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Asian Mid-session Market Update: Bank of Korea out with a surprise rate cut; New Zealand and Brazil central banks on hold

***Economic Data***

- (NZ) NEW ZEALAND CENTRAL BANK (RBNZ) LEAVES OFFICIAL CASH RATE UNCHANGED AT 2.25%; AS EXPECTED

- (KR) BANK OF KOREA (BOK) CUTS 7-DAY REPO RATE BY 25BPS TO 1.25% (record low); NOT EXPECTED; First rate cut in 12 months

- (BR) BRAZIL CENTRAL BANK (BCB) LEAVES SELIC TARGET RATE UNCHANGED AT 14.25%; AS EXPECTED

- (CN) CHINA MAY CPI Y/Y: 2.0% V 2.2%E (4-month low)

- (CN) CHINA MAY PPI Y/Y: -2.8% V -3.2%E (51st consecutive month of decline, smallest decline since Nov 2014)

- (JP) JAPAN APR MACHINE ORDERS M/M: -11.0% (biggest decline in 5 months) V -3.0%E; Y/Y: -8.2% (biggest decline in 17 months) V -1.8%E

- (JP) JAPAN MAY M2 MONEY STOCK Y/Y: 3.4% (7-month high) V 3.3%E; M3 MONEY STOCK Y/Y: 2.8% V 2.7%E

- (UK) MAY RICS HOUSE PRICE BALANCE: 19% V 35%E

***Index Snapshot (as of 04:30 GMT)***

- Nikkei225 -1.2%, S&P/ASX -0.5%, Kospi -0.2%, Shanghai Composite closed, Hang Seng closed, Jun S&P500 -0.2% at 2,115,

***Commodities/Fixed Income***

- Aug gold +0.3% at $1,266/oz, Jul crude oil +0.6% at $51.54/brl, Jul copper +0.6% at $2.07/lb

- JGB: (JP) Japan MoF sells ¥2.18T in 0.1% (0.1% prior) 5-year JGBs; Avg yield: -0.232% v -0.225% prior; Bid-to-cover: 4.66x (highest rate since Aug 2014) v 4.15x prior

- (JP) Japan investors bought net ¥894B in foreign bonds v sold ¥549B in prior week; Foreign investors sold net ¥97.8B in Japan stocks v sold ¥175B in Japan stocks in prior week

***Market Focal Points/FX***

- Trifecta of interest rate decisions in the Asia session kept produced some notable surprises and offered some macro volatility, even with markets in China out for the holidays. RBNZ decision was practically a coin flip, and a Neutral Hold sparked a 120pip rally in NZD/USD. Korean central bank cut for the first time in 12 months, calling the policy move "preemptive", while Brazil central bank signaled the recent progress on inflation may soon allow more flexibility with some room to ease. US futures point to a lower open with a 4pt slide below 2,115 as investors note retreat in China inflation data, large declines in Japan's forward looking machinery orders, and reports that George Soros has returned to trading with a large bearish bet on stocks due to concerns over slowdown in global economy. In FX majors, USD/JPY is down about 40pips below 106.60, AUD/USD is at the bottom of a 40-pip range that was capped at technically-pivotal $0.75 level, and NZD/USD seems to defy gravity after spiking to a 1-year highs above 0.7140.

- Although China market were closed for Dragon Boat Festival, Beijing released its May inflation data. As signaled in input price components of the latest PMI figures, inflation eased after several months of steady increases. CPI fell to a 4-month low of 2.0% y/y, as m/m contracted by -0.5% v -0.2% prior. Non-food CPI was unchanged at 1.1%, while food component slowed to 5.9% y/y v 7.4% prior. Wholesale PPI data remains in negative territory for over 4 years, though the declines were the lowest since late 2014.

- RBNZ was on hold at 2.25% but did not signal an imminent rate cut as was speculated even by those analysts who predicted no-change. Instead, RBNZ added that inflation will "strengthen reflecting the accommodative stance of monetary policy, increases in fuel and other commodity prices, an expected depreciation in NZD", and also upgraded its quarterly projections for CPI by 0.2pts for 2016-end and 2017-end to 1.3% and 2.0% respectively. The statement still maintained that further easing may be required, and subsequent comments from Gov Wheeler indicated that another rate cut is still built into projections. However, NZD was bid sharply higher as the central bank sent a message of inflation expectations stabilizing, and even more mentions of potential for more macro-prudential policy easing did little to sway sentiment away from the communicated neutral stance due to discomfort with housing inflation.

- Bank of Korea's 25bp rate cut was a major surprise, considering that last month's decision was unanimous after 2 members called for a cut back in April. Instead, today's decision also saw no dissent, as BOK statement expressed concern with rising household debt, slowdown in inflation (even if it was mainly due to agricultural increase), weakening consumption, and ongoing decline in exports. BOK Gov Lee spoke extensively after the decision, stating that growth projections are now expected to train the latest forecasts in April, economy is yet to show a clear recovery, corporate restructuring poses a threat to labor, and outflows from emerging markets are a risk due to anticipated Fed tightening.

- Brazil central bank was more in line with expectations, but even here there were hints of impending policy change. BCB noted there has been progress in fight against inflation, particularly its 2nd-round effects, suggesting that the high policy rate of 14.25% may finally see some relief.

- BOJ Dep Gov Nakaso also spoke at length ahead of next week's policy meeting, noting growing downside risks from overseas and commitment to add to easing if needed. Nakaso added there was no change to commitment to meet 2% target at earlier time possible, even with increase in monitoring of the health of JGB market in the environment of negative interest rates.

***Equities***

US equities / ADRs:

- EVHC: Said to be in merger discussions with Amsurg; deal may be announced next week - press; +9.1% afterhours

- EAT: Affirms FY16 near low end of $3.55-3.65 v $3.54e; Sees SSS to improve from Q3 but remain negative; Guides FY17 $3.40-3.50 v $3.45e; +5.5% afterhours

- ABM: Reports Q2 $0.31 adj v $0.28e, R$1.26B v $1.25Be; +3.6% afterhours

- SRPT: Announces proposed offering of $37.5M in common stock (~3% of market cap); -0.7% afterhours

- RH: Reports Q1 -$0.05 v $0.05e, R$455M v $459Me; Cuts FY16 guidance; -18.8% afterhours

Notable movers by sector:

- Consumer discretionary: Surfstitch Group SRF.AU -25.9% (guidance)

- Industrials: Amcor AMC.AU -7.9% (guidance); Southern Cross Electrical Engineering SXE.AU +18.6% (acquisition)

- Technology: LG Electronics Inc 066570.KR +4.4% (to become electric car part supplier to VW); Samsung SDI Co 006400.KR +1.4% (may supply batteries to Tesla); Toshiba Corporation 6502.JP +4.4% (Westinghouse confirms deal for nuclear reactors)

- Materials: Itochu Corp 8001.JP -1.4% (acquisition)

- Energy: Liquefied Natural Gas LNG.AU +4.4% (speculation of takeover interest)

- Telecom: Softbank Corp 9984.JP -2.0% (plans to merge certain units); Telstra Corp. TLS.AU -1.3% (considers sale of Autohome stake)

Signs of Bigger Islamic State Cell in Germany Emerge

Man detained in France testified to being part of a terror cell of between 10 and 20 people, officials say

A man who was detained in France and exposed an Islamic State terror cell in Germany told authorities that the cell contained many more people than the three arrested last week, according to officials familiar with his testimony.

The revelations, part of new details emerging about the arrested suspects, add to concerns that the extremist group could be poised to strike again in Europe.

Authorities in France, Germany and the Netherlands are examining testimony from Saleh A., who walked into a police station in the north of Paris in February claiming that he was part of an Islamic State sleeper cell of between 10 and 20 people, officials familiar with the investigation said. Based on his testimony, German police last week arrested three suspected Islamic State members who arrived in the country among Syrian asylum seekers on suspicion of preparing an attack in the western Germany city of Düsseldorf.

“Saleh A.’s statements are central” to the investigation, one German official familiar with the investigation said. German and French authorities have worked closely together on the case, the person said, adding that German investigators had been able to question Saleh A.

Saleh A. told French police that his terror cell was awaiting instructions from a certain Abu Doujana Al Tunisi, supposedly the head of foreign fighters for Islamic State, and that around 20 people were members of the cell, according to a French official. Another official familiar with the probe said Saleh A. had told investigators about 10 people would participate in the attack in Düsseldorf.

The incomplete dismantling of a cell could be a hazard in itself. Belgian police, for instance, say there is evidence the March arrest of Salah Abdeslam—the sole surviving member of the group that attacked Paris on Nov. 13—in Brussels persuaded his still-at-large accomplices to accelerate their plans for an attack.

Those accomplices had been preparing to strike France again, but when authorities published several of their names, they decided the risk of traveling to France was too great, according to testimony provided by one of Mr. Abdeslam’s accomplices. Days later, they set off bombs at Brussels Airport and in the Brussels metro, leaving 32 people dead.

Last week’s arrests have heightened concerns—once dismissed as unlikely by German security officials—that Islamic State could have smuggled hundreds of fighters among the 1.2 million refugees who have arrived in Germany since the start of last year, and that some could have Europe’s most populous country in their sight.

At least three of the alleged members of the cell had been living in migrant shelters in different states.

Saleh A. had been registered in a refugee camp in Kaarst, a small town near Düsseldorf, since late March 2015, said Stephan Adams, who runs the office of the town’s mayor. His file shows he wasn’t always present in the housing block he shared with other refugees, Mr. Adams said. His request for asylum was still being processed, he added.

At least two of the suspects arrested in Germany last week had also lived in migrant shelters. One of them, Mahood B., had lived in a refugee shelter in a quiet middle-class neighborhood of Mülheim in western Germany, a German official said. The man, identified as a 25-year-old Syrian national, had been registered in this shelter since late 2015, the person said.

The other, 27-year-old Hamza C., had lived in a migrant shelter in the small eastern German town Bliesdorf.

Another suspect named Abd Arahman A.K., a 31-year-old who according to the prosecutor had built explosive vests already in 2013 back in Syria, had been living in a privately rented apartment in the southwest German town of Leimen, according to the town’s mayor Wolfgang Ernst. The prosecutor’s office said he had come to Germany in October 2014. It was unclear whether he had requested asylum.

The German prosecutor last week said Saleh A. and Hamza C. had joined Islamic State in Syria in the spring of 2014. There, they received the order from the organization’s leadership to carry out an attack in the pedestrian zone of Düsseldorf, the prosecutor said. After receiving the orders, both traveled to Turkey and then separately to Germany via Greece, the office said.

The two men allegedly planned for two suicide bombers to blow themselves up on one of the main streets in the center of the city. “Further attackers” were supposed to “kill as many passersby as possible with guns and further explosives,” the prosecutor’s office said in its release last week. The German prosecutor’s office added that there was no indication the suspects had already begun concrete preparations for their plan.

Even after the arrests, questions remain about the identity of some of the presumed attackers.

The nationality of Hamza C., who according to the prosecutor is Syrian and had arrived at a migrant shelter an hour outside Berlin in September, was marked as “undetermined” in his file, the country’s migration commissioner Thomas Berendt said. Another German official said that two of the suspects are thought to have used fake identities but declined to say which ones.

German officials have warned for months that the chaotic situation under which thousands of migrants were let into the country without any background checks during the peak of the migrant crisis meant authorities were in the dark about who many of the new arrivals were.

Authorities in the Netherlands say they are also investigating Saleh A.’s disclosure that some members of the suspected Islamic State sleeper cell were staying at a refugee camp in Nijmegen, a city close to the German border.

“We cannot rule out that terrorists, despite our precautions, succeed in abusing the Dutch asylum procedure or refugee stream,” Dutch Justice Minister Ard van der Steur said Tuesday in a parliamentary session. “This case underscores concerns about the travel movement of terrorists.”

China’s Deal Makers Have German Tech Firms in Their Sights

Chinese investors have sought to buy German companies at a rate of roughly one a week this year

FRANKFURT—Chinese companies are on course to set record investment levels in Germany this year, fueling concerns about the country losing hold of its most innovative and technologically advanced companies.

Since the start of the year, Chinese investors have sought to acquire German companies at a rate of roughly one a week, according to data provider Dealogic.

They have offered to buy 24 companies, less than six months into 2016, and at this pace will soon surpass the record 28 German acquisitions racked up in 2014.

The deals have already achieved a new high in terms of spending.

By mid-May, Chinese investors had offered the equivalent of $9.1 billion for German companies, well beyond the record $2.6 billion splashed out in 2014, according to Dealogic.

Behind the surge are China’s rising labor costs and shifting demographics, which have slowed domestic growth.

“Now that China’s wage advantage has gone, the government has realized it’s important to create world leaders in markets, to build the empire basically,” said Andreas Grille, a principal in consultancy Roland Berger’s investment-banking practice.

The splurge is drawing attention less for the sums involved than the targets, some of which are considered pivotal to Germany’s ambitions in manufacturing and engineering technology. Several are touted as crucial players in a national initiative to digitize manufacturing and link factories to consumers via the internet, called Industrie 4.0.

The transactions also come at the same time European industry more broadly is complaining about difficulties doing business with China. The European Union Chamber of Commerce in China, representing 1,600 companies, said Monday that the environment there is becoming more “hostile” toward foreign companies, and remains skewed in favor of domestic competitors.

“We completely open up our markets, but the Chinese don’t open theirs to us. That could prove fatal in the long run,” said Daniel Bauer, spokesman for SdK, a German investor-protection association.

The deal that has irked Germany most is a $5 billion bid by Midea Group Co. , a Chinese appliance maker, for robotics specialist Kuka AG .

It is the latest example of a Chinese company seeking to buy into Germany’s pioneering technological and research prowess.

“I think the Kuka takeover raises some questions,” said Roland Klose, a professor at FOM Institute of Strategic Finance in Essen, Germany.

“Automation and Industrie 4.0 are supposed to be of long-term, strategic importance for German industry, [and] the €4.4 billion for Kuka isn’t much money for access to key technologies.”

Shareholder associations and German unions have also expressed concern, and last week German Economics Minister Sigmar Gabriel proposed forming a European consortium to launch an alternative bid for Kuka. On Wednesday Mr. Gabriel suggested tougher rules for investors from restrictive economies, without mentioning China specifically.

“We must consider we have one of the most open economies in Europe and are competing with companies that don’t come from open market economies,” Mr. Gabriel said.

Other recent proposed or completed Chinese deals in Germany include China National Chemical Corp.’s $1 billion takeover of KraussMaffei Group, a cutting-edge equipment maker that processes plastics and rubber, and Beijing Enterprises Holdings Ltd.’s $1.59 billion takeover of EEW Energy from Waste, which operates high-tech waste-incineration plants that produce electricity, heat and steam for industrial use.

Some Germans say their country is naive to leave its markets open to Chinese companies. “When Kuka’s development partners know its ownership has changed, they may reconsider their cooperation on certain innovations, given some of the information flows could be directed back to the Chinese owner,” said Mr. Grille at Roland Berger.

Germany ranks second in investment value of Chinese acquisitions in Europe this year behind Switzerland, according to Dealogic. Switzerland’s 11 Chinese deals, valued at $48.81 billion, were dominated by a $43 billion bid by China National Chemical—known as ChemChina—for Swiss agrochemical company Syngenta AG in February.

So far this year, 24 of a total 119 pending or completed Chinese acquisitions in Europe have been in Germany, putting it ahead of 15 each in France and the U.K., according to Dealogic. Last year showed a similar pattern.

“China is looking to improve its advanced manufacturing capability, with more digitization and automation. German firms are world leaders at this,” said Margot Schüller, senior research fellow at the GIGA Institute of Asian Studies in Hamburg.

Germany and Europe will have to get used to China’s increased presence, said Yi Sun, a partner at Ernst & Young, where she leads a team advising Chinese companies on investing in Germany, Austria and Switzerland. “Chinese companies are getting more successful at takeovers, especially because these firms are getting experienced. There are plenty more deals in the pipeline,” Ms. Sun said.

The German takeovers are part of a buying campaign that has made China the world’s top foreign acquirer to date in 2016. If it finishes in first place, it would dislodge the U.S. from the top spot it has held since 2007.