Archives of “June 2019” month

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Gazprom becomes Russia’s most valuable company

  
  Analysis

Russian gas giant Gazprom on Monday became the country’s top publicly traded company by market capitalisation after its shares shot up to their highest level since 2008, driven by a new dividend policy.

The state-owned company’s shares rose 12 per cent on Monday morning from Friday’s close, peaking at Rbs241.65 ($3.68) per share on the Moscow Stock Exchange. This spike raised Gazprom’s market capitalisation to Rbs5.62tn, putting it ahead of Sberbank, the country’s top lender.

Gazprom’s shares have risen sharply since mid-May, when the company recommended more than doubling dividend payments compared with the previous year to Rbs16.61 per share. The news pushed the company’s capitalisation to make it the second most valuable company on the exchange at the time.

Last week, the head of Gazprom’s finance department, Alexander Ivannikov, said the company was working out a new dividend policy, where it will strive to bring its dividend payments up to 50 per cent of net profit within three years, and pay no less than 27 per cent of net profit in the meantime.

The stock rose ahead of Gazprom’s board meeting scheduled for Tuesday.

10-year Treasury yield falls below 2.1% for first time since 2017

  
Analysis, Global Indices

Treasury yields added to their steep decline from May, with the benchmark 10-year note falling below the 2.10 per cent mark for the first time since September 2017 as President Donald Trump’s tariff threat against Mexico further rattled investors who are already on edge over renewed US-Chinese trade tensions.

Growing fears that Washington’s disputes with its biggest trading partners will hobble global economic growth have intensified expectations that the Federal Reserve will cut interest rates sharply this year.

In response, nervous, haven-seeking investors sent the yield on the 10-year paper down as much as 5.5 basis points on Monday to 2.0693 per cent — a near 21-month low. This comes on the heels of a 38 bps decline for the 10-year yield in May, the biggest monthly drop since January. Yields move in the opposite direction to price.

Yield on the more policy-sensitive two-year note was down as much as 8.2 bps to a fresh 18-month low of 1.8397 per cent. The 30-year yield fell 4.8 bps to 2.5204 per cent, a level not seen since November 2016. Other haven assets, including gold, also rallied on Monday while US stocks are set for another bruising session.

Mr Trump’s move to impose escalating tariffs on Mexican goods unless the country agrees to help curb migration from Central America shocked markets, and analysts at JPMorgan Chase believe the growing risk-off sentiment could push Treasury yields down further still. The bank now sees the 10-year yield down at 1.75 per cent by the year-end, compared to its prior forecast of 2.45 per cent.

“Even before the news on Mexico, downside risks to the economy had been building,” said the bank in a note to clients on Friday. “The latest developments this week are likely to have lasting damaging effects on business confidence and should thus prompt the Fed to respond.”

It is now pricing in a 43 per cent chance of a recession over the next 12 months and expects the Fed to cut interest rates twice this year.

The downbeat view was echoed by Morgan Stanley. which warned on Monday that the US market cycle has shifted from an expansionary phase to a “downturn” for the first time since 2007.

Underscoring the uncertainty sparked by the escalating trade war, bond volatility surged to an over two-year high on Friday. The Merrill Lynch Option Volatility Estimate (Move), a widely-watched measure of expected price swings in US Treasuries over the coming month, jumped to just below 73, its highest since April 2017 and two months after hitting a record low in March.

Trump: Many firms are leaving China for other countries, including the US

  
  Analysis

Trump tweets during his visit to the UK

The tweet reads:

“China is subsidizing its product in order that it can continue to be sold in the USA. Many firms are leaving China for other countries, including the United States, in order to avoid paying the Tariffs. No visible increase in costs or inflation, but U.S. is taking Billions!”

He’s playing down the effects of its tariffs with the final sentence on costs and inflation but it’d be imprudent to assume that they won’t have any side or spillover effects on the US economy. From his tone, he’s continuing to paint a picture that the Chinese camp is the losing side in all of this but they’re still standing firm that it’s not an issue. Stalemate…

Gold continues to shine amid global trade tensions, what’s in store next?

  
Analysis, Gold / Silver

Gold is up another 0.9% today as buyers stay in control

Gold D1 03-06

With gold having shook off its status as a proxy dollar trade, it has regained its previous allure of being a haven asset in times of uncertainty and risk aversion. With global trade tensions reignited in the past week, gold has been a standout performer from around $1,275 to now inch above $1,316 and also rise above the 100-day MA (red line).
That puts buyers back in the driver’s seat and with risk sentiment still cautious and unnerving, there’s still potential for bullion to post more gains as resistance is next seen only around $1,326 before the February high around $1,346.80 comes into play.
But besides the theme of risk aversion and haven flows, what else is next for gold beyond global trade tensions?
I reckon the next spot to watch will be the Fed. A key barometer for the global economy is how confident is the Fed in maintaining their current policy stance. Should they start shifting towards sending a message of rate cuts, expect that to have significant reverberations throughout emerging markets and risk assets in general.
In essence, the Fed signaling rate cuts can be argued as a possible tipping point for which traders will believe that an economic downturn is coming. In that regard, a weaker dollar and flows out of emerging markets should promote further strength in gold.
As such, global trade tensions will keep gold underpinned for the time being but for the commodity to really make its next run higher, that conviction lies with the Fed.

Yen catches a slight bid as Treasury yields start to slip up

  
Analysis, Forex

USD/JPY falls to 108.16 from 108.30 levels earlier

Bond yields are on the move once again it could be related to this headline here. Jitters and nervousness surrounding global trade tensions still remain and that’s weighing on markets as we begin European morning trade.

US 2-year yields are down by over 5 bps to 1.87% while 10-year yields are down by 3 bps to 2.093%, at session lows currently.

China said to be looking to issue warning on risks of studying in the US

  
  Analysis

According to Global Times editor, Hu Xijin

The tweet reads:

“Based on information I received, China will issue a warning on the risk of studying in the US. This warning is a response to recent series of discriminatory measures the US took against Chinese students and can also be seen as a response to the US-initiated trade war.”

There’s been plenty of talk about these responses and retaliatory measures from the Chinese camp but as of yet there’s no official communication, so tread lightly for now. But there’s no doubt that the message they’re trying to send is that they’re willing to pursue such course of action if the US does push things too far.

USD/JPY inches higher as dollar pares earlier losses

  
Analysis, Forex

USD/JPY moves to session highs as the greenback recovers some poise

USD/JPY H1 03-06

The pair is trading higher on the day now as the dollar shrugs off its decline from Asia Pacific trading, trading around 108.38 currently. The greenback is also posting advances against the rest of the major bloc with the dollar index moving back to flat levels now.
With the bond market still largely calm, markets are still in search of a fresh narrative to latch on to as we begin the week. Amid all the trade tensions, market participants will also have to now digest how serious is Trump’s tariff threats and if he does follow through with it, what are the implications of that towards the US economy and the Fed outlook?
In short, there’s still a lot of thinking to be done over the next few days/weeks before the dust will actually settle and we may not see such straightforward risk aversion moves.
For USD/JPY, there is minor resistance around 108.51 from the 23.6 retracement of the recent swing lower but also large expiries are seen around 108.50 which may help to put a cap on price action in the session ahead.

China merges 2 big steelmakers with eye on world’s No. 1

  
  Analysis

China Baowu Steel Group, the world’s second-largest steelmaker, will merge with domestic rival Magang (Group) Holding to come within striking distance of global top player ArcelorMittal.

Anhui Province’s State-owned Assets Supervision and Administration Commission, which owns Magang, will transfer a 51% stake to Baowu, according to a filing by listed Magang unit Maanshan Iron & Steel on the Shanghai Stock Exchange website Sunday.

The merger aims to strengthen international competitiveness, the Shanghai announcement said. The consolidation comes as China looks to boost profitability at domestic steelmakers in preparation for a drawn-out trade war with the U.S.

“This is a major step toward reaching the goal of 100 million tons a year,” a Baowu source said. Baowu’s current production volume is 67.43 million tons. Adding Magang’s 19.64 million tons will result in combined output of nearly 90 million tons — almost on a par with ArcelorMittal’s 92.5 million tons.

“We just need one more addition to the group to become the world’s No. 1,” the source said.

The Chinese government aims to push consolidation within the industry so that the top 10 players in China account for 60% of steel production, up from 35% today.

Baowu, China’s top steelmaker, is wholly owned by the central government’s State-owned Assets Supervision and Administration Commission.

The Baowu-Magang alliance’s bigger war chest would enable stepped-up capital investment as well as research and development.

Magang said it will push ahead with supply-side reform in conjunction with the direction set by Chinese President Xi Jinping. Consolidation of major steelmakers here will continue going forward, a brokerage analyst predicted. Reducing the number of companies will likely help resolve the issue of oversupply and boost the competitiveness of Chinese players.

China accounts for roughly half of global steel production. Production in the first four months of 2019 grew around 10% on the year, supported by demand for use in infrastructure projects.

Yet with automobile demand shrinking in China, and the outlook unclear for exports of home electronics with new tariffs kicking in, “China has to unite to strengthen the profitability of each steelmaker,” an industry insider said.

In the broader steel industry, the planned merger of India’s Tata Steel and Germany’s ThyssenKrupp was recently called off over fears that that the European Union would block a deal that would create a virtual duopoly in the common market. ArcelorMittal has announced that it will reduce production in Europe.

Amid uncertainties in the global economy, the consolidation in the Chinese steel industry — which accounts for half of the world’s top 10 steelmakers — will impact decision-making at each of the global players.

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