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Global Stocks Jump On Mega Merger Monday, Buoyed By Earnings, PMIs, Politics

by October 24, 2016 General

Global stocks jumped around the globe, with Europe’s Stoxx 600 and US equity futures rising more than 0.5% on a surge in merger announcements over the weekend including the $85 billion mega takeout of Time Warner by AT&T, the $6.4 billion acquisition of B/E Aerospace by Rockwell Collins, the $2.7 billion deal targeting Genworth by China Oceanwide and the just announced $4 billion purchase of Scottrade by Ameritrade.

In other risk-positive news, Spain stocks surged after the local socialist party shifted its strategy and cleared the way for a Rajoy re-election, ending a nearly year-long impasse that left Spain without a government, while a series of Eurozone flash PMIs for October printed stronger than expected, driven by strength in Germany:

  • Eurozone Oct. Flash Services PMI 53.5; Est. 52.4; Eurozone Oct. Flash Services PMI 53.5; Est. 52.4
  • Eurozone Oct. Flash Manufacturing PMI 53.3; Est. 52.7
  • Germany Oct. Flash Composite PMI 55.1; Est 53.3

There was even good manufacturing data out of Japan, where the Nikkei Japan Oct. Flash Manufacturing PMI rose to 51.7 vs 50.4 in Sept.

Additionally, European government bonds advanced after Portugal was retained at investment grade by DBRS Ltd, removing a key risk overhang for the peripheral country that threatened making it ineligible for ECB QE purchases. Portugal’s 10-year bond yield declined 10 basis points to 3.10 percent, touching the lowest level in more than a month. The nation’s credit rating was retained at investment grade by DBRS, securing eligibility of the country’s debt for the European Central Bank’s bond purchase program. Spain’s 10-year yield fell four basis points to 1.07 percent.

As a result, European markets started the week in a buoyant mood, as equities rose on earnings, bonds jumped on a brightening credit outlook and economic data exceeded analyst estimates. Shares climbed around the world, with 17 of the 19 industry groups in the Stoxx Europe 600 Index rising as Royal Philips NV surged on improved profits. Emerging-market currencies strengthened, led by the rand, while in Asia, the Shanghai Composite Index reached its highest level since January and the yuan sank toward an all-time low in the offshore market. Base metals jumped.

As Bloomberg adds, with more than 100 companies in the Stoxx 600 scheduled to report results this week, Europe’s markets received an additional boost after a Purchasing Managers’ Index for manufacturing and services showed euro-area economic momentum accelerated to the fastest pace this year. Earnings will play a key role for stocks this week, with three of the world’s four biggest companies by market value, including Apple Inc., due to announce results in America, while China has all four of its largest listed banks reporting.

Europe started off the week strong, thanks first of all to an upgrade of Eurozone stocks by JPM to “overweight” which said that equity valuations have improved, P/E, P/Book relative now attractive, region has seen biggest outflows out of the main developed equity markets YTD. That set the mood for the Stoxx Europe 600 Index which climbed 0.5% in early trading. Royal Philips NV jumped by the most since January after the Dutch company announced a 14 percent increase in third-quarter profit.

Spain’s benchmark IBEX 35 Index advanced the most among western-European markets after the Socialist Party leadership opted to stand aside and let acting Prime Minister Mariano Rajoy take office for a second term, signaling the end of the nation’s 10-month political stalemate. Elsewhere, Syngenta AG tumbled 6.2 percent, the most in 14 months, after the European Union said China National Chemical Corp. didn’t submit concessions to EU regulators by an Oct. 21 deadline for a review of the $43 billion takeover of the Swiss seed and pesticide maker.

The MSCI Asia Pacific Index rose 0.4 percent, reversing an earlier loss. The Shanghai Composite Index rallied to a nine-month high amid speculation China will boost fiscal spending and follow through with pledges to overhaul the ownership structure of state-owned firms. Hong Kong’s Hang Seng Index gained 1 percent from Thursday’s close as trading resumed following a typhoon on Friday.

“Stabilization in third-quarter economic data has provided support to the broader market,” said Wang Zheng, Shanghai-based chief investment officer at Jingxi Investment Management Co. “Some big state-owned enterprises are doing well as there is speculation that the government will accelerate their consolidation to improve efficiency and boost infrastructure spending to further bolster economic growth.”

S&P 500 Index futures rallied 0.5% before American companies including Visa Inc. and T-Mobile US Inc. announce quarterly earnings on Monday. Over the weekend more polls showed Hillary Clinton pulling ahead of Trump which has traditionally been perceived as positive for risk. About 80% of the 118 members of the S&P 500 that have reported so far beat estimates, though analysts still forecast a contraction in profits. AT&T Inc. said over the weekend it agreed to buy Time Warner Inc. for $85.4 billion.

“Earnings is the key metric for investors,” Matthew Sherwood, head of investment strategy in Sydney at Perpetual Ltd., told Bloomberg. “Meanwhile, there are a number of important macro events which are holding the market back, including the U.S. election early next month.”

10Y Treasuries were little changed and yielded 1.73%, after the rate sank six basis points last week. U.S. government debt handed investors a 0.6 percent loss in the month through Sunday, still the best performance in dollar terms among 26 major markets. U.K. notes ranked last with an 8.7 percent loss.

Bulletin Headline Summary from RanSquawk

  • European equities enter the North American crossover in positive territory with gains relatively broad-based from a sector specific standpoint
  • A very quiet start to the week, with the plenty of event risk around, but much of which looks to be priced in to the major FX pairs as tight ranges suggest
  • Looking ahead, highlights include Eurozone Services and Manufacturing PMIs, US Manufacturing PMI and Fed’s Bullard

Market Snapshot

  • S&P 500 futures up 0.5% to 2145
  • Stoxx 600 up 0.5% to 346
  • FTSE 100 up 0.2% to 7034
  • DAX up 0.8% to 10794
  • German 10Yr yield down 2bps to -0.01%
  • Italian 10Yr yield down 3bps to 1.35%
  • Spanish 10Yr yield down 4bps to 1.07%
  • S&P GSCI Index up 0.3% to 376.8
  • MSCI Asia Pacific up 0.4% to 140
  • Nikkei 225 up 0.3% to 17234
  • Hang Seng up 1% to 23604
  • Shanghai Composite up 1.2% to 3128
  • S&P/ASX 200 down 0.4% to 5408
  • US 10-yr yield down less than 1bp to 1.73%
  • Dollar Index down 0.12% to 98.58
  • WTI Crude futures up less than 0.1% to $50.87
  • Brent Futures up 0.2% to $51.87
  • Gold spot up less than 0.1% to $1,266
  • Silver spot up 0.5% to $17.64

Global Headline News

  • AT&T $40 Billion Loan Pledge From Wall Street Brings Fees, Risks: Dose of concern that the $40 billion loan pledge may get caught up in a regulatory impasse
  • Rockwell Collins Buying B/E Aerospace for $6.4 Billion: Largest acquistion in avionics company’s 83-year history
  • Axa in Talks to Sell Insurance Broker Bluefin to Marsh: In “advanced discussions” with U.S. insurance broker Marsh & McLennan over ~GBP300m sale of British unit, Sky News reports, citing sources
  • ChemChina and Syngenta Made No Concessions by EU Deal Deadline: EU has Oct. 28 deadline to decide on approval or longer probe
  • Ford, Nissan Seek Africa Car Industry Fixes With State Talks: African manufacturers group will seek to work with lawmakers
  • Russian Suspect Charged Over 2012 Hack of LinkedIn, Dropbox: Hacker known as Chinabig01, itBlackHat was arrested in Prague

Looking at regional markets, we start in Asia where stocks kicked off the week strongly with the exception of the ASX 200 (+0.4%), in which the index was pressured by health care names following another session of heavy declines in Healthscope (-6%) shares after Friday’s profit warning. While concerns have been mounting for Australia’s big 4 banks over potential dividend cuts ahead of their earning updates. Nikkei 225 (+0.3%) traded with marginal gains amid encouraging trade figures, whereby the contraction in exports was less severe than expected. Chinese markets outperformed with the Hang Seng (+1.0%) and the Shanghai Comp (+0.9%) buoyed by a firm liquidity injection by the PBoC, allied with a near record low in CNH. In credit markets, Japanese bond yields were a touch firmer overnight, with the curve notable flattening amid the outperformance in the long end.

Top Asian News

  • China Oceanwide Joins Deal Spree With $2.7 Billion Genworth Bid: China firms have announced $207b overseas deals in 2016
  • Chinese Money Flowing to Hong Kong Stocks Has Suddenly Dried Up: Financial shares fall out of favor with link investors
  • Japan’s Exports Drop for 12th Month in Dismal Year for Trade: Japan Sept. exports fall 6.9% y/y vs est. -10.8%
  • Yen Yields in BOJ Vise Give Investors Easier Path to Profit: Bond market volatility has plunged to lowest since January
  • Singapore Strains Mount as ASL Marine Seeks to Issue Shares: Swissco and Rickmers are struggling to repay bond investors
  • Mobius Doubles Down on India as Fund Exodus Seen Fleeting: India in a “sweet spot” and top emerging market pick, Mobius says

European equity markets have kicked off the week firmly in the green, with major indices trading higher by around 1%. Notable outperformance has been in the IBEX (+1.2%), with the index benefitting from news that Spain will finally form a government after almost a year without a permanent one, albeit a minority government. On a stock specific basis, Syngenta (-8.5%) are among the worst performers this morning, with fresh doubts over their potential merger with ChemChina after reportedly failing to make any concessions ahead of the EU deal deadline last Friday, while elsewhere Philips (+4.4%) outperform in the wake of their earnings release. Fixed income markets have remained relatively quiet today, with Bunds hovering just below the 164.50 level having failed to make a firm break above the level, while Portuguese debt reversed early outperformance, with some suggesting a buy rumour sell the fact strategy in the wake of Friday saw DBRS affirm the country’s sovereign rating, meaning they can continue to take part in the ECB’s bond buying.

Top European News

  • German Economy Regains Momentum as Manufacturing Powers Growth: Factory activity expanded at the fastest pace in almost three years
  • Philips Sees Lumileds Sale in 2016 as Health Boosts Profit: Aiming to sell division before year-end to better focus on health care, which helped drive a 14% increase in 3Q profit
  • Germany Reopens Aixtron Review in China Investment Curb Push: Follows calls by economy minister Gabriel, who is also Merkel’s deputy, for EU measures to give national governments powers to block or impose conditions on shareholdings of non-EU companies
  • Cobham Tumbles After Third Profit Warning in Less Than a Year: Satcoms, wireless units underperforming as Boeing cash delayed

In FX, the yuan fell 0.1 percent to a six-year low in Shanghai and was 0.1 percent shy of its all-time low in the offshore market, which started in 2010. A net $44.7 billion worth of yuan payments left China in September, the most in data going back to 2010, the currency regulator reported Friday. Goldman Sachs Group Inc. estimated on Friday that China’s outflows totaled about $500 billion in the first nine months of this year. “Market sentiment will be relatively negative in the near term as the offshore yuan tests record lows,” said Zhou Hao, an economist at Commerzbank AG in Singapore. “In the long term, China will still see net funds exit.” The Bloomberg Dollar Spot Index fluctuated ahead of Monday speeches by Federal Reserve Governor Jerome Powell and regional Fed presidents for New York, St. Louis and Chicago. The chance of a rate hike this year increased by two percentage points last week to 68 percent in the futures market. The euro halted a four-day run of losses.

In commodities, crude oil was little changed at $50.89 a barrel in New York, after advancing 0.8 percent on Friday. Iraq’s oil minister said Sunday that the nation should be exempted from production cuts proposed by the Organization of Petroleum Exporting Countries because it’s embroiled in a war with Islamic militants. The country is the group’s second-largest producer.Industrial metals advanced across the board following a seven-day slide in the London Metal Exchange’s LMEX Index. Zinc led gains with a 1.3 percent increase. Gold was little changed after advancing 1.2 percent last week. The net-long position in bullion futures and options fell to the lowest in more than seven months during the week ended Oct. 18, according to Commodity Futures Trading Commission data released Friday. “Market participants will be watching for any data that could drive the FOMC to raise rates,” Jason Schenker, president of Prestige Economics LLC, said in a note received on Monday, referring to the policy-setting Federal Open Market Committee by its initials. “Near-term Fed-hawkish, dollar-bullish factors threaten to send gold prices lower.”

It’s a busy start to the week today with the release of the flash October PMI’s this morning in Europe including the services, manufacturing and composite prints. In the UK we’ll also get the October CBI selling prices data. In the US we’ll also get the flash manufacturing PMI, along with the Chicago Fed national activity index.

* * *

US Event Calendar

  • 8:30am: Chicago Fed National Activity Index, Sept., est. -0.13 (prior -0.55)
  • 9:00am: Fed’s Dudley speaks in New York
  • 9:05am: Fed’s Bullard speaks in Fayetteville, Ark.
  • 9:45am: Markit US Manufacturing PMI, Oct. P, est. 51.5 (prior 51.5)
  • 1:30pm: Fed’s Evans speaks in Chicago
  •     2pm: Fed’s Powell speaks in New York
  • 3:30pm: BOC’s Poloz at House of Commons committee hearing

* * *

DB’s Jim Reid concludes the overnight wrap

It’s tempting to start this morning pondering over how, following the weekend results, the Premier League is shapely up nicely for one of the more closely fought contests in some time. Just 1 point separates the top 5 with Arsenal and Liverpool 2nd and 3rd respectively and separated only by goal difference leaving us with a rare sense of optimism on a Monday morning. That said, it also means that at least one of us will be left bitterly disappointed by the end of the season and the short history of the Premier League has also taught us that this optimism usually fades at a rapid rate by the turn of the New Year for our teams. We’ve also got far more important matters to highlight in markets for this week.

Indeed we’ve got various data, earnings and political snippets this week to keep us busy. In terms of the former, we’ve got the October flash PMI’s to look forward to today and also Wednesday along with the advance Q3 GDP reports for the UK on Thursday and US on Friday. The durable goods report in the US is always worth keeping an eye on too on Thursday. On the earnings front we’ve got 181 S&P 500 companies reporting and 115 Stoxx 600 companies on the cards for this week. As is so often the case now, Apple’s results after the close tomorrow have become something of a spectacle while a number of the energy names also report this week. Another potentially important event this week is the decision from the UK High Court on the judicial review brought against the government’s Brexit policy concerning the ability of the government to trigger Article 50 without a parliamentary vote. An appeals process to the Supreme Court aside, the implications of the High Court ruling against the government are still a bit of an unknown but it is highly likely that it would significantly increase Parliament’s leverage over the timing and nature of the Brexit process. It’s expected that the timing of the High Court decision will be made public via the Royal Courts of Justice Cause List at some stage.

So with politics likely to be one of the important themes this week, the news that Spain’s unprecedented ten-month long political impasse looks set to end is the main headline from the weekend. Indeed the big news yesterday is the announcement that the federal committee of the centre-left PSOE has voted in favour of facilitating the formation of a centre-right minority government led by their historical opponent PP by abstaining. As DB’s Marco Stringa highlighted in a note published last night, the decision of the PSOE aims to avoid the third election in 12 months and means that incumbent PM and PP leader Mariano Rajoy is set to serve a second term. His party is expected to form a coalition with the liberal Citizens party to reach 170 seats, six votes short from an absolute majority. Significantly, the PSOE federal committee remained divided. Indeed Marco notes that 139 versus 96 voted in favour of abstaining. As Marco highlights, the risk for the PSOE is to see more of its voters move to left-wing, anti-establishment Podemos as happened in Greece. A situation that warrants close attention. In terms of the market reaction, Marco notes that breaking the political deadlock was important but he expects only a subdued positive reaction from markets given that the dilemma of whether a third election could be avoided had already become a less and less pressing concern for markets.

Switching our focus now to the latest in Asia where, after a bit of a directionless start, most bourses are currently trading with a positive tone. The Nikkei (+0.31%), Hang Seng (+0.31%), Shanghai Comp (+1.29%) and Kospi (+0.40%) are all up despite a muted start, with just the ASX (-0.63%) languishing. Commodity markets are weaker with WTI Oil (-0.59%) in particular lower, while Gold (-0.26%) isn’t faring too much better. There has also been some data this morning and it was generally a little better than expected in Japan. The September trade data showed that exports (-6.9% yoy vs. -10.8% expected) declined less than expected and also improved from a -9.6% yoy decline in August. Imports (-16.3% yoy vs. -17.0% expected) contracted less than expected too, while the trade surplus swung back into surplus in unadjusted terms.

The moves this morning come following a pretty quiet end to the week on Friday in markets. A batch of mixed earnings reports on both sides of the pond largely dictated the amazingly muted closing levels for equity markets. Indeed in Europe the Stoxx 600 closed flat after mixed reports from SAP, Ericsson and Daimler. Over in the US the S&P 500 was initially weighed down by a decent rally for the US Dollar with the index tumbling as much as -0.50% at the open, before paring losses into the close to finish -0.01% by the closing bell. Earnings from both Microsoft and McDonalds were taken positively however that was offset by disappointing reports from General Electric and Advanced Micro Devices. That lack of any material moves on Friday also meant that the S&P 500 (+0.38%) and Stoxx 600 (+1.28%) finished the week up.

While we’re on earnings, it’s worth taking stock of where we are currently in reporting season. As it stands, 35% of the S&P 500 companies have reported and overall it’s been a decent start with Banks and the Tech sector in particular surprising to the upside. Using our US equity strategy team’s data, 73% have beaten at the earnings line versus 17% that have missed with a weighted average beat of 6.8%. EPS is also up over 4% year-on-year. Interestingly the EPS analyst cuts during the calendar quarter amount to -3% versus the five-year average of just over -4%. At the sales line the beat miss ratio is less of a standout at 41% versus 26% in favour of beating, while the average weighted beat is just 0.7%. Still, sales are still up 1.7% year on year. Our colleagues note that the bottom-up consensus EPS for Q3 is $30.41 now, which is +0.9% yoy. In their view they think Q3 EPS is likely to be in the range of $30.25-30.50 however it’s the energy sector, of which some report this week, which is the uncertainty factor. It’s worth noting however, that after four consecutive quarters of negative yoy EPS growth, the consensus is that this trend will be bucked, albeit just, with this current reporting season.

Away from earnings, the other big theme on Friday was M&A. The headliner was the news that AT&T has agreed to acquire Time Warner for about $85bn in cash and stock in a deal which would create the world’s largest vertically integrated content and distribution company according to the FT. The deal is still to face the scrutiny of US regulators however with a number of wires reporting this morning that it’s unlikely to be a smooth process. Meanwhile, the other big announcement was that of British American Tobacco’s offer for Reynolds American in a deal worth $47bn.

Elsewhere in markets on Friday the Euro (-0.41%) extended its post-ECB slide and in the process closed at the lowest level since March. The other side of that trade saw the US Dollar index (+0.39%) close up for the eighth time in the last ten sessions and the highest level since February. Meanwhile, 10y Treasury yields did dip 2.1bps to 1.736% but still remain some 14bps above where they were at the start of the month. In Europe 10y Bund yields continue to hover just north of 0% while 10y Portugal yields strengthened a couple of basis points with the news that DBRS had retained the sovereign’s BBB rating and so still making the country’s debt eligible for ECB QE purchases.

Away from that and with little in the way of data on Friday, the only other highlight was comments from the San Francisco Fed President Williams. He said that he expects the Fed to maintain its balance sheet reinvestment strategy and only expects the Fed to start to shrink its balance sheet once the Fed Funds rate is ‘well away’ from zero.

Turning now to the week ahead. It’s a busy start to the week today with the release of the flash October PMI’s this morning in Europe including the services, manufacturing and composite prints. In the UK we’ll also get the October CBI selling prices data. Over in the US this afternoon we’ll also get the flash manufacturing PMI, along with the Chicago Fed national activity index. Kicking off Tuesday will be France where the latest confidence indicators will be released. Over in Germany we’ll also get the October IFO index readings. Across the pond in the US on Tuesday the highlight is the October consumer confidence reading, while the Richmond Fed manufacturing survey, IBD/TIPP economic optimism print, FHFA house prince index and S&P/Case-Shiller house price index will also be released. Wednesday starts in Asia where we’ll get the latest consumer sentiment reading in China. In Europe consumer confidence readings are expected in Germany and France while it’s a busy session scheduled in the US on Wednesday with the remaining flash PMI’s (services and composite), wholesale inventories, advance goods trade balance and new home sales. We’re in Asia again on Thursday with the latest industrial profits data in China. In Europe we’ll get M3 money supply data for the Euro area, along with the advance Q3 GDP report for the UK. The important data in the US on Thursday is the September durable and capital goods orders data. Also due out will be initial jobless claims, pending home sales and the Kansas City Fed manufacturing survey. We end the week on Friday in Japan with the September CPI report and also the latest household spending and jobless rate data. During the European session we’ll get CPI reports for both France and Germany, along with the advanced Q3 GDP reading for the former. Euro area confidence indicators will also be released. In the US it’ll be all about the advance Q3 GDP report, while the final University of Michigan consumer sentiment reading for October is also due.

Away from the data, the Fedspeak this week is reserved for the first half with Dudley, Bullard, Evans and Powell on the cards today, with Lockhart scheduled to speak tomorrow. In Europe Draghi is scheduled to speak tomorrow at a lecture in Berlin on stability, equity and monetary policy while the ECB’s Mersch and Coeure speak on Thursday and Friday respectively. Over at the BoE Carney is due to be questioned by the House of Lords Economic Affairs Committee tomorrow on the economic consequences of the Brexit vote. As always, the other big focus this week is earnings. We’ve got 181 S&P 500 companies and 115 Stoxx 600 companies scheduled to release their latest results. The list includes Visa and T-Mobile today, Apple, AT&T and Fiat-Chrysler on Tuesday, Coca-Cola and Glaxo on Wednesday, Alphabet, Twitter, Amazon, ConocoPhillips and VW on Thursday and Exxon Mobil, Chevron and UBS on Friday.