Wall Street Breakfast: Japan Unveils Fiscal Stimulus

Wall Street Breakfast: Japan Unveils Fiscal Stimulus

Looking to jolt the nation back to life, Japanese Prime Minister Shinzo Abe’s cabinet has approved a ¥28T ($274B) stimulus package amid a growing consensus that monetary policy alone won’t be able to revive the economy. According to Dow Jones, the stimulus package ranks among Japan’s biggest since the global financial crisis, and will: Lift GDP by 1.4%, include childcare benefits, provide $150 handouts to 22M low income people, loan ¥10.7T for infrastructure and provide ¥7.5T for direct fiscal spending.

Economy

Typhoon Nida has swept through Hong Kong, shutting down its financial hub and disrupting hundreds of flights, but no major damage was reported as the storm moved onto the mainland. Winds of up to 90 miles per hour were recorded in some parts of the city, according to the Hong Kong Observatory, which also warned of the potential risks of flooding.

The Reserve Bank of Australia cut its benchmark interest rate overnight by 25 basis points to a fresh record low of 1.50% amid signs of slowing economic growth and persistently low inflation. “This is expected to remain the case for some time,” the RBA said in a statement. The Aussie slumped after the rate cut, while Australian equities remained in negative territory.

U.K. Prime Minister Theresa May will outline her bid to reshape the British economy for a post-Brexit world today, reviving the once unfashionable concept of industrial policy 30 years after Margaret Thatcher killed it off. May’s office said the strategy would focus on addressing long-term industrial productivity growth, including encouraging innovation and focusing on sectors and technologies that will give Britain a competitive advantage.

U.K. construction shrank the most since the financial crisis in July, with companies citing uncertainty related to Brexit for the continued weakness. Markit’s Purchasing Managers Index for construction activity slipped to 45.9 from 46 in June, marking the lowest level since 2009 (when the economy was last in a recession). All three sectors – housing, commercial and civil engineering – recorded sub-50 readings.

Oil prices are edging up after U.S. crude broke below $40 per barrel in the prior session, but traders said fuel markets continue to be dogged by a production glut. “We got here on the back of excessive storage in crude oil and gasoline,” said Bob Yawger, director of the futures division at Mizuho Securities. WTI settled 22% below its June peak Monday, meeting the common definition of a bear market.

Stocks

The integrity of the eurozone is at risk once Britain leaves the European Union, Jamie Dimon told CNBC, calling the scenario a possible “fat tail outcome” of Brexit. “It may take more than five years, but it may very well happen,” he added. What does that mean for JPMorgan (NYSE:JPM)? “We have to be prepared for whatever the outcomes are… Whatever the laws of the land are we have to follow. That may require us to do things differently than we do today.”

Credit Suisse and Deutsche Bank will be dropped from the Stoxx Europe 50 index (NYSEARCA:FEU) next Monday and replaced with ASML Holding (NASDAQ:ASML) and Vinci (OTCPK:VCISY). The move follows a more than 45% slump in shares of both Credit Suisse (NYSE:CS) and Deutsche Bank (NYSE:DB) so far this year. CS -4.5%; DB -2.8% premarket.

The negative impact of negative rates. Commerzbank (OTCPK:CRZBY) is warning of a profit drop this year due to weaker revenues from negative eurozone interest rates and adverse markets. The forecast came as the lender released its earnings results for Q2, with net profit falling to €209M from €307M a year earlier.

Banca Monte dei Paschi di Siena may have a strong future, according to Italian Prime Minister Matteo Renzi, in spite of the stricken lender receiving the bottom score in a Europe-wide stress test. “There are some problems, yes. If now, without non-performing loans, with a clear strategy, I think this bank [BMPS (OTCPK:BMDPY)] could be a very good bank for the future,” he told CNBC in Rome. “My view is that Italian banks are good.”

Private equity firm Carlyle Group said it could make a pair of acquisitions in Japan worth $2B apiece, a strategic departure from its previous focus on smaller transactions. “There could be about two large deals… from our current fund focusing on Japan,” Carlyle (NASDAQ:CG) Managing Director Takaomi Tomioka said at a media briefing, but didn’t name any acquisition targets, nor indicate any preferred sectors for investment.

Helping finance its planned purchase of LinkedIn (NYSE:LNKD), Microsoft (NASDAQ:MSFT) has raised $19.75B in its biggest ever debt sale and the fifth largest corporate bond sale on record. Strong demand helped the company to borrow at lower rates than it paid for the $13B of bonds it raised in October, as portfolio managers search out income. Trillions of dollars of sovereign and corporate debt are already trading with a yield below zero.

Salesforce is continuing its buying spree to expand the kinds of cloud-based apps and services that it offers to its customers beyond basic CRM. The company has just announced that it is acquiring Quip, the cloud-based word processing app that was co-founded by Bret Taylor, formerly CTO of Facebook (NASDAQ:FB). Salesforce’s (NYSE:CRM) purchase is valued at $582M, though TechCrunch reported the total arrangement is worth $750M.

Natalie Kerris is leaving Twitter just six months after joining the company as head of communications. Her departure isn’t good news for Twitter (NYSE:TWTR) investors. The firm has spent the past year-plus fighting the notion that it can’t control its own narrative, a factor that some believe to be responsible for its slumping stock price.

Confirming earlier reports, Japan’s Nidec has agreed to buy Emerson Electric’s (NYSE:EMR) motors and electric power generation business for $1.2B, in an all-cash deal expected to be completed by the end of the year. The transaction continues Nidec’s expansion of its motor business through multiple foreign takeovers, including the acquisition of Emerson’s motors and controls division in 2010.

Poor overall governance at Mitsubishi Motors (OTC:MMTOY) was a root cause of its mileage cheating scandal rather than just the fault of errant engineers, according to a probe by three former public prosecutors and an ex-Toyota director. The group was hired to conduct an investigation into practices at Mitsubishi after the automaker admitted in April to overstating fuel economy and using improper data to calculate mileage.

South Korea has banned sales of almost all Volkswagen (OTCPK:VLKAY) cars, one of the most severe punishments globally for the company as it struggles with a deepening emissions crisis. The country also fined VW $16.1M, claiming it fabricated documents to obtain certifications. Europe’s largest automaker more than tripled sales in South Korea to 35,778 last year, before suffering a slump following its scandal.

A merger between Didi Chuxing (Private:DIDI) and UBER China could face its first hiccup after Mofcom, one of China’s antitrust regulators, said it had not received a necessary application to allow the deal to go ahead. It had been unclear previously whether such a filing would be required as both firms are loss-making in China, spending billions of dollars to subsidize rides and win users.

Express Scripts is adding new drugs to its excluded list, meaning some treatments from makers including Valeant (NYSE:VRX), Eli Lilly (NYSE:LLY), and Bristol-Myers Squibb (NYSE:BMY) won’t be covered by insurance. Express Scripts (NASDAQ:ESRX) says exclusions have provided for better negotiated prices and savings for customers of an estimated $1.8B in 2017.

Embattled Theranos founder Elizabeth Holmes announced a new blood-testing device at an academic conference on Monday, but didn’t address issues found with the company’s earlier machines as it wasn’t the “appropriate” forum to discuss the problems. Theranos’ (Private:THER) new device, called miniLab, can run a broad range of blood tests on a single desktop machine, including a diagnostic for the Zika virus.

Federal health officials have advised pregnant women to avoid a Miami neighborhood – marking the first time the CDC has warned against travel to any area within the continental U.S. – as a Zika outbreak led to 10 more local cases. Other troubling news… Director Tom Frieden said that extensive spraying of insecticides in the area over the past several weeks has not reduced the local population of mosquitoes capable of transmitting the virus. Related tickers: SNY, INO, AEMD, XON, CEMI, BCRX, TMO, OTCQB:GOVX

Monday’s Key Earnings

Williams Cos. (NYSE:WMB) +4.1% AH with plans to invest $1.7B into Williams Partners (NYSE:WPZ).

Today’s Markets

In Asia, Japan -1.5% to 16391. Hong Kong closed. China +0.6% to 2971. India -0.1% to 27982.
In Europe, at midday, London -0.4%. Paris -1.4%. Frankfurt -1.4%.
Futures at 6:20, Dow -0.2%. S&P -0.2%. Nasdaq -0.2%. Crude +0.9% to $40.41. Gold +0.5% to $1366.40.
Ten-year Treasury Yield +5 bps to 1.54%

Today’s Economic Calendar

Auto Sales
6:15 PM Fed’s Kaplan: Monetary Policy
8:30 Personal Income and Outlays
8:30 Gallup US ECI
8:55 Redbook Chain Store Sales

Companies reporting earnings today »