Month: June 2014

Authored by Axel Weber (UBS Chairman and former Bundesbank President), originally posted at The FT,

When the governing council of the European Central Bank meets in Frankfurt on Thursday, it is widely expected to announce a loosening in policy – most likely a cut in both the refinancing and deposit rates. Two weeks later, the US Federal Reserve will probably respond to strengthening economic data by moving in the opposite direction, tapering the pace of quantitative easing for the fifth consecutive meeting. This is another sign of how monetary policy is diverging in the two largest economies, a trend that is set to shape funding markets for years to come.

In the US, output is set to rebound in the second quarter after having been disrupted by dismal weather in the first. And while price rises have been subdued so far, employment surveys suggest an emerging skills shortage and thus the potential for wage cost growth that could help lift inflation close to the Fed’s 2 per cent target. By any measure the labour market is tighter in America than in Europe, where the recovery remains weak and uneven despite buoyant financial markets. The gap between actual and potential output will barely shrink in the eurozone this year, and unemployment will remain close to a record high.

Before long, these divergent fortunes are bound to lead to large differences in policy. In the US, interest rates could begin to rise in 2015. In Europe, they are likely to stay low for much longer.

One might expect that movements in financial markets would reflect these expectations. However, so far, by and large, they have not. The dollar has been ailing for months, defying analysts’ expectations that the currency would strengthen in anticipation of higher US interest rates. What is going on?

The answer is that market expectations seem to count less than current conditions, which still support the euro. First, the high yields on government debt in countries such as Italy and Spain have made them an attractive investment for believers in the ECB’s pledge to do “whatever it takes” to save the euro. Second, America’s shrinking pension deficits may have stoked appetite among pension-fund managers to lock in profits and match liabilities, helping suppress long-term bond yields. And then there are the central banks. The Eurosystem’s balance sheet has been shrinking for more than a year, as banks that borrowed from the central bank under the longer-term refinancing operation (LTRO) have repaid their debts early. Meanwhile, the Fed’s balance sheet is still growing, albeit at a reduced rate.

However, these factors are temporary. LTRO repayments are coming to an end, US quantitative easing will be completed by the end of the year, five-year government bond yields in Spain are already similar to those in America and long-dated US government bond yields are pricing in unrealistically low expectations of future economic growth. Diverging monetary policy will soon begin to have more impact.

To my mind, investors should prepare for more volatility this year. The degree of easing of US monetary policy has been exceptional. The tightening, when it begins, will also be unprecedented. The tightening has not yet begun – the Fed’s balance sheet is still expanding. I see significant potential for volatility and setbacks on financial markets over the next few quarters.

In particular, the story is not over for emerging-market countries that rely on cheap dollar funding. The recovery of their stock markets and currencies in the past months does not reflect improved economic fundamentals, but a better mood among investors. These countries are still vulnerable. When US interest rates begin to rise, these borrowers may be able to turn to euro-denominated debt as an alternative source of cheap financing. However, this at best delays adjustment; improving fundamentals remains urgent.

The Fed’s balance sheet, which was about half the size of the Eurosystem’s going into the crisis, has now overtaken its European counterpart as a proportion of output. Emerging markets will not be the only ones to suffer when this trend goes into reverse. A tightening in US monetary policy always causes fallout. This time will be no different. In fact, it may be worse, since the tightening starts from extremely expansionary territory.

As we noted previously, it’s just a matter of time…

 

 

h/t @Not_Jim_Cramer

via Zero Hedge http://ift.tt/1udCpda Tyler Durden

We have shown the surge in short positioning that CFTC exposes via its Commitment of Traders data that has begun to see some covering; but despite Citi’s protestation that the recent rally in bonds ‘must’ have cleared out the short base and squared positions, the truth is – the Treasury market is dominated by more than just futures and institutional clients have not been this short Treasuries since 2006. As JPMorgan’s Client Survey exposes, as of the end of last week, active clients were adding to shorts… which could be a problem as the last time all clients were this net short, bond yields collapsed in the next few months…

 

 

So while we know that banks have massive flattener positions on, they continue to push the idea of steepeners and bearish bets to their clients… perhaps it is time to do as they ‘do’, not as they ‘say’.

 

Chart: Bloomberg

via Zero Hedge http://ift.tt/1hVw2Ea Tyler Durden

As SocGen’s Albert Edwards conveniently points out, during the excitement of the downward revision of Q1 US GDP from +0.1% to -1.0% investors seem not to have noticed a $213bn, 10% annualized slump in the US Bureau of Economic Analysis’s (BEA) favored measure of whole economy profits, defined as profits from current production. Also known as economic profits, the BEA makes adjustments to remove inventory profits (IVA) and to put depreciation on an economic instead of a tax basis (CCAdj). Edwards shows the stark difference between the BEA’s calculation for post-tax headline profits (up 5.3% yoy) and economic profits (down 6.8% yoy) in the chart below. In short: the plunge in actual corporate profits in Q1 was the biggest since Lehman!

 

It is not just SocGen’s bear who observes this surprising finding: Goldman is on it as well.

Last Thursday’s second release of the Q1 national accounts showed a 14% decline in the BEA’s measure of adjusted, after-tax corporate profits. In just one quarter, profit margins dropped from 10% to 8.7% of GNP…. The chart on the left of Exhibit 1 shows that the Q1 dip in profit margins was unusually large. As the chart on the right shows, the decline was felt across-the-board, with corporate profits in the domestic financial sector suffering the sharpest drop and domestic non-financial and rest-of-the-world profits showing large declines as well. In addition, corporate taxes rose as a share of profits, accounting for about one-tenth of the decline in after-tax profits.

 

Goldman is quick to note two reason why it hopes this inflection point does not signal the end of record profit margins:

1. The decline was driven by statistical adjustment factors. The first reason is that the decline in corporate profits as measured in the national accounts mostly reflects the capital consumption adjustment factor estimated by the BEA to account for the effect of the expiration of bonus depreciation at the end of 2013.
2. Q1 weakness should be temporary. Growth and productivity were unusually weak in Q1, which likely weighed on profits, but both should strengthen going forward. As we argued recently, Q1 weakness was mostly driven by temporary factors, while more recent data suggest that the acceleration is intact.

What is most perplexing is that while corporate profits will eventually decline it is expected that they will do so at the expense of rising wages. This is not happening: To wit: “Wage growth remains soft. Our wage tracker–an aggregate of average hourly earnings, the employment cost index, and nonfarm business compensation per hour–rose only modestly in 2014Q1 to 1.8%. As we previously noted, this is about 2 percentage points below the rate at which labor costs would begin to consistently eat into profit margins.”

If anything this is confirmation that there is far less slack in the economy than widely believed, and that corporate profitability can collapse even without a comparable increase in much needed wage inflation (the basis for David Rosenberg’s conversion from a deflationist to inflationist).

So Goldman spin aside, what is really happening? For the real answer we go back to Albert Edwards who is kind enough to explain:

Having spent the best part of 25 years following US whole economy profits I feel I have a good understanding on what exactly is going on. I was however most surprised at the divergence in the two key series shown on the front page chart. After a very long chat with a very helpful person from the BEA, she emailed me to “note this quarter, there is a substantial difference between profits from current production (that include IVA and CCAdj) and profits before tax (that exclude IVA and CCAdj) due to the expiration of investment incentives that allowed companies to accelerate depreciation over the past several years. As provisions of the tax acts from 2002, 2003, 2008, 2009, 2010, and 2012 expire, and as no new provisions are introduced, businesses are now expensing less depreciation for tax purposes. As a result, tax based depreciation expense, measured as CCA, is falling, while economic depreciation expense, measured as CFC, continues on a steady growth trend (see charts below). The difference between these two measures is the CCAdj. With economic depreciation expense higher than tax based depreciation expense, BEA’s measure of corporate profits with CCAdj shows a decline, while profits excluding CCAdj show an increase.”

The punchline: “headline reported profits are currently artificially inflated upwards to show a roughly 5% yoy increase, which is incidentally the same pace that the MSCI trailing reported stockmarket profits are rising by – both are misleading investors as to the underlying strength of profits.”

Or, said simply: accounting gimmicks relating to the tax treatment of accelerate depreciation managed to boost paper, not real, profits artificially higher. And now that the gimmick is no longer there, profits are finally reverting to a reality-based trendline.

But wait it gets worse: when looking at pure cash flow – the hardest to fudge corporate data point – the chart speaks volumes:

Edwards again:

The BEA press release itself describes net cashflow with IVA as “the internal funds available to corporations for investment (calculated as after tax profits with IVA and CCAdj, net of dividend payments but plus depreciation on an economic basis (CFC))”. We can see from the chart above that this decreased by $132bn in Q1 following a decrease of $43bn in Q4. This key measure of internal funds available for investment has stalled badly over the last two years (see chart above). No wonder US business investment has been struggling recently. The bottom line is that the US profits margin cycle has begun to turn down at long last (see chart below). It is doing so from elevated but not unprecedented levels – especially the nonfinancial part of the economy (my former colleague Leo Doyle always told me I had to add depreciation into the profits numerator as the denominator GDP was also measured gross of depreciation – i.e. the G in GDP!)

And visually – this chart is comparable to the Goldman one, only it looks at GDP not GNP and has profits on a pre-tax, not after-tax basis.

 

But why did nobody notice this earlier? We go back to Edwards for one final time:

Just about everyone I know, except my wife, has seen the Star Wars films and knows the scene when Obe Wan gets through a stormtrooper checkpoint using his Jedi powers –

Stormtrooper: Let me see your identification.

Obi-Wan: [with a small wave of his hand] You don’t need to see his identification.

Stormtrooper: We don’t need to see his identification.

Obi-Wan: These aren’t the droids you’re looking for.

Stormtrooper: These aren’t the droids we’re looking for.

Obi-Wan: He can go about his business.

Stormtrooper: You can go about your business.

Obi-Wan: Move along.

Stormtrooper: Move along… move along.

As Obi Wan might have said, “US Profits are not declining. China is not devaluing. There is nothing to see here. Move along and continue to party.”

via Zero Hedge http://ift.tt/1udru3l Tyler Durden

Proving once again that you can’t print your way to general economic prosperity, Abenomics took another shot to the chest last night as Japan’s base wages failed to rise month-over-month for the 24th month in a row (the longest streak in history). Even after all the promises and hope of the spring wage negotiations, Abe’s ‘plan’ to guilt employers into raising wages is not working; which is especialy problematic given the surge in inflation (as the ‘real’ wage slumped 3.1% in April) As Goldman warns, we caution against excessive expectations for sustained wage growth.

 

 

Via Goldman Sachs,

Basic wages still falling even after spring wage negotiations; total wages lifted by special wages/overtime: April total cash wages rose 0.9% yoy, accelerating from March (+0.7%). Special wages increased 20.5% yoy (March: +10.3%), pushing up the total by 0.6 pp. Overtime pay has underpinned wages as a whole recently but is beginning to peak out, although it still rose 5.1% in April (March: +5.8%) and contributed +0.4pp to overall wage growth.

Meanwhile, basic wages (80% of the total) remained on a yoy downtrend (April: -0.2%; March: -0.3%). While wage hikes resulting from the spring negotiations (shunto) will be largely reflected in basic wages, the April figure indicates no major change in basic wages since the start of the new fiscal year. Next month’s May data should shed more light, as many companies will include the shunto wage hike portion in salaries from May.

…

Part-time employees rise, regular employees show signs of peaking: Employee numbers have been growing stably, with the April figure coming in at +1.3% yoy (March: +1.2%), consistent with other employment-related economic indicators. The breakdown shows growth in part-time workers coming in at +2.8% yoy in April, accelerating from +2.1% in March, but growth in regular employees slowing to +0.6% (March: +0.9%), pointing to signs of a peak.

Focus on basic wages and overtime from May: It comes as a surprise that basic wages contracted in the first month of the new fiscal year despite the shunto wage hikes. Since many companies pay new-FY wages starting around May or June, we focus on the basic wage trend from next month…

Considering that there has been no change in basic wages so far, employment growth is skewed toward part-timers, and also continued increase in overtime wages, we think companies remain cautious on expanding fixed cost, i.e. full-time employees and basic wages, and are responding to cyclical activity growth by taking on more part-timers or increasing overtime hours. We caution against excessive expectations for sustained wage growth.

via Zero Hedge http://ift.tt/S2gtDI Tyler Durden

If Mario Draghi was waiting for the latest Eurozone inflation data to cement his decision to unleash negative deposit rates, if not more, in the Eurozone, he got it earlier today when Eurostat reported that May inflation tumbled to 0.5% – matching the cycle lows and the lowest since March 2009 – down from April’s 0.7%, below the 0.6% expected, and less than half the ECB’s target. In other words, despite everything tried in Europe nothing is working, and the most important chart – that showing the collapse in lending to private companies – not due to lack of supply but due to no demand, continues to be the most relevant one. Sadly, it is the one Draghi has shown over the past three years he has virtually zero control over.

Broken down by segments, the biggest drop in prices was in Energy and non-energy industrial goods, with food and alcohol rising a modest 0.1%, as services rose by the most or 1.1%.Still, even the core number of 0.7% came in below the 0.8% expected and down from 1.0% in April.

The commentators quickly commented:

“It’s a surprise, but not enough of a surprise to change materially the global economic outlook that the ECB will release on Thursday,” said Michel Martinez, an economist at Societe Generale SA in Paris. “What seems highly likely is that the ECB will cut key rates and probably also inject further liquidity.”

“Today’s inflation numbers underscore the need for the ECB to act. The ECB has consistently underestimated the deflationary forces threatening Europe and now is the time for unconventional monetary policy,” said Dominic Rossi, Global Chief Investment Officer at Fidelity Worldwide Investment.

The market response, as we already noted, was paradoxical, with Bunds selling off on the data:

German 10-year government bond yields, which hit 12-month lows last week, rose 3.1 basis points to 1.34 percent. Bund futures declined. Some traders said the weak inflation data was already priced into the market and prompted investors to book profits after a recent rally.

 

“That number was if anything bond-friendly. We expect the Bund to regain its momentum and start rallying again ahead of Thursday’s ECB meeting,” one trader said.

And now everyone looks forward to Thursday’s ECB monthly announcement, curious what non-existant bazooka Draghi will pull out of his sleeve.  As Bloomberg summarizes, the ECB has prepared investors for the prospect of stimulus when it announces the rate decisions on June 5. “We are ready to act,” ECB Vice President Vitor Constancio said on May 30. “We are not complacent about the risks from a protracted period of low inflation.”

“The ECB will announce rate cuts, including the deposit rate into negative territory,” said Martinez, who was one of the few economists accurately to forecast the May inflation rate in Bloomberg’s survey. The ECB will probably also stop sterilization of its Securities Markets Program and announce a targeted longer-term refinancing operation, Martinez said.

However, a possible interest rate cut by 0.1 to 0.15 percentage point would have little impact, as the rate tool has been exhausted, former ECB chief economist Juergen Stark wrote in today’s Frankfurter Allgemeine Zeitung.

As for negative rates? Well, let’s look at the example of Denmark which introduced negative rates nearly two years ago. Did it have an impact on lending? As the following chart courtesy of @GreekFire23 shows, the answer is: not at all.

None of this matters: what does matter is for the ECB to exude confidence and pretend like it knows what it is doing even as it is becoming increasingly clear that the reality is anything but.

via Zero Hedge http://ift.tt/1rGVAOY Tyler Durden

• At least 74 dead in crashes similar to those GM linked to faulty switches (Reuters)
• Obama Calls for $1 Billion Europe Security Fund; Will Increase U.S. Military Presence in Eastern Europe (WSJ)
• Euro Inflation Slowing More Than Forecast Pressures ECB (BBG)
• China accelerates as euro zone stumbles (Reuters)
• Russia says Ukraine situation worsening, submits U.N. resolution (Reuters)
• Secondary Sales Squeeze Investors (WSJ)
• Barclays Said to Start Cutting Jobs in Investment Banking Unit (Bloomberg)
• Backlash Grows on Release of Sgt. Bowe Bergdahl in Taliban Prisoner Swap (WSJ)
• For fallen soldiers’ families, Bergdahl release stirs resentment (Reuters)
• PIMCO’s Gross stares at record outflow (Reuters)
• China Builds Sulawesi Smelters as Ore Ban Cuts Jobs (BBG)
• Toilet Shortage Fuels India Rape as Women Are Prey (BBG)
• Bank of America Says Mistake Inflated Reported Size of Dark Pool (BBG)
• Six shot at Chicago laundry facility (Reuters)
• Norway Oil Riches at Stake as Political Brinkmanship Rules (BBG)
• Ex-Bankers Upgrade the Good Life as Violin Pools Beckon (BBG)

 

Overnight Media Digest

WSJ

* The Phoenix VA Health Care System, at the heart of the crisis at the Department of Veterans Affairs, is among a number of VA hospitals that show significantly higher rates of mortality and dangerous infections than the agency’s top-tier hospitals, internal records show. (http://ift.tt/1pOD2HM)

* Two years after three major book publishers settled a major civil antitrust lawsuit with the federal government, the Justice Department has gone back to the publishers asking about any recent pricing discussions they may have had with others in the industry, say people familiar with the situation. (http://ift.tt/1pOD42n)

* New federal caps on carbon emissions unveiled by the Environmental Protection Agency on Monday would force sweeping changes in the U.S. electric system but wouldn’t deliver the knockout blow to coal that mining companies and some power producers had feared. The proposed regulations give both states and utilities credit for reductions they already have made, including moving from coal to more natural gas and deploying renewable energy. (http://ift.tt/1pOD42q)

* Pilgrim’s Pride Corp raised its offer for Hillshire Brands Co by more than $1 billion, according to people familiar with the matter. The new offer from Pilgrim’s, a unit of Brazilian meat giant JBS SA, values the Chicago-based meats and desserts company at $55 a share, or more than $6.7 billion. (http://ift.tt/1rGPL45)

* United States Steel Corp said it would temporarily close plants in Texas and Pennsylvania and blamed illegally-priced imports, raising the volume on trade disputes with China and South Korea. The steel-maker’s decision to close its plants will affect 260 workers. (http://ift.tt/1rGPLkl)

* A dozen companies including Google Inc, J. Crew Group Inc, and Deere & Co acknowledged they or their suppliers may have obtained metals from mines in a region known to use mining to fund armed militias, according to filings with the Securities and Exchange Commission. (http://ift.tt/1rGPLkn)

* The Pentagon on Monday awarded Lockheed Martin Corp a $915 million contract for the first phase of its Space Fence, a radar system that would track more of the fast-growing field of debris in space that threatens satellites and manned spacecraft. (http://ift.tt/1pOD2Y8)

* Live Nation Entertainment Inc’s Ticketmaster agreed to a tentative settlement in a 2003 class action lawsuit that, if approved, would offer to issue roughly $400 million in credit to 50 million ticket buyers. (http://ift.tt/1pOD4iI)

* Activist investor William Ackman and Valeant Pharmaceuticals International Inc shifted their strategy yet again as they looked to pressure Allergan Inc on Monday to succumb to a $52.7 billion takeover. Ackman will now seek a more definitive vote to throw out a majority of Allergan’s board. (http://ift.tt/1pOD2Ya)

* The U.S. Supreme Court on Monday declined to make it easier to hold companies liable for encouraging others to commit patent infringement. The ruling, which came in patent litigation between Internet services companies Akamai Technologies Inc and Limelight Networks Inc restored prior legal rules that were loosened when a U.S. appeals court sided with Akamai in 2012. (http://ift.tt/1pOD2Yc)

* Patients with the skin cancer melanoma, who received drugs from Bristol-Myers Squibb Co and Merck & Co Inc , have survived longer than other cancer patients. Doctors say the outcomes were impressive because until recently, most patients with advanced melanoma could be expected to live for less than a year. (http://ift.tt/1pOD2Ye)

* The Federal Reserve is hiring Thomas Sullivan, who served as Connecticut Insurance Commissioner during the financial crisis, to lead its oversight of big insurance firms. Sullivan will lead oversight of some of the nation’s largest insurers and represent the Fed in global discussions about rules for the industry. (http://ift.tt/1pOD2Yg)

 

FT

U.S. private equity firm KKR & Co LP has shuttered its $510 million equities hedge fund a mere three years after roping in a group of former Goldman Sachs proprietary traders to run it.

European private equity firms Montagu and Astorg are to buy back French diagnostics company Sebia four years after selling it to private equity group Cinven, highlighting a scarcity of buyout opportunities in Europe.

British interdealer broker Tullett Prebon is in advanced talks to appoint a successor to Chief Executive Terry Smith. Former Nomura and Lehman Brothers executive John Phizackerley is the leading contender, two sources said.

Bank of America Merrill Lynch has poached UK banking industry veteran Tim Waddell from rival UBS to be its new vice-chairman of global corporate and investment banking for Europe, the Middle East and Africa.

Global security company G4S is under further pressure after a British government-funded watchdog agreed to investigate its activities in Israel and the occupied Palestinian territories.

 

NYT

* Enormous amounts of capital investment – up to $2.5 trillion a year – will be needed to supply the world’s energy needs through 2035, according to a report released Monday by the International Energy Agency, the intergovernmental organization based in Paris. And even that amount of investment would not eliminate many of the issues the industry faces. (http://ift.tt/1rGPIFh)

* Facing the prospect of a guilty plea in the United States, the giant French bank BNP Paribas SA, which is suspected of doing business with Sudan and other countries blacklisted by the United States, has enlisted the support of a powerful ally: its own government, including top regulators and even the French president. (http://ift.tt/1pOD2Yi)

* From the moment it was announced, the $53 billion joint bid for Allergan, the maker of Botox, made by Valeant Pharmaceuticals and the hedge fund manager William Ackman, was highly unconventional. In the last week, the joint bid has evolved from an already unusual deal into one of the most confounding takeover attempts in recent memory. (http://ift.tt/1pOD2Yl)

* Pilgrim’s Pride has raised its takeover bid for Hillshire Brands to $55 a share, people briefed on the matter said, turning up the heat in a battle over the maker of Jimmy Dean Sausages and Ball Park hot dogs. (http://ift.tt/1pOD2Yn)

* The Subway restaurant chain is taking a foot-long approach to original online video programming, sponsoring a second web series and considering a renewal for its first entry into the growing field. Subway is to announce on Tuesday that it will sponsor an original scripted web comedy series called “Summer With Cimorelli,” featuring six singing sisters whose pop music has become popular through YouTube. (http://ift.tt/1rGPLAR)

* Authorities in China have made Google Inc’s services largely inaccessible in recent days, a move most likely related to the government’s broad efforts to stifle discussion of the 25th anniversary of the crackdown on pro-democracy demonstrators in Tiananmen Square on June 3 and 4, 1989. In addition to Google’s search engines being blocked, the company’s products, including Gmail, Calendar and Translate, have been affected. (http://ift.tt/1pOD4iP)

* The Seattle city council went where no big-city lawmakers have gone before on Monday, raising the local minimum wage to $15 an hour, more than double the federal minimum, and pushing Seattle to the forefront of urban efforts to address income inequality.(http://ift.tt/1rGPLAT)

 

Canada

THE GLOBE AND MAIL

* The union representing Ontario’s provincial police has released two ads targeting Progressive Conservative Leader Tim Hudak, a first in its 60-year history. The 15-second TV ads feature a voice-over saying Hudak will tear up the union’s contracts, which would lead to “labor strife and extensive litigation.” (http://ift.tt/1pOD4iT)

* Canadian Prime Minister Stephen Harper will leave for Europe this week to discuss the fate of Ukraine. However, he will be dogged by questions over why Ottawa has failed to finalize a multibillion-dollar free-trade agreement Canada and the European Union announced more than seven months ago. (http://ift.tt/1rGPLAV)

Reports in the business section:

* Sotheby’s International Realty Canada is planning to double its presence in Calgary, a testament to the growing number of luxury properties that are selling in the city. Sotheby’s opened its first office in Calgary less than two years ago, with about 20 real estate agents. It now wants to grow its team to close to 60 people. (http://ift.tt/1rGPIFr)

NATIONAL POST

* Cities across Canada have launched an effort to preserve door-to-door mail delivery, even as the first cuts loom this fall. Canada Post announced last December that it would phase out door-to-door delivery, bringing in annual savings of $500 million. Since then, over 70 municipalities have joined together in opposing the measure. (http://ift.tt/1rGPIFt)

* Canadian Prime Minister Stephen Harper ignored the federal government selection committee’s nominee Lisa Campbell and chose Daniel Therrien as the next privacy commissioner. National Democratic Party leader Tom Mulcair has sent a letter to the government warning that Therrien will face conflicts since he helped establish controversial information-sharing arrangements with the United States that the previous privacy commissioner criticized. (http://ift.tt/1pOD4iZ)

FINANCIAL POST

* Canada and Mexico are working together to boost oil and gas production. A high-level delegation from Mexico was in Calgary on Monday to invite Canadian companies to take advantage of its sweeping energy reforms. (http://ift.tt/1rGPIVH)

* Sentry Investments Inc has launched a proxy fight to overhaul Timmins Gold Corp’s board, a relatively unique situation that experts believe could become more common in the future. Sentry said it is calling for change after Vancouver-based Timmins ignored shareholder requests to allow potential acquirers to conduct due diligence. (http://ift.tt/1pOD4zf)

 

China

SHANGHAI SECURITIES

– The government’s decision last Friday to lower the reserve requirement for more banks to shore up China’s economic growth does not mean it was easing monetary policy, economists say.

– China’s economy growth will not rebound sharply even though it posted over the weekend that its official Purchasing Managers’ Index rose to 50.8 in May from April’s 50.4, better than the market had expected, analysts say.

CHINA SECURITIES JOURNAL

– The Shanghai Stock Exchange adjusted the components of its main blue-chip stock index, the SSE180, to include 18 new firms, such as the newly listed Shaanxi Coal Industry Co Ltd .

– With another 20 firms publishing their draft share issue prospectuses on the China Securities Regulatory Commission website over the weekend, the total number of companies that have published such prospectuses as part of their initial public offering process has reached 430.

CHINA DAILY

– The persistent existence and rampancy of cult activities in China reveals failures in education and administration, an editorial by this official newspaper said after the murder of a woman at a fastfood restaurant in China last week sparked a national outcry as it was revealed she was beaten to death for refusing to give her telephone number to members of a banned religious group.

SECURITIES TIMES

– China Vanke Co Ltd said a Shenzhen-based financial firm representing 1,320 of Vanke’s employees has bought Vanke shares worth a combined 723 million yuan ($116 million) over the past three trading days.

PEOPLE’S DAILY

– Asia must guard against Cold War-like solutions that result in division, and those countries hoping to use military alliances to strike balance should abandon Cold War thinking, a commentary by this ruling Communist Party of China’s newspaper said after China, Japan and the United States exchanged harsh words at an Asian Security meeting in Singapore over the weekend.

 

Britain

* Enormous amounts of capital investment – up to $2.5 trillion a year – will be needed to supply the world’s energy needs through 2035, according to a report released Monday by the International Energy Agency, the intergovernmental organization based in Paris. And even that amount of investment would not eliminate many of the issues the industry faces. (http://ift.tt/1rGPIFh)

* Facing the prospect of a guilty plea in the United States, the giant French bank BNP Paribas SA, which is suspected of doing business with Sudan and other countries blacklisted by the United States, has enlisted the support of a powerful ally: its own government, including top regulators and even the French president. (http://ift.tt/1pOD2Yi)

* From the moment it was announced, the $53 billion joint bid for Allergan, the maker of Botox, made by Valeant Pharmaceuticals and the hedge fund manager William Ackman, was highly unconventional. In the last week, the joint bid has evolved from an already unusual deal into one of the most confounding takeover attempts in recent memory. (http://ift.tt/1pOD2Yl)

* Pilgrim’s Pride has raised its takeover bid for Hillshire Brands to $55 a share, people briefed on the matter said, turning up the heat in a battle over the maker of Jimmy Dean Sausages and Ball Park hot dogs. (http://ift.tt/1pOD2Yn)

* The Subway restaurant chain is taking a foot-long approach to original online video programming, sponsoring a second web series and considering a renewal for its first entry into the growing field. Subway is to announce on Tuesday that it will sponsor an original scripted web comedy series called “Summer With Cimorelli,” featuring six singing sisters whose pop music has become popular through YouTube. (http://ift.tt/1rGPLAR)

* Authorities in China have made Google Inc’s services largely inaccessible in recent days, a move most likely related to the government’s broad efforts to stifle discussion of the 25th anniversary of the crackdown on pro-democracy demonstrators in Tiananmen Square on June 3 and 4, 1989. In addition to Google’s search engines being blocked, the company’s products, including Gmail, Calendar and Translate, have been affected. (http://ift.tt/1pOD4iP)

* The Seattle city council went where no big-city lawmakers have gone before on Monday, raising the local minimum wage to $15 an hour, more than double the federal minimum, and pushing Seattle to the forefront of urban efforts to address income inequality.(http://ift.tt/1rGPLAT)

 

 

Fly On The Wall 7:00 AM Market Snapshot

ECONOMIC REPORTS

Domestic economic reports scheduled today include:
Factory orders for April at 10:00–consensus up 0.5%

ANALYST RESEARCH

Upgrades

BRF S.A. (BRFS) upgraded to Buy from Neutral at Goldman
China Mobile (CHL) upgraded to Buy from Neutral at Nomura
Devon Energy (DVN) upgraded to Outperform from Market Perform at Wells Fargo
East West Bancorp (EWBC) upgraded to Overweight from Equalweight at Barclays
LIN Media (LIN) upgraded to Overweight from Equal Weight at Evercore
Synovus (SNV) upgraded to Outperform from Market Perform at Keefe Bruyette

Downgrades

Allergan (AGN) downgraded to Neutral from Outperform at Credit Suisse
Broadcom (BRCM) downgraded to Hold from Buy at Stifel
Centene (CNC) downgraded to Sell from Neutral at Citigroup
Clovis (CLVS) downgraded to Neutral from Buy at Citigroup
Danone (DANOY) downgraded to Sell from Neutral at Goldman
Heineken (HEINY) downgraded to Sell from Neutral at Goldman
TPG Specialty Lending (TSLX) downgraded to Market Perform at Wells Fargo

Initiations

Alcentra Capital (ABDC) initiated with a Market Perform at Keefe Bruyette
Alcentra Capital (ABDC) initiated with a Neutral at RW Baird
Alcentra Capital (ABDC) initiated with an Outperform at Oppenheimer
Applied Materials (AMAT) initiated with a Buy at Jefferies
Devon Energy (DVN) initiated with an Accumulate at KLR Group
Emerge Energy (EMES) initiated with a Buy at Wunderlich
Kroger (KR) initiated with an Outperform at Oppenheimer
Lam Research (LRCX) initiated with a Buy at Jefferies
Lazard (LAZ) initiated with an Outperform at Bernstein
MeadWestvaco (MWV) initiated with a Buy at KeyBanc
Medley Capital (MCC) initiated with a Buy at MLV & Co.
Multimedia Games (MGAM) initiated with a Buy at Stifel
ONE Gas (OGS) initiated with an Underperform at BofA/Merrill
PBF Logistics (PBFX) initiated with a Buy at Citigroup
PBF Logistics (PBFX) initiated with a Buy at UBS
PBF Logistics (PBFX) initiated with an Outperform at Credit Suisse
PBF Logistics (PBFX) initiated with an Overweight at Barclays
RAIT Financial (RAS) initiated with a Buy at MLV & Co.
SuperValu (SVU) initiated with an Outperform at Oppenheimer

COMPANY NEWS

Pilgrim’s Pride (PPC) confirmed revised proposal to acquire Hillshire (HSH) at $55 per share
Hillshire Brands (HSH) board authorized discussions with Pilgrim’s Pride (PPC), Tyson Foods (TSN), says does not have right to terminate Pinnacle Foods (PF) merger on the basis of either of these proposals
IBM (IBM) disclosed conclusion of SEC investigation regarding cloud revenue, says SEC does not intend to recommend any enforcement action against company
Lockheed Martin (LMT) was awarded a $914.7M Space Fence contract
NPS Pharmaceuticals (NPSP) disclosed in a filing that it has not had any communication with Shire (SHPG) concerning a purported acquisition offer

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
Guidewire (GWRE)

Companies that missed consensus earnings expectations include:
Quiksilver (ZQK)

Companies that matched consensus earnings expectations include:
Krispy Kreme (KKD)

NEWSPAPERS/WEBSITES

Analysis says 74 deaths like those GM (GM) linked to switches, Reuters reports
Goldman (GS) planning to increase the size of its commercial bank and wealth management division, FT reports
Barclays (BCS) said to begin reducing 100 jobs in Asia-Pacific, Bloomberg reports
Humana (HUM) claims Medtronic (MDT) conspired with physicians, WSJ reports
France to stand by BNP (BNPQY) against possible U.S. fine, Reuters says
Marathon Oil (MRO) could jump 20% after unloading Norway assets, Barron’s says

SYNDICATE
1347 Property Insurance (PIH) files to sell 2.5M shares of common stock
Berry Plastics (BERY) files to sell 10M shares of common stock for holders
CoStar Group (CSGP) files to sell 2M shares of common stock
CommScope (COMM) files to sell 15M shares of common stock for holders
Nielsen (NLSN) files to sell 20M shares of common stock for holders
Oxygen Biotherapeutics (OXBT) files to sell 5.29M shares for holders
Profire Energy (PFIE) files to sell $17.42M of common stock
Wesco Aircraft (WAIR) files to sell 6M shares of common stock for Carlyle

via Zero Hedge http://ift.tt/1x02C1f Tyler Durden

Considering that both key overnight news reports: the Chinese HSBC PMI (printing at 49.4, vs 49.7 expected) and the Eurozone CPI print from a few hours ago (print of 0.5%, down from 0.7% and below the 0.6% expected), we find it odd that futures are red: after all this is precisely that kind of negative data that has pushed the market to record highs over the past five years. And speaking of odd, considering the ongoing non-dis-deflation in Europe, the fact that Bunds and TSYs are being sold off today makes perfect sense in a New Normal bizarro world.

The recurring theme of record highs in equities continues with the S&P500 (+0.07%) notching up its third straight record close, and the fifth record high of the last six sessions, to take the YTD tally to +4.14%. The index is up almost 11% since the January lows. One equity index that hasn’t done so well this year is the Nikkei (-7.5% YTD in local currency terms) but it’s been playing catch up over the last fortnight. Indeed, the Nikkei (+0.76% today) is poised to close stronger for the ninth time in the last 11 sessions amid some anecdotal reports that the economy has weathered the consumption tax hike and as the focus turns to expectations of structural reforms.

The topic of Japan’s structural reforms came up in a Reuters article today which detailed a draft of Prime Minister Abe’s upcoming policy paper, titled “Japan Industrial Revival Plan”. According to the article, the current draft of the government’s growth strategy provides little detail on how and if the government will cut the corporate tax rate, nor does it detail plans to overhaul the public pension fund, GPIF. These have been two of the potential measures being closely watched by investors. The draft also does not detail whether the Abe government will push to legalise casinos in Japan. The draft plan was compiled by government ministries and will form the basis of Abe’s “third arrow” reform update due to be announced later this month (Reuters).
Nevertheless, Japanese stocks are pushing higher today, buoyed by the momentum of USDJPY which rose the most in two months yesterday (+0.60% and unchanged today). On the topic of the GPIF, the Nikkei newspaper quoted the head of GPIF’s investment committee as saying that increasing the public pension fund’s weighting to domestic stocks to 20% (from the current level of 12%) would not be too high. The BoJ’s Kuroda was also on the newswires overnight, saying to the Japanese parliament that it is too early to discuss the BoJ’s exit strategy at the moment – this was partly in response to reports that the central bank was beginning early planning on how to withdraw from its current policy stance.

Turning to the day ahead, the focus will be on the Euroarea CPI report for May, which as noted came in below expectations, down from the prior month’s 0.7%, and in line with the cyclical low of 0.5%. This likely means that the ECB will introduce a package of easing options on Thursday.  In the US, monthly vehicle sales and factory orders data will be released today: we wonder how many seasonal revisions the data will sustain before the Fed is happy with its impact on stocks. President Obama begins his European trip with meetings Poland to discuss security issues regarding Russia. Obama is also expected to meet with the Ukrainian president-elect Petro Poroshenko.

 

Bulletin headline summary

• The Nikkei 225 (+0.7%) opened above the 15,000 handle for the first time since April 3 underpinned by possible GPIF reforms and a prospective future cut in the corporate tax rate, while Chinese PMIs further supported equity markets.
• Chinese HSBC Manufacturing PMI (May) M/M 49.4 vs. Exp. 49.7 (Prev. 49.7) 4-month high; Non-Manufacturing PMI (May) M/M 55.5 (Prev. 54.8) 6-month high.
• Treasuries lower, extending yesterday’s decline that pushed 10Y yield to highest since May 27; traders waiting for ECB Thursday as inflation in euro area slipped more than forecast; U.S. payrolls Friday.
• The euro area’s inflation rate fell to 0.5% from 0.7% in April, below 0.6% median in Bloomberg survey. The rate has been less than half the ECB’s target for eight months
• The Reserve Bank of Australia kept its benchmark cash rate at a record low 2.5% as fiscal consolidation adds to a mining investment slowdown as a brake on growth
• Clashes continued in eastern Ukraine between pro-Russian separatists and the armed forces, with the authorities reporting deaths among the insurgents
• Barclays Plc will start cutting hundreds of jobs across its investment bank this week, according to people with knowledge of the matter
• As Obama and Hollande prepare to meet on a Normandy beach this week to mark the 70th anniversary of D-Day, the relationship between the countries is getting chillier, with France selling weapons to Russia in defiance of American efforts to isolate Putin and the U.S. preparing to slap BNP with a $10b fine
• Obama, arriving in Poland today, announced a $1 billion fund to help boost defensive capabilities of European allies shaken by Russia’s annexation of the Crimean peninsula from Ukraine
• Sovereign yields higher. Nikkei +0.7%, leading most Asia equity markets higher; Chinese indexes little changed. European equity markets lower. U.S. stock futures fall. WTI crude and copper lower, gold gains

US event calendar

• 9:45am: ISM New York, May (prior 50.6)
• 10:00am: Factory Orders, April, est. 0.5% (prior 1.1%, revision 0.9%)
• 10:00am: IBD/TIPP Economic Optimism, June, est. 46.8 (prior 45.8)
• TBA: Domestic Vehicle Sales, May, est. 12.7m (prior 12.65m)
• Total Vehicle Sales, May, est. 16.1m (prior 15.98m) Central Banks
• 11:00am POMO: Fed to purchase $1.5b-$2b notes in 2020-2021 sector

 

ASIAN HEADLINES

The Nikkei 225 (+0.7%) opened above the 15,000 handle for the first time since April 3 underpinned by possible GPIF reforms and a prospective future cut in the corporate tax rate, while Chinese PMIs further supported equity markets.

Chinese HSBC Manufacturing PMI (May) M/M 49.4 vs. Exp. 49.7 (Prev. 49.7) 4-month high; Non-Manufacturing PMI (May) M/M 55.5 (Prev. 54.8) 6-month high.

EU & UK HEADLINES

Ahead of the upcoming ECB rate decision all eyes this morning were on the Eurozone CPI Estimate (0.5% vs. Exp. 0.6%), which although did reveal a lower than expected headline, was not as low as some participants had anticipated following yesterday’s much lower than previous CPI readings across the German states. As such, EUR/USD spiked higher to pare earlier losses and Bunds extended on their earlier losses stemming from lower Gilts amid upcoming supply and positioning ahead of a shake up to UK pensions, with the German 10yr yield rising to its highest level since 28th May. The aggressive move lower on good volume (7,000 June-14 contracts were traded on the break of 146.40) also saw Bunds break below the 50% fib retracement of the late May rally with the yield on USTs now at levels not seen since May 22nd and therefore retracing all of the recent move lower in yields.

US HEADLINES

Newsflow out of the US remains light with attention now turning to factory orders and durable goods revisions.

EQUITIES

European equities have failed to react to another slew of positive Chinese PMI releases (Euro Stoxx 50 -0.1%) as positioning ahead of key risk events dominated the price action.

FX

GBP/USD is currently trading in positive territory and in close proximity to its 50DMA despite paring some of its earlier gains after the lowest UK Construction PMI reading since October 2013. Elsewhere, AUD/USD is higher following Chinese & Australia data and after the RBA stood pat on its monetary policy (Cash Rate Target unchanged at 2.50%), repeating that it sees likely period of interest-rate stability.

COMMODITIES

Gold has now fallen for a sixth straight session, its longest losing streak in seven months on mixed macroeconomic data and ongoing erosion of risk premium surrounding Ukraine. However reports that Gazprom has delayed a threatened disruptions of gas supplies to Ukraine, to allow more time for talks, has ensured that spot gold prices traded steady overnight.

WTI and Brent crude futures trade slightly softer amid thin volumes as traders eye the API inventories after-market today as focus remains on Cushing OK stockpiles as analysts suggest a sustained period of low Cushing stocks could be apparent.

Gazprom has delayed a threatened disruption of gas supplies to Ukraine to allow more time for talks to resolve the simmering dispute between Ukraine and Russia. This comes in the background of fighting breaking out in Ukraine’s easternmost Lugansk Province. (FT)

* * *

We conclude with Deutsche’s Jim Reid summary of key overnight events:

The topic of Japan’s structural reforms came up in a Reuters article today which detailed a draft of Prime Minister Abe’s upcoming policy paper, titled “Japan Industrial Revival Plan”. According to the article, the current draft of the government’s growth strategy provides little detail on how and if the government will cut the corporate tax rate, nor does it detail plans to overhaul the public pension fund, GPIF. These have been two of the potential measures being closely watched by investors. The draft also does not detail whether the Abe government will push to legalise casinos in Japan. The draft plan was compiled by government ministries and will form the basis of Abe’s “third arrow” reform update due to be announced later this month (Reuters).
Nevertheless, Japanese stocks are pushing higher today, buoyed by the momentum of USDJPY which rose the most in two months yesterday (+0.60% and unchanged today). On the topic of the GPIF, the Nikkei newspaper quoted the head of GPIF’s investment committee as saying that increasing the public pension fund’s weighting to domestic stocks to 20% (from the current level of 12%) would not be too high. The BoJ’s Kuroda was also on the newswires overnight, saying to the Japanese parliament that it is too early to discuss the BoJ’s exit strategy at the moment – this was partly in response to reports that the central bank was beginning early planning on how to withdraw from its current policy stance.

Outside of Japan, Hong Kong and mainland Chinese markets have returned from public holidays trading firmer as they react to the weekend’s Chinese manufacturing PMI. There was a further two Chinese data points released today, and the overall tone was fairly mixed. The official Chinese nonmanufacturing PMI for May showed a 0.7pt month-on-month improvement (55.5 vs 54.8 prior). Meanwhile, the final HSBC manufacturing PMI printed  at 49.4, which is up 1.3pts from the April reading, though it was down slightly from the flash reading of 49.7. On a more positive note, the HSBC  manufacturing PMI is at a four month high. The Hang Seng and HSCEI is trading at +0.66% and 0.98% respectively as we type. In Asian EM currencies, there is a slightly weaker tone overnight with INR (-0.12%), IDR (-0.4%) and MYR (-0.01%) all trading lower against the USD, largely in a continuation of the EM weakness that we saw in LATAM and EMEA yesterday. In Australia, the RBA left rates and policy largely unchanged. The AUD is 0.1% higher overnight.

Returning to yesterday, much of the focus was on the US ISM (and subsequent revisions) and this resulted in a bit of intraday volatility in an otherwise straightforward session. The US ISM was originally reported at 53.2, lower than expectations for 55.5 which caused a brief wobble in risk. This sent equities and yields to intraday lows with the S&P500 reaching a low of 1916 and 10yr UST yields rallying 2.5bp to 2.485% shortly after the data release. However, markets quickly began to fade the move with chatter about incorrect seasonal factors being applied to the May data. Indeed, the ISM  subsequently revised the index to 56, and another revision saw the ISM corrected to 55.4 which was broadly in line with consensus and a 0.5pt  improvement on April’s number. From a post-data low, yields gradually ticked up to close above 2.52%, a level last seen in the early part of last week. In terms of other data, US construction spending for April was up +0.2%, lower than the 0.6% expected, but this was after substantial upward revisions to February (+0.6%) and March (+0.4%). Credit had a marginally positive session with continued tightening in European and US cash credit. The European Crossover (254.125bp, +0.125bp) and Main (65.2bp, -0.625bp) indices recovered into the European close to be unchanged to marginally tighter while US IG (62.1bp, – 0.1bp) was also unchanged

In the lead up to ECB Thursday, the European data was uninspiring with the Euro-zone PMI manufacturing for May came in at 52.2, 0.3 points weaker than the flash reading and 1.2 points down on the month. Our economists note that the subdued level of the employment PMI indices is a clear sign that the outlook for the expected slow and modest increase in inflation remains fragile. On that note, German CPI was weaker than expected at 0.9% (vs 1.1% expected) and the EUR fell 0.3%. The ECB’s Nowotny commented that Euroarea inflation is well below ECB targets and that the market cannot over estimate the value of monetary policy. The combination of the weaker PMIs and German CPI increase the probability that the ECB eases policy on Thursday.

Turning to the day ahead, the focus will be on the Euroarea CPI report for May, which is expected to come in at just 0.6% y/y, down from the prior month’s 0.7%, and just a touch above the cyclical low of 0.5%. The data may reinforce the view that the ECB will introduce a package of easing options on Thursday. Consensus expects the core reading to drop to 0.8% y/y (vs 1.0% prior) which is also marginally above the all time lows of 0.7% recorded in December 2013. Also due out this morning is the Spanish, Italian and Euroarea employment reports. Across the Atlantic, the monthly vehicle sales and factory orders data will be released today. President Obama begins his European trip with meetings Poland to discuss security issues regarding Russia. Obama is also expected to meet with the Ukrainian president-elect Petro Poroshenko. In the UK, an update will be provided on house prices. In EM, Turkey’s closely watched CPI will be reported today while the RBI is expected to keep rates on hold.

via Zero Hedge http://ift.tt/1orPvjJ Tyler Durden