>>> Drax profits halve amid UK policy U-turns

Drax profits halve amid UK policy U-turns

Drax, the UK power group, saw its earnings more than half in the six months to June as it was hit by weak energy markets and the UK government’s move to scrap a key renewable energy tax exemption.

The company, which has been converting its coal power plants to biomass plants, suffered a 58.5 per cent fall in its underlying pre-tax profit to £17m, while its earnings before interest, tax, depreciation and amortisation fell 41.7 per cent to £70m. That was slightly ahead of analyst forecasts of £64m EBITDA.

“Financially we continue to feel the effect of weak commodity markets and the removal of the Climate Change Levy exemption,” said chairman Phil Cox.

The company has been hurt by low energy prices which have fallen amid a global oil and gas price rout, as well as controversial u-turns by the UK government on green energy support measures.

Drax shares have fallen heavily in the wake of policy shifts by the UK government over the last year and a half.

The shares fell 26 per cent in one day last summer after Conservative Chancellor George Osborne scrapped the climate change tax levy exemption in the Budget last summer.

The exemption had provided crucial support to renewable energy projects, and the then David Cameron’s government had been lambasted by environmental groups and international organisations, who have suggested the move is undermining the fight against climate change.

Earlier this year Drax and rival energy group Infinis had a case against the government rejected. The companies said the government had not provided enough notice when scrapping the tax exemption.

In the renewable energy rat race for government favour, biomass shapes up fairly well. According to analysts NERA, biomass is slightly more expensive than onshore wind — but once its less intermittent nature is factored in, slightly cheaper.

FT : Glencore Russneft stake cut by debt deal

Glencore Russneft stake cut by debt deal

Glencore’s stake in Russneft is set to be heavily diluted as the oligarch founder of the Russian oil group moves to restructure its debt and reinforce his controlling position ahead of a possible flotation.
Mikhail Gutseriev is in the process of swapping $1bn of debt owed to another of his companies into new shares in Russneft.

Once this debt-for-equity swap is complete, Mr Gutseriev’s stake in the privately owned oil company will reach almost 75 per cent, while Glencore’s will be cut to 25 per cent plus one share, down from 46 per cent at the start of the year.
News of Mr Gutseriev’s move is the latest twist to the long relationship between Glencore and one of Russia’s richest and most resilient businessmen.
Mr Gutseriev, who is Russia’s 16th richest man according to Forbes, turned to Glencore for financial backing after a dispute with the Kremlin cost him his job at state-backed Slavneft 14-years ago.
He founded Russneft in 2002 and quickly made it a top-10 producer of Russian crude. Loans from Glencore totalled more than $2bn over the next eight years, according to a prospectus for the London-listed commodity house’s 2011 initial public offering.
In return, Glencore was given stakes in Russneft’s subsidiaries and the right to market the oil it produced, a boon for a commodity house that requires access to other companies’ barrels for trading.
This year, Russneft will produce about 150,000 barrels a day.
Russneft and Glencore both declined to comment on the debt-for-equity swap, which was first reported by analysts at rating agency Moody’s who have access to the Russian group’s management. But a person close to the company confirmed that Glencore’s shareholding would fall in August.
Industry experts said that while Glencore’s stake in Russneft would shrink, the company will be less indebted.
At the end of last year, Russneft had total debt of about $2.4bn, including almost $2bn owned to state-backed Bank VTB. After the debt-for-equity swap and deals struck by Mr Gutseriev, this will fall to $1.3bn, Moody’s said, under improved terms.
Last month, Mr Gutseriev told RBC, a business daily, that he was considering floating up to 10 per cent of Russneft’s shares on the Moscow stock exchange, estimating a total value of $4bn-$5bn.
Glencore, however, placed a carrying value of $685m on its 46 per cent stake, implying an equity valuation of $1.5bn.
Glencore’s offtake deal, which covers all of Russneft’s exports, will continue, although it was unclear whether the terms will stay the same. “There is a dialogue between the shareholders,” said one person familiar with the discussions.
Mr Gutseriev lost control of Russneft after he was charged with violating the terms of his oil licence and failing to pay taxes in 2006. He denied the charges, but the next year fled to London and sold the company to Oleg Deripaska, owner of Rusal.
Three years later, the charges were dropped, and he returned to Russia to begin rebuilding his stake in the company.
After regaining control of Russneft in 2013, Mr Gutseriev set about tackling its debt load and pursuing a merger with his other oil and gas operations — including Neftisa, the company he founded while in exile in London.
Glencore’s stakes in Russneft’s subsidiaries and almost $1bn of borrowings were converted into a 46 per cent stake in the parent company last year.
Glencore said in its 2015 annual report that while it held a significant stake in Russneft it could not exercise “significant influence over the financial and operating policy decisions” so carried it in its accounts as an investment.

(JPM) US Portfolio Strategy : Low Vol Sector Bubble, Valuations Displaced, Gro

 Equity Strategy and Quantitative Research

US Portfolio Strategy: Low Vol Sector Bubble, Valuations Displaced, Growth Underpriced — Buy Healthcare, Sell Staples

 

Income-seeking and growth-agnostic investors have crowded certain styles and sectors of the market. In particular, Low Vol, Quality, and Sustainable Income (i.e., Staples, Telecom, and Utilities) are outright expensive relative to Value and Growth (i.e., Healthcare and Technology).Historically, Healthcare and C. Staples have seen a high level of cointegration due to similar inelastic demand and stable fundamentals (vs. Cyclicals). However, in recent quarters performance and valuation between the two sectors have decoupled. Staples has increasingly become tied to rich valuations of “Sustainable Income,” while its defensive-peer Healthcare has seen multiple compression even though it offers long-term “Sustainable Growth.” Similar to Low Vol (relative to Value), Staples appears to be in a bubble (relative to Healthcare) after outperforming by 20% in the past year and it trades at a record valuation spread of more than 5x turns on PE NTM.

We are upgrading Healthcare to overweight and downgrading Staples to underweight as a convergence sector trade.Our thesis is predicated on: (1) recoupling in valuations within defensive sectors; (2) style rotation to favor sustainable growth opportunities over low vol; (3) investors refocus on attractive long-term fundamentals with Healthcare offering stronger organic growth and structurally higher margins; and (4) during four prior periods of Staples outperformance since 1980, the relative valuation never became this stretched. Why now? As uncertainties around the US election are already largely priced-in and Fed expectations very dovish, a reversal in sector positioning would be a risk for Staples. In this scenario, fund flows would likely reverse, Momentum rotates away from Low Vol, and the interest rate peg (record negative correlation between 10yr bond yield and Staples performance) becomes detrimental to performance.

·         Four other periods when Staples outperformed Healthcare by 20% or more. We believe Staples has become crowded during this cycle after a rotation triggered by the Fed turning more dovish, zero rates abroad, and stabilizing USD. This happened in an environment where investors were already skittish of holding Healthcare going into elections and piled into the only other defensive sector with ample liquidity (Staples market cap at 12% of S&P 500 compared to Telecom, Utilities, REITs all at only ~3% each). Since 1980, during each of the prior four rotations, Staples was supported by declining bond yields and the sector traded close to parity on valuation with Healthcare (unlike now with a wide valuation spread), Figure 6.

·         Staples valuation richer than Healthcare (and all sectors) as well as Low Vol (and all style factors). In our recent notes on Low Volatility and Global Style Investing, we argued investorsshould hedge against the negative tail risk by reducing exposure to Low Volatility where valuations are not justified by fundamentals. With Staples trading at 22x on PE (NTM), its valuation is even richer than Low Vol (also Momentum, Quality, and Growth) and all sectors (especially with its defensive peer Healthcare 16.5x). Historically, Staples have traded at a discount given lower growth and weaker margins. Also worth noting, Staples trades at a premium to Healthcare in most markets outside of the US.

·         Rising stock values have compressed shareholder yields for Staples to near lowest levels of this recovery. This despite more than 50% increase in dividends since 2007 — Staples will find it difficult to increase its shareholder yield higher with total payout ratio running near 100% in recent quarters. In other words, dividend growth will be capped at a rate equal to earnings growth unless companies significantly raise leverage. By comparison, Healthcare has a shareholder yield of 4.3% (Staples 4.1%) but has more flexibility with payout ratio near 70%.

·         Healthcare offers stronger organic growth with positive demographics and new product cycle. Healthcare expenditures have risen to 17% of total personal consumption wallet (i.e., ~12% of US GDP) from 6% since the 1950s, while Food and Beverages has declined to 7% from 21%. While a reversal in this trend might be a long-term threat, we believe the strong organic growth is likely to continue for now. In fact, Healthcare has generated strongest revenue growth of all sectors during this recovery (8.8% CAGR vs. 4.1% for Staples) and long-term (11% CAGR since 1994 vs. 6.2% for Staples). Healthcare is expected to continue generating stronger organic growth (6.4% NTM sales growth vs. 3.8% for Staples) driven by expanding market and new product cycle.

·         Healthcare enjoys structurally higher margins due to patent protection and higher barriers to entry (10% net income margin vs. 6% for Staples). The combination of stronger organic growth and insulated margins provides a structural advantage over Staples. Within S&P 500 Biotech/Pharma command some of the highest margins — even higher than scalable Software and Internet companies, see Figure 24. Even though Biotech ranks highest of all S&P 500 industries on pricing power (net income margin of ~40%), it ranks among the cheapest on valuation at only 13x PE. While Tobacco (Staples) enjoys high pricing power status (28% margin), we are uncomfortable with its long-term growth and valuation disconnect (22.7x PE).

·         Technicals could become less supportive for Staples. Investors have already rotated into Staples with steady fund flows into the sector compared to outflows for Healthcare over the last year, see Figure 8.Also, the crowded positioning is quite obvious by looking at style factors. Momentum constituents are heavily weighted to Low Vol compared to one year ago (Staples market-cap weight increased to 19% from 6% and Utilities has risen to 11% from 0%) compared to Growth (Healthcare has seen a sharp reduction in weight to 8% from 32% and Technology to 13% from 24%), Figure 5. If Momentum investors were to reverse positioning – possibly back to Growth – this would be a risk for Staples and Low Vol.

·         Election rhetoric and drug pricing headlines waning. Drug pricing headlines and political rhetoric have been drivers of Healthcare sector underperformance over the last year. While headline risk is likely to remain elevated at least through November, we see limited read-through to business fundamentals as successful reform would require considerable alignment in Washington. We recommend using any headline-related pullbacks to add Healthcare exposure.

We believe the initial rotation will be driven by technical drivers (investors look beyond elections and preference for bond proxies declines).Historically, Healthcare performance has been inversely tied to rates but recently it has shown little correlation while Staples is near record negative. This decoupling in correlation suggests that Staples’ outperformance will continue to be tied to lower bond yields, and less with fundamentals. Also, macro could be a risk if we get positive economic surprises relative to current depressed expectations, a tick-up in inflation, better than expected global growth, and/or consideration of new fiscal stimulus. Also, if interest rates move higher, this will have a negative effect on dividend growth, which has been funded by declining interest expense (a negative for bond proxies). In summary, we recommend investors overweight Healthcare and underweight Staples given the Low Vol bubble environment, displaced valuations, and underpriced sustainable growth.

Click here for the full Note and disclaimers.


Dubravko Lakos-Bujas
(1-212) 622-3601
dubravko.lakos-bujas@jpmorgan.com

Bhupinder Singh
(1-212) 622-9812
bhupinder.singh@jpmorgan.com

Narendra Singh
(1-212) 622-0087
narendra.2.singh@jpmorgan.com

Scott A Linstone
(1-212) 622-9970
scott.a.linstone@jpmorgan.com

Arun Jain
(1-212) 622-9454
arun.p.jain@jpmorgan.com

Marko Kolanovic, PhD
(1-212) 272-1438
marko.kolanovic@jpmorgan.com

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>>> What to look at today - 26th of July 2016

Dow -0.42% S&P -0.30% Nasdaq -0.05% Russell -0.25%
US Market closed lower, pulling back alongside a sustained downturn in crude oil. The Federal Reserve is set to deliver its latest policy statement on Wednesday while the Bank of Japan is scheduled to conclude its two-day policy meeting on Friday. Additionally, the European Central Bank will release bank stress test results later in the week. The broader market ticked higher in the final hour as nine sectors trimmed their losses. The commodity-sensitive energy sector (-2.0%) ended at the bottom of the leaderboard, following industrials (-0.6%), and telecom services (-0.4%). Volume were below average at 757mil shares. US After Hours CLGX +6%, TXN +6%, CR +5%, LVS +4.4% on earnings/guidance, semi and casino names higher in sympathy... SANM -10.8%, NDLS -6.9%, GILD -4% on earnings/guidance. Asian equity markets are mixed despite the more negative sentiment on Wall St in US hours, though volatility is picking up ahead of the Fed and BOJ policy decisions later this week. Japan markets are especially unsettled with more headlines pertaining to the fiscal / monetary stimulus mix, with Nikkei225 falling over 1.5% and USD/JPY plunging some 150pips below 104.40. A Nikkei report before market open speculated the govt would double planned "extra spending" for 2016 in stimulus package to ¥6T, and Econ Min Ishihara later remarked it was important to take steps wot proceed with fiscal reform given the current situation. However, Fin Min Aso later said the size of economic stimulus is not yet decided and monetary policy is in BOJ's hands.

Nikkei -1.39% Hang Seng +1.16% CSI +0.60% Shanghai +0.60%

Eur$ 1.1011 CNH 6.6800 CNY 6.6760 JPY 104.40 GBP 1.3122 CHF 0.9847 RUB 65.3863 WTI $43.23 (+0.23%)

S&P +0.10% EuroStoxx+0.30% Dax +0.37% SMI +0.27%

Macro :
- Threats to U.S. Financial Stability Are Higher After Brexit: OFR
- Italy’s Adepp Readies Atlante 2 Bank Rescue Fund Investment

Keep an eye on :
- ABI BB : SABMiller board to meet to consider ABI offer recommendation after receipt of formal offer (Increased offer difficult, but not impossible,  Bump in cash offer may void Altria and BevCo irrevocables, Attention turns to SABMiller investors Altria/BevCo's eligibility to vote) - Merger Market
- ALM SM : Almirall 1H Net Rises 37% to EU80.5 Million
- AMS SW : AMS Orders Positive, Gross Margin Negative, Baader-Helvea Says
- AUTN SW : Autoneum 1H Sales Rise, Ebit Margin Pre-Items Reaches Record
- COM GY : Comdirect 2Q Profit Jumps on EU41m One-Time Gain From Visa
- CBK GY : Commerzbank 2Q Net Income EU209m vs EU307m Y/y
- 1COV GY : Covestro 2Q Adj. Ebitda Beats Estimates, Raises 2016 Outlook
- DAI GY : Daimler Said to Invest in Hailo, Will Merge With MyTaxi: Sky
- DBHN GY : Dobrindt Says Profit Isn’t Deutsche Bahn’s Top Priority: Welt
- EUCAR FP : Europcar Cuts FY Forecasts Citing Terrorist Attacks, Brexit
- EOAN GY : EON, RWE Mandate Banks for Unit Spin Offs: Boersen-Zeitung
- EXO IM : Exor Board Approves Plan to Incorporate Co. in Exor Holding N.V
- LEY FP : Faiveley Transport 1Q Sales EU260M; Confirms 2016/17 FY Outlook
- EO FP : Faurecia Raises 2016 Targets; Now Seeks Op. Margin at Least 5%
- GEN DC : Genmab’s Daratumumab Gets FDA Breakthrough Therapy Designation
- GS US : Fed Said Preparing Action vs Goldman on Leak Case: NYT
- ICAD FP : Icade Says on Track to Meet Guidance, Raises Cash Flow Outlook
- ITP FP : Interparfums 1H Revenue Rises 10%; Confirms Full Year Guidance
- INW IM : Inwit 2Q Net Income EU25.1m, Up 18% Y/y
- LUX IM : Luxottica Says Assuming More Cautious Outlook for 2H 2016
- ML FP : Michelin 1H Profit Beats Estimate; 2016 Guidance Confirmed
- MITRA BB : Mithra Has Best Selling Month in June With 2.8% Mkt Share: Link
- MU US : Micron Poison Pill: ‘Friendly’ Acquirer May Benefit, Mizuho Says
- ORA FP : Orange 2Q Sales, Ebitda In Line With Ests.; Keeps Outlook
- PHIA NA : Philips CEO Says Medtech Acquisitions Possible: Boersen-Zeitung
- RAND NA : Randstad Says 2Q Europe Growth Continued, Rev. Stablized in U.S., CEO Says Low to Mid-Single Digit Growth Is New Normal
- RBS LN : RBS May Charge Negative Rates If BOE Cuts Below Zero: Sky
- RWE GY : EON, RWE Mandate Banks for Unit Spin Offs: Boersen-Zeitung
- SAZ GY : Activist AOC Proposes 4 Replacements for Stada Supervisory Board
- SO IM : Sogefi 1H Ebitda EU74.7m, Up 19.6% From EU62.4m Y/y
- TIT IM : Telecom Italia to Reduce Managerial Staff by 170
- UN1RV FH : Uponor 2Q Sales Beat Ests.; Keeps 2016 Guidance
- CSS FP : Vivarte Names Agent to Negotiate Debt: Le Figaro
- VOW3 GY : Skoda Mulls Other Markets, Including Iran, South Korea, HN Says
- VONN SW : Vontobel 1H Net Income Rises 6%; Reiterates 2017 Profit Targets
- WES NA : Wessanen 1H Autonomous Revenue Growth 8.6%; Repeats FY Guidance

>>> Europe : Brokers Upgrades & Downgrades - 26th of July 2016

>>> Up
*ASSA ABLOY RAISED TO HOLD VS UNDERPERFORM AT JEFFERIES
*FERROVIAL RAISED TO BUY VS NEUTRAL AT UBS
*FLSMIDTH RAISED TO NEUTRAL VS SELL AT GOLDMAN
*GEA RAISED TO BUY VS HOLD AT JEFFERIES
*HAMMERSON RAISED TO HOLD AT JEFFERIES
*INTER PARFUMS RAISED TO BUY AT B. RILEY
*KUKA RAISED TO HOLD VS UNDERPERFORM AT JEFFERIES
*LLOYDS BANKING GROUP RAISED TO HOLD VS SELL AT BERENBERG
*MEAD JOHNSON NUTRITION RAISED TO OVERWEIGHT AT JPMORGAN
*METSO RAISED TO NEUTRAL VS CONVICTION SELL AT GOLDMAN
*SAIPEM RAISED TO NEUTRAL VS UNDERWEIGHT AT JPMORGAN
*SSAB RAISED TO REDUCE VS SELL AT ALPHAVALUE
*TOMTOM RAISED TO BUY VS NEUTRAL AT UBS

>>> Down
*ACTELION CUT TO HOLD AT HSBC
*ARM HOLDINGS CUT TO HOLD VS BUY AT BERENBERG
*BANK ZACHODNI WBK CUT TO SELL VS NEUTRAL AT CITI
*BUCHER INDUSTRIES CUT TO HOLD VS BUY AT BERENBERG
*SFS GROUP CUT TO NEUTRAL VS OUTPERFORM AT CREDIT SUISSE
*ELRINGKLINGER CUT TO HOLD AT HSBC
*FIESTA RESTAURANT GROUP CUT TO HOLD AT JEFFERIES
*KION CUT TO HOLD VS BUY AT JEFFERIES
*LEGRAND CUT TO UNDERPERFORM VS HOLD AT JEFFERIES
*SFS GROUP CUT TO NEUTRAL VS OUTPERFORM AT CREDIT SUISSE
*SKF CUT TO HOLD VS BUY AT JEFFERIES
*STEICO SE CUT TO NEUTRAL VS BUY AT ODDO SEYDLER
*SUBSEA 7 CUT TO UNDERWEIGHT AT JPMORGAN
*VOLVO CUT TO HOLD AT JEFFERIES
*WARTSILA CUT TO HOLD VS BUY AT JEFFERIES

>>> PT Change


>>> Initiation
*MEDIASET RATED NEW NEUTRAL AT MACQUARIE; PT EU3.2
*MEDIASET ESPANA RATED NEW NEUTRAL AT MACQUARIE; PT EU11
*MEREO BIOPHARMA RATED NEW OUTPERFORM AT RBC CAPITAL
*PROSIEBENSAT.1 MEDIA RATED NEW OUTPERFORM AT MACQUARIE; PT EU53

>>> Call

FT :Hinkley Point: what to watch for from EDF

The board of EDF meets in Paris on Thursday morning to discuss its long-planned investment in a new nuclear power station at Hinkley Point in Somerset, southwest England. There is speculation that the meeting will come to a definitive decision after years of delay. If the outcome is to go ahead, the French company has work to do in rebuilding trust. So what should investors and consumers be looking for ?

To begin with, it is important to put aside the fanciful idea that the announcement is simply a matter of French politics. Most of the jobs created by Hinkley will be in the supply chain in France and the argument is that President François Hollande needs to ensure that they are not put at risk before the presidential election next year.

Equally fanciful surely is the idea that the UK government is gritting its teeth and going ahead with a project it no longer believes in because of the need to maintain good relations with France because of the Brexit negotiations and the desire to ensure that the French continue to manage the refugees in the camps outside Calais rather than exporting the problem across the Channel.

Cynical conclusions of this sort will surely be swept aside by the detail of the announcement on Thursday.

Of course, there will still be unanswered questions. Why is the UK government locking consumers into highly expensive power energy supplies, with an index link price for Hinkley fixed and guaranteed for 35 years, despite the fact that the price of every other form of power supply — including solar, wind and gas — is falling?

Why has the government not responded to the report from the National Audit Office which suggests the complex subsidies that give EDF a guaranteed price for the power it produces could impose a cost of up to £30bn on UK consumers because of the weakness of the deal negotiated in 2013 when wholesale electricity prices were higher?

Why has the government refused to countenance borrowing money on its own account to help fund the project — a move that would have cut borrowing costs and reduced the charge to consumers by at least 20 per cent ?

If this is to be a serious commitment by EDF we should at get answers to at least some of the doubts and concerns.

*First, we should expect to see the publication in full of the expert assessments made of the problems that have bedevilled the two EPR reactors under construction at Olkiluoto in Finland and Flamanville in Northern France. Olkiluoto was originally supposed to come on stream in 2009 and, according to the Finns, the costs of the delay now amount to some €2.6bn. Flamanville will be six years late at least and is already €7.3bn over budget. Trust in the technology has to be restored. Publication of the reports on what went wrong in both cases will demonstrate that lessons are being learnt and that EDF has remembered its commitment to transparency.
*Second, we should expect to see the contract for Hinkley published in full. This will be another important step in rebuilding trust. Consumers, French and British taxpayers, the company’s employees and investors — including shareholders in EDF, who have seen the company lose more than 60 per cent of its value over the last two years — need to know in detail who will be carrying the risks associated with the project. If construction is delayed, for instance,who pays any extra cost, and who will compensate consumers for the investment required to find alternative power supplies? The French government as the ultimate owner of EDF has seen these details. So has the Chinese government as a major investor. Consumers and non-government shareholders will be pleased to be brought into the circle of knowledge.
*Third, we should expect to see a detailed explanation of who is funding the construction phase of the project over the next decade. There are numerous estimates of the total cost of the project ranging from £18bn to £37bn but even the lowest figure would make Hinkley the most expensive nuclear station ever built. The sum dwarfs the resources of EDF itself, which has a current market capitalisation of just €21bn Euros. The company’s credit rating has recently been downgraded by Moodys and the outlook remains negative. The risks to the company have already provoked the resignation of the former finance director Thomas Piquemal. Any further French (or UK) government funding would raise more state aid issues in Europe. A proper financing plan is obviously critical to a final investment decision and will help to restore market confidence in the current leadership of EDF.
* Fourth, we should expect to see a clear and absolute commitment to deliver the project by 2025, as repeatedly promised in recent months by EDF’s leadership in the UK. The UK has to plan its energy supplies and the two reactors at Hinkley are due to provide 7 per cent of total requirements. Any further delay would require alternatives to be found, and soon. One hopes Thursday’s announcement will sweep aside all doubts and we will be able to look forward to cooking our Christmas turkeys in 2025 on Hinkley power.
All this, of course, assumes that there really will be a decision on Thursday rather than yet another postponement. The EDF board could decide that there are still too many unresolved problems associated with the EPR and that the risks to the company’s future are too high. As the French proverb has it: Qui mal commence, mal achève.

>>> Asian Update

Asian Mid-session Market Update: Japan stocks, Yen volatile amid more stimulus speculation; BOE's Weale talks down GBP


***Economic Data***
- (NZ) NEW ZEALAND JUNE TRADE BALANCE (NZ$): 127M (6th straight surplus) V 150ME; ANNUALIZED: -3.31B V -3.30BE
- (KR) SOUTH KOREA Q2 PRELIMINARY GDP Q/Q: 0.7% V 0.6%E; Y/Y: 3.2% V 3.0%E
- (JP) JAPAN JUNE PPI SERVICES Y/Y: 0.2% V 0.1% PRIOR
- (AU) Australia ANZ Roy Morgan Weekly Consumer Confidence Index: 115.5 v 114.9 prior

***Index Snapshot (as of 03:30 GMT)***
- Nikkei225 -1.6%, S&P/ASX -0.2%, Kospi +0.3%, Shanghai Composite +0.5%, Hang Seng +0.9%, Sep S&P500 +0.1% at 2,164

***Commodities/Fixed Income***
- Dec gold -0.4% at $1,323/oz, Sept crude oil +0.3% at $43.24/brl, Sep copper -0.6% at $2.21/lb
- GLD: SPDR Gold Trust ETF daily holdings fall 4.4 tonnes to 958.7 tonnes; 3-week low
- USD/CNY: (CN) PBOC SETS YUAN MID POINT AT 6.6778 V 6.6860 PRIOR
- (CN) PBOC to inject CNY130B in 7-day reverse repos
- JGB: (JP) Japan MoF sells ¥399.5B in 0.4% 40-year bonds, bid to cover: 2.89x v 3.07x prior

***Market Focal Points/FX***
- Asian equity markets are mixed despite the more negative sentiment on Wall St in US hours, though volatility is picking up ahead of the Fed and BOJ policy decisions later this week. Japan markets are especially unsettled with more headlines pertaining to the fiscal / monetary stimulus mix, with Nikkei225 falling over 1.5% and USD/JPY plunging some 150pips below 104.40. In other USD majors, NZD/USD was little moved by slightly softer than expected China trade surplus, trading in about a 20pips range around 0.70 handle, while AUD/USD was also in a 20pips range above 0.7460 prior to a late session bounce. S&P emini futures were flat after a 0.2% drop in early electronic trade, and gold remained little changed below 1,330.

- A Nikkei report before market open speculated the govt would double planned "extra spending" for 2016 in stimulus package to ¥6T, and Econ Min Ishihara later remarked it was important to take steps wot proceed with fiscal reform given the current situation. However, Fin Min Aso later said the size of economic stimulus is not yet decided and monetary policy is in BOJ's hands - comments which sent USD/JPY to a 1-week low around 104.30. Separately, PM Abe also maintained that the govt will not reach its nominal GDP target of ¥600T in FY24 if economic growth maintains its current pace.

- With the most recent UK PMI data beginning to showcase the headwinds of Brexit vote on business confidence, BOE's Weale commentary in FT indicated he is dropping his opposition to further monetary stimulus. Weale said the PMIs were very material for next week's decision as he also expressed concern over soft wage growth even before the Brexit referendum. GBP/USD plunged about 60pips on the comments, falling toward $1.3080.

- New Zealand trade data were the centerpiece of another light in economic data session. Terms of trade hit a surplus for the 6th straight month but slightly below expectations. Imports were right in line with consensus, while exports were slightly softer. Shipments to Australia saw the most notable decline of -8.5% y/y, as exports to China rose an impressive 17.9% and to US by 4.7%.

***Equities***
US equities / ADRs:
- TXN: Reports Q2 $0.76 v $0.73e, R$3.27B v $3.20Be; Guides Q3 $0.81-0.91 v $0.81e, R$3.34-3.62B v $3.39Be; +6.2% afterhours
- LVS: Reports Q2 $0.52 v $0.56e, R$2.65B v $2.75Be; +4.5% afterhours
- CNI: Reports Q2 C$1.11 v C$1.11 y/y, Rev C$2.84B v C$3.13B y/y; +0.8% afterhours
- ESRX: Reports Q2 $1.57 (adj) v $1.57e, R$25.2B v $25.5Be; Narrows higher FY16 $6.33-6.43 v $6.35e; +0.5% afterhours
- GILD: Reports Q2 $3.08 v $3.01e, R$7.78B v $7.85Be; Cuts FY16 Product sales R$29.5-30.5B; -3.9% afterhours
- SANM: Reports Q3 $0.63 v $0.63e, R$1.67B v $1.65Be; -9.9% afterhours
- NDLS: Reports prelim Q2 R$121M v $125Me; Chair/CEO steps down for personal reasons, effective immediately; -11.4% afterhours

Notable movers by sector:
- Consumer discretionary: Sands China LTD 1928.HK +7.2% (Q2 result); JSR Corp 4185.JP -7.8% (Q1 result)
- Financials: SmartGroup Corp SIQ.AU +13.7% (placement priced)
- Industrials: Geely Automobile Holdings 175.HK +3.9% (to sell stake in JVs); Hosiden Corp 6804.JP +13.8% (Mitsubishi UFJ Financial Group Raised to Overweight); Mitsui Home Co. 1868.JP -4.4% (delays Q1 result)
- Technology: Hynix Semiconductor 000660.KR -2.6% (Q2 result); Shin-Etsu Polymer Co 7970.JP +4.9% (Q1 result)
- Materials: Northern Star Resources NST.AU -1.1% (FY16 result); Alacer Gold Corp AQG.AU -1.5% (Q2 result); Perseus Mining PRU.AU -1.4% (Q4 result)

>>> US After Hours Summary: CLGX +6%, TXN +6%, CR +5%, LVS +4.4% on e


After Hours Summary: CLGX +6%, TXN +6%, CR +5%, LVS +4.4% on earnings/guidance, semi and casino names higher in sympathy... SANM -10.8%, NDLS -6.9%, GILD -4% on earnings/guidance

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: CRY +8.2% (ticking higher), CLGX +6.3%, TXN +5.8%, CR +5.3%, LVS +4.4%, CNXC +2.5% (thinly traded, also elects not to pay a distribution to holders of subordinated units for Q2), RE +0.9% (ticking higher), CNI +0.8%

Companies trading higher in after hours in reaction to news: SGY +9.6% (announces estimated production for the quarter ended June 30, 2016 of ~29 MBoe per day, slightly above the upper end of guidance for the quarter), ANCB +6% (Anchor Bancorp engages investment banking firm to assist it in identifying and evaluating various strategic options and operating scenarios), RAVN +4.1% and BEAT +3.8% (to join S&P SmallCap 600), MPEL +2.9%, WYNN +2.2%, MGM +1% (following LVS earnings), MBFI +1.2% (to join S&P MidCap 400), P +1.1% (following late surge higher -- reports that the company hired advisor for strategic options), SWHC +0.7% (Smith & Wesson to acquire Crimson Trace for $95.0 mln, subject to certain adjustments, utilizing cash on hand; expects the acquisition to be accretive to its EPS in fiscal 2017)

Select semi names are trading higher following TXN earnings: MXIM +4.9% , ADI +1.9%, NXPI +1.8%, LLTC +0.7%, MCHP +0.2%

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: SANM -10.8%, NDLS -6.9% (announces management and Board changes, sees Q2 revs below consensus), EFII -4.4% (light volume), GILD -4%, MPWR -3.6%, GIG -3.3%, CE -2.9%, CDNS -1.6%, SPN -1.6% (light volume), CMP -1.5%, VNOM -0.5% (thinly traded -  also announces a 7 mln common unit underwritten public offering)

Companies trading lower in after hours in reaction to news: MSTX -21.4% (Mast Therapeutics provides guidance on the anticipated timing for announcement of top-line data from the EPIC study, provided guidance on the anticipated timing for announcement of top-line data from the EPIC study), CRME -18.3% (announces proposed underwritten public offering of common stock), KLDX -5% (to acquire the Hollister mine and the Esmeralda mine and ore milling complex located in Northern Nevada; discloses CAD $100 mln bought deal financing), TCAP -3.8% (commences 6.25 mln common stock offering), PRKR -3.3% (files for ~1.44 mln share common stock offering by selling shareholders), CELG -3% (announces the Lymphoma Academic Research Organisation reported initial data from a phase III REMARC clinical study; REMARC achieved the primary endpoint of a statistically significant improvement inPFS for patients receiving REVLIMID)

>>> US Close Dow -0.42% S&P -0.30% Nasdaq -0.05% Russell -0.25%

Closing Market Summary: Averages Pullback Alongside Oil

The stock market began the week on a lower note, pulling back alongside a sustained downturn in crude oil. Participants maintained a cautious posture ahead of upcoming macroeconomic events and influential earnings reports. Additional focal points impacting today's trade included softening in the dollar and weakness from the heavyweight industrial (-0.6%) sector. The Dow Jones Industrial Average (-0.4%) finished behind the S&P 500 (-0.3%) and the Nasdaq Composite (-0.1%).

U.S. equities began the day on a choppy note, responding to a lack of conviction in European averages. Regional bourses slipped through the session as participants favored a cautious approach ahead of July policy statements from the Federal Reserve and Bank of Japan. The Federal Reserve is set to deliver its latest policy statement on Wednesday while the Bank of Japan is scheduled to conclude its two-day policy meeting on Friday. Additionally, the European Central Bank will release bank stress test results later in the week.

U.S. equities pulled back through the morning as oil extended an early loss. The energy component slipped from the $43.30/bbl price level at the start of the session, eventually carving out a session low ($42.98/bbl) near midday. The S&P 500 (-0.5%) moved lower lockstep with oil, finding support near the 2163/2165 price level. The broader market ticked higher in the final hour as nine sectors trimmed their losses. The commodity-sensitive energy sector (-2.0%) ended at the bottom of the leaderboard, following industrials (-0.6%), and telecom services (-0.4%). 

The Dow Jones Transportation Average (-0.9%) displayed relative weakness as airline names extended their recent rout. The U.S. Global Jets ETF (JETS 22.42, -0.21) declined by 0.9% as JetBlue Airways (JBLU 17.28, -0.30) underperformed ahead of tomorrow morning's earnings release. Separately, Kansas City Southern (KSU 96.41, -1.43) and Canadian Pacific (CP 146.91, -2.25) weighed on the rail sub-group.

In the heavily-weighted industrial sector (-0.6%), diversified machine names underperformed. Roper (ROP 163.33, -9.98) declined by 5.8% after missing estimates and lowering its earnings guidance for the full year. Elsewhere, Dow component General Electric (GE 31.64, -0.42) extended its post-earnings decline to 2.9%.

The countercyclical health care sector (-0.1%)  finished ahead of the benchmark index as the iShares Nasdaq Biotechnology ETF (IBB 282.26, +1.36) extended its monthly gain to 9.7%. Gilead Sciences (GILD 88.55, +2.00) displayed relative strength ahead of this evening's earnings release. Conversely, health care servicers underperformed as Aetna (AET 117.84, -2.62) and Cigna (CI 140.21, -5.79) declined 2.2% and 4.0%, respectively.

In the technology sector (-0.2%), Yahoo! (YHOO 38.32, -1.06) finished lower by 2.7% after agreeing to sell its operating business to Verizon (VZ 55.87, -0.23) for approximately $4.83 billion in cash. Separately, Dow component Apple (AAPL 97.34, -1.32) demonstrated relative weakness after being downgraded to "Sell" from "Hold" at BGC Financial.

The U.S. Dollar Index (97.27, -0.20) ended near its session low as the yen, pound, and euro each gained against the buck. The euro/dollar pair finished higher by 0.1% (1.0991) while the dollar lost 0.3% against the yen (105.79). Separately, sterling gained 0.2% against the dollar (1.3135).

Treasuries finished on a mixed note as the yield on the 10-yr note settled unchanged at 1.57%.

Today's trading volume was below the recent average as fewer than 757 million shares changed hands on the NYSE floor.

There was no economic data of note released today.

Tomorrow's economic data will include the 9:00 ET release of the Case-Shiller 20-city Index for May (consensus 5.4%). Separately, Consumer Confidence for July (consensus 96.0) and New Home Sales for June (consensus 560k) will both cross the wires at 10:00 ET.