AFS Morning Note, July 14, 2016

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Corporate Calendar NL Events:-; NL Events Tomorrow: Beter Bed sales EU/US Events: Getine, SEB Bank earnings; Burberry,

Suedzucker AGM; TSMC earnings; JPMorgan Chase earnings EU/US Events Tomorrow: Elisa, Galp Energia,

Handelsbanken, Husqvarna, Swatch earnings; H&M sales; Citigroup, Wells Fargo earnings NL/EU Ex-div: Voestalpine NL/EU Ex-div Tomorrow: Suedzucker

Macro Calendar

09:00 Turkey Current Account Balance 09:15 Switzerland Producer & Import Prices 13:00 Bank of England Announces Rates 14:30 US Jobless Claims 14:30 US PPI 17:15 Fed's Lockhart Speaks 19:15 Fed's George Speaks

Financials and Regulation Banks:

Commerzbank 2Q Wasn’t Better Than 1Q, Handelsblatt Says -- Corrects headline to 2Q. * Commerzbank’s earnings in 2Q

weren’t any better than in 1Q, when profits fell by half, Handelsbatt reports, citing unidentified people close to the company. * German govt has come to terms with having to keep its ~15% stake * Replacement for supervisory board chairman Klaus-Peter Mueller will be proposed soon (BN)

SEB 2Q Net Income Tops Estimates; Fee Income Below Ests. -- SEB 2Q net income SEK4.52b vs est. SEK3.91b. * 2Q net fee

& commission income SEK4.07b vs est. SEK4.30b * 2Q net interest income SEK4.65b vs. est. SEK4.68b * 2Q net credit losses SEK0.2b vs est. SEK0.3b * Says that from a risk perspective, the direct impact from Brexit on SEB is limited * Overall long-term impact from Brexit on global growth might not be so large, but says bank believes that with Brexit outcome, period with low and negative interest rates in Europe will be extended (BN)

*PASCHI MAY SEEK TO RAISE UP TO EU4B OF CAPITAL: MESSAGGERO (BN) Regulation/Other:

ECB’s Nouy Says Bank Stress Tests Unlikely to Yield Surprises -- The European Union’s 2016 stress test of banks is unlikely to

contains surprises for the bloc’s supervisors, says Daniele Nouy, head of the European Central Bank’s oversight arm. * “The baseline obviously is part of the capital requirement assessment for Pillar 2,” Nouy tells reporters in Brussels. “The adverse scenario will be used in the guidance part.” * Nouy: “If we have situations where the adverse scenario created a capital shortfall, it’s obviously for a reason that we know. If we are good supervisors, this is not something that we discover during the stress test. So there is a high probability that this is already taken into account in the different elements that we are looking at for the capital requirements with or without a stress test -- like credit risk, for example.” * “Guidance is something very serious,” she says. “I don’t expect banks to breach the guidance or to go below the guidance. We are in the steady state, and we have in mind the same level of capital in the system.” * The incorporation of guidance, which has no bearing on the maximum distributable amount, puts euro-area banks on the same terms as their U.S. and U.K. counterparts when it comes to MDA, she says. (BN)

EU Banking Union’s Credibility Not in Question on Italy: Koenig -- Italy’s attempts to shore up its banking system have not

damaged the credibility of the European Union’s efforts to strengthen the euro-area financial sector, says Elke Koenig, chair of the Single Resolution Board. * “I’m not seeing that the credibility of the banking union is called into question,” Koenig says in the European Parliament in Brussels. “We will always have the one or the other who says you need to abandon rules, you need to do this and that.” * NOTE: Italy has also sought EU approval for a bank-rescue plan that protects investors from taking losses under rules that allow precautionary support for solvent lenders if it’s used to address a capital shortfall identified in a stress test. The EBA will publish the results of the 2016 stress test on July 29. * “The resolution framework this parliament has put into place is a solid one,” Koenig says. It needs to be accompanied by further work on deposit guarantees, she says. “And it needs to be complemented by member states’ work on their insolvency systems, because the counterfactual for resolution is always insolvency.” * “The BRRD is fairly clear: We have no tools and no right, and I wouldn’t see any legitimacy, to separate between various types of investors in one class of liabilities.” (BN)

Junior Bank Debt Must Bear Loss in Bank Rescue, EU Lawmaker Says -- A bank’s shareholders and junior creditors should

bear losses before governments are allowed to recapitalize it, said Sven Giegold, a German member of the European Parliament. “We all promised together as European lawmakers to end a period of state aid to European banks,” Giegold told reporters on Wednesday. “The bail-in should be fully applied, but in order to avoid the political cost in Italy, there can be a compensation scheme for small investors on the basis of misselling.” Italy, where banks including Banca Monte dei Paschi di Siena SpA are saddled with about 360 billion euros ($400 billion) of soured loans, is lobbying to be allowed to put taxpayers’ cash into the weakest lenders. That conflicts with the underlying principles of Europe’s bank-resolution and state- aid rules, which require investors to share losses before public support can flow. Giegold’s comments echo those by EU officials including Elke Koenig, head of the euro area’s Single Resolution Board, and EU state aid director Gert-Jan Koopman. Italy is trying to shore up a banking system saddled with bad loans without breaching EU rules that require investors to share losses. The government is working to set up a second bank support fund by the end of the month, opening a new front in the country’s efforts to restore confidence in its financial system, people with knowledge of the matter said. The goal is to have 2 billion euros to supplement Atlante, two people said, referring to the privately backed fund for banks that has already been tapped twice since it was created with government help in April. Atlante is now seeking to use its remaining reserves to relieve Banca Monte dei Paschi di Siena SpA of 10 billion euros in bad loans, two Italian newspapers reported on Wednesday. (BN)

AFS Morning Note, July 14, 2016

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Leonteq Surges on Shareholder Veraison Capital’s Stake Building -- Leonteq rises most since 2012 IPO after activist fund

manager Veraison Capital increased its position. * Leonteq gains almost 16 percent to close at CHF74, with more than quadruple the avg volume of shares traded. * Veraison Capital increased stake in Leonteq to 5.01%, according to Swiss stock exchange statement Tuesday * Share price doesn’t reflect Leonteq’s fundamental value, Veraison said July 7. Chairman Gregor Greber declines to comment further Wednesday * Leonteq has slumped 68% since last yr’s high on Aug. 3, vs a 43% decline in Bloomberg Europe 500 Banks And Financial Services Index, which fell Wednesday. * Share price increase prompted by Veraison’s interest and other investors who followed Veraison’s rationale for owning the company, Martin Moeller, head of Swiss and global equity portfolio management at Union Bancaire Privee says by phone * “It’s an interesting growth story,” Moeller says; “the fact that you have that activist shareholder who didn’t stop at 3%, but kept buying toward 5%, means there’s demand in the market.” (BN)

Amundi CEO Wants to Grow AUM by EU40b/Year: Handelsblatt -- Amundi plans to grow assets under management by EU40b

annually, CEO Yves Perrier says in intv w/ Handelsblatt. * Amundi wants to grow by acquisitions where it can gain new expertise; Asia is “definitely” one focus (BN)

Fintech: no stories Insurers: no stories

Research Updates Citi raised UniCredit to Buy from Neutral; cut Snam to Sell from Neutral; cut Terna to Sell from Neutral. Credit Suisse raised Carrefour to Neutral from Underperform. Exane cut CRH to Underperform from Outperform. Liberum removes Novartis and AstraZeneca from its Conviction Buy list. DNB Markets cut Tele2 to Hold from Buy. RBC rated Eiffage new Sector Perform. Commerzbank raised Rheinmetall to Buy from Hold.

Credit Rating Changes S&P cut Teva Pharmaceuticals to BBB from BBB+, outlook Stable

Tech and Telecoms Tech, spying and hacking:

TSMC Profit Tops Estimates as Chinese Phones Make Up for Apple -- Taiwan Semiconductor Manufacturing Co. posted better-

than-expected earnings as demand from Chinese smartphone brands makes up for a market slowdown and weaker sales at its largest customer Apple Inc. The world’s largest contract chipmaker reported second- quarter net income of NT$72.5 billion ($2.3 billion), surpassing the NT$68.9 billion average of analysts’ estimates over the past four weeks. That beat came despite global smartphone sales growing at their slowest pace on record. The Taiwanese company is one of the key chip suppliers to the iPhone, and may have begun to crank out chipsets for the iPhone 7 ahead of its anticipated September rollout, according to SinoPac Securities Investment Service. But even as Apple faces its second straight decline in quarterly revenue, TSMC’s benefiting from the rising popularity of cheaper Android smartphones in emerging markets. Brands like Oppo and Vivo overtook Apple in China in May, pushing the iPhone maker to fifth place, according to Counterpoint Research. TSMC, which competes with Samsung Electronics Co. to make processors for Apple, is coming off a strong quarter for revenue. Its previously reported sales beat expectations and were the third-highest on record. The company now plans to erect a $3 billion wafer plant in eastern China to help it win more clients in the country. (BN)

TSMC Raises 2016 Planned Capex; 2Q Profit Beats Est. -- TSMC sees 2016 capex of $9.5b-$10.5b, co. says in statement. *

NOTE: Co. said in April it planned 2016 capex of $9b-$10b NSN O5M3HQ6KLVRX <GO> * 2Q net income NT$72.506b vs est. NT$68.858b * 2Q gross margin was 51.5% compared with 50% average of estimates (BN)

Software AG 2Q Sales Beat; Raises Op. Margin Outlook -- * 2Q IFRS total rev. EU203.4m vs EU205.6m; est. EU202.30m * 2Q

Digital Business Platform (formerly BPE) unit rev. EU100.5m vs EU99.8m * 2Q DBP license rev. rose 4% y/y; maintenance rev. up 3% y/y * 2Q Adabas & Natural (formerly ETS) unit rev. EU52.3m vs EU57.5m * A&N license rev. down 29% y/y; maintenance rev. up 5% y/y * 2Q IFRS Ebit EU43.3m vs EU33.2m; ests. EU41.0m * 2Q non-IFRS Ebita EU55.8m vs EU48.6m * 2Q IFRS net EU28.2m vs EU19.9m * Sees 2016 non-IFRS operating margin 30.5%-31.5%, saw 30%-31% * Sees 2016 A&N product rev. decline 2% to 16% (constant FX); saw -4% to -8% * Still sees 2016 DBP product rev. of between 5%-10% (constant FX) (BN)

Ireland Expects EU Decision in Apple State Aid Case This Fall -- Irish Finance Minister Michael Noonan on Wednesday said he

expected the European Union's top antitrust regulator to rule in the fall on the long-running probe into Apple Inc.'s tax arrangements with Ireland. At a press conference in Ireland on Wednesday, Mr. Noonan said following his meeting with EU antitrust chief Margrethe Vestager, he now expects the decision to come in September or October, according to a spokesman for Ireland's embassy to the EU. Mr. Noonan met with Ms. Vestager in Brussels on Tuesday. Mr. Noonan said he still has no indication of what the decision would be, the spokesman said. The EU could order Ireland to retrieve substantial sums from Apple in unpaid taxes. The European Commission, the bloc's antitrust agency, opened a formal probe into Apple's tax arrangements more than two years ago, accusing Ireland that the deals it struck with the U.S. tech company in 1991 and 2007 amounted to state aid. An Apple spokeswoman pointed to previous statements by a company executive saying it pays all the taxes it owes wherever the firm operates. Mr. Noonan previously had said a decision in the Apple case may come in July, but, after the U.K.'s referendum to leave the EU, he suggested the antitrust regulator may postpone its decision given the economic turmoil caused by the Brexit vote. Ireland previously has said it was confident its tax arrangements with Apple didn't breach EU rules, and it would defend "all aspects" of the case vigorously, in court if necessary. The EU also is investigating Amazon.com Inc.'s tax arrangements with Luxembourg. At issue are the tax rulings, or so-called comfort letters, governments hand to multinationals to give clarity on how a specific tax will be calculated. These would be illegal if they gave selective advantages to some companies. Separately, U.S. Treasury Secretary Jack Lew also met with Ms. Vestager while he was in Brussels on Wednesday. (DJ)

AFS Morning Note, July 14, 2016

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No more Tesla buyback guarantee as company cuts price of Model X -- Tesla Motors Inc has ended a program that guaranteed

the resale value of its cars, and lowered the starting price of its Model X crossover, the high-profile electric vehicle maker said on Wednesday. The discontinuation of the buyback program, as of July 1, allows Tesla to free up cash that had been set aside to buy back Model S cars after three years at a value of at least 50 percent of the base purchase price. The changes come after Tesla warned earlier this month it will miss its vehicle delivery target for a second consecutive quarter. It faces other challenges, including a regulatory investigation of its Autopilot technology following a May 7 fatal crash and more scrutiny of its financials after a proposed merger with SolarCity Corp. Within the next 12 months, Tesla has disclosed it could pay a maximum of $192.4 million to cover resale value guarantees on 4,209 vehicles. That amounts to a maximum liability of $45,711 per car, although Tesla could offset payouts by reselling repurchased vehicles. Tesla valued the total liability created by the resale value guarantee at $1.58 billion as of March 31, according to its latest quarterly filing with the Securities and Exchange Commission, up over 20 percent since the end of 2015. (R)

Tencent to Buy Majority Stake in China Music Corp., Creating Streaming Giant -- Chinese internet giant Tencent Holdings Ltd.

has agreed to acquire a controlling stake in China's leading music-streaming company in a deal that values the firm, China Music Corp., at roughly $2.7 billion and creates a dominant player in China's online-music market, people familiar with the matter said. Tencent, China's biggest social-networking and online-games company, which also runs its own music-streaming service, will boost its stake in China Music to about 60% from 16%, one of the people said. The deal turns Tencent into a clear market leader in China's online-music market, as it brings together the country's top-three mobile music applications owned by the two companies. CMC owns Kugou and Kuwo, while Tencent operates QQ Music. Kugou is the largest mobile music service in China with a 28% market share, followed by QQ Music's 15% and Kuwo's 13%, according to data from research firm iiMedia Research. In the first quarter, China's mobile-music services had 449 million users, more than the entire population of the U.S., making it the world's largest market by the number of users, according to iiMedia. Tencent plans to combine the team operating QQ Music with CMC, the people said. The combined music businesses will be valued at around $6 billion after the deal is completed and will operate as a subsidiary of Tencent, the people said. CMC had been planning an initial public offering in the U.S. before agreeing to be bought by Tencent. That plan has now been put on hold, the people said. (DJ)

China Likely Behind Hacking of FDIC Computers: Reuters -- The Chinese government was likely behind the hacking in 2010,

2011 and 2013, Reuters reports in tweet, without saying where it got the information. (BN)

Telecoms & other:

NZ Regulator Says Vodafone NZ/Sky Decision Expected Nov 11 -- Commerce Commission comments on approval process for

proposed Vodafone NZ merger with Sky Network Television. * “It has been agreed with Vodafone and Sky that we will make a decision by Nov 11. If our investigation does not identify any issues, then we may make an earlier decision” (BN)

Sanoma Raises Sales, Ebit Outlook for 2016 -- Co. sees FY net sales development adjusted for structural changes improving

from last yr. * FY operational Ebit margin to be about 9% * NOTE: Co. previously saw net sales development adjusted for structural changes in line with last yr or improving, operational Ebit margin of over 7% (BN)

Energy, Commodities, Transport and Construction Oil:

Oil Rebounds From 2-Month Low as Investors Weigh U.S. Supplies -- Oil rebounded after closing at the lowest level in two

months as investors weighed U.S. data that showed crude stockpiles slid and fuel inventories unexpectedly grew. Futures gained as much as 1.3 percent in New York, paring Wednesday’s 4.4 percent slump. U.S. supplies fell an eighth week, the longest losing streak since June 2015, according to the Energy Information Administration. Gasoline inventories rose further above their five-year average, while analysts had forecast a decline. Demand for the fuel fell during the week that included the Independence Day holiday -- usually a peak consumption period -- as output increased. Oil has traded between $44 and $51 a barrel in the last month after almost doubling from a 12-year low in February amid a spate of supply disruptions and falling U.S. output. The fuel surplus means American refiners may process less oil even as crude supplies remain more than 100 million barrels above the five-year average for this time of the year. West Texas Intermediate crude for August delivery rose as much as 58 cents to $45.33 a barrel on the New York Mercantile Exchange, and was at $45.32 at 12:10 p.m. Tokyo time. The grade fell $2.05 to settle at $44.75 on Wednesday, the lowest since May 10. Total volume traded was about 46 percent below the 100- day average. Brent for September settlement gained as much as 54 cents, or 1.2 percent, to $46.80 a barrel on the London-based ICE Futures Europe exchange. The contract dropped 4.6 percent to $46.26 a barrel on Wednesday. The global benchmark crude traded at 79-cent premium to WTI for September delivery. (BN)

Oil Traders Hoarding Most Oil Since 2009 Amass North Sea Fleet -- Oil traders increased the fleet of ships deployed in the

North Sea to store crude, the latest sign of faltering demand that has triggered the biggest build up of stockpiles at sea since 2009. Nine tankers holding about 9 million barrels of the major North Sea crude grades are floating off the U.K.’s coast, up from 7 million in May, according to a survey of oil traders and ship-tracking data compiled by Bloomberg. The volume of oil in storage on ships worldwide reached 95 million barrels at the end of June, the highest since the 2008 to 2009 recession gave traders an incentive to hold supplies for later delivery, the International Energy Agency said. “Unlike 2009 when volumes at sea increased” because oil prices made the activity profitable, “today it is driven by logistical and marketing issues,” the Paris-based IEA said in its monthly report Wednesday. The accumulation of stockpiles shows that even as excess oil production is fading and global markets are re-balancing, the recovery process will be a bumpy ride. The boost in world fuel demand from low prices appears to be fading, with a report from the Energy Information Administration on Wednesday showing gasoline use in the U.S., the biggest oil user, sliding at a time when sales normally surge. Most of the cargoes floating idle in the North Sea have yet to find buyers and will probably remain where they are for some time because of subdued demand in Europe, according to three traders who asked not to be identified. The cargo that’s been in place longest, in a supertanker anchored off the east coast of England named Maran Thetis, has been on the water since April 23. (BN)

AFS Morning Note, July 14, 2016

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Industrials/Utilities:

Kuka CEO Doesn’t See Problems Regarding Co. Sale: Sueddeutsche -- Review according to German foreign trade regulation

shouldn’t affect sale to Midea, Kuka CEO Till Reuter says in intv w/ Sueddeutsche Zeitung. * Foreign trade regulations refer to security, defence industry which don’t apply to areas in which Kuka operates in Germany * This also shouldn’t create issues in U.S. as Kuka’s business area related to military is “very small” (BN)

Yokogawa Electric Op Profit Seen Down 40% on Yen: Nikkei -- First-quarter oper. profit probably fell to ~4b yen on the impact of

the strong yen on overseas revenue, newspaper reports, without attribution. * Sales seen down 7% to 86b yen * Co. expected to maintain full-year forecast (BN)

[yday] EU Members Agree Energy Market ‘Overregulated’, Sefcovic Says -- There is room to cut fees embedded in energy

costs for EU consumers, which together with taxes now make up 51% of price on average, European Commission Vice President for Energy Maros Sefcovic says after meeting of EU Energy ministers in Bratislava. * EU member states agreed they must work toward gradually lowering energy prices for consumers * EU must speed up building energy infrastructure; “we can no longer afford to take years” to build pipelines and other energy projects (BN)

Renewables and environmental markets:

Tennet Mulls Green Bond Push to Pay German, Dutch Offshore Grids -- Tennet Holding BV will likely tap more green bonds to

pay for offshore power connections in the Netherlands and Germany, underscoring how the new environmental securities are supporting industrial investment. Tennet targets investments of about 22 billion euros ($24.3 billion) for a power “super highway” linking both nations, with some two-thirds of the finance tagged for Germany, said Group Treasurer Jeroen Dicker. Tennet has already issued 2 billion euros in green bonds as well as a 500 million euro debt certificate, or Schuldschein, for offshore power lines. The Dutch company sees manifold reasons to sell green bonds, Dicker said in a telephone interview from the company’s Arnhem headquarters. In addition to fostering a shift to green energy the securities burnish the state-owned company’s social responsibility credentials by enabling carbon-emission cuts, he said. Moreover, green bonds are attracting a wide investor base and may be becoming cheaper than ordinary corporate bonds. “Green bonds are a nice linking pin between the corporate and financial worlds,” Dicker said. “We like these green bonds; it seems there’s a pricing advantage -- at least we have the advantage of a broader investor base so it’s likely that we will issue more.” Investors including BlackRock Inc, Axa SA, Pimco Investments LLC and German development bank KfW own Tennet green bonds. Moody’s gave one of the grid builder’s 500 million euro issue its top green bond grade in May. Tennet is tying the proceeds exclusively to offshore grid building, where it can ensure it transmits 100 percent wind energy, thereby underpinning the integrity of the bonds, according to Dicker. Improved green-bond standards have helped industrial companies like Tennet catch up with private lenders and development banks in issuance, according to data compiled by Bloomberg. Apple Inc., Toyota Motor Corp, Nordex SEand Zhejiang Geely Holding Group Co. have issued green securities this year. Delayed construction of a new grid taking wind and solar power from Germany’s coast and northern states to the southern regions may benefit green bond growth as the emergence of the asset class coincides with a push to build transmission lines. Dithering over local environmental issues has stalled construction and caused transmission congestion amidst a surge in green energy. (BN)

Commodities: no stories

Transport:

Airbus Will Push to Break Even Below 20 A380s a Year: Bregier -- Airbus CEO Fabrice Bregier tells reporters at the

Farnborough Air Show: “I don’t say we’ll break even at 12 a year.” * Expects A380 production to rise again at later point * Says A380 production could reach 30, 40/yr by 2030 * Expects OFAC approval “soon” for sale to Iran * Says deferrals are low, doesn’t see changes coming * Says Zodiac shows improvement on business class seats * NOTE: June 16, Airbus to Review Goal of 50 A350 Deliveries Amid Supplier Crunch * AIR FP rose 1.7% in Paris today for a 3-day climb of 8.3%, the most since Feb. 29: Bloomberg data * Some Airbus A380 suppliers fall: B/E Aerospace -1.3%, Rockwell Collins -0.9%, Esterline -0.9%, Hexcel -0.8%, Triumph Group -0.3% * Zodiac outperforms, up 0.8% (BN)

Construction: no stories

Netherlands and AEX Delhaize, Ahold Agree to Sell 86 US Stores to Get FTC Merger Approval -- Food retailers Delhaize Group and Koninklijke Ahold

NV have agreed to sell 86 U.S. stores to get U.S. Federal Trade Commission approval for their roughly $31 billion tie-up. In a joint statement Thursday the companies said their U.S. subsidiaries have reached agreements with buyers, subject to FTC approval. The agreements are also subject to FTC clearance and formal completion of the merger, they said. Delhaize and Ahold said earlier this week that they expect to complete their merger by the end of July, subject to FTC approval. "Together, Ahold and Delhaize Group have been working hard to resolve the competition concerns raised by the FTC, and we are pleased to have found strong, well established buyers for the stores we are required to divest," Ahold Chief Executive Dick Boer said. The stores being sold represent 4.1% of the combined companies' U.S. store count and 3.2% of U.S. net sales. The companies announced their merger plan in June last year to create one of the largest grocery chains in the U.S. and Europe, with more than 6,500 stores and 375,000 employees. They hope that a combination will strengthen their buying clout and reduce costs as they grapple with competition from discounters and upscale chains on both continents. Shareholders have approved the merger and the Belgian Competition Authority granted its conditional approval for the merger in March. FTC clearance is the final regulatory approval requirement for the merger to complete. (DJ)

AFS Morning Note, July 14, 2016

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Vodafone Says EU Merger Offer Aims at Competition Concerns -- Vodafone says it’s offered concessions to EU regulators

examining its 50/50 Dutch JV with Liberty Global “to satisfy the competition concerns raised by” the EU “and other parties.” * Vodafone comments in e-mail, can’t comment on offer or conversations with regulators * “We are in constructive dialogue with the European Commission” * Co.s submitted commitments on July 12 * Deadline for EU to decide on approval or extended review remains Aug. 3 (BN)

*PHARMING TO DIRECTLY MKT RUCONEST IN 21 ADDITIONAL COUNTRIES (BN)

Stock Markets, M&A and Other Corporate News Stock markets:

Asian Equity Rally Loses Momentum With Oil Near $45; Pound Gains -- The rally that drove Asian stocksto levels last seen in

April showed signs of flagging as investors await details of Japan’s stimulus plans and the corporate earnings season begins in earnest. The pound strengthened before a forecast cut in U.K. interest rates. The MSCI Asia Pacific Index was set for its smallest gain this week, after rallies in U.S. and European shares stalled in the last session. The Topix index rose in Tokyo and the yen weakened amid speculation Japan could resort to so-called helicopter money, which involves the central bank directly funding government spending. Singapore Exchange Ltd. announced a temporary halt to all equities trading, citing a technical fault. South Korea’s won rose after a monetary policy review, while oil rebounded from a two-month low. Japanese shares have led gains in Asian equities this week after Prime Minister Shinzo Abe promised a package of fiscal stimulus. Chief Cabinet Secretary Yoshihide Suga said Wednesday that helicopter money was not being considered, refuting a report in the Sankei newspaper that it was being looked at. Shares in the U.S. are at an all-time high and investors will be looking to see whether better-than-expected economic data have helped arrest a slide in the earnings of America’s biggest companies. The MSCI Asia Pacific Index added 0.2 percent as of 2:16 p.m. in Tokyo, after advancing 3.6 percent over the last three sessions. The Topix gained 0.7 percent, headed for its highest close in a month. (BN)

China Shares Drop Off Three-Month High Amid Signs Rally Overdone -- Chinese stocks retreated from a three-month high, with

materials and consumer-discretionary companies leading the drop, amid signs that recent gains by the market were excessive. The Shanghai Composite Index halted a three-day advance as it declined 0.4 percent at the midday break after trade data signaled sluggish consumer demand in the world’s second-largest economy. Jiangxi Copper Co. paced metal shares lower after rising to this year’s highest level. The benchmark gauge’s 14- day relative-strength index Wednesday climbed above the 70 threshold that some traders see as a signal that a rally is about to reverse. The Shanghai Composite, which traded at 3,047.86, has risen 5.4 percent since June 23, when the U.K. voted to exit the European Union, placing the gauge among the top 5 gainers of the among 94 global benchmarks tracked by Bloomberg. The Hang Seng China Enterprises Index increased 0.1 percent in Hong Kong at 11:48 a.m., while the Hang Seng Index was little changed. (BN)

Brexit Bounce Making History as Stock Gain Closes on $2 Trillion -- The rebound in U.S. stocks from their post- Brexit selloff is

starting to take on historic dimensions. The S&P 500 Index edged higher Wednesday to climb in nine of the last 11 days, shaking off a 5.3 percent plunge following the U.K. vote to add almost $2 trillion to U.S. share prices since June 27. It’s an expansion that while burnished by the market’s already-high level, also ranks among the biggest increases in equity value ever. Stars are aligning for investors as a strong string of economic data combines with optimism over earnings and speculation the Federal Reserve will hold off raising rates. Not everything is rosy -- gains in 2016 are still being led by defensive stocks rather than those tied to economic growth -- but the push has still been enough to shatter a 13-month-old record and push the S&P 500 past Wall Street predictions. The S&P 500 rose less than 0.1 percent Wednesday to 2,152.43 at 4 p.m. in New York, after holding in a narrow range to close at a record for a third day. The Dow Jones Industrial Average added 24.45 points, or 0.1 percent, to 18,372.12, following its first all-time closing high in more than 13 months. The Nasdaq Composite Index fell 0.3 percent from its best level this year. About 6.5 billion shares traded hands on U.S. exchanges, 10 percent below the three-month average. (BN)

IG futures suggest the DAX will open down 21 points, the CAC down 10 and the FTSE down 3. (DJ)

Deutsche Boerse: Unscheduled Adjustment in DAX Before Merger -- Deutsche Boerse’s current share class (ISIN

DE0005810055) in DAX index to be replaced with the tendered share class of Deutsche Börse AG (ISIN DE000A2AA253) before expected merger of Deutsche Börse AG and London Stock Exchange, co. says in statement. * Change effective July 18 * Index change to be implemented with two trading days notice once an acceptance threshold of at least 50% is reached (BN)

M&A:

Deutsche Boerse Edges Closer to Investor Approval for LSE Deal -- Deutsche Boerse AG’s takeover of London Stock

Exchange Group Plc edged closer to shareholder approval, clearing another hurdle as the companies navigate the still- looming threat of government opposition. The German exchange said 53 percent of shareholders have approved deal so far, close to the 60 percent minimum required. Deutsche Boerse could reach that needed level by the end of the week, according to a person familiar with the matter, who asked not to be named citing confidentiality. LSE shareholders approved deal in a near-unanimous vote last week. Reaching the 50 percent level is a key threshold for Deutsche Boerse because it allows some passive index funds to begin tendering their shares. Such funds account for as much as 15 percent of the company’s stock and could help them reach the needed approval level. Should Deutsche Boerse secure shareholders’ blessing, the exchange operators still have other problems to surmount, including political fallout from the U.K. decision last month to leave the European Union. German authorities have shown unease at the prospect of their prized market’s holding company headquarters being in London, outside the EU. French and German leaders, meanwhile, are jockeying to take euro-denominated clearing -- a staple of one LSE unit -- away from London. The companies have also faced criticisms from Belgium and Portugal, where rival Euronext NV operates markets. Officials in those countries claim the merger would damage competition. Antitrust concerns have killed previous industry merger attempts. (BN)

AFS Morning Note, July 14, 2016

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Monsanto Said to Revive Talks With BASF on Bayer Alternative -- Monsanto Co. has revived talks with BASF SE about a

possible combination of their agrochemicals businesses, according to people familiar with the matter, as it seeks alternatives to a takeover offer from Bayer AG. The U.S. company is exploring various transactions, including the potential acquisition of BASF’s agriculture- solutions unit, the people said, asking not to be identified as the discussions are private. In return, Ludwigshafen, Germany- based BASF would likely receive newly issued shares in Monsanto, the people said. The discussions are at an early stage, and no final decisions have been made, they said. Talks with Bayer are continuing, they said. Monsanto’s board is split over the merit of potential deals with rivals BASF and Bayer, one of the people said, with some executives keen to remain independent and others preferring a takeover. The company in May rejected a $122-a-share offer from Bayer, saying the bid, which valued the company at $62 billion, was too low. It said in its earnings statement last month that it has been in discussions over the last several weeks with Bayer, as well as with other parties, about “alternative strategic options.” Monsanto would likely face pressure from its shareholders if it opted to buy BASF’s division and issues shares to pay for it instead of accepting Bayer’s all-cash premium offer, one of the people said. The price represented a 37 percent premium on Monsanto shares from their May 9 level. Representatives for BASF and Monsanto declined to comment. Earlier this year, Monsanto held talks with both BASF and Bayer about possible deals after losing the battle for Syngenta AG to China National Chemical Corp., people familiar with the matter said in March. BASF until now has sat on the sidelines and focused on smaller transactions, including the purchase of a coatings business from Albemarle Corp. for $3.2 billionlast month. BASF’s plant science unit has had a partnership with Monsanto since 2007. The division, which is separate from its crop fungicides and herbicides operation, develops genetically- modified seeds for crops such as corn, soybean and rice. The German company doesn’t disclose separately any income it derives from the venture. Monsanto has become vulnerable to a takeover as a number of problems piled up this year. The company’s profits continue to suffer, and it has said full-year earnings will now be at the low end of a previously announced range of $4.40 to $5.10 a share. It has also clashed with some of the world’s largest commodity-trading companies and been locked in disputes with the governments of Argentina and India. A Bayer takeover would be the largest deal this year and the biggest ever by a German company, creating the world’s biggest supplier of farm chemicals and seeds. (BN)

Hershey's Controlling Trust Is Besieged at a Pivotal Juncture -- The charitable trust that controls Hershey Co. could be asked to

consider the sale of one of America's most famous brands to snack giant Mondelez International Inc. at the same time the trustees are under scrutiny by Pennsylvania's attorney general. The attorney general's office is threatening to take the trustees to court if they don't make governance reforms at the trust by the end of the month, according to people familiar with the matter. Such legal action might not directly affect the chocolate maker, which recently spurned a $23 billion takeover offer from Mondelez. But it would be a potential distraction for the trust at a critical time. Mondelez, whose brands include Oreo cookies, hasn't dropped its pursuit of Hershey, and could raise the offer if it sees an opening, said two of the people familiar with the matter. Meanwhile, because of pressure from state regulators, the trust could lose three longstanding board members, after losing four members since December, including one last weekend. A spokesman for the trust, one the nation's richest charities, said the board is in talks with the attorney general's office and hopes to reach a resolution. The trust, which has a roughly 30% stake in the company and 81% of its voting power, was thrust into the spotlight by the Mondelez bid. Hershey's corporate board, which includes three representatives of the trust, unanimously rejected the offer. Even if the trustees should be persuaded to approve a sale of the company, the attorney general could challenge the sale, thanks to a quirk of Pennsylvania law. Trustees would have to prove in the local Orphan's Court that the sale was in the best interest of the charity. (DJ)

Other corporate news:

Volkswagen’s 3-Liter Car Recall Plan Rejected by California -- California regulators rejected Volkswagen AG’s plan for recalling

thousands of diesel-cheating vehicles, posing a potentially costly obstacle in the 10-month scandal as criminal probes and lawsuits on three continents roll ahead. The California Air Resources Board said in a statement Wednesday that the proposal for Volkswagen, Audi and Porsche models with 3.0 liter engines rigged to cheat emissions tests was inadequate. The agency, along with the Environmental Protection Agency, will continue its talks with Volkswagen in hopes of finding a fix, CARB said in letters dated Wednesday to Volkswagen executives and attorneys. The agency has been in talks with the carmaker over the 3- liter engines since at least Feb. 2 when it filed its first “single, incomplete recall plan," according to the letters. Additional data submitted by Volkswagen as recently as June is also “incomplete” and “substantially deficient” to meet the legal requirements for the cars to be fixed, CARB said. The rejection of the automaker’s proposal for fixing about 85,000 VW, Audi and Porsche vehicles with 3-liter diesel engines shows that the emissions-cheating scandal, despite a landmark $14.7 billion settlement, is far from over. That agreement, covering 480,000 cars with 2.0 liter engines, will require Volkswagen to devote as much as $10 billion to buy back the cars. A federal judge in San Francisco is considering whether to approve that settlement, which would also allow owners to have their cars repaired if a fix is approved by federal and state regulators. VW still faces lawsuits by at least five states plus investors and dealerships in the U.S., as well as parallel lawsuits, including consumer complaints, in Germany, all of which could raise the scandal’s price tag for the automaker. Future expenses will also include perhaps hundreds of millions of dollars in fees for the lawyers representing car owners. More penalties, along with further damage to VW’s reputation, may yet spring from criminal probes in the U.S., Germany and South Korea. (BN)

BMW, VW to Procure More Parts in Thailand Amid Asia Push: Nikkei -- BMW will establish procurement base in Bangkok as

early as August and ship Thai-made parts to its >30 plants globally, Nikkei reports, without citing anyone. * Volkswagen plans to relocate its parts procurement base in Kuala Lumpur to the same site as a Thai factory making commercial vehicles for its Scania brand as early as August (BN)

AFS Morning Note, July 14, 2016

7

Novartis Clears Hurdle in Effort to Sell Enbrel Competitor -- Novartis AG’s biosimilar version of a blockbuster arthritis drug made

by Amgen Inc. cleared a key regulatory hurdle Wednesday, bringing it a step closer to entering the U.S. market as a lower-cost competitor. A panel of Food and Drug Administration advisers voted 20-0 that the Novartis’s drug, called GP2015, should be approved to treat five chronic inflammatory conditions, including rheumatoid arthritis and plaque psoriasis. The FDA will take the panel’s recommendation into account when it decides later this year whether to clear Novartis’s biosimilar for sale. In a report released last week, FDA staff reviewing GP2015 called it “highly similar” to Enbrel, which was Amgen’s top- selling drug last year at $5.36 billion. The panel voted unanimously Tuesday that a different biosimilar, Amgen’s version of AbbVie Inc.’s Humira, a brand-name competitor to Enbrel, should be approved. As they did Tuesday, patients and representatives from patient groups at the panel meeting in Silver Spring, Maryland, raised concerns about what will happen when pharmacies and drug benefit managers switch patients from the brand-name original to the biosimilar, or between different biosimilars. Biologics are complex drugs made from living organisms that can’t be precisely copied. There are concerns that switching can cause patients to develop an allergic reaction or immunity to the drug so it’s less potent. (BN)

[yday] Linde Said to Extend Contract of CEO Buechele: Handelsblatt -- Co.’s supervisory board to approve second term for

CEO Wolfgang Buechele at its next regular meeting in Sept., Handelsblatt reports, citing unidentified sources. * Current mandate ends in May 2017 (BN)

Hella FY16 Sales Rise 9%; Adj. Ebit Up 7% -- * FY16 sales rise 9% to ~EU6.35b * FY16 adj. Ebit up 7% to ~EU476m * FY16 adj.

Ebit margin 7.5% * Says special effects pushed Ebit down to approx. EU420m * NOTE: Co. scheduled to publish full FY16 results on Aug. 11 * Statement * NOTE: Co. reiterated April 13 it expects FY consolidated income will see growth in the middle to high single-digit range; keeps FY Ebit forecast of lower y/y Ebit (BN)

*GETINGE 2Q NET SALES SK6.93B, EST. SK7.14B; 2Q PRETAX SK311M, EST. SK337.8M; EXPECTS MODERATE ORGANIC

SALES GROWTH IN 2016 (BN)

Valeant Falls After Report Citron Research Shorting Stock Again -- Citron Research has decided to short Valeant again, The

Street reports, citing Citron’s Andrew Left. * “It’s obvious it’s a zero now” (BN)

Central Banks, Macro and Geopolitics Brexit/UK:

Theresa May to hand out more jobs in first cabinet -- Prime Minister Theresa May will continue to form her new government later

- as she begins her first full day in Downing Street. Leading Brexit campaigner Boris Johnson said he was "humbled" having been named new foreign secretary, in one of Mrs May's first cabinet appointments. Philip Hammond became chancellor, Amber Rudd is home secretary, and Eurosceptic David Davis is new Brexit secretary. Mrs May later told European leaders she was committed to the UK leaving the EU. Mrs May will continue to fill out her new cabinet later on Thursday, with the new secretaries of state for health, education, and work and pensions among those expected to be appointed. Whenever she happens to be near a microphone, Theresa May tends to say - absolutely truthfully it appears - that she just wants to "get on with the job". Well she certainly has done that, wasting no time in announcing the most senior jobs in her cabinet, the first appointment only an hour or so after she walked in. No surprise on appointment one - Philip Hammond, the former foreign secretary, becomes the money man. He's the embodiment of the phrase, "a safe pair of hands", and takes on the biggest role as Mrs May's supporter. The biggest surprise is the appointment of Boris Johnson, the Tory members' darling, as the foreign secretary - one of the greatest offices of state, with a hugely different role as the UK contemplates life outside the EU. Speaking on Wednesday night, Mr Johnson said he was "very humbled" and "very proud" at the appointment. "Clearly now we have a massive opportunity in this country to make a great success of our relationship with Europe and with the world and I'm very excited to be asked to play a part in that," he told the BBC. (BBC News)

Carney Opens Lehman Playbook With BOE Interest Rate Cut -- Mark Carney looks poised to repeat a strategy that served him

well during the global financial crisis. As the Bank of England governor seeks to stave off any turmoil after Britain’s decision to quit the European Union, he has cited his experience at Canada’s central bank in 2008 as a guide. Acting early to prevent a deeper downturn became the hallmark of his approach in the prelude to the international slump, a perspective he can bring to the Monetary Policy Committee’s debate this week on whether to cut interest rates. With Brexit roiling currency markets before a 2.6 percent rally in the pound this week, confidence gauges diving and Carney warning of a “material slowdown,” economists and investors see more stimulus on the way. The governor is still at the vanguard of Britain’s response as the government remains sidetracked by a change of leadership in the ruling Conservative Party. On Wednesday -- the day the U.K. is set to get a new prime minister in Theresa May-- BOE policy makers will vote on whether to reduce the key rate for the first time since 2009. Carney also held a breakfast meeting with Scotland’s First Minister Nicola Sturgeon, according to the BBC, and is also meeting U.S. Treasury Secretary Jacob J. Lew. The rate decision will be announced at noon London time on Thursday. Thirty of 54 economists surveyed by Bloomberg predict a cut, with the majority of those seeing a reduction to a record-low 0.25 percent. Investors are pricing in an 80 percent chance of a rate cut this week, up from 11 percent just before vote counts showed the “Leave” campaign had won the referendum. A significant spike in those bets came after Carney’s speech on June 30, where he said it was “plausible that uncertainty could remain elevated for some time” and that “some monetary-policy easing will likely be needed over the summer.” (BN)

ECB: no stories

AFS Morning Note, July 14, 2016

8

Eurozone (member states):

Germany’s Bonds Rise as 10-Year Debt Sale Draws Negative Yield -- Germany’s government bonds rose, halting a two-day

decline, as the nation auctioned 10-year debt with a negative yield for the first time. The country’s finance agency allotted 4.038 billion euros ($4.5 billion) of zero-coupon bunds maturing in August 2026 at an average yield of minus 0.05 percent. This means that investors who buy the bonds now and hold until maturity will receive less money than they paid. Bids totaled 4.783 billion euros, compared with the target amount of 5 billion euros. Even so, the sale shows that as market conditions deteriorate amid concerns over the health of Italy’s banking sector and Britain’s vote to leave the European Union, some investors are choosing the safety of higher-rated sovereign debt over returns. In another sign of investor demand for havens, Switzerland sold bonds due in May 2058 at an average yield of minus 0.023 percent. Around 38 percent of the $25.3 trillion of securities that comprise the Bloomberg Global Developed Sovereign Bond Index have yields that are below zero. Yield starvation is creating a “mass psychosis,” according to Jeffrey Gundlach, chief executive officer of DoubleLine Capital, whose firm manages $102 billion. With market stress starting to ease, the demand for bonds at such low yields could suffer, according to Daniel Lenz, a market strategist at DZ Bank AG in Frankfurt. (BN)

Spain’s Rajoy Digs In as Socialists Block Path Into Power -- Mariano Rajoy has waited almost seven months to start a second

term as Spain’s prime minister and he’s prepared to keep waiting if need be. Rajoy said Wednesday that he’ll call a time out if he can’t recruit enough support to win a confidence vote in parliament this month, after holding talks with Socialist Leader Pedro Sanchez in Madrid. Sanchez, who heads the second-biggest group in the legislature after last month’s election, said his lawmakers will vote against Rajoy. “If I was convinced that I couldn’t be elected prime minister, I would open a period of reflection with other parties so we can decide on a way out,” Rajoy said at a press conference. “We are still at an early stage of the process.” Rajoy is starting talks with rivals after falling short of a governing majority for the second time in six months in Spain’s June 26 election. Rajoy’s People’s Party increased its representation in the 350-seat parliament to 137 lawmakers from 122 in December, but still faces a struggle to win a confidence vote. Earlier Wednesday, Ciudadanos’s leader Albert Rivera said his 32 lawmakers will help out by abstaining in the second round, when Rajoy just needs more yeses than noes. That’s not enough though, with the Socialists and anti-establishment party Podemos committed to voting against Rajoy. The caretaker premier is considering Aug. 2 as a possible date for facing a confidence vote in parliament, Europa Press reported, citing a comment from the premier Wednesday. Under Spanish law, the candidate needs the support of a majority of lawmakers to win the vote, while in a second vote 48 hours later, getting more votes in favor than against would be enough to take office. Sanchez is blocking Rajoy despite pressure from party grandees who say a period in opposition is the party’s best option as it seeks to rebuild after its worst ever election result. “Mr. Rajoy has to work hard and hold meetings with his potential allies,” Sanchez said at a press conference in parliament. “It’s his responsibility, his duty, to work out how far he needs to go in accepting changes to the status quo to achieve a stable majority.” The premier said he wants to put his name forward for a confidence vote in parliament if he’s nominated by King Felipe. At meetings this week he gave other party leaders a set of policy proposals that he aims to make the basis for eventual talks on forming a government. (BN)

Austria Won’t Reach Maximum Asylum Applications This Year: Welt) -- Austria won’t reach maximum authorized asylum

applications of 37,500 this yr, Interior Minister Wolfgang Sobotka says in intv w/ Die Welt. * Reasons are closure of Western Balkan route, legal possibilities to reject refugees, reinforced control of Serbian-Hungarian border * Austria had 25,700 asylum requests at end June, of which 20,100 granted further proceedings * Sobotka rejected EU request to grant refugees work permits 6 months after submitting asylum request (BN)

Switzerland: no stories Fed/North America:

Clinton Leads Trump Nationally, 42%-39%, in McClatchy Poll -- Hillary Clinton has the 3-ppt-lead over Donald Trump in head-to-

head matchup, McClatchy reports, citing McClatchy-Marist poll. * In four-candidate race, Clinton leads Trump 40%-35%, with 10% for Libertarian Gary Johnson, 5% for Green Party’s Jill Stein * Phone survey of 1,249 people conducted July 5-9, margin of error +/-2.8ppts (BN)

Fed Says Economy Growing Modestly Amid Scant Price Pressures -- The U.S. economy expanded at a modest pace since

mid-May amid “slight” price pressures and some softening in consumer spending, according to a report from the Federal Reserve’s 12 districts that lacked any sense of urgency on the need to raise interest rates soon. “The outlook was generally positive across broad segments of the economy including retail sales, manufacturing, and real estate,” according to the Fed’s latest Beige Book, an economic survey by reserve banks published eight times a year. “Districts reporting on overall growth expect it to remain modest.” The Fed’s policy-setting panel next meets July 26-27. Investors see about a 5 percent probability of a rate increase at that meeting, according to pricing in federal fund futures contracts, as officials weigh global risks after the U.K. voted June 23 to leave the European Union. Odds of a move by December were around 32 percent. The Beige Book, released Wednesday in Washington, summarizes comments received from business contacts around the country. It was based on information collected on or before July 1, the week following Brexit, which was cited by several regional Fed banks in the survey as a source of uncertainty among business contacts. Fed officials are weighing progress on their mandate for maximum employment to decide the timing of the next rate hike and expect that higher wages as the economy advances will feed through into an uptick in inflation, which has been under their 2 percent target since 2012. “Labor market conditions remained stable as employment continued to grow modestly since the previous report and wage pressures remained modest to moderate,” the Fed said. Several districts reported “strong demand for skilled labor” and businesses faced challenges in filling positions in information technology, biotechnology and health care services. (BN)

AFS Morning Note, July 14, 2016

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Fed’s Harker Says Two Interest-Rate Hikes May Be Needed in 2016 -- The U.S. economy shouldn’t sustain much damage from

the Brexit vote and may warrant as many as two interest-rate increases before the end of the year, said Federal Reserve Bank of Philadelphia President Patrick Harker. “I believe that inflation will return to target sometime next year," Harker, who does not vote on monetary policy in 2016, said in prepared remarks for a speech in Philadelphia Wednesday. “I anticipate that it may be appropriate for up to two additional rate hikes this year and that the funds rate will approach 3.0 percent by the end of 2018.” Harker’s comments come at a time when labor market progress has slowed and international risks remain, particularly in the wake of Britain’s June 23 vote to exit the European Union. The Fed has been looking for an opportunity to raise rates as the labor market heals and inflation moves up toward its 2 percent goal, but events abroad have spurred volatility in markets and stayed its hand so far this year. (BN)

Fed’s Kaplan Says June Jobs Report Shows Progress Continues -- Federal Reserve Bank of Dallas President Robert Kaplan

said a strong June employment report, coming on the heels of a weak May reading, shows the central bank is continuing to make progress in reducing labor-market slack. “The May report was not an anomaly,” Kaplan told reporters on Wednesday after a speech in Houston. But the June rebound “puts it in context, and we’ll have to debate the implications for that at the next meeting” of the Federal Open Market Committee, he said. Several Fed officials have said the 287,000 new jobs reported in June came as a relief after employers added just 11,000 in May. The committee appears divided, however, over whether that means the Fed should get back to tightening policy in coming months. Kaplan, who took over in Dallas in 2015 and doesn’t vote on the FOMC this year, didn’t say how many rate hikes he believed would be appropriate for the rest of 2016. Prices in the federal funds futures market indicate investors don’t expect the Fed to increase rates through December. The FOMC next meets July 26-27 in Washington. Kaplan said he’s uncertain over whether a tightening labor market may begin to spur higher inflation or prices will be held down by sluggish economic growth. The Fed’s preferred measure of inflation stood at 0.9 percent in the 12 months through May, below the central bank’s 2 percent target. “The jury’s out,” he said. “It may slow progress on the inflation mandate if we have slower GDP, but I don’t know yet.” (BN)

Japan/China:

Bernanke Floated Japan Perpetual Bonds Idea to Abe Adviser Honda -- Ben S. Bernanke,who met Japanese leaders in Tokyo

this week, had floated the idea of perpetual bonds during earlier discussions in Washington with one of Prime Minister Shinzo Abe’s key advisers. Etsuro Honda, who has emerged as a matchmaker for Abe in corralling foreign economic experts to offer policy guidance, said that during an hour-long discussion with Bernanke in April the former Federal Reserve chief warned there was a risk Japan at any time could return to deflation. He noted that helicopter money -- in which the government issues non-marketable perpetual bonds with no maturity date and the Bank of Japan directly buys them -- could work as the strongest tool to overcome deflation, according to Honda. Bernanke noted it was an option, he said. Though Honda said he thought Japan was already engaged in a strategy that involved helicopter money, he wanted to convey the idea to Abe and asked Bernanke to meet with the premier in Japan. While this didn’t happen in the spring, Bernanke joined central bank chief Haruhiko Kuroda over lunch this Monday and on Tuesday he attended a gathering with Abe and key officials, including Koichi Hamada, another influential economic adviser. Bernanke at the Tuesday meeting said Japan should carry on with Abenomics policies by supplementing monetary policy with fiscal stimulus, according to Hamada. Bernanke told Abe that the BOJ still has instruments to further ease monetary policy, said Yoshihide Suga, Japan’s top government spokesman. The central bank didn’t reveal what Kuroda and Bernanke discussed. Hamada said helicopter money wasn’t mentioned with Bernanke on Tuesday. Suga denied an earlier report in the Sankei newspaper that officials around Abe were considering helicopter money as a policy option. Bond traders, stock investors and economists have been mulling the possible implications of Bernanke’s visit and the next steps to come in Abenomics. Amid intense speculation about the chances of helicopter money, and the certainty of further fiscal stimulus ordered by the prime minister, Japanese shares have rallied for four consecutive days while the yen has weakened. “There’s a strong allergy to so-called helicopter money in Japan, though the definition of the word differs from person to person,” Honda said in an interview on Wednesday. “While looking at the BOJ’s bond purchases and fiscal policy as a package, which I see as a kind of helicopter money, it would be beneficial if the prime minister understands that there is a global leading scholar clearly advocating helicopter money,” said Honda, who was speaking by telephone from Switzerland, where he is serving as Japan’s ambassador. Honda, 61, said he told Abe about Bernanke’s views after his April meeting. “I told him now is the time for Japan to expand fiscal spending and at the same time, additional monetary easing should be taken,” Honda said. “I told him it is necessary to strengthen the effects of Abenomics” through such a strategy. Japan has a long history of tapping foreign advisers. Honda, though, has taken the practice to a new level, bringing prominent overseas economists into the inner circle of Japanese policy making. The objective: adding star power to the weight of his own views on pivotal economic decisions. Honda is a former Finance Ministry civil servant who has known Abe since they met at a wedding reception more than three decades ago. He was among the key people who persuaded the premier to adopt his program of reflation in 2013. In 2014, Honda set up a meeting for Abe with Nobel laureate Paul Krugman, who successfully made the case for delaying a sales-tax increase. When the same issue confronted the Abe administration this spring, Joseph Stiglitz, another Nobel recipient, was brought in. A visit with Krugman followed. (BN)

AFS Morning Note, July 14, 2016

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Japan Abe Adviser Fears 'Helicopter Money' Could Cause Repeat of Runaway Spending, Inflation -- Japan shouldn't make its

central bank directly underwrite government borrowing, or it could suffer the kind of runaway spending and inflation that followed a similar move in the 1930s, said an adviser to Prime Minister Shinzo Abe. "It would be too tempting for politicians. They wouldn't give it up once you made it possible for them to print and spend as much money as they please, either for political purposes or for their own ambitions," said Koichi Hamada in an interview with The Wall Street Journal recently. The stern warning from the Yale University professor comes as economists increasingly speculate that Mr. Abe may resort to the radical step to save his campaign to escape deflation, a negative cycle of price falls. Mr. Abe's recent pledge to bolster spending and his meeting earlier this week with former Federal Reserve Chairman Ben Bernanke, an advocate of monetization, has fueled such speculation. Supporters of the measure, known as "helicopter money," view it as the quickest, surest way to stimulate demand and create the 2% inflation wanted by Mr. Abe. But the problem is that politicians may not have the self-discipline to withdraw the policy before it destabilizes the economy, Mr. Hamada said, playing down a recent local newspaper report that portrayed him as supportive of helicopter money. "There is a huge risk that fiscal expansion would get out of control" if the Bank of Japan started underwriting government borrowing, Mr. Hamada said. The adviser called attention to the consequences of debt monetization in the 1930s by finance minister Korekiyo Takahashi. Mr. Takahashi's powerful stimulus helped the nation escape the Great Depression, but Mr. Hamada said it opened the door to aggressive military spending that later caused sky high inflation. Mr. Takahashi was assassinated by rebel officers in 1936. Other aides to Mr. Abe, including Japan's ambassador to Switzerland Etsuro Honda, see Mr. Takahashi as a national hero and put the blame for spiraling spending and inflation squarely on the military and capacity shortages in a war-torn economy. Renewed debate over helicopter money underlines the continued radicalization of discussions over how to remedy Japan's lost two decades. It also reflects frustrations over the limited effects so far of Abenomics--Mr. Abe's pro-growth policies, which were backed by many renowned economist when launched in 2013. Mr. Hamada agreed that expanding fiscal and monetary policies at the same time is likely to produce stronger stimulus effects than implementing them in isolation. But Mr. Hamada said that if the BOJ continues to buy debt from the markets, not directly from the government, the policy coordination wouldn't amount to monetization by strict definition. Speaking of the BOJ's coming policy decision on July 29, Mr. Hamada said he "can't say with absolute certainty for now" whether the central bank should undertake additional easing. "It depends on how much stock prices will have recovered and how much the yen's upward momentum will have weakened by then," he said. (DJ)

Japan’s Population Falls by Most Since Records Began in 1968 -- The Japanese population of Japan, the world’s fastest-aging

major nation, fell the most on record as the number of deaths outweighed those born in the country. The number of Japanese living in the country fell for a seventh straight year, down by 271,834 to 125.9 million people as of Jan 1., according to data released Wednesday. The figures, first compiled in 1968, showed those living in one of the three biggest urban areas (around Tokyo, Nagoya, and Kansai) rose to a record, while the number of foreigners living in the immigration-averse nation rose, mostly in large cities. Other key figures: * No. of foreigners rose 111,562 to 2.17 million (up 5.4 percent) * 1.30 million Japanese died during the year, more than the 1.01 million births * No. of Japanese living in the three biggest urban centers was a record 64.5 million (51.23 percent of the total); 1.54 million foreigners were also resident there, which is more than 70 percent of the total. Prime Minister Shinzo Abe has set out an aim of stopping the total population from falling below 100 million, but a failure to boost the nation’s birthrate could see its labor force collapse by more than 40 percent by 2060, according to a projection by a government panel. A smaller population runs counter to Abe’s aim of increasing the workforce by a million people -- and boosting gross domestic product by about 20 percent -- over the next four years, though there are glimmers of hope such as increased female workforce participation. Despite the increase in foreigners, mass immigration is still off the table. (BN)

BOJ Outlook May Get Boost From Fiscal Plan, Oil Prices: Nikkei -- In its July quarterly outlook, the Bank of Japan will weigh

recovering resource prices, and prospects for stronger public and private spending, against the impact of Britain’s decision to leave the European Union, the Nikkei reports, citing an unidentified central bank official. * Report notes Prime Minister Abe’s fiscal policy plan likely worth > 10t yen * Postponement of income tax increase “will impact fiscal health in the long term, but should have positive effects on the economy and prices in the short term,” report quotes BOJ official * Report says bank is hopeful oil price increase since time of last report will help boost consumer prices (BN)

Asia Pacific excluding Japan & China:

New Zealand Rate-Cut Bets Rise on Unexpected RBNZ Economy Update -- New Zealand’s central bank said it will issue an

unscheduled assessment of the economy next week, prompting traders to increase bets on an interest-rate cut in August. The assessment, which will be published on July 21 and won’t include a review of the official cash rate, is being made because of a longer-than-usual period between policy decisions, the Reserve Bank said in an advisory in Wellington Thursday. The odds of a quarter-point cut at the next OCR review on Aug. 11 rose to more than 60 percent from 40 percent, and the New Zealand dollar fell more than half a U.S. cent. Doubts about an August rate reduction grew after Deputy Governor Grant Spencer last week said the central bank needed to carefully consider risks to financial stability when deciding the path of monetary policy. The swing in sentiment helped drive up the kiwi dollar, which may suppress import prices further and make it harder for the RBNZ to attain its inflation target. The currency fell 0.8 percent to 72.15 U.S. cents at 5:20 p.m. in Wellington. The trade-weighted currency index fell to 77.05 from a 14-month high of 77.24 earlier this week. The RBNZ in June assumed the index would average 71.6 in the third quarter. The RBNZ said it decided to publish the economic assessment because of an 11-week gap between the June 9 monetary policy statement and the next rate decision. This year it has dropped a July review as it readjusts its release schedule. The central bank declined to comment further on its advisory notice. “We doubt the update would be occurring if the economic and inflation outlook had not changed markedly since the June MPS,” said Gibbs. If the currency was to sustain current levels, the RBNZ “would be forced to significantly mark down its inflation forecast –- and to some extent its GDP growth forecast –- in the August MPS,” he said. (BN)

AFS Morning Note, July 14, 2016

11

Nordics:

Skingsley Says Riksbank May Need to Strengthen FX Reserve: DN -- Deputy Governor Cecilia Skingsley says may need to

strengthen currency reserves to deal with liquidity risks posed by Nordea’s move to fold in its Nordic subsidiaries into Swedish bank, according to interview in Dagens Nyheter. * Says on rates that “we’re moving in a negative environment that means that if we continue to lower the repo rate we may end up in situations where the impact weakens. Possibly we’re starting to observe such signs already” * Says U.K. vote to leave EU prompted Riksbank to make its “first” economic outlook revision in latest report; “I say the first” because the impact of Brexit is something “we have to live with for a number of years” * Says Sweden’s recent tightening on mortgage amortization to curb household debt is “a good start,” but doesn’t “think we’re done safeguarding households toward future problems” * Backs inflation-targeting conclusions of report from former U.K. central bank governor Mervyn King and economics professor Marvin Goodfriend that bank should have a more flexible inflation target than 2% within 2 years (BN)

Eastern Europe: no stories Rest of the world:

Skingsley Says Riksbank May Need to Strengthen FX Reserve: DN -- Deputy Governor Cecilia Skingsley says may need to

strengthen currency reserves to deal with liquidity risks posed by Nordea’s move to fold in its Nordic subsidiaries into Swedish bank, according to interview in Dagens Nyheter. * Says on rates that “we’re moving in a negative environment that means that if we continue to lower the repo rate we may end up in situations where the impact weakens. Possibly we’re starting to observe such signs already” * Says U.K. vote to leave EU prompted Riksbank to make its “first” economic outlook revision in latest report; “I say the first” because the impact of Brexit is something “we have to live with for a number of years” * Says Sweden’s recent tightening on mortgage amortization to curb household debt is “a good start,” but doesn’t “think we’re done safeguarding households toward future problems” * Backs inflation-targeting conclusions of report from former U.K. central bank governor Mervyn King and economics professor Marvin Goodfriend that bank should have a more flexible inflation target than 2% within 2 years (BN)

AFS Morning Note, July 14, 2016

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Last Trading Day Stats

Index Close 1D %Chg YTD%Chg 1Y% Change Currencies Rate

AEX 444.45 -0.22% 0.60% -10.00% EURUSD 1.1104

EuroStoxx 50 2926.14 -0.25% -10.45% -18.88% USDJPY 105.32

CAC 4335.26 0.09% -6.51% -13.85% GBPUSD 1.3203

DAX 9930.71 -0.33% -7.56% -13.77%

FTSE 100 6670.4 -0.15% 6.86% -1.23% Bund Yield

SMI 8142.33 -0.01% -7.66% -12.55% 2yr -0.674%

OMX 1356.347 0.14% -6.25% -16.08% 5yr -0.596%

S&P 500 2152.43 0.01% 5.31% 2.06% 10yr -0.062%

Dow Jones 18372.12 0.13% 5.44% 1.76% 30yr 0.411%

Nikkei 225 16347.24 0.71% -14.11% -19.81%

Shanghai Composite 3051.197 -0.31% -13.79% -22.25% Sovereigns Yield

U.S. 10Y 1.491%

AEX Close 444.45 Japan 10Y -0.267%

ADR Impact 0.24 France 10Y 0.147%

ADR Impact % 0.05% Ita ly 10Y 1.208%

AEX Parity 444.69 Spain 10Y 1.148%

AEX Ex-div impact 0.00 Netherlands 10Y 0.037%

Volatility

ADR Close in NY VIX 13.04

Aegon 3.90$ 1.80% VDAX 21.96

ArcelorMittal 5.60$ 0.18%

ASML 101.11$ 0.06% Commodities

ING 10.62$ 0.19% Brent Crude 46.68

Philips 25.45$ -0.37% Gold Spot 1334.14

RELX 17.76$ 0.09%

Royal Dutch Shell 55.53$ 0.62%

Unilever 46.38$ -0.06%

Difference from Amsterdam closing

AFS GROUP AMSTERDAM Research: Arne Petimezas: a.petimezas@afsgroup.nl +31 20 522 0244; Jauke de Jong: j.dejong@afsgroup.nl +31 20 522 0242

Sources include: Bloomberg (BN); Reuters (R); Dow Jones Newswires (DJ); Market News International (MNI); Financial Times (FT); Wall Street Journal (WSJ); BBC News; CNN, NY Times (NYT), Washington Post (WP), The Guardian (G), het Financieele Dagblad (FD), Telegraaf (DFT), Volkskrant (VK) and NRC. The information and opinions contained in this document have been compiled or arrived from sources believed to be reliable but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. All opinions and estimates expressed in this document are subject to change without notice. AFS does not accept any liability whatsoever for any direct or consequential loss arising from the use of this document. This document is for information purposes only and is not, and should not be construed as, an offer to buy or sell any securities or derivatives. The information contained in this document is published for the assistance of the recipient, but is not to be relied upon as authoritative or taken in substitution for the exercise of judgement by any recipient.