Tuesday, August 20, 2013

Tuesday Watch

Evening Headlines 
  • Egypt Army Looms Over Politics as Deadly Crackdown Cements Power. Hend Soliman said she knows exactly who should lead Egypt out of a state of emergency after last week’s bloody suppression of Islamist protests: a military man. “We need an iron fist,” said Soliman, 37, a manicurist in Cairo. “These people know the country and how to run it.” While the conflict has led to further divisions among Egyptians, there are signs many of those opposed to former President Mohamed Mursi are allying with the military leaders who ousted him rather than the civilian politicians appointed to steer the Arab state toward elections
  • Muslim Brotherhood Leader Arrested in Egypt as Death Toll Mounts. The spiritual leader of Egypt’s Muslim Brotherhood was arrested in Cairo as part of an army crackdown on supporters of ousted President Mohamed Mursi that has killed about 1,000 people. Mohammed Badie was detained in an apartment in the Rabaa district and accused of giving instructions to Muslim Brotherhood supporters nearby who were protesting Mursi’s removal by the military on Feb. 3, said Public Security Department spokesman Yasser Abdel-Rauf. The Brotherhood’s Freedom and Justice Party also said on its website that Badie had been arrested along with fellow member Youssef Talaat.
  • JPMorgan(JPM) Says Buy Indian Options as Swings Widen on Rupee. India's biggest stock-market swings in 16 months are poised to continue, boosting options prices as the prospect of reduced Federal Reserve stimulus spurs further weakness in the rupee, according to JPMorgan Chase. The India VIX, which measures the cost of Nifty index options, surged 37% in the past 2 days. The last time it jumped this much, in August 2011, the Nifty lost 8% in two weeks.  
  • Rupiah Forwards Plunge to Lowest Since 2009 as Bond Risk Surges. Rupiah forwards slumped to a four-year low after Indonesia’s debt risk surged to the highest since October 2011 on concern the Federal Reserve will taper stimulus that has driven funds into emerging-market assets. Five-year credit-default swaps insuring the Southeast Asian nation’s debt against default has risen 56 basis points to 283 since the central bank kept its reference rate at 6.5 percent on Aug. 15, according to CMA, which is owned by McGraw-Hill Cos.
  • Indonesia Stocks Drop as Index Falls as Much as 20% From Peak. Indonesia stocks declined for a fourth day, sending the benchmark index down as much as 20 percent from its record high three months ago. The Jakarta Composite Index (JCI) fell 2.7 percent to 4,197.09 as of 10 a.m. local time, extending its four-day drop to 11 percent, as trading volumes climbed to 43 percent above the 30-day average. The gauge lost as much as 3.4 percent to 4,167.59, versus its closing record of 5,214.98 on May 20. Financial shares were the biggest drag on the index, with PT Bank Mandiri sinking 3.9 percent to the lowest level since July 2012
  • China Money-Market Rate Climbs to 2-Week High on Policy Concern. China's benchmark money-market rate rose to the highest level in more than two weeks and swaps advanced on concern about the direction of monetary policy. "The PBOC is still not very transparent on their intent to relax monetary policy," said Rees Kam, a strategist at SJS Markets Ltd., a Hong Kong-based financial services company that specializes in fixed income. "The market is not very clear on their intent, whether they will inject a lot of liquidity. The auction will have an impact on the yield as well." The seven-day repurchase rate, a gauge of funding availability in the banking system, climbed 29 basis points to 4.47% as of 11:32 am in Shanghai, the highest level since Aug. 5.
  • China Won’t Barter Away Territorial Interest, Chang Says. China is prepared to defend its interests and won’t trade away its territorial claims in the Asia-Pacific region, General Chang Wanquan, the country’s Defense Minister, said during a visit to the Pentagon. While China prefers to solve disputes in the region through “dialogue and negotiation, no one should fantasize that China would barter away our core interests,” Chang said at a news conference yesterday in Washington alongside U.S. Defense Secretary Chuck Hagel. “No one should underestimate our will and determination in defending our territorial sovereignty and maritime rights.”   
  • Thai Baht Slumps to One-Year Low as Economy Enters Recession. Thailand’s baht slumped to a one-year low after Southeast Asia’s second-largest economy entered a recession for the first time since 2009. Government bonds were little changed. Gross domestic product unexpectedly decreased 0.3 percent in the three months through June from the previous quarter, when it contracted a revised 1.7 percent, the National Economic and Social Development Board said yesterday. The agency cut its 2013 expansion forecast to 3.8 percent to 4.3 percent from 4.2 percent to 5.2 percent.
  • Asian Stocks to Aussie Bonds Drop as Ringgit, Baht Slide. Asian stocks fell for a fourth day after U.S. Treasury yields reached a two-year high. Currencies from Malaysia to Thailand declined amid an emerging market exodus that’s seen investors withdraw $8.4 billion from exchange-traded funds this year. The MSCI Asia Pacific Index lost 0.4 percent at 12:08 p.m. in Tokyo. Indonesia’s Jakarta Composite Index dropped 3 percent, taking a four-day rout beyond 10 percent.
  • Rubber Declines as Oil Rally Stalls, Thailand Enters Recession. Rubber declined the most in a week as a drop in oil eased speculation that prices of competing synthetic products will increase and as Thailand, the biggest producer, entered a recession for the first time since 2009. Rubber for delivery in January fell as much as 1.6 percent to 262.3 yen a kilogram ($2,685 a metric ton), the most for a most-active contract since Aug. 13, and traded at 263.8 yen on the Tokyo Commodity Exchange at 12:09 p.m. local time.
  • Rebar Swings as Investors Weigh Rising Demand With Higher Output. Steel reinforcement-bar futures swung between gains and losses as investors weighed increasing production at Chinese steel mills against prospects of stronger demand. Rebar for January delivery rose 0.3 percent to 3,824 yuan ($624) a metric ton at 10:37 a.m. on the Shanghai Futures Exchange, after advancing as high as 3,828 yuan and falling as low as 3,801 yuan.
  • Tombini Says Brazil Traders Pushed Market Interest Rates Too Far. Brazil’s central bank President Alexandre Tombini said traders, who are now betting policy makers will accelerate the pace of interest rate increases, have pushed swap rates too far. “The recent movement seen in interest rates in the market has incorporated excessive premium,” Tombini said in a statement posted on the bank’s website today. Yields on swap contracts due in January 2015 have soared 0.94 percentage point to 10.66 percent in the past week, indicating traders are pricing in the likelihood that borrowing costs may rise by as much as 75 basis points, or 0.75 percentage point, at this month’s monetary policy meeting. A week ago, they were betting on a 50 basis point increase in August.
  • Dubai Sees Need for Tallest Office Tower Amid 45% Vacancy. In Dubai, where almost half of the offices sit empty, the head of a state-owned business zone says there’s room to build the world’s tallest office tower. Ahmed Bin Sulayem, chairman of the Dubai Multi Commodities Centre, said the Persian Gulf business hub can still attract tenants and investors with such a project because many of its buildings are unsuitable for large businesses. Bin Sulayem helped lead the development of the DMCC’s 68-story Almas Tower, Dubai’s tallest building when it was completed in 2007. The tower’s full and has a waiting list for tenants, he said. Dubai’s speculation-driven property boom saddled the Persian Gulf sheikhdom with thousands of offices that are unattractive to businesses because of their design, location or ownership. Companies looking for at least 5,000 square meters (54,000 square feet) are frequently unable to find what they want and are increasingly looking for “built-to-suit” deals, broker Jones Lang LaSalle Inc. (JLL) said in an April 14 report. About 45 percent of the city’s offices are empty, according to CBRE Group Inc., another broker.
Wall Street Journal:  
  • Allies Thwart America in Egypt. Israel, Saudis and U.A.E. Support Military Moves. The U.S.'s closest Middle East allies are undercutting American policy in Egypt, encouraging the military to confront the Muslim Brotherhood rather than reconcile, U.S. and Arab officials said. The parallel efforts by Israel, Saudi Arabia and the United Arab Emirates have blunted U.S. influence with Egypt's military leadership and underscored how the chaos there has pulled Israel into ever-closer alignment with those Gulf states, officials said. A senior Israeli official called the anti-Muslim Brotherhood nations "the axis of reason." The Obama administration first had sought to persuade Egyptian military leader Gen. Abdel Fattah Al Sisi not to overthrow the elected government of President Mohammed Morsi and then to reconcile with his Muslim Brotherhood base. Gen. Sisi has done the opposite—orchestrating the president's overthrow and a crackdown in which over 900 people have been killed since Wednesday—reflecting his apparent confidence in the Egyptian government's ability to weather an American backlash, U.S. and Arab officials said.
  • J.P. Morgan(JPM) Faces New Probe on Energy Trades. Justice Department Investigation Is Latest Legal Hurdle for Bank. The Justice Department is investigating whether J.P. Morgan Chase & Co. manipulated U.S. energy markets, according to people familiar with the case, marking the latest legal hurdle for a bank already facing a mountain of litigation and regulatory scrutiny. J.P. Morgan last month agreed to pay $410 million to settle allegations raised by the Federal Energy Regulatory Commission that the bank manipulated markets in California and the Midwest. J.P. Morgan, the nation's largest bank by assets, didn't admit to wrongdoing as part of the settlement.
  • Cash-Poor Companies Feed Investor Hunger for 'Happy Meals'. Critics Say Deals Can Exacerbate Problems for Issuing Companies. When Energy Conversion Devices Inc. needed cash, the struggling solar-panel maker turned itself into what Wall Street likes to call a "Happy Meal." To make $316 million in bonds more appetizing, the company agreed to lend millions of its shares to hedge funds buying the bonds so they could simultaneously sell the stock in a bet against Energy Conversion's success. A subsequent crisis in the solar-power industry hit Energy Conversion hard. The bonds, issued in 2008, plunged in value, and last year the company filed for bankruptcy protection, wiping out shareholders. But the negative wagers paid off for the hedge funds. A Wall Street Journal examination showed that hedge funds that bought the bonds were positioned to earn upward of 20% on their investments.
  • Fear of Fed Retreat Roils India. Economic Weakness in Developing Nations Is Laid Bare as Easy Money Dries Up. The U.S. Federal Reserve's plan to reduce monthly bond purchases is exposing the deep-seated fragility of India's economy, unnerving investors and underscoring the risks to emerging markets at a time of rising global interest rates. India's stock market tumbled 1.6% Monday, adding to a 4% decline Friday, and the rupee hit a fresh low against the dollar. Government-bond prices slumped, sending yields sharply higher.
  • The Die Harder States. Minnesota has increased the incentive to move to Florida. The think tank's conclusion should be required reading for policy makers in every state still imposing a death tax: "If enough people move away and stop paying Minnesota taxes, then Minnesota will experience a net revenue loss due to the estate and gift tax." This will mean that people making less than $1 million a year will be left paying the tab. So much for spreading the wealth.
  • China’s new leadership takes hard line in secret memo. Communist Party cadres have filled meeting halls around China to hear a somber, secretive warning issued by senior leaders. Power could escape their grip, they are being told, unless the party eradicates seven subversive currents coursing through Chinese society. These seven perils were enumerated in a memo referred to as Document No. 9 that bears the unmistakable imprimatur of Xi Jinping, China's new top leader. The first was "Western constitutional democracy"; others included promoting "universal values" of human rights, Western-inspired notions of media independence and civil society, ardently pro-market "neo-liberalism," and "nihilist" criticisms of the party's traumatic past
  • Spiking interest rates rattle the market's cage. Benchmark 10-year note yields climbed as high as 2.90 percent Monday, the highest level since July 2011 and up from nearly 2.60 percent a week ago. Yields have gained more than a full percentage point since early May when Fed Chairman Ben Bernanke first hinted the central bank may scale back its asset purchases. Art Cashin, director of floor operations at UBS Financial Services warned earlier Monday that "alarm bells" will go off for stocks once the yield hit the 2.90 percent level, adding that rising interest rates are already causing problems for equities in emerging markets. "India is beginning to look particularly strange ... Indonesia is getting pounded," Cashin told CNBC. "You don't usually have these at the top of your list, but they lurk in the background."
Zero Hedge: 
Business Insider: 
Washington Post:
  • U.S. Postal Service May Withdraw From Federal Health Plan. Postal Service officials have proposed withdrawing from FEHBP, which also serves federal employees generally, in order to save money. In its place, USPS would run its own health insurance plan. The proposal requires congressional approval.
  • Judge endorses U.S. use of fraud law against Bank of America. A federal judge has endorsed a broad interpretation of a savings-and-loan era law that the U.S. Justice Department is trying to use in cases against Wall Street banks. U.S. District Judge Jed Rakoff in Manhattan said Monday that a "straightforward application of the plain words" of the Financial Institutional Reform, Recovery and Enforcement Act (FIRREA) allowed the interpretation sought by the government.
  • Fannie, Freddie should recognize bad loan costs immediately-watchdog. Fannie Mae and Freddie Mac are possibly masking billions of dollars in losses because of the level of delinquent home loans they carry, a federal watchdog said on Monday, adding that the companies should immediately be required to recognize the costs of some bad mortgages. In 2012, the Federal Housing Finance Agency began work on accounting changes to require the two housing finance firms to set aside loan loss reserves for mortgages delinquent at least 180 days. The new standard is set to go into effect in 2015. In its report released on Monday, the FHFA's inspector general called the timeline for implementation "inordinately long."
  • Bond funds have $19.7 bln outflow so far in August-TrimTabs. Investors have withdrawn $19.7 billion from bond mutual funds and exchange-traded funds so far in August as fears of a pullback in the Federal Reserve's stimulus continue to drive bond selling, data from research provider TrimTabs Investment Research showed on Monday.
Financial Times: 
  • Fed advises US banks to lift capital targets. The largest US banks should hold regulatory capital beyond their own internal targets to better prepare them for periods of market stress, according to a study published by the Federal Reserve on Monday.
Passauer Neue Presse:
  • Merkel Tells Passauer She Rejects Joint Euro Region Bond Sales. German Chancellor Angela Merkal said she rejects opposition proposals to introduce euro bonds and a common European debt redemption fund. Merkel said "we reject both because we're convinced that this would set wrong incentives and prevent the necessary reforms in some countries".
China Securities Journal: 
  • China Banks Shouldn't Mislead On Financial Products. Banks in China should make a strict distinction between their own products and those they sell for other companies and shouldn't mislead consumers when selling financial products, citing a statement issued by the China Banking Regulatory Commission yesterday.
Securities Times:
  • Chinese banks should supervise and strictly approve lending to local government projects as banks face risks in funding local government projects, Wang Yong, an academic at the PBOC's Zhengzhou training institute, says in an article published today.
21st Century Business Herald:
  • China's Hebei to Cut 60m Ton Steel Capacity by 2017. Northern Chinese province of Hebei will cut steel capacity by 60m tons by 2017 to curb air pollution, citing 2 plans that the province plans to release in the near term. Hebei will cut steel capacity by another 26m tons 2018-2020, according to the report.
Evening Recommendations 
  • None of note
Night Trading
  • Asian equity indices are -1.50% to -.75% on average.
  • Asia Ex-Japan Investment Grade CDS Index 158.50 +17.5 basis points.
  • Asia Pacific Sovereign CDS Index 122.75 +9.0 basis points.
  • FTSE-100 futures -.47%.
  • S&P 500 futures -.07%.
  • NASDAQ 100 futures -.01%.
Morning Preview Links

Earnings of Note

  • (HD)/1.21
  • (BBY).12
  • (MDT)/.88
  • (JCP)/-1.07
  • (DKS)/.74
  • (BKS)/-.67
  • (TJX)/.63
  • (INTU)/.00
  • (ADI)/.54
  • (WMS)/.31
Economic Releases 
8:30 am EST
  • The Chicago Fed National Activity Index for July is estimated to rise to -.1 versus -.13 in June.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The UK 10Y bond auction and the weekly retail sales reports could also impact trading today.
BOTTOM LINE: Asian indices are lower, weighed down by financial and industrial shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 25% net long heading into the day.

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