Economy
US: Consumer prices rising as housing stabilizes. Consumer prices rose in May by the most in more than a year, showing US companies are gaining some pricing power as the economy strengthens, and the homebuilding industry stabilized after a first-quarter swoon. The cost of living increased 0.4%, the biggest advance since Feb 2013. Other figures showed builders broke ground on 1m homes at an annualized rate after 1.1m in Apr, the best two-month reading since late 2013. The reports will be welcome news to Federal Reserve policy makers meeting today and tomorrow as the pickup in inflation lessens the threat of a prolonged drop in prices that hurts economic growth. Central bankers are projected to continue scaling back their bond-buying program, while an increase in interest rates is delayed until well into 2015. (Bloomberg)US: Housing starts beat 1m pace for second month. Builders broke ground on 1m US homes in May, indicating the industry is picking up this quarter after a weather-induced slump to start the year. Permits, a proxy for future construction, decreased, reflecting a decline in the volatile multi family category. A strengthening job market and a retreat in mortgage costs in recent weeks is helping support residential real-estate following a lull in building in early 2014. Faster sales will prompt developers to step up construction, given supplies of homes on the market remain lean and property values are rising. (Bloomberg)
EU: Reforms at risk as Draghi measures tame vigilantes. Having steered borrowing costs to all-time lows, the ECB risks inadvertently helping politicians placate austerity-weary voters. ECB President Mario Draghi’s decision to cut interest rates this month is enticing investors back into debt markets they shunned during the region’s financial crisis, even as the recovery stalls. Spanish and Italian yields dropped to records last week on bets ECB measures including a negative deposit rate and cheap loans will backstop the securities. After euro-skeptic and anti-austerity parties made gains in recent European Parliament elections, lower bond yields risk encouraging beleaguered governments to put off plans to reform everything from public-sector wages in Portugal to the debt load in Italy. That would run counter to officials’ efforts to control sovereign finances and to avert the threat of deflation. (Bloomberg)
UK: Inflation cools more than forecast to least since 2009. Britain’s inflation rate fell to the lowest in 4 1/2 years in May as food and transport costs declined, providing Bank of England policy makers breathing space over interest rates. Consumer prices rose 1.5% in May, the least since Oct 2009 and down from a rate of 1.8% in Apr. Inflation has been at or below the BOE’s 2% target for six months, the longest stretch since 2009. The figures buy time for Governor Mark Carney as a strengthening economy adds pressure on the Monetary Policy Committee to end five years of emergency stimulus. Investors, who were pricing in a Jan rate increase after Carney said that officials might have to tighten policy earlier than anticipated, pared those bets after the inflation data. (Bloomberg)
UK: London house prices rise most since before Northern Rock run. London house prices rose at their fastest pace since just before the panic at Northern Rock Plc marked the start of the financial crisis in the UK. Prices in the capital rose 18.7% in Apr from a year earlier, the most since a record 18.8% gain in Jul 2007. Across the UK, prices rose 9.9%. A seasonally adjusted 2% gain from Mar was the largest monthly increase since Jan 2010. The Bank of England’s Financial Policy Committee is meeting today to consider deploying macroprudential tools to cool the housing market. Governor Mark Carney, who introduced more stringent affordability checks for borrowers in Apr, says an increase in the key interest rate is the economy’s last line of defense against risks stemming from the property boom. (Bloomberg)
Japan: Mulls de-linking pensions from prices to allow payout cuts. Japan’s Finance Minister Taro Aso said the government is considering changes to the pension system that would enable it to cut payments as the nation grapples with the world’s heaviest debt burden. “It’s true the welfare ministry and related agencies are considering this,” Aso said. The ministry plans to revise the rules to allow nominal reductions of 0.9% a year, regardless of trends in prices and wages. Putting the pension system on a stronger financial footing could reduce the burden on the government, which shoulders half the annual costs of basic pension payments. At the same time, cuts in transfers to Japan’s growing ranks of pensioners, who face rising prices and a higher sales tax, would risk hurting consumption and economic growth. (Bloomberg)
Markets
Tanjung Offshore: Reverse takeover opposed. The proposed reverse takeover (RTO) of Tanjung Offshore (TOB) by several parties, including a unit of Paris-based oil and gas (O&G) giant Bourbon SA, is being opposed by a group of minority shareholders who want the option of being able to sell their shares to the new owners. They also raised the likelihood of the RTO hitting a snag, given that the exercise needs the nod from Ekuiti Nasional (Ekuinas). TOB had entered into a non-compete clause with Ekuinas in 2012 when the latter bought TOB’s marine vessel services arm, Tanjung Kapal Services SB (TKS), for RM220m. The three-year restriction – where TOB had agreed it would not be involved in any business similar to TKS - will only expire in the middle of next year. It is still unclear if TOB has applied for a waiver from this non-compete clause. (StarBiz)MBM Resources: Sees return on investment in 3 to 8 years. MBM Resources (MBMR) expects to see a return on investments from its cumulative capex since 2010 in the next three to eight years, said its group MD Looi Kok Loon. He said the automotive group’s capex peaked at RM182m last year, compared with RM27.9m in 2010. “Most of our investments are already in motion so we will be tapering off our capex,” he said, adding that MBMR was allocating capex of RM21.1m this year for general improvements and upgrades to its branches. Inclusive of its 2014 capex, the company has invested over RM430m since 2010. (StarBiz)
Luster: In pact to explore mining venture. Luster Industries' unit Linpower Resources SB has sealed a JV agreement with Venturian Minerals SB to establish a JV committee (JVC) to explore and carry out the mining of tin ore and any other minerals in Kemaman, Terengganu. Luster said the JV would provide it a new business opportunity to diversify into a new income stream in order to reduce its dependence on the subsisting business of the group. It is intended to initiate Luster's operations as a contractor for the mining, extraction and production of the products by providing Luster an attractive opportunity to venture into the mining industry, it said. The company will invest a total sum of RM5.5m into the JVC which it will finance through a combination of internally generated funds and bank borrowings. (SunBiz)
Narra: Gets shareholders’ nod to acquire concrete and cement assets from sister firms. Narra Industries, which was queried by Bursa Malaysia over the spike of its share price on Monday, received shareholders' approval yesterday to acquire concrete and cement assets from its sister companies under Hong Leong Group. 99.08% voted for the resolution of acquiring Hume Industries (Malaysia) SB, Hume Cement SB (HCement) and irredeemable convertible preference shares of HCement for RM448 million, to be satisfied with the issuance of new Narra shares. Only 0.92% voted against the resolution. (SunBiz)
Steel: Govt to probe steel imports on claims cheap imports damaging domestic sector. The Government is investigating claims that cheap imports of several types of steel products have caused “material injury” to the operations of domestic steel millers. The International Trade and Industry Ministry (Miti) said it would consider imposing a “preliminary anti-dumping duty” if the prices of imported hot rolled coils (HRC), chequered coils and pickled and oiled (P&O) coils from China, Indonesia and South Korea are found to be much lower than their own domestic market. (StarBiz)
MARKET UPDATE
Markets in the US continued to climb higher, albeit marginally, despite the announcement of less-than-encouraging economic developments overnight. Housing starts registered a 6.5% decline in May while cost of living has risen more than forecast (largest since Feb 2013), reflected by an uptick in consumer prices by 0.4%. The Federal Reserve begins its two-day meeting in Washington today, likely culminating in another USD10bn reduction in monthly asset purchases. For the day, both the Dow Jones Industrial Average and S&P 500 were 0.2% higher.Stocks in Europe closed higher as well despite German investor confidence falling for a sixth month, as measured by the ZEW Centre for European Economic Research. Investors remain unfazed (for now) in the face of triple threats to “safety”, namely the rising violence in Iraq, political wrangling in Ukraine/Russia and now, the threat of Argentina sinking into a second debt crisis in 13 years. Benchmarks in France, Spain and Germany rose 0.6%, 0.5% and 0.4% respectively while that of UK and Italy inched up 0.2% and 0.1%.
Most Asian equities traded lower however, led by China’s sharp declines owing to an unexpected 6.7% year-on-year contraction in its foreign direct investments for May. Additionally, the pickup in the pace of US inflation fueled speculation that the US Fed may raise interest rates sooner than expected, leading to more rapid “hot money” outflows. The Shanghai Composite Index slumped 0.9% as a result of its FDI declines, while the Hang Seng and Straits Times indices fell 0.4% and 0.5% respectively. The FBM KLCI inched up 0.2% however.
The threat has become real, with reports of Iraq’s biggest oil refinery in Baiji having been shut down following the insurgents’ advance into the town and surrounding of the facility. Iraq is OPEC’s second-largest crude oil producer. Brent crude and WTI oil prices which have already been creeping up since the start of the conflict may see another jump upwards given the obvious disruption in supplies, but which we expect to be temporal in nature. After all, it’s in everyone’s interests (government or militant) that the taps keep running, so to speak. Short-term negative reactions could continue to be seen in airline-related stocks, the most directly penalized from higher fuel costs or vice versa. Share prices of Air Asia and Air Asia X have been trending downwards while that of Malaysian Airlines is rising. Go figure! It would seem that this typical period of mid-year lull is not so mundane after all.
Source: PublicInvest Research - 18 Jun 2014
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