Sunday, March 06, 2016

Monday Watch

Posted by Gary .....at 10:25 PM
Today's Headlines
Bloomberg: 
  • ChemChina $50 Billion Loans Flag New Chapter in China Debt Binge. Just as Moody’s Investors Service warns of the strain on China’s finances of debt among state-owned enterprises, the companies are loading up on record overseas loans to buy assets around the world. China National Chemical Corp. got $50 billion in such financing for its $43 billion purchase of Swiss pesticides producer Syngenta AG, people familiar with the matter have said. Loans syndicated offshore for Chinese firms undertaking acquisitions, including those in the pipeline, have reached at least $36.3 billion this year, compared with the record $23.3 billion completed in 2015. Moody’s cut China’s rating outlook to negative from stable last week, saying state-sector leverage raises risks of a worse slowdown in economic growth as funds are diverted to service debt. Among the 38 SOEs with lowered outlooks were conglomerate CITIC Ltd., plagued by overruns in an Australian mining project, and Bright Food Group Co., which bought British cereal maker Weetabix Ltd. in 2012 and whose total debt was 137 percent of equity at end-2014. “Some of the SOEs only focus on growth right now without paying close attention to their balance sheet,” said Xia Le, chief economist for Asia at Banco Bilbao Vizcaya Argentaria SA in Hong Kong. “There will be risks for debt investors down the road. The huge amount of offshore loans the SOEs are taking on right now will make them vulnerable to changes in macro conditions and their own operations.”
  • Shanghai Property Market Is `Overheated,' Top City Official Says. Shanghai’s most-senior official said the city’s property market has “overheated” and should be more tightly controlled after a recent surge in residential housing prices. “An irrational and overheated sentiment have emerged in the Shanghai real estate market, and these sentiments have raised home prices," Han Zheng, the city’s Communist Party chief, said at briefing during annual legislative meetings in Beijing Sunday. Residential home prices in China’s so-called first-tier cities of Beijing, Shanghai, Tianjin and Shenzhen have surged amid a relaxation of housing curbs intended to boost real estate investment and increased monetary stimulus from the central bank. New home prices in Shanghai jumped 2.2 percent in January from a month earlier, while existing home prices increased 2.7 percent from a month earlier, the most since 2013, according to data from the nation’s statistics bureau. Last month, lines of prospective buyers outside property agents’ offices in a Shanghai suburb clogged roads and forced police to curb traffic to maintain order, Caixin reported. The frenzy prompted the city government to issued a call for calm on its official microblog account. Han said his city would strengthen housing regulations without giving details on specific measures, saying only that regulations should be “scientific as housing is a specialty commodity."
  • China Growth Addiction Leaves Deleveraging, Reform in Back Seat. Rule No.1 in China’s blueprint for the next five years: "give top priority to development." That’s the word from Premier Li Keqiang’s work report delivered Saturday at the start of the annual National People’s Congress in Beijing. Li acknowledged there would be some difficult battles ahead as he outlined plans to clean up the environment, boost innovation, further urbanize and cut excess capacity in industries like coal and steel. Yet the firmest target remains on the one thing he has the least control over -- the nation’s economic growth rate. For 2016, a 6.5 percent to 7 percent growth range was outlined, with 6.5 percent pegged as the baseline through 2020. That would be less than last year’s 6.9 percent rate, the slowest growth in a quarter century. To reach the new target, the government will permit a record high deficit and has raised its money supply expansion target. The upshot: debt grows even as growth slows. "The risk is that if stimulus is accelerated but reform continues to lag, the government could end the year with growth on target but even bigger structural problems to deal with," Bloomberg Intelligence economists Tom Orlik and Fielding Chen wrote in a note. The report "confirms that the focus is firmly on supporting short-term growth, with the deleveraging can kicked further down the road."
  • Yuan Breaks Four-Day Advance as Leaders Shy Away From Specifics. The yuan snapped a four-day run of gains as China’s leaders refrained from announcing specific support measures at their biggest gathering of the year. The nation will push ahead with efforts to make the yuan more convertible and promote its use overseas over the next five years, according to a development plan released at the National People’s Congress on Saturday. The currency will remain stable against a basket of exchange rates, People’s Bank of China Deputy Governor Yi Gang said on Sunday, using a line that has been repeated by several officials over the past few months. The currency fell 0.09 percent to 6.5127 a dollar as of 9:52 a.m. in Shanghai, ignoring the strongest central bank fixing in two months, according to China Foreign Exchange Trade System prices. The offshore yuan traded in Hong Kong dropped 0.05 percent to 6.5059. The PBOC raised the currency fixing by 0.26 percent to 6.5113.
  • How Hedge Funds Are Getting Around the PBOC's Market Meddling. Hedge funds with a bearish view on China’s currency are increasingly betting against yuan proxies instead, after the central bank stepped up efforts to stabilize the exchange rate. Colorado’s Crescat Capital is shorting U.S. exchange-traded funds that track Chinese and South Korean stocks, while the won and Taiwan’s dollar are among those favored by Hong Kong-based Bright Stream Capital Management. The exchange rates tend to decline on negative China sentiment because the nation is their biggest export market. The need for alternatives to direct bets on the yuan intensified after China’s central bank burned speculators earlier this year. The monetary authority drove offshore borrowing costs to record levels by choking the flow of funds out of the nation, mopping up yuan supplies and intervening to support the currency. Crescat Capital returned 4.4 percent in January as its bearish ETF bets paid off, while Bright Stream said its macro fund gained 2.8 percent, helped by short wagers on the Taiwan dollar and the Korean won.
  • Hong Kong Homes Sales Tumble 70% as Slowdown Intensifies. Hong Kong residential home sales plunged 70 percent in February from a year earlier to a 25-year low, as falling prices and economic uncertainty deterred buyers. In February, 1,807 homes were sold in Hong Kong, compared with 6,027 a year earlier, according to government statistics. Home sales fell from 2,045 in January, the data show. “The newspapers keep on saying the market is going down and buyers think they can get a cheaper house half-a-year later or one year later so are waiting," said Thomas Fok, a property agent at Centaline Property Agency in Hong Kong’s upscale Mid-levels West district where he hasn’t made one sale this year.
  • Bad Debts May Rise in Australia. (video)
  • Funding Slowdown May Signal Turning Point in Liquidity, BIS Says. A decline in international financing may signal the beginning of a tightening in global credit markets, according to the Bank of International Settlements. Outstanding debt securities fell the most in three years, with repayments surpassing new issuance by $47 billion in the fourth quarter, the Basel, Switzerland-based institution said in a report published Sunday that cited drops in a raft of measures of international financing. The decline in outstanding debt was driven by weak issuance by financial companies in developed economies. The slowdown may indicate financing is drying up, according to the report, which highlighted the “uneasy calm” in financial markets in late 2015 amid the prospect of higher Federal Reserve interest rates, slowing demand from China and plunging commodity prices. The deterioration of global growth prospects has rattled markets from the start of this year. “These developments in international bank and securities credit are significant because they may signal a turning point in global liquidity,” BIS said in the report. If tighter liquidity conditions persist, they “may raise stability risks in some countries, especially those where other indicators already point to a heightened risk of financial stress.”
  • Asian Stocks Swing as Investors Weigh China Goal, U.S. Jobs Data. Asian stocks fluctuated, following the biggest three-week advance since 2009, as investors weighed China’s move to cut its economic growth target and a surge in U.S. hiring that boosted optimism in the outlook for the world’s largest economy. The MSCI Asia Pacific Index was little changed at 126.31 as of 9:07 a.m. in Tokyo, after swinging between a gain of 0.3 percent and a loss of less than 0.1 percent.
  • Iranian Oil Lands in Europe for First Time Since Sanctions Ended. The Monte Toledo oil tanker covered the uneventful voyage from Iran to Europe with a haul of one million barrels of crude in just 17 days, but its journey has been four years in the making. On Sunday, the tanker became the first to deliver Iranian crude into Europe since mid-2012, when Brussels imposed an oil embargo in an attempt to force the Middle Eastern nation to negotiate the end of its nuclear program. The ban was lifted in January as part of a broader deal that ended a decade of sanctions. 
  • Fed Experts Deliver the Bad News: Productivity Slump Is for Real. (video) It’s a paradox that’s been puzzling economists for a while. How can U.S. productivity growth be slowing down at the same time that innovation in everything from smartphones to 3D printing seems to be speeding up? A trio of economists from the Federal Reserve and the International Monetary Fund think they have the answer and it’s not particularly pretty. They argue in a new paper that the down-shift in productivity is for real. It’s not a mirage of mis-measurement by government statisticians unable to keep up with rapidly changing technology.
Wall Street Journal: 
  • China’s Surging Credit Has Some Raising the Caution Flag. China Resources chairman says he is closely watching risks tied to expanding money supply. A credit boom is creating anxiety among executives and economists over heightened risks in China’s financial system and a wave of soured loans. China’s slowing economy—whose growth Beijing said Saturday would be maintained at an average of 6.5% over the next five years—is compounding a policy conundrum: how to generate lending without fueling what analysts have already flagged as the return of a residential property bubble....
  • China’s Leaders Put the Economy on Bubble Watch. Beijing aims to spur key sectors as growth slows, but officials are cautious about a buildup of debt. China’s leaders made clear they are emphasizing growth over restructuring this year, but suggested they are trying to avoid inflating debt or asset bubbles as they send massive amounts of money coursing through the economy. The government’s announcement of a 6.5% to 7% growth target for 2016 at the start of the National People’s Congress over the weekend came with subtle acknowledgment that some of its efforts to jump-start a... 
  • Investors Fret as ECB Looks Poised to Get More Negative. Some fear unintended consequences as European Central Bank is expected to cut a key rate further into negative territory. For investors, one question dwarfs all the others this week: How low can you go? The European Central Bank is expected on Thursday to push a key interest rate even further into negative territory, a move that is at once widely anticipated by markets and viewed with trepidation. Analysts and investors say the ECB’s action likely will drive down government-bond yields, further reducing borrowing costs that are already near...
  • The Scalia Seat: Let the People Speak by Ted Cruz. The legal stakes are higher than ever, and historic precedent favors waiting for a new president. Republicans and Democrats are deeply divided over the proper role of the Supreme Court. President Obama and Democrats favor justices who see the Constitution as a potter sees clay—something that can be molded to achieve their desired results. This has led the Supreme Court to invent rights that are nowhere in the Constitution—like the right to an abortion or to same-sex marriage—and ignore or restrict rights that even nonlawyers can’t miss—like the First and Second Amendments. 
  • The Trump-Obama Corporate Tax Reform Fail. They both want a minimum tax on the foreign earnings of U.S. companies. That’s no ‘inversion’ cure. Removing the incentive for American companies to move their headquarters abroad is a widely recognized goal. To do so, the U.S. will need to join the rest of the G-7 countries and tax business income only once, in the country where it was earned. Notably, this principle—called territoriality—is included in the bipartisan framework for international tax reform developed by Sens. Rob Portman (R., Ohio) and Charles Schumer (D., N.Y.) in 2015.
Fox News:
  • Rubio wins Puerto Rico GOP primary. (video) Florida Sen. Marco Rubio on Sunday won the Republican primary in Puerto Rico, his second victory in the 2016 race, according to the Associated Press. Twenty-three delegates were up for grabs in Puerto Rico.
  • Nancy Reagan, widow of Ronald Reagan, dead at 94. (video) Nancy Reagan, the widow of President Ronald Reagan and passionately devoted keeper of his flame, died Sunday morning of congestive heart failure at 94, according to her spokesperson. Reagan died at her home in Los Angeles. She's set to be buried at the Ronald Reagan Presidential Library in Simi Valley, California, next to her husband. Prior to the funeral, there will be an opportunity for members of the public to pay their respects at the Library, the spokesperson said. Details had not yet been announced Sunday afternoon.
  • Sanders turns up attacks on Clinton at feisty debate, Dem front-runner fights back. (video) Fresh off a series of weekend victories in state caucuses, Bernie Sanders turned up the heat on Hillary Clinton at Sunday’s debate in Flint, Mich., sharply challenging her economic credentials and suggesting her gun control stand would ban guns in America. But the Democratic front-runner fought back, blasting him for voting against the auto bailout, dismissing him as a “one-issue candidate” and hitting him once again for his stance on guns. The Vermont senator reached back to the 1990s as he went after Clinton’s support for “disastrous trade agreements” like NAFTA. His rhetoric was notably more pointed and, reflecting the tension in the race, Sanders even cut her off at times as she tried to speak over him. “Excuse me, I’m talking,” Sanders snapped, during one feisty exchange on the economy.
CNBC:
  • Fade the bank breakout, don't chase it: Technician. (video)
  • Faith in 'healing' central banks has faded: BIS. While financial markets have regained some composure since the start of the year, mounting global debt levels, sticky growth and the prospect of long-term negative rates are issues that are not going away anytime soon, the Bank for International Settlements has warned. Concerns about growth in China and other emerging market economies and the health of some of the world's largest banks made for a very difficult start to 2016 for most investors, resulting in one of the worst stock market sell-offs since the financial crisis of 2008.
 MarketWatch:
Zero Hedge:
 Business Insider:
IBD: 
  • EU Won’t Reach Its Carbon Goals, It’s Just Another Climate Hypocrite. Fraud: To great fanfare and self-congratulation, the European Union signed on to the Paris climate treaty in December. But it won’t be able to keep its promise. Yes, the entire enterprise is a sham. The British Guardian reported this week that the “EU is set to emit 2 billion tons more CO2 than it promised at the Paris climate talks, threatening an agreement to cap global warming at 2C.” Unsurprisingly, “lawmakers say that the shortfall could spur criticism from other countries that signed up to the Paris agreement, which aims for net zero emissions later this century.” As noted by The American Interest, “the EU was perhaps the most vociferous in its attempt to try and hammer out an international climate treaty.” But as it turns out, it has nothing — its leaders are just another bunch of climate hypocrites who are convinced that if they can act as if they are defending the climate, others will believe in their moral superiority.
Reuters: 
  • Delegate tells China parliament stock crisis 'destroying middle class'. A Shanghai representative to the National People's Congress (NPC) on Sunday lambasted China's market regulators for igniting a stock crisis that is "destroying the Chinese middle class", a rare rebuke for authorities during their biggest annual event. "The ten years of stock market development since 2007 is a decade of tears for Chinese investors," Fan Yun, a Shanghai businesswoman said during an open session at NPC in Beijing. Fan, who has a reputation for being outspoken, laid into Chinese brokerages for failing to educate investors while also blaming regulators for failing to properly control the margin lending and alternative credit channels that helped inflate a stock bubble that is still deflating. Views like Fan's are rarely expressed so baldly in official public forums, but they do reflect worries in Shanghai that the city's goal to become a global financial center to rival Hong Kong and New York by 2020 took a serious setback in 2015, thanks at least in part to clumsy central intervention by regulators in Beijing.
 Financial Times:
  • Bank for International Settlements warns of negative rates risk. Negative interest rates risk backfiring the longer and more deeply central banks in Europe and Japan venture into this unconventional monetary policy, economists from the Bank for International Settlements have warned. The caution over one of the most important experiments in monetary policy’s history comes before the European Central Bank’s meeting on March 10. Markets expect the ECB to push its deposit rate deeper into negative territory — lowering it 10 basis points to minus 0.4 per cent — to help stave off the threat of deflation. 
  • Systemic risk fears over fund manager credit lines. Fears over systemic risk have been fuelled by some of the world’s largest asset managers securing billions of dollars in additional credit to help prevent a run on their funds. The moves have worried international regulators who fear these borrowing arrangements could exacerbate liquidity problems in the event of a crisis.
  • Fears over US commercial property lending surge. A surge in commercial property has fuelled the fastest annual expansion of US banks’ loan books since 2007, a sign of greater confidence that also raises concerns that lenders are taking on too much risk. Holdings of commercial real estate loans — an area regulators are scrutinising closely because of worries about risky lending practices — jumped about a tenth last year.
 Telegraph:
  • Debtor days are over as BIS calls time on world credit binge. The world’s credit boom is beginning to show dangerous signs of unraveling, ushering in a period of fresh turmoil for the over-indebted global economy, the Bank of International Settlements has warned. The globe’s top financial watchdog called time on the world’s debt binge, noting that debt issuance and cross border flows in emerging economies slowed for the first time since the aftermath of the global credit crunch at the end of last year.
  • Downfall of Brazil’s Lula marks end of Brics fantasy. The dream of a Brics ascendancy has ended in sadness and squalor after the iconic figure of the era was seized by police at his home here, to the rapturous applause of Brazil’s stock exchange.
Night Trading
  • Asian indices are -.25% to +.50% on average.
  • Asia Ex-Japan Investment Grade CDS Index 148.75 +.75 basis point.
  • Asia Pacific Sovereign CDS Index 68.25 -1.75 basis points.
  • Bloomberg Emerging Markets Currency Index 70.18 +.02%.
  • S&P 500 futures -.21%.
  • NASDAQ 100 futures -.27%.
Morning Preview Links

Earnings of Note
Company/Estimate
  • (SUP)/.30
  • (NX)/-.12
  • (SHAK)/.07
  • (THO)/.62
  • (UNFI)/.48
  • (URBN)/.56 
Economic Releases
10:00 am EST
  • Labor Market Conditions Index for February is estimated to rise to 1.0 versus .4 in January.
3:00 pm EST
  • Consumer Credit for January is estimated to fall to $16.5B versus $21.267B in December.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Fischer speaking, Japan GDP report, Deutsche Bank Media/Internet/Telecom conference, Cowen Health Care Conference, Sandler O'Neill Financial Services conference, (AKAM) investor summit and the (NCR) investor day could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by commodity 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 week.

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