Friday Watch

Evening Headlines 

Bloomberg:

• China’s Stock Crash Is Spurring a Shakeout in Shadow Banks. China has been struggling to tame its shadow banks for years. Now, a stock market crash has hamstrung some of the fastest growing ones in a matter of weeks. Loans from sources such as online lenders for equity purchases have plunged by at least 700 billion yuan ($113 billion), a drop of 61 percent from this year’s peak, after authorities banned them from funding stock buying in July, according to a Bloomberg survey conducted last month. Peer-to-peer Internet lending for the purchases had more than tripled to 8 billion yuan in the second quarter, data from research firm Yingcan Group show.   

• The Unexpected Side Effect of China’s Stock Rout. (video)

• Great Wall Motor Sales Fall in July on H6 SUV Slump. Great Wall Motor Co., China’s largest SUV maker, fell in Hong Kong trading after sales declined for the first time in 10 months, raising concern that demand is faltering for local automakers in the world’s largest market. The shares fell 3.6 percent to HK$24.10 at 9:46 a.m., headed for the lowest close since December 2012. Deliveries fell 1.7 percent to 47,445 units in July, even after the company offered discounts, according to a company filing to the Hong Kong stock exchange on Thursday. Sales for its most popular model, the H6 sport utility vehicle, dropped 13 percent.

• The Irresistible China Trade That Keeps Burning Investors. It looked like a no-brainer for buyers of Chinese shares in Hong Kong. Valuations in April were 25 percent cheaper than in the mainland, monetary stimulus was just getting started and money was pouring in through Hong Kong’s new exchange link with Shanghai. Bulls snapped up funds tracking so-called H shares at a record pace, while analysts at some of the world’s biggest banks predicted big gains to come. The only problem, though, is that the trade hasn’t worked.  

• Bank of Japan Leaves Monetary Policy Unchanged as Forecast. The Bank of Japan refrained from expanding monetary stimulus as Governor Haruhiko Kuroda bets the world’s third-biggest economy will emerge from a recent soft patch and inflation will pick up. The central bank will keep increasing the monetary base at an annual pace of 80 trillion yen ($640 billion), it said in a statement on Friday in Tokyo. The result was expected by all 37 economists surveyed by Bloomberg.

• Australia Central Bank Signals Unemployment Has Peaked, Pushes Back Growth Upswing. Australia’s central bank indicated the jobless rate has peaked as signs mount the economy is improving, even as it pushed back forecasts of a growth upswing by a year. “Data on the domestic economy over the past few months have generally been positive,” the Reserve Bank of Australia said Friday in Sydney. “The unemployment rate is now forecast to remain little changed over the next 18 months or so from a level that is a bit lower than had earlier been forecast, before declining over 2017 as demand growth picks up.”

• Asian Stocks Follow U.S. Shares Lower Before U.S. Jobs, BOJ. Asian stocks fell, following a slide in U.S. equities, ahead of a U.S. jobs report that may cement prospects that the Federal Reserve will raise interest rates as soon as next month. The MSCI Asia Pacific Index declined 0.2 percent to 140.55 as of 9:01 a.m. in Tokyo.

• The Shale Patch Faces Reality. Shale producers lack the majors’ ability to remain afloat in an oil glut. The runup was short-lived. Fears over weak demand from China, along with rising production in the U.S., Saudi Arabia, and Iraq pushed prices back below $50. In July, even as the summer driving season boosted U.S. gasoline demand close to record highs, oil posted its biggest monthly drop since October 2008. “The much feared double-dip is here,” Francisco Blanch, head of global commodity research at Bank of America, wrote in a July 28 report.

• Carnage in Junk-Rated Energy Bonds Returns With Plunging Oil. Bond investors that lent to the riskiest energy companies have seen $3.5 billion of market value evaporate this week as oil trades at a four-month low. SandRidge Energy Inc.’s $1.25 billion of 8.75 percent securities maturing in 2020 issued in May have fallen to 72 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Prices on $1.3 billion of notes sold in 2010 by Chesapeake Energy Corp., an energy producer that halted its stock dividend last month, have fallen to 82 cents on the dollar to yield 11.4 percent. Up until June, the riskiest energy companies had tapped investors for a record $26.9 billion of debt this year. 

• Bank of America said planning sale of $1.2 billion in home loans. Bank of America Corp. is offering $1.2 billion of mostly delinquent home loans, extending a series of sales by lenders seeking to pare holdings and meet demand by investment firms for soured mortgages. The company is selling five pools consisting of nonperforming debt, loans that have been modified and resumed payment, and some that haven't defaulted, according to a person with knowledge of the matter. Four of the pools are being serviced Bank of America and one is managed by Ocwen Financial Corp., said the person, who asked not to be identified because the planned sale is private.

• Biogen(BIIB) Drops on Doctor Worry Over Drug Class Including Tecfidera. Biogen Inc. shares sank after doctors in a top medical journal said more instances of brain infections may occur in people taking a type of medication that includes the drugmaker’s top-selling multiple sclerosis treatment. The shares fell 5.6 percent to $316.60 at the close in New York following the publication of the letter in the New England Journal of Medicine, in which doctors in the Netherlands called for “further studies concerning safety monitoring and new methods for identification of patients at risk” for people taking dimethyl fumarate. More cases may arise as more people use dimethyl fumarate, the doctors said. Biogen makes a formulation of dimethyl fumarate marketed as Tecfidera.

Wall Street Journal:

• Primetime GOP Presidential Debate — Live Blog. 

• Iran Deal Splits Democrats Along Regional Lines. New York Sen. Charles Schumer, likely the next Senate Democratic leader, says he must oppose deal. President Barack Obama’s pursuit of congressional support for his landmark nuclear agreement with Iran has hit some turbulence in New York. At least four House Democrats from the state have already rejected the agreement reached last month between Iran and six global powers, which imposes strict limits on 

• Despite Glut of Oil, Energy Firms Struggle to Turn Off the Tap. Companies keep finding ways to drill wells faster in an effort to deal with declining crude prices. Despite all their spending cutbacks and idle drilling rigs, American energy producers are finding it hard to turn off the taps that have helped lead to a global glut of oil. Rising crude production was a major theme in the past week as shale drillers reported their second-quarter earnings. Devon Energy Corp. and Whiting Petroleum Corp. said they pulled record amounts of oil...

• Clinton’s Email Evasions. The FBI has plenty to investigate if it wants to get serious. The FBI is finally looking into Hillary Clinton’s handling of email as Secretary of State, but her campaign says not to worry because it’s not a “criminal referral” and she followed “appropriate practices.” The relevant question is why isn’t it a criminal probe?

• Trump: A Mismatch for the GOP. Conservatives are more focused than ever on substance and consistency. Of the 10 Republicans in Thursday’s debate, none is harder to explain than Donald Trump. It’s not that he isn’t a serious candidate. It’s that he’s on the wrong stage, with the wrong people, at the wrong time.

Fox News:

• Exclusive: Quds Force commander Soleimani visited Moscow, met Russian leaders in defiance of sanctions. (video) The shadowy Iranian Quds Force commander Qassem Soleimani recently visited Moscow to meet with senior Russian leaders, according to two Western intelligence sources, despite a travel ban and U.N. Security Council resolutions barring him from leaving Iran.

• Sparks fly at opening of GOP debate as Trump becomes lightning rod.

CNBC:

• Russia hacks Pentagon computers: NBC, citing sources. (video) U.S. officials tell NBC News that Russia launched a "sophisticated cyberattack" against the Pentagon's Joint Staff unclassified email system, which has been shut down and taken offline for nearly two weeks. According to the officials, the "sophisticated cyber intrusion" occurred sometime around July 25 and affected some 4,000 military and civilian personnel who work for the Joint Chiefs of Staff.

• Capital One(COF) nears deal to acquire GE healthcare unit. Credit card lender Capital One is in exclusive talks to acquire General Electric's U.S. healthcare finance unit, in a deal likely to top $10 billion, according to people familiar with the matter. Capital One has outbid other potential buyers in an auction for the unit, the people said on Thursday, cautioning that the negotiations are ongoing and that a deal has not yet been finalized.

Zero Hedge:

• Emerging Market Mayhem: Gross Warns Of "Debacle" As Currencies, Bonds Collapse. (graph)

• Which Countries Have The Highest Default Risk: A Global CDS Heatmap. (map)

• Mapping The Rising Poverty Of The U.S.

• $60 Trillion Of World Debt In One Visualization.

• One Third Of All Chinese 'Gamblers' Have Shut Their Equity Trading Accounts. (graph)

• The Sweet, Sickly Stench Of QE 'Success'.

• Payrolls Preview: Goldman Expects Seasonal Bounce In Jobs But Warns Wage Growth May Disappoint. (graph)

• Oil Trading "God" Loses $500 Million In July On Commodity Rout.

• Is Trump The Democrat 'Wolf' In GOP Clothing?

• TBTF Banks Lowering Down-Payments & Credit Standards To Keep High-End Housing Market Alive.

• Analysts Give Up On "Man-Made" China Data: It's "A Fantasy" That "No One Believes". (graph)

• 3 Warnings For Market Bulls. (graph)

• Dow Dumps Almost 1000 Points From Highs To 6-Month Lows, Crude Carnage Continues. (graph)

Business Insider:

• US companies are dying faster than ever.

• Russia is trying to take over the Arctic.

• This dazzling visualization shows how everything in China is shrinking.

• BP(BP) CEO: Job cuts are coming at 'a faster pace'.

• US race relations are deteriorating.

• 3 charts that show the stock market is almost in a bubble. (graph)

• Nvidia(NVDA) shares are exploding higher.

• McDonald's(MCD) cuts hundreds of corporate jobs.

• Donald Trump kicked off the GOP debate with a dramatic threat to the Republican Party.

• One of the Senate's top Democrats will oppose the Iran nuclear deal.

• Emerging markets are breaking down.

Reuters:

• Top Brazil hedge fund Verde says country 'flirting with an abyss'. Verde Asset Management, Brazil's largest hedge fund, said the country is flirting with disaster as policy response to growing fiscal disarray and fallout from a political crisis are clouding visibility for investments in Latin America's largest economy. In a monthly letter to investors published late on Thursday, money managers led by Luis Stuhlberger said the list of headwinds facing Brazil is long: a swelling budget deficit, an unstable currency that could tank further, rapidly eroding support for President Dilma Rousseff and policymakers' failure to head off stubborn inflation.

• U.S.-based money market funds attract $20.3 bln inflows in week - Lipper.

• Lipper fund flows IG US$740.2m outflow; HY US$1.201bn outflow.

Securities Times:

• Some China Banks Cut Back on Stock-Pledge Loans. Some banks and brokerages cut the amount of loans that investors could get using stocks as collateral, citing unidentified people from multiple banks and a securities co.

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are -1.0% to +.50% on average.

• Asia Ex-Japan Investment Grade CDS Index 113.25 +1.25 basis points.

• Asia Pacific Sovereign CDS Index 64.75 +1.0 basis point.

• S&P 500 futures +.13%.

• NASDAQ 100 futures +.19%.

Morning Preview Links

Earnings of Note

Company/Estimate

• (NILE)/.19

• (CVC)/.24

• (EBIX)/.48

• (GRPN)/.02

• (HSY)/.75

• (HMSY)/.13

• (JD)/-.13

• (BID)/1.24

• (WLH)/.31

• (BRK/B)/2962.61

Economic Releases

8:30 am EST

• The Change in Non-Farm Payrolls for July is estimated to rise to 225K versus 223K in June.

• The Unemployment Rate for July is estimated at 5.3% versus 5.3% in June.

• Average Hourly Earnings for July is estimated to rise +.2% versus unch. in June.

• The Labor Force Participation Rate is estimated at 62.6% versus 62.6% in June.

3:00 pm EST

• Consumer Credit for June is estimated to rise to $17.0B versus $16.086B in May.
  

Upcoming Splits

• None of note

Other Potential Market Movers

• The UK Trade Balance report and the Japan Central Bank decision could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by industrial and commodity shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.