Tuesday, October 04, 2016

Wednesday Watch

Posted by Gary .....at 9:46 PM
Evening Headlines
Bloomberg:
  • Could Tug-of-War Turn to War With China? (video) A fleet of Chinese aircraft thunders into a strategically vital strait. Japan scrambles fighter jets. In other words, business as usual in the waters off China, where peace and $5 trillion of annual trade hang in the balance. Only now it's even more worrying than before. Analysts warn of the possibility of armed conflict if tensions rise any higher and somebody misreads an intention — or reads it all too well. Seven nations have staked conflicting claims to a smattering of islands off China. They are Vietnam, Brunei, Malaysia, the Philippines, Japan, Taiwan, and China itself. China has drawn a bold line around more than four-fifths of the South China Sea using a decades-old old map. It has created islands to assert its ownership, spurring the Philippines to challenge it before an international tribunal, which ruled in Manila’s favor this summer. “The award is null and void and has no binding force” was Beijing's response.
  • Gross Says He Shortened Duration on Europe After Taper News. Fund manager Bill Gross said he switched positions on European debt following a Bloomberg report that the European Central Bank will probably gradually wind down bond purchases before the conclusion of quantitative easing. “The minute it posted, the 10-year bund contract dropped almost a point,” Gross said in an interview with Bloomberg Television’s Erik Schatzker on Tuesday. The report “caused me to basically reverse positions in terms of being long duration to being short duration.”
  • Global Banks Fight Back on Brexit, Warning $51 Billion at Stake. (video) Britain crashing out of the European single market could cost banks and associated businesses in the U.K. almost 40 billion pounds ($51 billion) in lost revenue, undermining a key sector of the economy, an industry report warned on Tuesday. Finance firms are making a fresh bid for special status in upcoming Brexit negotiations with the EU after U.K. government officials this week indicated banks will get no favors. The report, prepared by Oliver Wyman on behalf of TheCityUK lobby group, warns that almost 70,000 jobs and 10 billion pounds of tax revenue are at risk from a so-called hard Brexit.
  • Yen Rallying to Record 75 Seen in Charts by Hedge Fund Analyst. The yen’s first annual rally in five years is on course to push it to a record versus the dollar in a few years as the Bank of Japan refrains from adding monetary stimulus and fails to end deflation, according to hedge fund GCI Asset Management Inc. The BOJ is unlikely to cut interest rates further as it tries to help Japanese lenders cope in a sub-zero rate environment, which means the nation’s current-account surplus and deflationary economy would fuel further gains in its currency, said Tatsuhiro Iwashige, chief foreign-exchange strategist of the investment solutions group at Tokyo-based GCI Asset. The firm’s $100 million GCI Systematic Macro Fund surged 30 percent in the first half this year thanks to timely wagers on the yen and the pound.
  • Abe’s Aides Hint at Early Japan Election.
  • Gundlach Says Deutsche Bank(DB) Woes Show Harm of Negative Rates. Famed bond investor Jeffrey Gundlach said Deutsche Bank AG’s slumping share price highlights the impact of the negative-interest-rate policy in Europe on the region’s lenders and may help prompt central bankers to reconsider their approach. “You cannot save your faltering economy by killing your financial system and one of the clear poster children for this is Deutsche Bank’s stock price,” Gundlach, 56, said at Grant’s Fall 2016 Investment Conference on Tuesday in New York. “If you keep these negative interest rate policies for a sufficient future period of time you are going to bankrupt these banks.” Europe’s banks have seen their value shrink by about $280 billion this year, with Deutsche Bank losing almost half its market value. Germany’s largest lender extended losses after the U.S. Department of Justice last month requested $14 billion to settle a probe into residential mortgage-backed securities, sparking concerns that it will have to raise capital.
  • Korean Won Drops With Ringgit as ECB Seen Winding Down Stimulus.
  • Asian Stocks Retreat on Taper Bets While Japan Advances on Yen. Asian stocks outside Japan slid on concern central banks will reduce stimulus, while the Topix index climbed after the yen weakened. The MSCI Asia Pacific Excluding Japan Index fell 0.5 percent to 454.28 as of 9:05 a.m. in Tokyo. Bonds, currencies and stocks were shaken Tuesday after Bloomberg News reported the European Central Bank is likely to gradually taper asset purchases as it ends quantitative easing, citing officials who asked not to be identified. The odds the Federal Reserve will raise interest rates by December climbed to 61 percent on Tuesday, from about 50 percent a week earlier. The Topix added 0.2 percent on Wednesday, bucking declines after the yen fell the most against the dollar in more than a month. 
  • Evans Wants Fed to Update Inflation Message When It Hikes Again. Federal Reserve Bank of Chicago President Charles Evans said the U.S. central bank’s benchmark interest rate “may well be changing soon,” adding that he’d prefer that he and his colleagues strengthen their message on inflation when they raise rates again. Evans, one of the policy-setting Federal Open Market Committee’s biggest proponents of keeping rates low, argued in remarks prepared for a speech Wednesday in Auckland, New Zealand, that supporting an increase won’t be an easy decision until inflation moves up further. He’s a voting member next year on the FOMC.
  • Cattle Ranchers Their Own Worst Enemy as Large Herds Drop Prices. Cattle ranchers who quickly expanded their herds after a prolonged Texas drought now have become their own worst enemies. The industry-wide buildup was the fastest Shelby Horn, a fourth-generation cattleman with a family ranch in Nebraska, had seen in at least 30 years. The result: An explosion of beef on the market and a 30 percent drop in wholesale prices from a record set in May 2015, when supplies were tight after the drought. And with many of the calves still a year or two from slaughter, the industry finds itself with no easy way to adjust. This could mean beef prices will keep falling through 2019, according to John Nalivka, the president of Sterling Marketing Inc., an industry consulting firm.
Wall Street Journal:
Zero Hedge:
Financial Times:
  • IMF lowers growth forecast for US and other advanced economies. Brexit, US election and rising protectionism drag on world economy, fund warns. Low growth and a slow recovery from the 2008 crisis were fuelling “political tensions [which] have now made advanced economies a major locus of policy uncertainty”, the IMF's chief economist, Maurice Obstfeld, said as he unveiled the fund’s latest World Economic Outlook. Growth “has been too low for too long, and in many countries its benefits have reached too few — with political repercussions that are likely to depress global growth further”, he said. The IMF said it now expected the US economy to grow just 1.6 per cent this year and the UK’s economy to in 2017 to grow at half the rate it predicted before the June vote to exit the EU.
Night Trading 
  • Asian equity indices are -.75% to unch. on average.
  • Asia Ex-Japan Investment Grade CDS Index 117.0 unch.
  • Asia Pacific Sovereign CDS Index 33.25 +.25 basis point.
  • Bloomberg Emerging Markets Currency Index 72.64 +.01%.
  • S&P 500 futures -.07%.
  • NASDAQ 100 futures -.09%.

Earnings of Note 
Company/Estimate
  • (AYI)/2.39
  • (ANGO)/.13
  • (AZZ)/.71
  • (STZ)/1.65
  • (GPN)/.84
  • (MON)/-.02
  • (RECN)/.16
  • (YUM)/1.09  
Economic Releases
8:15 am EST
  • The ADP Employment Change for September is estimated to fall to 165K versus 177K in August.
8:30 am EST
  • The Trade Balance for August is estimated at -$39.2B versus -$39.5B in July.
9:45 am EST
  • Final Markit US Services PMI for September is estimated at 51.9 versus a prior estimate of 51.9.
10:00 am EST
  • ISM Non-Manufacturing for September is estimated to rise to 53.0 versus 51.4 in August. 
  • Factory Orders for August are estimated to fall -.2% versus a +1.9% gain in July. 
  • Final Durable Goods Orders are estimated unch. versus a prior estimate of unch.
10:30 am EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,059,180 barrels versus a -1,882,000 barrel decline the prior week. Gasoline supplies are estimated to fall by -99,090 barrels versus a +2,027,000 barrel gain the prior week. Distillate inventories are estimated to fall by -1,162,270 barrels versus a -1,915,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to fall by -.75% versus a -1.9% decline the prior week.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Lacker speaking, Fed's Kashkari speaking, Eurozone Services PMI report, weekly MBA mortgage applications report, (ECA) investor day could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by metals/mining and technology shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 25% net long heading into the day.

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