Service Sector Slows in Europe

June 23rd, 2016 5:56 am

Via Reuters:

LONDON, June 23 (Reuters)- – Euro zone business growth decelerated more than expected this month, suggesting the current quarter’s economic performance won’t match the strong pace set at the start of the year, a survey showed.

A surprising bounce in manufacturing activity was not enough to offset a marked slowdown in service industry growth, according to Markit’s flash Purchasing Managers’ Indexes.

One of the first growth indicators in a month, the composite PMI fell to a 17-month low of 52.8 from May’s 53.1. A Reuters poll had predicted a more modest dip to 53.0.

“There was some support to growth from the wider global economy, but the countering force of that is more political uncertainty, especially in France, but also in the wider euro area,” said Chris Williamson, chief economist at Markit.

French unions have been protesting since early March about planned labor reforms while Britain, which is outside the currency bloc, is holding a referendum on whether to leave the wider European Union.

Of concern to policymakers at the European Central Bank, companies cut prices at a slightly sharper rate this month. The output price index fell further below the 50 mark that separates growth from contraction, coming in at 49.2.

Inflation was -0.1 percent in May, nowhere near the central bank’s target of close to but below 2 percent.

Yet discounting failed to drive growth in the dominant service industry. Its PMI slumped to 52.4 from 53.3, below even the lowest forecast in a Reuters poll.

“While demand is just about growing strong enough to generate employment, it’s not strong enough to give firms pricing power,” Williamson said.

Therefore companies were less optimistic. The business expectations index fell to 61.9 from 62.8, its lowest reading in almost a year.

The picture was far brighter for manufacturing. The factory PMI leapt to a six-month high of 52.6 from 51.5, above all the forecasts in a Reuters poll. A sub-index measuring output was 53.8, up from 52.4.

That surge in activity was driven by new orders growing at their fastest rate this year. The sub index was 53.4 compared with May’s 51.7.

Williamson said the PMIs point to second-quarter growth of 0.4 percent, slightly faster than the 0.3 percent predicted in a Reuters poll earlier this month. The economy expanded 0.6 percent in the first quarter.

Graphic: link.reuters.com/cuh64s

 

Credit Pipeline

June 23rd, 2016 5:50 am

Via Bloomberg:

IG CREDIT PIPELINE: Long List Awaits When Timing Is Right
2016-06-23 09:48:30.200 GMT

By Robert Elson
(Bloomberg) —

LATEST UPDATES

* Sumitomo Life (SUMILF) A3/BBB+, to hold an investor meeting
July 19, via BofAML; focus to be on hybrid capital
* It last priced a USD deal in 2013
* Korea Gas (KORGAS) Aa2/A+, has mandated C/CS/HSBC/JPM/SG/UBS
to arrange investor meetings June 27-30; 144a/Reg-S
transaction may follow
* Molson Coors Brewing (TAP) Baa2/BBB-, held investor calls
June 21-22 via BofAML/C/UBS for possible USD, euro and/or
CDN dollar transactions; expects to issue ~$6.7b in
“permanent long-term financing” to help fund its $12b
acquisition of Miller beer brands, filing shows (page 29)
* KT Corp (KOREAT) Baa1/A-, schedules investor meetings June
16-24, via BNP/BAML/C/Nom, for possible USD 144a/Reg-S
* Dubai’s Emaar Properties (EMAAR) Ba1/BBB-, plans potential
USD bond sale
* USAID Ukraine (AID) heard to be in the works with possible
full faith & credit deal
* Kingdom of Saudi Arabia (SAUDI), weighing sale of $10b-$15b
after end of Ramadan in July
* May replicate Qatar’s $9b sale by issuing 5y, 10y, 30y
bonds, sources say
* Merck & Co (MRK) A1/AA; has not priced a new issue since
Feb. 2015, $1.5b matured May 18
* General Electric Company (GE) A3/AA-, has yet to issue YTD;
parent GE Co has $11.1b maturing this year, $2.3b matured in
May
* GE may be among high grade industrials to add leverage
in 2016, BI says in note (see point 3)

MANDATES/MEETINGS

* ITC Holdings (ITC) Baa2/BBB+, held investor meetings June
13-14, via BAML/JPM/WFS; it filed an automatic debt
securities shelf; last issued May 2014
* Kookmin Bank (CITNAT) A1/A, mandated BAML/CA/HSBC/Miz to
arrange investor meetings June 13-17
* SMBC Aviation Capital (SMBCAC) mandated C/CA/JPM/RBC/SMBC
for investor calls June 8-9; a potential US$ 144a/Reg-S
offering may follow
* Raymond James (RJF) Baa2/BBB, had BAML/JPM/RayJ arrange
investor meetings June 13-15; last priced a new deal in 2012
* Omega Healthcare Investors (OHI) Baa3/BBB-, held investor
meeting, via BAML/JPM, June 14
* National Grid (NGGLN) Baa1/na, hired JPM to hold investor
meetings that ran June 1-3

M&A-RELATED

* Shire (SHPLN) Baa3/BBB-, closed $18b Baxalta acquisition
loan; facilities to be refinanced through capital market
debt issuance
* Zimmer Biomet (ZBH) Baa3/BBB, to acquire LDR for ~$1b; co.
said it plans to issue $750m of sr unsecured notes after
deal completion
* Air Liquide (AIFP) A3/A-, held calls regarding Airgas
refinancing; planned to refinance the $12b loan backing the
deal via a combination of USD, EUR long-term bonds
* Bayer (BAYNGR) A3/A-, said to secure $63b financing, via
BAML/CS/GS/HSBC/JPM, for Monsanto (MON) A3/BBB+ bid; co.
likely will issue $20-$30b bonds to refinance part of the
bridge loan
* Great Plains Energy (GXP) Baa2/BBB+ to issue long-term
financing including equity, equity-linked securities and
debt prior to closing of Westar Energy (WR) A2/A deal; says
financing mix will allow it to maintain investment-grade
ratings
* Abbott (ABT) A2/A+; ~$5.7b St. Jude buy, ~$3.1b Alere buy
* $17.2b bridge loan commitment (April 28)
* Sherwin-Williams (SHW) A2/A; ~$9.3b Valspar buy
* $8.3b debt financing expected (March 20)
* Teva (TEVA) Baa1/BBB+; ~$40.5b Allergan generics buy
* $22b bridge; $5b TL commitment (Nov 18)
* Duke Energy (DUK) A3/A-; $4.9b Piedmont Natural buy
* $4.9b bridge (Nov 4)
* Anthem (ANTM) Baa2/A-; ~$50.4b Cigna buy
* $26.5b bridge (July 27)

SHELF FILINGS

* Tesla Motors (TSLA); automatic debt, common stk shelf (May
18)
* Debt may convert to common stk
* Reynolds American (RAI) Baa3/BBB filed automatic debt shelf;
sold $9b last June (May 13)
* Statoil (STLNO) Aa3/A+, files debt shelf; last issued USD
Nov. 2014 (May 9)
* Corporate Office (OFC) Baa3/BBB-; debt shelf (April 12)
* Rogers (RCICN) Baa1/BBB+; $4b debt shelf (March 4)

OTHER

* Discovery Communications (DISCA) Baa3/BBB-; may revisit bond
market this yr, BI says (May 18)
* Ford Motor Credit (F) Baa2/BBB; may have ~$7b issuance this
yr (May 10)
* Wal-Mart (WMT) Aa2/AA; 2 maturities in April (April 1)
* GE (GE) A1/AA+; $25b debt possible for M&A, buybacks (Jan
29)

IMF Cuts US Growth Forecast

June 23rd, 2016 5:45 am

Via Bloomberg:

  • Fund says U.S. to grow 2.2% this year, down from 2.4% in April
  • Fed should err on side of letting inflation overshoot: IMF

The International Monetary Fund cut its forecast for U.S. growth this year, urging the Federal Reserve to lean toward modestly overshooting its inflation target in considering whether the economy can handle higher interest rates.

The IMF said the U.S. economy will grow 2.2 percent this year, less than its projection of 2.4 percent in April. The fund left unchanged its forecast for a 2.5 percent expansion in 2017.

There’s a clear case for the Fed to proceed on a “very gradual” path in raising its benchmark rate, the IMF said in a statement Wednesday after concluding its annual assessment of the world’s biggest economy.

“The path for policy rates should accept some modest, temporary overshooting of the Fed’s inflation goal to allow inflation to approach the Fed’s 2 percent medium-term target from above,” the fund said.

A dovish tilt will ensure against the risk of disinflation and the possibility the central bank may have to reverse course and lower rates to zero, the IMF added.

Gradual Rise

The Fed last week signaled it would raise rates more gradually than anticipated amid concerns about slow job gains and the potential exit of the U.K. from the European Union. The Fed left its target range for the benchmark federal funds rate unchanged at 0.25 percent to 0.5 percent.

While the median forecast of 17 Fed policy makers remained at two quarter-point hikes this year, the number of officials who saw just one move rose to six from a single official in the previous forecasting round in March, according to Fed projections released June 15.

Fed Chair Janet Yellen told Senate lawmakers on Tuesday that she and her colleagues were on watch for whether, rather than when, the U.S. economy would show clear signs of improvement following disappointing job growth in May. She is scheduled to testify before the House Financial Services Committee on Wednesday at 10 a.m. in Washington for the second day of semiannual hearings on monetary policy.

Overall, the U.S. economy is in good shape, the IMF said. However, concerted action is needed soon to address the significant challenges it faces to achieving strong and sustained growth, it said.

Complex Risk

The U.S economy faces a number of headwinds, including a strong dollar, sluggish business investment and weak global demand, the IMF said. “A more complex risk to judge is the possibility that the recent weaker activity numbers actually reflect a lower potential growth rate and a smaller output gap than previously estimated,” the fund said.

The current-account deficit, at today’s real effective exchange rate, is expected to increase above 4 percent of gross domestic production by 2020, indicating the U.S. dollar is overvalued by 10 percent to 20 percent, the IMF said.

The IMF recommended a number of measures to boost growth and combat rising poverty, including an increase in infrastructure spending, a boost in the earned-income tax credit and the federal minimum wage, and the elimination of corporate tax loopholes accompanied by a cut in the overall income tax rate paid by companies.

“The near-term U.S. growth prospects are good despite the recent temporary setbacks,” IMF Managing Director Christine Lagarde said in a statement on Wednesday.

In last year’s assessment of the U.S. economy, the IMF waded into the debate over when the Fed should raise interest rates, calling on the central bank to wait until the first half of 2016. The Fed ended up raising its benchmark lending rate in December, the first increase in almost a decade, and then paused in each of its four meetings this year.

The Washington-based fund was conceived during World War II to monitor the international monetary system and promote policies that create growth.

Medicare Premiums May See Steep Rise

June 23rd, 2016 5:25 am

This story caught my eye as it directly impacts your humble correspondent. In addition the private company from which my wife receives coverage has informed us that it plans to hike rates in 2017 by 28 percent. I believe that is subject to final approval by the New York State Insurance Department.

Via the WSJ:
By Anne Tergesen
Updated June 22, 2016 5:12 p.m. ET
22 COMMENTS

Nearly a third of all Medicare beneficiaries face a steep increase in their premiums next year, the result of a policy that in certain circumstances requires some beneficiaries, including higher earners, to shoulder the burden of rising costs.

The government health-care plan’s trustees projected in a report Wednesday that premiums would rise by as much as 22% for wealthier beneficiaries of Medicare Part B, which covers doctor visits and other types of outpatient care.

The projected increase results from an intersection of the rules governing Medicare and Social Security, said Tricia Neuman, senior vice president and an expert on Medicare at the Kaiser Family Foundation.

Under the Social Security Act’s “hold harmless” provision, Medicare can’t pass along premium increases greater than what most participants would receive through Social Security’s annual cost-of-living adjustment. That adjustment is expected to be just 0.2% in 2017 thanks to low inflation. As a result, Medicare couldn’t pass along any premium increase greater than the dollar increase in Social Security payments to the estimated 70% of beneficiaries who will qualify for hold harmless treatment in 2017, Ms. Neuman said.

Instead, Medicare must spread much of the projected increase in its costs across the remaining 30%. Those who are paying the standard $121.80 a month for Medicare Part B this year would be charged $149 a month in 2017 if the trustees’ predictions come to pass.

Higher earners would pay more. The trustees project individuals earning between $85,001 and $107,000 and couples earning between $170,001 and $214,000 would have their 2016 monthly premiums rise from $170.50 a person this year to about $204.40 in 2017. For those earning more than $214,000, or $428,000 for couples, the projected increase is to about $467.20 a month, from $389.00 in 2016.

This isn’t the first time there has been such a disparity in Part B premiums between Medicare recipients.

Last year, Congress staved off a 52% premium increase for Medicare beneficiaries not covered by the hold harmless provision via a deal in the budget agreement that raised premiums by 16% for them instead. Those covered by the hold harmless provision, in contrast, pay $104.90 a month—the same amount they paid in 2014 due to the fact that there was no Social Security cost-of-living increase in 2016.

The projected increase in Part B premiums affects several other groups of Medicare beneficiaries, including those who receive Medicare but have deferred or aren’t eligible for Social Security benefits. It also would apply to those who are new to Medicare in 2017 and lower-income Medicare beneficiaries whose premiums are paid by state Medicaid programs.

In the latter case, the increase would be paid by Medicaid, Ms. Neuman said.

Paul Van de Water, senior fellow at the nonprofit Center on Budget and Policy Priorities, said the final Social Security cost-of-living adjustment won’t be known until October. If inflation rises by more than the trustees expect between now and then, it could “reduce the spike in the premium” for those who aren’t held harmless, he said.

Acting Administrator for the Centers for Medicare and Medicaid Services Andy Slavitt said at a news conference Wednesday, “We will continue to monitor the data and explore administrative options as needed.”

The Medicare trustees are projecting that the base Medicare Part B premium will reset for everyone at $124.40 a month in 2018, because they expect higher Social Security cost-of-living increases.

Medicare covered 55 million people last year, according to the trustees’ report. Part B covered nearly 51 million. In 2017 Medicare is expected to have 58.7 million total participants and 53.5 million in Part B.

 

If the trustees’ predictions come to pass, all Medicare beneficiaries will see their annual Part B deductibles rise from $166 in 2016 to $204 in 2017. “Everyone on Part B will be liable for the full increase,” says Ms. Neuman.

The report projects that monthly Medicare Part D premiums—which cover prescription drug costs—will rise from $34.10 to $40.59, while the annual Part D deductible will jump from $360 to $400. Those increases will apply to all Medicare Part D beneficiaries. Individuals with incomes above $85,000 (and couples earning more than $170,000) pay higher Part D premiums.

Write to Anne Tergesen at [email protected]

Stealth Stimulus in China

June 23rd, 2016 5:17 am

Via Bloomberg:

  • As private businesses tighten belts, government is stepping in
  • Spending supports growth, leads to higher government debt

China is stepping up stimulus by stealth in its efforts to ensure hitting the leadership’s growth target this year, with moves that will enhance the role of the state even as policy makers say they want a bigger role for the market.

The fiscal deficit when taking off-budget spending into account will exceed 10 percent of gross domestic product this year — more than triple the government’s stated ratio of 3 percent, according to economists at UBS Group AG and JPMorgan Chase & Co.

Beyond the official budget that allocates spending on defense, welfare and other day-to-day expenses, China’s Communist leaders are pumping money into the $10 trillion-plus economy. Part of that is through opening the funding tap to China’s three so-called policy banks, which are tasked with investing in government-backed projects. Much of the rest is through the actions of local governments, through the following methods:

  • Increasing issuance of bonds to fund construction projects
  • Deploying rising revenue from land sales as the property market recovers
  • Investing in public-private partnership projects spanning garbage treatment plants to holiday resorts
  • Using interest savings reaped from a central-government orchestrated debt swap converting expensive bank loans into bonds

The upshot: while President Xi Jinping has championed giving the invisible hand of markets more sway, the reverse is happening as the economy becomes even more reliant on the state. The Finance Ministry didn’t respond to a faxed request for comment on the private economists’ estimates of deficits exceeding official totals.

Hemmed in by tepid global demand and business reluctance to add to a corporate debt load that’s already swollen to 165 percent of GDP, Xi is deploying the government’s firepower to keep alive his growth goal for this year of at least 6.5 percent.

“Why would the private sector be willing to borrow? They are already heavily in debt,” said UBS Chief China Economist Wang Tao. “To stabilize growth, the government needs to boost infrastructure construction. Only the state will invest when there’s no money to be made.”

Debt Ratio

UBS estimates that the augmented fiscal deficit, which includes quasi-fiscal measures, exceeded 10 percent of GDP in 2015, with the government set to add 1.5 to 2 percentage points on top of that this year. The nation’s total debt-to-GDP ratio will reach 280 percent as a result, according to Wang.

JPMorgan analysts led by Zhu Haibin forecast the ratio will be 10.1 percent this year and possibly higher, up from 9.7 percent in 2015.

The latest shot of state support is a variation on a theme seen in the wake of the global financial crisis and ensuing global recession. Then, Xi and Premier Li Keqiang’s predecessors unleashed a massive spending splurge that saw state-owned banks lend to local-government financing vehicles for infrastructure and building projects across the nation.

The current fiscal injection comes as a monetary-easing cycle that started in late 2014 shows mixed results. While businesses remain reticent to expand, households have shown an appetite for more debt, with new mortgage loans rising to a record last month. But that property boost may already be fading, putting the onus back on the government to support demand.

Sheng Songcheng, head of the statistics and analysis department of the People’s Bank of China, wrote in a research paper this year that China can afford more fiscal spending in coming years without causing immediate debt-related risks. He predicted government debt would stay safely below 70 percent of GDP by 2025, even if the official fiscal deficit ratio jumps to as high as 4 percent for several years.

The government’s efforts to clear a glut of unsold homes is also gaining traction this year, pushing up new-home prices in larger economic hubs and second-tier cities, and spilling over to land sales revenue for local governments.

The key to deriving longer-term benefits from the public sector’s largess will depend on “whether the government can push forward economic reforms and improve productivity,” said Liu Liu, an economist at China International Capital Corp. in Beijing.

Wang at UBS says the state support is unlikely to spur a revival in private investment, which requires reform measures such as lowering the barriers for entry into service industries and encouraging consumption. That makes it imperative the fiscal priming is accompanied by policies to boost productivity and expansion in the private sector.

“Policies to support short-term growth and those to reform the economy in the long run don’t always work in the same direction,” Wang said. “But now it’s necessary to do the two at the same time.”

— With assistance by Xiaoqing Pi, and Yinan Zhao

Happy Days Are Here Again

June 23rd, 2016 5:11 am

Via WSJ:

Millions of U.S. Consumers Are Escaping Subprime
Percentage of Americans with subprime scores has fallen to the lowest in more than a decade

By AnnaMaria Andriotis
June 22, 2016 5:30 a.m. ET

The percentage of Americans with subprime credit scores has fallen to the lowest level in more than a decade, a development that could give bank lending and the overall economy a boost.

The share of U.S. adults with credit scores that are considered “subprime” fell to 20.7% in April, the sixth consecutive year-over-year decline and the lowest level since at least 2005, when Fair Isaac Corp. , or FICO, started tracking the data. The ranks of subprime borrowers swelled during the financial crisis, peaking at 25.5% in 2010 as mortgage payments, credit-card bills and other debts went unpaid.

The improving trend could bring relief to big banks, which tightened credit standards in the wake of the crisis. An increase in more-creditworthy borrowers could allow them to increase lending without lowering standards. Banks are desperate for revenue growth since the same superlow rates helping borrowers are also squeezing their own profits.

“It will have a positive impact on loan volume, loan growth and revenue,” said Morgan Whitacre, consumer client underwriting executive at Bank of America. Credit-card and auto lending would be the first type of loans to benefit.

This, in turn, could bolster consumer spending and the U.S. As more people gain access to credit, consumer spending in the short term should rise because borrowers can use loans to make purchases they otherwise wouldn’t have been able to make, said Rob Martin, U.S. economist at Barclays. “It frees people from having to spend only the cash they have on hand,” he said.

“It’s good for the economy in the sense that there’s a lot less risk in the credit that’s extended,” he added.

In some ways, the improvement is natural as the housing downturn and financial crisis fade further into the past. After a set number of years, foreclosures or missed debt payments drop off consumers’ credit reports, helping increase their scores and expanding their access to financing. This is particularly true for subprime borrowers, or those whose FICO credit scores range from 300 to 599 on a scale that tops out at 850.

There are other factors at work: The economy has recovered since the financial crisis and the unemployment rate, at 4.7%, is less than half its late-2009 peak. Wage growth of around 2% isn’t as high as the Federal Reserve would like, but it is still providing consumers with more firepower.

Superlow interest rates have also played a big role by reducing the debt burden for millions of Americans. Monthly debt-service payments accounted for 10.07% of households’ disposable personal income at the end of last year, down from a peak of 13.21% at the end of 2007, according to Fed data. Low interest rates, which have lessened required monthly payments for many borrowers, have helped bring this figure down.

Many borrowers have also been paying down credit-card debt, a move that can help increase their credit scores. Martha Souder, an administrative assistant in Silver Spring, Md., says she currently has a credit score of about 712. That is up sharply from around 545 in 2012 when she had roughly $50,000 in debt spread between 25 to 30 credit cards, many of which were maxed out.

“I have suffered a really long time, and it was a crushing burden,” she said. Her goal is to buy a house in coming years.

Meanwhile, as credit scores are rising, defaults are near record lows. Some 0.81% of consumer loan dollars—including mortgages, auto loans and general-purpose credit cards—were in default as of May, the lowest level in records going back to 2004, according to the S&P/Experian Consumer Credit Default Composite Index. This is down from 0.88% a year ago and a peak of 5.51% in May 2009. Much of that improvement is due to plummeting mortgage defaults in recent years.

“People are putting those delinquencies further and further in the rearview mirror,” said Ethan Dornhelm, senior director of scores and analytics at FICO.

Borrowers also are managing their debt more responsibly, with fewer incidences of defaults and collections. Some 11.8% of borrowers were 90 days or more past due on at least one debt obligation during the 12 months through April, down from 13.3% during the 12 months through October 2013, according to FICO.

Already, consumers are starting to borrow more again. Auto-loan balances surpassed $1 trillion for the first time ever this year, according to credit-reporting firm Experian. Credit-card debt is on pace to hit $1 trillion this year. Student-loan debt continues to swell.

That does raise some cause for concern. J.P. Morgan Chase & Co. chief James Dimon earlier this month called the auto-lending market “a little stretched.” As well, Synchrony Financial, the largest U.S. retail-store card issuer by purchase volume and balances, recently increased its forecast for credit losses for the next 12 months. Separately, May marked the fifth consecutive month of higher defaults for general-purpose credit cards.

Still, consumer-loan default levels remain at historically low levels. And household balance sheets have gone through years of postcrisis repair. U.S. household debt was equal to 102% of disposable income at the end of the first quarter, Fed data show, down markedly from a peak of about 130% in late 2007.

Write to AnnaMaria Andriotis at [email protected]

Early FX

June 23rd, 2016 5:08 am

Via Kit Juckes at SocGen:

<http://www.sgmarkets.com/r/?id=h10c83f84,1768efb7,1768efb8&p1=136122&p2=6490662ecfea10b735ffb6af88f5d956>

Guessing what the reaction to a once-in-a-lifetime event would be is a tall order, but I’ve had a go. My first thought is that it’s less symmetric now that it was a week ago. The final pre-vote poll (from ComRes) showed a small majority for ‘Remain’ and the pound is higher. Markets are ‘cautious’ to borrow from the FT. Market risks were broadly symmetric a week ago when opinion polls shifted in favour of ‘Brexit’ but the last few days have changed that. A decision to leave the EU is bad for global risk sentiment, good for the yen, and bad for sterling, the Euro and higher-beta currencies particularly central and Eastern European ones.

On a ‘Leave’ decision, we expect GBP/USD to fall to 1.30-1.35 quickly and we look for an eventual fall to 1.20-1.25 The Euro would suffer too, falling to 1.04-1.08 initially and potentially further over time. This takes EUR/GBP to 0.80-0.85. The Yen would out-perform the dollar, with USD/JPY potentially breaking 100 temporarily.

Other immediate moves would see strength for CHF vs. NOK, SEK, and PLN and a knee-jerk reaction of weakness by AUD and NZD vs. JPY as well as some contagion to EM Asian currencies, even if the direct economic impact is small.

On a ‘Remain’ vote, moves ought to be slightly smaller given positioning. GBP/USD can trade to 1.50-1.55 and EUR/USD test the last year’s high at 1.17, though if that breaks we could still see a further spike to 1.20. 1.17-1.20 in EUR/USD and 1.50-1.55 in GBP/USD represent long-term selling opportunities in our view, as both currency pairs will be too far out of line with underlying economic and policy prospects

The chart below plots 2-year rates and GBP/USD, the best FX/rates correlation in G10FX. The forecasts are based those in our latest Economics, Rates and FX outlooks. We’re sellers into a GBP/USD rally. As for EUR/USD, our base case is drift down in the current range on ‘remain’ and concern that positioning could drive a surprisingly big spike first.

GBP/USD vs. relative rates with SG forecasts (on ‘remain’).

[http://email.sgresearch.com/Content/PublicationPicture/227822/1]

EUR/USD and 10year yield differentials (with SG forecasts)

[http://email.sgresearch.com/Content/PublicationPicture/227822/2]

Away from sterling and the Euro, the biggest FX loser in a ‘Remain’ is the yen. USD/JPY could bounce to 110-115, taking EUR/JPYU all the way from 118 now to 130. Yen weakness would be seen in all the Yen crosses.

If it’s ‘Remain’ the yen looks very over-priced: EUR/JPY

[http://email.sgresearch.com/Content/PublicationPicture/227822/3]

USD/JPY and real yields. 110-115 on ‘Remain’.

[http://email.sgresearch.com/Content/PublicationPicture/227822/4]

[*] As for the voting itself…

Polls open at 7:00 a:m and close at 10:00pm. Two polls are expected to be released on Thursday evening after the polls close, with YouGov’s poll of a pre-selected group of people thought to be ‘representative’ of the electorate set to be announced on Sky New.
Eastern England is Euro sceptic, Scotland and London Europhile

Source: YouGov
The first results start to trickle through in the early morning on Friday, and attention will be paid especially to the more marginal constituencies. YouGov’s map shows what we might expect. Scotland and London are mostly pretty Europhile, and the East of England is more Euro sceptic than the West. I’m tempted to handicap results by where they are relative to theM1 motorway
Sunderland will be among the early results, and ‘should’ show a small majority in favour of leaving the EU. A vote to remain would cause concern in the ‘Brexit’ camp. Soon after, Wandsworth in London is expected to show a sizeable majority in favour of staying and a close result would likewise, ring alarm bells for the ‘remain’ camp. Merthyr Tydfil at around 1:30 am will be the first really swing voting areas to announce. We’ll have updates on the voting as results come in on SG Markets. My personal focus will be on Broxtowe in Nottinghamshire. Almost equidistant between the Irish and North Seas, it’s about as far from Newcastle to the North as Southampton to the South. In other words, it’s in the middle of England even if it’s in the Southern part of the UK. The votes of these fine people will be released at around 4:00 a.mn and unless the result really is as close as the opinion polls suggest, sometime thereafter the political analysts might feel able to speculate more confidently about the eventual outcome – though that will still take some time to become public (it will be announced by the chief counting officer, Jenny Watson, at Manchester Town Hall around breakfast time).
.
Eastern England is Euro sceptic, Scotland and London Europhile

[http://email.sgresearch.com/Content/PublicationPicture/227822/5]

Finally, to return to day-to-day business for a moment, the monthly purchasing managers’ season kicked off with a 47.8 (from 47.7) in Japan, in case anyone was felling optimistic. We look for 52 in Germany on manufacturing, 55 for the composite measure and for the Eurozone as a whole, 51.4 for manufacturing, 53.1 for services, 52.9 overall, down from 53.1. We’re also looking for a slowdown in US new home sales to 550k in May.

Credit Pipeline

June 22nd, 2016 5:36 am

Via Bloomberg:

IG CREDIT PIPELINE: Large List Remains as Issuance Dissolves
2016-06-22 09:25:53.889 GMT

By Robert Elson
(Bloomberg) —

LATEST UPDATES

* Korea Gas (KORGAS) Aa2/A+, has mandated C/CS/HSBC/JPM/SG/UBS
to arrange investor meetings June 27-30; 144a/Reg-S
transaction may follow
* Molson Coors Brewing (TAP) Baa2/BBB-, asked BofAML/C/UBS to
arrange investor calls June 21-22 in preparation for USD,
Euro and/or Canadian dollar transactions to perhaps follow;
expects to issue up to $6.8b in new debt to help fund its
$12b acquisition of Miller beer brands from AB InBev an SEC
filing shows
* KT Corp (KOREAT) Baa1/A-, schedules investor meetings June
16-24, via BNP/BAML/C/Nom, for possible USD 144a/Reg-S
* ITC Holdings (ITC) Baa2/BBB+, held investor meetings June
13-14, via BAML/JPM/WFS; it filed an automatic debt
securities shelf; last issued May 2014
* Kookmin Bank (CITNAT) A1/A, mandates BAML/CA/HSBC/Miz to
arrange investor meetings June 13-17; issuance may follow
* SMBC Aviation Capital (SMBCAC) mandated C/CA/JPM/RBC/SMBC
for investor calls June 8-9; a potential US$ 144a/Reg-S
offering may follow
* Dubai’s Emaar Properties (EMAAR) Ba1/BBB-, plans potential
USD bond sale
* Raymond James (RJF) Baa2/BBB, had BAML/JPM/RayJ arrange
investor meetings June 13-15; last priced a new deal in 2012
* USAID Ukraine (AID) heard to be in the works with possible
full faith & credit deal
* Omega Healthcare Investors (OHI) Baa3/BBB-, held investor
meeting, via BAML/JPM, June 14
* Kingdom of Saudi Arabia (SAUDI), weighing sale of $10b-$15b
after end of Ramadan in July
* May replicate Qatar’s $9b sale by issuing 5y, 10y, 30y
bonds, sources say
* Merck & Co (MRK) A1/AA; has not priced a new issue since
Feb. 2015, $1.5b matured May 18
* General Electric Company (GE) A3/AA-, has yet to issue YTD;
parent GE Co has $11.1b maturing this year, $2.3b matured in
May
* GE may be among high grade industrials to add leverage
in 2016, BI says in note (see point 3)

MANDATES/MEETINGS

* National Grid (NGGLN) Baa1/na, hired JPM to hold investor
meetings that ran June 1-3

M&A-RELATED

* Shire (SHPLN) Baa3/BBB- completes takeover of Baxalta (BXLT)
Baa2/BBB-, now lowered by S&P, in ~$32b deal buy $18b loan
to be refinanced via debt issuance (Jan 18)
* Zimmer Biomet (ZBH) Baa3/BBB, to acquire LDR for ~$1b; co.
said it plans to issue $750m of sr unsecured notes after
deal completion
* Air Liquide (AIFP) A3/A-, held calls regarding Airgas
refinancing; planned to refinance the $12b loan backing the
deal via a combination of USD, EUR long-term bonds
* Bayer (BAYNGR) A3/A-, said to secure $63b financing, via
BAML/CS/GS/HSBC/JPM, for Monsanto (MON) A3/BBB+ bid; co.
likely will issue $20-$30b bonds to refinance part of the
bridge loan
* Great Plains Energy (GXP) Baa2/BBB+ to issue long-term
financing including equity, equity-linked securities and
debt prior to closing of Westar Energy (WR) A2/A deal; says
financing mix will allow it to maintain investment-grade
ratings
* Abbott (ABT) A2/A+; ~$5.7b St. Jude buy, ~$3.1b Alere buy
* $17.2b bridge loan commitment (April 28)
* Sherwin-Williams (SHW) A2/A; ~$9.3b Valspar buy
* $8.3b debt financing expected (March 20)
* Molson Coors (TAP) Baa2/BBB-; ~$12b MillerCoors buy
* $9.3b bridge (Dec 17)
* Teva (TEVA) Baa1/BBB+; ~$40.5b Allergan generics buy
* $22b bridge; $5b TL commitment (Nov 18)
* Duke Energy (DUK) A3/A-; $4.9b Piedmont Natural buy
* $4.9b bridge (Nov 4)
* Anthem (ANTM) Baa2/A-; ~$50.4b Cigna buy
* $26.5b bridge (July 27)

SHELF FILINGS

* Tesla Motors (TSLA); automatic debt, common stk shelf (May
18)
* Debt may convert to common stk
* Reynolds American (RAI) Baa3/BBB filed automatic debt shelf;
sold $9b last June (May 13)
* Statoil (STLNO) Aa3/A+, files debt shelf; last issued USD
Nov. 2014 (May 9)
* Corporate Office (OFC) Baa3/BBB-; debt shelf (April 12)
* Rogers (RCICN) Baa1/BBB+; $4b debt shelf (March 4)

OTHER

* Discovery Communications (DISCA) Baa3/BBB-; may revisit bond
market this yr, BI says (May 18)
* Ford Motor Credit (F) Baa2/BBB; may have ~$7b issuance this
yr (May 10)
* Wal-Mart (WMT) Aa2/AA; 2 maturities in April (April 1)
* GE (GE) A1/AA+; $25b debt possible for M&A, buybacks (Jan
29)

German Options markets Not So Sanguine About Brexit Outcome

June 22nd, 2016 5:18 am

Via Bloomberg:
June 21, 2016 — 7:00 PM EDT
Updated on June 22, 2016 — 4:31 AM EDT

 

The sigh of relief breathed by investors across Europe as polls showed a drop in the odds of a U.K. secession is not being shared in Germany’s options market.

While a surge in optimism that Britons will vote to remain in the European Union spurred a 4.9 percent rebound in the benchmark DAX Index in the past three days, the cost of hedging against declines has continued climbing and is now at a six-year high versus bullish calls. The benchmark gauge rose 0.4 percent at 10:30 a.m. in Frankfurt.

Germany’s close ties with the U.K. make its companies vulnerable in the event of the island nation quitting the EU. Europe’s largest economy is Britain’s biggest trading partner, and DAX companies get 9 percent of their sales from the U.K., more than double that of their French peers on the CAC 40 Index, according to a note from Goldman Sachs Group Inc.

“I would expect a structural risk premium to be priced into European equities generally and into the DAX in particular,” said Bernd Ondruch, managing partner at London-based Astellon Capital Partners, which oversees $700 million. “I don’t expect Brexit to happen, but if it does, it will be extremely difficult in the mid term.”

A vote to leave would send the pound tumbling, making German companies less competitive than their U.K. counterparts, Goldman Sachs said in the June 6 note. According to a study released last week by the DIW Berlin economic research institute, Germany’s economy could start to suffer as soon as this year, and export sales could slide by about 15 billion euros ($17 billion) in 2017, with the automotive, pharmaceutical and chemical, and machinery sectors likely to be particularly affected.

 

Weakening global demand and a strengthening euro helped drag the DAX to among the world’s worst performing equity gauges earlier this year. A 19 percent rebound between February and April pulled it from this trough, but since then, lackluster corporate earnings, skepticism about the efficacy of European Central Bank stimulus, lingering concerns about China’s slowdown, as well as Britain’s June 23 referendum, have damped gains.

 

With the polls showing the vote too close to call, investors have increased hedging. The cost of bearish DAX options expiring within a month has jumped 55 percent relative to bullish contracts in June. While protection prices on the regional Euro Stoxx 50 Index have also climbed, they haven’t risen as much, data compiled by Bloomberg show.

The outcome of the U.K. vote ultimately won’t matter much for German companies, according to Reinhard Pfingsten, chief investment officer at Hauck & Aufhaeuser Privatbankiers KGaA in Frankfurt.

“The market’s positioning is very extreme right now given all the uncertainty,” he said. “The long-term effect on German stocks would be very small since discussions between the U.K. and EU wouldn’t end very differently than what we already see today in the EU’s relationship with Norway. From a regulatory perspective, very little would change.”

Still, outflows from the biggest exchange-traded fund tracking German shares have accelerated. Investors have pulled about 190 million euros from the iShares Core DAX UCITS ETF in June, more than in May and set for a fifth month of withdrawals.

While Guillermo Hernandez Sampere, the head of trading at MPPM EK in Eppstein, Germany, isn’t changing his investments ahead of the referendum, he warned that financial companies would suffer the most. European lenders have fallen 4.6 percent this month, the most since January, and Deutsche Bank AG hit a record low last week.

“The financial sector is the only one that would feel the effects immediately, and will need to deal with the high costs of moving their bases from London to Dublin, Paris, or Frankfurt,” said Hernandez Sampere, who helps manage 250 million euros. “German banks who have operations in London will also have to reorient themselves.”

Brexit and Corporate Bonds in UK

June 22nd, 2016 5:01 am

Via Bloomberg:

  • Potential pound drop may aid exporters and overseas issuers
  • Utilities seen as havens along with U.K. mortgage lenders

Corporate-bond investors are ready to go bargain hunting as the looming Brexit referendum stokes market volatility.

Investors are preparing for Britain’s June 23 referendum on European Union membership. The outcome remained too close to call a day before the vote, with one poll published this week showing exit ahead and another showing it behind.

“We have raised some cash and would look to add risk where the right opportunities occur,” said Ketish Pothalingam, a portfolio manager at Pacific Investment Management Co., which oversees $1.5 trillion of assets. “There may well be opportunities in the event of a vote to leave as some bonds will end up being oversold.”

U.K. drugmakers and other exporters are possible targets because a vote in favor of leaving the EU on Thursday would likely weaken the pound, according to Pothalingam. Other investors will look for price drops in notes issued by domestic mortgage lenders, which have little currency exposure, as well as by utilities where revenue shouldn’t be affected either way.

 

Some money managers are already buying. Luke Hickmore, a senior investment manager at Aberdeen Asset Management Plc, is among investors who have bought utility bonds, including notes from Western Power Distribution Plc, Electricite de France SA and phone company BT Group Plc.

He’s also bought bonds in pounds sold by Apple Inc. on the basis that sterling debt from non-British companies has been hurt even though issuers are unlikely to be affected by a Brexit. The fund manager also acquired Jaguar Land Rover Automotive Plc notes, taking advantage of price dips, because he has liked the luxury-car maker for a while and it’s among exporters that may benefit from a weaker pound, he said.

“Whichever way the vote goes, we’re poised for the opportunities that volatility will throw up,” said Hickmore. Aberdeen oversees about 290 billion pounds ($425 billion) of assets.

A leave vote may cause sterling to fall to below $1.35 for the first time since 1985, according to 21 of 31 economists surveyed by Bloomberg this month.

Retailer Risks

The possibility of a weakening pound means investors should shun euro-denominated debt from U.K.-based companies, HSBC Holdings Plc analyst Jamie Stuttard said in a report on June 16. U.K. non-food retailers also face a possible double Brexit squeeze because a weaker currency would make imports more expensive, while an economic slowdown would damp sales, he said.

Such concerns prompted Olivier Becker, a fund manager at Oddo Meriten Asset Management SA, to sell bonds issued by U.K.-based clothing retailer New Look Retail Group Ltd. Debt from competitors including Matalan Plc, Debenhams Plc and Marks & Spencer Plc also declined in the run-up to the referendum, along with notes tied to restaurant chain Pizza Express Ltd., according to data compiled by Bloomberg.

Becker is looking out for chances to buy debt from European companies with few ties to the U.K., if Brexit concerns spark a marketwide rout. French food companies Picard Groupe SAS and Labeyrie SAS are possible examples, he said. Oddo Meriten has 46 billion euros ($52 billion) of assets under management.

Any selloff in sterling debt could create bargains among notes from U.K. issuers that are insulated from a weaker pound, according to Gordon Shannon, a London-based portfolio manager at TwentyFour Asset Management, which oversees 6.4 billion pounds ($9.4 billion). One company he’s watching is mortgage provider Nationwide Building Society, which generates all of its sales domestically.

“The implications of Brexit aren’t that negative for them,” Shannon said. “If I saw its price fall a decent amount, I’d be tempted.”