Wednesday, February 03, 2016

Today's Headlines

  • China Seen Risking Credit Market Crunch With Leverage Crackdown. Six months after a debt-fueled rally in Chinese equity turned into a $5 trillion rout, authorities are stepping up efforts to make sure the same thing doesn’t happen in the bond market. Analysts and investors are concerned the crackdown itself could be a risky move. The People’s Bank of China moved to exert more control over wealth management products, which often invest in debt and are popular among investors seeking yields higher than on deposits. It told lenders Monday it will limit funds raised through the so-called WMPs that they can outsource to other financial institutions to manage, according to people familiar with the matter. The PBOC will also tighten control of leverage that banks take on when buying notes, the people said. External managers often borrow more aggressively for debt purchases, China Merchants Bank Co. said. “There is risk to deleveraging when economic growth is slowing,” Haitong Securities Co. analysts led by Jiang Chao wrote in a report Tuesday. “If there is a limit on how much funds banks can give to third parties to manage, it means a lack of momentum for further leveraging. Based on the history of China’s stock market, there is risk of stampede.”
  • Yuan Gap Widens Again as Depreciation Bets Swamp PBOC Fightback. The gap between the Chinese yuan’s exchange rates at home and abroad expanded to the biggest in three weeks, a sign that international traders are reviving bets against the currency after getting burned by the central bank earlier this year. The yuan traded in Hong Kong fell as much as 0.4 percent, taking its discount to the currency in Shanghai to 1.1 percent. That’s the most since Jan. 11, when the People’s Bank of China launched a two-pronged attack on short-sellers by mopping up the currency overseas and choking supply of yuan from the mainland. The assault pushed the offshore rate to a premium that week, before it swung the other way again. “Bears are not giving up on shorting the yuan simply because of the PBOC’s attacks, and they are preparing to return to the game," said Kenix Lai, a foreign-exchange analyst at Bank of East Asia Ltd. in Hong Kong. "There will be a very intense confrontation between short-sellers and the PBOC in the near term. While the market strongly believes there’s room for further declines, the central bank will try its best to keep the yuan stable." The offshore yuan fell 0.25 percent to 6.6444 a dollar as of 6:20 p.m. in Hong Kong on Wednesday, data compiled by Bloomberg show.
  • Cash Pouring Out of China Amid Talk of Allowing Even More: Chart. (graph/video)
  • ABB Profit Margin Widens as Cost Cuts Help Offset Slowdown. ABB Ltd. fourth-quarter profit margin widened as the Swiss maker of industrial robots cut costs to offset a slowdown in China and the oil and gas industry. A cost-reduction program lifted the operating margin for earnings before interest, taxes and amortization 60 basis points to 11.7 percent in the three months through December, the Oerlikon, Switzerland-based company said in a statement on Wednesday. Net income fell 70 percent to $204 million, although that included $496 million of reorganization charges. “ABB is weathering tough end market conditions with strong cost control,” Goldman Sachs analysts wrote in a note to clients. “While we are positively surprised by these results, we continue to expect deterioration of earnings ahead as base orders slowdown continues to accelerate.” Orders in China declined in the fourth quarter, contributing to the overall fall. While process industries are expected to slow in the world’s second-largest economy this year, ABB plans to seek out areas of growth by moving into western Chinese cities where there is demand for new power plant connections, Spiesshofer said.
  • Lenovo Tumbles as Sputtering PC, Phone Demand Hammers Sales. Lenovo Group Ltd. plunged in Hong Kong trading after quarterly revenue declined for the first time in more than six years on stalling demand for phones and computers. Shares fell 10 percent in their biggest decline in two years. The world’s largest PC maker said revenue dropped 8 percent in the three months ended December, even as broadening cost cuts delivered a surprise rise in net income. Lenovo is relying on cutting $1.35 billion from annual costs and eliminating 3,200 jobs to shield its earnings from intensifying smartphone competition and a shrinking market for PCs. While it’s expanding into other businesses, the company still gets more than half of revenue from a market that Intel Corp. last month warned was off to a “soft” start in 2016 amid tepid economic growth.
  • LG Default Risk Jumps as Moody's Turns Negative. Credit-default swaps insuring LG Electronics Inc.'s debt against nonpayment jumped 27 basis points to 136 on Tuesday, the biggest increase since September 2011, according to data provider CMA. Moody's Investor Service cut the outlook on the firm's lowest investment-grade debt score to negative from stable. 
  • German Note Yield Drops Below Minus 0.5% as Rally Gathers Pace. German government bonds jumped as disappointing U.S. data and expectations of more easing from the European Central Bank created a demand for the securities that pushed two-year yields below minus 0.5 percent for the first time. The move spread to bonds of all maturities, with 30-year bund yields dropping below 1 percent for the first time since May, and eight-year yields turning negative for the first time since April. The rally in bonds has pushed the amount of government debt yielding below zero percent in the Bloomberg Eurozone Sovereign Bond Index to $2.4 trillion.
  • European Investment-Grade Corporate Risk Climbs to Two-Year High. The cost of insuring European investment-grade corporate debt rose to the highest since October 2013 as low commodity prices spur concerns about borrowings at energy, metals and mining companies. The Markit iTraxx Europe Index of credit-default swaps on 125 highly rated companies rose for a third day and surpassed 100 basis points for the first time in more than two years, according to data compiled by Bloomberg. The four basis-points climb extended this year’s increase to 24 basis points. “The continued decline in energy and commodity prices, which is connected to China’s slowdown, is putting pressure on companies,” said Craig Veysey, head of fixed income for the private wealth arm of Sanlam Group, which manages about 40 billion pounds ($58 billion) of assets. “It’s not just those in that sector, but banks as well.” Low bond liquidity is also driving more investors to buy credit-default swaps to hedge risk from debt they are unable to sell, London-based Veysey said. The Markit iTraxx Europe Crossover Index of default swaps on non-investment grade companies surpassed 400 basis points for the first time in more than a year. A gauge of credit-default swaps on investment-grade financial companies rose six basis points to 103 basis points, the highest in about two years.
  • More Losses for Europe Stocks as Banks Fall, Earnings Disappoint. Declines in banks dragged European stocks lower for a third day, while investors weighed financial results amid concern over global growth. Novo Nordisk A/S slid 7.6 percent and Royal KPN NV lost 1.2 percent after they reported worse-than-estimated earnings. A gauge of lenders posted the worst performance in the Stoxx Europe 600 Index, extending its lowest level since 2012. The regional benchmark deepened a drop after U.S. services data missed estimates, stoking concern about a recovery in the world’s biggest economy. The Stoxx 600 fell 1.5 percent at the close of trading, capping its longest losing streak in two weeks. Italian lenders led declines among European peers, with Banco Popolare SC and Banca Popolare di Milano Scarl tumbling more than 5.7 percent amid concern over their piles of bad debt.
  • U.S. Gasoline Glut Keeps Pump Prices on the Road to $1.50: Chart. U.S. gasoline inventories last week jumped to the highest in weekly government data going back to 1990. 
  • Bank Selloffs Replacing Oil Rout as Stock Market Pressure Point. Breakdowns in financial stocks are becoming a little too routine for comfort of late. Dragged lower by falling interest rates and credit concern, the KBW Bank Index extended its three-day decline to as much as 7.5 percent earlier Wednesday -- the fifth time this year a loss has exceeded 5 percent over such a stretch, data compiled by Bloomberg show. At times this week, losses from Bank of America Corp. to Citigroup Inc. have exceeded 10 percent.
  • Bond Market Is Closer to No Fed Rate Increases Than One for 2016. The Federal Reserve won’t even get close to raising interest rates this year, if bond traders are right. The fixed-income market’s balance tipped toward zero rate hikes this year after a report showed U.S. service industries grew in January at the slowest pace since April 2014. Treasuries drew support from the data as well, briefly pushing the benchmark 10-year yield to a one-year low. The bond world’s skepticism about the Fed’s projected pace of four rate increases this year grew in January as sliding energy prices and stocks raised concern about policy makers’ ability to stoke economic growth. Traders see a 41 percent chance the Fed will raise rates at or before its Dec. 14 meeting, down from a 93 percent probability assigned at the end of last year. “The fall in the value of asset markets is a tightening of financial conditions,” Laurence Mutkin, head of G-10 rates strategy for BNP Paribas SA, said in an interview in New York. “It should affect central-bank policy, since it is tightening.
  • Wall Street's 1% Show Breadth of Market Malaise in Selloff. Twenty-four out of 1,941 stock funds: That’s how many managed to avoid this year’s carnage. After a far-from-stellar 2015 for equities, almost no one was prepared for such a rough start to 2016. As shares worldwide have plunged 7.7 percent, the only funds in positive territory were those lucky enough to focus on utilities and other industries deemed defensive -- those seen as more immune to an economic slowdown. Less than a repudiation of investing skill one month into the new year, the data show the pervasiveness of losses in global markets where $6.5 trillion has been erased. Almost nothing has worked in 2016 as last year’s winners health-care and consumer stocks joined in the meltdown since Dec. 31. “The vast majority of people were caught off guard,” said Michael Antonelli, an institutional equity sales trader and managing director at Robert W. Baird & Co. in Milwaukee. “Utilities, telecoms are the kind of sectors you would jump into -- companies that do relatively well in downturns because they offer products that people won’t stop using. We’re starting to see a rotation into those sectors, and it’s an expression of people preparing for a lower-growth world.
  • Money Managers Bleed Cash After Investors Pull Billions. Money managers are having trouble hanging on to money. Franklin Resources Inc. said Wednesday that investors withdrew $20.6 billion in the fourth quarter, the latest asset manager to highlight the issue of redemptions. Affiliated Mangers Group Inc. said on Tuesday that it had outflows of $6.8 billion, while Waddell & Reed saw $5 billion in withdrawals, contributing to the biggest drop in its stock since the financial crisis of 2008.
  • Food Stamps Still Feed One in Seven Americans Despite "Recovery". Wendee Crofoot lost her job as a fundraiser for a non-profit in 2011. After exhausting her savings and giving up her Mountain View, California, apartment she ended up working part-time as a restaurant cashier. The low pay qualified her for food stamps, so she signed up. “It wasn’t something I imagined would ever happen,” said Crofoot, 46. “There just weren’t any jobs.” During the 2007-2009 recession, state and federal governments actively encouraged people like Crofoot to take advantage of the aid. Millions did, and many are still claiming benefits. Enrollment in the Supplemental Nutrition Assistance Program, the formal name for food stamps, remains near record levels, even as the unemployment rate has fallen by half. “When unemployment was rising people said enrollment would fall sharply when things got better," said Parke Wilde, an associate professor of nutrition policy at Tufts University in Boston. "That hasn’t happened.” Another economic downturn could send costs to new heights
  • YouTube Schedules Original Shows, Movies for New Paid Service. Google’s YouTube will release the first batch of shows from a new original programming drive on Feb. 10, offering three movies and an adventure series designed to lure customers to its $9.99-a-month subscription service.
Fox News: 
  • Baltimore mosque set for Obama visit has controversial ties. (video) Barack Obama is making his first presidential visit to a U.S. mosque on Wednesday, but the historic occasion is being overshadowed by criticism that the Baltimore-area center he chose has extremist ties. The controversy centers around the Islamic Society of Baltimore's former imam, who has ties not only to the Muslim Brotherhood but the Northern Virginia mosque where the radical Anwar al-Awlaki used to preach. “As a Muslim American I’m just insulted, this is disgraceful that this is one of the mosques -- or the mosque -- that he’s chosen to visit,” Zuhdi Jasser, of the American Islamic Forum for Democracy, told Fox News on Sunday. “This mosque is very concerning.”
Zero Hedge: 
Business Insider:
The Daily Caller: 
  • Sore Loser Trump: ‘Cruz Didn’t Win Iowa, He Stole It’. I couldn’t have been more wrong about Trump’s post-Iowa strategy. Whew! After he gave that gracious concession speech, I figured he was playing rope-a-dope. But no. He’s not covering up and letting Cruz exhaust himself attacking. Probably because Trump realized the frontrunner doesn’t need to attack the loser who’s in second place. Winners don’t punch down. So now we can look forward to this sort of thing from Trump until New Hampshire:
sky NEWS: 
Le Figaro:
  • Radicalized Islamists in France Doubled in Year to 8,250. The number of people in France who have turned toward radical Islam more than doubled to 8,250 from 4,015 in March last year, citing exclusive information gathered by the authorities as of Jan. 28. The number of adolescents and women turning radical is on the rise, according to the report. The Paris region and southeast France saw the biggest jump in numbers.
  • Russian Envoy Says Meeting With OPEC Soon Seen as Unlikely. OPEC meeting with countries that aren't part of the organization unlikely in near future, citing Vladimir Voronkov, Russian envoy to intl organizations in Vienna.
O Estado de S. Paulo:
  • Brazil Government Members Said to Expect Downgrade by Moody's. Some govt officials see sovereign credit downgrade by Moody's as inevitable. 

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