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Daily Agenda: Inflation Ebbs as China Eases

The People’s Bank of China lowers range for yuan; rumors of a Dow, DuPont merger; Yahoo! rethinks Alibaba stake; Court pauses Rousseff impeachment.

On Wednesday the People’s Bank of China reduced the currency reference band to its lowest level since 2011, allowing the yuan to fall as low as 6.4140 per dollar, as the central bank’s policymakers try to get ahead of an anticipated U.S. interest-rate hike. Despite still-weak trade figures released yesterday, there are signs that PBOC easing measures are helping the Chinese economy find its feet. Inflation data for November released by China’s National Bureau of Statistics was surprisingly firm, with consumer prices flat on a year-over-year basis and producer price levels remain weak on low commodity inputs. Though driven primarily by volatile food segments, firming consumer prices appear to signal that household demand has not demonstrably weakened in the face of slowing industrial activity and investment. For investors the big question now is whether overall activity will improve in the coming quarters as the economy continues a painful transition towards greater dependence on internal demand.

Rumors of chemical megamerger. Multiple media outlets on Wednesday reported that Midland, Michigan-based Dow Chemical is in the final stages of merger negotiations with Wilmington, Delaware’s DuPont. If combined, the resulting firm would be the world’s second-largest chemical company globally based on Tuesday’s closing market capitalizations.

Yahoo! rethinks Alibaba spinoff. Reports citing anonymous sources surfaced Tuesday evening indicating that the planned spinoff of Yahoo!’s stake in Chinese ecommerce giant Alibaba has been postponed as company management considers other options. Yahoo!’s polarizing CEO Marissa Mayer has come under fire from activist shareholders after a series of acquisitions failed to drive growth in the company’s core business and the Internal Revenue Service failed to bless the proposed tax-free divestiture.

Citigroup sued by failed fund. Trustees handling assets of failed hedge fund Millennium Global Emerging Credit Fund have filed a suit in the U.K. against Citigroup, alleging that the bank liquidated fund assets hastily during the credit crisis in 2008 after failing to get full value. Michael Balboa, the manager of the fund that invested in frontier market debt was sentenced to prison in 2014 for fraudulent reporting of fund asset values.

Impeachment paused in Brazil. The Brazilian Supreme Court on Wednesday suspended impeachment proceedings against President Dilma Rousseff until deliberations over issues raised by Rousseff’s political allies are addressed. The court’s decision is expected next week. Separately, consumer inflation data released by the Instituto Brasileiro de Geografia e Estatistica this morning revealed a larger than anticipated 1.06 jump in prices during November.

Portfolio Perspective: Semi-circles and Semi-cycles

Over the past month we have highlighted that the mature bull market has left a narrow breadth of winners. We feel that the U.S. equity markets have become overly reliant on a number of well-defined trends that do not leave much room for error if they were to reverse.

Interestingly, our recent behavioral analysis of U.S. analyst earnings revisions and target prices have revealed that the semiconductor stocks have claimed the psychological sweet spot.

The result fits into our recent theme suggesting that investors revisit multinationals as both the strength of the U.S. dollar abates as well as the inventory cycle turns. U.S. cyclicals have suffered from the double headwind of a strong dollar and high inventory-to-shipment ratios. On-the-ground research from by our analysts on both sides of the Pacific hint that the worst of the Kitchin cycle may be over.

Equally, the Fed tech pulse index appears to have also firmed, suggesting that underlying technology conditions may finally be improving.

Sean Darby is chief global equity strategist for Jefferies in Hong Kong.

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