Sunday, January 10, 2016

Monday Watch

Today's Headlines
  • Chinese Stocks Extend Decline as Economic Growth Concerns Deepen. Chinese stocks fell, extending last week’s plunge, as factory-gate price data fueled concern the economic slowdown is deepening. The Shanghai Composite Index slid 3.3 percent to 3,080.89 at 11:18 a.m. local time, led by energy and material companies. The producer price index slumped 5.9 percent in December, extending declines to a record 46th month, data over the weekend showed. The Hang Seng China Enterprises Index tumbled 4 percent, while the Hang Seng Index fell below the 20,000 level for the first time since 2013. “Pessimism is the dominant sentiment” said William Wong, head of sales trading at Shenwan Hongyuan Group Co. in Hong Kong. “The PPI figure confirms the economy is mired in a slump. Market conditions will remain challenging given weak growth and volatility in external markets and the yuan’s depreciation pressure.”
  • China Slowdown to Hurt Export-Heavy Singapore the Most in Southeast AsiaPhilippines, Vietnam are least sensitive to weak Chinese growth. China's economic expansion has been a powerhouse for regional and global growth, boosting other countries' economies with demand for commodities and other imports. Now the reverse is happening - its slowdown is dragging down growth across the region. In Southeast Asia, Singapore could be the worst hit, with a 1 percentage point fall in China's economic growth subtracting 1.4 percentage points from Singapore's, according to estimates from Australia & New Zealand  Banking Group Ltd. China is the nation's largest export destination, taking almost 15 percent of shipments. Malaysia, the Philippines and Vietnam will be less affected, Glenn Maguire, ANZ chief economist for South Asia, Southeast Asia and Pacific, said in a Jan. 6 note, using a sensitivity index based on the past decade of data.
  • London Hedge Fund Omni Sees 15% Yuan Drop, and More in a Crisis. Omni. Partners, the $965 million London hedge fund whose wagers against China helped it beat the industry last year, said the yuan may fall 15 percent in 2016, and even more if the nation has a credit crisis. The currency, which tumbled to a five-year low last week, would have to drop to 7 or 7.5 a dollar to meaningfully reverse its appreciation and be commensurate with the depreciation of other slowing emerging markets, Chris Morrison, head of strategy of Omni’s macro fund, said in a telephone interview. The yuan slumped 1.4 percent last week to around 6.59 in Shanghai. “While Chinese authorities have been intervening heavily in the dollar-yuan market, they cannot ultimately fight economic fundamentals,” Morrison said, adding that even the 7-7.5 forecast would be too conservative if China were to have a credit crisis. “You’ll be talking about the kind of moves that Brazil and Turkey have seen, more like 50 percent, and that’s how you can create serious numbers like 8, 9 and 10 against the dollar.”
  • Intervention Loses Potency Just as Currency Wars Seen Escalating. As a new round of competitive devaluation looms, evidence is mounting that currency interventions are losing their potency. Mexico’s peso fell to a record on Friday as Cantor Fitzgerald LP criticized the nation’s efforts to strengthen the exchange rate as “mostly futile.” A study by Brazilian central bankers last week found “no evidence” that their intervention program was affecting currency volatility. And far from driving a sustained decline in the krona, mooted sales by Sweden’s Riksbank may actually be a buying opportunity, according to Citigroup Inc., the world’s biggest foreign-exchange trader.
  • Merkel's Refugee Woes Unbroken as Sexual-Assault Reports Rise. German Chancellor Angela Merkel surely can’t take many more weeks like last week. Merkel’s open-door refugee policy has blown open with the revelation of the New Year’s Eve sexual assaults, feeding opposition to migrants and widening the risks the chancellor faces at the start of 2016. With the number of women filing complaints soaring to more than 500 and the police seeking suspects, the latest stage in the crisis is still unfolding.
  • Catalonia Forms Separatist Government, Raising Pressure on Spain. Catalonia formed a government dedicated to splitting from Spain, increasing the pressure on Spanish political leaders to find a way out of their post-election deadlock. The regional assembly in Catalonia, Spain’s biggest economic region, endorsed Carles Puigdemont, a 53-year-old former journalist, as president in an emergency session late Sunday, following the decision of former incumbent Artur Mas to stand aside and not seek re-election. The new government will move ahead with plans to write a new constitution, create a central bank, expand the tax agency, and set up its own mechanisms for security and defense, Puigdemont said in a speech to the assembly on Sunday.
  • Whatever North Korea Tested, Its Nuclear Ambitions Remain Clear. North Korea is the only country known to have conducted a nuclear test this century. While defense experts are skepticalof Pyongyang’s claim that it detonated a hydrogen bomb on Jan. 6, they agree the latest test still advances its ambition to mount a nuclear warhead on a ballistic missile. Here’s a look at why joining the nuclear club has become an obsession of North Korea’s leaders from founder Kim Il Sung to his grandson, Kim Jong Un.
  • Won Drops to Five-Year Low as China Concern Fuels Stock Outflows. The won fell to the lowest since July 2010 as global funds sold South Korean stocks amid signs of faltering growth in China, the nation’s biggest export market. South Korea should closely monitor rising volatility in financial markets and scrutinize flows of foreign capital, Financial Services Commission Chairman Yim Jong Yong said Sunday. Overseas funds have pulled $550 million from local stocks this month following their first annual withdrawal in four years in 2015. China posted a record 46th monthly decline in producer prices and consumer inflation remained at about half the government’s 2015 target, according to data released Saturday. The won weakened 0.9 percent to 1,208.85 a dollar as of 10:05 a.m. in Seoul, according to data compiled by Bloomberg. The currency fell as low as 1,211.20. The Kospi index of shares declined as much as 1.3 percent, headed for its lowest close since September.
  • Saudi Arabian Stocks Lead Mideast Drop as Oil Slide Saps Trading. Saudi Arabian stocks led a decline across most Middle Eastern markets amid reduced trading, as investors weighed the impact of plummeting oil prices. The Tadawul All Share Index, the region’s biggest gauge, dropped 2.2 percent, extending its retreat this month to 12 percent. About 234 million shares were exchanged, or 9 percent less than the 30-day average. Qatari stocks fell 1 percent on about half the QE Index’s average volume. Trading in Dubai also slid. “Investors are waiting until the end of the first quarter to see the impact of low oil prices and government cutting spending on corporate profits,” said Nabil Farhat, an Abu Dhabi-based partner at Al Fajr Securities.
  • Asian Stocks Decline With Oil, Rand, Won; China Shores Up Yuan. Asian stocks extended last week’s global rout, oil dropped and the South African rand led a slump in emerging-market currencies as a China-fueled risk aversion stoked demand for government bonds. The yuan gained after the central bank kept its reference rate steady for a second day. The rand tumbled 9 percent to a record low before paring its slide. Oil sank to its lowest since 2003 and copper futures declined. Investments regarded as offering more safety found support, with sovereign yields falling in Japan, Australia and New Zealand. “The market is concerned about China’s financial stability,” said Matthew Sherwood, head of investment strategy at Perpetual Ltd. in Sydney, which manages about $21 billion. “People are also quite nervous about the Chinese economic outlook. China is certainly slowing on a very gradual path down. A lot of people are fearing a hard landing is in play, but that’s not our central scenario.” The MSCI Asia Pacific excluding Japan Index slid 0.9 percent as of 11:39 a.m. Tokyo time, as the Shanghai Composite Index slid 1.3 percent and the Hang Seng Index dropped 2.5 percent in Hong Kong.
  • Oil Extends Slide From 11-Year Low Amid Signs of China Weakness. Oil extended declines from the lowest close in 11 years amid further signs of weakness in China, the world’s second-biggest crude consumer. Futures fell as much as 2.2 percent in New York after dropping more than 10 percent last week. Producer prices in China fell for a record 46th month and inflation remained at about half the government’s 2015 target. Saudi Arabian Oil Co., the world’s biggest crude exporter, confirmed on Friday it was studying options for a share sale, including listing “a bundle” of refining subsidiaries, according to a statement from the state-owned oil monopoly.
  • Hedge Funds Greet 2016 by Cutting Bullish Oil Bets to 5-Year Low. Money managers began the new year by reducing wagers on rising oil prices to the lowest level in more than five years. Oil tumbled in the first days of 2016 as a global glut outweighed an increase in tension between Saudi Arabia and Iran. The decline accelerated as turmoil in China’s markets bolstered concern that an economic slowdown in the world’s biggest commodity-consuming nation is worsening. Speculators’ net-long positions in WTI fell by 23,863 contracts to 76,934 futures and options, the lowest since July 2010, CFTC data show. Longs, or bets that prices will rise, dropped 2.5 percent to the lowest since July, while shorts climbed 11 percent.
  • Metals Rout Deepens, Dragging BHP Billiton to Lowest in Decade. Metals slumped, with copper dropping to the lowest level in more than six years, after Chinese inflation figures underscored concerns about slowing growth in the world’s biggest consumer. BHP Billiton Ltd., the largest miner, fell to a fresh decade-low in Sydney. Copper dropped as much as 1.5 percent to $4,416 a metric ton and traded at $4,425.50 by 9:49 a.m. in Shanghai. Prices extended a 4.7 percent decline last week amid a rout in metals and mining company shares triggered by swings in China’s financial markets and fears the country’s economic slowdown will hit demand. In the latest signal, inflation in December stayed at about half of the government’s 2015 target. Nickel dropped 2.7 percent to $8,330 a ton. BHP shares sank 5.3 percent to A$15.48, their lowest since 2005. Rio Tinto Group lost 4.5 percent. The LME Index of six base metals slid 4.3 percent last week, the worst performance since May.
  • Unwanted Piles of Corn, Soy Spur Most-Bearish Crop Outlook Ever. Piles of unwanted grain on farms near Doug Schmitz’s storage bins in southern Minnesota are a stark reminder of just how bearish the outlook is for U.S. crop prices. After record yields during the harvest a few months ago, growers in the area still have 80 percent of their corn crop left to sell and 70 percent of soybeans, said Schmitz, who operates four grain elevators and markets to processors and exporters. Normally, half the supply would be unloaded by now, he said. While Schmitz Grain Inc. is under contract to collect 2 million bushels from local farmers, the outlook is so dim that most of that inventory hasn’t been priced yet, he said.
Wall Street Journal:
  • Fed Eyes Margin Rules to Bolster Oversight. Rules limiting what portion of stocks or bonds can be purchased through borrowing are moving up the Fed’s to-do list. The Federal Reserve is dusting off a legal power it has largely ignored for four decades, a move that could significantly expand the Fed’s influence over financial markets. 
  • Trump and Cruz Have Trouble in the Middle. Independents will decide the general election, and they’re far from sold on the Republican front-runners. A terrible way to forecast the 2016 contest is to gauge whose supporters are the loudest. Presidential elections are not decided by partisans or ideologues. The arithmetic is pretty simple: 41% of voters in the 2012 presidential election described themselves as moderates, and 29% as independents. Almost all Republicans (93%) and self-described conservatives (82%) voted for Mitt Romney, but that wasn’t enough. Even if Mr. Romney had...  
Fox News:
  • Something 'massive' is happening in the economy: Pal. (video) Looking at International Monetary Fund data, "the year-over-year change in global exports is at the second lowest level since 1958," Raoul Pal, Publisher of the Global Macro Investor told CNBC's"Fast Money"this week. Basically, it means economies around the world are shipping their goods at near historically low levels. "Something massive is going on in the global economy and people are missing it," Pal added.
Zero Hedge:
  • Investors in the mood to cut hedge fund exposure. Global investors are planning to cut their exposure to hedge funds in 2016 following a disappointing performance in the past year, according to a survey. The poll data, from research group Preqin, will be met with dismay by the hedge fund industry, which had hoped volatile stock markets would encourage investors to seek alternative sources of return. It is also likely to add extra pressure on hedge fund fees.  
  • Big five US investment banks hurt by China and oil. Wall Street banks are poised to unveil another batch of lacklustre profits after the run-up to the Federal Reserve’s historic interest rate rise failed to boost their crucial trading businesses. Results to be presented over the next week and a half are expected to show the big five US investment banks  generated even less revenue from trading in the last three months of the year than in the troublesome third quarter.
  • Abe Will Impose 'Severe' Sanctions on North Korea. Japanese Prime Minister Shinzo Abe said he will "respond severely" with unilateral sanctions of North Korea after its 4th nuclear test.
Beijing News:
  • China Premier Vows No More Strong Stimulus on Economy. China wouldn't seek strong stimulus or flood economy with too much money to expand demand, citing Premier Li Keqiang as saying. China will try its best to develop new business models and create new drivers for the economy, Li was cited as saying. China must take concrete measures to ease overcapacity in steel and coal sectors, Li said.
Night Trading
  • Asian indices are -2.50% to -1.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 150.25 +4.25 basis points.
  • Asia Pacific Sovereign CDS Index 76.25 -2.75 basis points.
  • Bloomberg Emerging Markets Currency Index 67.76 +.12%.  
  • S&P 500 futures -.27%.
  • NASDAQ 100 futures -.34%.

Earnings of Note
  • (APOL)/.31
  • (AA)/.04
  • (TISI)/.82
Economic Releases 
10:00 am EST
  • Labor Market Conditions Index for December is estimated to fall to 0.0 versus .5 in November. 
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Kaplan speaking, Fed's Lockhart speaking, Japan Current Account report and the (UAL) Dec. traffic report could also impact trading today.
BOTTOM LINE: Asian indices are sharply lower, weighed down by financial and industrial 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 week.

No comments: