Tuesday, May 31, 2016

Today's Headlines

  • Perfect Storm Brews in China as Fed Worry Meets June Cash Crunch. (video) A perfect storm may be brewing in Shanghai’s money market as a credit-fueled economic recovery coincides with the prospect of higher U.S. interest rates in June, a month that has historically seen funding crunches in China. The overnight interbank lending rate averaged 1.99 percent in May, up from 1.18 percent a year ago, as Federal Reserve tightening weakened the yuan, spurring capital outflow pressures. That borrowing cost has climbed every June since 2011, as lenders hoard deposits ahead of quarter-end regulatory checks. The cost of fixing rates in the swap market is surging as data showed property leading a rebound in investment in the world’s second-biggest economy. “The internal and external factors combined will certainly add pressure to the money market in June, driving interest rates higher,” said Liu Dongliang, a Shenzhen-based senior analyst at China Merchants Bank Co., the nation’s sixth-largest lender. “We’re not optimistic about the bond market in the short term.” Any cash crunch would aggravate a rout in bonds that led to 190.6 billion yuan ($28.9 billion) in canceled sales this quarter, making it harder for issuers to refinance a record amount of maturing debt.
  • Chinese Bonds Complete Worst Month in Year as Yuan Extends Loss. Chinese sovereign bonds posted their the steepest monthly loss in a year amid speculation authorities will refrain from easing monetary policy after the U.S. signaled higher borrowing costs as early as next month. The yuan fell by the most this month since the August devaluation. The yield on 10-year government bonds climbed nine basis points since the end of April to 2.98 percent in Shanghai, the highest level since December, ChinaBond data show. The yuan fell 1.6 percent this month to 6.5846 per dollar as of 4:50 p.m. in Shanghai, bringing losses in the second quarter to 2.1 percent.
  • One-Minute Plunge Sends Chinese Stock Futures Down by 10% Limit. (video) Chinese stock-index futures plunged by the daily limit before snapping back in less than a minute, the second sudden swing to rattle traders this month. Contracts on the CSI 300 Index dropped as much as 10 percent at 10:42 a.m. local time, recovering almost all of their losses in the same minute. More than 1,500 June contracts changed hands in that period, the most all day, according to data compiled by Bloomberg. The China Financial Futures Exchange said in a statement that a client using block trades for market hedging triggered a technical selloff. The slump follows a similar drop in Hang Seng China Enterprises Index futures on May 16 in Hong Kong, a move that heightened anxiety among investors facing slower Chinese economic growth and a weakening yuan.
  • China Futures Exchange Says Client’s Hedging Caused Flash Crash. (video)
  • Pound Drops as New Brexit Poll Shows ‘Leave’ Camp Taking Lead. (video) The pound dropped after a new poll showed a jump in support for the campaign to take Britain out of the European Union, spooking some investors who had thought that the result was a foregone conclusion. Sterling fell against all of its 16 major peers as ICM opinion polls released Tuesday by the Guardian showed a lead for the ‘Leave’ camp. A phone survey showed 45 percent of respondents supported leaving, 42 percent for ‘Remain’ and 13 percent were undecided, in contrast to a previous survey which put the pro-EU camp ahead. An online poll also put the Brexit camp ahead.
  • Europe Stocks Trim Their Best Monthly Gain in Six as Banks Fall. (video) European stocks fell, halting their longest advancing streak in almost seven weeks, as banks declined. Lenders posted the worst performance among Stoxx Europe 600 Index groups, with Banco Popolare SC and Banca Popolare di Milano Scarl down more than 5.4 percent. Volkswagen AG lost 2.6 percent after the company mired in an emissions-cheating scandal reported an 86 percent slide in quarterly profit at its namesake brand. The Stoxx 600 closed 0.8 percent lower, extending declines in the final hour of trading.
  • From Awesome in April to Gutted in May, Iron Ore Sinks Back Down. For iron ore, if April was a party then May’s been the aftermath. Benchmark prices are headed for the biggest monthly loss since August 2012 as a rally driven by a speculative frenzy in China segued straight into a back-to-reality slump when the fervor faded. Ore with 62 percent content has lost 24 percent in May to unwind April’s 23 percent rally, when prices posted a third monthly gain, according to data from Metal Bulletin Ltd. The raw material has collapsed 29 percent since peaking at more than $70 on April 21, and last week dipped below the $50 level. The commodity’s boom turned to a bust as regulators in China moved to prevent the frenzy from getting out of hand and signs emerged of increased supply, including higher port stockpiles. Steel-product prices that soared in April, lifting mills’ margins and encouraging output, have since retraced, denting iron ore demand. Goldman Sachs Group Inc. warned last week iron ore will probably extend its drop in the second half amid a rising global surplus.
  • Risky Reprise of Debt Binge Stars U.S. Companies Not Consumers. Consumers were the Achilles’ heel of the U.S. economy in the run-up to the last recession. This time, companies may play that role. Among the warning signs: rising debt, lagging profits and mounting defaults.  “Companies have been adding to their debt and their debt has been growing more rapidly than their profits,” said John Lonski, chief economist of Moody’s Capital Markets Research Group in New York. “That imbalance in the past has usually led to problems” in the economy as companies cut back on spending and hiring. Case in point: Last week’s news that so-called core capital goods bookings fell for the third straight month in April. The seasonally-adjusted total of $62.4 billion for non-defense orders excluding aircraft was the lowest in five years, prompting Neil Dutta of Renaissance Macro Research to label business investment “pathetic.” The similarities between the pre-recession debt binge by consumers and today’s burst of borrowing by companies are striking. Like households, corporations are using the money for short-term purposes rather to prepare themselves for the future. They’re basing their bets on rosy expectations that may not pan out. And it’s the bottom 99 percent that are most at risk should credit conditions tighten.
  • Jazz Pharmaceuticals(JAZZ) Agrees to Buy Celator for $1.5 Billion. Jazz Pharmaceuticals Plc agreed to buy Celator Pharmaceuticals Inc. for about $1.5 billion to gain an experimental medicine for a rare blood cancer. Jazz, based in Dublin, offered $30.25 per share in cash for Ewing, New Jersey-based Celator, the companies said in a joint statement on Tuesday. Celator’s board endorsed the transaction. Investors with 18.4 percent of Celator’s stock, including managers and board members, agreed to tender their shares.
  • Inside Uber’s Auto-Lease Machine, Where Almost Anyone Can Get a Car. In a deal led by Goldman Sachs, Xchange received a $1 billion credit facility to fund new car leases, according to a person familiar with the matter. The deal will help Uber grow its U.S. subprime auto leasing business and it will give many of the world's biggest financial institutions exposure to the company's auto leases.  The credit facility is basically a line of credit that Xchange can use to lease out cars to Uber drivers. Xchange caters to people who have been rejected by other lenders.
Wall Street Journal:
  • Pension Funds Pile on Risk Just to Get a Reasonable Return. An investor used to get a 7.5% return by holding safe bonds. To earn that now, research finds, takes a more volatile mix. What it means to be a successful investor in 2016 can be summed up in four words: bigger gambles, lower returns.
Zero Hedge: 
  • Apple Likely to Take 3 Yrs Between iPhone Model Changes. Apple will likely take three years between full-model changes of its iPhone devices. New cycle to be year longer than current 2-year cycle. Changes to model to be introduced this autumn will be minor. Functions like camera, water resistance and battery capacity will likely be improved; headphone jack will be removed.

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