Friday 29th July 2016
NEWS TICKER: JULY 28TH 2016: The Prysmian Group's first-half results are marked by revenue growth and a significant improvement in profitability. Explains CEO Valerio Battista. "The biggest drivers of growth have been Energy Projects and Telecom. The important set of technological innovations introduced between end of 2015 and 2016, involving the launch of the 600kV and 700kV cable systems, combined with greater project execution capabilities, involving the commissioning of Ulisse, the Group's third cable vessel, mean the Group is well positioned to continue taking advantage of the opportunities offered by the market. In the Telecom business, growth has been driven by the recovery in optical fibre competitiveness and the new optical cable manufacturing capacity in Eastern Europe. Performance by the higher value-added businesses has contributed to a fresh upturn in profitability, with a significant improvement in margins, also thanks to our actions to reduce fixed costs and rationalise manufacturing footprint. The newly acquired Oman Cables Industry has also made an important contribution in this regard." – The Samsung Electronics board has decided to make additional investments in Samsung Venture Investment Corporation's, an affiliated company of Samsung Electronics, New Technology Investment Funds. SVIC plans to establish a new venture fund, SVIC 32. SVIC 32 is a cooperative fund with its investment focus on the latest technologies to enhance competitiveness of existing set businesses and identify future growth businesses. The transaction is expected occur during the third quarter of 2016. The transaction size is KRW 198bn (99% of the total fund: KRW200bn) -- As a slug of generally positive data emerges from the UK this week, and commenting on today’s corporate results, Richard Marwood, senior fund manager at Royal London Asset Management, says, “Today’s flurry of corporate earnings suggests that as yet the outcome of the EU referendum has not had a major impact on many UK listed companies, outside of the movements in currencies. Without a clear financial picture of the impact, many CEOs are at pains to highlight the resilience of their business and their willingness to take strong action if required. I would expect the bid for ARM to herald a period of heightened corporate activity. The increased offer for Premier Farnell is another clear example of overseas bidders taking advantage of a depressed pound to snap up UK assets.” -- Singapore Exchange (SGX) today welcomed EC World REIT to Mainboard under the stock code “BWCU”. EC World REIT is the first Chinese specialised logistics and e-commerce logistics REIT to be listed on SGX. With an initial geographical focus on the People’s Republic of China (PRC), the REIT invests in a diversified portfolio of income-producing real estate primarily used for e-commerce, supply-chain management and logistics purposes. Peter Lai Hock Meng, Chief Executive Officer of EC World Asset Management Pte. Ltd., the Manager of EC World REIT, said, “We are pleased to celebrate EC World REIT’s successful listing and trading today and we would like to extend our sincere appreciation to all investors for making this milestone possible. Our IPO portfolio of six quality properties offers investors unique exposure to the logistics and e-commerce sectors in Hangzhou - one of the largest e-commerce hubs in China.” – Emerging markets assets benefitted in the Asian session today as the dollar retreated following the US Fed’s decision yesterday to do nothing. Yields on US government bonds declined slightly in the hours following the release of the monetary policy statement. The fall on the long end was with 6 basis points and was more pronounced than the drop on the short end of 3 basis points (bps). The dollar lost 3/4 of a cent vs the euro and stood this morning at 1.107 EUR/USD. The Federal Reserve stopped short of signalling a near-term increase in US interest rates, and while a December move is seen as likely, markets are focusing instead on the extra stimulus Japan's government is expected to deliver tomorrow. A subsequent retreat in the retreat boosted emerging assets in the Asian session with stocks at new 11-month highs despite fresh wobbles on Chinese equity markets. The Straits Times Index meantime (STI) ended 23.88 points or 0.81% lower to 2917.61, taking the year-to-date performance to +1.21%. The top active stocks today were DBS, which declined 2.34%, Singtel, which declined 0.46%, UOB, which declined 1.27%, OCBC Bank, which declined 0.57% and Wilmar Intl, with a close unchanged. The FTSE ST Mid Cap Index gained 0.04%, while the FTSE ST Small Cap Index declined 0.88%. MSCI's emerging equity index rose 0.25% despite pullbacks in Asian markets, where some concern is rising over volatility in China and the weakening yen. Elsewhere in Asia, Chinese shares fell as much as 3% at one point before recovering as new regulations are expected to prompt wealth managers at small banks to bail out of stocks and into bonds. Elsewhere, the Turkish lira continues to recover, firming to one-week highs. In emerging Europe, Turkish assets continued their post-coup recovery, shrugging off a worsening crackdown on alleged plotters. Stocks jumped 1 percent to one-week highs while the lira was flat, also near one-week highs. Turkey's economic confidence index hit also touched its highest level so far this year in July, rising 14.9% to 95.7. In Africa meantime, the temperature is different. the Nigerian naira hit new record lows against the dollar on Wednesday, shrugging off a rate increase of 200 basis points (bps). Traders are also waiting to see if Egypt will announce plans to devalue its pound at a central bank meeting. Cairo stocks pulled off three-month highs hit after news the government was in loan talks with the International Monetary Fund. The government’s 2025 dollar bond, which rose 4% after the news, eased half a percent. Poland too is in the spotlight today as the European Commission's statement yesterday gave Warsaw three months to address rule of law concerns. In early trading today Polish stocks extended losses, falling 0.7% and the zloty lost 0.2.%.

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LME goes east

Tuesday, 24 July 2012
LME goes east In the latest manifestation of China’s rising economic power, Hong Kong Exchanges & Clearing (HKEX) has agreed to buy LME Holdings, the parent company of the London Metal Exchange, for £1.388bn, an eye-popping 58.3x net profits for 2011 even adjusting for a higher fee schedule implemented only on July 2nd this year. It is a trophy price for a trophy property: the largest base metals futures and options exchange in the world, with an estimated 80% market share. If the transaction receives shareholder and regulatory approval—not a racing certainty, given the unusual voting rights of LME shareholders—the new owners of a traditionally western capitalist bastion reflects the relentless eastward shift in capital flows, driven by China’s rapid economic growth. http://www.ftseglobalmarkets.com/

In the latest manifestation of China’s rising economic power, Hong Kong Exchanges & Clearing (HKEX) has agreed to buy LME Holdings, the parent company of the London Metal Exchange, for £1.388bn, an eye-popping 58.3x net profits for 2011 even adjusting for a higher fee schedule implemented only on July 2nd this year. It is a trophy price for a trophy property: the largest base metals futures and options exchange in the world, with an estimated 80% market share. If the transaction receives shareholder and regulatory approval—not a racing certainty, given the unusual voting rights of LME shareholders—the new owners of a traditionally western capitalist bastion reflects the relentless eastward shift in capital flows, driven by China’s rapid economic growth.

The imperative to secure ownership of the LME by Chinese entities will come as no surprise. The Middle Kingdom now accounts for 42% of global metals consumption; Chinese companies already trade on the LME through member firms; and several LME members have opened offices in Hong Kong. Newedge, whose 15% to 18% market share by volume makes it the largest LME ring-dealing member, even has a joint venture with Citic, the Chinese financial conglomerate, through which qualified customers can trade on the Shanghai Metals Exchange, the regional market for the same metals that dominate trading on the LME: ­aluminium, copper, zinc and lead.

John FayJohn Fay, global head of fixed income, currencies and commodities at Newedge.Shanghai still takes its opening cue from LME closing prices, but the relationship between the two exchanges has evolved into a two-way street—traders now track closing prices and trends in Shanghai before they set opening prices in London the next day. If the Shanghai market were to open up to foreign participants, John Fay, global head of fixed income, currencies and commodities at Newedge, expects overall trading volume would grow but does not see business migrating from London to Shanghai. “Liquidity moves to where the capital is created,” he says. “The markets in China will continue to grow, but it will be complementary to growth on the LME. It will be additional volume.”



Unlike other futures exchanges, LME operates three trading systems that work in parallel: a continuous electronic trading platform open 24/7, ring dealing sessions on the exchange floor, and OTC trades negotiated off the floor. No matter where trades take place, they are centrally cleared by LCH.Clearnet, at least for now. The LME plans to set up its own clearing house by 2014, an initiative HKEX supports and to which it can bring its own expertise in clearing (albeit not in commodities). Self-clearing will give the LME greater flexibility to launch new products and may enable the exchange to take as eligible collateral assets not acceptable to LCH.Clearnet for initial and/or variation margin.

The LME also offers a wider range of delivery dates than other futures exchanges: daily “prompt dates” out to three months, weekly out to six months, and thereafter monthly to 15, 27, 63 or 123 months forward depending on the metal. HKEX has committed to retain this structure at least until 2015, but Fay is keen to see it preserved in perpetuity. “It is the model our customers want because it is built for size or speed,” he says. “They want to go to the floor for price discovery and liquidity, to be able to trade electronically or over the counter (OTC), and they want it all cleared.”

The LME model is unique, but may not remain so. In fact, it offers a viable template for trading financial OTC derivatives on an exchange: the prompt date flexibility eliminates the mismatch between quarterly contract expiration dates and the dates to which commercial participants need to hedge. “The LME model is an answer to Dodd Frank,” says Fay.

HKEX intends to help the LME expand in Asia through a combination of enhanced data distribution, the introduction of futures contracts denominated in renminbi (RMB) and additional warehouses. LME operates a network of more than 600 licensed warehouses around the globe in which market participants can deposit ­deliverable material in exchange for a bearer warrant for the number of contract lots the metal represents at that location. None of the existing warehouses are in mainland China, however; Chinese companies typically deliver to warehouses in South Korea if need be, which is typically in times of tight supply.

Michael Overlander, chief executive of Sucden, a ring-dealing LME member that accounts for between 10% and 15% of trading volume, says past efforts to license warehouses in China have foundered on doubts about the rule of law in the country. If someone presented a bearer warrant to the warehouse at an inopportune moment, would the operator honour the obligation?

“In countries where the LME does have warehouses the warrant would never be questioned,” says Overlander. “I think fear of the unknown legalities has prevented the LME from putting warehouses on the ground in China.” Local warehouses would no doubt improve liquidity and attract more Chinese participants to the LME, but while HKEX can help the LME cut through bureaucratic red tape it may not be able to resolve the legal difficulty.

HKEX wants to leverage its existing renminbi-based trading and settlement infrastructure in Hong Kong to support new LME futures contracts denominated in the Chinese currency. Although these products would be another step toward the internationalisation of the renminbi, Overlander does not see them as an immediate precursor to free convertibility. “The Chinese government has shown a great reluctance to take the handcuffs off the RMB,” he says. “It will first have to relax the controls to get people excited about a currency with limited uses.”

Michael OverlanderMichael Overlander, chief executive of Sucden.Both Sucden and Newedge own shares in the LME but, at just under 3%, their holdings are far smaller than their market shares of exchange ­business. Maintaining the business model should be more important to both firms than the price at which they can sell LME shares, but few people are altogether immune to the lure of money. “I would be lying if I said the equity isn’t important,” says ­Overlander. “It would be hard to see the value of our shares topped in the foreseeable future. It was a relatively easy decision for us to support the transaction: we were satisfied with the buyer and the price.”

The losing bidders—Intercontinental Exchange and CME Group—must now explore alternatives if they wish to expand in base metals. For ICE, it would be a new business line, while CME has a copper contract traded on the Comex that competes directly with the LME. Apart from copper, CME has historically focused on precious metals—gold, silver, platinum and palladium—that do not overlap with LME products.

The LME’s dominant position represents a significant barrier to entry, however. Market participants have great confidence in price discovery on the LME, so much so that prices for physical contracts (which are not traded on the LME) are usually based on LME prices. The LME warehouse infrastructure would be hard to replicate too. “Virtually anywhere in the world, metal can be stored in exchange for a negotiable LME warrant. Warrant holders can have almost instant access to material on whatever day they want,” says Overlander. “The warehouse network is just one example. It would be tough to knock the LME off its pedestal.”

The reaction in some quarters to the LME sale—another British champion passes into foreign hands—may be more Sinophobic than xenophobic. Nobody claimed that American interests would interfere with price discovery in London when ICE bought the International Petroleum Exchange or NYSE Euronext took control of LIFFE. Chinese influence in London is likely to grow if Chinese companies do more business on the LME but ­Overland insists Chinese ownership will not affect market operations. “Whatever the rationale for buying the LME, it was not to manipulate prices in favour of Chinese buyers,” he says. “The LME will still have to comply with FSA rules that govern regulated investment exchanges, which are designed to make sure the market has the confidence of users.” 

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