(Barron's) Conservative Party Win Is Good News for Banks

Conservative Party Win Is Good News for Banks
Beneficiaries include companies that might have suffered under a Labour-led government, such as utilities, outsourcing providers, and banks.

Investors in Great Britain got some unexpected good news Thursday. Surprising pollsters and pundits, the Conservative Party, led by Prime Minister David Cameron, won a slender majority in parliamentary elections.

Victory for the Conservatives, known as the Tories, means there will be no drawn-out negotiations with rivals to form a coalition and removes some of the uncertainty weighing on the British pound and on United Kingdom equities in the near term.

Sterling racked up a gain of more than 1% against the dollar, and was trading at $1.543 Friday afternoon , its highest level since February. London’s benchmark FTSE 100 index surged 0.9%, as investors breathed a huge sigh of relief that something like a political status quo has been maintained.

It is an outcome that few, if any, had predicted. Opinion polls suggested that the Tories and the Labour Party would win the lion’s share of the votes, but neither would win enough seats in the House of Commons, the lower house, to govern alone.

But the Tories won 331 of the 650 seats up for grabs, surpassing the 325 needed for a majority.

Political pundits spent weeks poring over coalition possibilities. The Scottish Nationalist Party was expected to be the king maker. The SNP did better than expected, securing 56 seats, largely at the expense of Labour, which won only 232 in a disappointing showing.

Stewardship of the British economy was a central theme in the campaign, and voters clearly felt more comfortable leaving management in the hands of the center-right Tories.

Defying International Monetary Fund forecasts, the Tories, in coalition with the Liberal Democrats for the past five years, have steered the U.K. away from recession to a position of health. Gross domestic product growth this year is estimated at 2.8%, above the European average.

Conservative governments are more pro-business than their Labour foes. Historically, in the month after a Tory election win, the FTSE 100 index has outperformed by five percentage points, while after a Labour victory it has underperformed by one percentage point, says John Baker, who manages the JPMorgan Intrepid European fund (ticker: VEUAX). “That could be a profitable trade,” he says.

Beneficiaries include companies that could have suffered under a Labour-led government, such as utilities and outsourcing providers. Those sectors were targeted by Labour for price caps and more regulation.

Arguably, the biggest winner is the banking sector. Labour had advocated squeezing an extra 800 million pounds ($1.23 billion) from the bank levy, an annual tax on the value of debts in U.K. banks, which would have cut 2016 consensus earnings by 2% to 8%.

It is an emotional issue for London-based HSBC Holdings (HSBA.UK) and Standard Chartered (STAN.UK). Both have enormous asset bases overseas. HSBC last month said that it was considering moving its domicile to another jurisdiction. HSBC’s sizable contribution to government coffers would be difficult to replace. In all likelihood, a Tory government could seek to strike bargains on the banking levy with HSBC and Standard Chartered to ensure they stay put.

Another positive for banks could be a pickup in the housing market. Fears that Labour would impose a tax on high-end homes or other duties have given consumers cause to put off making those kinds of decisions in recent months.

But with a more certain outlook, there could be a pickup in activity. Royal Bank of Scotland Group (RBS.UK), a leading lender, could benefit.

RBS shares rallied 6.1% Friday to close at £3.52. They have performed poorly in 2015, losing about 11% in value, while the Stoxx Europe 600 banks subsector has added about 15%. RBS trades at 13 times 2016 projected earnings of 25 pence per share, but just 0.7 times tangible book value, a preferred measure among analysts for assessing the worth of banks.

The government owns about 62% of RBS as a result of a bailout during the financial crisis. Chancellor George Osborne has indicated that selling down that stake would be a priority after the election. Eradicating that overhang would be positive.

Lloyds Banking Group (LLOY.UK) also has a clearer path ahead. Defeat for Labour removes the threat of market-share caps, which presented a tail risk for Lloyds. It is on course for a core Tier 1 capital ratio of about 14.6% in 2016, which should drive a rerating. Lloyds shares, which closed at 87 pence Friday, trade at 11 times forecast 2016 earnings, and at a price-to- tangible book value of 1.6 times.

THE TORY WIN COMES AT A PRICE in the longer term. Cameron has pledged to hold a referendum on U.K. membership in the European Union by the end of 2017, an event that could haunt sterling for the next couple of years.

An EU exit would be damaging for the U.K., creating barriers to trade and investment. Analysts suggest there is little chance that the U.K. will leave the EU, but, as this election has shown, predictions can be wrong.

Another potential headache: The SNP’s strong showing in Scotland could prompt calls for a rerun of last year’s referendum on Scottish independence. That’s something the new government would want to avoid.

(BFW) Ahold, Delahize Decline to Comment on Merger Talks Report

MORE: Ahold, Delahize Decline to Comment on Merger Talks Report
2015-05-09 09:20:26.913 GMT


By Celeste Perri and James G. Neuger
(Bloomberg) -- Ahold, Delhaize spokesmen separately say
companies decline to comment on market speculation.
* Earlier: Delhaize, Ahold in preliminary talks on possible
merger, De Tijd and L’Echo report, citing “several
sources”
* Link to report


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To contact the reporter on this story:
Celeste Perri in Amsterdam at +31-20-589-8505 or
cperri@bloomberg.net
To contact the editors responsible for this story:
Celeste Perri at +31-20-589-8505 or
cperri@bloomberg.net
Steve Bailey

>>> Weekly Update

Weekly Market Update: Tory Surprise and US Jobs Report Save the Week

Global equities lost altitude through Thursday as the parade of poor economic data and bond market choppiness continued. Early in the week, the ADP jobs report raised real worries that the US would see another anemic payrolls number for April, while Chinese trade data was concerning. There was no breakthrough on Greece, with both sides seemingly committed to forcing negotiations down to the wire. The global bond market rout continued apace this week and the surge in yields kept pressure on stocks worldwide, nudged further by Fed Chair Yellen weighing in on equity valuations. The stampede out of stocks and bonds sent European indexes to their lowest levels in two months. Note that the UST 10-year yield peaked just below 2.3% on Wednesday and then headed back below 2.12%, while the 10-year Bund peaked around 0.777% on Thursday and quickly dropped below 0.540% by Friday. The surprise landslide victory by the Conservative government in UK elections and Friday's not-too-hot, not-too-cold US jobs report helped equities recoup their losses for the week, with DJIA gaining 0.9%, the S&P500 adding 0.4% and the Nasdaq ending just above flat.

Fed Chair Yellen raised eyebrows on Wednesday after commenting on equity market valuations in a panel discussion. "I would highlight that equity market valuations at this point generally are quite high," said Yellen. "There are potential dangers there." Commentators compared Yellen's remarks to her call on biotech valuations a year ago as well as Alan Greenspan's notorious "irrational exuberance" comments. "We've also seen the compression of spreads on high-yield debt, which certainly looks like a reach for yield type of behavior," added Yellen. She also warned that another potential trouble spot was low long-term interest rates, which could spike as the Fed normalizes its policy, causing disruption across the financial system.

On Thursday, European bond yields had a serious hiccup, with the yield on the German 10-year Bund surging by as much as 21 bps to 0.80%, its highest level since last November, before easing back below 0.60%. Interestingly, peripheral Europe yields saw weaker gains and then fell significantly as buyers stepped in. There was no apparent proximate cause for the spike, besides a general lack of liquidity. Analysts have begun watching the rebound in yields with a certain degree of skepticism: the oil price rebound helped blunt fears of outright deflation, relieving some of the pressure on yields. The euro has reversed course and has begun strengthening, and European stocks have been heading lower in the face of Greek chaos. Economic data is not showing a big improvement in the real economy.

The April jobs report showed the US labor market bounced back firmly from the anemic March results. April non-farm payrolls rose to 228K, about in line with expectations, but the March figure was slashed to 86K from the already disappointing 126K. Unemployment fell to 5.4% from 5.5% in March. Hourly earnings fell slightly, raising worries that wage pressures were not sufficient to deliver much more economic growth. The biggest jobs growth was in white-collar and healthcare sectors, construction saw modest gains, while manufacturing was flat.

The US trade deficit rose 43% y/y to $51.5 billion in March (a six-month high), reflecting a surge of imports that followed the settlement of the West Coast port dispute. Exports edged up 0.9% to $187.8 billion, but imports leaped a record 7.7% to $239.2 billion. Economists say the numbers were less favorable than those used to calculate advance Q1 US GDP, however it remains unclear how much the imports will boost March inventory numbers and their impact on Q1 US GDP revisions.

UK Prime Minister David Cameron won an absolute majority in Britain's Parliamentary elections, taking 326 of the 650 seats up for grabs in the House of Commons. The outcome was surprising after weeks of polls that had been predicting a dead heat between Labour and the Conservatives. Labour's Ed Miliband said he would step down as party leader after his party's share fell to 229 seats from 258 prior. Nick Clegg resigned as leader of the Liberal Democrats after a disastrous result for his party, whose representation fell to eight seats from 57 prior.

Negotiations between Europe, the IMF and Greece went back and forth again this week and became even more divisive. Greek Finance Minister Varoufakis reinserted himself in the mix, denying he had been sidelined and claiming he was prepared to go "down to the wire" in talks. Greece made its payment to the IMF this week, while the next big payment is €745 due on May 12th. There were no signs that the two sides would be able to reach a deal at the Eurogroup meeting on Monday, May 11th. The ECB doled out another ELA expansion to the Greek banking system but deferred making a decision on collateral haircuts to next week. The ECB has used bank collateral obligations as a bargaining chip in bailout negotiations, and by deferring the decision it allows the EU to put a bit more pressure on the Greeks.

The gains in oil prices continued through midweek, with WTI coming within a dollar of the $70 level on Wednesday after the DoE weekly report included the first draw-down in crude inventories since early January. There has been a persistent feeling that the worst of the oil rout is over and prices were seeking a new, higher level, however traders warned of persistent weakness in the physical market (and it was softness in crude deliveries that wreaked havoc late last summer). EIA and OPEC data shows the world still producing more oil than it consumes, and a report that Iranian oil production capacity would be around 3.96M bpd in 2016 helped take futures off their highs.

The March quarter earnings season is slowly winding down. Ecommerce giant Alibaba saw revenue up nearly 50%, with users and mobile metrics rising sharply. Chairman Jack Ma also decided to reinvigorate his management team by bringing in a new CEO. Comcast hit an important milestone, as subscribers for internet service now outnumber cable TV subscribers. Sprint's headline numbers were a bit disappointing, but its widely watched churn rates improved. Green Mountain tanked after missing top- and bottom-line expectations and cutting its FY forecast. Whole Foods said it would launch a new "value-oriented" chain, upsetting some investors. Metlife and Prudential reported firm first quarter results.

McDonalds unveiled its big turnaround strategy. The main focus will be reorganization into four new corporate segments in an effort to strip away unwanted layers of management. McDonald's will also refranchise more than 3,000 restaurants through 2018, bringing its total percentage of franchised restaurants to 90% from 81% globally. Improving food quality will be a top priority. Friday MCD reported April SSS that were down again, by 0.6% globally, but the stock rallied after the decline was less then generally expected.

Lumber Liquidators suspended sales of Chinese laminate flooring, bowing to accusations that the products had dangerous levels of formaldehyde. The firm insisted that while 97% of 26,000 indoor air quality tests with kits provided by the company came back clear, it would suspend sales until a special committee looking into all allegations wrapped up its work. The sudden gain in LL's stock price after the announcement evaporated within hours. Meanwhile, activist Whitney Tilson told CNBC that the development would be the decisive point in the eventual collapse of Lumber Liquidators and disclosed he had "materially increased" his short position.

Alexion Pharmaceuticals agreed to pay a huge premium to buy rare disease specialist Synageva BioPharma for $8.4 billion in cash and stock. Notably, Synageva has no products on the market. Alexion officials said the deal will help their company accelerate and diversify its revenue growth and expand its manufacturing abilities. Alexion's shares tumbled after the deal was announced as investors decided the firm was overpaying.

Trade data out of China showed more signs of slowing growth in the domestic economy. April imports declined for the sixth month in a row, and it was the fourth consecutive month in which imports dropped by a double digit percentage. Chinese exports fell for the second straight month, dismissing hopes of a seasonal rebound while adding to the expectation the PBoC is close to stepping in again. Meanwhile, the China April final HSBC manufacturing PMI sank lower, racking up the biggest contraction in a year. The Shanghai Composite traded down by over 7.5% at its low point of the week before Friday's 2% rally on rate cut expectations. Inflation data due out early Saturday morning in China is expected to show CPI continuing a rebound off of five-year lows registered in January.

>>> US Close Dow+1,39% S&P+1,17% Nasdaq+1,42% Russell+0,77%

Closing Market Summary: Employment Report Helps Stocks Erase Weekly Losses

The stock market enjoyed a broad-based surge on Friday, which helped the S&P 500 (+1.4%) erase its weekly loss. As a result, the benchmark index added 0.4% for the week.

Equity indices registered the bulk of their gains at the open thanks to a pair of factors that underpinned the sharp spike before the first trade was made in the cash market. First, the UK general election proved surprising as conservatives expanded their presence in the parliament and won 331 of 650 seats. Meanwhile, Ed Miliband (Labour), Nick Clegg (Liberal Democrats), and Nigel Farage (UKIP) resigned from leading their respective parties. Although the results were surprising, markets cheered the preservation of status quo with UK's FTSE surging 2.3%.

Index futures held modest gains following the election results and they extended their gains once the U.S. Nonfarm Payrolls report for April beat expectations (223K; consensus 218K); however, it is worth noting that the March reading was revised down to 85K from 126K and hourly earnings growth remained weak (+0.1%; consensus +0.2%).

The report sparked a fire under equities and Treasuries as lackadaisical wage growth is likely to be used as an argument in favor of the Federal Reserve maintaining its current policy stance for longer. Treasuries soared in reaction to the report, but they retreated from their highs during the afternoon. Still, the 10-yr note ended in the green with its yield down four basis points at 2.14%. The benchmark yield narrowed its weekly increase to two-basis points and ended the week beneath its 200-day moving average (2.19%).

All ten sectors finished the day in positive territory and only three groups posted gains slimmer than 1.0%. Materials (+1.6%) and health care (+1.6%) jockeyed for the lead throughout the session, but the energy sector (+1.6%) overtook them both as part of a late rally. On a related note, crude oil rose 0.7% to $59.42/bbl.

Moving on, the health care sector received a boost from biotechnology with iShares Nasdaq Biotechnology ETF (IBB 351.93, +7.82) spiking 2.3%, and above its 50-day moving average, which had been an area of focus during the past two weeks.

Interestingly, today's broad advance masked the underperformance among a couple other high-beta areas like chipmakers and transport stocks.

The PHLX Semiconductor Index gained 1.0%, but spent the day behind the broader market as NVIDIA (NVDA 20.81, -1.68) weighed. Shares of NVDA fell 7.5% after the company reported in-line results and guided lower. That being said, the broader technology sector (+1.4%) ended a step ahead of the broader market with large cap names like Apple (AAPL 127.52, +2.26), Google (GOOGL 548.95, +6.91), and Microsoft (MSFT 47.75, +1.05) picking up the slack. Microsoft was a standout, climbing 2.3% after Reuters reported the company is no longer looking to acquire Salesforce.com (CRM 72.40, -2.12).

Elsewhere, the industrial sector (+1.2%) settled just behind the broader market even as transport stocks underperformed with the Dow Jones Transportation Average advancing 0.6%. Five components of the bellwether complex registered losses with Landstar System (LSTR 63.18, -0.86) sliding 1.3%.

Today's participation was below recent averages as 759 million shares changed hands at the NYSE floor.

Economic data included Nonfarm Payrolls and Wholesale Inventories:
  • Nonfarm payrolls added 223,000 new jobs in April, up from a downwardly revised 85,000 (from 126,000) in March while the consensus expected an increase of 218,000 
    • Private payrolls increased by 213,000 jobs in April after adding a downwardly revised 94,000 (from 129,000) in March while the consensus expected an increase of 215,000 
    • The average hourly wage increased 0.1% in April after increasing a downwardly revised 0.2% in March 
      • The average workweek remained at 34.5 hours for a second consecutive month 
      • The combination of the increase in payrolls and wages along with constant hours pushed aggregate earnings levels up 0.3% in April. Earnings were flat in March 
    • The unemployment rate fell to 5.4% in April from 5.5% in March, which met consensus expectations 
  • Wholesale inventories increased 0.1% in March after increasing a downwardly revised 0.2% (from 0.3%) in February while the consensus expected an increase of 0.3% 
    • The BEA assumed that wholesale inventories increased 0.6% in the advance Q1 2015 GDP report. The downside miss in March combined with the revisions to February will result in a downward revision to first quarter GDP when the second estimate is released at the end of the month 
There is no economic data on Monday's schedule.
  • Nasdaq Composite +5.4% YTD
  • S&P 500 +2.7% YTD
  • Russell 2000 +2.3% YTD
  • Dow Jones Industrial Average +2.0% YTD

GS Asia Views: China's big ease continues

1. Chinese policymakers have stepped up the pace of easing in recent weeks, with interest rates continuing lower. The 7-day repo rate -- the key short-term policy interest rate -- has fallen nearly 300bp in just two months. Lower rates are typical following periods of rapid debt accumulation in most countries, as policymakers try to maintain growth by easing high debt service costs. With repo rates near our year-end forecast of 2.25% and the curve steepening through our target of 30bp, we see the best opportunities now further out the curve. Policymakers' focus may also have shifted in this direction, given their desire to ensure a successful launch of new municipal securities in coming weeks.

2. Heightened focus on supporting economic activity--reinforced at the most recent Politburo meeting--is clearly appropriate. Q1 growth was dismal, the worst since the global financial crisis. Official data implied only a 2-3% real GDP growth pace on a quarter-over-quarter basis after subtracting a large contribution from the financial sector's fervent activity, and industrial output was especially weak in March.

3. Lower rates are unlikely to be sufficient by themselves to push Chinese growth back up towards the official target of "around 7%". Measures to stabilize housing activity--recent data suggests that progress is being made in this area, although we saw a false start late in 2014--and especially to boost fiscal outlays will be key. On the latter point, local governments have been a key source of growth in China in recent years, generating significant revenue from land sales and borrowing heavily via off-balance sheet funding vehicles. With these revenue sources under threat--the former from a softer property market and the latter from regulatory intervention to bring greater accountability and transparency--and the anticorruption campaign providing strong incentives for local officials to be conservative, spending has slowed significantly.

4. Clients we visited recently in London, Singapore, Seoul, and Tokyo were extremely curious about the Chinese equity boom--even after the selloff of the past few days, A shares have rallied over 70% in 6 months--and what it means for the economy and other asset markets. We see a stronger equity market as a helpful, albeit modest, support for activity in the near term, and perhaps more importantly as a vehicle for reducing the reliance of the economy on debt financing. Our equity strategists remain overweight, though they see the best opportunities in offshore listings such as select H-shares and China ADRs. Views differ considerably depending on where clients sit, with sentiment bullish within greater China and generally more skeptical outside it.

5. Skepticism has certainly been the theme in southern Asian asset markets in recent weeks. Weakness in equities and some currencies (notably the Thai baht) began before the selloff in core bond markets--based on client conversations, this seems to reflect concerns about the progress of structural reforms, weaker-than-expected growth outcomes, and possibly some rotation towards China-related assets. Governments in south and southeast Asia are confronting diverse challenges, including pressure to deliver on high reform expectations and/or domestic political challenges. Though some political leaders in the region have openly called for monetary easing, central bankers remain concerned about various domestic (inflation or credit growth) or external (current account) imbalances despite progress since the "taper tantrum", particularly given expectations for the onset of Fed rate hikes later this year.

6. Indeed, a key concern raised in client meetings--particularly within Asia--continues to be the potential impact of Fed rate hikes on regional asset markets and currencies. For policymakers dealing with "lowflation" concerns, weaker currencies are more likely to be an acceptable or even desirable outcome of Fed tightening (for example in Japan, Korea, and Thailand--arguably China too, though policymakers there seem more focused on maintaining stability versus the dollar to support their longer-term policy goal of renminbi internationalization). For countries such as Indonesia (and to a lesser extent India) that run current account deficits, or for rate-sensitive financial centers such as HK and Singapore, a gradual Fed liftoff will be especially important.

7. From an investment perspective, we see the biggest opportunity for further policy rate cuts in China (where we expect a benchmark rate cut of 50bp), Korea, and Thailand. Further cuts are also a possibility in India (where the market is already pricing one) and Indonesia (given a disappointing Q1 growth report), though our base case in both countries is for policy to stay on hold. Our Japan economics team expects the Bank of Japan to step up monetary easing to maintain the credibility of the 2% inflation target; however, this now appears likely to happen later in the year (October is our forecast) given the BOJ recently revised its expected timeframe for achieving the target back to mid-2016. While the BOJ's adjustment appears to have been digested relatively well by markets (at least compared to recent European and US bond market moves), any signs of a more significant rethink in the policy approach might not be --though we emphasize this is a medium term risk, not a concern for the coming 12-18 months.

>>> InterXion options include counter-offer for Telecity

InterXion options include counter-offer for Telecity

Launching a counter-bid against Equinix [EQIX: NASDAQ] for Telecity [TCY:LON] is one of several responses InterXion [NYSE:INXN] will consider, it is understood.

Equinix launched on 7 May a non-binding offer for Telecity at GBP 11.45 per share, payable in cash and stock. Telecity had already agreed to acquire InterXion through an all-share merger announced in March.

In principle InterXion has the financial capabilities to outbid Equinix's current proposal and buy Telecity, it was said. At this stage, it is not clear whether such an offer would be made using cash and stock, it is understood. However, an all-cash bid partially funded using equity would be possible.

InterXion would find it difficult to compete if Equinix made a firm offer, it was said separately. Telecity and InterXion are of similar size, it was noted, and the cash portion of any competing offer would likely have to equal Equinix’s.

InterXion will also consider whether it should accept a reduced premium for its shares tendered to Telecity, it is understood.

The existing agreement would see InterXion shareholders receive 2.3386 new TelecityGroup shares per Interxion share. TelecityGroup shareholders will own approximately 55%, and InterXion shareholders approximately 45% in the combined entity.

The exchange ratio of 2.3386 new TelecityGroup shares per Interxion share implies a 15% premium.

A third option available would be to adjust the exchange ratio offering InterXion a smaller stake in the combined entity, it was said. InterXion’s priority is to pursue its deal with Telecity, it was said. Equinix’s approach nullifies the exclusivity obligation placed on Telecity and InterXion.

Alternative bidders for InterXion include Digital Realty, which has identified the European market as a priority, it was noted. The list of potential bidders in the data centre and colocation space is limited though, it was said.

Telecity shareholders have said they are very pleased with the potential Equinix offer, a source said. The company’s share price rose from 900p per share to GBP 10.93 since the deal announcement.

There are several factors that contribute to the attractiveness of a deal with InterXion, it was said. Firstly, the combination with InterXion has known synergies, while Equinix is yet to conduct due diligence on Telecity.

Shareholders taking a three-four year view on Telecity stock may favour a combination with InterXion, it was noted.

InterXion declined to comment while Telecity could not be reached.

(BFW) *TEVA SAID TO SEEK $25 BILLION IN FINANCING FOR MYLAN TAKEOVER

BN 05/08 16:37 *NO FINAL DECISION MADE ON RAISING OFFER PRICE ON MYLAN
BN 05/08 16:37 *TEVA TALKING TO BANKS INCL. BARCLAYS, CITI, BOFA, HSBC ON LOAN
BN 05/08 16:36 *TEVA FINANCING MAY GIVE IT MEANS TO RAISE MYLAN BID: SOURCES
*TEVA SAID TO SEEK $25 BILLION IN FINANCING FOR MYLAN TAKEOVER
2015-05-08 16:36:52.901 GMT

--ELIZABETH FOURNIER

-0- May/08/2015 16:36 GMT