Tuesday, March 15, 2016

Today's Headlines

  • China's Counterproductive Plan to Eliminate Bad Debt. Swaps don't have scale or address the problem's source. China's latest remedy for the vast amount of souring corporate loans on its collective balance sheet turns an old maxim on its head: it promises short-term gain for longer-term pain. Reuters initially reported that China's central bank was laying the framework for financial institutions to swap non-performing loans into equity stakes in those firms. Turning debt positions into equity reduces the number of non-performing loans on banks' balance sheets, presumably giving them more room to finance the stimulus efforts that China hopes will boost economic activity. However, the subordinate position of equity relative to debt in the capital structure will cap how many bad loans that banks can make disappear—and the swaps that are carried out could end up worsening the problem China is trying to solve. In some respects, this plan is a rehash of a measure deployed during China's banking crisis in the 1990s to address elevated levels of bad loans. The deleterious impact these swaps have on banks' Tier-1 capital ratios will limit the extent to which non-performing loans can be reduced through this method.
  • China Drafts Rules for Tobin Tax on Currency Transactions. (video) China’s central bank has drafted rules for a tax on foreign-exchange transactions that would help curb currency speculation, according to people with knowledge of the matter. The initial rate of the so-called Tobin tax may be kept at zero to allow authorities time to refine the rules, said the people, who asked not to be identified as the discussions are private. The tax is not designed to disrupt hedging and other foreign-exchange transactions undertaken by companies, they said. Imposing a levy on foreign-exchange trading would be the most extreme step yet by policy makers to prevent speculative bets against the Chinese currency, after state-run banks repeatedly intervened to support the yuan and the government intensified a crackdown on capital outflows. A Tobin tax would complicate plans by China to create an international reserve currency and could undermine the leadership’s pledge to increase the role of market forces in the world’s second-largest economy. "The levy will hurt market sentiment and make investors more panicked, as this shows that existing capital controls are not enough to curb outflows," said Andy Ji, a Singapore-based foreign-exchange strategist and economist at Commonwealth Bank of Australia. "Now is not a good time to roll out a Tobin tax as the market is already concerned about whether China will be able to increase capital account convertibility in the coming years, and this is another step backward to achieve that goal."
  • China Tells Foreign Firms to Brace for Bigger Competitors. Scouring China’s annual gathering of leaders for clues about business prospects, foreign companies got a clear message: Brace for bigger, stronger local competitors. Reform of the nation’s $18 trillion state sector will focus on making companies "bigger and better" with mergers and acquisitions pivotal, said the State-Owned Assets Supervision and Administration Commission Saturday. That plan to create national champions is undermining the confidence of European companies to put more investment in China, said Joerg Wuttke, president of the European Chamber of Commerce in Beijing. The meeting of parliament that ends Wednesday has seen few advances on President Xi Jinping’s past vow to deliver the biggest market opening in two decades. Foreign companies -- already with marginal access in industries from finance to telecoms -- are now up against mercantilist moves including a "Made in China" initiative and periodic attacks from state entities including China Central Television, which Tuesday aired an annual program renowned for spearing foreign brands.
  • BOJ Move Backfires as 0.001% Deposits Lure Cash of Fund Managers. It’s a strange world when bank accounts earning almost no interest are one of the most attractive investments around. Despite the Bank of Japan’s efforts to spur risk-taking with negative rates, cash is flowing out of funds targeting bills and commercial paper in favor of 0.001 percent savings plans, according to Deutsche Bank AG and Monex Group Inc. Eleven money-market funds stopped accepting new investment in February as banker association data showed deposits climbed almost 6 percent.
  • Singapore Developers Post Lowest New Home Sales in 14 Months. Singapore developers sold the lowest number of new homes in 14 months, as mortgage curbs cooled demand in Asia’s second-most expensive housing market. Developers sold 301 units in February, down 7 percent from the revised 323 units in January, according to data released Tuesday by the Urban Redevelopment Authority. While annual sales rose just under 2 percent to 7,440 units in 2015, it’s still half the clip recorded in 2013. Singapore home prices have dropped for nine quarters, the longest losing streak in 17 years, as property curbs cooled demand. An index tracking private residential prices fell 0.5 percent in the three months ended Dec. 31 from the previous quarter, according to data from the Urban Redevelopment Authority. That took the annual decline in prices to 3.7 percent, almost matching the 4 percent drop in 2014, which was the first year-on-year slide since 2008.
  • Emerging Currencies Drop Led by Rand as Fed Rate Wagers Increase. Emerging-market currencies weakened for a second day and stocks fell from this year’s high as slumping commodity prices weighed on assets of exporters and increasing wagers that the Federal Reserve will raise U.S. interest rates as soon as the next quarter damped demand for risk. The rand slid 2.5 percent, leading declines among 24 peers, as police said South Africa’s finance minister failed to meet a deadline to answer questions in a probe into the national tax agency. The ruble and Brazilian real fell as Brent crude traded below $40 a barrel. The offshore yuan weakened after China’s central bank cut its daily reference rate by the most since January. Persian Gulf shares capped the longest stretch of losses in two months. Egyptian stocks extended gains after the biggest currency devaluation since 2003.
  • Global Stocks Drop, Yen Jumps as Commodity Prices Slide 2nd Day. (video) Global stocks dropped and emerging markets weakened as the biggest two-day slide for commodity prices in a month reminded investors of the financial-market turmoil that marked the start of this year. The Stoxx Europe 600 Index dropped 1.1 percent with commodity producers posting the biggest drop of the index’s 19 industry groups. Antofagasta Plc fell 4.5 percent after abandoning its dividend and saying annual profit slumped 99 percent. Among energy-related companies, Tullow Oil Plc and Seadrill Ltd. lost more than 9.7 percent.
  • Loans get scarcer for developers trying to finish projects. Lenders are getting stingier when it comes to funding risky U.S. real estate developments, putting pressure on landlords in need of fresh funding to keep their projects afloat. Banks are proceeding with caution as the specter of slowing economic growth rattles financial markets and shakes investor confidence in a six-year recovery that's helped lift property values to records. Lenders are going to be more selective and discriminating as the year progresses, said Mark Myers, the head of the commercial real estate business at Wells Fargo & Co., the largest U.S. commercial-property lender.
  • Oil Firm That Cut a Deal With Apollo Braces for New Debt Squeeze. Just eight months after distressed-debt investors gave Lightstream Resources Ltd. a lifeline amid the worst oil-slump in a generation, the energy producer is warning investors it may need another. The Calgary-based company is bracing for banks to cut its credit line after crude prices dropped to the lowest levels in more than a decade. With the bond market shut for the riskiest energy firms, that means it might need to work out yet another deal with distressed investors. A pair of funds run by Apollo Global Management LLC and Blackstone Group LP’s GSO Capital Management already agreed in July to exchange unsecured bonds for second-lien notes with a higher claim to the company’s assets, people with knowledge of the transaction said.
  • Obama Bars Atlantic Offshore Oil Drilling in Policy Reversal. The Obama administration is reversing course on opening Atlantic waters to a new generation of oil and gas drilling, after a revolt by environmentalists and coastal communities that said the activity threatened marine life, fishing and tourism along the U.S. East Coast.
  • U.S. Oil Companies Cut 100,000 Jobs to Survive Slump. (video) The U.S. oil and gas industry, once a bright spot for the country’s economy, are employing the fewest workers since before the financial crisis. More than 100,000 jobs have disappeared in two years, according to data compiled by Bloomberg. Worldwide, there have been more than 265,000 layoffs since oil prices began tumbling in late 2014, according to Airswift, a workforce solutions provider that helps companies find workers.
  • Demand Shows More Pain Ahead for Commodities: Anand. (video)
  • Crude Oil Extends Drop as Iran Spurns Production Freeze Accord. (video)
  • Hedge Fund Pain Brings Loss Worse Than '08 in Crowded Stocks. It’s well known that stocks with the most hedge funds ownership have been doing badly in the U.S. How badly might surprise you. While volatility has seeped into every corner of the market over the last year, no group has had it worse than equities where professional speculators are most concentrated. Since July, Russell 3000 Index companies in which hedge funds have the highest ownership percentage have plunged 31 percent, compared with a 2.8 percent decline in the Standard & Poor’s 500 Index, according to data compiled by Bloomberg.
  • Perhaps Too Quiet: Traders Fear Calm as Volatility Bets Jump. Even as a gauge of investor anxiety hovers close to the lowest level of 2016, the calm washing over the U.S. stock market has a suspicious feel to some traders. The concern is visible in the record number of shares outstanding in an exchange-traded note betting on an increase in the Chicago Board Options Exchange Volatility Index. Share counts, which rise along with demand for ETFs, sit around the highest levels of the year for two other long-VIX securities, according to data compiled by Bloomberg. Meanwhile, the fear gauge has closed below 20 for 10 straight days, the longest such streak since December.
  • Valeant(VRX) Plunges Most Ever on Forecast Cut, Warning Over Debt. (video) Valeant Pharmaceuticals International Inc. shares plunged Tuesday in their worst day ever, falling as much as 49 percent after the company cut its 2016 forecast, reported a weak fourth quarter and said it risked breaching some of its debt agreements if it can’t file its annual report in time.
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