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IB Traders' Insight

Global market commentary from IBG traders and market participants.

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2014-04-23 05:17:26

Posted by
IB European Trade Desk
Contributor

Stocks

Market update: Netherlands / Belgium

  • ROYAL VOPAK (NL): FY Ebitda ex-items to be 5%-10% lower than EU753m in 2013. * Co. says no major improvements in business climate following FY results, continues to face challenges mainly in EMEA; current performance not in line with long-term ambitions * Co. to review performance of current terminals * 1Q occupancy rate 88% vs 89%.
  • UNIBAIL-RODAMCO (NL): Unibail-Rodamco 1Q Rev. EU463m vs EU430m Y/y. Reiterates full-yr recurring EPS growth forecast of at least 5.5%.
2014-04-23 05:16:20

Posted by
IB European Trade Desk
Contributor

Stocks

Market update: France

  • SAFRAN (FR): Safran 1Q Adj Revenue Climbs 3.3% Y/y to EU3.44b on OE, Services. FY 2014 outlook confirmed despite the Euro’s persistent strength, co. says in e-mail. Mid-single digit growth 2014 achievable if average EU/$ spot rate 1.37 remains. 1Q Aerospace propulsion rev EU1.8b, up 2.2% Y/y. 1Q Aircraft Equipment rev EU1.02b, up 11% Y/y. 1Q Defence rev EU257m, down 12% Y/y. 1Q Security business rev EU345m, up 1.5% Y/y. NOTE: Feb. 21, Safran Lacks Upside, Cut to Hold, Deutsche Bank Says.
  • ZODIAC (FR): Zodiac Aerospace Sees Further Year of Organic Growth in 2013/14. Zodiac Aerospace says 1H rev. rises 9.2% to EU1.998m, LFL growth 7.8%, continues to benefit from growth in air traffic, increase in air deliveries, growth in after-sales business. 1H current operating income +7.2% to EU255.7m, LFL growth 8.8%. 1H net income attributable +11% to EU162.8m. Says FX rates had negative impact of -3.1ppts. Sees a further year of organic growth in co.’s business.
  • EIFFAGE (FR): Co. says APRR highway toll 1Q toll revenue rose 2.2% to EU479.6m.
  • GL EVENTS (FR): Co. says 1Q revenue rose to EU219.3m, up from EU214.6m year-earlier.
  • JCDECAUX (FR): Outdoor advertising co. appointed Emmanuel Bastide and Daniel Hofer to its executive board.
  • ORANGE (FR): Phone co. signs wage agreement for 2014 with CFDT and FO unions.
  • RENAULT (FR): Car maker may manufacture electric vehicles in China, Nikkei reports, citing Asia-Pacific Chairman Gilles Normand.
  • SOCIETE GENERALE (FR): Jerome Kerviel, facing prison for unauthorized trades that led to one of the biggest losses in banking history, is suing Societe Generale for allegedly bribing a witness in his appeals trial, Agence France-Presse reported, citing Kerviel’s lawyer. * Eric Cordelle, formerly Kerviel’s boss, dropped employment lawsuit against SocGen last year over the terms of his dismissal: AFP * SocGen says in a statement it heard about Kerviel’s plan to file a complaint and calls it another attempt to divert attention from his responsibilities.
2014-04-23 05:15:13

Posted by
Stephen Alley
IB Asia Trade Desk
Contributor

Stocks

Nikkei shrugs off China PMI numbers to close at the day-high

The Nikkei opened +91 at 14,480 after the rally in the US overnight and with the Yen 0.1% weaker against the USD at 102.6. The Nikkei briefly dropped to 14,459 as Hong Kong and China stocks dropped following the HSBC/Markit China Flash Manufacturing PMI. However, the Nikkei later recovered to close at the day-high +158 at 14,546 (+1.1%).

Mining stocks outperformed after Mitsui Mining and Smelting (5706) guided after yesterday's market close that its full-year operating profit forecast was expected to rise to JPY 25.7 billion from JPY 22.3 billion. Mitsui Mining and Smelting (5706) closed +4.5%, while Sumitomo Metal and Mining (5713) closed +4.2%.

 

2014-04-23 05:13:16

Posted by
IB European Trade Desk
Contributor

Stocks

Market update: Spain/Italy

  • UNIPOL (IT): UnipolSai May Issue EU500m Hybrid Bond to Cut Debt, Sole Says. UnipolSai is considering selling EU500m hybrid bond to partially repay subordinated debt with Mediobanca, Il Sole 24 Ore reports without citing anyone. NOTE: Italy’s antitrust reg. told UnipolSai to cut subordinated debt by EU350m as part of Unipol/Fondiaria merger last year.
  • ALITALIA (IT), AIR BERLIN (DE): Alitalia says CEO gave report on state of talks with Etihad.
  • INTESA, UNICREDIT (BOTH IT): Intesa +2.1%, UniCredit +2.6% after memorandum on bad loans with Alvarez & Marsal, Intesa, KKR.
  • LIBERBANK (ES): Liberbank Sees Non-Performing Loans Ratio Peaking in 2014.
  • ACS, FERROVIAL (BOTH ES): ACS, Ferrovial Bid on EU700m Canada Highway Contract.
  • TELEFONICA (ES): Telefonica SA called on Mexican regulators to crack down on America Movil SAB, saying the company isn’t obeying regulations on sharing its network or selling unlocked mobile phones. America Movil’s landline units refused to provide information about their network infrastructure, Telefonica said today in an e-mailed statement. Instead, the units responded to Telefonica’s request with a letter that said they disagree with the rules set by the Federal Telecommunications Institute. Telefonica filed a complaint asking the government agency, known as IFT, to force America Movil to follow the rules or require it to divest assets. IFT imposed the regulations on Mexico City-based America Movil earlier this year after finding the company dominant in the mobile and landline markets. Press officials at America Movil and IFT didn’t immediately reply to requests for comment. Madrid-based Telefonica has about 20 percent of Mexico’s wireless subscribers, trailing America Movil’s 70 percent.
2014-04-23 05:11:24

Posted by
IB European Trade Desk
Contributor

Stocks

Market update: Scandinavian Region

  • KEMIRA (NORD): Kemira 1Q Net, EPS Beat Ests., Sales Miss; Outlook Is Maintained. Kemira reports 1Q net sales of EU529.9m vs est. EU557.6m. 1Q op. Ebit EU36.3m vs EU42.2m y/y. 1Q EPS EU0.28 vs est. EU0.17 (4 ests.). 1Q pretax profit EU49m vs est. EU40.4m. 1Q net income EU41.9m vs est. EU26.2m (4 ests.) Keeps guidance; sees revenue in local currencies ex- divestments, acquisitions slightly higher than in 2013; sees FY op. Ebit higher than in 2013. Kemira separately says new coagulant plant started up in Tarragona, Spain; Tarjei Johansen named as head of oil, mining unit and Americas region.
  • ERICSSON (NORD): Ericsson Boosts Margins as Sales Drop Amid Capacity-Order Focus. Ericsson AB, the world’s biggest maker of wireless networks, reported a profit margin that beat analysts’ estimates while sales fell short as the company focused on more lucrative contracts. Gross margin, a key measure of profitability, expanded to 36.5 percent of sales in the first quarter from 32 percent a year earlier, Ericsson said today in a statement. Analysts predicted 34.4 percent, the average of estimates compiled by Bloomberg. Sales fell about 9 percent to 47.5 billion kronor ($7.2 billion), compared with the average estimate of 50.8 billion kronor. Carrier spending in the U.S. and Japan is cooling after a wave of investments in speedier, fourth-generation networks, leaving Stockholm-based Ericsson and rivals Nokia Oyj, Alcatel- Lucent SA and Huawei Technologies Co. to compete for fewer deals. To respond, Ericsson is trying to win more profitable network contracts while expanding its services business. “Our focus on profitability is paying off,” Chief Executive Officer Hans Vestberg said in the statement. “The business mix in the quarter was predominantly driven by mobile broadband capacity projects.” Ericsson’s profitability improved year-on-year for the fourth consecutive quarter, helped by a focus on projects to increase carriers’ network capacity. Such deals are often more lucrative than labor-intensive network-modernization contracts. Ericsson’s gross margin, or the proportion of sales remaining after production costs, has rebounded from 30.2 percent in the fourth quarter of 2011, the lowest since at least 1989. Net income almost doubled to 2.12 billion kronor from 1.21 billion kronor a year earlier, when the company had 1.8 billion kronor of reorganization costs, mostly related to job cuts in Sweden. Shares of Ericsson rose 2 percent to 86.25 kronor yesterday, giving the company a market value of about $43 billion. The stock has gained 9.9 percent this year.
  • TELIASONERA (NORD): TeliaSonera 1Q Sales Miss, Sees Modest Risk to FY Rev. Outlook. TeliaSonera reports 1Q sales SEK23.97b vs est SEK24.23b, reiterates 2014 forecast although sees “slightly” higher risk to rev. guidance due to lower equipment sales. Says 1Q organic sales drop driven by lower equipment sales and cuts to mobile termination rates. 1Q Ebitda SEK8.35b vs est SEK8.33b, Ebitda margin 34.8% vs 34.6% y/y. 1Q net income SEK3.95b vs est SEK3.97b.
2014-04-23 05:06:42

Posted by
IB European Trade Desk
Contributor

Stocks

Market update: United Kingdom

  • AMEC (UK): Amec YTD Trading In Line; Order Book at March 31 GBP4.2b. Amec says Foster Wheeler acquisition remains on track for completion in 3Q; sees double- digit earnings enhancing in the first 12 months after completion. YTD trading in line with expectations, however N. Americans currencies weak vs GBP; 2014 trading outlook unchanged. Order book at March 31 GBP4.2b vs GBP3.7b y/y. Net debt ~GBP27m. Trading outlook unchanged from full-year results in Feb. Expects good underlying rev. growth for existing ops, with ongoing strength in the oil and gas and clean energy markets.
  • ARM (UK): ARM Sees Royalties Improving in 2H as 1Q Sales Miss. ARM reiterates forecast for FY sales to be in line with current mkt. expectations, expects royalty rev. to benefit from improving mkt. environment in 2H. Says pipeline of licensing opportunities remains healthy for 2Q and rest of the year. Reports 1Q sales GBP186.7m vs est. GBP187.6m. Processor royalties fall 4% y/y to GBP76.9m, processor licensing rev. rises 34% to GBP69.6m. 1Q normalized pretax profit GBP97.1m vs est. GBP96.1m. 1Q normalized EPS 5.6p vs est 5.6p.
  • BP (UK): BP Sells Stakes in 4 Alaska North Slope Fields to Hilcorp. BP sells entire stakes in Endicott, Northstar; 50% stakes in Liberty, Mine Point fields to closely held Hilcorp. No sale terms disclosed; BP operated 4 fields, co. expects to submit field development plan for Liberty at end-2014. Hilcorp to become Endicott, Northstar, Milne Point operator. BP says remains committed to Prudhoe Bay; sees adding 2 drilling rigs in 2015-16, total incremental $1b investment over 5 years.
2014-04-23 05:02:53

Posted by
IB European Trade Desk
Contributor

Stocks

Market update: Switzerland

  • GAM HOLDING (CH): GAM Holding says it repurchased CHF420.7m worth of shares through buyback program that ended last week.
  • MOBIMO (CH): Mobimo issues of 7-year CHF200m bond with 1.625% coupon.
  • APG (CH): APG says CEO Daniel Hofer to be proposed board chairman.
  • SWISS COMPANIES AGMs (CH): Banque Cantonale de Geneve, Swiss Life hold AGMs.
2014-04-23 05:00:52

Posted by
IB European Trade Desk
Contributor

Stocks

Market update: Germany

  • DEUTSCHE BANK (DE): Deutsche Bank AG is reducing its equities team in Latin America and considering closing that business in Chile as companies sell fewer shares and the firm reins in costs, two people with knowledge of the matter said. Germany’s biggest lender is eliminating staff for that business in Sao Paulo, Santiago and New York, the people said, asking not to be named because the decision isn’t public. The bank doesn’t plan cuts in Mexico, a location it deems a priority along with Brazil, one of the people said. The reductions stem from the firm’s plan announced in 2012 to shrink annual costs by 4.5 billion euros ($6.2 billion) by 2015, one of people said. The Frankfurt-based company will continue investing in more profitable businesses in Latin America, the person said. Deutsche Bank is this year’s top equity underwriter in Latin America, where total offerings have slumped to $1.78 billion with 12 deals, according to data compiled by Bloomberg. That compares with $11.5 billion in the same period last year. For all of 2013, the firm ranked 16th while competing for parts of 79 deals totaling $32.4 billion. Equity-trading fees are also being reduced in Latin America, one of the people said.
  • ALITALIA (IT), AIR BERLIN (DE): Alitalia says CEO gave report on state of talks with Etihad.
2014-04-22 14:59:42

Posted by
IB Securities Lending Desk
Contributor

Securities Lending

SLB Update: Largest Outstanding ETF Short Positions

These are the 15 largest outstanding ETF short positions among Interactive Brokers customers as of 04/17/14.

2014-04-22 14:02:12

Posted by
Singapore Exchange

Contributor

Futures

Path to becoming a major reserve currency - part 2

  • China’s share of the World’s FX market at 1.5% is disproportionately small relative to its share of World GDP and Trade. The 1% increase over three years from 2010’s 0.5% was due to the birth of CNH and the Dim Sum bond market.
  • Deepening both the Renminbi onshore (CNY) and offshore (CNH) financial markets coupled with reforms in the domestic capital markets are needed before China can fully liberalize and internationalize its currency.
  • Ultimately the timing and pace of the reforms will depend largely on China’s policy priorities. When China’s economy deepens and grows further, the need for a world class capital market will outweigh the benefits of a fixed exchange rate centered mercantilist policy.

As discussed in the path to becoming a major reserve currency - part 1 (click here), China’s Renminbi (CNY) was first unpegged from the US Dollar (USD) in 2005 and its relevant economic foundations. The second part of this focus shows a contrast, the gap between China’s economic fundamentals versus its share of the World’s capital and foreign exchange markets. Moreover there are sign posts that are likely to occur first before full liberalization of the currency can occur.

Current state of currency turnover

While China is the World’s second largest economy and provides one-fifth of world trade, the share of the CNY in the global currency market of USD 4.7 trillion is disproportionately small. From Chart 1 below, China’s share of the World’s FX turnover, has grown from 0.5% in 2007 to 1.5% in 2013 and is still dwarfed by the US share of 43.5%. While China is the second largest trading nation after the US, the bulk of its trade is settled in US dollars. China’s export revenue is paid in USD which has led to a massive accumulation of primarily USD-denominated FX reserves of USD 3.8 trillion. China has signaled intentions to diversify from the high USD concentration in its reserves but this could prove challenging without significantly impacting the mark to market valuation of its reserves.

Chart 1 – OTC foreign exchange turnover by currency

Source: Bank for International Settlements

The increase of China’s share of World’s FX turnover, by 1% from 2010 to 2013 was largely the result of establishing a market for the CNY on an off-shore basis from July 2010 through the CNH (Renminbi traded in offshore markets).

Chart 2 shows the increase of the CNH denominated bond market also known as the Dim Sum bond market from 2010. As noted in part 1 (click here) while China runs a current account surplus versus developed countries, it typically runs a current account deficit versus other emerging countries because of its huge importation of energy, materials and resources.

Chart 2 – Dim Sum bond market (CNH denominated bonds)

Source: Hong Kong Monetary Authority

The policy decision to make the CNY tradable off-shore led to the birth of the offshore Dim Sum bond market. This gave the economies that run trade surpluses versus China a means to buy Chinese assets with their Renminbi trade receivables. Due to a lack of full capital account convertibility, foreign investors have only been able to buy into onshore Chinese assets on a limited quota basis under the Qualified Foreign Institutional Investor scheme (QFII). Separately, the Dim Sum market which is only into its fourth year is still small in comparison to other global bond markets. The most recently revived plans to link together the Hong Kong Exchanges and Shanghai Exchange can help to address the shortfall of flows into China to some degree. Although the scheme is strictly meant for investors in Hong Kong and China and not open to other countries at this point.

For China to increase its share of global FX turnover and ultimately for the CNY to become a major reserve currency, China must open up its domestic capital markets to foreign investors. While Shanghai will play a key role in this, China is expected to continue further reform of its domestic capital markets to a point where market forces determine the pricing and allocation of capital. At the moment, the State and large state-owned financial institutions are primarily fulfilling the role.

Further, from a policy development perspective, market structures must also become more efficient and elegant so that the Peoples Bank of China (PBoC) can effectively execute monetary policy decisions aimed at balancing economic growth and inflation.

Interest rates market reform and currency internationalization

While the exact time line of CNY liberalization will be unknown, there are necessary foundations or signposts that investors can look out for before full liberalization can be achieved. Full liberalization can be defined as firstly, complete current account convertibility and secondly, complete capital account convertibility without restrictions to merchants, investors or other market participants.

Current account convertibility

In the context of China and many other emerging countries, current account convertibility is easier to achieve than convertibility with restrictions. In this context, trade flows of goods and services can occur without impediment as long as it is legitimately supported by trade documentation e.g. import and export papers, letters of credit. The flow of foreign exchange as a medium of transaction in this context is rarely an issue and hence, full current account convertibility is the easier of the two to achieve.

For full capital account convertibility, foreign traders and investors must be able to buy and sell financial assets without impediments. Typically, central banks and foreign exchange authorities will impose restrictions to prevent the free-flow of money across borders because of the potential for these flows i.e hot money to destabilize economies and markets. During the Asian Financial Crisis of 1997, the outflow of funds from some Southeast Asian economies caused interest rates to spike which subsequently helped contribute to economic recessions. Only a handful of countries in the world have deep enough financial markets that can weather the adverse impact of large amounts of funds freely flowing in and out of their markets.

In international finance, countries are restricted by the ‘Trilemma’ which is illustrated in the diagram below. Countries are able to choose between positions A, B or C. For a country that has free capital flow and a fixed exchange rate regime, it cannot have sovereignty over its monetary policy. Similarly for a country that has free capital flow and sovereignty over its monetary policy, it cannot have a fixed exchange rate. In China’s case, which is similar to position C, the lack of free capital flow, allows China to control its currency as well as set interest rate levels.

Chart 3 – The Trilemma

As China moves towards further liberalization of its currency which ultimately will bring it closer to points A or B, China has to choose between maintaining control over its currency or its monetary policy. Given the size of China’s economy at USD 9 trillion, the second largest in the World, policymakers could see much at stake in the prospect of giving up sovereignty over its monetary policy. China would likely gravitate towards point B.

What the theory means is that there is a basis for the CNY to delink itself further from the USD, and possibly reference its relative value to a basket of currencies of top trading partners. When this happens, the pin point precision that authorities currently can influence the CNY will cease and the CNY will behave more as a freely floating currency where global markets will set its value.

Authorities can of course intervene in the currency market, buying and selling occasionally to “set the tone” for the currency but it without a peg - policymakers cannot control the currency as it did before.

When China exerts control over its monetary policy, it first needs to further reform its domestic interest rates and fixed income markets. Currently, the People’s Bank of China (PBoC) still has control over various interest rates like deposit rates, lending rates and of course PBoC’s rates. In July 2013, the PBoC moved the floor of its lending rate to 4.2% with the benchmark rate at 6%. At the same time, the PBoC also sets the mid-rate for the CNY versus the USD.

As China moves towards having free capital flows and adopts interest rates as an anchor for its monetary policy, money markets, interest rates markets and bond markets which are all inextricably linked also need to harmonize and integrate closer. Piecemeal setting of individual rates will be a thing of the past as interest rates markets become more efficient. China’s monetary system will ultimately be one where the PBoC sets the policy rate similar to a Fed Funds Target Rate and the markets will then reflect that monetary policy decision in various segments of the yield curve. The CNY will then draw its international value base on supply and demand and relative interest rate differentials vis-à-vis other currencies.

SGX to introduce RMB futures in Q3 2014

Singapore Exchange (SGX) will introduce a new set of Asian currency futures to expand its current suite of foreign exchange (FX) futures in the third quarter of 2014, subject to regulatory approval. The new Asian FX suite includes currency futures contracts on Chinese Renminbi (RMB), Japanese yen and Thai baht follows closely after the initial launch of six FX futures contracts in November 2013, which have seen over US$1.3 billion in notional value traded in the five months since it began trading.

SGX’s introduction of Asian FX futures is in line with global G20 regulatory reforms where all standardised OTC derivative contracts should be traded on exchanges or electronic platforms, where appropriate, and cleared through central counterparts. The trading of FX derivatives on a regulated exchange platform will promote greater transparency, and better serve investment and risk management needs in the Asian time zone.

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