Wednesday, January 27, 2016

Today's Headlines

  • China Stocks Fall to 13-Month Low After Industrial Profits Slide. China’s stocks fell to a 13-month low as slumping industrial companies’ profits increased concern the economic slowdown is deepening. The Shanghai Composite Index dropped 0.5 percent to 2,735.56 at the close, extending Tuesday’s 6.4 percent plunge. Airlines and power producers led declines after industrial profits slumped 4.7 percent last month and analysts said a weaker yuan could further hurt earnings of companies with dollar debt. The benchmark gauge pared a loss of as much as 4.1 percent after PetroChina Co., long considered a favorite holding of state-linked rescue funds, jumped the most in three weeks.
  • China's $1 Trillion Money Exodus Isn't About Capital Controls. (video) Last year, Chinese policy makers watched $1 trillion in capital head for the exits. Now, the question on the minds of global investors is what exactly will President Xi Jinping’s economic team do about it. One option is to build a wall around the $10 trillion-plus economy with new and comprehensive capital controls. It’s the economic equivalent of breaking the glass and pulling the alarm--and some serious people are advocating it. One is Bank of Japan Governor Haruhiko Kuroda, who turned heads at the talking salons of Davos last week when he urged China to impose capital controls to stem the flow of cash leaving. 
  • The Conference Board's New China GDP Figures Suggest 'Hard Landing' Happened Already. (video) An alternate estimate of economic growth. "This year’s Global Economic Outlook uses an alternate series of [gross domestic product] estimates for China, which adjusts for overstated official Chinese data.
  • China Swaps at Four-Week High as Odds of Reserve-Ratio Cut Fade.
  • PBOC Said to Ask China Banks to Suspend Offshore Yuan Loans. China’s central bank gave guidance two weeks ago to some Chinese banks in Hong Kong to suspend offshore yuan lending to curb short selling and tighten liquidity, said people with knowledge of the matter. The People’s Bank of China told banks including BOC Hong Kong (Holdings) Ltd. and Industrial & Commercial Bank of China (Asia) on Jan. 11 to curb lending unless necessary, said the people, who asked not to be identified as the instructions weren’t public. The central bank hasn’t issued new guidance since then, they said.
  • China Resists Kerry Appeal for Tougher North Korea Sanctions. Secretary of State John Kerry failed to secure China’s support for tougher sanctions against North Korea in the wake of its fourth nuclear bomb test earlier this month, with the two sides agreeing only to pursue a new UN Security Council resolution. Kerry and Chinese Foreign Minister Wang Yi announced the commitment Wednesday after meeting in Beijing to discuss a stronger response to Kim Jong Un’s nuclear bomb test earlier this month. While the U.S. is seeking measures like bans on oil exports to China’s neighbor and imports of North Korean mineral resources, China is emphasizing the importance of returning to the negotiating table.
  • Aberdeen Sees Sovereign Assets Shrink $19 Billion in Two Years. Aberdeen Asset Management Plc has seen sovereign wealth-fund assets shrink by about 13 billion pounds ($19 billion) since a peak in 2013 as clients from oil-dependent countries cashed out and markets slumped. Chief Executive Officer Martin Gilbert said SWF’s now represent about 2.5 percent, or 7 billion pounds, of Aberdeen’s total assets under management. That’s down from 10 percent two years ago. Aberdeen rose Wednesday after the company said outflows slowed in the first quarter and more cost cuts were announced. 
  • European Investment-Bank Overhaul to Wipe Out Profits, Citi Says. Europe’s investment banks will probably see profit wiped out by restructuring costs in the fourth quarter as they make changes started by their U.S. competitors years earlier, according to Citigroup Inc. Deutsche Bank AG, Credit Suisse Group AG and UBS Group AG will post losses for the three months through December, while Barclays Plc will be “broadly break-even,” Citigroup’s Andrew Coombs and Nicholas Herman wrote in a report on Wednesday.
  • Europe Bank Rout Erases $434 Billion, Twice Greek Economy: Chart. The plunge in European bank stocks over the past six months has wiped out about 400 billion euros ($434 billion) in market value, an amount that’s more than twice the annual economic output of Greece at current prices. The STOXX Europe 600 Banks Index, grouping 46 lenders, dropped twice as much as the region’s benchmark share index since late July. Banking stocks have fallen 14 percent in January alone, heading for their worst monthly performance since the depths of Europe’s sovereign-debt crisis in 2011. Deutsche Bank AG and Standard Chartered Plc are each down more than 40 percent since July.
  • Italy, EU Reach Bad-Debt Deal as Bank Shares Extend Decline. Italy and the European Commission agreed on a plan to help banks offload bad debts, ending months of negotiations on how to ease the burden on the nation’s lenders while staying on the right side of European rules. Banks will be able to securitize bad loans, with senior debt tranches benefiting from a government guarantee priced at market rates, the Italian Treasury said Wednesday. The mechanism to remove soured assets will help lenders clean up their balance sheets and spur lending, the commission had said Tuesday. Italian bank shares reversed early gains on Wednesday on concern the plan may not be enough, after swinging wildly for more than a week on worries that an agreement wouldn’t be reached at all. Bad loans at the nation’s banks, which have been hit by record-low interest rates and a struggling economy, reached a high of 201 billion euros ($217 billion) in November, while the doubtful loans the Italian five largest banks haven’t provisioned for will exceed 120 billion euros. “The Italian version of a bad bank is very different from government-funded bad banks set up in other EU countries, and as such is likely to be a less powerful tool to clean up banks’ balance sheets,” a Citigroup Inc. team including Giada Giani and Guillaume Menuet wrote in a report Wednesday. “Its effectiveness remains to be ascertained.”
  • Europe Faces Another Million Refugees This Year, UN Report Says. As many as 1 million people from Africa, the Middle East and Asia will seek refuge in Europe this year, according to a report by global migration agencies, a number that nears levels seen last year in the continent’s worst migration crisis since World War II.
  • Europe Shares Rise in Late Trade as Oil Boosts Energy Companies. European stocks erased declines to advance in the final minutes of trading as oil rebounded and investors assessed value after some disappointing earnings reports. A measure of energy companies recovered in afternoon trade as oil rose after data showed stockpiles at the biggest U.S. storage hub dropped. Royal Dutch Shell Plc added 2.9 percent after winning shareholder approval to buy BG Group Plc, which gained 3.5 percent. BASF SE lost 1.8 percent after the world’s largest chemical maker said it will book a 600-million euro ($652 million) charge in the fourth quarter because of lower oil and gas prices. The Stoxx Europe 600 Index advanced 0.3 percent to 340.24 at the close of trading, erasing losses of as much as 1 percent.
  • Commodities Junk Faces More Pain Amid Contagion Threat, UBS Says. A prolonged slump in oil prices promises more pain for commodities-related debt and threatens to spread to other parts of the leveraged-finance market, according to UBS Group AG. Energy bonds have borne the brunt of crude’s plunge to a 12-year low, falling 10 percent this year after a 24 percent drop last year. With no end in sight to the oil slump, the market may not be adequately pricing in defaults or compensating investors for mark-to-market and liquidity risks for lower-rated junk companies, UBS strategists led by Matthew Mish wrote in a note Wednesday. "Given the significant widening in commodity spreads, is it the case that the market has largely priced in the risk? Not necessarily," Mish said in a phone interview. "The linkage between commodity spreads and the underlying physical commodity is still very strong. Lower oil will trigger more stress and wider spreads." The premium investors demand to hold junk energy bonds widened to a record 19.3 percent this month, compared with a five-year average of 7.6 percent, Bank of America Merrill Lynch indexes show.
  • BlackRock's(BLK) Fink Says 400 Energy Firms May Not Survive Cheap Oil. Laurence D. Fink, chairman of BlackRock Inc., the world’s largest money manager, said as many as 400 energy companies may not survive because oil prices are not high enough for them to meet their debt obligations. “Carbons are going to be cheaper for longer,” Fink said in a presentation to the New Jersey Pension Investment Council in Trenton today. He did not make a forecast for oil prices or name specific companies. Crude is down about 15 percent this year as volatility in global markets adds to concern over brimming U.S. stockpiles and the outlook for increased exports from Iran after the removal of international sanctions. Independent American oil explorers are forecast to report 2015 losses totaling almost $14 billion amid the price collapse, according to data compiled by Bloomberg. 
  • Fed Leaves Rates Unchanged; Watching Global Developments. (video) Federal Reserve officials left interest rates unchanged and said they still expect to raise borrowing costs at a “gradual” pace while watching to see how the global economy and markets impact the U.S. outlook. The Federal Open Market Committee is “closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook,” the central bank said in a statement Wednesday following a two-day meeting in Washington. The Fed omitted a line from the previous statement in December.
  • Goldman's Former Head of Junk Bond Trading Has Some Choice Words About the Credit Market. The unwinding of the "efficient capital structure" beckons. It may feel as if bond bears are everywhere these days, but for Jeff Bahl, former head of U.S. high-yield credit trading at Goldman Sachs and now a portfolio manager at Bahl & Gaynor, there aren't enough of ’em. What follows is a "while history does not repeat, it certainly rhymes"-style argument applied to the high-yield debt market, which has jumped from about $944 billion outstanding back in 2008 to $1.8 trillion currently. And while Bahl isn't predicting an "end of times"-style wave of corporate defaults, he is drawing on his two decades of bond trading experience to call for a turn in the credit cycle that will spur deleveraging.
  • The Big Bank Long Has Turned into the Big Bank Short. Remember how investors piled into financial stocks betting higher interest rates would stoke an earnings renaissance? A month later, that big long is a big short. The Standard & Poor’s 500 Financials Index has tumbled 11 percent in 2016, putting it on track for its worst month in more than four years. The group -- which includes Berkshire Hathaway Inc., Wells Fargo & Co. and 86 other companies -- is neck-and-neck with commodity stocks for the biggest slide among 10 industries since Federal Reserve policy makers met Dec. 16. The financials index was little changed at 9:44 a.m. in New York. 
  • Clinton, Sanders Would Bypass Congress to Tax the Rich. Most of the proposals that Hillary Clinton and Bernie Sanders have pitched for taxing the rich won’t go anywhere if Republicans keep control of the House of Representatives, as expected. But spokesmen for both of the leading candidates for the Democratic presidential nomination said this week that they could take executive action, bypassing Congress, to go after a shorter list: the carried-interest tax advantage that investment-fund managers receive, corporate inversions that companies use to move their tax addresses offshore and -- in Sanders’s case, at least -- a few other parts of the tax code that benefit high-income taxpayers.
  • Boeing(BA) Plunges After Weak 2016 Forecast Fans Slowdown Concerns. Boeing Co. fell the most in five months after predicting weaker profit and fewer jetliner deliveries than analysts expected, stoking concerns that airlines’ appetite for new planes is waning amid global economic turmoil. The company was the worst performer among the 30 members of the Dow Jones Industrial Average even though its fourth-quarter profit exceeded estimates by a wide margin. The stock plunged 9.5 percent to $115.87 at 10:14 a.m. in New York after earlier dropping as much as 10 percent, its steepest intraday decline since August.
  • Study Says Sarao May Not Have Been Responsible for Flash Crash. Navinder Singh Sarao, dubbed the Hound of Hounslow by newspapers after his arrest for allegedly manipulating markets, has a few academics on his side as he goes back to court next week. Sarao may not have had a material, or even any, impact on the bout of equity market volatility in May 2010 that later became known as the flash crash, according to a draft research report by University of California, Santa Cruz and Stanford University professors dated Jan. 25. The study, which has yet to be formally released because the authors are still soliciting feedback, claims to be the first to analyze the entire order book on a millisecond level.
Zero Hedge: 
Business Insider:
  • Exclusive: White House dropped $10 million claim in Iran prisoner deal. Nader Modanlo was facing five more years in federal prison when he got an extraordinary offer: U.S. President Barack Obama was ready to commute his sentence as part of this month's historic and then still-secret prisoner swap with Iran. He said no. To sweeten the deal, the U.S. administration then dropped a claim against the Iran-born aerospace engineer for $10 million that a Maryland jury found he had taken as an illegal payment from Iran, according to interviews with Modanlo, lawyers involved and U.S. officials with knowledge of the matter.

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