Bloomberg:
- China Money-Market Turmoil Poses Test for New Leaders: Economy. China’s cash squeeze over the past two weeks is testing the management skills of new Communist Party leaders saddled with risks from a record credit expansion under their predecessors. The one-day repurchase rate touched an unprecedented high of 13.91 percent yesterday, prompting speculation the central bank was forced to pump liquidity, before diving today by the most since 2007. Premier Li Keqiang signaled determination to stamp out speculation funded by cheap money with a June 19 State Council statement saying banks must make better use of existing credit and step up efforts to contain financial risks. Any prolonged constriction of interbank liquidity risks triggering a broader credit crunch, further depressing an economy that’s already slowing. The dangers add to burdens on a global recovery contending with the prospect of reduced Federal Reserve stimulus in coming months. “It’s really hard to deflate these things in an orderly way,” said Michael Pettis, a finance professor at Peking University in Beijing. “The problem is that when debt levels have got so high, and it’s more debt that keeps the existing debt afloat, you absolutely have to stop the process but it’s very difficult to stop the process in an orderly way.”
- Stress Test for Banks Inflicting Collateral Damage: China Credit. China's decision to tolerate the worst cash crunch on record is evolving from a stress test of banks into a threat to the ability of companies to raise funds. As their overnight borrowing costs neared 13%, banks switched focus toward shoring up their own finances and slashed investments in the bond market they dominate. The one-year yield on AAA corporate debt jumped a record 121 basis points this month to 5.15%, ChinaBond indexes show. Bond sales slumped to $26 billion in June, the least in 17 months and down 57% from May, Bloomberg data show.
- China Grain Policies Stock Imports, Inflation: Chart of the Day. China's effort to boost grain output by raising guaranteed prices and stockpiling harvests has inadvertently turned the world's biggest producer into a net importer while fueling inflation, according to research by the Chinese Academy of Social Sciences.
- China Funds Lose in Fifth Week of Asian Outflows, Citigroup Says. International money managers pulled a combined $1.2 billion from Asian funds this past week, a fifth straight week of outflows, according to Citigroup Inc. (C) China funds posted the biggest losses with $558 million of net withdrawals in the week ended June 19, followed by regional funds at $521 million, Citigroup’s Hong-Kong based chief Asian strategist Markus Rosgen wrote in a note to clients today. Foreigners net sold Asia by $3.6 billion in the week, with South Korea and Taiwan taking up the largest shares, he wrote.
- Minsky Moment Alarm Sounded in China by SocGen: Cutting Research. Credit growth in the world's most populous country has outstripped economic expansion for five quarters, raising the question of where the money has gone, Societe Generale SA economist Yao Wei wrote in two recent reports. In the first quarter, for example, bank loans, shadow banking credit and corporate bonds together accelerated more than 20 percent year-over-year, while gdp grew less than half that much. The gap has been widening since early 2012. Yao says the answer to where the money is going is a growing "debt snowball" which doesn't contribute to economic activity. The result is both companies and the public sector face burgeoning interest expenses. This fits with the theory first put forward by economist Hyman Minsky of Washington University in St. Louis. His financial instability hypothesis showed how markets create waves of credit expansion and asset inflation, followed by periods of contraction and deflation.
- Bond Auctions Fail From Russia to Korea as Brazil Protests Rage. Developing nations around the world are scaling back or canceling billions of dollars of bond sales as borrowing costs climb the most since 2008, just as spending needs increase amid slowing economic growth. Romania’s Finance Ministry rejected all bids at a seven-year bond sale yesterday because of market volatility, while South Korea raised less than 10 percent of the amount planned in an auction of inflation-linked bonds. Russia scrapped a sale of 15-year ruble-denominated bonds June 19, the second time it canceled an auction this month, and Colombia pared an offering of 20-year peso debt by 40 percent. A cash shortage led to failures last week of China Ministry of Finance debt sales. The tumble in bonds, stocks and currencies, spurred by investors’ biggest retreat from emerging markets in two years, is tightening credit as the Federal Reserve says it may end cheap money that had made investment plentiful. Yields on local-currency emerging nation bonds surged 74 basis points this month to 6.5 percent, the biggest increase in five years. In Turkey and Brazil, anti-government protests are challenging development plans that require additional funding.
- Asian Stocks Decline on Fed Stimulus, China Concerns. Asian stocks fell, with the regional benchmark index heading for its biggest two-day decline since September 2011, amid concern the Federal Reserve will reduce stimulus and China’s economic slowdown may deepen as a cash crunch worsens. Jiangxi Copper Co. (358), China’s biggest producer of the metal, sank 2 percent in Hong Kong as copper futures fell. Newcrest Mining Ltd., Australia’s No. 1 gold producer, slumped 6.7 percent as the bullion touched a September 2010 low. Mitsubishi UFJ Financial Group. Inc., Japan’s largest lender, fell 2.6 percent after a unit agreed to settle claims in New York that it transferred billion of dollars for countries facing sanctions including Iran, Sudan and Myanmar. The MSCI Asia Pacific Index slid 0.9 percent to 126.45 as of 11:02 a.m. in Tokyo, with about 12 shares falling for each that rose.
- Rubber Tumbles to Nine-Month Low on Concern China Demand to Slow. Rubber declined to a nine-month low amid concerns that an economic slowdown in China, the biggest buyer, will reduce demand for the commodity used in tires. The contract for delivery in November on the Tokyo Commodity Exchange plunged as much as 4.2 percent to 228 yen a kilogram ($2,345 a metric ton), the lowest level since September, at 10:06 a.m. local time. Futures are heading for a sixth weekly fall and have lost 24 percent this year.
- U.S. Said to Consider Doubling Leverage Standard for Big Banks. U.S. regulators are considering doubling a minimum capital requirement for the largest banks, which could force some of them to halt dividend payments. The standard would increase the amount of capital the lenders must hold to 6 percent of total assets, regardless of their risk, according to four people with knowledge of the talks. That’s twice the level set by global banking supervisors. U.S. regulators last year proposed implementing the 3 percent international requirement for what’s known as the simple leverage ratio. Now the Federal Reserve and Federal Deposit Insurance Corp., under pressure from lawmakers, are weighing increasing that figure for some of the biggest banks, according to the people, who asked not to be identified because the discussions are private. “The 3 percent was clearly inadequate, nothing really,” said Simon Johnson, an economics professor at the Massachusetts Institute of Technology and a former chief economist for the International Monetary Fund. “Going up to five or six will make the rule be worth something. Having a lot of capital is crucial for banks to be sound. The leverage ratio is a good safety tool because risk-weighting can be gamed by banks so easily.”
- Debt Sales Halted in U.S. as Companies Weigh Fed Taper Prospect. Corporate bond sales in the U.S. have all but halted after the Federal Reserve said this week that it’s prepared to taper its stimulus program later this year, prompting the biggest increase in investment-grade yields in 21 months. Solar Star Inc. was the only borrower said to be marketing bonds yesterday, with a $1 billion issue, following $330 million in offerings June 19. The slowdown is trimming a daily average of $7 billion as of June 18 that put 2013 on pace for a record year, according to data compiled by Bloomberg.
- Turmoil Exposes Global Risks. The turmoil exposed vulnerabilities in the financial markets and the world economy that had been mostly ignored because central banks were willing to ride to the rescue with huge amounts of money.
- Greece Faces Fresh Threats. Greece's shaky coalition government was hit Thursday with a double blow as talks over the shutdown of the state broadcasting company threatened to fracture the government and new worries over the financing of the country's bailout program emerged. The breakdown in the talks sparked a threat from the junior partner in the three-party coalition to withdraw its support from the government, representing the coalition's gravest internal crisis to date. "No agreement has been reached," Democratic Left's leader, Fotis Kouvelis, said after a two-hour meeting—the third in a week—of the three party chiefs. A meeting of his parliamentary deputies is scheduled for Friday morning to decide the party's future in the coalition government.
- As Belts Tighten, Darden(DRI) Feels Squeeze. Since the recession ended, Americans' disposable personal income has risen by 3.1% at a compound annual rate. At the same point after the previous two recessions ended in 1991 and 2001, annualized growth was 5.5% and 4.8%, respectively. The payroll-tax increase this year has recently pushed year-over-year growth down to one of the lowest levels of the expansion.
- Case Closed? Far From It. The FBI seems blasé about the IRS investigation, so it's crucial Congress make it a priority.
- John Kerry's ObamaCare Boondoggle. A backroom deal he cut for Massachusetts hospitals has caused a bipartisan uproar in Congress. A bipartisan backlash is growing against another section of President Obama's health-care law. The president can blame this latest embarrassment on none other than Secretary of State John Kerry.
- Hedge Funds' Emerging Growth Pains. (video)
- Oracle's(ORCL) Cloud Subscriptions Disappoint; Shares Dive. Oracle missed expectations for software sales and subscriptions for the second straight quarter, sending its shares plunging as investors worried CEO Larry Ellison may have trouble getting the technology giant back on track. On Thursday, Oracle executives forecast new software sales and subscriptions will rise 0 percent to 8 percent this quarter, blaming weakness in the past quarter on disappointing sales in Asia and Latin America.
Business Insider:
New York Times:
- U.S. Approves a Label for Meat From Animals Fed a Diet Free of Gene-Modified Products. The Agriculture Department has approved a label for meat and liquid egg products that includes a claim about the absence of genetically engineered products. It is the first time that the department, which regulates meat and poultry processing, has approved a non-G.M.O. label claim, which attests that meat certified by the Non-GMO Project came from animals that never ate feed containing genetically engineered ingredients like corn, soy and alfalfa.
AP:
- 1M Brazilians fill streets with protest, violence. More than a million Brazilians poured into the streets of at least 80 cities Thursday in this week's largest anti-government demonstrations yet, protests that saw violent clashes break out in several cities as people demanding improved public services and an end to corruption faced tear gas, pepper spray and rubber bullets. In Rio de Janeiro, where an estimated 300,000 demonstrators swarmed into the seaside city's central area, running clashes played out between riot police and clusters of mostly young men, their T-shirts wrapped around their faces. But several peaceful protesters were up in the crackdown, too, as police fired tear gas canisters into their midst and at times indiscriminately used pepper spray. Thundering booms echoed off stately colonial buildings as rubber bullets and the gas were fired at fleeing crowds. At least 40 people were injured in Rio.
- Illinois' finances worst ever in FY 2012: auditor. Illinois' finances sank deeper into the red in fiscal 2012, with the general revenue fund deficit hitting a record $9.1 billion as increased spending outran a jump in revenue, according to a report released on Thursday by the state auditor general. The deficit for the fiscal year that ended June 30, 2012, was up $1.1 billion from fiscal 2011 when measured by generally accepted accounting principles, according to the comprehensive annual financial report. The bigger deficit was driven by a nearly $4.7 billion increase in spending that eclipsed revenue growth of $3.7 billion, the audit said.
- Euro bailout fund conditions complicate efforts to separate bad banks and sovereigns. Euro zone finance ministers on Thursday agreed on how its bailout fund can invest in troubled banks, but imposed so many conditions that they may not completely succeed in their goal of separating problem banks from their indebted home countries. The 500 billion-euro bailout fund was originally set up to help struggling governments and was later expanded to include banks in an effort to restore confidence in the financial markets, ravaged by three years of debt and financial crisis.
- U.S. senators urge inclusion of food safety in Smithfield(SFD) review. A bipartisan group of 15 U.S. senators urged the Obama administration on Thursday to consider whether the proposed sale of Smithfield Foods Inc to the Chinese meat company Shuanghui International posed a threat to the U.S. food supply that could justify blocking the deal. "We believe that our food supply is critical infrastructure that should be included in any reasonable person's definition of national security," the senators said in a letter to Treasury Secretary Jack Lew, whose department chairs the interagency panel that reviews foreign investment for national security threats.
- Pipeline foes say Obama's climate plan no tradeoff for Keystone. Foes of the proposed Keystone XL pipeline, which would carry oil from Canada to Texas, said on Thursday that an expected White House package of proposals to combat climate change was not an adequate trade-off for approval of the controversial project.
- U.S. Fed balance sheet grows in latest week. The U.S. Federal Reserve's balance sheet grew in the latest week on increased holdings of U.S. Treasuries and mortgage-backed securities, Fed data released on Thursday showed. The Fed's balance sheet liabilities, which is a broad gauge of its lending to the financial system, stood at $3.427 trillion on June 19, compared with $3.367 trillion on June 12.
- Emerging markets crushed by double squeeze in China and America. Short-term borrowing rates in China have soared to record highs as credit seizes up, prompting fears that the country’s liquidity squeeze may be spinning out of control.
- French economy to contract by 0.1pc this year, says INSEE. The French economy will contract by 0.1pc this year and the unemployment rate climb to 10.7pc, the national statistics agency INSEE said.
- PBOC Unlikely to Loosen Monetary Policy Greatly. PBOC may increase open market adjustments to keep "reasonable and stable" inter-bank liquidity, citing a market analyst. China's economic slowdown risks may rise in the short-term as policymakers may keep prudent policy to control financial risks.
- Bad loans rise sharply in Shanghai bank sector. Mid-sized lenders pressured amid slump as regulator urges tighter risk controls. The Shanghai branches of several mid-sized mainland banks have seen rapid increases in bad loans this year as private companies feel the pinch of the nationwide economic slowdown. At the Shanghai branch of Beijing-headquartered China Citic Bank - listed in Shanghai and Hong Kong - the non-performing loan (NPL) ratio jumped to about 5 per cent of total outstanding loans this month, far higher than the national average of about 1 per cent, according to sources familiar with the matter. A 5 per cent NPL ratio translates into about six billion yuan (HK$7.5 billion) of bad loans, the sources added. "It's not just Citic Bank. Other banks' Shanghai branches are also facing trouble and could wind up with similarly huge bad loans on their books," one of the sources said. Bad loans began to increase rapidly since the third quarter of last year. It worsened in the first half of this year, in particular among many small- and medium-sized enterprises in the wealthy Yangtze River Delta economic zone in the east, including Shanghai city and Zhejiang and Jiangsu provinces.
- State Researcher Says China 2H Growth to Slow From 1H. Chen Dongqi, deputy director of the National Development and Reform Commission's Academy of Macro Economic Research, says China's economic growth in the second half will be slower than the first half.
Wells Fargo:
- Rated (CVX) Outperform.
- Asian equity indices are -2.25% to -.75% on average.
- Asia Ex-Japan Investment Grade CDS Index 166.0 +7.0 basis points.
- Asia Pacific Sovereign CDS Index 134.25 +19.0 basis points.
- FTSE-100 futures -.45%.
- S&P 500 futures +.21%.
- NASDAQ 100 futures +.09%.
Earnings of Note
Company/Estimate
- (KMX)/.57
- (DRI)/1.05
- None of note
- None of note
- The BoJ's Kuorda speaking could also impact trading today.
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