Tuesday, February 16, 2016

Today's Headlines

  • China Turns on Taps and Loosens Screws in Bid to Support Growth. (video) China is stepping up support for the economy by ramping up spending and considering new measures to boost bank lending. The nation’s chief planning agency is making more money available to local governments to fund new infrastructure projects, according to people familiar with the matter. Meantime, China’s cabinet has discussed lowering the minimum ratio of provisions that banks must set aside for bad loans, a move that would free up additional cash for lending. Officials are upping their rhetoric too. “Policymakers are battling to prevent any further slowdown, which could escalate into a hard landing,” said Rajiv Biswas, Asia-Pacific chief economist at IHS Global Insight in Singapore. Analysts cautioned that the jump in credit could be a signal the nation’s state-run banks are being instructed to open up the lending spigots, even as authorities promise to rein in the nation’s growing debt pile. “Short-term prospects look brighter, but runaway loan growth will do nothing to ease concerns about China’s over-extended banks and over-indebted corporates,” Bloomberg Intelligence economists Tom Orlik and Fielding Chen wrote in a note.
  • China's Debt Surge Has Potential to Pressure Ratings, S&P Says. China is facing systemic risks and potential pressure to its ratings as record-low interest rates and a scramble to repay overseas corporate loans fuel a borrowing spree, according to Standard & Poor’s. The yuan’s worsening outlook is spurring some Chinese companies to raise funds onshore to pay down foreign-currency debt, which could contribute to higher domestic leverage over the next one to two years, Kim Eng Tan, senior director of Asia-Pacific sovereign ratings, said in an interview in Shanghai. Also, local firms tend to borrow as much as they can during an easing cycle, he added. Total social financing and new yuan loans both jumped to all-time highs last month, after the central bank cut interest rates six times since November 2014 and reduced lenders’ reserve-requirement ratios. The cost of servicing overseas debt climbed last year as the yuan weakened 4.5 percent and the currency is forecast to drop a further 3.1 percent in 2016. China’s debt-to-gross-domestic-product ratio climbed to 232 percent at the end of 2014, the highest since Bloomberg started compiling the data in 2004. “The ratio continued to climb, albeit at a slower pace,” said Singapore-based Tan. “While corporate financial risks are not as high as what the leverage level suggests -- as companies tend to hold a lot of liquid assets -- the increase in the debt-to-GDP ratio still poses a systemic risk, which could potentially add pressure to ratings.”
  • A Direct Turkey-Russia Clash Is a Growing Risk on Syria Border. There’s only one major group of combatants in the Syrian war that’s backed by both Russia and the U.S. -- and now Turkey is attacking it. For a fourth day on Tuesday, Turkey unleashed its 155-millimeter heavy guns across the border with Syria. The targets were Kurdish forces, whose recent advance is a key part of the Russian plan to restore President Bashar al-Assad’s control over Syria. Syria’s five-year war has turned into a tangled web of proxy conflicts between global and regional powers, with a growing risk that some of them could clash directly. Right now the most dangerous flashpoint is between Russia and NATO member Turkey, which shot down a Russian plane in November. Since then tensions have steadily built as the Assad-Russia alliance -- with help from the Kurds -- threatens to surround Turkish-backed rebels in Aleppo, Syria’s biggest city.
  • Emerging Market ETFs Lose Investors for 6th Week, Led by China. Investors pulled money out of U.S. exchange traded funds that buy emerging-market stocks and bonds for the sixth straight week, bringing this year’s total losses to $5.73 billion. Redemptions from emerging-market ETFs that invest across developing nations as well as those that target specific countries totaled $436.3 million in the week ended Feb. 12 compared with withdrawals of $1.16 billion in the previous period, according to data compiled by Bloomberg. The losing streak is the longest since the 11 weeks that ended Sept. 11. Last week, stock funds lost $262.8 million and bond funds declined by $173.5 million. The MSCI Emerging Markets Index fell 3.8 percent in the week. The biggest change was in China and Hong Kong, where funds shrank by $108.7 million, compared with $231.2 million of redemptions the previous week. Investors withdrew $106.6 million from stock funds and $2.1 million from bonds.
  • European High-Yield Index Loses 1.58 Percent; All Sectors Negative. (graph) The Bloomberg Euro High Yield Index lost 1.58 percent on a total-return basis during the week ended Feb. 12. The yield to worst rose by 46 basis points, to 6.16 percent.
  • The Never-Ending Story: Europe's Banks Face a Frightening Future. If you had to pick the moment when European banking reached the point of no return, which would you choose? The July day in 2012 when Bob Diamond resigned as Barclays’s chief executive officer amid the Libor rigging scandal? Or the fall morning later that year when UBS announced it was pulling out of fixed income and firing 10,000 employees? How about Sept. 12, 2010, when Basel III’s raft of costly capital requirements started upending the economics of global finance? All signature events, to be sure. But try May 21, 2015. That’s when Deutsche Bank stockholders filed into the dome-shaped Festhalle arena in Frankfurt to take part in one of the most venerated and, let’s be honest, boring rituals in corporate life: casting a vote on management’s strategy and performance.
  • German Investor Confidence Falls Amid Equity and China Woes. German investor confidence fell to its lowest level since October 2014 as equities plummeted amid slowing Chinese growth and concern over the profitability of euro-area lenders. The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months ahead, slid to 1.0 in February from 10.2 in January. Economists predicted a decline to zero, according to a Bloomberg survey. "The looming slowdown of the world economy and the uncertain consequences of the falling oil price put a strain on the ZEW Indicator of Economic Sentiment,” said Sascha Steffen, the head of International Finance and Financial Management research at ZEW. “In view of these developments, the concern over an increased credit default risk has already caused stock and bond prices for many banks in Europe, Japan and the US to slump." 
  • Europe Stocks Halt Rally as Standard Chartered Leads Banks Lower. (video) A rebound for European stocks once again proved short-lived on renewed concerns about global-growth prospects, dragging banks and miners lower. Lenders fell after their biggest two-day surge since 2011. Mining-related companies also halted a rally that pushed them up 11 percent, with steel-pipe maker Tenaris SA and Norsk Hydro ASA leading declines. Energy stocks reversed an advance, as oil retreated after Saudi Arabia and Russia agreed to freeze output. The Stoxx Europe 600 Index dropped 0.4 percent to 320.37 at the close of trading, after rising as much as 0.8 percent and falling 1 percent
  • Oil Retreats as Saudi, Russian Output Freeze Seen Leaving Glut. (video) Oil dropped on speculation that a pledge by Saudi Arabia and Russia to freeze production at January levels won’t succeed in tackling the global oil surplus. Crude fell after climbing as much as 7.1 percent in New York. The agreement depends on other producers following suit, Qatar’s Energy Minister Mohammed bin Saleh al-Sada said in Doha Tuesday. The pact won’t be meaningful unless Iran and Iraq, which have been raising output, cooperate, Commerzbank AG said. Saudi Arabia’s Ali al-Naimi said the freeze could be followed by other steps to improve the market. "The market is reacting rationally," said Mike Wittner, head of oil-market research in New York at Societe Generale SA. "There’s been a lot of chatter about a possible cut over the last month, so the reaction has got to be: Is this the best we can do? I struggle to find anything bullish in this announcement."
  • The Glaring Problem With Oil Giants' Production Freeze. Has anything really changed? (video) Oil traders aren't too impressed with Saudi Arabia and Russia's accord to cap oil production at near-record levels. After rising above $31.50 per barrel when news of this agreement was reached, front-month West Texas Intermediate futures contracts have since retreated to below $30 per barrel. It's not just the production freeze, rather than an outright cut, that helps explain the minimal impact this announcement has had on prices, or the conditions attached to it. What also doesn't help buoy prices is the fact that for the two largest oil-producing nations, there's been a de facto ceiling at these levels for an extended period of time.
  • Vale Expected to Keep Feeding Iron Glut as China Demand Slows. The biggest iron-ore miner is expected to have more bad news for its competitors this week: another quarter of record production. On Thursday, Vale SA will report all-time high output of 88.3 million metric tons for the fourth quarter, up from 88.2 million in the third quarter and 83 million a year earlier, according to the average forecast of seven analysts surveyed by Bloomberg News. Vale will join rivals Rio Tinto Group and BHP Billiton Ltd. in boosting production at a time steel making and demand in China contracts after years of growth.
  • Watching Credit Markets for Recession Indicators. (video)
  • Fallen Giants Block Path to S&P Bull Market as Amazon Slumps. (video) Anyone expecting a quick exit from the first global bear market in four years should take a look at all the money being lost in sectors dear to individual investors. In a switch from 2015, consumer and technology companies have come to dominate the list of worst-performing American stocks this year, with declines stretching past 20 percent for Amazon.com Inc. and Netflix Inc. Optimism is being squeezed just as the worst start ever for U.S. equities erases about $2.5 trillion from brokerage accounts.
  • Community Health Has Surprise Quarterly Loss, Stock Plunges. Shares of Community Health Systems Inc., the U.S.’s second-largest chain of for-profit hospitals, plunged after the company reported an unexpected fourth-quarter loss. The stock fell as much as 29 percent to $13.20, the lowest intraday price since March 2009. With Tuesday’s drop, Community’s shares have lost almost 80 percent of their value since their 52-week closing high of $64.04 on June 26.
  • Fed's Kashkari Floats Breaking Up Big Banks to Avert Meltdown. Federal Reserve Bank of Minneapolis President Neel Kashkari will lead an effort to toughen U.S. banking laws to prevent another financial crisis, saying regulators must consider options including breaking up the nation’s largest financial institutions. “The biggest banks are still too big to fail and continue to pose a significant risk to our economy,” Kashkari, who managed the U.S. Treasury’s $700 billion Troubled Asset Relief Program for rescuing banks in the 2008 crisis, said Tuesday in Washington. It was his first public speech since joining the central bank on Jan. 1 as its newest policy maker. 
  • Sanders Gains Ground in Nevada, Testing a Clinton Firewall.
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