Asian Mid-session Update: Asia indices mixed heading into holiday week; Spain general election results to require more compromise by ruling PP; Star Wars sets weekend record
***Economic Data***
- (NZ) NEW ZEALAND Q4 WESTPAC CONSUMER CONFIDENCE: 110.7 V 106.0 PRIOR
- (NZ) NEW ZEALAND NOV RETAIL CREDIT CARD SPENDING M/M: 0.7% v 1.8% PRIOR; Y/Y: 8.5% v 7.8% PRIOR
- (NZ) New Zealand Nov Net Migration: 6.3K v 6.2K prior (fresh record high)
- (JP) Japan Oct All Industry Activity Index M/M: 1.0% v 0.9%e
***Index Snapshot (as of 04:30 GMT)***
- Nikkei225 -1.1%, S&P/ASX flat, Kospi +0.1%, Shanghai Composite +1.4%, Hang Seng +0.3%, Mar S&P500 +0.4% at 2,000
***Commodities/Fixed Income***
- Feb gold +0.3% at $1,067/oz, Feb crude oil -0.7% at $35.79/brl, Mar copper -0.4% at $2.10/lb
- (IQ) Iraq Oil Min: Oil prices set to rise from very low levels - financial press
- GLD: SPDR Gold Trust ETF daily holdings rise 18.7 tonnes to 648.9 tonnes; first rise since Oct 19
- SLV: iShares Silver Trust ETF daily holdings fall to 10,017 tonnes from 10,062 tonnes
- USD/CNY: (CN) PBoC sets yuan mid point at 6.4753 v 6.4814 prior; 1st stronger Yuan setting after 10 straight weaker fixes
- USD/CNY: ANZ strategist: Today's stronger Yuan fix does not mean depreciation trend is over; Currency likely to continue to decline next year - financial press
- (KR) South Korea sells 20-yr govt bond, avg yield 2.210%
***Market Focal Points/FX***
- Asian indices are mixed entering the new holiday-thinned trading week despite the 2nd consecutive significant down day on Wall st on Friday. Shanghai Composite is leading the rally, helped by hints of more assistance from policymakers. China power companies were especially strong on reports that the govt will start power company mixed-ownership reform next year. Chatter of more free trade zone trials were also constructive, as several provinces have interests to host their own version of FTZs. Finally, PBoC has set Yuan midpoint stronger for the first time in 2 weeks, even as analysts suggest this is unlikely to reverse a more structural trend of steady CNY decline.
- Spain's general elections offered a consolation prize to the anti-austerity camp. Even though the more conservative ruling Popular Party (PP) was victorious with 123 seats in Parliament, it was well below the number required for majority govt and also 63 seats shy of the 2011 result. Subsequently PP, which has ceded a number of seats to the upstart Podemos, will either have to look for a partner or attempt to form a minority govt that will likely produce political turmoil. Note that socialists obtained 90 seats, Podemos 69 seats, and centrist Ciudadanos got 40 seats.
- After last week's BOJ policy statement, the central bank's monthly report expanded on the decision. BOJ reiterated the economy has continued to recover moderately, adding that exports will likely increase, housing investment will pick up, and producer prices will likely decline further for the time being. Note the BOJ's "hawkish easing" confounded economists as they expanded the ETF buying to assets/ETF qualifications that technically do not yet exist. The program will not begin until Apr of 2016. Separately, Toshiba was down sharply on reports that it will see a FY15/16 net loss of about ¥500B amid unfolding accounting scandal, cutting jobs in its TV and home appliances division with estimated cost of about ¥200B.
- Korean press cited think tank LG Economic Research Institute (LGERI) cutting 2016 GDP target to 2.5% vs 2.7% prior forecast due to continued export slump and weakening domestic consumption. A separate report estimated household debt in South Korea rising 2.2% in 2015 to KRW61.8M.
- Trading in USD majors was subdued and rangebound going into the holiday week. AUD/USD was in a 20pip range above 0.7150, USD/JPY was contained to a 50pip range above 121, and EUR/USD rose some 30pips from the open above 1.0880 despite the potential political turbulence in Spain.
***Equities***
US equities / ADRs:
- DIS: Star Wars sets N America opening weekend box office record, taking in $238M (exceeding prior record of $208M for 'Jurrassic World')
Notable movers by sector:
- Consumer discretionary: China Modern Dairy 1117.HK -0.5% (profit warning)
- Financials: Fosun International 656.HK +2.2% (withdraws takeover proposal)
- Technology: Epistar Corp 2448.TW +5.6% (clarification); Samsung Electronics 005930.KR -0.3% (to expand OLED production); Renesas Electronics Corp 6723.JP +2.9% (INCJ unlikely to sell major stake); Toshiba Corporation 6502.JP -10.0% (FY15/16 speculation); Japan Display Inc 6740.JP -0.9% (speculation that Japan Display to acquire LCD unit)
- Materials: LG Chem 051910.KR -0.5% (suspends investment plan)
- Energy: China Resources Power 836.HK +2.6% (China to start power company reform)
- Telecom: China Unicom 762.HK -1.0% (Nov result)
China's Shenzhen hit by landslide, major gas pipeline explodes - state media
A landslide hit the southern Chinese city of Shenzhen in Guangdong province on Sunday, burying 22 buildings and leaving 27 people missing, state media reported.
A nearby section of China's major West-East natural gas pipeline also exploded, the official China Central Television (CCTV) broadcaster reported.
Hundreds of rescuers sifted through rubble looking for survivors after the landslide struck Shenzhen's Hengtaiyu industrial park in the city's northwestern Guangming New District in the morning, the official Xinhua news agency said.
Four people have been rescued from the debris, with three sustaining minor injuries, it said, citing rescuers.
As of 0900 GMT, rescuers had evacuated more than 900 people from the site, said Xinhua.
Xinhua had earlier said at least 41 people were missing, with seven people rescued and one suffering minor injuries.
Intelligence Should Recruit Like Google
An interesting story made the rounds back in August. While conducting a search for “python lambda function list comprehension,” programmer Max Rosett was suddenly invited to attempt a cryptic coding challenge. After completing it, he was contacted by Google — where he now works. The challenge was part of Google’s novel recruiting strategy, which allowed the company to identify talent by analyzing search habits.
In the wake of the Paris killings, Western leaders have begun emphasizing a need to ratchet up intelligence efforts. Much of what they propose would involve personnel. There is a widespread feeling that too much is slipping through the cracks, and what seem like small lapses are leading to unacceptable catastrophes.
Hillary Clinton has called for an “intelligence surge.” David Cameron pledged that the U.K. would hire 1,900 new intelligence officers, and the French enacted sweeping emergency powers, many of them designed to strengthen and broaden intelligence-gathering operations.
Even before the terrible recent events, Washington was well aware of how badly it needs Silicon Valley. Prominent officials have made repeated visits to Palo Alto, and Defense has invested a great deal of money in tech. These efforts go well beyond recruiting, seeking innovations and tools that are considered “vital to the future of national defense.” Information technology and intelligence are now inextricably linked.
Despite these overtures, the relationship between government agencies and tech is at a low point. The issue of encryption has been the primary source of contention. Law enforcement seems to feel that tech firms are prioritizing customer retention and privacy over national defense, while security experts feel that the agencies fail to understand the technical difficulties underlying their requests, as well as the fact that they are undermining the very security they hope to achieve by making systems generally more vulnerable to attack.
Things have gotten so bad that the tone among technical experts has shifted toward open contempt, which is understandable when their critics have openly admitted to lacking even basic knowledge of the technologies they opine upon. The current gridlock is particularly concerning, given the increasing urgency of preventing these attacks — especially when tech could be doing a great deal to help.
Finding good intelligence hires is difficult. It requires identifying individuals who can absorb large quantities of information while quickly and accurately gauging significance and risk. Information technologists are uniquely capable of facilitating these recruiting efforts with unconventional methods. By creatively employing underutilized data sources (such as search habits), tech companies can locate these skills more easily among the civilian population, effectively increasing the size and quality of the available talent pool for intelligence.
But where tech could be most useful is in building software tools. One of the biggest issues intelligence agencies face is akin to the “big data” problem so often talked about in tech: They need to find a way to effectively analyze and act upon the huge stores of data at their fingertips. Many of the information sharing programs in place today are concerned more with reporting and providing access to disparate bits of information rather than with gleaning significance and communicating it rapidly.
A recent piece in BankInfoSecurity does a nice job of distinguishing between intelligence sharing and information sharing. We need far more of the former. The signal-to-noise problem appears to already be overwhelming even our most sophisticated agencies. Terrorism benefits from the more general trend now emerging in which small groups can cause asymmetric damage from afar, and such threats are increasingly difficult to detect among the noise. When defense efforts are broad and untargeted, they will inevitably fail.
One area where tech could be extremely useful would be in analyzing volumes of financial data for anomalies. Indeed, this has been an area of increasing focus for governments since the attacks, and with good reason: It quickly became evident that financial information concerning the attackers and their networks was already on hand at a variety of financial institutions. Bank intelligence has already been used to strategically target ISIS oil assets.
I suspect a useful defensive device for small-scale attacks would be something akin to a “financial wiretap,” which might alert intelligence analysts of suspicious activity in real time, as opposed to the slower reporting system in place today. Had such a tool existed prior to Paris, one or many intelligence services might have been instantly alerted to the prepaid debit card transactions that the attackers used to move funds, and said services could have quickly prioritized them as targets.
But such tools will only be useful if they are aimed at suspects reasonably under suspicion already (or else they will produce huge numbers of false positives from the broader population). And if those in the tech industry are to be expected to produce them, they must trust that they will be used responsibly in the national interest, with clear and constitutional bases for their use.
We cannot simply press-gang the industry into it, or expect them to blindly trust that the groups that have abused their power before will not do so again. Likewise, it can be hoped that if law enforcement makes these overtures, the industry will become more welcoming and contribute to the important work that needs to be done.
During an iconic scene in the show Mad Men, Don Draper says, “If you don’t like what’s being said, change the conversation.” Neither American national security nor the tech industry seems to be benefiting much from the bitter fight over encryption. They should follow Don Draper’s advice … we urgently need them to.
Isis proves vulnerable to its own ‘ghost armies’
Isis may be claiming to wage a holy war for Islam but the self-declared caliphate is as vulnerable to the region’s deep-seated corruption as the secular Iraqi and Syrian regimes it displaced.
Evidence from its former fighters and officials suggests that “ghost armies” are fighting on both sides of the conflict.
A year ago Iraq denounced deep corruption within its army, alleging 50,000 “ghost” soldiers had been drawing salaries from the military without serving.
According to Omar, a rebel commander who fought with Isis for more than a year before fleeing and asked not be identified by his real name, the same thing happened on his side.
“You’d have a frontline [Isis] commander apply for salaries for 250 people, but really he only has 150,” he said. “When officials discovered the schemes they started sending financial administrators to deliver salaries. Then the administrators started agreeing with commanders on scams, too.”
Ex-fighters and former employees who worked under Isis often argue that, for all the jihadis’ talk of rejecting the secular Iraqi and Syrian governments they drove out, their officials often mimic those regimes’ penchant for bureaucracy — and graft.
From agricultural management to food subsidies, the officials put in charge by Isis often adopt the same systems developed by the ruling parties of Syria and Iraq, including their excessive use of paperwork and stamps.
Locals say Isis co-opted decades-old institutions that secured loyalty through patronage. And the more Isis expands, the more it depends on officials and fighters who prize financial reward over its radical ideology. In Syria some of the officials hired by Isis are the same people once employed by President Bashar al-Assad’s regime.
Abu Rasheed, a hospital pharmacist from Syria’s eastern city of Mayadeen who asked to use a false name for his safety, says he was surprised when Isis hired a medical official fired by the Assad government. The official was accused of embezzlement, and appears to have attempted the same scheme under Isis: he wrote dozens of fake medicine orders and, after receiving the money, burnt down the dispensary to avoid being caught.
“There’s no doubt that some of the effects of this power are turning them into something we would recognise as a corrupt, autocratic system,” said one western intelligence official who follows Isis.
Even so, intelligence officials say Isis tolerates much less graft than previous regimes. The group’s comparative efficiency and lack of corruption was repeatedly mentioned by residents during the jihadis’ takeover as a reason they were prepared to tolerate the group — a sobering assessment for the coalition, which needs to work with partners like the Iraqi government to beat Isis.
“The reality is that prior to [Isis] control of Mosul, things were probably more corrupt,” the western official said. “They deal with corruption harshly.”
Not harshly enough for Abu Rasheed. When Isis leaders discovered the medical scam, they arrested the official, shaved off his hair and beard to disgrace him, and forced him to take a course in Islamic law. “But, according to their own laws, they should have cut off his hand,” he said.
Syrians and Iraqis living under Isis rule say they increasingly sense weak spots in the system that they believe are the result of growing corruption.
They point to the proliferation of people-smuggling out of Isis territory since the leadership banned residents from leaving most parts of its self-proclaimed caliphate. Locals often bribe Isis fighters to look the other way at checkpoints, making its borders more porous.
Isis corruption scandals have become lore among former fighters, who gossip about emirs that spirit fortunes over the border into Turkey, then disappear.
The rebel commander who worked with Isis says that in his area of eastern Deir Ezzor province, an emir known as Abu Fatima al-Tunisi ran off with some $25,000 in zakat (a form of tax) funds. He says the fugitive fighter left a message to former comrades on Twitter: “What state? What caliphate? You idiots.”
Rolls-Royce chief voices ‘disquiet’ over diesel engine business
Warren East, Rolls-Royce’s chief executive, has flagged new risks to the performance of the aerospace group’s diesel engine business — the only division to have so far escaped a downgrade in the last five profit warnings.
Speaking in an interview with the Financial Times, Mr East voiced “disquiet” about trading conditions in the unit that supplies power systems for the mining and offshore oil industries.
“If you look at our competitors in our reciprocating engines part of the business, there have been some fairly serious downgrades on next year,” he said. “When I look at that, I do have a feeling of a little bit of disquiet . . . I’ve got to say, that’s a risk area.”
Mr East told investors last month that he would not rule out a new profit warning after five since February 2014. Now the Rolls-Royce boss is going further by identifying the industrial businesses as still vulnerable to a downgrade.
However, the company made clear on Sunday night that it was not planning to issue a formal profit warning.
Analysts have slashed forecasts for 2016’s earnings from about £1.2bn to about £764m during the past year.
Mr East stressed that the power systems division, which last year generated £2.7bn of the group’s total £14.6bn in underlying revenues, was also exposed to resilient sectors such as rail and defence, giving him cause to be more confident than his competitors.
Mr East last week took the first step in his plan to transform Rolls-Royce by shaking up top management and abolishing the group’s divisional structure. The chief executive, who took up his post in July, has been meeting investors in recent weeks to explain his transformation plan and highlight key risks for 2016 in an effort to improve transparency and restore confidence.
Rolls-Royce is “fundamentally a great business model”, he said.
Outlining the near-term challenges, Mr East pointed to the troubles of Anglo-American, which is scaling back its mining operations amid a deepening commodities downturn. Other companies exposed to segments served by Rolls-Royce, such as Caterpillar and Weir Group, have also warned of a difficult outlook for 2016.
Analysts are expecting a flat performance from the power-systems unit, created from the combination of Rolls-Royce’s Bergen marine engine business and the recently acquired Germany-based Tognum. But this was increasingly in question, given the market context, analysts said. “Everybody who has been exposed to extractive industries has been killed,” said one.
Mr East also issued a word of caution over the aerospace business after news last week that Airbus was encountering difficulties in the delivery of its A350 wide body, on which Rolls-Royce is the exclusive engine.
“Rolls-Royce will supply as many engines as Airbus needs and wants [for the A350],” he said. “But it may be a bit slower because of other things going on in the supply chain.”
Mr East insisted Rolls-Royce would come through its current difficulties, even if the transformation to a leaner, fitter group would take time.
“The root of the profit warnings are because information about things that are going on in the market, don’t get translated into implications for the company quickly enough,” Mr East said. Improving transparency for investors and for management was one of the priorities of his restructuring.
In a demonstration of his confidence Mr East last week bought 17,300 shares last week for a total consideration of £99,821. Nevertheless some investors are not willing to wait for the transformation to take effect. Old Mutual Global Investors confirmed to the Telegraph that it had sold its undisclosed stake after the fifth profit warning in November. Its disposal follows the exit of Neil Woodford as a long-time shareholder this month when he sold his 2.3 per cent stake.
LeBron Endorsement Deal Won’t Foul Nike
Nike’s lifetime deal for LeBron James and rising endorsement costs aren’t as rich as they might seem.
You have to spend money to make money, an adage Nike Inc. knows all too well.
The sportswear maker earlier this month inked basketball superstar LeBron James to a lifetime endorsement deal. Terms weren’t disclosed, but ESPN said the deal “easily surpasses” the 10-year, $300 million pact that Nike gave Kevin Durant last summer. Some observers even pegged it above $500 million.
Nike’s latest splash will eventually find its way to the income statement as a “demand-creation” cost, a category worth watching in its fiscal second-quarter results this week. Demand-creation costs comprise everything from marketing and sponsorships to advertising and endorsements. While they tend to be volatile quarter to quarter, they have risen in Nike’s past four fiscal years, hitting $3.2 billion in the year ended in May.
Cutting checks that big might look worrisome, but to Nike’s credit, this line item isn’t as rich as it may appear. As a percentage of total revenue, Nike’s demand-creation expenses have been on a downward trajectory for much of the past seven years, suggesting prudent rather than outlandish spending.
And when Nike reports results on Tuesday, chances are good they will exceed Wall Street’s estimates. Analysts polled by FactSet anticipate earnings of 86 cents a share for the period ended in November, up from 74 cents a year earlier. Nike has topped expectations in 31 of the past 33 quarters. Sales are estimated to rise 5.8%.
Investors tend to also focus on “futures orders”—a measure of anticipated shipments over the next five months. Futures rose 9% in Nike’s most recent report, aided by strong demand in China. That was up sharply from 2% in the prior two quarters.
Nike shares, up more than 30% this year, have been a consistent performer, nearly tripling over the past five years. The stock trades at 28 times next year’s projected earnings, near the highest level since the late 1990s. Yet Nike remains a far cheaper bet than rival Under Armour Inc., which fetches a multiple north of 60.
Just like LeBron’s deal, Nike’s stock shouldn’t give investors sticker shock.
Iraqi Oil Minister Says Oil Prices Are Too Low
Current crude oil prices are "too low", Iraq's oil minister Adel Abdul-Mahdi said Sunday, expressing hopes that they could have bottomed out.
Iraq, a member of the Organization of the Petroleum Exporting Countries, has been pumping oil furiously to shore up a budget strained by low prices and a war with Islamic State.
Iraq's output in 2015 has jumped by almost 500,000 barrels making it--along with the U.S.--one of the world's two fastest sources of supply growth and a key driver of surging OPEC production, according to the International Energy Agency.
The minister's comments come after OPEC failed to reach any agreement to restrain production earlier this month, leaving members to continue pumping crude at near-record levels into an already over supplied market. The group abandoned its production ceiling of 30 million barrels a day, which it had breached routinely.
The Saudi Arabia-led policy is meant to cause a period of low prices that drives out producers thought to need high prices, such as U.S. production, thereby reducing supplies and increasing OPEC's share of the market and eventually causing a market correction. The strategy has taken longer to work than some OPEC officials initially thought, though the International Energy Agency said there were signs of success.
However, Saudi Arabia, OPEC's kingpin, and its Persian Gulf allies are willing to pull back oil output to boost oil prices but won't cut unless other producers such as Iran, Iraq and Russia join them, Gulf officials have said.
Mr. Abdul-Mahdi did not say on Sunday whether Iraq would cut its production to support prices but said "there are pressures on OPEC and Arab countries to take the initiative of cutting production so other countries outside the organization to claim a bigger share of the market."
Iraq Oil Min: Oil prices set to rise from very low levels - financial press
- Says: "There is no doubt that oil prices will rebound...This current level is too low, and its affecting oil producers. I think economic factors and fundamentals are still strong."
Shire to improve offer for Baxalta with GBP 8bn cash sweetener
Shire [LON:SHP], an Anglo-Irish pharmaceuticals group, is preparing a GBP 8bn (EUR 10.96bn) cash sweetener for its takeover bid for Bannockburn, Illinois-based rival Baxalta [NYSE:BXLT], The Sunday Times reported.
The newspaper cited senior City sources who said the improved offer would revive Shire's GBP 20bn bid, which had seemed to be about to unravel.
Shire tabled an entirely share-based bid for Baxalta in July, which was confirmed by Baxalta in August, although Baxalta said the offer significantly undervalued its business and that the offer was not a basis for further talks.
Relations between Shire and Baxalta improved recently after the Irish company said it was willing to include a large cash component in its offer, the article said.
Shire could offer to pay up to 40% of the offer in cash, the item said, citing sources close to the talks.
Shire’s position on the sweetener means the two companies could agree a deal within weeks, the item said. Shire is believed to be looking to agree the takeover ahead of a pharmaceuticals conference in San Francisco in the middle of next month, according to the newspaper.
Sources cited by the report said there remains a chance that the two parties will not agree a deal. It is known that Shire CEO Flemming Ornskov is prepared to abandon the bid should Baxalta insist on a price he considers too high, the item said.
Shire had initially structured its offer as an all-share bid so as to maintain the tax benefits arising from Baxalta’s spin-off from Baxter, the article continued. However, sources said Shire now thinks it can include a cash component in its offer without putting the tax benefits at risk, according to the report.
Baxalta's market capitalisation stood at USD 26.06bn (GBP 17.48bn)
Shire refused to comment, according to the report.
Sunday Times