Sunday, January 31, 2016

Monday Watch

Today's Headlines
  • China Factory Gauge Signals a Record Streak of Deterioration. (video) China’s official factory gauge signaled conditions deteriorated for a sixth month as an index of services continued to hold up, illustrating the widening divergence in the two-speed economy. The purchasing managers index dropped to a three-year low of 49.4 in January, the National Bureau of Statistics said Monday. That compared with a median estimate of 49.6 in a Bloomberg survey of economists, and represents the longest stretch of readings remaining below 50 on record. Numbers below 50 indicate deterioration.
  • China's Efforts to Squeeze Bets Against the Yuan Haven't Achieved Much. The cost of betting against the yuan in Hong Kong is back to where it was at the start of the year, highlighting the shortcomings of China’s attempt to starve the offshore market of funds while flooding domestic banks with cash to support the economy. The Hong Kong InterBank Offered Rate for three-month yuan loans fell to 4.87 percent on Friday, 59 basis points lower than the Dec. 31 fixing and down from a record 10.42 percent on Jan. 12. The comparable rate in Shanghai is 3.10 percent and Chris Morrison at $965 million hedge fund Omni Partners says funds will flow offshore, providing a pool of yuan to be borrowed and sold, unless China imposes draconian capital controls.
  • China Bears Miss Worst Selloff Since 2008 After Cutting Short Bets. Talk about mistimed trading: Bears on Chinese equities just missed the biggest sell-off in seven years. Short sellers abandoned their bearish bets against the biggest A-share ETF listed in the U.S. just as mainland stocks tumbled the most in January since the global financial crisis. Shares borrowed and sold on expectations of a decline in the exchange-traded fund fell to a one-year low of 4.2 percent of stock outstanding on Jan. 11, down from a record of 38 percent on Dec. 9, according to data compiled by Bloomberg and Markit. The trades were unwound as the fund, which tracks the CSI 300 Index of companies traded in Shanghai and Shenzhen, lost as much as 28 percent from a peak in late 2015 through last week
  • BOJ Rate Cut No Solace for Top Japan Fund That's Staying in Cash. J Flag Investment Co., an investment advisory firm which helps run among the top five funds in Japan, says the Bank of Japan’s move to negative interest rates won’t assuage investor anxiety or damp volatility in the nation’s stocks. The firm, which advises on 25 billion yen ($210.8 million) in assets, boosted cash last year and has no plans to get back in the market because it expects stocks to remain volatile over the next three to six months even after the central bank lowered its interest rates to minus 0.1 percent on certain holdings. J Flag’s long-only fund rose 24 percent in 2015, the fourth best-performing fund among 26 Japan-focused peers tracked by Eurekahedge Pte.
  • HSBC Says Hiring, Salaries to Be Frozen in 2016 in Cost-Cut Plan. HSBC Holdings Plc will impose a hiring and pay freeze this year as part of its drive to cut as much as $5 billion in costs by the end of 2017, a spokeswoman for the bank said Sunday. The actions were outlined in a memorandum received by employees on Friday, the bank’s Gillian James said in an e-mail statement. “As flagged in our Investor Update we have targeted significant cost reductions by the end of 2017,” James said. HSBC Chief Executive Officer Stuart Gulliver in June outlined a three-year plan to pare back a sprawling global network by shutting money-losing businesses and eliminating jobs as he pushes to improve earnings amid surging compliance costs. Other major European lenders from Credit Suisse Group AG to Deutsche Bank AG are cutting thousands of jobs as they battle to adapt to tougher regulatory demands on capital.
  • Korean Won Weakens Most in Three Weeks as Export Outlook Worsens. The won suffered its biggest drop in three weeks after South Korea’s exports shrank the most since August 2009 and the yen’s slide worsened the outlook for shipments. Government bonds rose, pushing yields to record lows, after official data on Monday showed overseas sales contracted 18.5 percent in January from a year earlier, more than the median estimate for a 10.3 percent decline in a Bloomberg survey. The yen weakened after the Bank of Japan adopted negative interest rates on Friday, boosting the competitiveness of Japanese goods. The two nations compete in global markets to sell everything from cars to electronics. The won weakened 0.5 percent to 1,205.38 a dollar as of 10:47 a.m. in Seoul, data compiled by Bloomberg show. It fell as much as 1 percent, the most since Jan. 11, and is Asia’s worst performer this year with a 2.7 percent loss.
  • Gulf Arab Stocks Trim Worst Start in 10 Years After Oil Rebounds. Gulf Arab equities trimmed their worst January in at least a decade after oil capped its second weekly advance. Dubai’s DFM General Index led gains in the region, climbing to the highest in more than three weeks as the number of shares traded was almost double the six-month average. Abu Dhabi’s ADX General Index had the biggest increase in more than a year. Saudi Arabia’s Tadawul All Share Index rose a fourth day, the longest streak since November. The Bloomberg GCC 200 Index, a gauge of 200 of the region’s biggest companies, added 2.1 percent, gaining for a third day. The measure has lost 9.2 percent this month, the worst start to a year since the index was created 10 years ago. 
  • Asian Stocks Advance for Fourth Day Amid Central Bank Optimism. Asian stocks rose, with the regional benchmark index heading for its fourth day of advances, as shares in Tokyo extended Friday’s rally after the Bank of Japan stepped up its monetary stimulus. The MSCI Asia Pacific Index gained 0.4 percent to 121.82 as of 9:05 a.m. in Tokyo.
  • Oil Declines as Kuwait to Nigeria Boost OPEC Crude Production. Oil halted its longest run of gains this year as Kuwait and Nigeria helped boost crude production from OPEC, exacerbating a global glut. Futures lost as much as 1.7 percent in New York after earlier rising as much as 1.7 percent. Output from the Organization of Petroleum Exporting Countries climbed to 33.11 million barrels a day in January as Iran pumped a further 60,000 barrels a day, according to data compiled by Bloomberg. China’s purchasing managers index dropped to 49.4 in January, the National Bureau of Statistics said Monday. Numbers below 50 indicate deterioration.
  • BofA Says Sharp Yuan Devaluation Will Depress Commodity Prices. A depreciation of 1 percent in the Chinese yuan leads to a decline of 0.6 percent in commodity prices, according to Bank of America Corp. This relationship with the currency is the strongest for commodities such as copper and platinum, of which China is the world’s dominant consumer, the U.S. bank’s strategists wrote in a report dated Jan. 25. A cheaper yuan will erode the purchasing power of the Chinese, pushing prices down and outweighing any benefit from easier financial conditions that a devaluation may bring, they said.
  • Singer, Griffin Give Combined $5 Million to Super-PAC Backing Rubio. Rubio also scored some Bush defectors.
Wall Street Journal:
  • Oil-Price Poker: Why the Saudis Won’t Fold ‘Em. Don’t underestimate the impact of Middle East politics. The game being played in the global oil market today bears more than a passing resemblance to poker. Nobody wants to quit while they’re losing. That is important for investors to keep in mind as they ponder what have become almost daily spikes and drops in the price of crude. So, too, is the role of Saudi Arabia in the game.
  • Trump and the Obama Power Temptation. A history of using lawsuits or government to silence critics and rivals raises the question: How would he behave in office? Of all the Republicans campaigning in Iowa, perhaps none is campaigning harder than Ben Sasse, a Republican senator from Nebraska. Mr. Sasse isn’t running for president. He’s running against Donald Trump. The particular focus of his opposition deserves a lot more attention
  • Medals for U.S. Humiliation. Iran honors the commanders who captured U.S. sailors. In other news from the receding tide of war, the Ayatollah Ali Khamenei has given medals to the Iranian Revolutionary Guards who recently captured and humiliated American sailors. Iran state media reported Sunday that the Supreme Leader had awarded the Fath, or Victory, medal to the head of the Revolutionary Guards navy and four commanders who were involved in seizing two U.S. Navy boats in January. The two patrol boats were seized after they somehow entered Iran’s territorial waters. The Pentagon hasn’t publicly...
 MarketWatch:  Zero Hedge:  Business Insider:
New York Post:
  • ‘This was all planned’: Former IG says Hillary, State Dept. are lying. The State Department is lying when it says it didn’t know until it was too late that Hillary Clinton was improperly using personal e-mails and a private server to conduct official business — because it never set up an agency e-mail address for her in the first place, the department’s former top watchdog says. “This was all planned in advance” to skirt rules governing federal records management, said Howard J. Krongard, who served as the agency’s inspector general from 2005 to 2008.
Washington Post:
  • Mid-tier Chinese banks piling up trillions of dollars in shadow loans. Mid-tier Chinese banks are increasingly using complex instruments to make new loans and restructure existing loans that are then shown as low-risk investments on their balance sheets, masking the scale and risks of their lending to China's slowing economy. The size of this 'shadow loan' book rose by a third in the first half of 2015 to an estimated $1.8 trillion, equivalent to 16.5 percent of all commercial loans in China, a UBS analysis shows. For smaller banks, the rate is much faster.
  • Moody's sees higher costs for Australian banks on mining downturn. Ratings agency Moody's Investors Service said on Monday it expects credit costs to increase "moderately" for Australian banks as a deep downturn in the resources sector aggravates macroeconomic risks. Moody's said regions and sectors most exposed to mining are starting to see some signs of stress and while Australian banks' direct exposure to the resources sector was relatively low, they faced "high second-order risks".
 Financial Times:
  • Gilead(GILD) risks becoming victim of its own success. During the past two years, Gilead, a California-based drugmaker, has emerged as the undisputed leader of the four large US biotech companies. Its hepatitis C medicines, Harvoni and Sovaldi, set a new record for the most successful drug launch, thanks in part to a contentious price tag that works out at roughly $1,000 per pill.
 The Times of India:
  • ISIS Yazidi sex slaves subjected to traumatic 'virginity tests' after escaping. Yazidi women and girls who manage to escape ISIS after being captured as sex slaves have been undergoing traumatic "virginity tests" to prove they were abused. Human Rights Watch interviewed victims who survived organised rape, captivity and forced marriage only to be subjected to the "abusive" examinations after believing they had reached safety in Iraqi Kurdistan. Rothna Begum, a researcher at the group's women's rights division, said she spoke to a woman called Luna who had been kidnapped by ISIS as the group swept through northern Iraq in 2014, sold four times and raped by all her "owners". She was one of hundreds of Yazidi women and girls believed to have since undergone painful "virginity tests" as a method of proving the rapes to Iraqi officials documenting ISIS crimes.
Night Trading
  • Asian indices are -.25% to +.75% on average.
  • Asia Ex-Japan Investment Grade CDS Index 152.0 -.5 basis point.
  • Asia Pacific Sovereign CDS Index 76.75 +3.5 basis points.
  • Bloomberg Emerging Markets Currency Index 68.18 +.05%.
  • S&P 500 futures -.12%.
  • NASDAQ 100 futures -.09%.
Morning Preview Links

Earnings of Note
  • (AET)/1.22
  • (CAH)/1.26
  • (SOHU)/-.42
  • (SYY)/.41
  • (AFL)/1.48
  • (GOOG)/8.09
  • (APC)/-1.07
  • (BRCM)/.71
  • (IDTI)/.35
  • (MAT)/.61
  • (TSO)/2.09
Economic Releases
8:30 am EST
  • Personal Income for December is estimated to rise +.2% versus a +.3% gain in November.
  • Personal Spending for December is estimated to rise +.1% versus a +.3% gain in November.
  • Real Personal Spending for December is estimated to rise +.1% versus a +.3% gain in November.
  • The PCE Core MoM for December is estimated to rise +.1% versus a +.1% gain in November.
9:45 am EST
  • Final Markit US Manufacturing PMI for January is estimated at 52.7 versus a prior estimate of 52.7.
10:00 am EST
  • ISM Manufacturing for January is estimated to rise to 48.4 versus 48.2 in December.
  • ISM Prices Paid for January is estimated to rise to 35.0 versus 33.5 in December.
  • Construction Spending MoM for December is estimated to rise +.6% versus a -.4% decline in November.
Upcoming Splits
  • (AFSI) 2-for-1
Other Potential Market Movers
  • The Bank of Australia rate decision and the Eurozone PMI report could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by financial 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 week.

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