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Draghi Signals ECB May Boost Stimulus Later This Year

Published: 08:29 22 Jul 2016 BST

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Draghi Signals ECB May Boost Stimulus Later This Year
Here is the opening of this report from Bloomberg:

Mario Draghi signaled that the European Central Bank will consider adding fresh stimulus later this year when it has a clearer picture of the economic impact from the U.K.’s vote to leave the European Union.
“Over coming months, when we have more information including staff projections, we will be in a better position to assess the underlying macroeconomic conditions,” the ECB president told reporters in Frankfurt on Thursday after a meeting of the Governing Council. “If warranted to achieve its objective, the Governing Council will act by using all instruments available within its mandate.”
The risk for the euro area is that its recovery might prove too fragile to cope with any downturn in trade and investment as a consequence of the Brexit vote. Even so, after calming market volatility with pledges of liquidity, officials have bought themselves time to judge how much further they can push their unprecedented easing, especially in the absence of more support from government policies.

David Fuller's view
This is another sobering assessment by the European Central Bank (ECB) president.  In mentioning Brexit, he also comments on the lack of both structural reforms and fiscal spending in the EU.  We have heard this before and Mario Draghi remains the prime source of stimulus within the EU, while frequently mentioning in previous discussions that the ECB’s efforts, on their own, are insufficient to revive GDP growth.  In the Audio within Bloomberg’s article above, Draghi also says: “Risks to the Euro area growth outlook remain tilted to the downside”.
 

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David Fuller's view
Details and charts are in the Subscriber’s Area.


Can Republic of Turkey Survive Erdogan Purge?
Here is the opening of this sobering report by Bloomberg Business Week, posted without further comment:

On the afternoon of May 6 the Turkish journalist Can Dundar was speaking to a television reporter outside Istanbul’s Caglayan courthouse when he noticed a man with a mustache and a navy-blue windbreaker walking toward him, holding a handgun. Dundar (pronounced DOON-dar) is editor-in-chief of the newspaper Cumhuriyet, one of the few Turkish media outlets still openly critical of the government. He and Cumhuriyet colleague Erdem Gul were awaiting their sentences after a month’s long criminal trial. Dundar’s bodyguard had remained inside during the court’s recess. Seeing the gun, the TV reporter said, “Run.”
The man with the mustache fired two shots, shouting, “Traitor!” Dundar hopped to one side, his shoulders hunched, and ducked behind his interviewer, who moved to shelter him. Dundar’s wife, Dilek, grabbed the assailant’s right arm, and a parliamentarian who had been standing nearby bear-hugged the man from behind. Dundar ran a few steps off, then slowed and looked back. He was unscathed, though one bullet had grazed the leg of the TV reporter. Seconds later the attacker was kneeling, with the guns of three plainclothes police officers and the cameras of more than a dozen TV crews trained on him. Then Dundar and Gul went back into the courthouse to receive their sentences: five years in prison for Gul, five years and 10 months for Dundar. (They remain free while their case is on appeal.)
A trim man with a broad face and a springy mane of gray hair, Dundar, 55, becameCumhuriyet’s editor-in-chief in February 2015. His conviction this May—Dundar says he’s the defendant in so many concurrent cases he’s all but lost track—was the result of a story he published a year earlier detailing how Turkey’s national intelligence agency smuggled weapons into neighboring Syria, most likely for Islamic rebels fighting the forces of President Bashar al-Assad. After the story came out, Turkey’s president and former prime minister, Recep Tayyip Erdogan, went on television and promised that the parties responsible for the story “will pay a heavy price.” Six months later, Dundar and Gul were charged with aiding a terrorist organization, attempting to overthrow the government, espionage, and revealing state secrets. So far, the two have been convicted only of the last offense. They’ve already spent three months in pretrial detention, inhabiting adjoining cells in Istanbul’s Silivri Prison until Turkey’s constitutional court ordered their release.
Turkey has never had a truly free press. It has a long tradition of censorship, especially around the combustible politics of its religious and ethnic minorities. And that was before the bloody coup attempt of Friday, July 15, which began with fighter jets buzzing Ankara and military units in Istanbul closing both bridges across the Bosporus. Battles among civilians, police officers, and soldiers left 290 dead and 1,400 wounded. The putsch also showcased the courage of Turkish journalists: The staff at CNN Turk defied a helicopter full of putschist soldiers who showed up to take over their studios, and a photographer for the pro-government daily Yeni Safak was shot dead in the street.



David Fuller's view


Email of the day
On Brexit and 'the Osborne pivot':

Dear David I thought this was a rather good article. It's fascinating to now hear so many who threatened they would leave the UK now sounding a different tune after Brexit is now a reality. Maybe we could call it 'the Osborne pivot'. I hope someone soon publishes an even more detailed account of the costs for businesses in the EU centres vying to steal UK business. Let's have a detailed comparison of labour laws, employment costs to companies, taxes to individuals, limitation on earnings and bonuses, corporation tax, inability of companies to let staff go etc etc. The reality is beginning to strike home!


David Fuller's view
Thank you for this good article by Paul Blanchard, with which many of us will agree, and I like 'the Osborne pivot'.
How we fare, as I have said before, depends on top-down governance in the UK.  We are very fortunate to have Theresa May at the helm and the Conservatives in charge for the next several years, because there will be plenty to do.  We do not need a Lib/Dem coalition or any variation of Labour trying to emulate the EU’s ‘progressive socialism’.
I wish Europe well but the EU has yet to prove that it can save itself. 


Email of the day on Chinese international acquisitions
Have a look at this deal:   

My son is COO of this business.  Keith is 35 years of age with a PhD in Molecular Biology plus a number of years at Merrill Lynch.

I understand the sale price was very sweet. Seems to be yet another example of many eager buyers when "money has no cost". I am told the Chinese are eager to access Genesis IP. The buyers are also discussing ambitious new business targets for Genesis going forward.  I understand these new business opportunities have already been identified.   

This deal is not one of our Prime Minister's new sexy IT business opportunities.  A message our PM incessantly preaches to the electorate. Perhaps our PM should stop trying to pick winners. There are many areas of the local economy where Australia demonstrates very competitive global business skills.  This includes but is not exclusive to medical services. Sadly this message from our business leaders has been repeatedly and firmly ignored by both the Canberra bureaucracy and our nation's political elite.


Eoin Treacy's view
Thank you for this email and congratulations to your son on playing a pivotal role in such a successful company. I agree we would likely all be better off if politicians left running companies to the companies themselves rather than assuming they have specialist knowledge in areas they have no experience of.


Komatsu Signals Mining Optimism in $2.9 Billion Joy Takeover
This article by Simon Casey, Masumi Suga and Javier Blas for Bloomberg may be of interest to subscribers. Here is a section:
The deal creates a competitive landscape with two matching global peers, Stephen Volkmann, a New York-based analyst at Jefferies LLC, said Thursday by phone.

“This deal allows Komatsu to compete toe-to-toe everywhere with Caterpillar,” Volkmann said. “There’s just two major players and each one basically does everything.”

Joy is the largest independent maker of underground-mining equipment and has long been viewed as a potential target for Komatsu, which manufactures dump trucks and large excavators for companies such as Rio Tinto Group. Komatsu looked at Joy as recently as 2012 but rejected a deal after concluding there were few cost savings.

Conditions in the mining industry have deteriorated since then. Tumbling metal and coal prices spurred producers to cancel projects and rein in spending, reducing demand for everything from underground tunneling kit for copper mining to big shovels used to extract coal. Joy has posted a net loss in each of the last three quarters and its share price is down by more than half over the last five years.

The pullback contrasts with the mining-machinery industry’s boom during 2000-2010 on the back of surging commodity prices.

Back then, miners complained of shortages and long lead times to secure equipment. Companies such as Joy were able to raise prices, benefiting from both increased demand and higher margins.



Eoin Treacy's view
Low interest rates and the potential for additional monetary stimulus have boosted M&A activity right around the globe and with rebounding commodity prices the resources sector is ripe for similar activity.

Komatsu’s takeover of Joy Global is opportunistic but gives it the potential to compete in sectors that were not previously open to it. Whether it is successful will depend largely on the continued relative strength of the commodity sector.


Started from the Bottom Now We're Here
Thanks to a subscriber for this report from Clarus Securities. Here is a section:

POSITIONING FOR BETTER PRICES: We are of the opinion that we have seen the worst of both the crude oil and natural gas markets and that prices should further improve as we enter 2017. We are currently forecasting ~US$50/bbl WTI for H2/16, which is a level where most producers fail to grow on a per share basis. In our updated growth tracker, we now expect average production per share to decline by 8% (-12% growth on a median basis); this compares to our estimates of -3% (median -8%) and 5% (median -3%) during Q2/16 and Q1/16, respectively. The decline in per share growth has been a result of dispositions to reduce debt, equity financings without concurrent M&A, or some combination thereof. Ultimately, only a few select companies are able to generate consistent per share growth. Most are natural gas operators but some oil-weighted names, chiefly RRX and SPE, continue to grow on a per share basis.

IMPLIED OIL PRICES: Despite the ~US$5/bbl pullback in WTI prices, there has not been panic selling of the equities. This benign response is attributed to the belief that the worst is behind us and that any weakness in oil prices will be short lived. However, with equities not pulling back, it is important to estimate the implied oil price by name. We looked at each company’s historical multiple relative to its current trading level in order to back out the oil price needed. Based on our analysis, very few names are pricing in US$50/bbl oil, with most between US$55/bbl and US$65/bbl. Companies with cheaper implied pricing generally possessed higher than average debt, which weighed on valuation.

IMPLIED GAS PRICES: Using the same methodology with the gas weighted names results in implied prices mostly ranging between $2.25/mcf to $3.50/mcf. The valuation for the gas names is generally a bit more difficult to assess because some producers are promising very high rates of growth which may be difficult to achieve (versus oil producers, where growth profiles are much lower and more manageable). Regardless, we see some opportunities for investors who are bullish on natural gas going into H2/16.



Eoin Treacy's view
Optimism about a recovery in oil prices has improved following an almost 100% rally since January. This is despite the fact higher prices ensure a great deal of marginal production is now approaching economic viability. At the lows it was difficult to impress upon anyone that a rally was possible. Now that marginal supply can once more be produced economically many analysts anticipate additional upside.

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