Bloomberg:
- China Manufacturing Contraction Deepens Amid Cash Pinch: Economy. China’s manufacturing is shrinking at a faster pace this month, adding to stresses in the economy and financial system after interbank borrowing costs surged to the highest in seven years. The preliminary reading of 48.3 for a Purchasing Managers’ Index (EC11FLAS) released today by HSBC Holdings Plc and Markit Economics compares with the 49.1 median estimate in a Bloomberg News survey of 15 economists. May’s final reading of 49.2 was the first below 50 since October, indicating contraction. Manufacturing weakness, along with the money-market cash crunch, will further test how far Premier Li Keqiang is willing to go in sacrificing short-term expansion for more-sustainable long-term growth. After record credit in the first four months of the year failed to stoke growth, China’s State Council, led by Li, said last night that the financial system needs to do a better job of supporting the economy. “If market rates remain at such high levels, the only scenario for the Chinese economy is a hard landing,” said Xu Gao, chief economist with Everbright Securities Co. in Beijing. “That possibility is growing now -- it seems the leadership is deliberately taking a wait-and-see stance to see how low China growth can be.”
- China Money Rate Jumps to Record as PBOC Holds Off on Cash Boost. China’s benchmark money-market rate climbed to a record as the central bank refrained from using reverse-repurchase agreements to ease a cash crunch in the world’s second-biggest economy. The financing system must “support economic transformation and upgrading in a more forceful way, serve real economy development in a better way, promote domestic demand in a more targeted way and prevent financial risks in a more concrete way,” the central government said yesterday in a statement after a meeting led by Premier Li Keqiang. The central bank did not conduct open-market operations to add or drain funds, though 40 billion yuan ($6.5 billion) was injected via an auction of six-month deposits from the Finance Ministry. The seven-day repurchase rate, which measures interbank funding availability, rose 124 basis points, or 1.24 percentage points, to 9.51 percent as of 9:44 a.m. in Shanghai, a weighted average compiled by the National Interbank Funding Center shows. It touched 12 percent, the highest in data going back to May 2006.
- Worst JGB Loss in Decade Shows Risk of Kuroda Plan: Japan Credit. Japan's government bonds are set for the worst quarterly performance in a decade as the central bank's unprecedented buying of the debt crowds out investors and increases volatility. JGBs maturing in more than a year have lost 1.7%, set for the biggest slump since the quarter ended September 2003. Bank of Japan Governor Haruhiko Kuroda is seeking to push down yields by buying bonds, while convincing financial institutions to purchase assets other than JGBs in so-called portfolio rebalancing. Instead, 10-year yields have swung from a record low of .315 percent to as high as 1 percent this quarter, spurring concern that fluctuating borrowing costs will undermine Prime Minister Shinzo Abe's effort to jump-start growth in the world's third-largest economy.
- Ford(F) CEO Says Japan Is Currency Manipulator, Most Closed Market. Ford Motor Co. Chief Executive Officer Alan Mulally said Japan is manipulating the yen and its market is more closed than China. “It’s just the most closed market in the world,” Mulally said in a Bloomberg TV interview today, in reference to Japan. “With the currency manipulation, we just have to get back to the place where the currencies are set by the markets and the free trade agreements really are free trade agreements.” Mulally said the cheapening Japanese currency is hurting U.S. companies, reiterating past complaints.
- Japan Inc. Holds Italy-Sized Cash Pile as Abe Urges Spending. Japan’s companies stockpile of cash reached a record in the first quarter as they poured investment abroad, underscoring Prime Minister Shinzo Abe’s challenge to boost the nation’s investment and wages. Private companies’ cash and deposits rose 5.8 percent from a year before, to 225 trillion yen ($2.4 trillion) -- an amount in excess of the size of Italy’s economy or the liquid assets held by American firms, Bank of Japan data showed in Tokyo. Businesses held 55 trillion yen in direct investment abroad. The report underscores the appetite for manufacturers to ramp up operations in faster-growing economies as they await evidence for Abe’s growth agenda opening new opportunities at home. Without a revamp of corporate governance practices that forces Japan Inc. to deploy its cash pile, it will be tough for Abe to transform the economy, economist Masaaki Kanno said. “This is a very big problem in Japan’s economic system,” said Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo and a former BOJ official.
- U.S. Human-Trafficking Report Criticizes China, Russia. The Obama administration has downgraded the ratings of China, Russia and Uzbekistan in an annual report on global efforts to combat modern slavery. The three-tier ranking puts Russia and China on a list of the world’s worst offenders, such as North Korea and Saudi Arabia, and below second-tier countries such as Rwanda, described in the report as a destination for “women and children subjected to forced labor and sex trafficking.”
- Singapore Smog Reaches ‘Hazardous’ All-Time High on Fires. Singapore’s smog level reached an all-time high yesterday evening, prompting the government to unveil plans to use satellite imagery to identify companies involved in forest burning on the Indonesian island of Sumatra. Singapore’s pollution index jumped to 321 at 10 p.m. yesterday, the National Environment Agency, or NEA, said on its website. That’s a record, according to Channel NewsAsia. A reading above 300 is deemed “hazardous.” The reading had dropped to an “unhealthy” level of 137 by 6 a.m.
- Asian Stocks Drop on Fed Statement, China Flash PMI. Asian stocks slumped the most in a month amid concerns a credit crunch in China is worsening and after Federal Reserve Chairman Ben S. Bernanke said the central bank may reduce bond purchases later this year should the U.S. economy strengthen. Industrial & Commercial Bank of China Ltd. dropped 2.5 percent in Hong Kong, pacing declines among Chinese lenders as interbank interest rates climbed and a preliminary survey showed China’s manufacturing is shrinking. Samsung Electronics Co. (005930), the world’s largest smartphone maker, slipped 2.2 percent in Seoul. Inpex Corp., Japan’s No. 1 energy explorer, dropped 3.6 percent as crude oil futures headed for a second day of decline. The MSCI Asia Pacific Index dropped 2.6 percent to 129.62 as of 11:30 a.m. in Tokyo, heading for its biggest loss since May 23 as almost eight shares fell for each that rose.
- Sao Paulo, Rio Revoke Bus Fare Increases After Protests. Brazil’s two largest cities bowed to popular demands and revoked increases in bus fares that sparked the nation’s biggest street protests in almost two decades. Authorities in Sao Paulo and Rio de Janeiro said they were scrapping increases for public transportation even as they struggle under strained budgets to pay for the reductions.
- Metals Fall on Fed Comments as Copper at Seven-Week Low. Copper declined to a seven-week low as industrial metals dropped after Federal Reserve Chairman Ben S. Bernanke said bond purchases may be reduced and as China’s manufacturing is slowing. Nickel fell to the lowest since 2009. Copper for delivery in three months fell as much as 1 percent to $6,888.25 a metric ton on the London Metal Exchange, the lowest since May 3, and was at $6,902 at 10 a.m. in Shanghai. Metal for delivery in September on the Comex in New York dropped 0.9 percent to $3.1225 per pound.
- Rubber Drops as China Manufacturing Contracts at Faster Pace. Rubber declined as data showed China’s manufacturing shrank at a faster pace this month, raising concern that demand from the largest consumer may weaken. The contract for delivery in November on the Tokyo Commodity Exchange fell as much as 0.8 percent to 235.3 yen a kilogram ($2,434 a metric ton) and was at 235.8 yen at 11:40 a.m. Futures extended losses for this year to 22 percent.
- U.S. Company Credit Swaps Rise Most in Year After Fed Statement. A gauge of U.S. corporate credit risk rose the most in more than a year after the Federal Reserve concluded a two-day policy meeting, spurring speculation the central bank will reduce stimulus that’s bolstered the market. The Markit CDX North American Investment Grade Index, used to hedge against losses or to speculate on creditworthiness, increased 5.9 basis points to a mid-price of 87.7 basis points at 4:57 p.m. in New York, according to prices compiled by Bloomberg. That’s the biggest jump since the measure added 6.2 basis points on May 14, 2012, excluding rolls into new series of the benchmark. The risk premium on the Markit CDX North American High Yield Index rose 37.2 basis points to 438.7 basis points, the largest increase since March 27, Bloomberg prices show.
- BlackRock(BLK) Corporate Bond ETF Plunges Most in Almost Two Years. A $21 billion BlackRock Inc. (BLK) exchange-traded fund that owns investment-grade corporate bonds plunged the most in almost two years after the Federal Reserve signaled it may slow unprecedented stimulus supporting the market. The iShares iBoxx Investment Grade Corporate Bond ETF (LQD) dropped 1.4 percent to $114.72, the biggest decline since August 2011. Investors have redeemed about $3.4 billion of the fund’s shares this year, data compiled by Bloomberg show.
- Wall Street REIT Success Gives Investors Hangover Part II. Investors in companies buying mortgage bonds are discovering that coming late to the party can still leave them with the biggest hangover. Mortgage real-estate investment trusts raised $7.4 billion in the first quarter by selling new shares, the most in two years, just before a plunge in the value of the firms. American Capital Agency Corp. (AGNC) has declined 20 percent since offering $2 billion in February and Armour Residential REIT Inc. (ARR) has slumped 26 percent after raising $444 million that month. “It was the absolute wrong time to raise money,” said Julian Mann, who helps oversee $6 billion in bonds as a vice president at Los Angeles-based First Pacific Advisors LLC. “Rather than turn money away, these asset gatherers chose to double-down.”
- Federal Reserve Eyes End of Bond Buying, Spooking Markets. Federal Reserve Chairman Ben Bernanke said the central bank could start winding down its $85 billion-a-month bond-buying program later this year and end it altogether by mid-2014, setting up a high-stakes test to see if the economy and financial markets can begin to stand on their own. Financial markets—which have been enlivened by the fuel of the Fed's easy-money policies—didn't take the news happily. The Dow Jones Industrial Average finished the day down 206.04, or 1.35%, at 15112.19. Yields on 10-year Treasury notes jumped 0.126 percentage point to 2.308%, the highest level since March 2012. The dollar strengthened. Asian markets moved lower in early trading Thursday.
- U.S. Icons Now Made of Chinese Steel. Imports Surge While U.S. Mills Idle; Lacking Bridge Expertise at Home. The Verrazano-Narrows Bridge was a feat of American engineering when it was built across New York's harbor in the 1960s. Now, it's being repaired with steel made in China. Chinese steel imports have surged so far this year, even as U.S. producers are awash with excess domestic capacity. Chinese steel was also recently used in the San Francisco-Oakland Bay Bridge. The reason is partly because Chinese-made steel is cheaper. In fact, U.S. steel companies argue its price is unfairly subsidized, and want the U.S. government to restrict imports as much as possible. China claims it is simply a more efficient producer.
- Obama's Nuclear Proffer Gets Russian Rebuff. In Berlin Speech, President Says U.S. Could Cut Deployed Arsenal by One-Third; a Call for 'Peace With Justice'. Standing before a towering emblem of the Cold War, President Barack Obama called for steep reductions in nuclear weapons through negotiations with the Russians, as a step toward what he conceded was the "distant" goal of eliminating global arsenals.
- David Rivkin and Elizabeth Foley: An ObamaCare Board Answerable to No One. The 'death panel' is a new beast, with god-like powers. Congress should repeal it or test its constitutionality. Signs of ObamaCare's failings mount daily, including soaring insurance costs, looming provider shortages and inadequate insurance exchanges. Yet the law's most disturbing feature may be the Independent Payment Advisory Board. The IPAB, sometimes called a "death panel," threatens both the Medicare program and the Constitution's separation of powers. At a time when many Americans have been unsettled by abuses at the Internal Revenue Service and Justice Department, the introduction of a powerful and largely unaccountable board into health care merits special scrutiny.
- Lawmakers question Obama's pledge to scale back US nuclear arsenal. President Obama’s pledge to cut the United States' nuclear arsenal by one-third is sending the wrong message to the global community, some Washington lawmakers said Wednesday. “Now is not the time to pursue further strategic nuclear force reductions,” Sen. Jim Inhofe, R-Okla., said following Obama’s speech in Berlin, Germany. Inhofe was among several lawmakers who warned that cutting the country’s strategic nuclear arsenal by one-third would put America at a disadvantage against countries like Russia, North Korea and Iran. Inhofe said the president’s plan wrongly assumes that reducing the role of nuclear weapons would make the world safer. “Instead, our experience has been that nuclear arsenals -- other than ours -- are on the rise, Russia defies us at almost every turn, efforts to curb the nuclear ambitions of North Korea and Iran are failing, and our allies grow increasingly uneasy about the reliability of U.S. nuclear guarantees,” Inhofe, the ranking member of the Senate Armed Services Committee, said.
- China's Red Flags. (graphs)
FXStreet.com:
- Flash: The biggest risk factor is China's financial bubble - RBS. The big risk factor for global markets is risk of air being let out of a financial bubble in China, reiterates Greg Gibbs, FX Strategist at RBS, after sharing his view on the Chinese cash crunch yesterday too. Expanding on yesterday's take, Gibbs notes that the real risk is that "banks are being squeezed because investors in off balance sheet products are not rushing to roll over their investments or throw more of their savings into new ones that may be required to keep the same old borrowers afloat on their existing assets." Gibbs also notices a further squeeze by a reversal of capital inflow from foreigners closing carry trades in CNY. Gibbs emphasizes the need to continue keeping an eye on China very closely, noting that "We must not be easily calmed if and when the PBoC inject liquidity, we must watch where term lending rates settle; if the yield curve steepens rapidly from one week out it will be a sign of banking sector distress." The end result on this ongoing cash crunch in China, according to Gibbs, is more cautiousness by the banks, "in which case growth in China is likely to slow further" Gibbs said.
- Jabil(JBL) to cut jobs, forecasts core earnings below estimates. Contract electronics maker Jabil Circuit Inc forecast current-quarter core earnings below analysts' estimates and said it planned to cut an unspecified number of jobs as part of a restructuring plan. Jabil said it expected to book about $188 million in restructuring charges over the next three years, of which $60 million to $70 million will be in the current quarter. The company counts Apple Inc, Cisco Systems , General Electric Co, Hewlett-Packard, IBM Corp, NetApp Inc and BlackBerry among its top customers. Jabil forecast core earnings of 50-58 cents per share for the current quarter, below the average analyst estimate of 59 cents.
- Brazil real dives 2 pct as Fed signals end to stimulus. Brazil's currency slumped nearly 2 percent on Wednesday to close at a more than four-year low after U.S. Federal Reserve Chairman Ben Bernanke suggested the bank's stimulus program, which has supported investors' appetite for emerging market assets, could end within the next 12 months.
- Budget cuts hit security checks for U.S. defense contractors. A budget shortfall has forced a Pentagon security unit to sharply cut back on regular investigations used to update security clearances for defense contractor employees. In a little-noticed announcement posted on its website on June 7, the Defense Security Service said that "due to a funding shortfall," it has been obliged to suspend "most" routine re-investigations of defense contractor employers cleared at the "Top Secret" level, at least through the end of September.
- Germany's ascendancy over Europe will prove short-lived. Germany has peaked. Its hegemony in Europe is a “power illusion”, a confluence of fleeting advantages soon to be overwhelmed by the delayed effect of error and the crush of historic forces.
- Brazil fares move fails to quell protests. Brazilian authorities have failed to halt nationwide protests, despite reversing the public-transport fare increases that sparked the unrest. Crowds blocked main roads in Sao Paulo and Brasilia, and protesters confronted police in Rio de Janeiro state shortly after the U-turn was announced. Earlier, there were clashes before Brazil's football team played Mexico in Fortaleza in the Confederations Cup.
- Indian rupee nears 60, Sensex dives 400 points on Fed concerns. The Indian rupee on Wednesday fell to an all-time low of 59.93 per dollar in the opening trade after the US Federal Reserve chairman Ben Bernanke said the central bank would start reducing its stimulus measures later this year if the economy is strong enough. The BSE benchmark Sensex fell as much as 423 points to 18,822.65 in early trade on Thursday. Market were also hit by data showing China’s factory activity weakened to a nine-month low in June. Bond yields jumped, with the benchmark 7.16% 2023 bond yield rising 10 basis points to 7.36% from its previous close. Meanwhile, the Reserve Bank of India has halted trading in bonds following the sell-off.
- China Asks Banks to Add External Risks to Management. China asked banks to include external risks prevention into their overall risk management, citing a notice from the nation's banking regulator. Major sources of external risks that banks should be wary of are from small loan cos., pawnshops, guarantee institutions, private financing and illegal fund gathering, the report cites the notice.
- China Short-Term Pressures Shouldn't Sway Policy. Chinese policymakers shouldn't be swayed by short-term downward economic pressures, according to a front-page commentary written by reporter Zhang Zhaohui.
- None of note
- Asian equity indices are -2.50% to -1.50% on average.
- Asia Ex-Japan Investment Grade CDS Index 159.0 +23.0 basis points.
- Asia Pacific Sovereign CDS Index 115.25 +9.0 basis points.
- FTSE-100 futures -1.63%.
- S&P 500 futures -.52%.
- NASDAQ 100 futures -.47%.
Earnings of Note
Company/Estimate
- (KR)/.88
- (IHS)/1.05
- (RAD)/.09
- (PIR)/.19
- (ORCL)/.87
- (TIBX)/.19
- (AH)/.09
8:30 am EST
- Initial Jobless Claims are estimated to rise to 340K versus 334K the prior week.
- Continuing Claims are estimated to fall to 2958K versus 2973K prior.
- The Preliminary Markit US PMI for June is estimated to rise to 52.7 versus 52.3 in May.
- Philly Fed for June is estimated to rise to -2.0 versus -5.2 in May.
- Existing Home Sales for May are estimated to rise to 5.0M versus 4.97M in April.
- Leading Indicators for May are estimated to rise +.2% versus a +.6% gain in April.
- None of note
- The Eurozone Manufacturing PMI report, EuroGroup meetings, Spain 10Y Bond auction, China Business Sentiment Indicator, 30Y TIPS auction, Eurozone Consumer Confidence report, SNB rate decision, (FB) event, Bloomberg Economic Expectations Index for June and the weekly Bloomberg Consumer Comfort Index could also impact trading today.
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