Friday, October 09, 2015

Friday Watch

Evening Headlines 
  • If You Thought China's Equity Bubble Was Scary, Check Out Bonds. As a rout in Chinese stocks this year erased $5 trillion of value, investors fled for safety in the nation’s red-hot corporate bond market. They may have just moved from one bubble to another. So says Commerzbank AG, which puts the chance of a crash by year-end at 20 percent, up from almost zero in June. Industrial Securities Co. and Huachuang Securities Co. are warning of an unsustainable rally after bond prices climbed to six-year highs and issuance jumped to a record. The boom contrasts with caution elsewhere. A selloff in global corporate notes has pushed yields to a 21-month high, and credit-derivatives traders are demanding near the most in two years to insure against losses on Chinese government securities. While an imminent collapse isn’t yet the base-case scenario for most forecasters, China’s 42.1 trillion yuan ($6.6 trillion) bond market is flashing the same danger signs that triggered a tumble in stocks four months ago: stretched valuations, a surge in investor leverage and shrinking corporate profits. A reversal would add to challenges facing China’s ruling Communist Party, which has struggled to contain volatility in financial markets amid the deepest economic slowdown since 1990. “The Chinese government is caught between a rock and hard place," said Zhou Hao, a senior economist in Singapore at Commerzbank, Germany’s second-largest lender. "If it doesn’t intervene, the bond market will actually become a bubble. And if it does, the market could crash the way the equity market did due to fast de-leveraging.”   
  • Is a Bubble Forming in China's Bond Market? (video)
  • No Room for Mistakes as World Economic Waters Turn Choppy. For years, the global economy surfed a flood of easy money from central banks and a surge in Chinese demand for commodities. Now, policy makers are trying to anticipate what’s exposed when the tide goes out. “This is a pretty unforgiving environment,” and “not a type of economy in which one can make mistakes,” Bank of England Governor Mark Carney said Thursday at annual meetings of the International Monetary Fund and World Bank in Lima. “Everybody needs to recognize there isn’t going to be a big surge of demand from abroad.” 
  • Fast Retailing Misses Estimates on U.S. Losses. (video) Fast Retailing has fallen the most in nearly 18 months after earnings and forecasts missed analysts estimates due to losses at its Uniqlo and J Brand businesses in the U.S. Bloomberg's Peter Elstrom reports on "Trending Business."
  • PC Shipments Fall 7.7% as Strong Dollar Boosts Prices. Global personal-computer shipments fell 7.7 percent in the third quarter on slower desktop sales and higher dollar-based prices, market researcher Gartner Inc. said. PC manufacturers shipped 73.7 million units, compared with 79.8 million a year earlier, Gartner said in a statement Thursday. The introduction of Microsoft Corp.’s new Windows 10 operating system had a “minimal impact” as many upgrades went on existing PCs instead of new ones, the company said. Researcher IDC reported a similar drop in shipments. The decline, following a 9.5 percent drop in the prior quarter, underscores the persistent challenges facing PC makers as more shoppers opt for smartphones and tablets. The stronger dollar is making computers more pricey abroad even as companies try to lure buyers with new types of devices.  
  • Asia Stocks Set for Best Week Since 2011 as Fed, Oil Buoy Shares. Asian stocks rose, with the regional benchmark index heading for its biggest weekly advance since December 2011, as U.S. shares rallied after minutes from the Federal Reserve’s latest meeting indicated the central bank won’t rush to raise interest rates. Energy companies led gains as oil headed for its steepest weekly increase since August. The MSCI Asia Pacific Index climbed 0.7 percent to 132.13 as of 9:00 a.m. in Tokyo, poised for a 4.6 percent rally this week.
  • 85 Gas Projects Dying on the Vine as LNG's Promise Falls Short. Five years ago, energy companies hungry for the next big thing began planning as many as 90 terminals to send natural gas around the globe. Now, it seems the world only needs five more. Consulting firm IHS Inc. says only one in every 20 projects planned are actually necessary by 2025 as weakening Asia economies, cheap coal, the return of nuclear power in Japan and the ever-expanding glut of shale supply in North America temper demand for the power-plant fuel, putting tens of billions of dollars worth of export projects at risk.
Wall Street Journal: 
  • Assad Seen Trying to Force the West to Choose Between his Regime, Islamic State. Russia’s intervention aims at opposition rebels. Syrian President Bashar al-Assad and his inner circle are engaged in a high-stakes gamble for the future of their fractured nation, betting Russian attacks on rebel positions will shift momentum in the conflict and shore up support from their core constituency. Russia’s intervention is lending credence to what is widely believed to be Mr. Assad’s... 
  • Fed’s Rate Delay Spurred by Worry Over Low Inflation, Minutes Show. Inflation has been below the Fed’s 2% target for more than three years. Federal Reserve officials held off on raising short-term interest rates at their September policy meeting because of worries that inflation could remain stuck at exceptionally low levels, according to minutes released Thursday. The Fed has twin goals of a robust labor market and low, stable inflation. Policy makers concluded at the meeting they were near their goal of “full employment,” but they...
Fox News:
  • EXCLUSIVE: U.S. officials conclude Iran deal violates federal law. (video) Some senior U.S. officials involved in the implementation of the Iran nuclear deal have privately concluded that a key sanctions relief provision – a concession to Iran that will open the doors to tens of billions of dollars in U.S.-backed commerce with the Islamic regime – conflicts with existing federal statutes and cannot be implemented without violating those laws, Fox News has learned.
  • Goldman(GS) lowers 2016 price forecasts for nickel, zinc, lead. Goldman Sachs on Thursday slashed its 2016 price forecasts for nickel, zinc, and lead by more than 20 percent, primarily citing challenges to Chinese metals and mining demand. "China's metals and mining commodity demand is likely to continue to be challenged by a substantial debt and property inventory overhang and further dollar strength," the influential U.S. investment bank said in a note. Goldman cut its 2016 outlook by 29 percent each for nickel and zinc to $14,500 per tonne and $2,383 per tonne, respectively, while lowering its outlook for lead by 21 percent to $2,083 per tonne. Low Chinese demand, increasing competition from nickel pig iron output in the country along with a depreciating Chinese currency, are among the factors that could provide a downside risk to nickel prices, Goldman said. Goldman said it expected copper and aluminum prices to decline from current levels over the coming year but left its 2016 outlook for both the metals unchanged. The bank, however, cut its copper forecast for this year to $5,582 from $5,670 per tonne.
The Standard:
  • HK growth pace to slow. The Hong Kong Institute of Economics and Business Strategy expects local economic growth to ease to 1.9 percent in the fourth quarter from a year earlier the slowest gain in the same period since 2012.
Evening Recommendations 
  • None of note
Night Trading
  • Asian equity indices are +.75% to +1.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 142.5 -6.75 basis points.
  • Asia Pacific Sovereign CDS Index 81.5 +.25 basis point.
  • S&P 500 futures -.15%.
  • NASDAQ 100 futures +.17%.

Earnings of Note
  • None of note
Economic Releases
8:30 am EST
  • The Import Price Index for September is estimated to fall -.5% versus a -1.8% decline in August.
10:00 am EST
  • Wholesale Inventories for August are estimated unch. versus a -.1% decline in July.
  • Wholesale Sales for August are estimated to fall -.4% versus a -.3% decline in July.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Lockhart speaking, Fed's Evans speaking, IMF World Bank Meetings, UK Trade Balance and the WASDE Crop report could also impact trading today.
BOTTOM LINE: Asian indices are higher, boosted by commodity and industrial 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.

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