>>> Weekly Update

Weekly Market Update: Historically Poor Start to 2016 Extends on Global Market Turmoil


The New Year's market mayhem went from bad to worse this week. Beijing took its campaign to create volatility in the yuan FX rate to Hong Kong, creating elevated levels of paranoia regarding the economic strategy behind its big interventions. On Wednesday, the Shanghai Composite slipped below 3,000 for the first time since last August, putting the index in a technical bear market, down 20% from its December highs. The index closed the week below its August lows at 2,900, down about 6.5%. US and European equities were whipped around by the continuing chaos, with highly volatile trading seen all week, however Friday's session was the real moment of truth, as options expiration, the coming three-day weekend and a real sense of panic in markets combined to drive a massive selloff, with the DJIA and S&P500 down more than 3% a piece and the Nasdaq down more than 4% at their worst levels. On Friday, the S&P500 plunged through its August low of 1867 in mid-day trading before recovering to close above it. The 10-year UST yield tumbled nearly 18 basis points from its high of 2.175% on Monday below 2.00% before the open on Friday. Short rates fell too, when futures traders used Friday's disappointing US data to push Fed rate hike expectations out further into 2016. And behind it all, WTI and Brent crude marched in lockstep to 12-year lows below $30.

For the five sessions through Thursday, the PBoC set the yuan fixing higher, then set it slightly lower on Friday. So after pushing down the yuan last week, the PBoC has worked hard to build it right back up again this week, driving confusion and chaos in domestic and overseas markets along the way. Many analysts say that is exactly the point, with the bank creating volatility to make betting against the yuan more expensive and tamp down the flow of money heading out of the country. Beijing's efforts to monkey with the yuan over recent months have paid off, as seen in the December Chinese trade data. China's December trade surplus in both CNY and USD terms was much higher than expected. Outbound shipments priced in CNY rose +2.3% v -4.1%e, and in USD terms the decline was just -1.4% v -8.0%e. The decline in imports in both CNY and USD terms were much less than expected.

Another theater of conflict in the Chinese crisis opened up in Hong Kong this week. On Monday, short-term rates in Hong Kong (HIBOR) to borrow offshore yuan (CNH) jumped to a record 13.4% from 4% on Friday. On Tuesday, HIBOR spiked to an astonishing 66.8%, and then settled back around 8% in the latter half of the week. Traders said the PBoC - via large Chinese banks - intervened in the offshore market by selling USD/CNH, to reduce the pool of offshore yuan liquidity, in an effort to crush the yuan carry trade, punish the short CNY trade and narrow the spread between onshore and offshore yuan. The CNY/CNH spread had spiked rapidly through the first week of the New Year to a five-year high, topping out around 1.02 before PBoC action crushed the spread back below 1.00. Meanwhile, the Hong Kong Dollar sank to its lowest level against the greenback in five years.

Brent and WTI crude prices cratered in lockstep, with both contracts closing out the week below $30, for 12-year lows. With Iran weeks or even days from achieving final compliance with the International Atomic Energy Agency (IAEA) on mothballing its nuclear program, there was little prospect of support for prices any time soon. Morgan Stanley, Goldman Sachs and Citigroup all published research pieces this week asserting that the price of oil would remain in the $20 handle over the near term as a result of China's slowdown, the appreciation of the USD and the fact that drillers are not curbing production despite the oil glut. USD/CAD touched a 13-year high of 1.4550 on the continued softness in crude, with traders waiting anxiously for a possible rate cut at next week's Bank of Canada policy meeting.

Two Fed presidents - dove Evans and hawk Bullard - aired their fears about the impact of plunging oil prices on inflation. Evans said he was nervous that inflation expectations might not be well anchored, citing downward pressure from the endless decline in oil prices. Bullard echoed his comments, warning that inflation expectations were becoming worrisome. Bullard took an even stronger stance than Evans and said the Fed may no longer be able to keep looking past crude prices when assessing inflation trends. Bullard said that low crude prices are now correlated with falling inflation expectations, could hold down actual inflation levels. Friday the Fed's Dudley offered little solace to plunging markets. Dudley opined he does not see much change in the economic situation and believes core inflation remains relatively stable.

It's no secret that US manufacturing has been seeing sequential declines over recent months, and data out on Friday confirmed that the trend is not improving. The January Empire manufacturing survey from the New York Fed (the first of the regional Fed factory surveys for January) was a total disaster, which declined to its lowest level since the depths of the recession in early 2009. The new orders and production indexes each deteriorated by nearly 20 points. US industrial production dropped for the third straight month in December. Analysts note that a major part of the month's decline was due to utilities cutting output amid unusually warm weather and energy companies reducing activity in the face of falling oil prices. The November figure was revised much lower, to -0.9% from -0.6% prior.

The Bank of England kept its key interest rate at a record low of 0.5% and made no changes to its asset purchase program. Both decisions were widely expected, as the outlook for UK growth and inflation has been crushed by negative developments in the energy markets and the world economy. The MPC voted 8-1 to keep rates at 0.5% where they have stood since March 2009, but voted unanimously to keep it's QE program unchanged. "Recent volatility in financial markets has underlined the downside risks to global growth, primarily emanating from emerging markets," the central bank said in minutes from its meeting. GBP/USD saw its highs of the week around 1.4600, then skidded lower to under 1.4300 in the chaotic trading on Thursday and Friday, to a fresh six-year low.

Alcoa marked the unofficial beginning of the fourth quarter earnings season on Monday. Alcoa's earnings topped analysts' expectations, but revenue fell just short of what was expected, as some high-growth segments helped to slightly negate headwinds in its legacy business. The firm's outlook for aluminum demand growth in 2016 was +6% y/y, down slightly from its last 2015 forecast of +6.5% y/y.

JPMorgan widely exceeded expectations in its fourth-quarter earnings report. Profits rose more than 5% y/y, while revenue was only up incrementally. The corporate and investment bank saw huge profit growth, however, the commercial bank and asset management unit both saw lower profits. Executives warned of rough waters ahead for the US economy. "We're not forecasting a recession - I think the US economy looks pretty good at this point," said CEO Dimon. Citigroup turned in good quarterly results, with profits up sharply y/y as the bank shakes off its legal woes, and revenue up 3% y/y, both beating expectations. Wells Fargo only just met top- and bottom-line expectations.

Shire has finally bagged Baxalta, with the latter agreeing to be acquired in a $32 billion deal valued at $45.47 in cash and stock. The deal includes an $18/shr cash component, not too far from the 40% cash portion rumored last week. Baxalta, which was spun out of Baxter International, generates a large portion of its sales from Advate, a drug for hemophilia. This is Shire's third major buy in just over a year, coming after last November's $5.9 billion Dyax buy and the acquisition of NPS Pharmaceuticals for about $5.2 billion a year ago.

>>> US Close Dow-2.39% S&P-2.16% Nasdaq-2.74% Russell-1.75%

Closing Market Summary: Stock Market Led Lower by Energy and Financials 

The major indices hover above their worst levels of the day after an aggressive selloff through the first half. Today's session has marked a new 52-week low in the benchmark index as it has surrendered more than 52 points this session. The averages have slipped as oil concerns and poor economic data weigh on the beleaguered stock market. The Nasdaq (-3.5%) trails the S&P 500 (-3.0%) and the Dow Jones Industrial Average (-2.8%).

Overnight, WTI crude was pressured by news that the International Atomic Energy Agency may announce that Iran is in compliance with an agreement to restrict the country's nuclear program. This move is expected to help lift sanctions against the country and to lead to the re-establishment of oil trade. In response to this, WTI crude surrendered the $31.00/bbl price level overnight. This helped weigh on international indices heading into the open. Currently the energy-component is down 5.9% at $29.37/bbl.

Futures extended their losses when a slew of poor economic data was released this morning. Specifically of note, the Empire Manufacturing report fell to -19.4 in January (Briefing. com consensus -3.5) and the U.S. Retail Sales report for December showed a decline of 0.1% (Briefing.com consensus +0.1%).

On the leaderboard, financials (-4.2%), energy (-4.2%), technology (-3.6%), and materials (-2.8%) post the steepest losses. Meanwhile, in front of the pack, countercylical utilities (-1.8%), telecom services (-1.8%), consumer staples (-2.1%), and health care (-2.2%) outperform. 

Looking in the financial sector, large-caps Wells Fargo (WFC 48.57, -2.07) and Citigroup (C 42.41, -2.96) underperform after both companies announced Q4 earnings this morning. Wells Fargo showed earnings and revenue in-line with consensus. Meanwhile, Citigroup reported in-line EPS with a revenue beat. The two stocks trade lower by 4.1% and 6.5%, respectively. Citigroup is likely suffering because it announced a $549 million loan loss reserve build mirroring JPMorgan Chase's (JPM 56.52, -1.67) news after their Q4 results yesterday. Both Citigroup and JPMorgan Chase have increased their loan loss reserves due to positions in their energy portfolios.

In the heavily-weighted technology space, high-beta chipmakers show relative weakness, evidenced by the 5.2% decline in the PHLX Semiconductor Index. The sub-group is showing relative weakness after constituent Intel (INTC 29.88, -2.86) reported earnings this morning. Despite reporting a beat, the stock is down 8.7%, likely due to a $200 million decline in operating income. Meanwhile, large-cap constituents Facebook (FB 94.66, -3.67), Microsoft (MSFT 50.87, -2.23), and Apple (AAPL 96.62, -2.90) have kept pace with the retreat, declining between 2.2% and 3.5%, apiece.

Heavy selling pressure in equities has pushed Treasuries to their highs. The benchmark note yield is lower by six basis points at 2.03%.

Economic data released today included December PPI, December Retail, January Empire Manufacturing Index, December Industrial Production report, November Business Inventories, and the preliminary reading of the Michigan Sentiment Index for January.

  • The Producer Price Index report for December produced a 0.2% decline
    • The downtick in the final demand index was due to a 0.7% decline in prices for final demand goods.
  • The index for final demand services ticked up 0.1%.
    • On a year-over-year basis, the index for final demand is down 1.0%, which is the eleventh consecutive 12-month decline.
  • Core PPI is up 0.3%. core PPI, which excludes food and energy, increased 0.1%.
  • December Retail Sales report decreased 0.1% (consensus +0.1%) while sales ex-auto also decreased 0.1% (consensus 0.3%).
    • Total sales for 2015 were up 2.1% from 2014 while Q4 sales rose 1.8% year-over-year.
  • Empire Manufacturing Survey for January registered a reading of -19.4, which was below the prior month's revised reading of -6.2 (from -4.6) (consensus -3.5)
  • Industrial production declined 0.4% in December with a revised 0.9% decline (from -0.6%) in November. (consensus -0.2%)
    • That was the fifth consecutive monthly decline
    • Total industrial production in December was down 1.8% below the December 2014 level.
  • Total industry capacity utilization dipped to 76.5% (consensus 76.9%) from a revised 76.9% (from 77.0%) in November.
    • Rates were down for all major industry groups, led by utilities, which fell to 73.2% from 74.8%.
  • Total business inventories were down 0.2% in November following a downwardly revised 0.1% decrease (from 0.0%) in October. (consensus unchanged)
    • Retailer inventories increased 0.2% in November on top of a 0.1% increase in October.
    • The inventory-to-sales ratio was unchanged at 1.38; this is up from the same period a year ago when the ratio stood at 1.32.
  • The preliminary reading for the University of Michigan Index of Consumer Sentiment for January was 93.3 (consensus, which was at 92.6.)
    • This was up from the final December reading of 92.6  
    • The improvement stemmed from a better Consumer Expectations component, which increased to 85.7 from 82.7.
    • The increase in expectations outweighed a drop in the Current Economic Conditions Index, which decreased to 105.1 from 108.1.

>>> Liberty Global slowing growth may facilitate Vodafone talks

Liberty Global slowing growth may facilitate Vodafone talks
* Slowing Liberty growth may aid valuation parity and premium negotiations
*Malone needs to be convinced of Vodafone growth - bankers
*Liberty debt and differing philosophies remain a hurdle

Deal talks between Vodafone [LON:VOD] and Liberty Global [NASDAQ:LBTYA] could be facilitated by the latter’s declining growth rate and valuation, bankers and a top Vodafone minority investor said.

Not enough has changed since asset swap talks were terminated in late September, to significantly facilitate another attempt at reaching agreement, the bankers believed. Valuations appear to have narrowed but not enough of a parity has been reached, they argued.

As it stands, Liberty Global’s price expectations are not in line with Vodafone’s, a source familiar with the situation said. When you have valuations that are rich already, it is difficult to justify a 30%-40% premium for either party, a second source familiar said.

But Liberty Global’s growth is believed to have peaked and is now slowing, analysts pointed out. Should this continue, the parties will reach the valuation balance needed to get a deal done quicker than if relying only on Vodafone’s continued growth, the said.

Short-term dips in Liberty Global’s share price will not encourage a deal, bankers said, referring to a downgrade by Morgan Stanley on 11 January. Liberty’s share price has fallen from USD 37.09 before the downgrade to around USD 34.79.

But one Vodafone analyst, taking a forward-looking approach, estimated Liberty Global would eventually be trading at 8x and Vodafone at 7x EV/EBITDA, based on the companies’ own projections. A second analyst said the previous four-point gap between the two companies’ multiples was gradually narrowing and there was currently only about a three-point gap between the two.

Liberty Global and Vodafone are currently trading at 9.9x EV/EBITDA and 7.34x EV/EBITDA on a trailing 12-month basis, respectively. This compares to Liberty at 11.6x and Vodafone at 7.46x on 4 June, the day before the companies confirmed they were in asset swap talks.

Vodafone would likely pay for Liberty Global using a significant share portion, leaving chairman John Malone with a large minority stake, bankers and the investor pointed out. Malone would be more receptive to the idea of holding a stake in Vodafone as a result of the UK group’s growth prospects, bankers said. A significant share portion would reduce premium expectations due to the greater upside seen in being part of the combination, the first banker and investor said.

Management structure could also alleviate the need for a substantial premium, the second source familiar said. If either CEO steps down, the deal would be seen as a takeover, with a requirement for a takeover premium. If Malone were to become Chairman, this would be addressed, the source said.

Dilution and Malone’s influence on the management board are not big concerns, despite the cultural differences between the two companies, the investor added.

But Malone still needs convincing this is the right outcome for his company, bankers said.

The first banker referred to statements made by Malone when he owned a stake in AT&T. Malone became a significant minority shareholder in AT&T after selling the US telco his cable company, Tele-Communications. Malone was critical of AT&T’s then-chairman and the telco’s disappointing performance at the time. The banker pointed out that Malone would be extra cautious in deciding to become a large minority shareholder in a telco again.

Both Malone and investors need more evidence of Vodafone’s growth before talks can move to a high-level stage, the bankers said.

Vodafone’s full-year results (for the year ending 31 March 2016), usually published in May, need to show continued top-line growth and further proof of returns from Project Spring, its network-investment programme, for the company to be in a strong negotiating position, the first two bankers said.

When presenting its first-half results in November, Vodafone said its full-year results may beat its initial forecast. Investors will also be looking for guidance on the next financial year, the Vodafone investor said.

Vodafone executives are not discussing a merger or acquisition, it was said. The parties and bankers continue to think about ways in which a deal can get done but a solution is seen as complex and potentially far off, it was added. Reports that a GBP 140bn merger is imminent are inaccurate, it was said.

Vodafone’s communications with shareholders have not hinted at an imminent deal, the investor said, adding he would be surprised if a deal was announced this quarter. “Time is on Vodafone’s side,” the investor said.

Liberty Global’s debt level continues to be potentially problematic in reaching agreement, the bankers and sources said. Its gross leverage is 5x, according to its Q3 2015 results, published in November. A balance would need to be found to do a deal, the investor agreed.

The fundamental difference in the two companies’ philosophies is a bigger issue, the second source said. Liberty likes leverage, Vodafone is the opposite, the source said, adding that Liberty likes share buybacks while Vodafone likes dividends.

Vodafone would look to de-lever Liberty post-merger or acquisition, which could put its dividends policy at risk, the first banker said. Figuring out a capital structure that works for both is therefore still seen as difficult, it was said. However, threats to dividend will only concern certain types of investor, the investor pointed out.

WSJ : BT-EE Deal Clears Way For Creative Orange Accounting

BT-EE Deal Clears Way For Creative Orange Accounting

Orange wants its proposed takeover of Bouygues Telecom judged in Paris

BT’s deal to buy EE from Orange and Deutsche Telekom has finally been blessed by the U.K. competition regulator. That clears one hurdle in the path of Orange’s bid to consolidate the French telecoms market by buying local rival Bouygues Telecom. But the French incumbent may still have a job bypassing the hawkish European watchdog.
European Competition Commissioner Margrethe Vestager has taken a skeptical line on telecoms mergers. Citing concerns over price increases, she blocked a deal in her native Denmark and turned down a request by the U.K. competition authority to rule locally on the tie-up of O2 and Three.
Orange wants its case for the deal to be heard by the more sympathetic French competition authorities. To quality for national oversight, both companies need to make more than two-thirds of sales in France, according to European law. Bouygues qualifies. But Orange has been losing sales in its home market. Even stripping out EE, the numbers risk falling short.

Orange’s French consumer division accounted for 47% of group sales (ex-EE) in 2014, and HSBC expects the unit’s revenues to have fallen 1.1% last year. The complication is that the group also makes French sales within its business-to-business “Enterprise” division as well as its “International Carriers & Shared Services” division, which agrees deals for other telecom and media companies to use Orange’s infrastructure.
In 2014, 69% of Enterprise sales were classified as French, while the share for IC&SS was 93%. That took the French share of Orange’s business up to 64%—still below the two-thirds threshold.
Of course, how revenues are allocated geographically within Orange’s various businesses is a gray area. Orange is due to publish accounts for 2015 in February. Don't be surprised if the country’s former telecoms monopoly is looking more French than ever.

La Tribune : Rennes : accident thérapeutique grave lors de l'essai d'un médicame

Rennes : accident thérapeutique grave lors de l'essai d'un médicament

L'accident thérapeutique, survenu lors d'un essai thérapeutique dans le centre de recherche médicale de la société française Biotrial à Rennes, a entraîné l'hospitalisation de six patients, dont l'un est en état de mort cérébrale. Le test en phase I concernait une molécule produite par le laboratoire portugais Bial. Une enquête a été ouverte.

Le pôle santé publique du parquet de Paris a ouvert vendredi 15 janvier une enquête après un accident qui a eu lieu près de Rennes lors d'un essai thérapeutique. Le produit testé lors de l'accident médical qui a causé l'hospitalisation de six personnes à Rennes, dont une est en état de mort cérébrale, est une molécule à "visée antalgique" contenant du "cannabinoïde" (il s'agit de substances utilisés comme psychotropes pour soulager des douleurs chroniques), prise par voir orale. A noter que l'essai en question, mené par la société Biotrial, un centre de recherche médicale, était en phase I, c'est-à-dire effectué sur un nombre limité de sujets sains, sous contrôle médicale strict. Le but est d'évaluer la sécurité de l'emploi d'une nouvelle molécule. Celle-ci a été conçue par le laboratoire portugais Bial, selon une source proche du dossier, rapporte l'AFP. Ce dernier est le plus grand groupe pharmaceutique portugais.

La société française Biotrial, qui emploie 300 salariés dans le monde, dont 200 personnes à Rennes, a vu passer environ 55.000 volontaires en vingt-cinq ans, selon Ouest-France.

Marisol Touraine se rend à Rennes en urgence
Pour le moment, on ne sait pas qui, de la molécule ou des conditions de l'essai, a provoqué cet accident. De fait, l'enquête ouverte par le pôle santé du parquet de Paris doit déterminer les causes de cet accident, a affirmé le ministère de la Santé. Par ailleurs, Marisol Touraine se rend à Rennes vendredi après-midi pour tenir un point presse où devrait également se rendre un responsable de la société. A noter que le centre de recherche biomédicale de Biotrial est agréé par le ministère.