Monday Watch

Today's Headlines 

Bloomberg:  

• Barclays to BlackRock Say the China Rebound Rally Won't Last. The rebound in Chinese equities spurred by the government’s efforts to boost growth will probably fade as the measures underscore fundamental weakness in the world’s second-largest economy, according to Barclays Plc, Blackfriars Asset Management Ltd. and BlackRock Inc. A $582 million exchange-traded fund tracking mainland stocks jumped to a two-month high in the U.S. on Friday as the People’s Bank of China, after the close of local trading, announced its sixth interest-rate cut since November. The gain pushed the advance from this year’s low in August to 23 percent. The rebound has been driven in large part by speculation that the government will move more aggressively to bolster an economy projected to expand in 2015 at the slowest pace in a quarter century. “I don’t think this is the start of a new move in Chinese equities higher,” Ajay Rajadhyaksha, head of macro research at Barclays, said by phone from New York on Friday. The country needs economic “growth numbers to improve sharply, and that does not seem to be happening,” he said. 

• China's Bid to Prop Up Property Investment Challenged Amid Glut. China’s moves to ease mortgage restrictions and cut interest rates are bearing fruit in the nation’s smaller cities, where home prices have staged a recovery. Now comes the bigger challenge: Clearing a supply glut to spur investment by developers. Lower borrowing costs are helping a residential market recovery spread from the economic hubs such as Shanghai and Shenzhen to smaller and less-prosperous cities. New-home prices rose in September from August in more than half of the 70 major cities monitored by the government for the first time in 17 months. Yet, a construction boom over the past two years has led to 424.7 million square meters of unsold homes languishing nationwide as of Sept. 30.

• Nomura Bond Trader Says China Rate Shift Raises Odds of Fed Move. China’s interest-rate cut will lead the Federal Reserve to raise borrowing costs in the U.S., said John Gorman, the head of dollar debt trading for Asia and the Pacific at Nomura Holdings Inc. China’s policy shift last week will help curb volatility in its markets, removing an obstacle that kept the Fed from acting at its last meeting in September, Gorman said. The U.S. central bank’s next policy session is Oct. 27-28. Asian stocks rose Monday after China cut both interest rates and lenders’ reserve requirements on Friday. “It reduces the chance of volatility out of China, which is one of the reasons the Fed didn’t go in September,” Gorman said. “I think they’re going in December.” Nomura is one of the 22 primary dealers that trade directly with the U.S. central bank.

• India Is Spending Billions to Populate a Remote Area Claimed by China. India plans to invest billions of dollars to populate a remote northeastern state it has neglected since fighting a war with neighboring China more than five decades ago. Prime Minister Narendra Modi’s government is finalizing blueprints for a $6 billion highway in Arunachal Pradesh, which is also claimed by China. Construction on the 2,000-kilometer (1,243-mile) road will start as early as 2018, Kiren Rijiju, minister of state for home affairs, said in an interview. 

• India to Squeeze State-Run Companies as Deficit Worries Grow. With funds running short to sustain an infrastructure spending spree that’s underpinning India’s economic growth, Finance Minister Arun Jaitley will step up pressure on state-run companies to pick up the slack. Jaitley plans to meet public-sector companies in November -- two months earlier than usual -- to urge them to pay higher dividends if they don’t invest more, according to two people familiar with the discussions. The dividends will go to the government, which is the majority shareholder in companies like Coal India Ltd., the world’s largest producer of the fuel.

• Israel Debt Risk Gains Most in 14 Months as Violence Rises. The deteriorating security situation in Israel and the impact it may have on economic growth has led to the second-biggest surge in credit risk this month among developed nations. Israel’s credit-default swaps, contracts insuring the nation’s debt against default for five years, have advanced four basis points so far this month, the second-biggest gain after the U.S. among 23 developed countries, to 73 basis points, CMA prices show. The swaps increased five basis points last week, the most since August 2014. Meanwhile, the shekel depreciated the most in two months during the same period. 

• Ringgit Retreats as China Easing Deepens Growth Outlook Concern. The ringgit fell the most in almost a week as China’s interest-rate cut heightened concern that growth in Asia’s biggest economy and a top Malaysian export market is slowing. The People’s Bank of China also reduced the amount of cash banks must set aside as reserves on Friday to bolster growth, which is set for the slowest annual expansion in a quarter of a century. Malaysia’s 2016 budget last week included tax increases for high-income earners and a pledge to further lower the fiscal deficit. The macro economic outlook hasn’t changed though amid lower energy prices and weak domestic demand, according to a Morgan Stanley report on Monday. 

• Korean Won Leads Declines in Asia After China Cuts Interest Rate. South Korea’s won led a decline in Asian currencies amid concern China’s interest-rate cut will lead to more weakness in the yuan and other regional exchange rates. The won fell the most in a month after the People’s Bank of China lowered its policy rate for a sixth time since November late on Friday. That followed data last week that showed gross domestic product in China, South Korea’s biggest export market, increased at the slowest pace in more than six years in the third quarter. The devaluation of the yuan on Aug. 11 sparked declines in Asian exchange rates and raised fears of a currency war.

• Asian Stocks Extend Two-Month High as China Cuts Interest Rates. Asian stocks rose after China’s central bank cut its benchmark lending rate, stepping up efforts to cushion a deepening economic slowdown. The MSCI Asia Pacific Index gained 0.3 percent to 136.15 as of 9 a.m. in Tokyo after closing Friday at the highest since Aug. 19. The gauge climbed 9.7 percent this month through the end of last week as investors pushed back expectations for the first U.S. interest-rate increase and central banks signaled further measures will be enacted to stave off weak economic growth. 

• Oil Swings Near 4-Week Low as Investors Weigh Rigs Against China. Oil swung between gains and losses near the lowest closing price in almost four weeks as investors weighed a slowing pace of U.S. drilling-rig reductions against an interest rate cut in China. Futures in New York rose as much as 0.5 percent and fell as much as 0.4 percent. The number of active machines targeting oil dropped by 1 through Oct. 23 after declining by 45 over the prior three weeks, according to Baker Hughes Inc. China, the world’s second-biggest crude consumer, stepped up monetary easing with its sixth interest-rate cut in a year on Friday to combat deflationary pressures and a slowing economy.

Wall Street Journal:

• Cash Crunch Clouds Future for Oil Firms. Spending on new projects, share buybacks and dividends outstrips cash flow. The world’s biggest oil companies are struggling to generate enough cash to cover their spending and dividends, despite efforts to slash billions of dollars from their budgets in the face of tumbling oil prices.

Zero Hedge:

• America's Top 10 Fears.

• The Death Of Europe.

• The Mechanics Of The Fed As Seen By The Eurodollar Curve. 

• Chinese Stocks Rise To 2 Month High Following PBOC's Rate, RRR Cut But Copper, Crude Struggle. (graph)

• "If We Don't Find A Solution Today, It's The End Of The European Union" - Refugee Crisis Hits Tipping Point. 

• "The Distress Is Showing Up" Credit Managers Index Plunges To Recessionary Levels. (graph)

• The Fatal Fallacy Of Faith In The Fed's Assumed Powers.

• Hedge Funds Suffer Worst Year Since 2011. (graph)

• US Economic Data Has Never Been This Weak For This Long.

• 6 Months Later, The Australian Crack Shack Sells For $60,000 More.

• Putting China's "6.9% GDP Growth" In Context.

• The Fed's Inconvenient Truth (In 1 Hope-Crushing Chart). (graph)

Business Insider:

• China's fix for falling profits is only making things worse.

• 6 reasons China's economy is weaker than you think.

• I went to a seminar with one of the world's largest banks and almost everything said there was really bearish. (graph)

• Valeant(VRX) is about to hold the most intense investor call in years — here are the questions they must answer.

• The junk bond market isn't the only place to look for signs of trouble in the lending markets. (graph)

Telegraph:

• Eurozone crosses Rubicon as Portugal's anti-euro Left banned from power. Constitutional crisis looms after anti-austerity Left is denied parliamentary prerogative to form a majority government. 

• China does not need to defend 7pc growth target 'to the death', says premier. Li Keqiang claims China's prospects remain bright as world's second largest economy shifts to "new normal" of slower, more sustainable growth. 

Night Trading

• Asian indices are unch. to +.75% on average.

• Asia Ex-Japan Investment Grade CDS Index 131.75 -3.5 basis points.

• Asia Pacific Sovereign CDS Index 71.25 -3.0 basis points.

• Bloomberg Emerging Markets Currency Index 72.17 +.05%.  

• S&P 500 futures -.21%.

• NASDAQ 100 futures -.19%.

Morning Preview Links

Earnings of Note

Company/Estimate 

• (LH)/2.07

• (SOHU)/-.58

• (AVB)/1.93

• (BRCM)/.73

• (CAKE)/.56

• (IACI)/.78

• (MSTR)/2.16

• (PCL)/.51

• (RCII)/.45

Economic Releases 
10:00 am EST

• New Home Sales for September are estimated to fall to 550K versus 552K in August.

10:30 am EST

• Dallas Fed Manufacturing Activity for October is estimated to rise to -6.5 versus -9.5 in September.
  

Upcoming Splits

• None of note

Other Potential Market Movers

• The China Economic Meeting and German IFO Business Climate Index could also impact trading today.

BOTTOM LINE: Asian indices are mostly higher, boosted by real estate and consumer shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the week.