TheChek News Flow

Asian equity markets are mixed in the wake of inconclusive rhetoric out of G7 in Japan and more hawkish Fed-speak over the weekend. Shanghai Composite and the Hang Seng are up modestly while Nikkei225 is down over 1% amid renewed selling in USD/JPY. The pair fell over 50pips from Friday close below 109.70 after disappointing Japan trade components and more warning against further intervention from US Treasury's Lew at the G7. Japan may still get some help from the US in terms of generating more Yen weakness as there were further comments from Fed officials suggesting the FOMC is drawing close to another rate hike. FOMC voter Rosengren in an interview with FT said some recent data have been positive on spending, latest payrolls miss is still consistent with gradually tightening labor market, and concluding that the conditions for the hike laid out in the latest Fed minutes as of right now seem to be close to being met. UK Treasury report estimates that UK economy would take a 3.6pt hit and a likely recession in the event of a Yes vote on Brexit. In Athens, Greek ruling party MPs voted in favor of more austerity measures to secure continued funding despite thousands of protesters rallying against tax hikes. Also of note, a UBS report said investors have pulled out from funds tracking European equity and debt markets for nearly 15 straight weeks - the longest such period since 2008 - due to economic malaise, weak banks, and risky political climate.

Nikkei -0.51% Hang Seng +0.04% CSI +0.11% Shanghai +0.31%

Eur$ 1.1226 CNH 6.5604 CNY 6.5484 JPY 109.81 GBP 1.4509 CHF 0.9901 RUB 66.60 WTI $48.11

S&P +0.04% EuroStoxx -0.04% Dax +0.02% SMI -0.09%

Macro :

- Barron’s Roundup: Wien’s Weak Market; Red Hat, PepsiCo May Rise

- Japan’s Aso Told Lew That Japan Will Raise Sales Tax as Planned

- G-7 Reaffirms FX Agreements, Won’t Target Exchange Rates: Japan

- Brexit May Cut House Prices by a Fifth, Osborne Says: Telegraph

- Swiss Referendum May Cause CHF1.3b Budget Hole: FinMin in Blick

- Iran Won’t Freeze Oil Output as It Gears Up for OPEC Meeting

- Goldman Raises 2016, Cuts 2017 Oil Price Views on Shale, OPEC

Keep an eye on :

- ACS SM : ACS Wins Abu Dhabi Industrial Contract Valued at EU235 Million

- AIR FP : Iran Air Seeks to Finalize Airbus, ATR Deals in 45 Days: Fars

- AIR FP : Boeing Wins $11.3 Billion Order for 737 Max Planes From Vietjet

- AIXA GY : Aixtron Said in Talks to Sell Itself to Chinese Investor Group

- AIXA GY : Aixtron Gets EU6/Share Offer From Fujian Grand Chip Investment

- ALV GY : Allianz Italia Eyes Italy Investments: CEO Tells Milano Finanza

- ATL IM : Atlantia to Invest EU15b in Italy Over 10 Yrs: CEO to Repubblica

- CS FP : AXA to Sell Tobacco Investments Worth Over EU1.7b: BBC (26mil shares IMT LN, BATS 3.4mil shares, PM US 2.6mil sahres, Japan Tobacco 2.14mil shares, Swedish Match 571k shares)

- BARC LN : PIC Considering Group to Buy Barclays Africa Operations: FT

- BAYN GY : Bayer Offers to Buy Monsanto for $122/Share in Cash

- BAYN GY : Monsanto May Resist Any Offer Below $150/Shr: Jefferies

- BPER IM : BPER, UBI in Talks With Veneto Banca for Possible Merger: Sole

- BWO NO : BW Offshore 1Q Ebitda Rises; Planning to Raise $100m in Equity

- CARLB DC : Carlsberg Needs House In Order Before Mulling Larger Buys: FD

- ENEL IM : Enel CEO: Europe Power Prices to Stay Low at Least 2 to 3 Years

- FCA IM : German Transport Authority Finds Fiat Emissions Cheating: Bild

- GL FP : Galeries Lafayette in Sunday Opening Accord With 2 Unions: Echos

- GLEN LN : Glencore's NSW rail business could interest Carlyle, The Australian

- GBL BB : Groupe Bruxelles Lambert Raises Ontex Holding to 15.01%

- ILD FP : Iliad, Sky May Consider Creating Fourth Italian Operator: FT

- ISAT LN : Inmarsat May Have to Exit FTSE 100 After Plunge: Telegraph

- INXN US : InterXion Rises; Digital Realty May Pursue Co.: DealReporter

- BAER VX : Julius Baer CEO Says Kairos IPO When Mkt Conditions Right: Sole

- KCR1V FH : Konecranes confident Terex offer will succeed, thanks to large cash component - Talouselama

- NHH SM : NH Hotel Ready to Pay Dividend in 2017, CEO Tells Expansion

- NOKIA FH : Nokia to Cut 1,000 Jobs in Finland: DPA

- OHL SM : OHL Seeks Investors for Industrial Business: Expansion

- PBR US : Board says the appointment of the new CEO by the controlling shareholder will be analyzed at extraordinary board meeting on Monday; current CEO Bendine has not tendered his resignation

- PAH3 GY : Porsche SE Denies Spiegel Report of VW Supervisory Board Dispute

- RAND NA : Randstad to Acquire Obiettivo Lavoro in Italy for EU102.5m

- RCS IM : Mediobanca, UnipolSai, Pirelli Sign Pact in Joint RCS Bid

- RNO FP : Groupe, Renault in Talks With Proton on Strategic Pact: Edge

- RNO FP / 7201 : Nissan says battery power could more than double in 10 years - FT

- RYA LN : Ryanair Full-Year Profit Misses, Forecasts Net Below Consensus

- SAB LN : SABMiller’s CEE Assets Said to Draw Interest From Advent, KKR

- SKY LN : Sky Said to Be in Early Talks About Backing O2 Bids: Telegraph

- S32 LN : South32 Nickel Wage Talks Wrapping up With Deal Elusive: Union

- TIT IM : Telecom Italia Ready to Sell 100% of Sparkle for Metroweb: Sole

- TEF SM : Sky Said to Be in Early Talks About Backing O2 Bids: Telegraph

- TEF SM : Telefonica leaning towards listing for O2 rather than sale - Irish Independent on Sunday

- UCG IM : UniCredit Has Potential for Capital Rebuilding, Timing Key: Citi

- DG FP : Vinci Added to Goldman Conviction Buy List, Sees Re-Rating

- VOW3 GY : VW Truck Unit Starts Diesel-Recall Solution for Caddy 1.6 TDI

*BANCO MACRO RAISED TO NEUTRAL VS SELL AT CITI

*SEB EXITS KEPLER CHEUVREUX NORDIC TOP PICKS AS COVERAGE DROPPED

In the beginning the Prophet Satoshi brought us Bitcoin. And the cryptogeeks and libertarians looked upon it, and said lo, we smile upon this, for it is good, and decentralized, and solves the Byzantine Generals Problem. For a time all was well. But then came wailing and gnashing of teeth and wearing of sackcloth. And then came the Prophet Vitalik, bearing Ethereum; and lo, it was even better.

What is Ethereum? It’s a combination of a cryptocurrency, like Bitcoin, and a vast decentralized computer. Let me explain. As an above-average TechCrunch reader, you already know Bitcoin is a currency whose transactions are secured by the immense computing power of its distributed network of “miners,” rather than any central entity. But you may not appreciate that every Bitcoin transaction is actually a program written in the Bitcoin scripting language — aka a “smart contract.”

Bitcoin’s contractual language is quite limited, by design. But it allows for transactions that can be delayed until a particular time; or transactions that occur only if, say, 3 of 5 signatories agree to them; or crowdfunding campaigns that only transfer money if a particular total is attained; and many other possibilities. Importantly, once incorporated into the Bitcoin blockchain, these contracts require no trust and no human intervention. Bitcoin is programmable money … with a highly restrictive programming language.

Ethereum removes those restrictions entirely. The Ethereum scripting language is Turing-complete, meaning it can replicate any program written in any traditional programming language. However, to prevent ill-behaved contracts with infinite loops from running forever, every Ethereum transaction computation must be paid for. Just as Bitcoin miners collect small amounts of bitcoin, known as “fees,” in exchange for mining transactions onto the Bitcoin blockchain, Ethereum miners collect “ether,” the Ethereum currency, for running Ethereum contracts.

You may well be thinking: “Oh come on. Bitcoin was more than abstruse and geeky enough. Now this new made-up-magical-money thing is even more complicated? Why should I care?”

You should care because decentralized cryptocurrencies like Bitcoin and Ethereum are–or at least could be–essentially an Internet for money, securities, and other contractual transactions. Like the Internet, they are permissionless networks that anyone can join and use. Ethereum optimists might analogize Bitcoin as the FTP of this transactional Internet, with Ethereum as its World Wide Web.

I’ve waxed about why I think Bitcoin matters. I’m a little less enthusiastic about Ethereum … so far. To be clear: as I’ve written before, Ethereum is really cool, truly innovative, and potentially revolutionary. However, it is now–probably–at the peak of its initial hype cycle.

Consider: heavily funded Bitcoin startup Coinbase will soon support Ethereum trading on its rebranded cryptocurrency exchange. Microsoft offers “Ethereum Blockchain As A Service” on Azure. Ether has risen in value more than tenfold over the last year, to a market cap which now exceeds $1 billion. And while Bitcoin’s hashrate, a measure of the computing power devoted to mining, still vastly exceeds Ethereum’s, look at the hockey-stick nature of that latter chart.

Most of all, though, consider the DAO, and the $163 million — $163 million! — it has raised. Sorry: I mean “raised.”

What is the DAO? It stands for “Decentralized Autonomous Organization.” Ethereum offers a tutorial explaining how to create your own. The DAO, however, as Seth Bannon explained on TC recently, is a particular DAO which:

as of the time of writing, controls more than $100 million in assets, and yet it exists entirely on the Ethereum blockchain.

In exchange for supporting The DAO financially (in the form of Ether), backers get DAO tokens, which they can then use to vote on the direction of the organization. They can use their tokens to vote on big governance issues (akin to traditional shareholders) but also on minute details of how The DAO spends its resources. In this way, token holders have total control over The DAO’s assets and its actions.

People with projects they’d like to build for The DAO can submit ideas in the form of a proposal written in plain English accompanied by smart contract code. The code automatically executes payments so long as certain agreed-upon conditions are met. Because this is all built on top of Ethereum, which allows for robust smart contracts, this can all be done autonomously.

Or as Peter Vessenes put it:

It’s a cross between a crowdfunding site and a venture capital / private equity partnership. It’s controlled by a set of voting rules encapsulated and enforced on the Ethereum blockchain as a smart contract. People that trust the code, rules and plan are sending ether directly to fund the contract. […] If a certain percentage decide to fund a proposal, then it’s funded.

Think of it as a kind of corporation incorporated only on the Ethereum blockchain, whose laws consist entirely of those defined by its contract code. A corporation that appears to be a means of investing in the future … without having any concrete idea exactly what that future is yet. For many people, that kind of investment is a holy grail.

But if this sounds to you like a poor fit with existing legal and regulatory structures, and/or a disaster waiting to happen, well, you’re certainly not alone:

Follow

Josh Myer ‎@xek

What's the future of the DAO? Regulators nuking it, of course. http://techcrunch.com/2016/05/16/the-tao-of-the-dao-or-how-the-autonomous-corporation-is-already-here/ …

10:41 PM - 17 May 2016

1 1 Retweet 3 3 likes

To quote Eris COO (and attorney) Preston Byrne:

the plain-English covenants made on funding proposals, the absence of legal certainty as to what THEDAO actually is and the nebulous and ever-shifting nature of THEDAO’s “membership,” will make it very difficult to properly assign ownership in these projects’ work product.

#THEDAO might look and feel like a company, but on cursory examination, too many gaps, too few formalities, not enough structure and legally incorrect methods reveal themselves as fatal to the exercise.

[…]

I sympathise with THEDAO’s intentions, in that I believe that the financial markets are currently rigged against the “little guy” and that there is no reason why the kinds of investment opportunities (and returns) available to the super-wealthy should not be available to small investors whose traditional means of accumulating wealth (savings) are all but useless given current, zero interest-rate monetary policy.

I also believe that blockchain tech will one day play a role in facilitating more democratic access to the capital markets. However, the current body of laws governing this sphere of conduct exists to ensure that people to whom investments are marketed can be absolutely certain about what they’re getting in exchange for their money.

In this respect THEDAO clearly falls very short of the mark.

Follow

Michael Casey ✔ ‎@mikejcasey

Yes. ALSO possible to imagine a (not legally suspect) DAO that isn't a crapcoin disaster. Sad if this sets us back

Just so we're clear, it's possible to be excited about ethereum / ether, but also think the DAO is a crapcoin disaster in the making.

— Ryan Selkis (@twobitidiot) May 18, 2016

…

4:48 PM - 18 May 2016

2 2 Retweets 6 6 likes

Its worth noting that the money the DAO has “raised” is essentially refundable. As Bitshares founder and DAO skeptic Dan Larimer puts it:

The DAO has tentatively raised $100 million dollars worth of ETH, but so far the investors have taken no real risk. Every single person who has purchased DAO tokens has the ability to reclaim their ETH so long as they never vote. The end result is a massive marketing campaign that totally misrepresents what has been invested and what hasn’t. Considering there is no real risk being taken beyond the risk of holding ETH and that there is the potential for a large gain it is no wonder so many people have participated.

So let’s all try to damp down the hype just a bit. Right now all we have headlines, promises, a lot of “raised” money which has not actually been committed. Let’s wait for the results, if any — legal and otherwise — to roll in before declaring the DAO revolution underway. Because, I mean, I like hype too, but this is getting more than a little ridiculous.

View image on Twitter

View image on Twitter

Follow

Preston J. Byrne ‎@prestonjbyrne

Jesus H. Christ. IT'S SOFTWARE, PEOPLE #dao #blockchain #whales https://prestonbyrne.com/2016/05/17/thedao-dont-walk-away-restructure/ …

12:50 AM - 21 May 2016

13 13 Retweets 20 20 likes

That said, the DAO does serve to illustrate that these are fecund, exciting times for Ethereum. I’m not worried about the hype; that gets in everywhere. What most concerns me about the Ethereum project is security.

Ethereum is planning a transition from proof-of-work security (mining) to proof-of-stake security. There are very good reasons to do this, but proof-of-work, for all its flaws and excesses, is simple and thoroughly tested. Ethereum’s “Casper” proof-of-stake mechanism is fascinating; but if it has a serious undiscovered flaw, the entire network is at risk.

Similarly, one reason Bitcoin’s scripting language is limited is to help prevent hacking and denial-of-service attacks on the Bitcoin network and its miners. There’s no denying that Ethereum offers a vastly larger attack surface than Bitcoin does.

Worse yet, this applies not just to the network itself, but to individual Ethereum contracts. As Vessenes puts it: “Ethereum Contracts Are Going To Be Candy For Hackers.” To quote the ensuing, and surprisingly good, Hacker News discussion: “Running a machine on a blockchain (Ethereum) is much more complex and error prone then recording transactions on a blockchain (bitcoin.)”

I hope this doesn’t sound too pessimistic. I am genuinely excited about Ethereum in the medium to long term, and you should be too. But I also think we’re now at the peak of its first hype cycle, and important lessons need to be learned, hopefully the easy way, before it begins to achieve its revolutionary potential. There is a reason that “may you live in interesting times” is deemed a curse.

When the drill bits slow down, the checkbooks come out. Or so it used to go in the oil patch.

Heading into the current energy bust, investors were on the lookout for takeovers of bombed-out energy assets, as in past cycles. But, with the price of oil still below half its level in the summer of 2014, it hasn’t happened. Only one large acquisition has been inked, the takeover of Britain’s BG Group by Royal Dutch Shell. Dozens of potential targets, both distressed and merely wounded, remain independent despite lots of wishful thinking from shareholders.

While many look tempting, doing big deals is tougher this time around. Instead, oil companies are snapping up a few assets here and there such as Exxon Mobil’s acquisition of acreage in the prolific Permian Basin last summer.

One problem is that many companies are asset rich but cash poor. “It’s like buying a home with a big mortgage on it. There isn’t a lot of equity left there,” Exxon chief Rex Tillerson said in March.

But even companies that can be bought without financial baggage may stay single. That is because the ability to extract synergies is far less than during earlier busts.

When Shell agreed to buy BG for about $70 billion, for example, it saw about $1.2 billion in upfront costs and $2.5 billion in eventual annual savings. It later raised that estimate when shareholders became skeptical. But its shares have lagged behind five peers by over 10 percentage points on average since announcing the deal.

Shell’s initial estimate of cost savings was about 0.6% of combined revenue. By contrast, when Chevron announced it was buying Texaco in October 2000 the savings were proportionately twice as high. When Exxon merged with Mobil in 1998, the estimated cost savings were even greater at about 1.5% of revenue.

In both cases, the companies eliminated about 7% of their combined workforces. And when BP bought Amoco a few months before Exxon’s deal, it achieved savings of about 1.4% of revenue.

Energy companies, both gigantic ones and small fry, are much more efficient now. A big-oil executive recently observed that companies involved in extracting oil and gas from America’s prolific shale deposits are good at what they do. While their beaten-down share prices might look attractive, tacking on a 30% or so premium as part of a buyout absent meaningful synergies wouldn’t leave much meat on the bone.

The longer the bust lasts, the less inclined big oil may be to do a deal. Not only will their own balance sheets be in worse shape, but distress among small fry will force them to sell reserves.

Why buy the cow when you have the milk?

Stock and bond markets appear ready to absorb the next Federal Reserve rate increase without descending into turmoil, fund managers say, reflecting economic shifts and investor positioning since the last Fed move in December.

Fears of another market tantrum arose last week after Fed officials repeatedly warned that investors were underestimating the likelihood of a rise in the fed-funds rate at the central bank’s June 14-15 meeting. The 10-year Treasury yield posted its largest one-day rise this year on Wednesday following the release of minutes saying the Fed could raise rates next month if economic growth continues. Yields rise when prices fall.

Yet many portfolio managers say upheaval appears unlikely. One reason, they say, is that the dollar and oil are both offering markets much more comfort than they did as recently as last year.

After rising significantly over the past two years, the WSJ Dollar Index, which measures the greenback against a basket of currencies, is down 2.9% for 2016, relieving pressure on the earnings of large U.S. companies and the finances of many emerging-market nations that have borrowed in dollars. Oil has rallied 82% from its 2016 low amid supply disruptions, taking pressure off U.S. energy producers and likely limiting further ripple effects from the crude collapse.

A sharp selloff in stocks and bonds during the first six weeks of the year largely stemmed from fears the U.S. could be headed into recession. But several recent gauges of U.S. economic health, measuring industrial output, housing sales and consumer prices, have shown growing momentum. Wages have picked up after a long period of stagnant growth, but inflation broadly appears soft, likely giving the Fed room to raise rates only gradually.

These factors, together with the declines over the past month in stock and bond prices, mean the market can handle a well-telegraphed rate increase, many investors say—the only kind most analysts believe the Fed would dare attempt.

“There is a lot of money globally chasing very few high-quality assets,” said Mark MacQueen, co-founder and portfolio manager at Sage Advisory Services Ltd., which oversees $12 billion. He said a quarter-point rise in the fed-funds rate likely won’t change that dynamic, and that he might buy U.S. government bonds if the Fed raises rates.

Concerns about a stock-market pullback in response to future rate increases often center on soft corporate earnings and extended valuations. But some analysts see signs in this year’s energy recovery that the picture could be brightening.

First-quarter earnings for U.S. companies were poor, but “that may have been a nadir," said Ben Mandel, global strategist at J.P. Morgan Asset Management. He believes U.S. stocks could offer mid-single-digit annual returns by the end of this year. The S&P 500 index is up 0.4% so far in 2016.

Nor are investors overly worried about big price declines in U.S. government debt. Central banks in Europe and Japan have pushed their benchmark interest rates into negative territory in a bid to boost economic growth there, making U.S. Treasurys more attractive for foreign buyers. Demand from those investors is expected to keep prices on longer-term bonds steady, even as others sell short-term Treasurys, which are typically most sensitive to Fed policy.

In another sign of the improved market tone since January, U.S. corporate-bond sales—even those from risky, highly levered companies—have picked up in recent months. Corporate-debt sales largely came to a halt earlier in the year, as jittery investors refused to lend money amid the market turmoil. But the market has opened up again, allowing a relatively low-rated company like Dell Inc. to sell $20 billion of investment-grade debt last week, the fourth-largest corporate-bond deal on record.

Data from the Commodity Futures Trading Commission released Friday showed investors were growing more optimistic in certain parts of the market, underscoring the positive tone. Bullish bets by speculators on crude oil and long-term Treasurys increased while bearish bets declined, according to the data, which reflects positioning as of May 17.

Investors have readjusted their interest-rate expectations significantly in recent days. About a week ago, interest-rate futures priced in just a 4% chance that the Fed would raise rates in June, according to CME Group. But the odds rose to 26% by Friday.

The yield on the two-year Treasury note, highly sensitive to the Fed’s policy outlook, rose by 0.13 percentage point last week to settle at 0.888%, the biggest weekly increase since November. The WSJ Dollar Index rose 0.8% last week.

Not all investors are sounding the all clear. Despite the positive economic data in recent weeks, U.S. economic growth clocked in at a lackluster 0.5% in the first quarter. Concerns remain about the pace of economic growth in China, and a further slowdown there could reduce demand for commodities, lowering prices and renewing pressure on energy and mining firms. CFTC data show an uptick in bearish bets on the 10-year U.S. Treasury, whose yield has risen to 1.85% after earlier declines.

But David Donabedian, chief investment officer of Atlantic Trust Private Wealth Management, which had $27 billion of assets under management at the end of April, said any selloff likely would afford many investors the opportunity to hunt for value from beaten-down assets.

"No matter whether the Fed raises rates in June, July or later, the key point is that the Fed is in for a very slow pace of normalizing its interest-rate policy, which is not the stuff that would push stocks into a bear market,’’ he said.