Golden Week no More- China brings out the bears

Golden Week no More- China brings out the bears
by Brenda Kelly

After the big upside move last week, it’s little wonder we’re seeing a little caution from investors now. Consumer staples and healthcare are garnering most of the flow and again it’s the materials sector that’s taking the worst hit. It was nice when it lasted.

Last week was a golden one for investors and the ‘out of sight, out of mind’ mentality was a decent if temporary replacement for basic fundamentals but China is back on the radar today and once again for all the wrong reasons.

The spectre of slowing growth in the world’s second biggest economy is now again presented in sharp relief with both exports and imports falling in September – this is in spite of the myriad of stimulus measures undertaken by the PBOC over the past number of months. In dollar terms, the fall in imports of 20.4% is due almost entirely to falling import prices.

The disinflation phenomena seems to be here to stay and GBPUSD manifested the risks of attempting to ascertain a trend in the FX complex with a round trip up to 1.5388 before falling back to 1.5259 on the back of the weaker than expected UK CPI print.

Copper is also adding to the losses seen yesterday, now trading at $2.39/lb – the failure to even challenge the highs seen in September tend to put the bias to the downside although we can expect a certain degree consolidation – the price is already down 18% since mid- May.

Oil’s slide yesterday, on oversupply concerns, has sent oil company shares lower and airlines are reaping the benefit with EasyJet and IAG recapturing gains in early trade. This has essentially been confirmed today by the IEA. Demand growth, on the back of weak global GDP is likely to see this oversupply glut endure through 2016. Brent Crude prices has been grappling with the $50/bbl marker lately but remaining around this level now seems to be an outlier and additional falls will mean it will present the usual psychological resistance, despite the recent weakening in the greenback. A return to the lows seen earlier this month seem the more likely outcome for now.

Glencore (-4.66%) is to hire BoFA and UBS to advise on its copper mine sales. The battle to cut its’ debt load is in many respects impacting the value of the company too as the depletion in assets ramps up. The share price may have bounced from its lows in recent days but investor confidence is not exactly on fire and this is materialising in the lack of sustained upside.

VOLKSWAGEN (-0.75%) Seeks €3bn in cost cuts at suppliers. Volkswagen is likely to reduce employee profit-sharing bonus from €5,900 per employee last year. Cost cutting aside, the reputational damage done to the company and the as yet unknown costs that will be associated with the scandal are likely to weigh on the share price over the near term.

BARCLAYS (-1.21%) It’s never pleasant when a company share price moves negatively on the back of a CEO entrance or departure. But the news that former J.P. Morgan Chase executive James Staley is set to be its next CEO isn’t exactly pumping the stock higher just yet. The bank has selected their candidate but deal is not yet done. Jes Staley has not yet signed a contract + regulatory approval pending. This appointment is likely to be made official in the coming weeks.

ROYAL DUTCH SHELL (-1.45 e The oil company is selling two assets in the North Sea as the big energy companies respond to high production costs and a massive decline in crude prices both historic and let’s be honest imminent. Shell is endeavouring to offload its 50% stake in the Gannet field and its 26% holding in the Triton vessel operated by Dana Petroleum.

ROYAL MAIL( -4.43%) - The U.K. government has sold its remaining 14% stake in Royal Mail Group Plc to institutional investors.

LMVH (-3.36%): reported third-quarter revenue that exceeded analysts’ estimates, boosted by growth in Europe, the U.S. and Japan. Total revenue for the quarter climbed 16% to €8.58 billion ($9.76 billion). Expectations were for € 8.53 billion

Ladbrokes (+1.23%) — an upgrade from Citi to neutral is helping the stock rise this morning. Citi has stated that upside and downside risks are broadly balanced and give a price target to 110p (from 100p), the mid-way point between the upside from a deal and the downside from no merger agreement with Gala Coral. Citi price target now implies a 3.9% upside from present levels.

GlaxoSmithKline (+1.03%): Upgraded to neutral from underweight by JP Morgan

Swiss banks hit by higher leverage ratio requirement
by Ipek Ozkardeskaya

News that big Swiss banks will be subject to a higher leverage ratio of 5% hit UBS (3.5%), Credit Suisse (-3.35%) and Julius Baer (-1.95%) shares in Zurich.

Although the Swiss regulation regarding the core ratio requirements is among the strictest in the world, the leverage ratio requirements were known to be more flexible compared to the UK and US banks. The project was on its way and is finally here.

To remain competitive, Swiss banks need to reinforce their image of ‘world’s safest banks’, especially following heavy squeezes endured during the 2008 financial crisis and after its most valuable asset – the banking secrecy – has been shattered.

As a result of the new regulation, biggest Swiss banks will need to divest their capital intensive activities and will certainly need to reduce their dividends in order to consolidate their balance sheets. Naturally, less leverage means tighter liquidity in the market, which somewhat goes against the SNB’s efforts to loosen the monetary conditions in the Swiss market, hence to curb the franc appreciation.

While the euro is successfully kept in 1.08/1.10 implicit band, the broad-based weakness in the US dollar sent it to 0.9580 against the franc, its cheapest level since September 18th.

New measures could give a bit of shine to the franc and re-charm safe-haven investors.
The Swiss National Bank could hence speed up its foreign exchange operations to keep the franc at acceptable levels. However, the pressure on the SNB’s balance sheet will certainly be inconsequential; the negative rates on the franc are to remain the major drag for investors craving to re-build franc denominated positions.