Sunday, February 07, 2016

Monday Watch

Today's Headlines
  • Holding Back China's Capital Flight ‘Dam’ Is Key. The decline in China’s foreign-currency reserves to a four-year low, even without evidence of widespread domestic capital flight, adds pressure on policy makers to strengthen the economy through fiscal easing and structural reforms. China’s reserves, once a continuously rising hoard, fell $99.5 billion in January, continuing a slump from 2015 as the People’s Bank of China sought to shore up the yuan. While estimates of the sources of the hard-currency outflows differ, much of the total is thought to be pay-downs of foreign debt. A much bigger threat -- "the dam that the PBOC must make sure doesn’t break," according to Frederic Neumann at HSBC Holdings Plc -- would be an exodus of funds from domestic investors.
  • The Magic Formula That Powered Japanese Stocks Is Falling Apart. For Japanese investors, it must have seemed the equivalent of turning lead into gold. Unlike in the Middle Ages, the alchemy now relied on mixing central bank stimulus with a weakening yen to create rising profits and a stock market that soared to an eight-year high. But that was back in August, and the formula has since lost its potency. By one measure, earnings in the world’s third-largest stock market are poised to retreat more than 20 percent this quarter, and for the first time since 2012 more Japanese companies are missing forecasts than beating them. Meanwhile, the yen just staged its biggest weekly rally since 2009 even though the Bank of Japan surprised the world by cutting interest rates to below zero.
  • Consumption Seen Dropping as Japan's Workers Eke Out 0.1% Rise. Japan’s workers barely got a pay rise in 2015, with a 0.1 percent increase in cash earnings slower than the 0.4 percent bump in 2014. Total wages in Japan haven’t risen more than 1 percent in any year since 1997 and they fell for the past four years once inflation is accounted for, the labor ministry said on Monday in Tokyo. Higher wages are considered crucial to generate growth and consumption and for the Bank of Japan’s efforts to spur inflation. Japanese Prime Minister Shinzo Abe has repeatedly called for companies to boost pay, and Bank of Japan Governor Haruhiko Kuroda has said that the level of increase is "somewhat slow" considering Japan’s low unemployment and companies’ profits.
  • Russia Courts Foreign Banks as Funding Crunch Overtakes Politics. Pressure is mounting on Russia to break the vow of abstinence on selling Eurobonds it has maintained since the U.S. and Europe slapped sanctions on some of its biggest companies. In the three weeks since the finance ministry last said there’s no point to go abroad for cash while penalties are still in place, the ruble tumbled to a record amid an oil plunge and rising yields at home made borrowing targets more elusive. For the first time since Russia last issued international bonds in September 2013, the government said on Friday it invited banks from nine countries to submit proposals to broker its return to foreign capital markets. “Russia probably needs to access international markets to raise funds to plug its deficit this year,” Greg Saichin, the chief investment officer for emerging-market fixed-income at Allianz Global Investors Europe GmbH, said by e-mail Friday. “The problem is sanctions. They are still on, but we presume that they may fall away completely at best or eased at worst.”
  • Dollar Gains Versus Yen, Euro as Fed Odds Weighed Before Yellen. The dollar rose for a second day against the euro and yen as investors looked toward Federal Reserve Chair Janet Yellen’s testimony to Congress Wednesday for signs of whether markets are underestimating the odds of a near-term interest-rate increase. The greenback climbed after a U.S. employment report showed wage growth exceeded estimates, bolstering the case for the Fed to continue lifting rates this year. Futures pricing for a move before year-end climbed to 53 percent Friday from 46 percent the previous day. The yen weakened versus Australia’s dollar as equities in Japan pared declines and the nation reported a current account surplus that was smaller than economists had forecast.
  • Gulf Stocks Retreat From Highest Level in More Than Three Weeks. Stocks across the Gulf fell, following a drop in global markets, as traders cashed in on gains after a gauge of the region’s biggest companies climbed to a three-week high. The Bloomberg GCC 200 Index, which tracks some of the six-nation Gulf Cooperation Council’s largest companies, slipped 0.8 percent from the highest level since Jan. 11. The Tadawul All Share Index was the region’s biggest decliner as it retreated 1.3 percent, followed by ADX General Index with a 0.9 percent drop. The MSCI World Index lost 1.6 percent on Friday. “Markets have had a good run, now we’re seeing a bit of profit taking," said Wafic Nsouli, the managing director and head of equities at Dubai-based investment bank Arqaam Capital Ltd.
Wall Street Journal:
  • Big Companies Pull Back After Rough Quarter. Strong dollar, slumping stocks lead to cautious capital budgets; some firms plan layoffs. After a tough end to 2015, big companies are starting the new year with a tight rein on capital spending, and in some cases layoffs, as they seek to cope with sluggish industrial demand and uncertainties about the continued resilience of the American consumer.
  • Emerging-Market Central Banks Battle Capital Flight. Rate cuts are avoided as they signal concerns about growth prospects. Central banks in some emerging markets are stepping up efforts to flood their financial systems with cash, highlighting the pressure that they face from rapid capital flight.
Zero Hedge:
 Business Insider:
Chicago Sun-Times:
  • Losing GOP candidates double down on being mean. Chris Christie and Jeb Bush, in particular, have decided their best chance to stay in the race is to attack other candidates. Chris Christie seems to be reverting to form as a guy with a mean streak, something he has mostly avoided in the debates. He is at his best when he channels his anger toward terrorists and worst when he demeans his fellow Republicans. His comments this week about Marco Rubio make Christie, not Rubio, look bad. If Bush, Christie or Kasich fare poorly in New Hampshire, I hope they will do the right thing. The same goes for Ben Carson and Carly Fiorina. Hanging on hoping you can take another candidate down a notch certainly does the party no good.
Night Trading
  • Asian indices are -.50% to unch. on average.
  • Asia Ex-Japan Investment Grade CDS Index 159.0 +3.0 basis points.
  • Asia Pacific Sovereign CDS Index 80.25 +.75 basis point.
  • Bloomberg Emerging Markets Currency Index 68.58 +.02%.
  • S&P 500 futures +.29%.
  • NASDAQ 100 futures +.34%.
Morning Preview Links

Earnings of Note
  • (CNA)/.89
  • (CTSH)/.78
  • (DO)/.53
  • (HAS)/1.30
  • (L)/.77
  • (WEX)/1.05
  • (OMI)/.49
  • (OI)/.40
  • (YELP)/.12
Economic Releases
10:00 am EST
  • Labor Market Conditions Index for January is estimated to fall to 2.5 versus 2.9 in December.
Upcoming Splits
  • (HRL) 2-for-1
Other Potential Market Movers
  • The German Industrial Production report, CSFB Financial Services Forum and the BIO investor conference could also impact trading today.
BOTTOM LINE: Asian indices are modestly lower, weighed down by commodity and industrial shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 25% net long heading into the week.

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