Thursday, July 09, 2015

Thursday Watch

Posted by Gary .....at 12:41 AM
Evening Headlines 
Bloomberg:  
  • Who Blew Up China’s Stock Bubble? Beijing urged people to buy stocks. Now it’s begging them to stop selling. In China, the invisible hand of the market sometimes needs help from the iron fist of the state. That’s certainly true after a meltdown vaporized $3.5 trillion in the value of shares traded on the Shanghai and Shenzhen exchanges. President Xi Jinping’s government isn’t being subtle in its campaign to reflate the bubble it had a big role in creating. The government has suspended initial public offerings and eased rules on margin loans, even allowing investors to use their homes as collateral to borrow money to buy stocks. 
  • China Lets Banks Roll Over Loans Backed by Share Pledges. China’s banking regulator said it will allow lenders to roll over loans backed by shares when they mature and adjust collateral requirements, adding to government efforts to contain the effects of a stock market rout. The China Banking Regulatory Commission also encouraged banks to support companies’ share buybacks by offering them collateralized loans, in a statement on Thursday.
  • China's Market Meddling Makes Yuan Look Like a Poor Reserve Currency. China’s escalating intervention in its collapsing stock market -- after months of quiescence while equities surged -- is tarnishing policy makers’ efforts to establish the yuan as an official reserve currency. An outflow of capital from China earlier this year already exposed the dangers to officials of a full dismantling of cross-border capital controls. The appetite to let domestic investors put more funds overseas won’t be helped by the 34 percent plunge in the Shanghai Composite Index since June 12. Yet greater openness and fewer restrictions on use of the yuan are what’s needed for the currency to qualify to join the dollar, euro, pound and yen in the International Monetary Fund’s reserve-currency basket, known as the SDR.
  • China’s Stock Sale Ban Draws Scorns From Templeton, Wells Fargo. Templeton Emerging Markets Group calls it an act of “desperation.” UBS Wealth Management labels it “extreme.” And Wells Fargo Funds Management says it just “postpones the inevitable.” China’s decision to ban major stockholders from selling stakes in listed companies has drawn skepticism from foreign investors. The money managers, with combined assets of almost $4 trillion, say the latest step to stem the country’s equity rout is just another measure to meddle in the market and won’t be enough to restore investors’ confidence. “It suggests desperation,” Mark Mobius, chairman of Templeton Emerging Markets Group, said by phone. “It actually creates more fear because it shows that they’ve lost control.” 
  • Greeks Under the Gun to Produce a Reform Plan to Keep Euro. Greece is rushing to pull together a detailed economic package to convince European leaders that it can keep the euro. The government extended capital controls through Monday, and Prime Minister Alexis Tsipras has until midnight Thursday to present his European colleagues with a plan that includes spending cuts, in exchange for a new European bailout. The continent’s most indebted country has never been closer to leaving the currency after more than six European leaders made clear this is Greece’s last chance. Failure to get a deal could result in the European Central Bank cutting funds to Greek banks, forcing the country to issue IOUs or some other form of exchange to prevent economic collapse.
  • China Headwinds Collide With Greece to Stymie Emerging Borrowers. Turbulence in global markets is pushing developing-nation debt sales into a freeze. Brazil is delaying its dollar offering to the end of the quarter, a person familiar with the strategy said on Tuesday. Kazakhstan and the Iraqi region of Kurdistan have yet to tap markets after completing investor meetings last month, while the number of issuers forced to postpone offerings will only grow, according to Sergey Dergachev at Union Investment Privatfonds GmbH in Frankfurt. Debt sales have dried up since Gabon’s $500 million offering a month ago as a rout in Chinese equities and the deadlock over a bailout for Greece takes the country to the brink of exiting the euro.  
  • China Junk Bond Premiums Gap Most in Two Months Amid Stock Rout. The extra yield investors demand to hold junk debt in China widened the most in two months as the government’s failure to avert a stock slump damped demand for risky assets. The gap between five-year top-rated and AA- rated corporate bond yields increased seven basis points Wednesday to 142.25, matching the steepest climb since May 15, ChinaBond data show. Notes rated AA- or below are considered junk in China’s onshore market.
  • China ETF Posts Record Drop Amid More Efforts to Arrest Rout. The early market reaction to China’s latest efforts to stem the nation’s $3.6 trillion stock selloff is in. The largest U.S.-listed exchange-traded fund tracking yuan-denominated equities plunged more than 11 percent Wednesday, the most since it started trading in 2013, after Chinese regulators banned major stockholders from selling stakes in listed companies. The iShares China Large-Cap ETF that tracks the nation’s companies trading in Hong Kong tumbled the most in six years. “A lot of these measures are a little bit desperate,” Jorge Mariscal, chief investment officer for emerging markets at UBS Wealth Management in New York, which oversees $1 trillion in invested assets, said by phone Wednesday. “Some of the interventions have created more volatility and more nervousness than they intended to.”
  • Asian Stocks Swing With China as Hong Kong Rebounds, Japan Slips. Asian stocks fluctuated, with Chinese equities swinging between gains and losses as the government tries to stem the rout. Shares in Hong Kong rebounded while Japan’s Topix index slid. Citic Securities Co., China’s biggest brokerage, jumped 13 percent in Hong Kong, heading for its first gain in six days. China Life Insurance Co. gained 5 percent after UBS AG raised its rating on the nation’s largest insurer to buy from neutral. Honda Motor Co. slipped 1.8 percent as Japanese exporters retreated after the yen jumped on Wednesday amid China’s rout. The MSCI Asia Pacific Index was little changed at 139.63 as of 11:18 a.m. in Hong Kong, swinging between a gain of 0.7 percent and a loss of 1.7 percent.
  • Iron Rout Seen by Andy Xie Extending Into $30s as Supply Grows. The iron ore rout isn’t done yet and the raw material will extend declines into the $30s a metric ton this year, according to Andy Xie, an independent economist who predicted a collapse in prices in February. Steel demand in China is shrinking while iron ore supplies are still rising, Xie, a former Asia-Pacific chief economist at Morgan Stanley, said in an interview from Hong Kong on Wednesday after benchmark prices collapsed 10 percent. The slump in China’s stock markets, which showed a speculative bubble was bursting, was accelerating declines, according to Xie. “China’s steel production is actually declining, that’s the reality,” Xie said by phone. “All the high-cost guys have to shut down for this market to stop falling. It’s not going to stabilize because Chinese demand is coming back, that’s not going to happen in the foreseeable future.”
  • Fed Increase Little More Than Coin Flip for Derivative Traders. Unrest in China and Greece looms large with money-market derivative traders who now see little more than a coin flip's chance that the Federal Reserve will lift interest rates this year. Fed funds futures give a 54 percent probability that the central bank will lift rates in December, down from 59 percent before the Fed on Wednesday released the minutes of its June policy gathering. At the start of the month, the likelihood of the central bank lifting its near-zero benchmark rate this year was nearly 70 percent. The chance of a September hike is now 21 percent.
  • NYSE, SEC Suspect Software Update Triggered Trading Halt. A computer malfunction that knocked out trading at the New York Stock Exchange for more than three hours Wednesday probably stemmed from a software update that went awry, said two people briefed on a preliminary review. The NYSE must now verify the cause and report its conclusions to the U.S. Securities and Exchange Commission, said the people who asked not to be named because the inquiry isn’t public. The SEC will use those findings to investigate whether any rule violations occurred, the people said.
Wall Street Journal: 
  • Fear Grows in Greece as Decisive Hour Nears. As creditors express skepticism and capital controls bite, many Greeks find euphoria after Sunday’s ‘no’ vote fading fast. Greece requested a new three-year bailout from its skeptical eurozone creditors and pledged some economic overhauls on Wednesday, but the euphoria that some Greeks felt after Sunday’s “no” vote on the last deal was fading fast. 
  • The Iranian Nuclear Paradox. Once an agreement is reached, a U.S.-Iran confrontation becomes more likely, more quickly. The lines are clearly drawn in Washington on President Obama’s plan for a nuclear deal with Iran. As negotiations for a final agreement continue well past their June 30 deadline, most Republicans oppose the deal and Democrats will not block it. Many critics claim to believe that a “good deal,” which would permanently dismantle the...
  • Lessons of China’s Crash. Attempts to put a floor under prices are adding to the market panic. Beijing is learning the hard way that intervention can make a stock panic worse. In the past two weeks the Chinese government has rolled out measures to support share prices, even forcing state-run entities to buy. Yet the indexes have continued to fall, and each failure is making it more difficult for the market to find its natural bottom. The Shanghai Composite Index fell a further 5.9% on Wednesday, 32% below its June 12...
Fox News:
  • Despite San Francisco criticism, Clinton once backed sanctuary city policies. (video) High-profile Democrats now speaking out about San Francisco's "sanctuary" treatment of an illegal immigrant charged with the murder of a young woman weren't always so critical of the policies. Hillary Clinton and Sen. Dianne Feinstein, D-Calif., both criticized San Francisco for ignoring a federal request to hold Francisco Sanchez -- who already had been deported five times -- when he went into city custody in March. He was released in April, and is now in jail for the murder last week of Kate Steinle, 32.
MarketWatch.com: 
  • Why the NYSE trading halt should alarm investors. Even if the NYSE is not the victim of cyber terrorism and is simply experiencing a regular technical glitch, if the exchange was forced to hit the “off” switch, it signals a vulnerability of a market that is almost entirely electronic and highly technical.
  • China’s stock-market crash is just beginning. Since the Shanghai Composite index dropped from a 52-week high around 5,178 on June 12, it’s been downhill all the way. In just three weeks, stocks listed on mainland China’s most prominent exchange tumbled 30% from their seven-year highs. The even more speculative ChiNext Index has lost 42% of its value over 21 days.
CNBC:
  • Greece is bad but this is worse! (video) The twin fears of China and Greece will hang over markets Thursday with China increasingly the bigger concern. "There's definitely an issue if we see a further correction in the Chinese stock market," said Russ Koesterich, BlackRock's chief investment strategist.
Zero Hedge: 
Business Insider:
Reuters:
  • Exclusive: Greek banks face closures, bailout or not - sources. Some large Greek banks may have to be shut and taken over by stronger rivals as part of a restructuring of the sector that would follow any bailout of the country, European officials have told Reuters. European leaders will gather on Sunday in a last-ditch attempt to salvage agreement with Greece after months of acrimonious negotiations that have taken the country to the brink of leaving the euro. But regardless of whether or not fresh funds are now unlocked for the government, some Greek banks, damaged by political and economic havoc, may have to be closed and merged with stronger rivals, officials, who asked not to be named, told Reuters. One official said that Greece's four big banks - National Bank of Greece (NBGr.AT), Eurobank (EURBr.AT), Piraeus (BOPr.AT) and Alpha Bank (ACBr.AT) - could be reduced to just two, a measure that would doubtless encounter fierce resistance in Athens.
  • Alcoa(AA) earnings hurt by low aluminum prices, higher global surplus seen. Metals company Alcoa Inc reported a quarterly profit that missed expectations due to plunging primary aluminum prices on Wednesday, but revenues topped estimates on an ongoing drive to reduce reliance on the company's legacy commodity business. The New York-based company has been investing in more advanced aerospace and automotive products while selling off some of its more traditional yet costly smelting facilities.
Financial Times:
  • Emerging market currencies in line of fire. China's equity rout is leaving its fingerprints all over the currencies of developing economies, already squeezed by the prospect of a rise in US interest rates and the bear market for oil. MSCI’s emerging equity index suffered a 2.5 per cent drop on Wednesday, its biggest in two years.
Telegraph:
Evening Recommendations 
  • None of Note
Night Trading
  • Asian equity indices are -1.0% to +.75% on average.
  • Asia Ex-Japan Investment Grade CDS Index 117.75 -1.0 basis point.
  • Asia Pacific Sovereign CDS Index 64.5 +2.75 basis points.
  • S&P 500 futures +.61%.
  • NASDAQ 100 futures +.62%.

Earnings of Note
Company/Estimate
  • (PEP)/1.24
  • (CUDA)/.08
  • (PSMT)/.72
Economic Releases
8:30 am EST
  • Initial Jobless Claims are estimated to fall to 275K versus 281K the prior week.
  • Continuing Claims are estimated to fall to 2250K versus 2264K prior.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Kocherlakota speaking, Fed's Lael Brainard speaking, Fed's George speaking, BoE rate decision, $13B 3Y T-Bond auction, weekly Bloomberg Consumer Comfort Index, Bloomberg July US Economic Survey, weekly EIA natural gas inventory report, (LB) June Sales call and the (AAL) June Traffic update could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by industrial and technology shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 25% net long heading into the day.

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