Monday, February 15, 2016

Tuesday Watch

Today's Headlines
  • China's Bad Loans Rise to Highest in a Decade as Economy Slows. (video) Soured loans at Chinese commercial banks rose to the highest level since June 2006 as the nation’s economic expansion slowed to the weakest pace in a quarter century. Nonperforming loans jumped 51 percent from a year earlier to 1.27 trillion yuan ($196 billion) by December, data from the China Banking Regulatory Commission showed on Monday. The bad-loan ratio climbed to 1.67 percent from 1.25 percent, while the industry’s bad-loan coverage ratio, a measure of its ability to absorb potential losses from soured credit, weakened to 181 percent from more than 200 percent a year earlier.
  • China New Credit Surges to Record on Seasonal Lending Binge. (graph) China’s broadest measure of new credit surged to a record as a seasonal lending binge coincided with a recovery in property prices, and as companies paid back foreign currency loans amid yuan weakness. Aggregate financing rose to 3.42 trillion yuan ($525 billion) in January, according to a report from the People’s Bank of China on Tuesday, compared with the median forecast of 2.2 trillion yuan in a Bloomberg survey. New yuan loans jumped to 2.51 trillion yuan, also a record and beating the median estimate of 1.9 trillion yuan. The strong figures were helped by banks front loading their 2016 lending targets, companies switching foreign currency loans into yuan ones, and strong corporate bond issuance. To be decided is whether the acceleration in lending will translate into a sustained pick up in economic growth. "Chinese banks expanded their balance sheet aggressively in the first month of this year, which implies an implicit support from the government to counter the economic slowdown," said Zhou Hao, senior economist at Commerzbank AG in Singapore.
  • China Holiday Visitors to Macau Keeping Tight Hold on Wallets. Mainland Chinese tourists poured into Macau in greater numbers during the week-long Lunar New Year holiday, even as many shunned neighboring Hong Kong again this year, but gambling revenues extended an almost two-year slump as high-rollers stayed home. Macau had 793,598 visitor arrivals from mainland China during the Feb. 7-13 period, up 4.3 percent over the corresponding week last year in China’s lunar calendar, the Macau Government Tourist Office said yesterday. While that was good news for the world’s largest gaming center, it didn’t help much to narrow a protracted slump in casino revenues.Average daily revenue at tables during the week was HK$790 million, a 20 percent drop from a year ago, according to Nomura Holdings Inc. gaming analyst Richard Huang.
  • HSBC CEO Says Asia Turmoil Is Slowing Pace of Hiring in China. HSBC Holdings Plc may slow the pace of hiring in China’s Pearl River Delta amid a market rout and cooling growth in the world’s second-largest economy, Chief Executive Officer Stuart Gulliver said. While the bank still plans to add some 4,000 jobs in China’s southeast region in coming years, it may happen at a “slightly slower” pace, Gulliver said in a telephone interview on Monday. HSBC will provide an update on the scale of a planned redeployment of about $100 billion of risk-weighted assets to Asia alongside full-year results on Feb. 22, he said.
  • Soaring Chinese Imports From Hong Kong Renew Fake Trade Concerns. A surge in China’s imports from Hong Kong has raised fresh concern trade invoices are being manipulated to get capital out of the country. January data released Monday show imports from the territory leaped 108 percent from a year earlier even as total imports dropped by 18.8 percent and inbound shipments from other major trading partners fell. Economists at Macquarie Securities Ltd., Australia & New Zealand Banking Group Ltd. and Natixis SA said the unusual spike in Hong Kong imports points to companies using trade channels for financial arbitrage. Over invoicing for goods gives a company or individual the opportunity to skirt China’s capital controls and shift money off shore. "It’s very likely to be fake trade," said Larry Hu, head of China economics at Macquarie. "That’s the main reason why imports from Hong Kong have surged."
  • Chinese Dye Maker Defaults After Chairman Assisted Probe. A Chinese dye-and-paint maker defaulted on a bond after its chairman’s involvement in a government probe crimped financing, flagging risks to investors posed by President Xi Jinping’s corruption crackdown. Yabang Investment Holding Group Co. failed to make full payment of principal and interest totaling 215.9 million yuan ($33.2 million) on 7.95 percent commercial paper due Feb. 9, according to a company statement to the Shanghai Clearing House. The firm’s Chairman Xu Xiaochu had been required to assist in an unspecified probe and some banks had tightened lending to the company after that, it said.
  • India's WPI Diverges From Consumer Inflation Before Modi Budget. India’s wholesale prices fell more than estimated in January after consumer inflation unexpectedly accelerated, complicating the job of policy makers before Prime Minister Narendra Modi’s government presents its budget on Feb. 29. Wholesale prices fell 0.9 percent in January from a year earlier, the Commerce Ministry said in a statement on Monday, compared with a 0.73 percent decline the previous month. The median of 30 estimates in a Bloomberg News survey had predicted a 0.13 percent decrease. Consumer prices had increased at the fastest pace since August 2014.
  • Brazil's 5,500 Bankruptcies in 2015 Signal Deeper Credit Crisis. In his two decades covering Brazil, Fitch Ratings’s Joe Bormann says he’s never seen the nation’s companies in such a dire state. To appreciate just how bad things are, consider this: Brazilian courts granted more than 5,500 bankruptcy filings in 2015, the most since 2008, according to Sao Paulo-based credit rater Serasa Experian. Brazil’s deepest two-year recession in more than a century and plummeting commodity prices are leaving businesses in industries from steel to air travel among the most at risk of default, according to Fitch. And more pain is looming in Latin America’s biggest economy as borrowing costs soar, predicts Bormann, who oversees a team of 60 analysts responsible for rating more than 500 companies in the region.
  • Kuroda's Negative Rate Takes Effect as Economic Woes Mount. The Bank of Japan’s negative interest-rate regime kicks off Tuesday amid increasing volatility in financial markets and rising concern that weak consumer spending may crimp economic growth in 2016. Japanese stocks have been whipsawed and the yen has surged in the two weeks since Governor Haruhiko Kuroda outlined the negative-rate strategy on Jan. 29, undermining efforts to boost sentiment among households and investors. Data released Monday dealt another blow, with the gross domestic product for the fourth quarter of 2015 showing the economy contracted an annualized 1.4 percent.
  • Draghi Says ECB Will Act If Market Turmoil Threatens Outlook. The European Central Bank will take measures to ensure its monetary policy reaches the real economy if that appears threatened by financial-market turbulence, President Mario Draghi said. The euro fell. “In the light of the recent financial turmoil, we will analyze the state of transmission of our monetary impulses by the financial system and in particular by banks,” Draghi told European Parliament lawmakers in Brussels on Monday. In addition, the ECB will examine the impact of renewed declines in energy prices and “if either of these two factors entail downward risks to price stability, we will not hesitate to act,” he said.
  • ECB Met Goldman, Barclays, Moore Capital Before December Meeting. Top-ranking European Central Bank officials met employees from banks including Goldman Sachs Group Inc. and Barclays Plc and hedge fund Moore Europe Capital Management just weeks before they unveiled a package of new stimulus measures in December. While the diaries of the Executive-Board members show multiple gatherings with investors in November, the last one occurred on Nov. 26. The two days directly before the Dec. 3 meeting aren’t included in this release.
  • Shares Jump From Europe to Japan as Oil Holds Rally; Yuan Soars. (video) Stocks came back with a vengeance amid speculation losses that sent global equities into a bear market had gone too far, with rallies in crude oil and the Chinese yuan burnishing sentiment. Shares in Europe capped their biggest two-day gain in more than four years and Japan’s Topix index soared the most since 2008, with markets in North America closed for a holiday. Developing-nation equities rebounded from their worst weekly drop in a month, as oil built on Friday’s surge. The yuan strengthened the most since a dollar peg was scrapped in 2005 after People’s Bank of China Governor Zhou Xiaochuan talked up the credentials of the world’s second-largest economy. Demand for haven assets such as gold and the yen waned, while nickel climbed the most in two months amid the yuan rally. The Stoxx Europe 600 Index rose 3 percent, extending Friday’s climb as European Central Bank President Mario Draghi reiterated that policy makers would act should financial turmoil threatened price stability during testimony to the euro region’s parliament.
  • Oil Jumps on Saudi Talks as Chinese Shares Gain; Treasuries Fall. Brent oil advanced above $34 a barrel, boosting energy shares and commodity-linked currencies, amid speculation that some of the world’s biggest crude producers will co-operate to reduce output.Oil futures climbed as much as 4 percent in London after Saudi Arabia’s oil minister was said to plan a meeting with his Russian counterpart in Doha on Tuesday.  PetroChina Co. advanced 7.3 percent, helping to send the MSCI Asia Pacific Index toward its biggest two-day gain since 2011, as Chinese shares also got a boost from data showing a surge in lending last month. Australia’s currency strengthened for a fifth day. U.S. Treasuries fell and Standard & Poor’s 500 Index futures climbed after an American holiday on Monday.
  • Iron Ore Rally Seen Unraveling as Demand `Doesn't Look Great'. A rally in iron ore that’s lifted prices to the highest level since November is poised to unravel as China’s steel demand weakens and miners press on with efforts to cut costs, according to Sucden Financial Ltd. “We do not view this rally as sustainable over the longer term,” analyst Kash Kamal said in an e-mailed response to questions. “Demand for steel has dropped sharply and with the domestic industry battling with overcapacity and oversupply, the long-term outlook for iron ore demand doesn’t look great.
  • China Must Cut Steel Output Deeper and Faster, India's JSW Says. China’s plan to cut its annual crude steel capacity by about 13 percent by 2020 won’t be enough to revive an industry reeling under a slowdown in the world’s second-biggest economy, a top official at India’s third-biggest producer said. “There’s excess surplus, so they have to cut production,” Seshagiri Rao, joint managing director of JSW Steel Ltd. and chief financial officer for the group, said in an interview in Mumbai. “Almost every country has taken one step or the other to close its borders, but the import threat continues.”
  • Gold Drops for Third Day Amid Recovery in Global Equity Markets. Goldfell for a third day after touching a one-year high last week as the recovery in equities looked set to continue in Asia. Bullion for immediate delivery fell as much as 0.4 percent to $1,204.99 an ounce and traded at $1,206.90 at 7:51 a.m. in Singapore, according to Bloomberg generic pricing. The metal surged to $1,263.48 on Feb. 11, the highest level since February 2015.
Wall Street Journal:
  • The Supreme Court After Scalia. The stakes are so high because the left made the Court so political. With the death of Antonin Scalia, Democrats and the media are graciously offering Republicans an ultimatum: Give them control of the Supreme Court now, or they’ll use the vacancy as a political club to hold the White House and retake the Senate. False choices don’t get more false than that.
  • The Schumer Precedent. What the New York Senator had to say about Supreme Court vacancies in 2007. Speaking of politicizing the Supreme Court (see above), Sen. Chuck Schumer always delivers. In July 2007 the New York Democrat gave a speech to a progressive legal society in which he said this about confirming a George W. Bush nominee in the last 18 months of his Presidency as recounted in Politico:
  • Why Obama’s Middle East Policy Is Failing.
Zero Hedge: 
 Business Insider:
BuzzFeed News:
Night Trading
  • Asian indices are +.75% to +1.50 on average.
  • Asia Ex-Japan Investment Grade CDS Index 165.75 -2.75 basis points.
  • Asia Pacific Sovereign CDS Index 79.50 -3.25 basis points.
  • Bloomberg Emerging Markets Currency Index 68.54 unch.
  • S&P 500 futures +.29%.
  • NASDAQ 100 futures +.46%.
Morning Preview Links

Earnings of Note
  • (BXLT)/.55
  • (GPC)/1.01
  • (HRL)/.37
  • (ZTS)/.39
  • (A)/.43
  • (BYD)/.13
  • (CERN)/.57
  • (CAKE)/.52
  • (DVN)/.71
  • (ESRX)/1.55
  • (FE)/.57
  • (FOSL)/1.46
  • (NBR)/-.30
  • (PSA)/2.42
  • (TEX)/.52
  • (VNO)/1.29 
Economic Releases
8:30 am EST
  • Empire Manufacturing for February is estimated to fall to -10.5 versus -19.37 in January.
10:00 am EST
  • The NAHB Housing Market Index for February is estimated at 60.0 versus 60.0 in January.
4:00 pm EST
  • Net Long-Term TIC Flows for December. 
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Rosengren speaking, Fed's Kashkari speaking, Fed's Harker speaking, UK CPI/Retail Sales reports and the German ZEW Index could also impact trading today.
BOTTOM LINE: Asian indices are higher, boosted by financial and technology shares in the region. I expect US stocks to open higher and to maintain gains into the afternoon. The Portfolio is 50% net long heading into the week.

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