Monday, February 22, 2016

Tuesday Watch

Evening Headlines
  • Yuan Weakens as PBOC Cuts Reference Rate by Most in Six Weeks. The yuan weakened after the People’s Bank of China lowered its daily reference rate by 0.17 percent, the most in six weeks. The currency fell 0.08 percent to 6.5284 a dollar as of 9.36 a.m. in Shanghai, according to China Foreign Exchange Trade System prices. In Hong Kong’s offshore market the yuan dropped as much as 0.1 percent to 6.5347, the lowest in almost two weeks. The onshore spot rate can diverge from the central bank’s fixing by a maximum 2 percent.
  • Aussie's Rally Falters as 1 1/2-Year-Old Resistance Point Looms. The Australian dollar retreated after its biggest daily advance in more than two weeks took it close to a resistance level it hasn’t breached since 2014. The Aussie is within 1 percent of its 200-day moving average, which it last traded above in September 2014, as rallies in equities and commodities boosted demand for the nation’s assets. The currency on Monday joined a rally in higher-yielding, resource-linked peers led by Brazil’s real and South Africa’s rand, while the pound and euro were the worst-performing majors amid concerns Britain may vote in June to leave the European Union. The JPMorgan Chase & Co. gauge of global currency volatility has dropped in three of the past four sessions.
  • Singapore Lawyers Warn of 1998-Like Pain as Debt Defaults Spread. Rajah & Tann Singapore LLP, Southeast Asia’s largest law firm, reckons the region’s rising bond defaults will inflict as much pain on creditors as the financial crises of 2008 and 1998. As distress spreads from shipping to mining and retail to construction industries, the law firm said in an interview that recovery rates will be similar to those seen in the global credit meltdown and Asian financial crisis. Secured creditors recover only less than 33 cents on the dollar from insolvencies in East and South Asia, compared with more than 80 cents in the U.S., according to World Bank studies. Rival law firm Hogan Lovells US LLP said in an interview that regional banks will likely boost sales of bad loans in coming months. 
  • African Markets Catch Bear Fever. Hopes are fading that Africa’s bond and equity markets will draw more than the most adventurous. A toxic cocktail of plunging commodities prices, policy mismanagement and stubborn corruption have exposed investors like Mark Mobius for their excessive optimism. In 2012, when he declared that Africa “could be the emerging-market story of the next decade,” his Templeton Emerging Markets Group followed Neptune Investment Management Ltd. and JPMorgan Chase & Co. in setting up a fund dedicated to the continent.
  • Treasuries Advance as China Yuan Shift Drives Demand for Safety. Treasuries rose for the first time in three days after China weakened its currency, reinforcing speculation the world’s second-largest is economy is slowing and boosting demand for safer assets. The yuan weakened as the People’s Bank of China lowered its daily reference rate for the currency Tuesday by the most in six weeks. The first indicators for China’s economy this month are signaling its slowdown hasn’t yet bottomed out. “If there’s something dramatic in the Chinese market, then normally people buy U.S. Treasuries,” said Toshifumi Sugimoto, chief investment officer at Capital Asset Management in Tokyo. “The Chinese economy is not doing well.” U.S. 10-year note yields fell two basis points to 1.73 percent as of 11:23 a.m. in Tokyo, according to Bloomberg Bond Trader prices.
  • China's Stocks Fall From One-Month High as Financial Shares Drop. China’s stocks fell, led by financial and industrial companies, after the central bank weakened the yuan by the most in six weeks and the first indicators for the economy this month signaled the slowdown hasn’t bottomed. The Shanghai Composite Index slipped from a one-month high, losing 0.7 percent to 2,907.68 at 10:36 a.m. The benchmark gauge closed above its 30-day moving average for the first time this year on Monday after the nation’s securities regulator appointed a new chairman. Citic Securities Co. paced declines for brokerages, while China Communications Construction Co. slumped 2 percent.
  • Global Stock Rally Falters as Yuan Weakens, Crude Oil Declines. A global equity rally stumbled as Asian gauges swung between gains and losses, while U.S. index futures dropped. Crude slumped, the yuan weakened and the yen climbed. Benchmark equity indexes in Japan, China and South Korea turned lower, while contracts on the Standard & Poor’s 500 Index slid 0.3 percent. Japan’s currency appreciated against all 16 major peers. The yuan declined after the People’s Bank of China lowered its daily reference rate by the most in six weeks. New York oil dropped after surging above $33 a barrel on Monday. The Topix index dropped 0.2 percent in Tokyo as of 11:06 a.m. Tokyo time. Australia’s S&P/ASX 200 Index slid 0.3 percent, the Shanghai Composite Index lost 0.5 percent and the Kospi index fell 0.3 percent in Seoul. The MSCI Asia Pacific Index gained 0.3 percent.
  • `Liquid Freedom' Sails From Texas, Tilting Power in Global Oil. The sea stretched toward the horizon last New Year’s Eve as the Theo T, a red-and-white tug at her side, slipped quietly beneath the Corpus Christi Harbor Bridge in Texas. Few Americans knew she was sailing into history. Inside the Panamax oil tanker was a cargo that some on Capitol Hill had dubbed “Liquid American Freedom” -- the first U.S. crude bound for overseas markets after Congress lifted the 40-year export ban.
  • BHP(BHP) Cuts Dividend for First Time in 15 Years on Profit Drop. BHP Billiton Ltd. made a larger-then-expected cut to its dividend, lowering the payout for the first time in 15 years, as the world’s biggest mining company seeks to protect its balance sheet and credit ratings amid a price collapse that saw first-half profits tumble 92 percent. Underlying profit fell to $412 million at its continuing operations in the six months to Dec. 31, from $4.9 billion a year earlier, Melbourne-based BHP said Tuesday in a statement. Its first-half dividend was cut to 16 cents from 62 cents a year earlier and the company said it will adopt a policy to provide payouts at a minimum of 50 percent of underlying attributable profit. The payout had been forecast to drop to 31 cents, according to Bloomberg data.BHP warned in the statement that weaker prices and higher volatility across commodities markets are likely to persist for longer than the company had expected, prompting it to also cut its capital spending forecast and shake up top management.
Wall Street Journal:
  • Donald Trump’s Tax Return Dodge. He shoots the messenger—us—for asking to see his ‘beautiful’ returns. Donald Trump didn’t become the favorite for the Republican presidential nominee without having political talent—not least his ability to unleash a torrent of verbiage that ducks a question. If he loses in the end, the guy should start up Trump Political School.
  • No signs OPEC production cut is close at hand. (video) An OPEC production cut does not appear close at hand, but the cartel is seemingly eager to participate in an effort to bring up oil prices. OPEC Secretary General Abdalla Salem El-Badri told CNBC on Monday that oil producers are still "feeling the water" over a possible deal to freeze production, and it is "wait and see" as to whether it leads to any other type of deal
Zero Hedge:
Business Insider:
  • Fitbit(FIT) is crashing. Fitbit shares dropped by as much as 15% in after-hours trading on Monday after the company reported quarterly results.
RTT News:
  • UTX(UTX) Held Early Deal Talks With Honeywell(HON), But Didn't Proceed Further. Responding media reports, United Technologies Corp. confirmed Monday that it has previously engaged in preliminary, exploratory conversations about a range of potential collaborative options with Honeywell. But, United Technologies never explored these options further due to significant regulatory obstacles, customer concerns and valuation issues.
  • Occidental(OXY) CEO warns of looming issues from midstream debt. Oil and gas pipeline and processing companies that borrowed vast amounts to grow when crude oil prices were much higher and U.S. output was surging now face major issues over that leverage, the CEO of Occidental Petroleum Corp warned on Monday. During the plunge in crude oil prices, investors have punished exploration and production companies that had freely tapped capital markets for funds to drill new wells. Now, those same markets are penalizing pipeline companies formed as master limited partnerships (MLPs), which rely on growth to pay out rich dividends to investors in exchange for favorable tax treatment. "If you think debt is bad in the production business, the midstream has a lot more relatively," Stephen Chazen, Occidental's chief executive told the IHS CERAWeek conference in Houston on Monday.
Financial Times:
  • Smart beta ‘could go horribly wrong’. Smart beta, one of the most popular investment strategies of the past 12 months, could go “horribly wrong” and leave investors nursing large-scale losses, according to one of the pioneers of the concept
  • Rise in US shale oil output set to fill cutback by Opec. A senior Opec official on Monday highlighted the likelihood that a reduction in the oil cartel’s production would be filled by an increase in US shale oil output. The comments by Abdalla El-Badri, the Opec secretary-general, were echoed by the head of the rich countries’ energy watchdog, underlining the limits to any rally in the oil market.
Night Trading 
  • Asian equity indices are -.25% to +.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 155.5 -6.0 basis points. 
  • Asia Pacific Sovereign CDS Index 77.0 -1.5 basis points. 
  • Bloomberg Emerging Markets Currency Index 68.91 -.01%. 
  • S&P 500 futures -.32%. 
  • NASDAQ 100 futures -.42%.
Morning Preview Links

Earnings of Note

  • (CTB)/.73
  • (CBRL)/1.90
  • (FDP)/.02
  • (HD)/1.10
  • (ICPT)/-3.07
  • (LXK)/1.12
  • (M)/1.87
  • (ODP)/.11
  • (SNH)/.47
  • (TOL)/.40
  • (TREX)/.22
  • (WWW)/.28
  • (CAR)/.18
  • (CZR)/-.12
  • (CBI)/1.11
  • (CPRT)/.43
  • (DWA)/.16
  • (FSLR)/.77
  • (JAZZ)/2.60
  • (PZZA)/.58
  • (WBMD)/.57 
Economic Releases 
9:00 am EST
  • The S&P/CS 20 City MoM SA for December is estimated to rise +.85% versus a +.94% decline in November. 
10:00 am EST
  • Consumer Confidence for February is estimated at 97.2 versus 98.1 in January.
  • The Richmond Fed Manufacturing Index for February is estimated at 2.0 versus 2.0 in January. 
  • Existing Home Sales for January are estimated to fall to 5.32M versus 5.46M in December. 
Upcoming Splits 
  • None of note
Other Potential Market Movers
  • The Fed's Fischer speaking, Fed's Kashkari speaking, Eurozone GDP report, German IFO Data, US weekly retail sales reports, $26B 2Y T-Note auction, RBC Capital Healthcare Conference, Jefferies Media/Communications Conference, (JNPR) analyst update and the (JPM) investor day could also impact trading today.
BOTTOM LINE: Asian indices are slightly higher, boosted by industrial and consumer shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.

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