Friday, 16 November 2018

China's U-turn on market curbs brings back the speculators

SHANGHAI (Reuters) - Speculators are staging a forceful comeback in China’s stock market, bidding up shares in loss-making companies as regulators ease rules around trading, fundraising and backdoor listings to prop up struggling bourses.

In a bid to stop the kind of market meltdown China saw in 2015-16, authorities are urging funds to invest in cash-strapped companies and encouraging others to do mergers and acquisitions (M&As).

The measures mark a reversal of the more restrictive curbs introduced two to three years ago, which were designed to prevent a repeat of the boom-and-bust cycle that triggered the last major rout.

The relaxations, however, have resulted in an immediate surge in speculative bets on possible acquisition targets and trading in small-cap shares.

For some, the moves simply clear unnecessary regulatory interference that inhibits robust and open capital markets. But for others, the new policies are a dangerous “Faustian Bargain” that delivers short-term stability at the expense of sustainable valuations.

“Currently, all the emergency measures are deals with the devil,” said Yuan Yuwei, partner at Water Wisdom Asset Management. Imploring speculators to rescue the market could set the stage for trouble, he added.

Over the past year, speculators have largely laid low due to a relentless crackdown on market manipulation and insider trading.

However, a pledge by China’s top securities regulator on Oct. 19 to boost market confidence through a series of measures has prompted a rapid return of the punters.

An index tracking so-called “Special Treatment”, or ST, stocks - loss-making companies that involve high risks or are candidates for possible delisting - has surged over 30 percent since Oct 19.

That compares with a mere 3 percent rise in the CSI300 index .CSI300, whose blue-chip constituents were market darlings last year.

Money is also pouring into companies that speculators think might become acquisition targets for backdoor listings, dubbed “shell companies”.

One company that appears to have benefited is Hengli Industrial Development Group Co (000622.SZ), whose share price tripled over the past three weeks as investors bet on a possible acquisition.

Speculators have ignored repeated warnings by the automotive air conditioner maker, who said the price surge defied fundamentals.

Based on current profitability and valuation, investors buying the stock would need to wait 2,800 years to recoup investment through dividend payments. An investor relations official at Hengli declined to comment, saying the company had no undisclosed information.

Speculators have also piled into Changsheng Bio-technology (002680.SZ), the company at the center of a nationwide vaccine safety scandal that faces the risk of delisting.

A “special treatment” stock, Changsheng rose the maximum 5 percent on Thursday for the sixth consecutive session, despite the Shenzhen Stock Exchange flagging risks to investors. Changsheng could not be reached for a comment.

Between 2013 and 2015, lax regulation contributed to a boom in M&As and private share placements, which led to reckless expansion, overpriced deals, bubbly stock prices and mountains of inflated goodwill sitting on companies’ books.

Regulators probe Snap over IPO disclosures
Following the crash of 2015-16, the China Securities Regulatory Commission tightened scrutiny of share sales and M&As to prevent the rapid buildup of speculative positions.

The regulator’s moves in recent weeks, however, reverse these curbs. On Oct. 19, the CSRC said it had initiated fast-track approvals for M&A deals. The next day, it said it would support backdoor listings by companies whose applications for initial public offerings (IPO) are rejected.

And last week, the CSRC revised regulations to allow listed firms to issue additional shares more frequently, and for broader use.

Easier fundraising enables indebted firms to pay debts and expedite M&As. Also fuelling investment flows are expectations the central bank will loosen the monetary spigot by cutting interest rates.

However, Yuan, of Water Wisdom, said that relaxing rules to prop up companies that might otherwise fail is a concession to interest groups and a sign the government has been “kidnapped by populism”.

Shen Weizhen, a fund manager at LC Securities, said the moves skewed market behavior.

“If buying garbage companies can make a lot of money ... who would be interested in blue-chips any more?”

The CSRC did not respond to Reuters’ request for comment for this story.

For now, market authorities appear more worried about falling share prices than a new speculative bubble.

The Shanghai Stock Exchange said on Nov. 2 that it would seek to avoid interfering with trading, and vowed to largely refrain from restrictive measures such as suspending trading accounts. CSRC said on Oct. 30 it would reduce “unnecessary intervention” in the market.Retail investor Wu Beicheng said he welcomed what he saw as “corrective” measures by the government.

“Speculation is the lubricant of the market,” he said. “Without speculation, the market would be lifeless.”

Reporting by Samuel Shen and John Ruwitch

Parliament will vote down May's Brexit deal, Davis says

LONDON (Reuters) - The British parliament will vote down Prime Minister Theresa May’s draft Brexit deal so she will have to go back to the European Union for a different deal, one of her former Brexit minister said on Friday.

“The policy we have to deal with is going to be rejected I think by the House of Commons. Then the prime minister has to come up with an alternative,” David Davis said.

He declined to speak about his views on May’s future, saying that as he was outside the United Kingdom it was not correct to comment.

Reporting by Guy Faulconbridge

LONDON (Reuters) - Sterling tumbled on Thursday after a series of resignations rocked British Prime Minister Theresa May’s government and threw into doubt her long-awaited Brexit agreement just hours after it was unveiled.

The pound slumped nearly 2 percent against the dollar and euro and was set for its biggest daily drop this year after Brexit minister Dominic Raab resigned to protest at the draft deal with the European Union. Three other ministers followed suit.

Fears that May’s hard-fought Brexit deal could collapse sent British financial markets into gyrations not seen since the sell-off following the June 2016 referendum on EU membership.

British stocks sank. Shares in state-owned lender RBS (RBS.L) fell 9.1 percent in their worst one-day loss since the 2016 vote.

British gilt yields also plunged with the 5-year yield on track for the biggest one-day decline since August 2016 when the Bank of England unleashed a round of stimulus after the Brexit vote.

The darkening outlook for Britain’s economy was also reflected in the money markets, where investors have all but priced out a rate hike by the Bank of England next year.

The cost of insuring exposure to Britain’s sovereign debt through credit default swaps  rose to its highest level in almost two years.

Traders fear May’s leadership is now in serious jeopardy.

“What concerns us is how many ministers seeing this news will be pondering if it is better to get their resignations in now rather than wait,” said Nomura strategist Jordan Rochester.

“If more ministers go, it becomes very difficult for Theresa May to hold her position.”

Sterling trimmed some of its losses when May vowed in a press conference on Thursday to fight for her draft divorce deal with the EU.

“Am I going to see this through? Yes,” May told reporters at her Downing Street office.

She said on Wednesday she had won over her divided cabinet after a five-hour meeting but Thursday’s wave of resignations fueled a sell-off, suggesting rising fear in the markets about a “no-deal” Brexit.

Outcomes now range from a “hard Brexit” to a general election and a second referendum.

In volatile trading, the pound GBP=D3 sank 1.9 percent to $1.2730, its biggest daily drop this year. At 1750 GMT sterling was down 1.7 percent against the euro at 88.85 pence.

Markets had priced in some opposition to the draft deal negotiated by May but the latest round of resignations unleashed fresh volatility in UK assets. That sent investors to the relative safety of government debt.

British financial regulators contacted major banks asking for feedback on market conditions because of sharp falls in the pound, sources said.

The prime minister showed little sign of backing down but senior eurosceptic lawmaker Jacob Rees-Mogg said a number of letters of no confidence in May had been submitted to party officials.

Sterling slips; markets await Brexit deal decision
Concerns about a leadership challenge were reflected in the foreign exchange derivatives markets, where three- and six-month gauges of expected volatility in the British currency spiked to their highest levels in two years. Extreme short-dated volatility indicators also jumped.

Britain is now more likely to either stay in the European Union or crash chaotically out of the bloc - a “no deal” Brexit - than depart under the terms presented by May, analysts from U.S. bank Citi said.

“Over the next few days the very real prospect of a hard Brexit will likely ensure that the pound remains vulnerable,” said Jane Foley, an FX strategist at Rabobank.

“Any turn of events in Westminster that appears to increase the risk of a general election would likely compound the vulnerability of the pound.”

Reporting by Saikat Chatterjee

Brexit-sensitive stocks battered on deal backlash, exporters gain

LONDON (Reuters) - British stocks slid on Thursday with RBS and housebuilders sharply down after Brexit minister Dominic Raab quit in a blow to Prime Minister Theresa May’s efforts to win backing for her draft deal to exit the EU.

Housebuilders, retailers and banks all fell, dragging the FTSE 250 .FTMC index down 1.5 percent by 1350 GMT, while the exporter-heavy FTSE 100 .FTSE managed to hold flat, supported by a plunge in the value of sterling against the euro and the dollar.

The resignations of Raab and the work and pensions minister Esther McVey in protest at May’s draft deal for leaving the European Union pushed sterling down 1.7 percent against the dollar.

Traders say uncertainty has increased, with outcomes ranging from a second referendum, a “hard” Brexit and a general election.

Shares in state-owned lender RBS (RBS.L) sank 9.1 percent, set for their worst one-day loss since the June 2016 Brexit vote selloff, as shareholders priced in a higher risk of a general election.

The Labour party has pledged in its manifesto to break up the lender.

Lloyds (LLOY.L) shares also fell 5.7 percent while Barclays fell 4.6 percent as domestic banks were knocked by the heightened political uncertainty.

Housebuilders Persimmon and Taylor Wimpey fell 9.5 and 9.1 percent, and Berkeley Group lost 7.1 percent. All three were set for their worst day since the 2016 Brexit vote caused housebuilder stocks to crumble.

Peer Barratt sank 8.4 percent, while mid-cap housebuilder Bovis Homes fell 10 percent, and Redrow and Crest Nicholson dropped by 8 percent and 6.8 percent respectively.

The FTSE 350 index of housebuilder stocks  was down 2.7 percent and was set for its biggest daily loss in a month.

Retailers were also hit, with Marks & Spencer (MKS.L) down 4.9 percent and Next (NXT.L) down 5.9 percent.

“There is a high risk that parliament fails to pass the withdrawal deal in December,” said David Page, senior economist for the UK and U.S. at AXA Investment Managers.

“Uncertainty over the coming months is going to be high and the prospect of a disorderly exit in March is rising,” he added.

Royal Mail (RMG.L) shares made a U-turn from their positive open, trading down 6.9 percent by 1320 GMT after first-half profit dropped about 25 percent as costs weighed.

Sterling slips; markets await Brexit deal decision
Shares in contractor Capita (CPI.L) sank 10 percent, the worst FTSE 250 performer, after the Financial Times reported it is in danger of losing a British public health service (NHS) contract after failing to send letters with cervical screening dates or test results.

A source later told Reuters the contract, which it said is currently loss-making, was not being withdrawn.

Asset manager Intermediate Capital Group (ICP.L) was a rare gainer on the mid-caps index, up 6.5 percent after its results showed a 17 percent increase in first-half assets thanks to strong inflows of new money from clients.

The FTSE 100’s multinational exporters Unilever (ULVR.L), Diageo (DGE.L), Reckitt Benckiser (RB.L), British American Tobacco (BATS.L), and Imperial Brands (IMB.L) were up by 0.8 to 2.9 percent as they gained from the weaker pound.

Strong mining stocks also helped limit losses, with Randgold Resources (RRS.L), Rio Tinto (RIO.L), Glencore (GLEN.L), and BHP Billiton (BLT.L) rising 1.8 to 4.9 percent on hopes of a rapprochement between the U.S. and China on trade.

Reporting by Helen Reid

Thursday, 15 November 2018

Asia stocks lifted by China-U.S. trade hopes; oil resumes retreat

TOKYO (Reuters) - Asian stocks rose on Thursday, cheered by a bounce in Chinese equities on signs China and the United States may be taking steps to de-escalate their bitter trade dispute, while oil prices resumed their retreat on fears of oversupply.

A cautious start is expected in Europe, however. Spreadbetters see Britain's FTSE .FTSE opening flat, Germany's DAX .GDAXI slipping 0.25 percent and France's CAC .FCHI losing 0.2 percent.

U.S. government sources told Reuters on Wednesday that China had sent a response to U.S. demands for trade reform but gave no further details, raising hopes the two sides could resume negotiations to end their trade war.

U.S. oil futures fell 0.3 percent to $56.08 a barrel, after a slight bounce overnight that followed 12 straight losing sessions. Brent was down 0.1 percent at $66.04.

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was up 0.7 percent. The index had fallen the previous day as the sharp slide in oil prices heightened anxiety about the outlook for broad demand and global growth.

Shanghai Composite Index .SSEC gained 0.9 percent, while Hong Kong's Hang Seng .HSI rose 0.8 percent.

Traders have cautiously welcomed news in recent days that Washington and Beijing have resumed informal discussions ahead of a meeting between presidents Donald Trump and Xi Jinping late this month. Few market watchers expect a trade agreement at that meeting but hopes are growing that they may agree on a de-escalation while the two sides pursue more detailed talks.

Elsewhere, Australian stocks inched up 0.05 percent and Japan's Nikkei .N225 shed 0.2 percent.

“While it’s difficult to pin-point a specific event for the risk-off move, recent themes appear to be keeping markets cautious include oil’s recent plummet, Apple’s fall, U.S. political gridlock, China’s slowing growth, tightening liquidity, a hawkish Fed, earnings peak, Italian jitters, and Brexit uncertainty,” wrote economists at ANZ.

The S&P 500 .SPX fell for a fifth straight day overnight as financial stocks were hit by fears that banking industry regulations would tighten once the Democratic Party takes control of the House of Representatives.

U.S. equities were also pressured by concerns that earnings growth might be peaking, trade tensions and a slowing global economy - factors that had triggered a rout in riskier assets in October.

“If U.S. stocks are to bounce back, economic indicators will be key,” said Junichi Ishikawa, senior forex strategist at IG Securities in Tokyo.

“Immediate focus will be on today’s U.S. retail sales data, which will provide a view of how private consumption -the main component of economic growth- is faring.”

U.S. retail sales for October will be released at 1330 GMT.

In currencies, the pound and euro kept gains made after British Prime Minister May’s cabinet backed her draft Brexit deal. May now has to gain the support of parliament, though it is unclear whether she has enough votes to clinch approval.

The pound was 0.2 percent higher at $1.3010 GBP=D4.

Sterling slips; markets await Brexit deal decision
The euro also added 0.2 percent, to $1.1334 EUR=.

The single currency’s upside was limited by uncertainty on how European Union officials would react to Italy’s latest fiscal proposal after they rejected a version of it last month for violation of certain EU rules.

Italy on Wednesday re-submitted its draft 2019 budget to the European Commission with the same growth and deficit assumptions as a draft rejected for breaking European Union rules, stepping up its showdown with the EU over its fiscal policy.

Reference: Shinichi Saoshiro

BoE rate hike in 2019 now unlikely, money markets suggest

LONDON (Reuters) - Money markets no longer expect the Bank of England to hike interest rates in 2019, as investors slashed their bets on monetary tightening after Dominic Raab resigned on Thursday as Britain’s Brexit minister.

Investors now price in a 25 basis point rate hike from the BoE in 2020, having priced out such a move for next year. Money markets had previously priced in one hike - from current levels of 0.75 percent - before December 2019.

Raab resigned on Thursday in protest at Prime Minister Theresa May’s Brexit deal, throwing her government into political turmoil. The re-pricing in money markets came as sterling fell sharply and British government bond yields tumbled.

Reporting by Tommy Reggiori Wilkes

LONDON (Reuters) - Sterling slipped on Thursday after a volatile overnight session as UK Prime Minister Theresa May faces an uphill task to get parliament to approve her draft European Union divorce deal.

The British pound ended higher on Wednesday after May said she had won over her divided cabinet following a five-hour meeting, which includes some senior Brexiteers.

But in a sign of just how hard the vote in the British parliament might be, Shailesh Vara, who backed EU membership in the 2016 referendum, quit on Thursday as a junior minister in May’s government.

Those concerns were reflected in the foreign exchange derivatives markets where three and six-month gauges of expected volatility in the British currency remained firm while extreme short-dated volatility indicators edged lower.

British government bonds were also a beneficiary of the greater uncertainty on the progress of the Brexit deal with gilt yields falling four to five basis points across the board.

“PM May is not out of the woods yet and the price action suggests FX markets are cautious about the outcome,” said John Marley at FX risk management specialist, Smart Currency Business.

In the currency markets, the pound edged 0.1 percent lower at $1.2961.

Sterling slips; markets await Brexit deal decision
While the currency has been extremely volatile this week — realised price swings this week alone has averaged about 12 percent annualised on a daily basis, twice that of end October, prices have stayed within broad ranges.

Though a Brexit endgame is still some way away and risks have intensified, Goldman Sachs strategists said in an overnight note their base case scenario is that the Parliament will ratify a withdrawal deal by then.

Against the euro, the British pound fell half a percent to 87.56 pence.

Reporting by Saikat Chatterjee

Euro, pound firm after draft Brexit deal; yen strengthens

SINGAPORE (Reuters) - The dollar weakened on Thursday against the pound and euro, which rose after Britain’s prime minister won cabinet approval for her draft Brexit plan, but gains were capped by concerns over whether that plan will win parliamentary approval.

Prime Minister Theresa May won the backing of her senior ministers for a European Union divorce deal on Wednesday, pushing the euro and sterling up 0.8 percent and 1.2 percent against the dollar, respectively, from their intraday lows hit on Monday.

The draft divorce deal with the European Union struck on Tuesday would allow the United Kingdom to leave the EU with a deal that avoids a chaotic “hard Brexit” departure. But EU chief negotiator Michel Barnier cautioned that the road to ensuring a smooth UK exit was still long and potentially difficult.

The dollar index, a gauge of the currency’s performance against six major peers, ticked up slightly to 96.87, but remained off a 16-month high hit on Monday.

The recent correction in the dollar index has been due to rallies in the euro and sterling, which together constitute around 70 percent of the weight in the index.

Despite their outperformance over the dollar on Thursday, analysts still see firm support for the safe haven greenback amid broader concerns about Brexit and global trade tensions.

Sterling gained 0.06 percent versus the dollar, changing hands at $1.3002.

“Getting the draft approved by the parliament will be extremely challenging and that’s why we are seeing sterling gains capped at 1.3,” said Ray Attrill, head of currency strategy at National Australia Bank.

He said the dollar’s fundamentals remain strong, backed by a robust U.S. economy and rising wage pressures which will keep the Federal Reserve on track for further rate rises.

“A rate hike in December is fully priced in and the next lift-off in rates will most likely be in March next year, which is likely to support the dollar,” said Attrill.

The euro firmed 0.15 percent to trade at $1.1328.

However, further gains will most likely be muted as traders are unwilling to place bullish bets after Italy re-submitted its draft 2019 budget to the European Commission. It had the same growth and deficit assumptions as a draft rejected for breaking European Union rules, stepping up its showdown with the EU over its fiscal policy.

Against the Japanese yen, the dollar lost 0.13 percent to trade at 113.47. The yen had gained in the previous two sessions versus the dollar. But investors think the dollar still remains the more favoured flight-to-safety currency over the yen and Swiss franc.

Sterling slips; markets await Brexit deal decision
Adam Cole, chief currency strategist at RBC, thinks a major factor supporting dollar/yen is the emergence of a ready buyers on dips in the form of domestic investors buying unhedged U.S. bonds and taking hedges off existing holdings.

The Australian dollar gained 0.55 percent to trade at $0.7275 on the back of stronger than expected job data on Thursday.

Reporting by Vatsal Srivastava

Wednesday, 14 November 2018

European shares recover after U.S. tech rout; dollar gains

LONDON (Reuters) - European shares recovered on Tuesday after feeling the strain of a tech rout on Wall Street, while political risks in Europe helped the dollar as investors dumped riskier assets.

Fears of a peak in corporate earnings growth, softening global demand and rising interest rates in the United States have put investors on edge in the past month.

So has the Sino-U.S. trade war and the twin risks from Brexit and Italy’s budget row with the European Union. Volatility is on the rise again.

Monday’s equity sell-off in the U.S. was led by tech stocks, and Apple and Amazon were the major culprits, with the latter’s stock slumping over 5 percent.

But fears about a long-term slump in technology stocks faded on Monday as investors turned to efforts to wind down the Sino-U.S. tariff war. The pan-European STOXX 600 gained 0.5 percent by 0930 GMT.

Markets in Asia also recouped some losses after a report that China’s top trade negotiator was preparing to visit the United States before a meeting between the leaders of the world’s two largest economies.

The Shanghai composite index .SSEC rose 0.9 percent but Japan's Nikkei .N225 lost more than 2 percent.

“Though there have been some efforts to resolve the (trade war) tensions in recent days, in my opinion, things are likely to get worse before they get better,” said Sergio Ermotti, CEO UBS.

Some reckon that U.S. President Donald Trump will turn up the heat over trade. His administration is broadening its trade battle with a plan to use export controls, indictments and other tools to counter alleged Chinese the theft of intellectual property, the Wall Street Journal reported.

Riskier assets including Asian equities have been hurt by rising U.S. interest rates. The Federal Reserve is expected to tighten policy further in December.

In Europe, sterling jumped half a percent to as high as $1.2917 GBP=D3 after a British cabinet office minister said a Brexit agreement with the EU was still possible in the next 24 o 48 hours.

A growing rift over Italy's budget has hit the euro recently but the currency drifted up from a 16-month low to $1.1234 EUR=EBS, up 0.1 percent.

The Italian government faces a Tuesday deadline to submit a revised budget to the EU. Its refusal so far to cut the draft deficit sets the stage for a collision with Brussels.

The political malaise in Europe continued to aid the dollar .DXY against a basket of currencies. At 0900GMT it was flat at 97.6. It had hit 97.70 on Monday, its highest since June 2017.

Saudi Arabia says need for 1 mln bpd cut in oil
“King dollar has staged a return,” said Valentin Marinov, head of G10 FX strategy at Credit Agricole. “After the Fed’s hawkish policy outlook last week, investors are pretty happy to reload on long dollar positions. The European currencies look most vulnerable.”

Oil prices hovered near multi-month lows after declining for a record 11th consecutive session as Trump said he hoped there would be no oil output reductions.

U.S. crude skidded 83 cents to $59.1 a barrel. Brent crude futures fell 74 cents to $69.38.

Saudi Arabia’s energy minister jolted Brent crude futures around 2 percent higher on Monday with comments that Riyadh could reduce supply to world markets by 500,000 barrels per day in December.

Spot gold XAU= was 0.2 percent firmer at $1,203.58 per ounce.

Reference: Tom Finn