Sunday, February 21, 2016

Monday Watch

Today's Headlines
  • China's Debt Seen Rising Through 2019, Peaking at 283% of GDP. China’s ratio of debt to its economic size is seen climbing for at least another four years, underscoring the risks facing policy makers as they strive to prevent a deeper slowdown without triggering a credit blowout. Seven out of 12 economists see the debt-to-gross-domestic-product ratio increasing through at least 2019, with four expecting a peak in 2020 or later, according to a Bloomberg News survey. Debt will peak at 283 percent of GDP, according to the median estimate of eight economists. Policy makers grappling with the fallout from a credit binge after the global financial crisis are also being confronted by anemic demand for exports and an aging workforce, pushing economic growth to the slowest pace in a quarter of a century. With robust consumption and services struggling to pick up the slack from slowing investment and manufacturing, China’s communist leaders are striving to put a floor under growth to ensure average expansion stays around 6.5 percent through 2020. "We doubt the debt ratio will peak before 2020," said Julian Evans-Pritchard, a China economist at Capital Economics Ltd. in Singapore. "Our model puts the peak in the debt ratio in 2024, but the ratio could rise further beyond that if Chinese policymakers fail to implement the necessary structural reforms required to improve credit allocation."
  • Liu Picked to Cure China's Stock Hurt After $5 Trillion Rout. The new head of China’s securities regulator has been tasked with restoring confidence after policy missteps by his predecessor rattled investors and helped deepen a $5 trillion rout. Liu Shiyu is assuming oversight of the world’s second-largest stock market in the wake of last summer’s slump that saw Xiao Gang criticized for mismanagement. As well as needing to rebuild morale among the nation’s 99 million investors, Liu will preside over an overhaul of initial public offerings, the planned expansion of a trading link with Hong Kong and a campaign to get the nation’s shares included in MSCI Inc.’s global indexes. "China faces a confidence crisis after the recent stock market turmoil, stoked to a large extent by policy flip flops," said Vasu Menon, Singapore-based vice-president for wealth management research at Oversea-Chinese Banking Corp. “International investors will wait to see if he can deliver fresh policies to stabilize the stock market with a steady hand without backtracking on market liberalization."
  • China's Yuan Bears Predict More Trouble Ahead. Before China’s devaluation in August roiled global markets and spurred some of the hedge fund industry’s biggest names to bet against the yuan, a small cohort of researchers saw the whole thing coming. Now, some of those same forecasters are warning that there’s more turmoil in store -- and it’s not just China they’re worried about.
  • China at the Heart of North Korea's Illicit Cash-Flow Funnel. A trail of money stretching from a Panamanian shipping agent to an octogenarian Singaporean to a Chinese bank provides a window on why U.S. efforts to tighten sanctions on North Korea may be harder to achieve than in the case of Iran. For decades North Korea has built networks of front companies and foreign intermediaries to channel currency in and out, circumventing attempts to isolate it over its nuclear-weapons program. Court documents and interviews with investigators, banks and prosecutors show the cornerstone of those networks is China. 
  • Aussie Banks' Debt Is Ugliest in More Than a Decade Versus U.S. Australian bank bonds haven’t been this expensive to insure compared to U.S. financial debt in more than a decade. As the prospects for world growth have dimmed and global markets have been thrown into turmoil, Australia’s banks face additional risks including a reliance on offshore wholesale funding. They are also being buffeted by a housing market that’s showing signs of stuttering, the end of a decade-long mining bonanza and an economy that’s trying to adapt to slowing demand from China. The average cost of protecting the bonds issued by the four largest lenders in Australia last week climbed to 29 basis points more than the mean for the current four biggest American banks, the widest gap on record in credit default swap prices stretching back to 2004, data compiled by Bloomberg show. This comes at a time when the Aussie institutions are paying more than they were previously to borrow in the primary market.
  • OPEC's Path From Oil Freeze to Output Cuts Is Far From Clear. Saudi Arabia said its accord with Russia to cap oil production was “the beginning of a process,” but the path from a freeze to the output cuts needed to eliminate a global surplus is far from clear. When Saudi Oil Minister Ali al-Naimi suggested that the agreement in Doha was a prelude to “other steps,” he fanned hopes that the kingdom’s resistance to production cuts was finally weakening. Oil’s recovery from a 12-year low last month was fueled by speculation that major producers were finally building a coalition that could work to end the glut. The problem with using a production freeze as the bedrock for deeper cooperation is that none of the parties involved have to make any effort to comply. “The four producers involved are already producing close to their peak,” said Miswin Mahesh, an analyst at Barclays Plc in London. “The freeze is the oil-market equivalent of calling for a cease-fire when they’re running out of ammo.”
  • S&P Proves Unforgiving Toward Emerging Markets as Poland Gripes. Standard & Poor’s is taking the hardest line among ratings firms on emerging markets as a global slowdown and political risk erode creditworthiness. The firm was the first to downgrade sovereign debt from Saudi Arabia to Poland this year. The unexpected cut of Bahrain’s rating to junk on Feb. 17 -- a day after the Gulf kingdom set prices on $750 million of bonds -- forced it to annul the sale. Bahrain was downgraded along with Kazakhstan, Oman and Brazil.
  • Asian Stocks Rally With Crude as Pound Sinks on `Brexit' Tussle. Asian equities rallied as the yen’s retreat sparked a revival in Japanese shares and China replacing the head of its securities regulator underpinned gains in the nation’s stocks. The pound slid amid a split in the U.K.’s ruling political party over whether Britain should leave the European Union. Japan’s Topix index reversed early declines as the yen snapped a two-day climb, while the weekend ouster of China’s chief market regulator sparked equity advances in Shanghai and Hong Kong. The U.K. currency weakened the most in a month against the dollar after London Mayor Boris Johnson, a popular and well-known political figure, said he’ll campaign for Britain’s exit from the EU in a June referendum, putting him at odds with Prime Minister David Cameron. Crude oil rebounded, while gold extended losses. The MSCI Asia Pacific Index added 0.3 percent as of 11:42 a.m. Tokyo time, rising for the fourth time in six days as the Topix advanced 0.2 percent. The Japanese index slid 1.5 percent on Friday, reducing its steepest weekly gain since 2009 to 8 percent.
  • Iron's Rally Toward $50 Will Reverse, Australia's Top Mill Says. Iron ore’s surprise rebound toward $50 a metric ton may run out of steam as a further increase in global supplies and the closure of some steel producers in China will boost a global glut, according to the head of Australia’s largest steelmaker. Prices are more likely to drop than rise, said Paul O’Malley, chief executive officer of BlueScope Steel Ltd. Almost all of China’s mills are losing money, which means that further production cuts are possible, he said on Monday. The commodity bottomed at the lowest level in over six years in December as surging low-cost output from miners including Vale SA in Brazil, and Rio Tinto Group and BHP Billiton Ltd. in Australia coincided with shrinking steel consumption in China. Since then, prices have rebounded, capping the biggest gain since April last week, on a seasonal upswing in consumption after a break in the largest user and signs that the pace of miners’ supply growth may be easing off. Still, the uptick probably won’t endure, according to O’Malley.
  • Copper Skeptics Boost Bearish Wagers, Defying Rally for Prices. While copper prices have rallied in four of the past five weeks on the prospect of improved industrial demand in China, hedge funds are skeptical that recovery will last. The funds and other large speculators have bet on declines for the metal since October. Last week, the net-short position in copper holdings grew for the first time since mid-January, even as the metal advanced. Investors increased their net-short holdings in copper to 7,672 U.S. futures and options in the week ended Feb. 16, according to Commodity Futures Trading Commission data released three days later. That compares with 7,134 a week earlier. Long wagers slumped 9.1 percent to 33,217 contracts, the biggest drop since Nov. 3. While prices traded in New York rose 2.4 percent to $2.0805 a pound last week on the Comex, the metal is still down about 20 percent over the past 12 months. Global inventories monitored by exchanges in New York, London and Shanghai jumped 4.6 percent last week to 547,004 metric tons. The gains were driven by increases at Chinese warehouses. The stockpiles tracked by the Shanghai Futures Exchange grew by 15 percent, the biggest gain in a year, signaling that the Asian country is well supplied.
  • Biggest Banks' Commodity Revenue Slid to Lowest in Over a Decade. Revenue from commodities at the largest investment banks sank to the weakest in more than a decade last year, laid low by a rout in prices for everything from metals to gas. Income at Goldman Sachs Group Inc., Morgan Stanley and the 10 other top banks slid by a combined 18 percent to $4.6 billion, according to analytics firm Coalition Ltd. That was the worst performance since the London-based company began tracking the data 11 years ago, and a slump of about two-thirds from the banks’ moneymaking peak in 2008. Revenues are unlikely to return to the heights of $14.1 billion seen at the top of the market, according to George Kuznetsov, head of research at Coalition.
  • Rubio, Cruz Tout Themselves as Best Challenger to Trump After South Carolina. (video) Rubio, who finished second in South Carolina, and Cruz, who came in at third just behind Rubio, noted that approximately 70 percent of Republicans don't support the former reality television show host, and said they could consolidate voters from that bloc, particularly now that Jeb Bush, the onetime front-runner and fundraising leader, has suspended his campaign. "As this race continues to narrow, I think it’ll be easier and easier for that 70 percent to coalesce, and so that’s why I feel so good," Rubio, Florida's junior U.S. Senator, said on "Fox News Sunday." "I believe it’s literally down to three people who are running full-scale national campaigns." Rubio, a member of the Senate foreign relations committee, told reporters on his campaign jet that U.S. presidents need to grasp world issues from their first day in office -- and suggested that would be a stretch for Trump. "It's not about taking on Trump, but there are differences, and we are going to talk about them, particularly on foreign policy. Donald, now that the race has narrowed, needs to step up and outline his policy vision. And it can't be something that relies on experts he won't name."   
  • Apple's(AAPL) New Lawyer Calls iPhone-Unlock Order a ‘Pandora's Box’. Apple Inc.’s newly hired outside lawyer, in his first remarks on a U.S. court order requiring the company to help unlock the iPhone of a dead terrorist, said the move could imperil the privacy of millions of people around the world. Former U.S. Solicitor General Ted Olson, a partner with the law firm Gibson, Dunn & Crutcher, said on ABC’s “This Week” program that the order would open a “Pandora’s box” of privacy issues. “This is not just one magistrate in San Bernardino,” said Olson, 75, whose wife died in the Sept. 11, 2001, terror attacks. “There are hundreds of magistrates, there are hundreds of other courts.”
Wall Street Journal:
  • Chinese Military Spending, Ambitions Fuel Asian Arms Race, Studies Say. Regional defense spending rises even as nations’ economies are tested. The rapid rise in Chinese military spending and a greater assertiveness in its territorial claims is fueling an arms race in the Asia-Pacific region even though many of the countries involved have been hit by an economic slowdown, new research reports suggest.
  • Bombings in Syria Kill Nearly 130 People. The attacks strike a town on the outskirts of Damascus and the city of Homs. A series of bomb attacks on Sunday killed close to 130 people in areas of Syria loyal to President Bashar al-Assad, as his Russia- and Iran-backed forces moved closer to encircling rebels in the northern city of Aleppo and the U.S. sought to salvage attempts to implement a cease-fire.
  • U.S. Agreed to North Korea Peace Talks Before Latest Nuclear Test. Pyongyang rejected condition that nuclear arms would be on the agenda—and then carried out atomic test. Days before North Korea’s latest nuclear-bomb test, the Obama administration secretly agreed to talks to try to formally end the Korean War, dropping a longstanding condition that Pyongyang first take steps to curtail its nuclear arsenal.
  • South Korea's shrinking Feb exports a worrying sign of global slowdown. South Korean exports shrank by one-sixth for the first 20 days of this month from a year earlier despite longer working days, data showed on Sunday, adding to concerns that the global economy was losing momentum. South Korean exports during the Feb. 1-20 period totaled $22.16 billion, down 17.3 percent from the comparable period of 2015, while imports fell 17.4 percent to $20.19 billion, according to the data from the Korea Customs Service.
 Zero Hedge:  Business Insider: Reuters:
 Financial Times:
  • Fed to raise the bar in bank stress tests. The biggest US banks are bracing for a tougher round of stress tests from the Federal Reserve, which could crimp their plans for higher dividends and share buybacks. The two-part exam, which became an annual event in 2011, is designed to assess whether banks have enough loss-absorbing capital to keep trading through a shock to the system similar to the collapse of investment bank Lehman Brothers in 2008.
 Telegraph: Night Trading
  • Asian indices are unch. to +.75% on average.
  • Asia Ex-Japan Investment Grade CDS Index 161.5 -1.0 basis point.
  • Asia Pacific Sovereign CDS Index 78.50 +.25 basis point.
  • Bloomberg Emerging Markets Currency Index 68.51 +.03%.
  • S&P 500 futures +.46%.
  • NASDAQ 100 futures +.51%.
Morning Preview Links

Earnings of Note
  • (AGN)/3.32
  • (AWI)/.33
  • (DF)/.34
  • (DDS)/2.48
  • (RAIL)/.79
  • (MIC)/.42
  • (MDR)/-.11
  • (SGY)/.10
  • (THC)/.34
  • (VECO)/-.02
Economic Releases
8:30 am EST
  • The Chicago Fed National Activity Index for January.
9:45 am EST
  • Markit Preliminary US Manufacturing PMI for February is estimated to rise to 52.5 versus 52.4 in January.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Eurozone Manufacturing PMI, Mobile World Congress, Credit Suisse Energy Summit and the (ABX) investor day could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by real estate and commodity shares in the region. I expect US stocks to open higher and to weaken into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the week.

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