to mitigate the impact of any surprise results from next Tuesday's election. The Treasury complex gained across the curve, exerting continued pressure on yields from multi-month highs. The yield on the benchmark 10-yr note declined three basis points to 1.80% while the yield on the 2-yr note slipped two basis points (0.82%). 

The pullback in yields failed to offer a reprieve for high-yielding sectors as real estate (-1.5%), utilities (-1.3%), and telecom services (-1.2%) continued their recent losing streaks.

Crude oil also extended early losses after the EIA confirmed a larger-than-expected build in crude oil inventories. The Department of Energy reported that crude oil inventories rose by 14.42 million barrels (consensus: +1.01 million) while gasoline stockpiles fell by 2.20 million barrels (consensus: -1.89 million). The energy component settled lower by 2.9% ($45.31/bbl; -$1.37).

The major averages saw some movement after the latest policy statement from the FOMC, but the S&P 500 ended near levels seen right before the release of the statement. The FOMC opted to leave the target range for the fed funds rate unchanged at 0.25% to 0.50% while stating that the case for moving rates higher had strengthened. Interestingly enough, only two FOMC members dissented at this meeting as Boston Fed President Eric Rosengren rejoined the majority.

The benchmark index finished near its worst level of the day, slipping below the psychological 2100 price level. All eleven sectors finished in the red with energy (-1.0%) and financials (-0.8%) representing notable laggards. 

The commodity-sensitive energy space (-1.0%) weighed as refining names underperformed Marathon Petroleum (MPC 41.00, -1.34) finished lower by 3.2%. On the other hand, Anadarko Petroleum (APC 60.14, +0.19) outperformed after being upgraded to "Outperform" from "Neutral" at Credit Suisse.

In the financial sector (-0.8%), banking names underperformed as falling interest rates and declining oil prices weighed. Wells Fargo (WFC 45.24,- 0.36) finished lower by 0.9%. The in-line policy statement from the Fed failed to upset the rate hike picture for the remainder of the year. Per the CME's FedWatch Tool, the implied probability of an interest rate hike at the December meeting rose to 71.5% from 68.4% in the prior session. 

The heavily-weighted technology sector (-0.7%) paced the retreat in the broader market as Facebook (FB 127.17, -2.33) and Alphabet (GOOG 768.70, -14.91) fell 1.8% and 1.9%, respectively. Facebook is scheduled to report its quarterly results this evening.

Biotechnology names weighed on the health care space (-0.5%) as Allergan (AGN 197.89, -10.76) and Gilead Sciences (GILD 72.51, -1.56) fell a respective 5.2% and 2.1%. Both names missed bottom-line estimates for the quarter. Conversely, Anthem (ANTM 122.99, +5.57) gained 4.7% as reaffirmed full-year guidance overshadowed below-consensus earnings. 

Today's trading volume was above the average of 865 million as more than 970 million shares changed hands at the NYSE floor.

Today's economic data included the weekly MBA Mortgage Index and the ADP Employment Report for October: 

  • The MBA Mortgage Index indicated that mortgage applications fell 1.2% in the week ending October 29. This followed a 4.1% decline in the prior week.
  • The ADP Employment Change report for October showed an estimated 147,000 positions were added to private sector payrolls in October versus the consensus estimate of 165,000.
    • The mitigating factor with the headline disappointment for October was the upward revision for September to 202,000 from an originally reported 

Tomorrow's economic data will include the 7:30 ET release of October Challenger Job Cuts. Meanwhile, weekly initial claims (consensus 256k) and the preliminary estimate of third quarter Productivity (consensus 1.8%) and Unit Labor Costs consensus 1.2%) will cross the wires at 8:30 ET. The day's data will be capped off with Factory Orders for September (consensus +0.2%) and ISM Services for October (consensus 55.8), which will be released at 10:00 ET. 

  • Dow Jones: +3.1% YTD
  • S&P 500: +2.6% YTD
  • Russell 2000: +2.5% YTD 
  • Nasdaq: +2.0% YTD

>>> FOmC

FOMC Full Statement

November 2, 2016 2:01 pm
Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid. Household spending has been rising moderately but business fixed investment has remained soft. Inflation has increased somewhat since earlier this year but is still below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation have moved up but remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The Committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo. Voting against the action were: Esther L. George and Loretta J. Mester, each of whom preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.

Implementation Note issued November 2, 2016

2016 Monetary Policy Releases

WSJ : U.K. Unlikely to Issue Significantly Longer-Dated Debt, Official Says

U.K. Unlikely to Issue Significantly Longer-Dated Debt, Official Says
Such deals don’t deliver value for taxpayers, head of Debt Management Office says

The U.K. is unlikely to follow other European governments in issuing ever longer-dated bonds, because such deals don’t deliver value for taxpayers, the official tasked with selling Britain’s debt said.

European governments have rushed to raise cash for increasingly lengthier periods this year as borrowing costs fall to record lows. Last week, Austria sold a €2 billion ($2.2 billion), 70-year bond at a yield of 1.53%, while Ireland and Belgium have both sold privately placed deals that don’t come due for a century.

The average maturity of European sovereign bonds sold so far this year is 11.3 years, up from 9.2 years in 2015, according to data provider Dealogic.


Longer-dated bonds tend to be popular with investors such as local pension funds and insurance companies, which buy them to match their liabilities. Because bonds with longer maturities carry more risk, they typically pay more income, which has made these securities more popular at a time when central bank buying has pushed down yields across fixed-income markets.

But Robert Stheeman, the head of the U.K.’s Debt Management Office, said that such headline-grabbing “trophy deals” can be expensive for the borrower.

“We’re pretty anti-trophy. My sense is, in the long run, that is likely to be better value for the taxpayer” not to do such deals, he said in an interview with The Wall Street Journal.

Mr. Stheeman said that the U.K. could sell longer-dated bonds if there was sufficient demand at cheap rates. But it is hard to predict where borrowing costs will be in the future.

“The problem with doing these deals based solely on the assumption that this will prove to be cheap financing in the future is you’re effectively saying you’re smarter than the market, as you have no way of knowing for certain ex ante what yields will actually do,” Mr. Stheeman said.

Mr. Stheeman pointed out that people thought interest rates were very low in 2010, but they have since fallen much further.

In 2012, then U.K. Treasury chief George Osborne announced plans to launch a 100-year deal. That year, the DMO consulted investors about such longer-dated bonds, as well as perpetual debt that doesn’t have a fixed maturity.

But the DMO concluded that selling debt at maturities significantly longer than its current 50- to 60-year range wouldn’t be cost-effective.

U.K. government bonds have been volatile since the country surprised markets by voting to leave the European Union in June. After a sharp initial rally, U.K. bonds led a selloff in global government debt last month. That was accompanied by a fall in sterling. A depreciating currency raises the risks of increased inflation, which eats into bond returns.

“It felt uncomfortable,” said Mr. Stheeman, a former banker who joined the Treasury in 2003. Usually, overseas investors would tend to buy more gilts as sterling weakened to counteract the shrinking value of their gilt holdings in foreign currency terms.

“I was worried a few weeks ago that we might face a situation where that relationship was breaking down when sterling and gilts were selling off together,” said Mr. Stheeman.

Gilts and sterling have both shown signs of stabilizing, albeit at lower levels. The pound was up 0.6% against the dollar at $1.2310 Wednesday. The yield on the 10-year gilt was down 0.06 percentage point at 1.219% as prices rose, according to Tradeweb. That came as investors’ sought safe-haven investments amid increased concern over the U.S. election.

NYT : As China Battles Corruption, Glaxo Lands in the Cross Hairs

As China Battles Corruption,
Glaxo Lands in the Cross Hairs
China sought to make an example of the GlaxoSmithKline
case, which involved bribery of doctors and investigators
and ended with guilty pleas and record penalties.


SHANGHAI — Peter Humphrey was in the bathroom of his Shanghai apartment when the police kicked the door off its hinges and knocked him to the ground. Nearly two dozen officers stormed his home. They confiscated files, laptops and hard drives related to his work as a corporate investigator.
Mr. Humphrey and his wife, Yu Yingzeng, were taken to Building 803, a notoriously bleak criminal investigation center normally reserved for human smugglers, drug traffickers and political activists. Sleep-deprived and hungry, he was transferred later that day to a detention house, placed in a cage and strapped to an iron chair. Outside, three officers sat on a podium and demanded answers.
Mr. Humphrey knew the reason for the harsh interrogation. He and Ms. Yu had been working for GlaxoSmithKline, the British pharmaceutical maker under investigation in China for fraud and bribery.
The Glaxo case, which resulted in record penalties of nearly $500 million and a string of guilty pleas by executives, upended the power dynamic in China, unveiling an increasingly assertive government determined to tighten its grip over multinationals. In the three years since the arrests, the Chinese government, under President Xi Jinping, has unleashed the full force of the country’s authoritarian system, as part of a broader agenda of economic nationalism.

Driven by the quest for profits, many multinationals pushed the limits in China, lulled into a sense of complacency by lax officials who eagerly welcomed overseas money. Glaxo took it to the extreme, allowing corruption to fester.

When bribery accusations surfaced, the company followed the old playbook, missing the seismic changes reshaping the Chinese market. Rather than fess up, Glaxo tried to play down the issues and discredit its accusers — figuring officials wouldn’t pay attention.
Along the way, there were bribes of iPads, a mysterious sex tape and the corporate investigator, who gave his operations secret code names. The company’s missteps are laid bare in emails, confidential corporate documents and other evidence obtained by The New York Times, as well as in interviews with dozens of executives, regulators and lawyers involved in the case.
The aftershocks of the Glaxo case are still rippling through China. The authorities have unleashed a wave of investigations, putting global companies on the defensive. The government has intensified its scrutiny of Microsoft on antitrust matters this year, demanding more details about its business in China. And just two weeks ago, the authorities detained a group of China-based employees, including several Australian citizens, working for the Australian casino operator Crown Resorts, on suspicion of gambling-related crimes.
Companies are racing to find new strategies and avoid getting locked out of China, the world’s second-largest economy after the United States. Disney and Qualcomm are currying favor with Chinese leaders. Apple redid its taxes in China after getting fined. Some multinationals are training employees in how to deal with raids.
The crackdown has prompted a complete rethinking for Glaxo — and for much of the pharmaceutical industry. To appease the government, drug makers have promised to lower prices and overhaul sales practices.
“For a long time, there’d been this policy of going easy on foreign enterprises,” said Jerome A. Cohen, a longtime legal adviser to Western companies. “The government didn’t want to cause embarrassment or give outsiders the impression that China is plagued with corruption. But they’re not thinking like that anymore.”
The Glaxo case was fueled by missed clues, poor communication and a willful avoidance of the facts. For more than a year, the drug maker brushed aside repeated warnings from a whistle-blower about systemic fraud and corruption in its China operations.
The company’s internal controls were not robust enough to prevent the fraud, or even to find it. Internally, the whistle-blower allegations were dismissed as a “smear campaign,” according to a confidential company report obtained by The Times.
Glaxo just wanted to make its problems go away. It offered bribes to regulators. It retaliated against the suspected whistle-blower. It hired Mr. Humphrey and Ms. Yu to dig into the woman’s background, family and government ties, as a way to discredit her. And Glaxo may even have gone after the wrong person, documents and emails obtained by The Times suggest.
Photo
Yu Yingzeng inside a police vehicle in Shanghai in August 2014. She and her husband, Mr. Humphrey, worked together and were arrested together. CreditAly Song/Reuters
None of it mattered. The allegations were true.
Prosecutors charged the global drug giant with giving kickbacks to doctors and hospital workers who prescribed its medicines. In 2014 Glaxo paid a nearly $500 million fine, at the time the largest ever in China for a multinational. Five senior executives in China pleaded guilty, including the head of Glaxo’s Chinese operations, a British national, in a rare prosecution of a Western executive. With Glaxo embroiled in scandal, sales plummeted in China, the company’s fastest-growing market.
Glaxo has declined multiple requests for comment, referring instead to earlier statements. Glaxo “fully accepts the facts and evidence of the investigation, and the verdict of the Chinese judicial authorities,” one statement read. “GSK P.L.C. sincerely apologizes to the Chinese patients, doctors and hospitals, and to the Chinese government and the Chinese people.”
Mr. Humphrey and Ms. Yu, both in their late 50s at the time of their arrests, were punished too. The couple spent two years in prison for illegally obtaining government records on individuals.
Mr. Humphrey was crowded into a cell with a dozen other inmates. There were no beds or other furniture, just an open toilet and a neon light overhead. During his incarceration, Mr. Humphrey said, he suffered back pain, a hernia and a prostate problem that was later diagnosed as cancer.
“I was in a state of complete shock and breakdown,” said Mr. Humphrey, who was released along with his wife in July 2015. “I was physically broken down and mentally blown away. I didn’t sleep for 45 days.”
Photo
About seven weeks after Peter Humphrey was arrested in China, he and his wife, Yu Yingzeng, appeared on China Central Television. They spent about two years in prison.
A Whistle-Blower Emerges
An anonymous 5,200-word email in January 2013 to the Glaxo board laid out a detailed map to a fraud in the Chinese operations.
Written in perfect English, the email was organized like a corporate memo. Under the header “Conference Trip Vacations for Doctors,” the whistle-blower wrote that medical professionals received all-expenses-paid trips under the guise of attending international conferences. The company covered the costs of airline tickets and hotel rooms, and handed out cash for meals and sightseeing excursions.
In a section labeled “GSK Falsified Its Books and Records to Conceal Its Illegal Marketing Practices in China,” the email explained how Glaxo was pitching drugs for unapproved uses. As an example, the whistle-blower said the drug Lamictal had been aggressively promoted as a treatment for bipolar disorder, even though it had been approved in China only for epilepsy.
Glaxo “almost killed one patient by illegally marketing its drug Lamictal,” said the email, which was obtained by The Times. “GSK China bought the patient’s silence for $9,000.”
The email was one of nearly two dozen that the whistle-blower sent over the course of 17 months to Chinese regulators, Glaxo executives and the company’s auditor, PricewaterhouseCoopers.
How the Case Unfolded
JANUARY 2013 The whistle-blower sends a 5,200-word email to the Glaxo chairman, senior executives and the company’s outside auditor. The email, like the previous ones to authorities, describes a systemic fraud and bribery scheme. The allegations are dismissed by the company as a “smear campaign.”
When the authorities pressed Glaxo, the company was dismissive. It failed to properly investigate the allegations. It didn’t beef up its internal controls. And it didn’t change its marketing practices.
The decision was calculated. In the decades since China began opening its economy, most multinationals had avoided scrutiny over bribery. China needed overseas companies to help develop its economy, by setting up manufacturing operations and creating jobs. The authorities were reluctant to jeopardize investment, so they took a softer approach to enforcement.
When companies did run into trouble, fines were tiny. The rare cases tended to be colored by politics. Seven years ago, the Chinese authorities detained executives from the global mining giant Rio Tinto on suspicion of stealing state secrets. The charges were eventually downgraded to bribery, and the company avoided punishment.
By the time Glaxo’s fraud bubbled to the surface, China had changed.
Over the last decade, China has emerged as an economic powerhouse, but it took off even more as the rest of the world slowed after the financial crisis. That gave China the upper hand with overseas companies, which were increasingly dependent on profits from the country’s growing consumer base.
The economic might coincided with the Communist Party’s increasingly nationalistic stance. The authorities in China, already undertaking a severe crackdown on Chinese companies, wanted to show that, like American regulators, they could also penalize and sanction global companies.
And it was no secret that big drug makers were violating the law in China.
Years earlier, the consulting firm Deloitte warned about rampant corruption in China’s pharmaceutical market. As Deloitte found, doctors and health care workers were poorly compensated, so they could easily be induced to write more prescriptions with offers of cash, gifts, vacations and other benefits. Big drug makers, eager for growth, willingly obliged.
“The remarkable thing is that China is a more hospitable environment to this type of corruption, because it’s a market where doctors and hospitals are heavily reliant on drug sales,” said Dali Yang, who teaches at the University of Chicago and has studied the industry. “They were like fish swimming in water.”
American investigators had punished several major drug companies for such behavior abroad. In 2012, Eli Lilly agreed to pay $29 million, and Pfizer $45 million, to settle allegations that included employees’ bribing doctors in China. In settling the cases, neither company admitted or denied the allegations.
That summer, Glaxo agreed to pay $3 billion in fines and pleaded guilty to criminal charges in the United States for marketing antidepressants for unapproved uses, failing to report safety data on a diabetes drug and paying kickbacks. The case was built off tips from several whistle-blowers.
After that, Glaxo’s chief executive, Andrew Witty, pledged, “We’re determined this is never going to happen again.”
But it did — in China.
Photo
Prime Minister David Cameron of Britain, right, speaking to Andrew Witty, chief executive of GlaxoSmithKline, during a visit in March 2012 to one of the company’s plants in Ulverston, northern England. CreditJames Glossop/Reuters
Redirecting Bribes
In early 2013, Glaxo realized it couldn’t ignore the problems. The authorities were asking questions. The whistle-blower continued to send emails.
So the company tried another common gambit in China: bribing officials.
The company set up a special “crisis management” team in China and began offering money and gifts to regulators.
That strategy had worked in the past. A company, often using a middleman, would try to soothe officials and regulators, offering gifts and favors.
One government agency had received multiple emails from the whistle-blower, and Glaxo targeted multiple branches of the agency, according to state media reports. One executive tried to cozy up to a Shanghai investigator with an iPad and a dinner totaling $1,200, another Glaxo employee said in a statement to the police. When that executive asked for money to bribe the Beijing branch, Mark Reilly, the head of the company’s Chinese operations, gave the “go ahead.”
Another executive with Glaxo’s Chinese operations bribed regulators to focus on “unequal competition,” rather than a more punitive investigation into “commercial bribery.” The goal, that executive admitted in a statement, was to limit any potential fine to about $50,000. It didn’t work.
As pressure mounted, the case took a bizarre turn, setting Glaxo on a collision course with the government.
In March 2013, Glaxo’s chief executive and five other senior executives in the company’s London headquarters received an anonymous email with a media file. In it, a grainy video showed Mr. Reilly, the executive in China, engaged in a sexual act with a young Chinese woman.
The attached email alleged that Mr. Reilly, a British national who had helped manage the company’s China operation for four years, was complicit in a bribery scheme tied to a travel agency called China Comfort Travel, or C.C.T. According to the email, Glaxo funneled money through the travel agency to pay off doctors. The travel agency also supplied Mr. Reilly with women, as a way to secure that business.
“In order to acquire more business, C.C.T. bribed Mark Reilly, the general manager of GSK (China) with sex,” the email said. “Mark Reilly accepted this bribery and made C.C.T. get the maximized benefits in return.”
Glaxo later discovered that the video had been shot clandestinely, in the bedroom of Mr. Reilly’s apartment in Shanghai. Analysts working for the company said it had been edited to disguise the location.
Glaxo executives in London were shocked. They deemed the video a serious breach of privacy, involving a possible break-in at the home of a senior executive in China. Mr. Reilly moved to a more secure residence.
Project Scorpion
Like many global companies, Glaxo has a code of conduct that encourages employees to report fraud or wrongdoing without fear of retaliation by the company. In many countries, including China, the rights of whistle-blowers are protected by law.
Glaxo didn’t seem to care.
By the time the video surfaced, Glaxo already had its suspicions about the identity of the whistle-blower. Months earlier, the company had fired Vivian Shi, a 47-year-old executive handling government affairs in Glaxo’s Shanghai office. The official reason for Ms. Shi’s firing was falsifying travel expenses. In fact, she was dismissed because the company believed she was the whistle-blower, according to confidential corporate documents obtained by The Times.
Ms. Shi did not return multiple calls for comment.
After receiving the video, Glaxo took more aggressive action, seeking to discredit Ms. Shi, who had already left the company.
How the Case Unfolded
MARCH 2013 Top Glaxo executives in London receive another whistle-blower email, this time showing Mark Reilly, the head of the company’s operations in China, engaged in a sexual act in his apartment.
At that point, in the spring of 2013, the company turned to Mr. Humphrey, the investigator. He ran ChinaWhys, a small risk consultancy firm that advised global companies like Dell and Dow Chemical.
His firm was engaged in what he called “discreet investigations,” helping multinationals cope with difficult situations like counterfeiting and embezzlement. Short in stature, with a shock of white hair, Mr. Humphrey portrayed himself as a kind of modern-day Sherlock Holmes.
“He likes a good adventure and likes solving cases,” said his friend Stuart Lindley, who runs a financial services company in China. “But he was definitely aware that some of that stuff was risky.”
In April 2013, Mr. Reilly met with Mr. Humphrey at Glaxo’s glass office tower near People’s Square in central Shanghai. According to meeting notes obtained by The Times, they discussed the emails, the sex video and Ms. Shi, the suspected whistle-blower. Mr. Reilly told the investigator that she held a grudge against Glaxo.
At the meeting, Mr. Reilly asked the investigator to look into the break-in at his apartment. But he made clear that he also wanted to assess what power and influence Ms. Shi might have with the government.
Legal experts say Mr. Reilly should not have been put in charge.
“The executive so accused has an obvious conflict of interest in overseeing such an investigation,” said John Coates, a Harvard Law School professor. “Even if the executive were entirely innocent of the whistle-blower’s charge, giving that same executive the role of investigating the whistle-blower smacks of retaliation.”
Efforts to reach Mr. Reilly, who has since left the company, were unsuccessful.
Using the code name Project Scorpion, Mr. Humphrey and his staff spent the next six weeks working undercover, gathering evidence. They visited Lanson Place, the upscale apartment complex where Mr. Reilly lived when the sex tape was made. They created a dossier on the suspected whistle-blower, searching for motives and ties to high-ranking officials or regulators. They interviewed former co-workers, scrutinized her résumé and scoured the web for information about her father, a former health official.
Glaxo may have crossed a line in this regard, putting the company more sharply in the government’s sights.
As part of the investigation, Mr. Humphrey turned to a Chinese detective to acquire a copy of Ms. Shi’s household registration record, or hukou. The official document contained information about her husband and daughter. The authorities had warned private detectives about acquiring confidential government documents.
“This type of household information is supposed to be private,” said John Huang, a former government official who is now managing partner at McDermott, Will & Emery in Shanghai. “But people were buying and selling it.”
Glaxo got little payoff from the investigation.
On June 6, 2013, Mr. Humphrey delivered a 39-page report to Glaxo that said Ms. Shi was probably the whistle-blower and even had a “track record of staging similar attacks” at a previous job. But the report included no evidence linking her to the emails or the sex video, according to a draft obtained by The Times.
Glaxo’s strategy of bribery and discrediting ultimately failed.
With the Chinese government in the midst of a crackdown on corruption, the police carried out a series of raids on June 27, 2013. They seized files and laptops from multiple Glaxo offices and interrogated dozens of employees. In Shanghai, four senior executives were detained. Investigators also raided the offices of several travel agencies that had worked closely with Glaxo, including China Comfort Travel.
A week later, the police stormed Mr. Humphrey’s apartment in Shanghai. He and his wife were charged with violating privacy laws.
Mr. Humphrey declined to comment on the specifics of the Glaxo case. His son defended his work, saying Glaxo engaged him “under false pretenses.” “My father is an honorable and law-abiding man,” said the son, Harvard Humphrey.
When prosecutors announced the case against Glaxo in July 2013, several weeks after arrests began, their allegations closely mirrored those of the whistle-blower. They described an elaborate scheme to bribe doctors and workers at government-owned hospitals using cash that had been funneled through a network of 700 travel agencies and consulting firms.
“It’s like a criminal organization: There’s always a boss, and in this case GSK is the boss,” said Gao Feng, one of the lead investigators.
Glaxo said little about the developments until July 15, when several high-ranking executives confessed from prison on state-run television. After that, the company capitulated, issuing a blanket statement for its misdeeds: “These allegations are shameful and we regret this has occurred.”
Cleaning Up Corruption
Photo
In this screenshot, Mark Reilly, center, the head of Glaxo’s operations in China, was escorted by the police to the courtroom to hear his sentence in September 2014 at the Changsha Intermediate People’s Court in the Hunan Province in central China. CreditImaginechina
Dressed in a dark suit and a blue tie, Mr. Reilly, the Glaxo executive, was led in handcuffs into a small courtroom in the city of Changsha, in central China, in September 2014. With security guards behind him, he stood alongside four other senior Glaxo executives as a judge read the charges.
“The defendant company GSKCI is guilty of bribing nongovernment personnel and will be fined 3 billion yuan,” the judge, Wu Jixiang, said sternly, referring to Glaxo’s Chinese name. The company and the executives, having confessed, were given relatively light sentences, the court said.
Mark Reilly was sentenced to three years in prison and ordered to be expelled from China.
After handing down that sentence, the judge turned to Mr. Reilly.
“Do you obey the court’s verdict? Do you appeal?” he asked.
Mr. Reilly said that he would not challenge the verdict. Because he was swiftly deported, he will not serve prison time in China.
Glaxo is still trying to clean up the mess.
In China, Glaxo has promised to overhaul its operations and has put in place stricter compliance procedures. The company has changed the way its sales force is compensated and has eliminated the use of outside travel agencies.
Glaxo has also tightened oversight of expenses and cash advances, areas central to the case. Employees must now send in photographs of the guests and food, to verify that the meetings took place.
And in August 2015, Glaxo tried to make amends by rehiring Ms. Shi, an acknowledgment that the company had erred in firing an employee suspected of being a whistle-blower.
But the decision also hinted at a more troubling admission — that Glaxo had targeted the wrong person. There are indications that Ms. Shi was not the whistle-blower, and that there may have been more than one person.
The emails sent to regulators were written in fluent English and came mostly from a Gmail account. The email with the sex video came from a local Chinese account and was written in poor English. The only similarity was the anonymity.
The Times sent emails to both accounts and got a response from just one, the person who had written the detailed emails to the Chinese authorities and Glaxo. “You have reached who you are looking for,” the person replied.
In a series of exchanges, the author denied being Ms. Shi, acting in concert with her or sending the video. The person said Glaxo had erroneously blamed Ms. Shi for the emails and never found the actual whistle-blower.
The Times was unable to verify the identity of the person, who described working in Shanghai but declined to come forward for fear of retribution.
“I didn’t reveal to GSK personnel that I was the whistle-blower because doing so would have placed me in potential physical jeopardy,” the whistle-blower wrote in an email to The Times. “You understand that criminals — you know that they were convicted later in Chinese courts — were in charge of GSK China at that time, and I truly believe that they would have harmed me in some fashion had they discovered my identity. ”