(HSBC) Currencies Global - January 2016

* USD to weaken in 2016. We believe the USD will weaken in 2016, in contrast to a consensus
that expects the USD rally to extend. History shows the USD weakens once the Fed starts to
hike rates. In addition, we believe the conversation about the pace of Fed hikes will retain a very
dovish tone in 2016, mirroring the experience of other central banks which have tried to raise
rates after the 2008/09 financial crisis.
* ECB will not be able to engineer a fresh bout of EUR weakness. The ECB faces constraints
on how much it can expand QE, both in terms of the amount of bonds available to buy, and
internal support for further monetary easing. Better than expected Eurozone data is also a
challenge to a market still short EUR.
* The JPY may strengthen as the BoJ is unlikely to expand QE further in 2016. Like the ECB,
the BoJ’s QE programme is reaching its limit, and we believe the central bank will move to a
rates-based policy framework in 2016. In any event, the pressure for additional easing is on the
wane given the BoJ’s focus on the new (and higher) core inflation measure.
* GBP to strengthen before succumbing to ‘Brexit’ fears. The market no longer expects the
BoE to raise rates in 2016. We disagree, believing a rate hike in May is likely. The re-pricing of
rate expectations should help push GBP higher early in the year towards 1.60 for GBP-USD.
An intensification of the Brexit debate will likely raise fresh concerns about the sustainability of
the UK’s sizeable current account deficit causing GBP to weaken afresh.
* Canada’s fiscal experiment could be a game changer for the CAD. Although the currency
will remain beholden to the vagaries of the oil price, other factors argue the currency could
strengthen later in 2016. Chief among these is the prospect of some fiscal stimulus at a time
when monetary policy and currency war gains are nearing exhaustion. We forecast USD-CAD at
1.25 by the end of 2016.
We expect the pace of EM FX weakness to ease in 2016 as the adjustments already made in
currencies mean more of the risks are priced in. Commodity prices have already fallen a long
way, thereby posing less of a threat going forward. Also EM FX should not fear a gradual Fed
hiking cycle. Nonetheless, there is still not a convincing case for a significant EM FX recovery in
2016 given a meagre EM growth outlook, China risks, high EM leverage and local frailties.

>>> US Gapping down

Gapping down
In reaction to disappointing earnings/guidance: SONC -4.9%, AN -4.8%, CNX -3.9%, CMG -2.9%, MSM -2.8%, MON -1.3%

Select metals stocks trading lower: BBL -7.4%, MT -7.3%, BHP -6.8%, RIO -6.6%, VALE -5.4%, FCX -4.2%, X -4%, AA -3%

Select oil/gas related names showing early weakness: LEI -5.8%, SDRL -5.8%, STO -3.9%, PBR -3.8%, RDS.A -3.6%, RIG -3.3%

Other news: EPZM -10.4% (proposed public offering of $120 mln in stock), CEMP -9.5% (to offer and sell shares of its common stock with a price of ~$175 mln in an offering), PXD -8.3% (upsizes and prices 12 mln shares of common stock at $117.00 per share), TXMD -7.6% (launched $125 mln offering of common stock), SAGE -7.5% (filed mixed securities shelf offering for an undisclosed amount, commenced an offering of $150 mln of its common stock), OTIC -5.7% (announced $100 mln stock offering), ACAD -5.1% (proposed public offering of $300 mln in shares of common stock), ESV -3.3% (receives notice from Petrobras (PBR) asserting that Petrobras believes the DS-5 drilling services contract is void effective January 4), VRX -3.2% (looking to appoint a new CEO as Michael Pearson remains hospitalized, according to the WSJ), PRTA -3% (commenced an underwritten public offering of 2.25 mln of ordinary shares), SWHC -2.9% (modest pull back following yday's strength), ASML -2.9% (in symp with AAPL), XLRN -2.7% (prices offering of 3,750,000 shares of common stock at $40.00 per share), UN -2.4% (still checking), NXPI -2.2% (in symp with AAPL), AAPL-2.2% (cont weakness following yday's nikkei story)

Analyst comments: QLIK -4.3% (downgraded to Sector Weight from Overweight at Pacific Crest), HSBC -4.1% (downgraded to Underweight at JP Morgan), WDAY -2.9% (downgraded to Equal Weight from Overweight at Barclays), MASI -2.9% (downgraded to Outperform from Strong Buy at Raymond James), CHKP -2.6% (downgraded to Underweight from Equal Weight at Barclays), HCP -2.6% (downgraded to Underweight from Equal Weight at Barclays), H -2.5% (downgraded to Neutral from Overweight at JP Morgan)

>>> US Gapping up

Gapping up
In reaction to strong earnings/guidance: N/A.

M&A news: AMIC +20.8% (Co and Independence Holding (IHC) announced sale of stop loss business to Swiss Re Corporate Solutions for $152.5 mln in cash)

Select metals/mining stocks trading higher: HMY +7%, AEM +2.3%, AUY +2.1%, AU +1.9%, GFI +1.4%, NEM +1%, GG +0.9%, ABX +0.9%, SLW +0.8%

Other news: CNAT +23.7% (achieved positive results with Emricasan in initial stage of Phase 2 liver cirrhosis clinical trial), OXGN +7.1% (confirms the FDA granted orphan drug designation to CA4P for the treatment of neuroendocrine tumors), MBLY +6.3% (signs Memorandum of Understanding with Volkswagen (VLKAY) and announces a strategic partnership to explore and integrate REM into Volkswagen's fleet), VICL +5.2% ( confirms the FDA granted Orphan Drug Designation for VL-2397 for the treatment of invasive aspergillosis), KANG +4.5% (cont strength), HLTH +2.5% (intended to restate consolidated financial statements for FY14 and for 2015 interim periods), WATT +1.4% (introduced the first miniature WattUp transmitter design that is both small and cost effective enough to ship in-box with small wearable and IoT devices.)

Analyst comments: TASR +3.2% (upgraded to Overweight from Neutral at JP Morgan)

>>> Fed Vice Chair Stanley Fischer interview on CNBC

Fed Vice Chair Stanley Fischer interview on CNBC
  • Says China developments are more significant as they are difficult to interpret and know.
  • Notes uncertainty has risen in the markets.
  • Unclear the impact of North Korea news.
  • The overall arch of the rate increase is more important than the meeting to meeting assumptions.
  • Believes projected rate increase (4 in 2016 at the moment) is 'in the ballpark'; Does not have enough information at the moment to say with certainty how many hikes are in 2016.

>>> Monsanto beats by $0.12, misses on revs; lowers FY16 EPS guidance, reaffirms

Monsanto beats by $0.12, misses on revs; lowers FY16 EPS guidance, reaffirms cash flow guidance
  • Reports Q1 (Nov) loss of $0.11 per share, excluding non-recurring items, $0.12 better than the Capital IQ Consensus of ($0.23); revenues fell 22.7% year/year to $2.22 bln vs the $2.39 bln Capital IQ Consensus.
  • Co lowers FY16 EPS guidance to the lower half of prior guidance range of $5.10-5.60 vs. $5.27 Capital IQ Consensus Estimate.
  • With a focus on disciplined cash management, the co continues to project free cash flow in the range of $1.6-1.8 bln for fiscal year 2016. The company expects net cash provided by operating activities to be $2.6 bln to $3 bln, and net cash required by investing activities to be ~$1-1.2 bln
  • The company now expects 5-7% gross profit growth (mid-to-high single digit growth) from its core Seeds and Genomics segment in fiscal year 2016
    • This growth is expected to be led by new global corn hybrid portfolio introductions, continued significant Intacta RR2 PRO soybean adoption and additional licensing opportunities in the range of $275 million.
  • Note: In Q1 of MON's five segment, its Corn seed and traits and Soybeans sees and traits segments made up 92% of total compay gross profit

FT : Reversion to commodity mean: The force awakens


    There’s a funny fact (touted by gold enthusiasts) about the purchasing power of gold. For most of history — with few exceptions — an ounce of gold has been able to buy you pretty much the same sort of thing: a good quality pair of shoes, a belt and a suit.
    Somewhere in our psyche, the suggestion is, that’s how much we’d ever really forgo to obtain a little lump of gold: the combined value of what it costs to clothe ourselves properly (since clothes wear and tear over time and always need replacing).
    What it also suggests is that any time the gold price trades at more than the collective value of a good pair of shoes, a belt and a suit, chances are it’s massively overvalued. Eventually — bar some major technical innovation which finds a more pressing use for gold — the historical trend will reassert itself.

    Arguably, the same is true of other commodities too. Reversion to mean — to the true consumption and replacement value of a commodity — is a really important cyclical force in commodities. If demand increases, the price goes up to the point that economic resources can be incentivised to increase the rate of production to satisfy that demand. Once that production is online — and there is no need to increase the rate of production anymore — the price will and always does descend to the maintenance/replacement cost rate.
    Keeping that in mind, here’s a long-term chart of Brent crude, which on Wednesday descended below $35 per barrel for the first time since 2004:
    And here’s a shorter-dated chart to compare:
    And here’s the gold price:
    Whenever consumption demand for a commodity suddenly goes up for whatever reason (like expanding population), producers will benefit in terms of how many additional good quality finished goods and services they will be able to buy with their resources. The nation’s currency strengthens. It becomes a petrodollar. Problem is, once the rate of production adjusts to the new equilibrium, it becomes ever harder to get others to forgo more than the actual consumption/replacement cost of those commodities in terms of the finished goods they can actually be deployed to create.
    That’s when a nation which previously depended on others forgoing some share of finished goods for the right to their resources (imports) is exposed to currency weakening. The new equilibrium, in essence, demands them to do more than just provide resources. All things being relative, the currencies of such countries weaken to encourage the build up of finished goods (or services) for their own consumption relative to the rate they were previously consuming at, which in turn boosts demand for the underlying commodities… and so forth.
    Keeping that in mind here’s the Nigerian Naira:
    The Russian rouble:
    The Azeri Manat:
    And the Saudi Riyal:
    These are the currencies of countries all facing major restructuring challenges as a result of the new resource equilibrium. How they cope with this challenge will arguably determine the geopolitics of our era.
    Relatedly, here’s Alan Cameron from Exotix Sovereign Research dept on why it makes sense to expect another Naira devaluation imminently (our emphasis):
    From a fundamental perspective, the need for a devaluation of the naira has been obvious for some time, all the more so after the latest drop in oil prices during Q4 2015. What’s different is the official view from inside Nigeria: the sudden change in rhetoric that appears in the budget speech was clearly authorised (if not written) by the Presidency, and was likely to have followed extensive consultation within the upper levels of the country’s economic management. It may also have been timed to coincide with Christine Lagarde’s visit to Nigeria (4-7 January), the IMF Article IV mission (beginning 10 January) or, at the latest, the first MPC meeting of the year (25-26 January).
    The big give-away for us – in addition to the very obvious change in rhetoric mentioned above – can be found in the detail of the budget. Specifically, we cannot seem to arrive at the official deficit target of NGN2,220bn (US$11.3bn) using the other benchmarks provided in the budget speech, unless we begin to tamper with FX rate assumptions. Under our current baseline scenario, we think the deficit target in the proposed budget would be achievable at an exchange rate of NGN240-250/US$, depending on what other assumptions one makes. (The model supporting this view is available on request.)
    The change in official thinking around the FX rate appears to have happened more quickly than we expected. At the beginning of November 2015, we argued that we could be stuck with the existing FX regime for another six months or more. No doubt the official thinking was influenced by the fall in oil prices since then, but an equally important factor, in our view, has been the push for more orthodox economic policy from ministers and other insiders with ties to the President. A devaluation would represent a partial victory for this camp, and as such should be seen as a positive, in our view.

    WSJ : Credit Suisse’s Tardiness Likely to Extend Monitor’s Sojourn

    Credit Suisse’s Tardiness Likely to Extend Monitor’s Sojourn

    Neil Barofsky’s stay is likely to be longer than expected

    ZURICH— Neil Barofsky was meant to delve into Credit Suisse Group AG for no more than two years.

    Now, the former federal prosecutor, assigned by a New York regulator in 2014 to monitor the Swiss bank after a tax evasion scandal, may be sticking around much longer. The reason: the bank hasn’t been able to provide all of the information he’s requested in a timely manner.

    For Credit Suisse, his longer-than-expected stay highlights the challenge of drawing a line under its recent troubles, as the bank revamps under new management.

    Mr. Barofsky was tapped by the New York Department of Financial Services to investigate Zurich-based Credit Suisse’s compliance programs and its dealings with American clients, after the bank admitted in May, 2014, to aiding U.S. tax evasion.

    Not long after Mr. Barofsky’s engagement in October, 2014, a so-called tolling period was triggered, as Credit Suisse struggled to produce information at a pace and volume that he required, according to a person familiar with the matter.

    The tolling period delayed the start of a countdown to the end of Mr. Barofsky’s tenure, which was originally slated to “not exceed two years,” according to a consent order. Mr. Barofsky’s term is being paid for by the bank.

    The tolling period ramped up pressure on Credit Suisse, the person familiar with the matter said, and indicates that Mr. Barofsky may end up probing the bank for a total of three years or more.

    Credit Suisse has sought to bring the tolling period to a close soon, by providing everything Mr. Barofsky has asked for, the person familiar with the matter said.

    Related costs have mounted. For the second quarter of this year, Credit Suisse disclosed expenses including the cost of the monitor that amounted to 66 million Swiss francs ($65.5 million). The figure rose to 68 million francs for the following, third quarter. Credit Suisse hasn’t yet reported fourth-quarter results.

    Depending on how long the investigation lasts, its total cost may end up being several multiples of what’s already been recorded, according to the person familiar with the matter.

    Mr. Barofsky has closely examined the bank’s dealings with U.S. clients. A group of more than 100 Credit Suisse employees and external contractors hired by the bank is assisting him, the person familiar with the matter said.

    When Credit Suisse pleaded guilty to aiding U.S. tax evasion in 2014, it settled with regulators including New York’s Department of Financial Services. The DFS required the appointment of the monitor as part of the settlement.

    Now, Credit Suisse must continue to accommodate Mr. Barofsky as it seeks to move forward with a strategy overhaul under Chief Executive Tidjane Thiam. The bank recently raised 6 billion francs in new capital to bolster that effort.

    Mr. Thiam said in a statement given to The Wall Street Journal that he has “found the monitor’s work very helpful.”

    “We consider his requests for information and meetings appropriate,” Mr. Thiam said. “The issues he has identified working with us are real and we are working hard to implement his recommendations.”

    Mr. Barofsky’s suggestions so far have included formalizing the process for Credit Suisse bankers to deliver information about a prospective client’s nationality to internal staff tasked with verifying it, according to a person familiar with the matter.

    A spokesman for New York’s DFS said in a statement that, “Both at Credit Suisse and more generally, monitorships are a critical part of making sure we truly clean up and reform a bank’s operations.”

    Credit Suisse funds Mr. Barofsky’s regular trips to Switzerland, where he stays at upscale hotels at rates negotiated by the bank.

    Mr. Barofsky has also recently begun dropping in on Credit Suisse’s overseas offices, people familiar with the matter said.

    So far, he has interviewed dozens of managers at the bank, according to people familiar with the matter, and has also quizzed junior bankers on compliance procedures.

    Mr. Barofsky is one of a number of monitors placed at big banks in recent years, as regulators seek to deter future misbehavior. Other foreign banks assigned monitors by U.S. regulators include Deutsche Bank AG and HSBC Holdings PLC.

    Mr. Barofsky solidified his reputation as a dogged investigator during his time as special inspector general for the U.S. Treasury Department’s Troubled Asset Relief Program, or TARP, during the financial crisis.

    WSJ : Investors Poured Record $236 Billion Into Vanguard Last Year

    Investors Poured Record $236 Billion Into Vanguard Last Year

    Largest annual flow of money to a mutual-fund firm is latest sign of shift away from money managers who try to handpick winners

    Investors poured an industry record $236 billion into mutual-fund company Vanguard Group in 2015, the latest evidence of a shift away from money managers who try to handpick winners.

    Vanguard’s 2015 haul was the largest annual flow of money to a mutual-fund company, according to research firm Morningstar Inc.
    The pioneer of passively managed, lower-cost products, such as index funds that track the market, exceeded the previous industry mark set by the Malvern, Pa.-based firm in 2014, when it attracted a net $214.5 billion. Its assets under management in the U.S. also rose to more than $3.1 trillion in 2015, a company spokeswoman said.

    The influx of cash to funds that emphasize a hands-off approach to investing accelerated after the 2008 financial crisis, as investors realized that paying for more expertise didn’t necessarily shield them from losses. Index funds can charge lower fees because they don’t need to evaluate individual stocks and bonds, and their stable portfolios of holdings can lead to fewer trading costs.

    The trend continued in 2015 despite a volatile environment for the broader U.S. stock market. Investors added $361.8 billion to all passively managed stock and bond funds in the U.S. in the first 11 months of 2015, while pulling $139.5 billion from actively managed funds, according to the most recent Morningstar data available.

    Vanguard, which launched the first index funds for individual investors in 1975, has been the prime beneficiary of the shift while riding a wave of rising markets. It has made aggressive moves to help it gain market share at the expense of rivals and is undercutting many on fees. While it offers some actively managed funds, the majority of its products are passively managed.

    Investors pay just under 18 cents per $100 invested in Vanguard products, according to Morningstar. That compares with $1.23 for the average actively managed fund and 89 cents for the average passive fund, according to Morningstar.