Tuesday, August 11, 2015

Wednesday Watch

Posted by Gary .....at 11:34 PM
Evening Headlines 
Bloomberg:
  • Yuan Set for Biggest Two-Day Drop Since 1994 as China Central Bank Devalues. The yuan was set for its biggest two-day drop in two decades, dragging currencies lower across Asia, after the People’s Bank of China set the weakest reference rate since 2012. The yuan fell 1.4 percent to 6.4105 per dollar as of 9:59 a.m. in Shanghai, after sliding 1.8 percent on Tuesday. The central bank lowered its daily fixing by 1.6 percent to 6.3306, a 0.1 percent discount to the previous closing level of 6.3231. The yuan sank 1.6 percent in Hong Kong’s offshore trading. “Today’s weak fixing indicates the PBOC wants to see further depreciation in the yuan, as yesterday’s drop won’t be enough to prop up China’s exports,” said Kenix Lai, a foreign-exchange analyst at Bank of East Asia Ltd. in Hong Kong. “Capital will flee from China to the U.S. due to the economic slowdown and the yuan devaluation.”
  • Brazil Rating Cut by Moody’s to Cusp of Junk; Outlook Stable. Moody’s Investors Service lowered Brazil’s rating to the cusp of junk in the second downgrade since President Dilma Rousseff came to office. Stocks and the real pared losses as it signaled another cut isn’t likely soon. Brazil’s grade was cut by one notch to Baa3, with a stable outlook. Standard & Poor’s cut its rating to the lowest investment grade in March 2014, the nation’s first downgrade in a decade. The move adds pressure to Rousseff’s economic team, led by Finance Minister Joaquim Levy, who has reduced spending and raised taxes to shore up fiscal accounts. With Brazil’s economy heading for its worst contraction in a quarter century, government revenue is falling more than expected. “Weaker-than expected economic performance, the related upward trend in government expenditures and lack of political consensus on fiscal reforms will prevent the authorities from achieving primary surpluses high enough to arrest and reverse the rising debt trend this year and next,” Moody’s said in a statement Tuesday.
  • Emerging Market Stocks Enter Bear Market. Emerging-market stocks entered a bear market and currencies slid on concern China will curtail imports after the biggest slide in the yuan in two decades. The selloff took the MSCI Emerging Markets Index’s decline from a peak last September to 20 percent, the threshold for a bear market. The gauge declined 1.1 percent to 878.27 on Tuesday, ending a bull rally that started in 2012, according to data compiled by Bloomberg. The yuan helped lead declines among 24 developing-nation peers, as a Bloomberg index of 20 most-traded emerging currencies slumped 0.7 percent to a record low. Credit and currency markets in Brazil, Peru and Chile are exposed because of their reliance on China for exports, Commerzbank AG said. Russia and South Africa count China as their biggest trading partner. “There is a great deal of nervousness around emerging markets now that the general economic environment has been less favorable for them,” Alan Gayle, senior strategist for Atlanta-based Ridgeworth Investments, said by phone. “The fact that China decided to let its currency drift lower will add even more pressure.”
  • Australia Bank Capital Raisings Surpass Crisis After CBA Offer. Commonwealth Bank of Australia is planning a A$5 billion ($3.6 billion) rights offer that will take capital raising by the nation’s biggest banks this year to levels surpassing the global financial crisis. In response to stricter regulatory requirements -- put in place partly to buttress lenders against a possible slump in the country’s booming property market -- the bank and its three largest rivals have now revealed plans to raise A$16 billion this year. That exceeds the A$13 billion raised to bolster balance sheets in the aftermath of the 2008 financial crisis.
  • Currency Rout Goes Global as Jen Sees Risk of 50% Loss on China. As bad as things are for emerging-market currencies, China is about to make them a whole lot worse. Its devaluation of the yuan risks a new round of competitive easing that may send currencies from Brazil's real to Indonesia's rupiah tumbling by an average 30 percent to 50 percent in the next nine months, according to investor and former International Monetary Fund economist Stephen Jen. 
  • Won Falls to Three-Year Low on Rate-Cut Bets After Yuan Devalued. The won fell to the lowest in more than three years amid speculation the Bank of Korea will cut interest rates further to spur growth after China devalued the yuan. South Korea faces uncertainties from China, the nation’s biggest overseas market, and persistent export weakness, Finance Minister Choi Kyung Hwan said at a meeting in Seoul Wednesday. The People’s Bank of China weakened the reference rate for its currency by record Tuesday amid a deepening slowdown in Asia’s largest economy. All 16 economists surveyed by Bloomberg see the BOK keeping borrowing costs at an unprecedented 1.5 percent on Thursday, after reductions in June and March. The won fell 0.3 percent to 1,182.88 a dollar as of 9:57 a.m. in Seoul, according to data compiled by Bloomberg. That’s the lowest since June 2012. The currency has declined 7.8 percent this year. 
  • Malaysia Consumers Send Najib Warning on Growth as Ringgit Drops. There’s a growing risk for the Malaysian economy, and it’s not just the plunging currency, falling oil exports or the political scandal. The warning signs can be found right on the doorstep of Prime Minister Najib Razak’s party headquarters. At the Putra World Trade Centre in Kuala Lumpur, seat of the United Malays National Organisation, cafe employee Noraini Ibrahim is feeling gloomy and spending less due to rising living costs. The cashier even curbed festivities during Hari Raya Aidilfitri, the celebration that marks the end of the Muslim fasting month. 
  • Singapore Stocks Head for Biggest Drop in Two Years on China. Singapore stocks tumbled, with the benchmark Straits Times Index heading for its biggest decline since June 2013 amid concerns China’s currency devaluation will hurt bank earnings and slow economic growth. The Straits Times Index sank 2.5 percent to 3,075.27 as of 10:37 a.m. in Singapore, the most in the Asia-Pacific region. DBS Group Holdings Ltd., Oversea-Chinese Banking Corp. and United Overseas Bank Ltd., the nation’s three key lenders, slumped at least 2.9 percent, among the eight biggest decliners on the benchmark measure.
  • Asian Stocks Head for Almost Seven-Month Low as Yuan Tumbles. Asian stocks fell, with the regional benchmark index heading for its lowest close since January, after China cut the value of the yuan for a second day, sending equity indexes across the region lower. The MSCI Asia Pacific Index slumped 1.6 percent to 137.88 as of 10:42 a.m. in Tokyo.
  • Cheap Debt Evaporates for Junk Companies in Oil's Cruel Summer. The weakest corporate borrowers are finding the days of free-flowing credit quickly evaporating. The weakest corporate borrowers are finding the days of free-flowing credit quickly evaporating. The $39.6 billion of junk-rated bonds and loans issued since July is the least since the summer of 2008, according to data compiled by Bloomberg. For those that are coming to market, many are paying up or struggling to find buyers at terms they can stomach. Appetite for energy companies, in particular, has vanished just as they need to refinance big credit lines they took out when oil was more than twice its current price.
  • Slumping Yuan Threatens More Gloom for World’s Metals Producers. It’s just what global producers of steel and aluminum didn’t need: a yuan devaluation that makes the flood of exports from the world’s biggest producer even cheaper. China’s shipments of steel and aluminum, used in everything from fridges to skyscrapers, surged to a record this year as the slowing economy left a domestic surplus with nowhere else to go. The surprise move by the central bank, which left the yuan heading for the biggest two-day slump in 21 years, make the products cheaper still, threatening more pain for world rivals struggling with lower prices.
  • Treasuries Are a Winner as China Exports Deflation Says Bill Gross. Bill Gross said deflation will wash up on other shores after China devalued its currency, sending investors into Treasuries. ``The weak Chinese economy seems to require a competitive devaluation against other Asian producers which points to weak global growth, lower commodity prices and again, lower inflation worldwide,'' Gross, money manager at Janus Capital Group Inc., wrote in an e-mailed response to questions after the People’s Bank of China cut the yuan’s reference rate by the most in two decades to combat an export slump. ``The disinflationary/deflationary effect will keep 10- and 30-year Treasuries well bid.’’
  • Parts of 2 Clinton E-Mails Now Earmarked as ‘Top Secret'. Intelligence officials have “recommended that portions of two of the four e-mails” in former Secretary of State Hillary Clinton’s personal e-mail account flagged by the intelligence community’s inspector general “should be upgraded to the top secret level,” State Dept. Spokesman John Kirby says in a statement.
  • Berkshire(BRK/A) Risks S&P Rating Cut on Leverage From Buffett Deal. Warren Buffett’s Berkshire Hathaway Inc. may be downgraded by Standard & Poor’s after agreeing to buy manufacturer Precision Castparts Corp. for about $37.2 billion. Buffett’s company was put on CreditWatch Negative because of “uncertainty around the funding of the acquisition and how it may affect current cash resources and leverage metrics at the holding-company level,” the ratings firm said in a statement Tuesday on Omaha, Nebraska-based Berkshire. “To fund the acquisition, Berkshire is likely to use some of the capital resources available at its insurance companies.”
Wall Street Journal: 
  • Cheaper Chinese Currency Has Global Impact. By devaluating yuan, Beijing is turning to a controversial growth-boosting tactic whose effects reverberate far and wide. Beijing signaled with its currency devaluation that the domestic economic slowdown it has failed to reverse is no longer a problem confined within China’s borders. It is now the world’s problem, too. Chinese officials have cut interest rates four times in the past 12 months, increased the amount of money banks can lend out and pumped funds into the stock market—measures meant to boost domestic demand in the world’s second-largest... 
  • Devalued Yuan Set to Take Bite Out of Apple(AAPL), Give Boost to Chinese Rivals. Weakened currency means reduced China revenue when converted to dollars, while local firms will enjoy lower costs. Apple Inc. may be one of the biggest losers from China’s surprise decision to devalue its currency, while the U.S. company’s Chinese rivals and the main assembler of its iPhone are expected to be among the biggest winners. Foreign companies such as Apple and fast-food retailer Yum Brands Inc. rely heavily on sales in the world’s second-largest economy. For them, a weaker yuan means less revenue when the currency is converted back into U.S. dollars. Chinese manufacturers, on the
Fox News:
  • FBI has Hillary Clinton emails from home server, official says. (video) The FBI has taken possession of thumb drives containing Hillary Clinton's emails, some of which have been deemed to contain highly sensitive classified information, according to a U.S. official briefed on the matter. The official was not authorized to be quoted publicly and spoke on condition of anonymity. Clinton's lawyer, David Kendall, turned over the emails after the FBI determined that he could not remain in possession of the classified information, the official said. The State Department previously had said it was comfortable with Kendall keeping the emails at his Washington law office.
  • After nuke deal, European companies rush into Iran to sell tools of oppression. (video) The lifting of international sanctions on Iran has triggered a stampede of European companies beating a path to Tehran to secure contracts, but some of the equipment being offered has dark, dual purposes in the hands of the Islamic Republic’s oppressive government. The cranes made by Austrian manufacturer Palfinger could be used to transform Tehran’s skyline, but also have played a starring role in Iran’s infamous public executions, where convicted criminals are often hanged from the giant booms high above public squares. German company Herrenknecht, whose senior officials visited the Iranian capital last month, makes industrial drilling rigs critics say could be used to nestle nuclear facilities deep inside mountains. Other companies lining up to do business with the mullahs make equipment that also could be used against Iran’s enemies – or its populace. “It reminds me of the economy and the industry of the Third Reich,” said Ariel Muzicant, vice president of Europe’s Jewish Congress.
Zero Hedge: 
Reuters:
  • Senior U.S. lawmakers condemn 'provocative' China currency devaluation. Senior U.S. lawmakers from both political parties on Tuesday condemned China's surprise currency devaluation as a grab for an unfair export advantage and urged inclusion of currency manipulation curbs in a new Pacific Rim trade deal. Several members of Congress said the devaluation of the yuan by China's central bank on Tuesday raised serious concerns. Some suggested it was further proof China cannot be trusted on currency policy. China's 2.0 percent yuan devaluation came weeks ahead of the first state visit to the United States by Chinese President Xi Jinping amid other tensions over trade, cybersecurity and international development. "It's time for the administration to focus more intensively on China's cheating and label the country a currency manipulator," Democratic Senator Bob Casey, a member of the Senate Finance Committee, said in a statement.
  • Index-linked stock funds signal less faith in wobbly China market. Beijing's efforts to support collapsing shares have pulled Chinese stocks back to around 4,000 points, but index-linked funds trading at discounts tell a less optimistic story. Exchange-trade funds (ETFs) listed overseas, which track China's main share indexes, suggest the stock market is valued as much as 10 percent lower, and the gap between what ETFs price in and the actual market may widen the more Chinese stocks are seen to be artificially propped up. Outflows in China ETFs began in mid-June when the market tumbled 30 percent in a span of just one month after a 110-percent rally from November to June. Selling intensified after Beijing rolled out interventionist policies to support the market and allowed hundreds of companies to suspend trade. "These ETFs are just a reflection that foreigners are losing faith in the China market," said Nitin Dialdas, chief investment officer at Mandarin Capital Limited in Hong Kong. "Perhaps these ETFs now reflect the true value of the underlying stock market, given the heavy intervention in onshore stocks."
Financial Times:
  • ‘Enormous’ rise in EM debt rings alarms bells. Emerging market private sector debt has surged by an “enormous” 33 per cent of gross domestic product since the global financial crisis, heightening the risk of financial crises, according to new analysis by JPMorgan. The findings come amid mounting expectations that the US Federal Reserve is drawing close to its first rate rise since the crisis, a move many fear many reduce capital flows to emerging markets, potentially raising borrowing costs even if central banks do not raise policy rates in order to defend their currencies. JPMorgan’s analysis suggests that the debt burdens of emerging market companies and households have jumped from 73 per cent of GDP in 2007 to 106 per cent at the end of 2014, virtually as high as in the developed world.
Telegraph:
21st Century Business Herald:
  • China May Ban Brokerages From Off-Exchange Finance. China may ban brokerages, fund management cos. from doing off-exchange financing via asset-management schemes, citing people familiar with the matter. The regulator plans to revise rules on what securities cos. are banned from asset management.
Evening Recommendations 
Morgan Stanley:
  • Raised (GOOG) to Overweight, target $820.
Night Trading
  • Asian equity indices are -1.75% to -1.0% on average.
  • Asia Ex-Japan Investment Grade CDS Index 118.75 +4.5 basis points.
  • Asia Pacific Sovereign CDS Index 68.75 +4.25 basis points.
  • S&P 500 futures -.50%.
  • NASDAQ 100 futures -.43%.

Earnings of Note
Company/Estimate
  • (BABA)/.58
  • (M)/.76
  • (BGG)/.39
  • (CACI)/1.71
  • (CSCO)/.56
  • (FLO)/.22
  • (NTES)/1.98
  • (NWSA)/.05
Economic Releases
10:00 am EST
  • JOLTS Job Openings for June are estimated at 5350 versus 5363 in May. 
10:30 am EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory decline of -1,735,830 barrels versus a -4,407,000 barrel decline the prior week. Gasoline supplies are estimated to fall by -770,830 barrels versus a +811,000 barrel gain the prior week. Distillate inventories are estimated to rise by +1,658,330 barrels versus a +709,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to fall by -.58% versus a +1.0% gain prior.
2:00 pm EST
  • The Monthly Budget Deficit for July is estimated to widen to -$137.0B versus -$94.6B in June.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Dudley speaking, China Retail Sales/Industrial Production reports, Eurozone Industrial Production report, BoJ Minutes, $24B 10Y T-Note auction, Wasde Crop report, weekly MBA mortgage applications report, (CVA) analyst day, (T) analyst conference, (XLNX) general meeting, Oppenheimer Tech/Internet/Communications Conference, Canaccord Growth Conference and the (ROG) investor day could also impact trading today.
BOTTOM LINE: Asian indices are lower, weighed down by industrial and technology shares in the region. I expect US stocks to open modestly lower and to maintain losses into the afternoon. The Portfolio is 25% net long heading into the day.

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