Asian Market Update: China unveils 2016 GDP target of 6.5-7.0% range, raises fiscal deficit and cuts retail spending expectations
***Economic Data***
- (AU) AUSTRALIA FEB ANZ JOB ADVERTISEMENTS M/M: -1.2% V +0.9% PRIOR
- (AU) AUSTRALIA FEB AIG PERFORMANCE OF CONSTRUCTION INDEX: 46.1 V 46.3 PRIOR; 3rd month of contraction and 1-year low
- (JP) JAPAN FEB OFFICIAL RESERVE ASSETS: $1.25T v $1.25T PRIOR
- (JP) JAPAN JAN PRELIMINARY LEADING INDEX CI: 101.4 V 101.6E; COINCIDENT INDEX: 113.8 V 113.8E
***Index Snapshot (as of 04:30 GMT)***
- Nikkei225 -0.5%, S&P/ASX +1.1%, Kospi +0.3%, Shanghai Composite +0.8%, Hang Seng +0.2%, Mar S&P500 -0.1% at 1,993
***Commodities/Fixed Income***
- Apr gold -0.8% at $1,260/oz, Apr crude oil +2.% at $36.64/brl, May copper -0.4% at $2.25/lb
- SLV: iShares Silver Trust ETF daily holdings rise to 10,035 tonnes from 9,777 tonnes ; highest since Dec
- GLD: SPDR Gold Trust ETF daily holdings fall 0.2 tonnes to 793.1 tonnes; first decline since Feb 12th
- (CN) China's 5-year plan seeks to cap energy consumption at a maximum of 500B MT of standard coal by 2020, up 16% from 4.3B tons in 2015
- USD/CNY: *(CN) PBOC SETS YUAN MID POINT AT 6.5113 V 6.5284 PRIOR; strongest setting since Jan 4th; 3rd consecutive stronger CNY setting
- (CN) PBOC to inject CNY30B in 7-day reverse repos
- (AU) Australia MoF (AOFM) sells A$500M in 3.25% Bonds; avg yield: 2.82%; bid-to-cover: 2.72x
- (KR) South Korea MoF sells 3-yr bonds at 1.52%
***Market Focal Points/FX***
- Asian equities are somewhat firmer, as the rhetoric from China Premier Li and his release of 2016 economic projections were just as mixed as the US February non-farm payrolls report on Friday which saw slightly higher than expected job growth against lower wages. While the anticipated GDP was set as a range of 6.5-7.0% for the first time in years, investors are taking solace in reassurances that a hard landing will be avoided and that policymakers are ambitious on the fiscal side despite the rise in govt debt levels. Shanghai Composite is up nearly 1%, China iron ore futures are limit up, oil has rallied about 2% in electronic trade, and gold has retreated. In FX, the latest risk-on flows are consolidated in Asian trade, with USD/JPY in a 40pip range below ¥114, AUD/USD in a 30pips range above $0.74, and NZD/USD down as much as 40pips below $0.6780.
- In addition to the GDP forecasts which included expectations of at least 6.5% annual growth in 2016-20 period, China Premier Li's other 2016 forecasts were as follows: CPI was maintained at 3% vs 1.4% actual 2015 print, budget deficit set at 3% of GDP - not as high as 4% speculated but also up from 2.3% 2015 target and 2.4% actual figure, M2 money supply raised to 13% from 12% target, retail sales cut to 11% from 13%, and fixed asset investment cut to 10.5% from 15%. China trade projections were notably absent from Li's address after widely missing estimates last year. China also maintained its goal of creating 10M new jobs, keeping urban jobless rate below 4.5%, and lowering defense budget growth to 7.6% from 10.1% last year. Li added that downward pressure on economy is growing, promising the PBoC monetary policy will be "prudent with flexibility" and fiscal policy will stay proactive. Exchange rate would remain basically stable, to which end China continued to strengthen Yuan fix today to its highest level since early Jan.
- On the 2nd day of the People's Congress in Beijing, other speakers weighed in with their assessment of the economy and offered some more forecasts. Fin Min Lou said China banks' NPLs would continue rising due to structural reforms, but the financial system is not in crisis management. Lou also said the increase in deficit ratio would allow spending on big projects, and while there is some further room to increase that debt ratio, any increase will be gradual and not large. PBoC Dep Gov Yi called FX reserves as stable and ample as markets await the release of monthly FX flows data, while the overall assessment of cross-boder flows was seen as manageable. State planning agency NDRC chairman declared that speculators' predictions of a hard landing in China will fail, though policy makers are cognizant of global challenges including unstable financial markets, falling prices of commodities and risks of geopolitical nature. China Stats officials added Yuan will remain volatile due to Fed policy expectations and IMF SDR basket related movements.
- Commentary from Japan officials were fairly boilerplate as markets look ahead to tomorrow's final GDP numbers. PM Abe pushed for businesses to raise wages with the start of the new fiscal year in April. BOJ Gov Kuroda also spoke extensively in defense of negative rates, stating that lower rates are justified in the fight against deflation even if they produce turbulence in money markets and weigh on the earnings of financials. Kuroda also said the economy has improved over the past 3 years, and while the most recent perception appears to be that of deterioration, the recent JPY rise was due to macro risk aversion outweighing the impact of negative rates policy. Note that Kuroda comments appear to be more defensive in light of the latest opinion polls showing cabinet approval ratings well below 50% and the latest disapproval rating for Abenomics rising 3pts to 47%.
**US Saturday/Sunday primaries**
- Trump wins Louisiana and Kentucky
- Cruz wins Kansas and Maine
- Rubio wins Puerto Rico
- Clinton wins Louisiana
- Sanders wins Nebraska, Kansas, and Maine
***Equities***
- Toshiba 6502.JP: Reportedly planning to sell controlling stake in medical business for ~¥700B - financial press; +7.5%
- Sharp 6753.JP: Hon Hai expected to sign agreement to acquire Sharp as soon as Wednesday - Japan press; +6.6%
- China iron ore futures trading limit up - financial press; FMG.AU +19.3%, BHP +5.3%, RIO +3.7%
- Gold prices lower; NCM.AU -1.5%, EVN.AU -3.3%
- 000720.KR: Awarded KRW1.85T contract from Kuwait National Petroleum Company; Construction to take about 5 years' +1.7%
- 316.HK: Reports FY15 Net $284M v $270M y/y; Rev $5.95B v $6.52B y/y; -1.8%
North Sea oil producers are in talks to put aside their commercial rivalries and collaborate on an unprecedented scale as they look to slash costs amid some of the toughest market conditions the sector has ever faced.
Premier Oil, one of the biggest independent producers in the North Sea, is leading talks with a handful of other oil companies to merge substantial parts of their operations, including procurement, logistics and finance departments.
The move would be the most significant co-operation ever seen in what is normally a hyper-competitive industry, where companies fight for the smallest advantage over their rivals. The fact that such measures are even being discussed is a sign of how difficult conditions are in the North Sea, where high costs leave companies particularly exposed to the slumping oil price.
Tony Durrant, Premier’s chief executive, said: “We are talking about shared rigs, shared logistics, shared back offices. We are at an early stage, the talks are quite complicated and there are lots of parts involved, but this could be quite radical for our industry.”
Under the plans being discussed, companies could set up a central procurement unit that would buy parts such as valves or piping, which could then be purchased or leased by individual operators.
They could also create other joint back offices, dealing with everything from finance to human resources and logistics.
Such a move would end the practice of increasing differentiation in the equipment that companies use, which has helped drive up costs across the industry. Operators use 28 different shades of yellow paint, for example, to paint their subsea equipment, as well as 250 types of valve stem, each 1/1000th of an inch different in size.
Ministers and regulators have been urging companies for months to collaborate more to try and extend the lifespan of the UK North Sea. Oil and Gas UK, the industry body, warned last month that if oil stays at about $30 a barrel for the rest of 2016, nearly half of all fields will be lossmaking.
Last year the government set up a new regulator, called the Oil and Gas Authority, with a remit to encourage companies to work together to cut costs.
So far this push has met with some success. Some companies are now sharing helicopter flights, for example, or using each other’s platforms.
Faroe Petroleum, for example, which has interests across the North Sea, has secured the agreement of Eni, the Italian oil group, to use the latter’s Hewett gas platform to house some of Faroe’s workers at night.
Some companies are even sharing office space, with many having shut down smaller offices, and job losses having freed up space elsewhere.
But many in the industry say that a more substantial sharing of operations has proved difficult to agree.
Mr Durrant said: “At high oil prices, people worried about the reliability of their equipment and services, and so wanted to control all of that themselves.
“But that has locked in high oil prices, and we have ended up with 100 different supply chains.”
Stephen Marcos Jones, business development manage at Oil and Gas UK, said: “There is without doubt a general trend towards more co-operation across the upstream industry.
“Procurement is an area which presents real scope for improvement so we would support companies working co-operatively to improve efficiency and reduce costs in this area.”
European Central Bank must be much bolder
A debate about policy alternatives is needed, starting with a realisation that QE has failed
This is perhaps one of the most shocking statistics about the eurozone: the last time core inflation was close to the official 2 per cent target was in May 2007, almost nine years ago. The core rate, which measures the underlying inflation trend, is telling us that the European Central Bank’s monetary policy has been off-track for a very long time. And lately, the rate has fallen again. Is there something the ECB can do when its governing council meets this Thursday?
I have three recommendations. One useful measure that would bring immediate benefits would be purchases of non-performing loans in the banking sector. It could be accompanied by policies to force cross-border bank mergers. This would detoxify and restructure the banking system in a swoop. The objective should be not to protect bank profits but to get banks to take on more risk.
This would then make it easier for the ECB to cut the deposit rate, which applies to bank reserves at the central bank. The deposit rate is now -0.3 per cent. Negative rates are tricky. If they fall too low, banks may find it cheaper to store their reserves in cash vaults. Some German banks are already preparing for this.
No one knows how far rates can go down until that moment comes but we are not at that limit now. A rate cut of up to 0.5 percentage points — taking the deposit rate to -0.8 per cent — would still keep us on the safe side of that limit because the cost of insuring large amounts of vault cash is expensive.
My second recommendation is about measures that should not be taken — policy gimmicks. These are decisions that get some people excited but will not lift the rate of inflation. For example, the ECB should not buy bank bonds, or indeed any other form of corporate bonds, or equity. The reason banks are not lending is not a lack of funding but the presence of too many toxic assets on their balance sheets. It would be much better to address this problem directly.
Another gimmick to avoid is so called two-tier interest rates. The basic idea is to split the deposit rate into two, with a lower rate applied to reserves above a certain threshold. If you exempt a certain part of the reserves from the negative rates, you provide some relief, but that also reduces the effect of the measure itself.
My third recommendation regards future policies. The ECB should hold an open debate about policy alternatives, starting with a realisation that quantitative easing has failed. The ECB acted late, and did not do enough. QE, the injection of liquidity through large-scale purchase of bonds, might have worked if it had been implemented in 2008. When it was introduced last year, it was too late. The purchasing volumes were puny compared with similar programmes in the US, the UK and Japan; the time given for the programme too little.
Perhaps the most important difference is the operating environment. The programmes in the US and the UK started when market interest rates were higher than today. The European programme came when rates were already low. Since one of the main objectives of QE is to lower rates, its marginal impact is thus much smaller.
So what are the policy alternatives the governing council should discuss? I have argued in favour of a ‘helicopter drop’ , even before the recent deterioration in economic growth and the outlook.
A helicopter drop means that the ECB would print and distribute money to citizens directly. If it were to distribute, say, €3,000bn or about €10,000 per citizen over five years, that would take care of the inflation problem nicely. It would provide an immediate demand boost, and drive up investment as suppliers expanded their capacity to meet this extra demand. The policy would bypass governments and the financial sector. The financial markets would hate it. There is nothing in it for them. But who cares?
The ECB has not run out of ammunition but the number of effective policy tools is clearly finite. It should not dismiss them casually, or it might risk losing what little credibility it has left.
Weekly Performance
Dow+2.20% S&P+2.67% Nasdaq+2.76% Russell+4.31% Nikkei+5.10% HangSeng+4.20% Shanghai+3.86% Bovespa+18% EuroStoxx+3.69% CAC+3.29% Dax+3.27% Ibex5.54% MIB+4.55% FTSE+1.70% SMI+1.34%
US and European equity markets saw their third straight week of gains as stronger crude prices and the prospect of more easing kept the rebound on track. The ECB has all but guaranteed more easing at its policy meeting on March 10th, and President Draghi reiterated that the ECB has no limits on policy tools that are within its mandate, highlighting the growing downside risks to the euro zone outlook. Russia, Saudi Arabia and an ad-hoc group of other OPEC producers continue to discuss a meeting later this month to finalize plans on freezing crude production at current levels, helping push crude futures close to YTD highs. In China, the PBoC kept the yuan strong and cut the RRR ratio for the first time since 2009. There was a raft of dodgy US economic data, but the very good February jobs report provided a strong counterweight, and by Friday markets were pricing in at least one Fed rate cut this year, as well as a small chance of second rate hike by the fourth quarter. For the week, the DJIA rose 2.2%, the S&P500 gained 2.7%, and the Nasdaq added 2.8%.
Macro:
- China Eases Fiscal Stance to Meet Slower 2016 Growth Target
- Fed to Propose Big Banks Cap Credit Risk to Each Other at 15%
- More Than Half Feb Rally Driven by ’Systemic’ Inflows: Kolanovic
- China Sets 6.5%-7% Economic Growth Target Range for 2016
- U.K. Farmers Say Leaving the EU Would Be Too Great a Risk: Times
- Ulster Unionist Party Says Northern Ireland Better Off in EU
Keep an eye on :
- A2A IM : A2A Buys LGH Controlling Stake for EU113m in Cash and Shares
- MT NA : ArcelorMittal chief bullish on steel sector despite price woes - FT
- BAS GY : BASF Said Working With Advisers to Weigh Counter Bid for DuPont
- BATS LN : U.K.’s BAT Said to Hire Centerview as an Adviser: Telegraph
- CBK GY : Commerzbank Names Martin Zielke as New CEO From April 30
- EDP PL : Portuguese Electricity Demand Fell 3.1% in February, REN Says
- ELI1V FH : Elisa may now find it near impossible to take over Anvia - Turun Sanomat
- ENI IM : Eni Sees Oil Price Rising in 2H, CEO Descalzi Tells Messaggero
- FCC SM : Slim’s Carso to Make Bid for Spain’s FCC at EU7.60/Shr
- IP IM : Interpump Sees EU1B Revenue in 2017 Fueled by M&A, Il Sole Says
- LSCC US : Lattice Semiconductor CFO Joe Bedewi to Leave; Shares Down 10%
- LOGN VX : Logitech CEO Says Ready to Buy ’Sizable’ Company If Suitable
- LSE LN : LSE Group Investor Says ICE Could Fund Takeover Offer: Telegraph
- MRVL US : Marvell Technology Said to Be Open to Sale: NYP
- NOVN VX : Novartis’s Cosentyx Shows Longer Benefit Than Stelara in Study
- OML LN : Old Mutual Said to Be Considering GBP9b Breakup: Sky News
- PFV GY : Busch prepares for merger with Pfeiffer Vacuum by changing legal form - Euro am Sonntag
- RR/ LN : Drone-Deal Guarantees Jobs at BAE, Rolls-Royce: Telegraph
- SBRY LN : Sainsbury Expected to Raise Argo Offer to 180p, Telegraph Says
- 005930 KS : Samsung Says It Won’t Buy Jay Z’s Tidal: Variety
- SDRL US : Seadrill Soars 177% in U.S. Amid Short Covering, Bailout Talk
- SUN SW : Investor Vekselberg Mulls Divestitures at Sulzer, SaS Reports
- TC1 GY : Tele Columbus shareholder United Internet could push for full control or sale - Euro am Sonntag
- TIT IM : Telecom Italia Wants Broadband Deal With Metroweb in Weeks: Rtrs
- TEX US : Terex Drops; Zoomlion Hasn’t Submitted Filings: DealReporter
- VIV FP : Vivendi, Mediaset Met to Discuss Alliance on Content: La Stampa
- VOW3 GY : VW Brand Won’t Get 2nd Chance, Unit Chief Diess Tells WAZ
- VOW3 GY : VW’s Poetsch Was Informed of Diesel Affair Sept. 8, 2015: Bild
- VOW3 GY : VW Had Signs of Cheat 4 Months Before Disclosure: Handelsblatt
ArcelorMittal chief bullish on steel sector despite price woes
The global steel industry is poised for a recovery, says the head of the world’s biggest steelmaker, who believes market conditions will pick up as China starts to shut factories.
A collapse in prices for the metal has wrought havoc on producers over the past year, with Chinese mills accused of compounding sluggish demand by dumping surplus steel on to international markets.
But Lakshmi Mittal, chief executive of ArcelorMittal, said there were signs of change. “We believe that we have reached the bottom of the situation and things should continue to improve,” Mr Mittal told the Financial Times.
He pointed to an uptick in spreads — a measure of the difference between steelmakers’ raw material costs and their selling prices — that suggests ArcelorMittal and its peers can look forward to improved earnings.
The Luxembourg-based company recorded a net loss of $7.9bn in 2015 and is seeking $3bn in a rights issue to reduce its debt. Rivals such as US Steel and Posco of South Korea also racked up losses last year.
China accounts for almost half the world’s annual steel production, and slowing economic growth has meant that exports of the metal have soared. But Beijing has pledged to cut between 100m and 150m tonnes of steel production capacity over the next five years.
Mr Mittal expressed confidence that China’s capacity reductions would happen for three reasons: Beijing’s environmental commitments under the latest global agreement to cut carbon emissions, the provision of funds to help laid-off workers and potential risks to the country’s banking sector.
More than half of major Chinese producers were in the red last year, according to the China Iron and Steel Association, whose members swung into a combined loss of Rmb64.5bn ($9.8bn).
“I think they have realised that this level of pricing and this level of excess production at a loss is not sustainable,” said Mr Mittal. “Three years [ago] . . . we thought that China’s [steel consumption] would peak in 2018 but sadly it has peaked in 2015/2016 now.”
Analysts said the effect of Chinese capacity reductions on global steel prices would partly depend on its pace.
Michael Shillaker, analyst at Credit Suisse, said: “China has talked about closing capacity in the last 10 to 15 years. The one difference now is that we are in an unsustainable part of the cycle and steel prices can’t stay at this level. Something has to give or [low] prices are going to put a large part of the global steel industry out of business.”
Beijing’s move to cut capacity comes amid a growing trade backlash: this month the US slapped a tariff of 266 per cent on one kind of steel from China.
European Union authorities have imposed some duties and launched investigations, but critics complain the bloc’s response is not sufficiently robust.
“There has been progress in the past six months [in EU trade actions] and I only wish that they could be faster, swifter in deciding the actions,” said Mr Mittal. “I think there could have been higher levies in some of the products.”
Hedge funds’ bearish mining bets turn sour
Hedge funds that made big profits betting against mining stocks in 2015 have seen the trade turn sour, as commodity prices have bounced off multiyear lows and triggered a huge rally in the natural resource sector.
Anglo American and Glencore, the two worst-performing stocks on the FTSE 100 last year, have both had their share prices almost double since the beginning of January, as industrial metal prices have gone on a six-week tear.
That has left some bearish wagers placed by high-profile hedge funds down hundreds of millions of dollars since the turn of the year. Short sellers, borrow shares from institutions, sell them into the market and hope to buy them back at a lower price.
Lansdowne Partners, one of the best known funds in London, was short of 227m Glencore shares, according to data from the Financial Conduct Authority. The recent surge in Glencore will have seen the $21bn fund surrender a large chunk of the gains made since it first started betting against the Switzerland-based miner and commodity trader 20 months ago, according to bankers.
Odey Asset Management — founded by Crispin Odey — is also likely to see its position betting against Anglo American take a sizeable hit since January. The $13.4bn fund started amassing its short position over a year ago.
Lansdowne and Odey declined to comment.
Betting against mining stocks last year became a popular way for funds to try to make money out of China’s slowing growth. The world’s second-largest economy has become by far the world’s biggest consumer of industrial metals over the past decade, accounting for about 40 per cent of all copper demand. Anglo American and Glencore were also targeted because of their high debt levels.
Data compiled by the FCA show Lansdowne, Viking Global Investors, Passport Capital and Steadfast Capital Management hold a short position in Glencore equivalent to four per cent of its entire share capital.
While Viking, Passport and Steadfast have reduced their position against the company in recent weeks, the data shows, Lansdowne has held fast or even increased its short position, suggesting it may be prepared to weather more pain in the expectation the commodity rout has further to run.
hedge funds
“This is deeply scary for the shorts,” said one banker. “The fear of insolvency, which was never a reality, has now receded in Anglo and Glencore and institutions aren’t selling. This could be an almighty problem.”
As pessimism about demand in China reached near panic levels in January, discloseable short interest in Anglo American and Glencore reached record levels of more than 5.7 per cent and 5.5 per cent respectively, according to the data. But as only positions above 0.5 per cent of the company’s have to be publicly disclosed, the short position was likely far larger.
Markit, a financial data provider, said 18 per cent of Anglo American’s shares were out on loan as recently as February 23, while more than eight per cent of Glencore’s shares were out on loan in late January.
Funds buying back short positions to return borrowed shares likely contributed to the surge in share prices across the mining sector.
In heavy trading, Glencore’s shares hit 180p on Friday, taking gains since the start of the year to more than 98 per cent. It later fell back to 160p. Anglo American hit 599p, up 99 per cent since January 1.
Semiconductor maker Marvell Technology Group, which last month settled a patent dispute with Carnegie Mellon University for $750 million, is open to a sale, The Post has learned.
KKR and Starboard have significant stakes in the $5 billion market cap Marvell.
Also, Marvell said this week its audit committee had finished a six- month investigation into allegations of accounting fraud without finding any wrongdoing.
The committee did say not all internal controls were fully followed.
Starboard, which reported last month that it owns a 6.7 percent stake in the Bermuda company, wants Marvell to cut costs and to exit its mobile-device business.
The activist has not yet started discussions with the husband and wife co-founders of the business, who are also its top executives, a second source said.
Marvell mostly makes chips in storage devices and for networking.
A possible Marvell buyer is Avago Technologies, a source said. Many semiconductor companies are under pressure to boost earnings.
The Semiconductor Industry Association reported that worldwide semi sales fell 5.8 percent in January, to $26.9 billion, from the year earlier.
Marvell’s shares, which have fallen 40 percent over the past year, closed Friday at $9.75, down 5 cents.
The company did not return calls.