After Hours Summary: AGLE +15% after receiving Fast Track designation by the FDA; PLCM +11% following receipt of revised non-binding proposalAfter Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: NDSN +6%
Companies trading higher in after hours in reaction to news: AGLE +14.9% (receives Fast Track Designation from the FDA for its lead investigational molecule, AEB1102), PLCM +10.8% (receives revised non-binding proposal), SPWR +1.2% (SunPower and Total (TOT) sign power purchase agreement for the supply of 300 gigawatt hours per year of clean solar energy to Metro of Santiago)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: XGTI -17.8%
Companies trading lower in after hours in reaction to news: SSW -8% (to offer 5 mln common shares in underwritten registered public offering; CEO and director to purchase $15 mln of the offering), WMGI -2.8% (announces 6.2 mln orinary share offering by selling shareholders), BAH -2.4% (commences 13 mln common stock offering by selling shareholder The Carlyle Group)
Civil Antitrust Lawsuits Reinstated Against 16 Banks in Libor Case
Appeals court restores private suits against Bank of America, J.P. Morgan Chase, Citigroup and others
In a setback for some of the world’s largest financial institutions, a U.S. appeals court on Monday reinstated the private antitrust lawsuits filed against 16 banks for allegedly rigging Libor interest rates.
The ruling from the Court of Appeals for the Second Circuit reverses a lower court decision from 2013, in which U.S. District Judge Naomi Buchwald dismissed the claims because she said the banks’ alleged conduct did not violate federal antitrust laws.
The lawsuits accuse 16 major banks—including J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—of collusion in manipulating the London interbank offered rate, or Libor, to the detriment of the banks’ consumers.
The plaintiffs, who owned various financial instruments that were affected by Libor, claim the returns on their investments were depressed by the banks’ collusion. The lawsuits were filed by several groups of plaintiffs, including the local governments of cities like Baltimore, San Diego and Houston.
Judge Buchwald had dismissed the antitrust claims, saying the plaintiffs failed to show they were injured by the alleged rate manipulation. She said that because setting Libor was a “cooperative endeavor,” there could be no anticompetitive harm to consumers.
But the appeals court Monday disagreed and kicked the case back to the lower court for further proceedings. A three-judge panel found that the plaintiffs did show an antitrust injury “by alleging that they paid artificially fixed higher prices.”
Judge Buchwald in 2013 had allowed other claims by the plaintiffs to proceed, including allegations that the banks breached commodities laws, but the antitrust claims were a central part of the litigation, as violations can require a defendant to pay triple damages.
The appellate judges noted that the plaintiffs will still have to prove at a later stage whether the allegedly corrupt Libor rate did have an influence on the prices of their financial investments.
If this litigation is ultimately successful, the potential total bill to banks could be in the billions, analysts have estimated.
A lawyer representing the banks declined to comment, while a lawyer for the plaintiffs did not immediately respond to a request for comment.
Libor, a widely used benchmark that helps set interest rates for everything from mortgages to corporate loans, is calculated daily for different currencies based on estimated borrowing rates submitted by banks on panels. The lawsuits are targeting banks on the panel that sets U.S. dollar rates under Libor.
These private lawsuits are separate from the sprawling criminal and civil probes around Libor rigging, which began in 2008 and have implicated traders around the world. Regulators have accused big banks of letting their traders and executives raise Libor rates up or down to benefit their trading positions.
About a dozen financial firms have settled charges of manipulating Libor, and many have pleaded guilty to criminal charges. The largest penalty imposed was the $2.5 billion paid by Deutsche Bank AG last year.
In total, U.K. and U.S. authorities have imposed sanctions of more than $6 billion in the Libor cases. A series of global investigations are still ongoing, but The Wall Street Journal reported in February that regulators in the U.S. and U.K. are preparing to bring a final round of civil charges against several banks in the probe.
The defendants affected by the appellate ruling Monday are Bank of America Corp., Bank of Tokyo-Mitsubishi UFJ Ltd., Barclays PLC, Citigroup Inc., Credit Suisse Group AG, Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank), Deutsche Bank AG, HSBC Holdings PLC, J.P. Morgan Chase & Co., The Norinchukin Bank, Portigon AG/Westdeutsche ImmobilienBank AG, Lloyds Banking Group PLC, Royal Bank of Canada, Société Générale, UBS Group AG and The Royal Bank of Scotland Group PLC.
Closing Market Summary: Indices End Modestly Lower as Rates Remain in FocusThe S&P 500 (-0.2%) began its week on a flat note with the index traversing a narrow eight-point range. Focal points for today's action included hawkish commentary from FOMC members, a downtick in the dollar, a modest loss in oil, and the underperformance of the heavily-weighted health care (-0.5%) sector. The benchmark index (-0.2%) finished behind the Nasdaq Composite (-0.1%) and the Dow Jones Industrial Average (-0.1%).
The major indices began their day on a choppy note as investors ruminated over a string of hawkish remarks from members of the Federal Open Market Committee. Over the weekend, Boston Fed President and FOMC voter Eric Rosengren kept the door open for a June rate hike when he stated that criteria for the next hike are "on the verge" of being met. St. Louis Fed President James Bullard and San Francisco Fed President John Williams also echoed this sentiment when they each stated that an interest rate hike could be argued for sooner than the market expects.
Oil rebounded from a session low before the cash market opened, but pressured equities as it hovered beneath its flat line. The energy component ended lower by 0.6% ($48.12/bbl). Meanwhile, countercyclical utilities (-1.0%) and telecom services (-0.7%) showed the largest losses as rate-sensitive groups continued to struggle.
Equities established new lows in the final hour of trade as heavily-weighted health care (-0.5%) and consumer discretionary (-0.4%) joined utilities (-1.0%) and telecom services (-0.7%) on the bottom of the leaderboard. On the flipside, materials (+1.2%) and consumer staples (UNCH) ended at the front of the pack.
In the materials space (+1.2%), Monsanto (MON 106.00, +4.48) gained 4.4% after receiving an offer to be acquired by Bayer (BAYRY 95.48, -4.72) for $122 per share in cash. Monsanto shares have risen 17.3% since reports first indicated that Bayer was interested in the company on May 11.
The high-beta chipmakers outperformed as the sub-group moved higher on reports that Apple (AAPL 96.43, +1.21) requested 78 million units of the iPhone 7 from its suppliers, which is more than what was previously expected. Elsewhere, Red Hat (RHT 74.80, +1.63) gained 2.2% after receiving positive commentary from Barron's.
Biotechnology outperformed in the health care group (-0.5%), evidenced by the 0.7% gain in the iShares Nasdaq Biotechnology ETF (IBB 266.03, +1.85). Conversely, CIGNA (CI 126.15, -5.13) fell 3.9% after headlines signaled that there were disagreements with Anthem (ANTM 133.18, -2.55) over their potential merger. Furthermore, the Department of Justice recently voiced concerns regarding the merger of the two health care providers.
In the consumer discretionary sector (-0.4%), retail names continued to underperform as the SPDR S&P Retail ETF (XRT 40.87, -0.39) lost 1.0%. On that note, ETF components Best Buy (BBY 33.00, +0.66) and AutoZone (AZO 742.08, -19.48) are scheduled to report earnings tomorrow morning.
The U.S. Dollar Index (95.29, -0.05) pulled back as the greenback trimmed its gain over commodity currencies and the euro. The euro/dollar pair finished flat at 1.1218 while the dollar gained 0.3% against the Canadian dollar (1.3148). Separately, the dollar lost 0.8% against the yen (109.27).
Treasuries ended on a mixed note with the yield on the 10-yr note ending at 1.83% (-1 bps). Meanwhile, the yield on the 2-yr note rose one basis point to 0.89%. The 2-yr yield has increased by 11 basis points since April's settlement (0.78%) while the yield on the 10-yr note has dropped one.
Today's participation fell below the recent average aQs fewer than 800 million shares changed hands on the NYSE floor.
Investors did not receive any economic data today.
Tomorrow's economic data will be limited to the April New Home Sales Report (consensus 521,000), which will be released at 10:00 ET.
- Nasdaq Composite -4.8% YTD
- Russell 2000 -2.2% YTD
- S&P 500 +0.2% YTD
- Dow Jones +0.4% YTD
Cost will drive M&A in oilfield services - Mergermarket Energy Forum
M&A activity in the oilfield services sector will be primarily cost-driven in the near term, panel experts said at the Mergermarket Energy Forum in Houston, Texas last week.
Halliburton’s (NYSE: HAL) attempt to merge with Baker Hughes (NYSE: BHI), driven by the same motives, held up deals as companies wanted to see if it would go through or not, said David Andrews, senior managing director with Evercore (NYSE: EVR). Transactions in the near term will be between companies that “don’t have balance sheet issues” interested in lowering administrative expenses and leverage, he added.
“There isn’t anybody willing to bet their balance sheet and put a lot of cash up on a deal unless it’s a sizeable company buying somebody smaller,” Andrews said. “The focus has to be on cost synergies.”
Andrews, who advised on the Technip (EPA: TEC)/FMC Technologies (NYSE: FMC) USD 13bn merger announced this week, said the failed Halliburton transaction “for a variety of reasons may have made this deal more likely.”
Meanwhile, the appetite for technology-driven M&A is “low,” and some time off yet as companies focus on different business models and ways to cut costs, the panel said.
“In general nobody’s been sitting on the sidelines waiting to go pay something astronomical for a tech company,” Andrews said. “It really feels like we’re down into nuts and bolts of how we get rid of costs. Innovation deals will come but they will come in smaller size. The big stuff, people aren’t really looking for it.”
“No one has the time," said Edward Bialas, director with energy private equity firm First Reserve. “In the near term, the only innovations to get adopted will be adjacencies to products and services that already exist. There’s not many people that have time to evaluate something different and distinct. This market is more about filling in gaps in the product line than it is about going and acquiring new technology at high prices.”
Those hoping to make an impact in the field will need to come up with a disruptive technology that increases marketshare or margins, said Steven McDowell, global director of acquisitions and divestitures with Weatherford International.
“It might be a while until you see a lot of investment (in this space), but there will continue to be small capital expenditures,” McDowell said. “We are obsessed with market share. That’s the game changer for us.”
“You certainly can see things coming more out of the technology space in terms of big data,” said Rodney Reed, vice president corporate development with National Oilwell Varco (NYSE: NOV). “There’s some real potential here but you don’t want it to be something that’s sort of cool but doesn’t yield a return for you.”
PBOC officials said to have quietly moved back to stability as primary goal for currency policy, dropping the more market based mechanism - financial press (UPDATE)
- sources say that at closed door meetings in early January, the PBOC dropped its scheme for a more market based mechanism for currency and went back to a policy of maintaining stability as its primary goal. The policy flip flop has not been formally announced but officials have gone back to the prior way of making daily adjustments in the yuan value based on officials' judgment rather than any market based metric.
- the decision not to announce the policy reversal is said to be based on concerns about capital flight and spillover effects if China is perceived as weakening its currency to support exports. A weaker currency could also make debt servicing more difficult for Chinese firms with large dollar denominated debts.
IMF urges eurozone to ease Greece’s debt pile with interest cap
The International Monetary Fund confronted Germany over Greece’s unsustainable debt burden, issuing a bleak assessment of its financial future just as eurozone finance ministers prepared for a crunch meeting on debt relief.
As detailed talks begin on Tuesday to resolve a long-running stand-off with Berlin, the IMF signalled it would be standing its ground, calling for European creditors to forgo any Greek debt payments until 2040 and, most controversially, to fix interest rates at 1.5 per cent over that time in a move that could require other eurogroup members to plug yet more Greek gaps in the future.
While officials involved with the talks were upbeat about a deal taking shape that could be completed on Tuesday, negotiators have dug-in on specifics. Some eurozone officials are also disappointed Christine Lagarde, the IMF director and a key figure in brokering previous political deals over Greece, will be in Kazakhstan and unable to attend.
Analysts said the move to release the paper ahead of Tuesday’s eurogroup meeting was controversial but also a sign of the pressure Mrs Lagarde and the IMF’s staff were under from its non-European members to abide by the Fund’s rules and not to grant Athens or its European creditors any special treatment.
“It is very provocative,” said Andrea Montanino, a former Italian representative to the IMF now at the Washington-based Atlantic Council. “You have the IMF telling the Europeans what to do on their own debt. [Yet] in the whole document there is no word on what to do with the IMF debt.”
In its publicly-released paper, the IMF also gave little hint of compromise on its core assessment of the Greek economy, concluding in its debt sustainability paper that the Greek bailout programme’s budget surplus target of 3.5 per cent of gross domestic product was overambitious and unrealistic.
“In all key policy areas — fiscal, financial sector stability, labour, product and service markets — the authorities’ current policy plans fall well short of what would be required to achieve their ambitious fiscal and growth targets,” IMF staff wrote.
Most contentiously for Germany, the IMF called for a more “plausible” surplus target of 1.5 per cent, supplemented by extensive debt relief. A large part of that debt relief would come from fixing interest on all eurozone loans until 2040 at current market rates of about 1.5 per cent.
Both the IMF and eurozone officials believe the market for long-term fixed rate paper could not absorb the €200bn of debt that would have to be refinanced at that rate, meaning eurozone countries would need to offer a fiscal subsidy that Germany insists would be contrary to EU treaties.
“The fixing of the interest rates would in effect require a commitment by member states to compensate the ESM for the losses associated with fixed interest rates on Greek loans, or any similar commitment,” the IMF paper said. “This would clearly be highly controversial among member states in view of the constraints — political and legal — on such commitments within the currency union.”
The IMF also warned that “even under the proposed debt restructuring scenarios, [Greece’s] debt dynamics remain highly sensitive to shocks” and that European creditors could be forced to make even greater concessions down the line.
A modest slip in Greece’s long-run economic growth from 1.5 per cent to 1 per cent would yield a “downside scenario” that would make both its debt and gross financing needs “unstable” and could require European institutions to forgo any interest on Athens’ debts until 2050.
One live option remains the possibility of drastically scaling back the IMF’s exposure to Greece, potentially through an EU buyout of up to €14bn in IMF bailout loans.
Such a move could lower the debt-sustainability bar on future IMF loans. But even after a buyout, Greece may struggle to meet the IMF’s normal lending standards, especially in more pessimistic economic scenarios.
While Berlin is open to the idea of an IMF buyout, it wants the commitment to be tied to conditions Athens must fulfil, and only made at the end of Greece’s rescue in 2018. Wolfgang Schäuble, German finance minister, wants to avoid taking any big concessions or changes to the Bundestag before the 2017 federal elections.
The IMF did open some ground for a compromise. Its paper called for “an upfront unconditional component to debt relief” to reassure markets. But given Greece’s patchy reform record, the IMF says it “understands and supports” the eurozone’s desire to “make further relief contingent on programme implementation”. Its main stipulation is that any conditions should end in 2018 — a position that sits uneasily with Berlin.
The IMF concluded that Greece’s debt-to-GDP ratio would hit 174 per cent of GDP by 2020 and rocket to 250 per cent by 2060, assuming no relief. Greece’s gross financing needs — the funds it requires each year to roll over debt — would reach 30 per cent of GDP by 2040.
IMF’s debt restructuring options
In its report, the International Monetary Fund presented a number of debt restructuring options to ease Greece’s financial burden.
Extending maturities
The IMF suggests extending loans from the ESM and EFSF, the eurozone’s two bailout funds, by 10 years and 14 years respectively, and extending loans owed to Greece’s fellow eurozone governments (known as the Greek loan facility) by 30 years.
This would reduce Greece’s gross financing needs by 7 per cent of gross domestic product and its debt by 25 per cent of GDP by 2060 but would be “insufficient to ensure sustainability”.
A moratorium on payments
Another proposal is for “payment deferrals” until 2040 — which would mean Greece would pay none of the costs of servicing any of its bonds or loans for the next 24 years.
This would mean extending the grace period on its existing European Financial Stability Fund loans by another 17 years, ESM loans another 6 years, and loans owed to member states by 20 years.
In total, these measures would help reduce the country’s payments bill by 4.5 per cent of GDP over the next 24 years, according to the IMF.
Capping interest rates through debt swaps
The biggest concession to Athens proposed by the IMF would be to allow Greece to pay no more than 1.5 per cent of its GDP every year to service the costs of its ESM/EFSF loans until 2045 and a similar rate on loans to other countries.
The fund proposes this be done by swapping about €200bn of debt into longer term paper with lower repayments.
Earlier this year, the ESM tapped the market with a 2055 bond which yields 1.56 per cent while an ESM bond maturing in 2032 is returning 0.97 per cent to investors.
But the market may not absorb €200bn. So guaranteed low rates of interest could require eurozone governments to in effect pay a subsidy to Athens, a move that is likely to be highly controversial — and legally contentious — with some creditor countries, above all Germany.
Still, the fund says this option would drastically reduce Greece’s financial burden, reducing Greece’s debt by 151 per cent of GDP and its gross financing needs by 39 per cent by 2060.
Fiat hits back at German transport body over emissions tests
Fiat Chrysler Automobiles has hit back at the German transport authority over allegations that it installed illegal defeat devices in its vehicles to manipulate emissions tests — in an echo of the Volkswagen scandal.
On Monday, a growing feud between the Italian-American company and Germany’s KBA escalated when the carmaker said that the transport body was not a “competent” authority to test its cars.
Over the weekend, reports in a German newspaper stated that the KBA had found evidence of software in Fiat cars designed to cheat emissions tests — and suggested that the company could face a sales ban in Germany.
Shares in FCA fell 6 per cent on Monday morning, leading the company to issue a robust statement defending itself.
“We believe all our vehicles respect EU emissions standards and we believe Italian regulators are the competent authority to evaluate this,” the company said.
FCA shares later recovered some ground to close 4.2 per cent lower at €6.05 in Milan.
Under European rules, Italy is responsible for testing Fiat cars to check that they comply with EU-wide standards. But a report in the Bild newspaper said that the KBA had found “adequate evidence of an illegal defeat device”.
Following the report, the KBA confirmed that it had passed findings to the European Commission and to the relevant Italian authorities, but refused to comment further.
Vehicle emissions testing has been thrown into sharp focus after Volkswagen last year admitted to installing defeat devices in 11m cars worldwide, in order to make their engine emissions seem compliant in laboratory conditions.
In the wake of this scandal, several European authorities, including the KBA, began investigations into the real-world performance of all vehicles sold in their countries.
So far, General Motors’ Opel division, Daimler’s Mercedes-Benz and several VW brands have been drawn into these probes.
FCA’s feud with the German authorities has been brewing for several weeks, since reports first emerged suggesting that the KBA had found evidence of engine management software in Fiat cars.
These reports claimed that the Fiat software shut down an emissions reduction feature after 22 minutes, which is two minutes longer than the standard emissions test.
Relations between Fiat and the German authorities deteriorated further last week when the company failed to attend a meeting with German transport minister Alexander Dobrindt to discuss the KBA’s findings.
Bild’s report over the weekend cited German transport ministry sources claiming that FCA could face a sales ban in the country until the matter is resolved. Germany is Fiat’s second-largest European market after Italy.
Last month, Sergio Marchionne, chief executive of Fiat Chrysler, said that there was “a phenomenal amount of confusion” over the rules for emission control across Europe.
He said that there was no clarity on what is a “sound technical reason” for suspending a vehicle’s emissions controls.
“There needs to be much better co-ordination across national bodies about what it is that is effectively allowed as relevant technology used to meet emission standards,” he said. “We have done our best to meet these standards over time.”