Halister News

(Bloomberg) -- Additional borrowings by banks at ECB’s new-format TLTRO this month may be capped given the abundance of liquidity already in the system, analysts say.

• Any impact on euro-area bonds may be muted, according to strategists at UBS to Rabobank, while the operation may add support for European stocks, strategists at Pavilion say
• The first TLTRO-II auction will take place on June 23 and the result is due the next day -- the same day the outcome of the U.K. referendum on EU membership will be announced
• NOTE: Banks will repay TLTRO-I loans on June 29, according to an ECB statement last Friday

• Pictet Wealth Management
  • Expect a relatively high gross take-up for the first operation, up to around EU450b, including extra net demand between EU50b and EU100b, economist Frederik Ducrozet writes
  • The incentives look strong, and smaller peripheral banks that are still facing higher funding costs (or no access to wholesale funding at all) may be willing to take it as a safety net too
  • On the other hand, banks don’t need the cash with excess liquidity getting close to EU900b and it may not always be worth being tied to ECB liquidity for a potential gain of just 40bps
  • The possibility of a U.K. vote to leave EU at the June 23 referendum could spur a higher number

• Citigroup
  • Doubt the effectiveness of the program can be gauged based on the size of the take-up, even though a large number would be useful from a balance-sheet perspective as it helps to curtail euro appreciation
  • Anticipate additional take-up of EU115b

• BNP
  • Even if net demand isn’t very strong, reasonably expect a take-up close to EU400b
  • That won’t raise the level of excess liquidity significantly further, but the maturity of liquidity will lengthen sharply to almost 4 years from 2.2 years
  • While liquidity provided by TLTRO II isn’t TLAC- eligible, it will be a good substitute for other TLAC- ineligible funding, such as covered bonds; so demand for 3-yr to 4-yr loans may decline, leading to receiving interest on 3 or 4y fixed swap rates; as a result, 4y OIS/BOR spreads may tighten in coming months
  • Continue to recommend receiving 4Y OIS/BOR spread 1Y forward, targeting 22bps

• Barclays
  • Revises expectations of the total gross take-up at the June TLTRO II to EU400b from EU420b, while keeping forecast of net borrowing unchanged at about EU30b
  • Given the abundant liquidity conditions, any additional funding from the TLTRO shouldn’t have a significant effect on money-market rates, which Barclays expects to remain low and close to the ECB deposit rate
  • Any market impact is likely to be in terms of market confidence in the banking sector and the economic outlook, as good participation could be seen positively in terms of lower cost of funding for banks and potential improvement of lending to the real economy

• Commerzbank
  • Take-up may provide an important indication of whether the ECB’s strategy is working or whether additional steps could be needed later this year, analysts Christoph Rieger and Juliane Rack write in client note
  • Wouldn’t be surprised by a negative net allotment, which could raise concerns that the central bank’s measures aren’t working; unlikely there would be a major market impact amid the U.K.’s EU referendum-related volatility on that day
  • Alongside the asset purchases, the TLTRO-II will further skew the supply/demand imbalance especially in covered bonds, leading to further scarcity with liquidity becoming a challenge for more names
  • While carry opportunities are hardly compelling, still believe that peripheral sovereigns could benefit in coming months from higher demand as peripheral banks that are engaging in liability management exercises park their cash in govt bonds

• BofAML
  • See EU75b-EU125b of new funds to be taken and expect total TLTRO funds outstanding following the June operation (across both the TLTRO I and II) to be EU500b to EU550b

• JPMorgan
  • Given the optionality of paying a cheaper rate, JPMorgan was originally expecting a repayment close to the full amount
  • However, taking the repayment into consideration and under the assumption that about EU50b of extra liquidity will be borrowed at the TLTRO-II, now estimate an uptake of about EU420b at the first auction

• UBS
  • An effect of QE has been a large-scale creation of deposits in euro-area banks and while TLTRO I took place before QE was announced, banks have been unable to repay it until now, Justin Knight writes in client report
  • In core countries, many have been burdened with large excess liquidity leading to a drag on net-interest margins
  • Any concept of a major carry trade taking place in peripheral markets would be misplaced

• SocGen
  • The TLTRO-I repayment is in line with SocGen’s expectations, Anatoli Annenkov writes in e-mailed comments
  • Expect a net take-up of TLTRO-II funding of around EU150b in 2016, which would allocate equally over the three auctions, according to an earlier client note
  • In June, could see a relatively large gross take-up of the TLTRO II, of around EU430b
  • While this should provide funding security, we doubt it will materially increase credit to the corporate sector
  • MORE: Sell the 2y2y/4y1y area of EUR vol grid vs cheaper 5y tails, SocGen said Friday

• Rabobank
  • Reports that the net take-up is anticipated to be only in the “few” tens of billions fits with Rabobank’s own thinking that it will be in the EU50b-100b range, likely to be biased toward the first two operations, analysts write in research note
  • While ECB says the main gauge of the operations’ effectiveness will be improving funding conditions rather than just the volume of take-up, the latter does matter for the govt bond market, with the small net take-up indicating there won’t be a rush into EGBs as was seen with the original two VLTROs in 2011/2012
  • The repayment suggests that all of that will be flipped into TLTRO-II in June, which is ~EU50b less than total current outstanding under TLTRO-I and suggests TLTRO-II uptake will disappoint
  • That said, EU50b is a bit of a drop in the ocean when around EU85b of excess liquidity is being pumped in by the ECB via QE every month

• Pavilion
  • Easier consumer-credit conditions and an improved outlook for consumer spending in peripheral countries should add a further boost to companies’ sales, strategists write in note
  • And European firms have significant capacity to increase dividends and share buybacks with ECB’s corporate-bond purchase plan and TLTRO removing a significant headwind in this regard

--SHAJI MATHEW

--STANLEY JAMES

(Bloomberg) -- Apple told GOP leaders it won’t donate technology, cash to the party’s 2016 presidential convention, as it has done in the past, Politico says, citing people familiar.

• Says AAPL made decision based on Donald Trump’s controversial comments about women, immigrants, minorities
• NOTE: Wells Fargo, UPS, Motorola Solutions, JPMorgan, Ford, and Walgreens also opted out of sponsoring the convention despite sponsoring the 2012 GOP convention

(Bloomberg) -- Foreign stocks could rally if the U.K. remains in the European Union, and they’re favored over bonds for “any extended period,” Barron’s said in its June 20 issue. The Euro Stoxx 50 index has dropped 13% so far this year; Japan’s Topix has tumbled 19%. Valuations and rich dividends make equities attractive, especially compared to negative bond yields in most of Europe and Japan. Global plays include:

• The Vanguard FTSE Europe (VGK) exchange traded fund, which yields 3.5% and has slipped 6% this year.

• IShares Core MSCI EAFE (IEFA), which tracks Europe and other developed markets including Japan. It’s down 3.4% this year and yields 2.7%.

• IShares MSCI Japan (EWJ), which is down 5.7% this year, and the harder-hit Wisdom-Tree Japan Hedged ETF (DXJ), down 21%.

• Separately, Germany’s Adidas (ADS GR) and Switzerland’s Roche (ROG VX) offer solid returns, Brexit or not, Barron’s reported.

Other highlights from this week’s magazine (subscription required):

• Top 100 Hedge Funds: Little-known Parametrica Management, with $476 million under management, led the Barron’s list. The Hong Kong-based fund returned 45% last year. About a third of this year’s picks were based outside the U.S. Jonathan Herbert’s Camox fund came in No. 2, focusing on small and mid-cap European shares. David Tepper’s Appaloosa and Ken Griffin’s Citadel made top 50, while Third Point while David Einhorn’s Greenlight Capital missed the list.

• Delphi (DLPH) could soar 60%, helped by strong industry trends, Barron’s reported. It has focused on fuel efficiency, making the auto-parts supplier poised for client demand under stricter federal standards by 2025. It also invested in technology and electronics, as clients including BMW and Dodge turned to Delphi for hybrid vehicle battery chargers. The company also is at the forefront of developing self-driving cars.

• Celgene (CELG) could climb 30% in the next year, based on rising demand for its multiple myeloma drug Revlimid, Barron’s said. The company also is testing Revlimid as a treatment for lymphoma. Data is expected from 18 late-stage clinical trials by 2018, and EPS may at least double by 2020. Last year’s acquisition of Receptos is expected to boost sales of new drugs, including Ozanimod, which could receive first approvals in 2018 and generate sales of up to $6 billion.

• Oracle (ORCL) may rise 20% or more after the software giant reported strong quarterly sales of cloud-based products on Thursday, Barron’s said. Macquarie analyst Sarah Hindlian raised her price target on the shares to $52, and the stock closed Friday at $39.68.

• Square (SQ) could tumble to $5 a share from the current $9.04, Barron’s said. The unprofitable electronic payments processor has a “huge overhang of stock” after a recent lockup expiration, and a “sizable short position.” Its fees for merchants are higher than rivals, and analysts cite concerns about customer acquisition and pricing. New regulations also may add to costs.

• Monster (MNST) could rise 15%, helped by new products including Mutant, a “supersoda” recently announced that could kick Monster’s growth into “higher gear,” Barron’s reported. The company also just launched Hydro, a 100- calorie sports drink, that could sell well with women. A distribution deal with Cola-Cola is also expanding its reach.

(Bloomberg) -- Co. is set to reduce variety of models offered to significantly less than 300, Handelsblatt reports, citing people it didn’t identify.

• Volkswagen Group brands Seat, Skoda, Audi, Porsche, VW currently have ~340 different models
• Co. to cut lower-volume models as variety too complex
• NOTE, on June 16: Volkswagen Pushes for Redemption With Electric Cars, Robo-Taxis

--DANIEL TEN KATE