FX

July 14th, 2016 6:26 am

Via Marc Chandler at Brown Brothers Harriman:

Will BOE Ease on May Day?

  • After a nearly three weeks of turmoil following the UK referendum, there is now a sense of order returning to UK politics
  • Today’s focus though is not on Brexit per se, but rather the Bank of England meeting
  • News reports indicate that some key Japanese officials appear to be pushing for bold action that includes both strong monetary and fiscal stimulus
  • The US reports weekly initial jobless claims and PPI
  • Bank of Korea kept rates steady at 1.25%, as expected; Banco de Mexico releases minutes
  • Central banks of Chile and Peru meet, steady rates expected from both

The dollar is mostly softer against the majors.  The Swiss franc and sterling are outperforming while the yen and Kiwi are underperforming.  EM currencies are mostly firmer.  ZAR and RUB are outperforming while CNY and IDR are underperforming.  MSCI Asia Pacific was up 0.2%, with the Nikkei rising 1%.  MSCI EM is up 0.8%, with Chinese markets down around 0.2%.  Euro Stoxx 600 is up 0.9% near midday, while S&P futures are pointing to a higher open.  The 10-year UST yield is up 2 bp at 1.50%.  Commodity prices are mixed, with oil up 1%, copper down 0.3%, and gold down over 1%.  

After a nearly three weeks of turmoil following the UK referendum, there is now a sense of order returning to UK politics.  Two elements of the new government are particularly relevant.  First, May demonstrates strategic prowess by putting those like Johnson and Davis, who campaigned for Brexit, to lead the negotiations with the EU, while putting Tories who favored remaining in the EU in the internal ministries.  

The second element that is important is that May represents a different wing of the Tory Party than Cameron and Osborne.  Not to put too fine a point on it, but she and at least part of her cabinet are more interested in social justice.  That was what her first speech emphasized, not Brexit.  She has expressed concern about executive pay and is sympathetic to having workers represented on corporate boards.  

Today’s focus though is not on Brexit per se, but rather the Bank of England meeting.  The surveys show divided markets.  Many of those who don’t think the BOE will cut rates look for a move next month.  The mixed view in the market warns of the risk of volatile market response no matter the decision.  The Times and City AM run their own shadow MPC exercises, and both favored a rate cut today.  

In addition to the price of money, i.e., interest rates, there is some focus on the potential for a new asset purchase plan.  If QE is ventured, there are some thoughts that the BOE would focus the operation on corporate bonds.  The BOJ and now the ECB are buying corporate bonds, so it is not completely unprecedented for the BOE in the sense that previously they bought a few billion pounds of commercial paper.  

Estimates suggest that the UK corporate bond market is roughly GBP435 bln.  Most of the corporate bonds, however, would likely not be included for reasons ranging from ratings (below investment grade), issuers (non-UK domiciled business), sectors (banks bonds), and technical reasons (e.g., maturity).  Still, when these allowances are made, there may be more than GBP125 bln to “pick from.”  Even a small program might be sufficient to revive the UK corporate bond issuance market, which has slowed to about GBP900 mln this year compared with GBP1.6 bln in the same period a year ago.  

The BOE is not the only potential source of fresh accommodation that the market is focused on today.  The yen is under continued pressure as participants begin appreciating that new bold stimulus is possible from Japan.  As we noted yesterday, like the word recession, there is not agreed upon definition of “helicopter money” except to note some blurring of monetary and fiscal policy, which incidentally is what critics claim of QE in the first place.  

In any event, news reports indicate that some key Japanese officials appear to be pushing for bold action that includes both strong monetary and fiscal stimulus.  A key advisor to Abe (Honda) may have found support for his proposal for the Japanese government to issue non-market perpetual bond (no maturity) which the BOJ buys directly.  This would, in effect, free government spending from another restraint.  

The implication that investors see is the debasing of the currency.  The yen’s has declined 4.8% against the dollar this week (and there have complaints from Japanese officials about the pace of the move).  This has the makings of the largest weekly decline in the yen in over a decade, and among the biggest in the floating-rate era.  

After the yen today, the New Zealand dollar is the weakest of the majors.  It is off about three-quarters of a percent on heightened rate cut speculation following the central bank’s announcement of an unscheduled economic assessment next week.  The central bank meets again in the second week of August.  The derivatives market now shows around a 60% chance of a rate cut then, up from 40% previously.  

The Australian dollar is second only to sterling today.  It was helped by a sharp jump in full-time employment (38.4k), which is the strongest since last November.  This, coupled with the tick up in consumer inflation expectations, keeps investors from anticipating a near-term RBA cut.  

The US reports weekly initial jobless claims and PPI.  Neither are typically market movers, especially ahead of tomorrow’s more important retail sales and CPI reports.  Three Fed officials speak:  Lockhart, George, and Kaplan.  Regardless of what they say, the market will not become convinced of a hike later this month.  Whether the Fed goes in September, which the market is pricing in less than a 10% chance, is dependent on the next couple months of data.  

Bank of Korea kept rates steady at 1.25%, as expected.  However, it cut its 2016 growth and inflation forecasts.  We do not think that the 25 bp cut in June was “one and done” and so we think rates will be cut again in Q3.  Earlier this year, the BOK cut its forecasts at one meeting and then followed up with the June rate cut.  Given the BOK’s cautious approach, it’s not surprising that it will wait a month or two before cutting rates again.

Banco de Mexico releases minutes from its June meeting.  At that last meeting, it surprised markets with a larger than expected 50 bp cut and so the minutes will be scrutinized for clues on future moves.  With the growth outlook worsening, we think another hike will be hard to justify.  The next policy meeting is August 11, and that decision will really depend on how the peso is trading then.

Chilean central bank meets and is expected to keep rates steady at 3.5%.  CPI rose 4.2% y/y in June, slightly above the 2-4% target range but still converging.  We think the tightening cycle has ended, as the economic outlook remains soft along with low copper prices.

Peruvian central bank meets and is expected to keep rates steady at 4.25%.  CPI rose 3.3% y/y in June, slightly above the 1-3% target range but still converging.  We think the tightening cycle has ended here too.  For both these banks, an easing cycle seems unlikely until late this year or early 2017.  

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Overnight Data Preview

July 13th, 2016 3:11 pm

Via Robert Sinche at Amherst Pierpont Securities:

CHINA: Over the next week the PBOC will release its monetary report for June; the Bberg consensus expects that Aggregate Financing Activity to have picked up to CNY 1,100bn from a 7-month low of CNY659.9bn in May. Since GDP and other key data will be released tomorrow night, it is likely the PBOC will release monetary data tonight.

AUSTRALIA: The Employment report has become less volatile in the last year as seasonal adjustment factors appear to have caught up with the China-induced seasonal swings. The BBerg consensus expects a moderate +10K increase in Employment in June, which would be the 4th consecutive MOM rise, but for the UR to inch up to 5.8% from 5.7% in May.

NEW ZEALAND: The June Manufacturing PMI will follow a very solid 57.1 reading in May, the strongest since January, while Consumer Confidence for July will follow a mid-range reading of 118.9 in June.

S. KOREA: The BoK is expected to hold the Official Bank Rate at 1.25% after a modestly surprising 25bp cut to 1.25% last month.

INDIA: During the remainder of the week Trade data for June is expected to be released. In May, Exports slipped only -0.8% YOY, the smallest annual decline since November 2014.

SINGAPORE: The Bberg consensus expects the advance report for 2Q Real GDP to be reported at 2.2% YOY, which would be the strongest annual rise since 1Q2015.

UK: The BoE will release its first policy decision since the vote for Brexit, and the Bberg consensus expects a 25bp rate cut, taking the Bank Rate to 0.25%. The fall in the trade-weighted GBP is an effective easing of policy and the new May government could move toward more fiscal flexibility. In this context, there is a real risk the MPC holds off on immediate easing, particularly as the weaker GBP should raise the BoE forecast for future inflation.

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FX

July 13th, 2016 6:54 am

Via Marc Chandler at Brown Brothers Harriman:

Sterling and Yen Momentum Slows

  • Momentum is stalling today across many markets
  • The Japanese government cut its GDP and inflation forecasts today
  • Bank Negara unexpectedly cut rates 25 bp to 3.0%; China reported a slightly smaller trade surplus
  • There are two key events in North America:  the Bank of Canada and the Fed’s Beige book  
  • Brazil reports its monthly GDP proxy for May

The dollar is broadly weaker against the majors.  The Swiss franc and Norwegian krone are outperforming while the Loonie and Kiwi are underperforming.  EM currencies are narrowly mixed.  MYR and PHP are outperforming while TRY and ZAR are underperforming.  MSCI Asia Pacific was up 0.8%, with the Nikkei rising 0.8%.  MSCI EM is up 0.4%, with Chinese markets up around 0.3%.  Euro Stoxx 600 is up 0.4% near midday, while S&P futures are pointing to a lower open.  The 10-year UST yield is down 2 bp at 1.49%, while Germany sold 10-year bunds at negative yields for the first time ever.  Commodity prices are mixed, with oil down 1.5%, copper up 1.3%, and gold up 0.4%.  

The two main developments in the foreign exchange market this week in recent days has been the opposite of what has transpired over the past several weeks.  Sterling moved higher quickly.  The yen moved down just as fast.  Over the past five sessions through late morning levels, sterling has gained 2.5% while the yen has shed 2.8%.  

However, the momentum is stalling today.  Sterling stalled a few hundredths of a penny from last week’s high that Bloomberg has just above $1.3340.  The BOE meets tomorrow, and the market seems divided.  If anything, the last minute shifts may be away from a cut given the stabilization of sterling.  In some ways, the political uncertainty has been lifted with May set to replace Cameron.  Yet in other ways, the political uncertainty (snap election while Labour is having its own internal issues? Brexit czar?) is multi-dimensional.

There are many who doubt that Article 50 will be even triggered.  The argument is that parliamentary approval is needed.  Parliament is, or at least was, opposed.  It was a non-binding referendum that was passed by the smallest of margins.    

 The dollar stalled just shy of JPY105.  A press story yesterday suggested that ostensibly after meeting with Bernanke, Japanese officials are considering helicopter money.  This was denied in Japan.  Separately, we note that the Japanese government cut its GDP and inflation forecasts today.  The projection for the current fiscal year’s growth was halved to 0.9% from 1.7% and this year’s inflation forecast was slashed to 0.4% from 1.2%.  It does not help matters that May industrial output was revised to show a -2.6% decline month-over-month from -2.3%.  

The pessimistic, even if more realistic forecast is part of the case for a substantial fiscal package.  Helicopter money is loosely used but generally refers to the blurring of monetary and fiscal policies.  Some consider that the amount of government bonds being bought by the BOJ while the government runs a budget deficit of nearly 6% of GDP as being already engaged in helicopter money.    

While fiscal stimulus may be helpful for short-run performance alone (complimented with monetary policy), it will not be enough to lift potential growth in Japan.  That is ultimately the problem, and despite the likely renewing of Abe’s first two arrows, it still comes back to the missing third arrow, structural reforms.  

Momentum seen in other markets is also slowing.  The Nikkei extended its gains for the third consecutive session, though the 0.8% gain was the smallest in this week’s streak.  The same applies to the MSCI Asia Pacific Index, seeing smaller gains for the third session.  The Dow Jones Stoxx is up 0.2%.  It is its smallest gain in the five sessions it has advanced.  The DAX is lower in the session, with losses led by information technology and health care.  Italian shares are also on the downside, and the strong four day recovery in Italian bank shares has stalled.  They are off 0.5% near midday in Milan.  

The sell-off in US Treasuries has stalled.  The 10-year yield had risen from a little below 1.32% last Wednesday to almost 1.53% yesterday.  It is now trading near 1.49%.  The US 3- and 10-year auctions have been weakly received, and today 30-year bonds are to be sold.  Asia-Pacific bonds were under pressure given the US sell-off, but European bonds are firmer today and yields are 1-2 bp lower.  Gilts are outperforming, with the yield off nearly 5 bp.  Italian bonds are underperforming, leaving yields flat to slightly higher.  

There have been a few other developments to note today.  Malaysia unexpectedly cut rates for the first time in seven years, as the new central bank governor took decisive action at his second meeting.  Only 1 of 18 economists anticipated this in a Bloomberg survey.  The 25 bp cut to 3.0% underscores our belief that most EM central banks will tilt more dovish in H2 due to Brexit risks and generally slower global growth outlook.  In Asia, we believe that Thailand and the Philippines will be the next to ease in the coming months.

China reported a slightly smaller trade surplus ($48.1 bln in June from $50 bln in May).  In dollar terms exports were soft (-4.8% year-over-year from -4.1% in May) but in yuan terms, they stabilized (+1.3% after 1.2% in May).  Imports fell sharply in dollar terms (-8.4% vs. -0.4% in May) and in yuan terms (-2.3% compared with +5.1% in May).  

Separately, the overnight rate jumped in Hong Kong to its highest level since February.  The market talk suggests Chinese officials, through the policy banks, may be active in the CNH market.  

The eurozone confirmed what the national reports mostly showed.  Industrial output fell in May.  The -1.2% fall was more than many had initially expected before the country reports. The April series was revised up to 1.4% from 1.1%.  

There are two key events in North America today.  First is the Bank of Canada.  A rate cut would surprise the market, though the economy is struggling, the labor market has stalled, and non-oil exports contracted amid a record ex-US trade deficit.   A dovish statement coupled with the pullback in oil prices, which are off 1% in the European morning, could weigh on the Canadian dollar.  The second is the Fed’s Beige Book.  It typically is not a market mover, and although the leading hawk on the FOMC (among voting members) has said she would renew her call for an immediate hike, she will have to dissent again.  

Brazil reports its monthly GDP proxy for May, which is expected at -3.9% y/y vs. -5% in April.  This comes after much weaker than expected retail sales in May, at -9% y/y vs. -6.3% expected.  While the economy is trying to bottom, we do not think robust growth will be seen until 2017 at the earliest.  COPOM next meets July 20 and is unlikely to start the easing cycle then.  The meeting after that on August 31 may be a better bet.  

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Trump Making Inroads in Key States

July 13th, 2016 6:16 am

Via Politico.com:

Swing-state stunner: Trump has edge in key states

Did Donald Trump really just surge past Hillary Clinton in two of the election’s most important battlegrounds?

New swing-state polls released Wednesday by Quinnipiac University show Trump leading Clinton in Florida and Pennsylvania — and tied in the critical battleground state of Ohio. In three of the states that matter most in November, the surveys point to a race much closer than the national polls, which have Clinton pegged to a significant, mid-single-digit advantage over Trump, suggest.

The race is so close that it’s within the margin of error in each of the three states. Trump leads by three points in Florida — the closest state in the 2012 election — 42 percent to 39 percent. In Ohio, the race is tied, 41 percent to 41 percent. And in Pennsylvania — which hasn’t voted for a Republican presidential nominee since 1988 — Trump leads, 43 percent to 41 percent.

Other polls give Clinton an advantage in all three states. Including the new Quinnipiac surveys, POLITICO’s Battleground State polling average — which include the five most-recent polls in each state — give Clinton a 3.2-point lead in Florida, a 2.8-point edge in Ohio and a larger, 4.6-point advantage in Pennsylvania.

While the Quinnipiac results are eye-popping, they don’t represent any significant movement — except in Florida. In three rounds of polling over the past two months, the race has moved from a four-point Trump lead in Ohio in the first survey, then tied in the next two polls. In Pennsylvania, Clinton led by one point in the first two polls and now trails by two.

But in Florida, the race has bounced around. Clinton led by one point in the first poll two months ago, but she opened up an eight-point lead in June — a lead that has been erased and more in the new Quinnipiac survey.

The polls from the Connecticut-based school are likely to be met with some skepticism. When Quinnipiac released their first round of polls in the same three states two months ago, they prompted a round of sniping from Democrats and an F-bomb on Twitter from Nate Silver, the FiveThirtyEight founder who has built a career using poll results to make political predictions.

But subsequent polls later confirmed the May Quinnipiac surveys: Trump pulled virtually even with Clinton nationally after knocking out his rivals for the GOP nomination.

It’s possible the results of the FBI investigation into Clinton’s private email server dating back to her service as secretary of state — FBI Director James Comey called Clinton and her staff “extremely careless,” even as he said the government shouldn’t press charges because there wasn’t evidence of criminal intent — are driving Clinton’s poll numbers down leading into the conventions, typically a critical time for campaigns.

In the poll release, the school suggested the investigation could have played a role, pointing to other lingering questions about Clinton’s honesty and trustworthiness. “While there is no definite link between Clinton’s drop in Florida and the U.S. Justice Department decision not to prosecute her for her handling of emails,” Quinnipiac pollster Peter Brown said, “she has lost ground to Trump on questions which measure moral standards and honesty.”

But the Quinnipiac polls are imperfect measures of a post-email investigation race. That’s because, like many of the school’s other polls, they were conducted over an unusually lengthy, 12-day time period: June 30 through July 11.

The national polls conducted since Comey’s statement are mixed: Clinton posted a 3-point lead in this week’s NBC News/SurveyMonkey online tracking poll, down from a 5-point lead the week prior. Morning Consult, another online tracking poll, gave Clinton identical 1-point leads in the days before and after Comey’s statement.

Overall, Clinton leads by 4.3 points in the latest national HuffPost Pollster average, and she has a 3.7-point advantage in the RealClearPolitics average.

The polling in other battleground states since the announcement are also cloudy. Monmouth University surveys conducted after the Comey statement gave Clinton a 4-point lead in Nevada — but showed Trump ahead by two points in Iowa.

In the Quinnipiac polls, there are warning signs for both candidates in all three states. First, despite near-universal name-ID, neither candidate can break out of the low 40s on the ballot test. That points to two very unpopular candidates.

But, in a reversal from earlier surveys, it’s a more acute problem for Clinton. Clinton’s unfavorable ratings (59 percent in Florida, 60 percent in Ohio, 65 percent in Pennsylvania) are higher than Trump’s (54 percent in Florida, 59 percent in Ohio, 57 percent in Pennsylvania) in all three battleground states. And majorities in all three states — which together account for 67 electoral votes, or nearly a quarter of the 270 necessary to win the presidency — have a “very unfavorable” view of Clinton.

Another measure of voters’ ambivalence about Clinton in the Quinnipiac poll: a second ballot-test question, this time adding two third-party candidates to the mix. When voters are asked to consider the general election again, this time given the option of choosing Libertarian candidate Gary Johnson and Green Party candidate Jill Stein, Trump’s advantage over Clinton grows in each state. Trump leads on the four-way ballot by five points in Florida, one point in Ohio and six points in Pennsylvania.

There are some eyebrow-raising results from the polls, however. On the two-way ballot test in Florida, Clinton trails Trump despite the Republican winning just 21 percent of non-white voters in the increasingly diverse state.

In Ohio, Clinton wins 90 percent of Democrats, but Trump only captures 77 percent of Republicans, putting him at a significant disadvantage. In Pennsylvania, where Democrats outnumber Republicans by close to 10 percentage points, both candidates are at 82 percent among their own partisans, with Trump only three points ahead among self-identified independents.

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Heavy Trading of Secondary Market Corporate Bonds

July 13th, 2016 6:06 am

Via Bloomberg:

IG CREDIT: 5th Highest Trading Volume on Record; Spreads Tighter
2016-07-13 09:52:30.365 GMT

By Robert Elson
(Bloomberg) — Secondary IG trading ended with a Trace
count of $21.3b vs $15.9b Monday, $14.5b the previous Tuesday.

* $21.3b was the 5th highest volume of any session back to
July 2005 when the series began; more than on 99.8% of
trading days since July 2005
* It was 2nd highest of any Tuesday since July 2005
* $15.9b was the 6th highest of any Monday since July 2005
* 10-DMA $16.1b; 10-Tuesday moving avg $16.4b
* 144a trading added $3.2b of IG volume vs $2b Monday, $1.9b
last Tuesday

* Most active issues:
* HSBC 2.95% 2021 was 1st; client selling was twice buying
* ABIBB 3.65% 2026 was next with client and affiliate
flows accounting for 71% of volume
* ABIBB 2.65% 2021 was 3rd with client flows taking 88% of
volume
* DELL 6.02% 2026 repeats as most active 144a issue with
client and affiliate trades taking 75% of volume

* Bloomberg US IG Corporate Bond Index OAS at 150.8 vs 153.6
* 2016 high/low: 220.8, a new wide since Jan. 2012/150.8
* 2015 high/low: 182.1/129.6
* 2014 high/low: 144.7/102.3

* BofAML IG Master Index at +152 vs +155
* 2016 high/low: +221, the widest level since June
2012/+152
* 2015 high/low: +180/+129
* 2014 high/low: +151/+106, tightest spread since July
2007

* Standard & Poor’s Global Fixed Income Research IG Index at
+195 vs +199, its first time below +200 since May 5
* +262, the new wide going back to 2013, was seen
2/11/2016
* The widest spread recorded was +578 in Dec. 2008

* S&P HY spread at +628 vs +644; +947 seen Feb. 11 was the
widest spread since Oct. 2011
* All-time wide was +1,754 in Dec. 2008

* Markit CDX.IG.26 5Y Index at 70.8 vs 72.2
* 73.0, its lowest level since August, was seen April 20
* 124.7, a new wide since June 2012 was seen Feb. 11
* 2014 high/low was 76.1/55.0, the low for 2014 and the
lowest level since Oct 2007

* Current market levels vs early Tuesday levels:
* 2Y 0.677% vs 0.661%
* 10Y 1.490% vs 1.483%
* Dow futures +8 vs +74
* Oil $46.25 vs $45.51
* ¥en 104.66 vs 103.84

* IG issuance totaled $11.75b Tuesday vs $3.6b Monday
* July now totals $41.5b, YTD $938.8b

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Credit Pipeline

July 13th, 2016 6:02 am

Via Bloomberg:

IG CREDIT PIPELINE: 5 Set to Price, Domestics May Be Added
2016-07-13 09:34:07.439 GMT

By Robert Elson
(Bloomberg) — Expected to price today:

* Japan Bank for International Cooperation (JBIC) A1/A+, to
price 2-part deal, via managers BNP/BAML/C/Nom
* 5Y, guidance MS +60 area
* 10Y, guidance MS +64 area
* Municipality Finance (MUNIFIN) Aa1/AA+, launched $1b
144a/Reg-S 3Y at MS +28, via C/GS/Nom/TD; IPT
* International Finance Corp (IFC) Aaa/AAA, to price Global
5Y, via Barc/BMO/JPM/Nom; spread set at MS +20
* European Bank for Reconstruction & Development (EBRD)
Aaa/AAA, to price $500m Global 3Y Green Bond, via BAML/CrAg;
guidance MS +10 area
* Dai-ichi Life Insurance (DAIL) A3/A-, to price $bench
144a/Reg-S Perp/NC10 subordinated step-up, via
C/GS/JPM/Miz/MS; IPT 4.375%-4.50%

LATEST UPDATES

* Tengizchevroil (TCOKZ) Baa2/BBB, to hold investor meetings,
via C/HSBC/JPM July 12-19; USD 144A/Reg S may follow
* Danone (BNFP) Baa1/BBB+; ~$12.1b WhiteWave (WWAV) Ba2/BB
* Co. Says deal 100% debt-financed, expects to keep IG
profile (July 7)
* Teva Pharmaceutical Industries (TEVA) Baa1/BBB+, said to
consider accelerating $22b bond sale plan
* Some expectations this deal may be as soon as this week
* TEVA ~$40.5b Allergan generics buy
* $22b bridge; $5b TL commitment (Nov 18)
* Woori Bank (WOORIB) A2/A-, mandates BAML/C/Cmz/CA/HSBC/Nom
for investor meeting July 11-20
* Thermo Fisher (TMO) Baa3/BBB, gets loans for FEI (FEIC) buy
via 21 banks
* Investment Corp of Dubai (INVCOR), weighs bond sale; last
issued in May 2014
* Kingdom of Saudi Arabia (SAUDI), said to tap C/HSBC/JPM for
its first international bond sale; kingdom will probably
wait until after summer to sell at least $10b of bonds and
may replicate Qatar’s recent sale by issuing 5y, 10y, 30y
tranches, sources say
* Potash Corp Of Saskatchewan (POT) A3/BBB+, files automatic
debt shelf; last issued March 2015
* Monsanto (MON) A3/BBB+, may see higher bid from Bayer
(BAYNGR) A3/A-
* Microsoft (MSFT) Aaa/AAA, added to list of possible issuers,
says Morningstar; also notes PG, DOV as potentials
* 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
* 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
* 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

MANDATES/MEETINGS

* Kookmin Bank (CITNAT) A1/A, held investor meetings June
13-17, via BAML/CA/HSBC/Miz
* 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 $12b loan backing the deal
via 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)
* 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

* ERP Operating LP (EQR) Baa1/A-, filed an automatic debt
securities shelf June 28; last issued $450m 10Y notes May
2015
* 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)

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Helicopter on Tarmac But Engine Not Running

July 13th, 2016 5:59 am

Via Reuters:

Japan’s Suga: Not true govt is considering helicopter money

TOKYO, July 13 (Reuters) – Japan’s top government spokesman said on Wednesday the government was not considering “helicopter money” as an option, denying a media report that its advisers were suggesting the policy.

The Sankei newspaper reported on Wednesday that Etsuro Honda, an economic adviser to Prime Minister Shinzo Abe, told the premier that now was a good time to embark on the policy, in which money is printed and directly handed to the private sector to stimulate the economy.

Chief Cabinet Secretary Yoshihide Suga told a news conference that the Bank of Japan would decide monetary policy steps based on market movements and economic environment.

Abe’s meeting on Tuesday with former U.S. Federal Reserve Chair Ben Bernanke, a proponent of “helicopter money” policies, also fueled speculation that the government’s stimulus package could be funded by the Bank of Japan’s easing.

(Reporting by Kaori Kaneko; Editing by Chang-Ran Kim)

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Gunlach Musings

July 13th, 2016 5:55 am

I think it interesting that he thinks the election of Donald Trump is likely. I think I  previously read that he thinks the outcome will be analogous to the UK’s Brexit vote.

Via Bloomberg:
July 12, 2016 — 6:28 PM EDT
Updated on July 12, 2016 — 8:55 PM EDT

 

Investors who rushed into bonds last week will face a hard time making money as the market finds a bottom and rates begin to rebound, according to Jeffrey Gundlach, chief executive officer of DoubleLine Capital.

“There’s something of a mass psychosis going on related to the so-called starvation for yield,” Gundlach, whose firm manages $102 billion, said during a webcast Tuesday. “Call me old-fashioned, but I don’t like investments where if you’re right you don’t make any money.”

Treasuries suffered their steepest two-day selloff this year, as demand sagged at this week’s government auctions after yields tumbled to unprecedented lows last week.

Benchmark 10-year note yields jumped 15 basis points through Tuesday, reaching the highest this month at 1.53 percent, after a gauge of demand at a $20 billion sale of the securities sagged to the weakest since 2009. It was the second of three note and bond offerings this week, after an auction of three-year notes on Monday also attracted the weakest demand in seven years, sparking a selloff across maturities.

The slump left the Bloomberg U.S. Treasury Bond Index little changed in July, after it surged 5.4 percent through June 30 in its best start to a year since 2010.
Fund Gains

Gundlach said on the webcast that he expects it will take until next year for 10-year Treasuries to climb back above 2 percent.

 

The Los Angeles-based money manager discussed his $7.1 billion Core Fixed Income Fund, which returned 6.1 percent this year through July 11, beating 65 percent of its Bloomberg peers, and his $260 million Flexible Income Fund, which is up about 3.3 percent. He said Flexible Income’s average effective duration of less than two years makes it appropriate for investors preparing for an environment of rising interest rates.

Gundlach also said:

Policy responses to insolvency concerns for European banks are likely to be “bond unfriendly,” creating inflation “that would take everybody by surprise.”

“Watch out” for the stock market high being rejected. He said he’s been making money with “a cautious view of the stock market” by shorting some equities.

Emerging-market debt, especially in local currencies, is a better bet for now than U.S. junk bonds.

Oil prices are more likely to fall below $40 than exceed $50 because of high inventories.

He’s “quite sure” that Donald Trump will be elected U.S. president.

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Japan Cuts Growth and Inflation Forecast

July 13th, 2016 5:50 am

Via Bloomberg:

Japan’s cabinet office cut its forecasts for growth and inflation as the government considers a stimulus package to support the ailing economy.

Gross domestic product will expand by just 0.9 percent in the fiscal year that started April, compared with a January estimate of 1.7 percent. The consumer price index will rise 0.4 percent, compared with an earlier projection of 1.2 percent, the cabinet office said.

Prime Minister Shinzo Abe has ordered his ministers to compile a fiscal spending package that one adviser said should be as large as 20 trillion yen ($192 billion). The yen has fallen this week while stocks rally as the market awaits news on the size of the package and speculation continues about possible coordination with the Bank of Japan, which meets later this month to assess monetary policy.

Japan needs to keep various policy options open, including coordinated action by the government and central bank, Koichi Hamada, a key adviser to Abe on economic policy, said in an interview earlier on Wednesday.

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Early FX

July 13th, 2016 5:41 am

Via Kit Juckes at SocGen:

<http://www.sgmarkets.com/r/?id=h10ecbc01,17a2cbfd,17a2cbfe&p1=136122&p2=9a3b4f7b1e1fb0c912a46502a5e19581>

I don’t know if the credibility of GDP as a concept is quite what it was before yesterday’s Irish GDP data (and revisions). These put Q1 2015 GDP at +24.4% (that’s a 97.6% q/q saar rate, the way the US releases data) on the back of a huge jump in exports, all due to multinationals choosing to take advantage of Ireland’s low corporation tax rates. But away from Irish fun and games, I’m struck at the enthusiasm of all and sundry to tell us that European and US growth rates will hardly be affected by the UK post-referendum slowdown. That flies in the face of the increased correlation of major economies’ growth rates in an ever more connected world. You can’t have it both ways – if the world thrives post-Brexit, the UK won’t suffer that badly. Particularly if there is a strong fiscal policy response. For now, the sterling short-squeeze goes on. I doubt GBP/USD can get through 1.35, but the June 24 peak was 1.5020 (albeit in middle-of-the-night liquidity) and the low is just above 1.28, so a 50% retracement of the fall would be around 1.39….just to say, watch this play itself out. The real focus should be on the fiscal response to the negative growth shock. It’s time to make Krugman and co happy by taking advantage of low rates/yields to boost investment in infrastrcture (private, public, pub/priv)…

GDP growth (% y/y) – we’re all in this together

[http://email.sgresearch.com/Content/PublicationPicture/228883/1]

The yen’s slightly stronger this morning amid speculation that we’ll get a big fiscal package rather than substantial further monetary easing. The Nikkei’s higher again, but USD/JPY bulls need US yields to go on pushing higher. The US news/data today is limited to the Beige Book this evening, while there will be a 30year bond auction that will attract interest after a poor 10-year auction yesterday evening.

The Asian risk-on tone has once again left the AUD, NZD and CAD cold. Our preference for CAD remains intact, and AUD is dogged by concerns about the effect of a narrow election win on fiscal policy and the country’s creditworthiness. If oil and other commodities are unable to push higher and if the slide in treasury yields is over for now however, all three are going to struggle against the dollar.

A better bet in a risk-friendly world may be to short EUR/SEK at current levels. This pair rose with EUR/GBP and with the pound bouncing, it’s lagged. The entry level here is attractive, to sell with a stop at 9.6 and a target of 9.1.

EUR/SEK is a sell (target 9.1, stop 9.6)

[http://email.sgresearch.com/Content/PublicationPicture/228883/4]

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