Monday, January 11, 2016

Today's Headlines

  • PBOC Put? Li Signals No Major Stimulus While Past Suggests a Cut. (video) While the weekend’s inflation reading suggests there’s room to act, government signals give reason to pause: Policy makers wouldn’t seek strong stimulus or flood the economy with too much investment to boost demand, Beijing News cited Premier Li Keqiang as saying. The central government’s website republished that report Sunday, and the official Xinhua News Agency cited the comments on its online front page on Monday. What’s not clear is whether that rules out near-term monetary stimulus, or just the extent of any upcoming move. "Li’s statement signals that this year the focus of economic work will shift to the ‘supply side’ compared to previous demand-side stimulus," said Xia Le, a Hong Kong-based economist at Banco Bilbao Vizcaya Argentaria SA. One reason to delay further rate cuts is that such a move may exacerbate capital outflows, Xia said. Pressure on the currency, stocks, capital outflows and growth is intensifying as China’s policy makers wrestle with the transition towards a greater role for markets. "We are not going to use ‘strong stimulus’ or ‘flood irrigation’ investment to expand domestic demand," Li was cited as saying in the Beijing News report. Instead, policies will seek to develop new business models and create new drivers for the economy, Li said according to the report.
  • Magnus Fears the Worst for China Economy as Credit Squeeze Lurks. China’s market ructions are likely masking a credit crisis and a bleak outlook for its economy, according to UBS economic adviser George Magnus. "Beneath all of the financial turbulence there lurks, in my view, a credit crisis," Magnus told Tom Keene and Francine Lacqua on Bloomberg Television on Monday. "I fear the worst now." The worries about the Asian economy triggered a stock-market rout that rippled around the world and pushed the offshore yuan to a five-year low last week. While China’s top policy makers promised a wave of reforms in December, including promoting flexible monetary policy and boosting agricultural production, they aren’t likely to be enough, Magnus said. “Incremental reforms do not substitute for the changes to the way in which your institutions function and the way in which your economy can respond to those institutional changes,” Magnus said. “The reform agenda, in many ways that really matters, has stalled" and so "things are looking much bleaker for China going forward."
  • JPMorgan: Potential Capital Outflows From China Have Become 'Practically Boundless'. A hurdle to large-scale depreciation has been jumped. China has seen nearly $1 trillion in capital leave the nation since the second quarter of 2014, and according to analysts at JPMorgan Chase, the sky's the limit for outflows going forward. The causes of these massive capital outflows, which have prompted the People's Bank of China to tap the country's war chest of reserves to support the currency, have grown more numerous in the second half of 2015, argues a team led by managing director Nikolaos Panigirtzoglou. Amid the broadening of sources of downward pressure on the yuan, however, a major factor that may have restrained the central bank from devaluing the currency in a big way has vanished. "The Chinese capital outflow picture appears to have entered a new phase in [the third quarter], broadening to include foreign direct investment and portfolio instruments, something that could make future capital outflows practically boundless," writes the JPM team.
  • Yuan Loan Rates Soar in Hong Kong as PBOC Halts Currency's Slide. (video) Interbank yuan lending rates in Hong Kong climbed to records across the board and the exchange rate surged the most in four months after suspected intervention by China’s central bank last week mopped up supplies of the yuan in the offshore market. The city’s benchmark rates for loans ranging from one day to a year all set new highs, with the overnight and one-week surging by the most since the Treasury Markets Association started compiling the fixings in June 2013. The overnight Hong Kong Interbank Offered Rate surged 939 basis points to 13.4 percent on Monday, while the one-week rate jumped 417 basis points to 11.23 percent. The previous highs were 9.45 percent and 10.1 percent, respectively. “Yuan liquidity is extremely tight in Hong Kong,” said Becky Liu, senior rates strategist at Standard Chartered Plc in the city. “There was some suspected intervention by the People’s Bank of China last week, and the liquidity impact is starting to show today.”
  • Brazil roiled by China mess shows investors can't catch a break. For investors in Brazil battered by a terrible 2015, there was reason to believe January would provide a respite. With summer holidays in full gear and Congress in recess, developments in the political scandals that had roiled markets were put on hold. And then came China. The turmoil in Brazil's largest trading partner sent its benchmark stock index down 8.2 percent in dollar terms to begin the year, making for the worst week in almost six months, as shares of commodity producers tumbled with raw materials to the lowest in more than a decade. The currency weakened past 4 per dollar, back to levels seen after Standard & Poor's surprised investors by cutting Brazil to junk in September.
  • China Rout Threatens to Spawn India Crisis, Top Banker Says. A deepening slowdown in China threatens to derail India’s economic growth, triggering financial market upheaval and a falling currency, Vishal Kampani, the nation’s top investment banker, said. “If China keeps getting hit like this, the yuan has to devalue, and we will see another crisis in India,” Kampani, managing director at JM Financial Ltd., the South Asian country’s top mergers and acquisitions adviser last year, said in a Jan. 8 interview. “I refuse to believe that India will stand out and will look very different.”
  • Suicide Attack Kills at Least 17 People at Baghdad Mall. Suicide bombers and gunmen killed at least 17 people and briefly took hostages in an attack on a mall in the Iraqi capital, an especially brazen assault in a city used to militant violence. Islamic State claimed responsibility. Attackers detonated a car bomb outside and suicide vests inside the building in the Baghdad Jadida neighborhood, police and Interior Ministry officials said by phone, adding that a child was among those killed. Twenty-one others were wounded before security forces ended the raid.
  • Emerging-Market Stock Volatility Surges Most in 224 Weeks: ChartThe Chicago Board Options Exchange Emerging Markets Volatility Index rose 51 percent in the week ended Jan. 8. That was second only to the 57 percent surge in the five days through September 23, 2011 amid a slump triggered by the euro-area debt crisis and the downgrade of U.S. credit rating by Standard & Poor’s.
  • Emerging-Market ETFs Suffer Worst Loss in 8 Weeks, Led by Taiwan. U.S. exchange-traded funds that invest in emerging markets had the biggest net outflows since mid-November, led by withdrawals from Taiwan and India. Redemptions from ETFs that invest across developing nations as well as those that target specific countries totaled $566.7 million in the week ended Jan. 8, compared with inflows of $431.3 million in the previous period, according to data compiled by Bloomberg. The last time investors pulled more money from the funds was in the week of Nov. 13, when outflows reached $1.06 billion, the data show. Last week, stock funds lost $507.3 million and bond funds declined by $59.4 million. The MSCI Emerging Markets Index fell 6.8 percent in the week. The biggest outflows were in Taiwan, where funds shrank by $164 million, compared with $26 million of inflows the previous week. All of the withdrawals were from stock funds, while bond funds remained unchanged.
  • Emerging Stocks Extend Worst Start to Year Since 1998 on China. Emerging-market stocks retreated to the lowest in more than six years and currencies weakened as concern that China’s growth outlook is worsening and a commodity slump pushed investors away of riskier assets. All 10 industry groups in the MSCI Emerging Markets Index fell as a gauge of energy companies fell to the lowest since September 2004. Philippine shares entered a bear market as Chinese equities on the mainland and in Hong Kong led a rout in Asia. The dollar-denominated RTS Index of Russian stocks plunged 5 percent as Brent crude sold for less than $32 a barrel. The MSCI Emerging Markets Index decreased 2.2 percent to 723.70 at 11:49 a.m. in New York, dragging the average valuation of its member stocks to 10.3 times projected 12-month earnings, the lowest in more than four months. That represents a 30 percent discount to the MSCI World Index of advanced-nation shares. A gauge of developing-nation financial companies slid 2.8 percent while one tracking energy stocks retreated 2.9 percent
  • Europe Stocks Erase Gains, Head for Lowest Level Since September. After a day of fluctuations, European stocks finally closed at their lowest levels since September, extending losses after their worst weekly plunge in more than four years. The Stoxx Europe 600 Index erased its gain in the final hour of trading, falling 0.3 percent at the close as commodity producers reversed advances. Germany’s DAX Index, which heavily relies on exporters and was among the worst developed markets last week, slipped 0.3 percent, after earlier climbing as much as 1.3 percent.
  • Oil Risks Revealed at Maersk as Nordea Warns of `Toxic Cocktail'. A.P. Moeller-Maersk A/S is a conglomerate with about 900 different divisions, but investors only really need to worry about one number in 2016: the price of oil. The owner of the world’s biggest shipping line is being battered “by a toxic cocktail with challenges in both the oil and the container division,” Stig Frederiksen, an analyst at Nordea in Copenhagen, said by phone. But “it’s now become the oil price that’s the main driver for Maersk’s share.” Maersk’s stock lost 9.8 percent in the first week of 2016, its worse start to a year since at least 1992. Brent crude was down by roughly as much last week. Maersk shares will probably be driven by the price of oil “for a while,” Frederiksen said. “We think that will be the case for 2016.”
  • China's Demand for Crude is Showing Signs of Cracking. Resilient supply isn't the only problem for crude. When looking for the prime culprit behind widespread weakness in commodity prices, fingers often point squarely at China. On the supply side, especially in select metals, the world's second-largest economy deserves a hefty portion of the blame for the rout. But in the case of crude, China has responded to lower prices with a jump in demand, says Barclays' Commodities Analyst Miswin Mahesh. Although, as he notes, there are signs that this increased appetite may soon wane.
  • Oil Seen Heading to $20 by Morgan Stanley on Dollar Strength. (video) A rapid appreciation of the U.S. dollar may send Brent oil to as low as $20 a barrel, according to Morgan Stanley. Oil is particularly leveraged to the dollar and may fall between 10 to 25 percent if the currency gains 5 percent, Morgan Stanley analysts including Adam Longson said in a research note dated Jan. 11. A global glut may have pushed oil prices under $60 a barrel, but the difference between $35 and $55 is primarily the U.S. dollar, according to the report.
  • Glencore Debt Swaps Jump to Six-Year High as Copper Price Slides. The cost of insuring Glencore Plc’s debt against default rose to a more than six-year high as the price of raw materials such as copper continued to tumble. The trader and miner’s credit default swaps increased to as much as 946 basis points, the highest since April 2009 on a closing basis, according to data from S&P Capital IQ’s CMA. Slumping commodity prices have battered Glencore, prompting it to scrap a dividend payment, sell new shares and outline asset sales as it seeks to curb debt to maintain its investment-grade rating. Copper dropped to a six-year low amid a rout in metals as muted Chinese inflation increased concern that demand from the world’s largest buyer of raw materials will slow.
  • No Hedges? No Problem for Stock Traders Used to Resilience. With U.S. stocks off to the worst-ever start to a year, equity investors accustomed to swift market rebounds haven’t seen as much of a need for downside protection. It may come back to haunt them. In one example from the listed options market, the ratio of bearish to bullish contracts on an exchange-traded fund tracking the Standard & Poor’s 500 Index sits 15 percent below its one-year average, according to data compiled by Bloomberg. There are now 5 million fewer open options contracts on the ETF than in mid-September, the data show. As the bull market approaches its seventh anniversary, investors have gotten used either to buying the dip or waiting for a rebound to come“Investors have become completely disengaged with the process of protecting their downside,” said Jeff Sica, who oversees more than $1.5 billion as the president of Circle Squared Alternative Investments in Morristown, New Jersey. “This market has been so good for so long, people don’t think they need to hedge. There’s an overconfident, laissez-faire attitude creeping in.”
  • Fed's Lockhart Says Global Markets Drop Won't Hurt U.S. Outlook. Federal Reserve Bank of Atlanta President Dennis Lockhart said he favors continued tightening of monetary policy this year, and a global selloff in stock markets is unlikely to affect the U.S. economy.
    When such volatility develops, I think it’s helpful to look at the real economy of the United States as opposed to the financial economy and ask if something is fundamentally wrong,” Lockhart said in prepared remarks in Atlanta. “Are there serious imbalances that make the broad economy vulnerable to foreign shocks? I don’t see that kind of connection in current circumstances. ”
  • Bank of America: Rail Traffic Is Saying Something Worrying About the U.S. Economy. Rail carloads are looking recessionary. It's not the jobs report or the latest housing data but railway cargo that has analysts at Bank of America concerned. Railroad cargo in the U.S. dropped the most in six years in 2015, and things aren't looking good for the new year. "We believe rail data may be signaling a warning for the broader economy," the recent note from Bank of America says. "Carloads have declined more than 5 percent in each of the past 11 weeks on a year-over-year basis. While one-off volume declines occur occasionally, they are generally followed by a recovery shortly thereafter. The current period of substantial and sustained weakness, including last weeks -10.1 percent decline, has not occurred since 2009."
  • Midtown Manhattan Office Vacancies to Rise as Large Spaces Empty. Midtown Manhattan, once the pinnacle of U.S. office markets, is facing a jump in large, empty work spaces as new towers open and tenants spread out across the city, including outer boroughs that businesses once shunned. By 2017, about 21 million square feet (1.2 million square meters) of Midtown’s Class A offices, or about 14 percent of the market, will probably be available, Keith DeCoster, director of U.S. real estate analytics for brokerage Savills Studley Inc., estimated. That’s just shy of the 22.6 million square feet of top-quality space that was available at the height of the last recession in early 2009, he said.
Fox News:
  • FBI's Clinton probe expands to public corruption track. (video) EXCLUSIVE: The FBI investigation into Hillary Clinton’s use of private email as secretary of state has expanded to look at whether the possible “intersection” of Clinton Foundation work and State Department business may have violated public corruption laws, three intelligence sources not authorized to speak on the record told Fox News. This new investigative track is in addition to the focus on classified material found on Clinton’s personal server. 
Zero Hedge:
Business Insider:
Gregor Peter:
  • China Industry Capacity Cuts May Cost 3M Jobs, CICC Says. Cut in production by 30% in industries w/most excess capacity to cause 3M job cuts in the coming 2-3 years, citing a report by China International Capital Corp. Industries: iron & steel; coal mining; cement; shipbuilding; aluminum & flat glass.

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