Evening Headlines
Bloomberg:
- China’s Stocks Slump as Rate Cut Fails to Stop $5 Trillion Rout. China’s stocks extended the steepest five-day drop since 1996 as an interest-rate cut by the central bank failed to stop a $5 trillion rout. The Shanghai Composite Index sank 3.8 percent to 2,852.21 at 10:42 a.m. local time, rising as much as 1.2 percent earlier. About eight stocks fell more each that rose on the gauge. The fifth interest-rate cut since November was announced hours after the benchmark measure closed with a 7.6 percent drop on Tuesday. Chinese equities have lost at least $5 trillion, or half their value, since mid-June as margin traders closed out bullish bets and concern deepened that valuations are unjustified by the weak economic outlook. The government has halted intervention in the equity market this week as policy makers debate the merits of an unprecedented rescue, according to people familiar with the situation. “The prevailing sentiment is still that investors want to cash out, whatever the government does,” said Ronald Wan, chief executive at Partners Capital International in Hong Kong. “Confidence is already damaged. Doubts over the effectiveness of policies are getting bigger. The market will remain under selling pressure for a while.” The Hang Seng China Enterprises Index dropped 0.7 percent. Hong Kong’s Hang Seng Index fell 1.2 percent as the value of shares traded reached double the 30-day average for this time of day.
- Volkswagen Auto Sales Slid in July as Emerging Markets Stumble. Volkswagen AG, aiming to become the world’s largest automaker by 2018, said Tuesday that global sales slipped 3.7 percent in July amid turmoil in key markets. Volkswagen delivered 792,100 vehicles last month, bringing the 2015 total to 5.83 million, 1 percent less than the Wolfsburg, Germany-based company sold in the same period a year earlier. “The overall economic situations in China, Russia and Brazil continue to be tense,” Christian Klinger, VW’s sales chief, said in a press release. “In the second half of the year, we expect the patchy development of markets to remain a key factor in the various regions.” In China, Volkswagen’s biggest market, sales for the first seven months of the year declined about 5 percent to 1.99 million vehicles.
- Danger Signs That Made Fund Quit 25% of Assets Say Worst to Come. John Lekas’s “sell” triggers helped the bond fund manager dodge some losses amid the worst month this year for distressed debt from emerging markets. They’re now warning of more pain to come. Lekas, who oversees $1.4 billion at Leader Capital Corp. in Portland, Oregon, trimmed about a quarter of his holdings in the past two months based on his modeling’s signals. That included Noble Group Ltd.’s 2020 notes before they fell almost 20 percent. He’s now buying short-term U.S. Treasuries and predicting a deeper fallout in emerging markets. “We sold about 25 percent of our portfolio because things are not working out, it got too risky,” said Lekas. “I would have sold more -- the liquidity in the market has become more problematic.” Lekas’s modeling uses components such as interest rates, market volatility and risk-reward scenarios.
- GM Moves to Cut Jobs at Brazil Factory Amid Economic Turmoil. General Motors Co. plans to cut 800 jobs in Brazil, after announcing less than a month ago that it will invest another $1.9 billion in the South American nation. The automaker reached an agreement with a union at a plant near Sao Paulo to put the reductions on hold, after a two-week strike. The 800 workers will be on paid leave for five months, with GM and the government each paying half of their wages, company spokesman Nelson Silveria said. They probably will be released after that period because of weak demand, he said.
- China's Yuan Shock Gives Carry-Trade Crowd Worst Year Since '08. China just gave investors one more reason to shun the most popular trading strategy in the $5.3 trillion-a-day currency market. Carry trades, or borrowing one currency cheaply to invest in a higher-yielding asset elsewhere, were already suffering the biggest losses since 2008 as the rout in emerging markets sent potential purchases tumbling. By cutting interest rates two weeks after its shock devaluation, China effectively crossed the yuan off investors’ shopping lists, too. Add to this a surge in volatility -- which is kryptonite for these transactions because it can wipe out the profit from the interest-rate differential -- and carry traders are finding fewer and fewer ways to make money. JPMorgan Private Bank and the asset-management unit of Bank of China both say the strategy’s best days are behind it.
- Ringgit Slumps to 17-Year Low on Emerging-Market Jitters, Oil. Malaysia’s ringgit plunged to a 17-year low, leading losses among Asian currencies, on concern about the outlook for emerging markets and lower energy prices. The ringgit depreciated 1.7 percent to 4.2838 a dollar as of 8:47 a.m. in Kuala Lumpur, according to prices from local banks compiled by Bloomberg. It reached 4.2990, the lowest since July 1998, and has weakened more than 18 percent in 2015.
- Asian Stocks Rise After China Cuts Rates, Reserve Requirements. Asian stocks rose, with Japanese shares rebounding from the biggest two-day plunge since 2011, as investors awaited the opening of mainland Chinese markets following Tuesday’s cut in interest rates. The MSCI Asia Pacific Index advanced 0.7 percent to 125.75 as of 9:07 a.m. in Tokyo, after capping an eighth straight decline Tuesday to enter a bear market.
- Bank of Montreal CEO Sees Further Loan Losses If Oil Prices Drop. Bank of Montreal, Canada’s fourth-largest lender, will see further loan losses from oil-and-gas firms if energy prices remain low, Chief Executive Officer William Downe said. “If oil prices stay down, we will have provisions for credit loss that we otherwise wouldn’t have,” Downe said Tuesday in a phone interview. “They’re not a good thing, but with respect to potential losses relative to the size of the bank or our total overall portfolio, they remain manageable.”
- Blame Oil Glut on Investors Who Still Love Drilling Over Profits. Investors sent a surprising message to U.S. shale producers as crude fell almost 20 percent in August: keep calm and drill on. While most oil stocks have fallen sharply this month, the least affected by the slump share one thing in common: they don’t plan to slow down, even though a glut of supply is forcing prices down. Cimarex Energy Co. jumped more than 8 percent in two days after executives said Aug. 5 that their rig count would more than double next year. Pioneer Natural Resources Co. rallied for three days when it disclosed a similar increase.
- Merger Bubble May Burst as Record Goodwill Piles Up: Real M&A. The biggest threat to U.S. stocks right now may not be China, currencies or commodities prices. It might be American companies’ own merger appetite. Acquirers worldwide have already spent $2.2 trillion on transactions in 2015, putting the year on track for a record. The buying spree has been particularly audacious in the U.S., where acquirers are offering record prices relative to the revenue and profit they’re gaining from the deals.
Wall Street Journal:
- Stock-Market Tumult Exposes Flaws in Modern Markets. Exchange-traded funds became hard to price as stocks tied to them cratered. Monday’s mayhem exposed significant flaws in the new architecture of Wall Street, where stock-linked funds—as much as shares themselves—now trade en masse on U.S. markets. Many traders reported difficulty buying and selling exchange-traded funds, a popular...
- Glut of Chinese Steel Looms Large. China is increasingly using recycled steel, pressuring iron-ore prices and global miners. The world’s biggest producers of iron ore have a problem, and it lies in the steel that has already gone into China’s cars, bridges and skyscrapers.
- Closing the Planned Parenthood Loophole. Whatever your stance on abortion, it’s clear the laws governing fetal tissue don’t work—and should be fixed. Disturbing videos that show Planned Parenthood personnel casually discussing the sale of fetal organs from abortions have caused widespread outrage. As each new video is released, the calls for Congress to cut Planned Parenthood’s federal funding grow stronger. No matter where you stand in that debate, the videos provide unarguable proof that current laws governing the fetal-tissue trade don’t work. Congress must tighten them.
Fox News:
- Exclusive: State Dept.-released Clinton email had classified intel from 3 agencies, possibly violating Obama order. (video) One of the emails that triggered the FBI probe into Hillary Clinton’s server contained classified intelligence from three different agencies, Fox News has learned – which could mean the State Department violated a President Obama-signed executive order by authorizing its release.
MarketWatch.com:
- Transocean(RIG) seeks to cancel two dividend payments. Transocean Ltd. is seeking to cancel the third and fourth installments of its dollar-denominated dividend this year, which the company had already approved in May. Shares dropped 12% to $10.75 in after-hours trading. Through Tuesday's close, they had fallen 67% in the past 12 months. The offshore driller said in February that it planned four installments of 15 cents each, which represented an 80% reduction from the previous payout rate, citing its "cyclical and capital-intensive industry."
- Oshkosh(OSK) wins $6.7 billion military contract to replace Humvee. Oshkosh Corp. was awarded a $6.7 billion contract to build the first batch of as many as 55,000 light trucks to replace the aging Humvees used by the U.S. Army and Marine Corps, the Pentagon said Tuesday.
Zero Hedge:
Business Insider:
Reuters:
- Century Aluminum to idle Kentucky smelter due to weak prices. Century Aluminum Co, which is owned by Glencore PLC, said on Tuesday it will idle its Hawesville, Kentucky, smelter, the first aluminum plant to shut in years as sinking prices and increased Chinese exports harm producers. Century said in a statement it would begin curtailing capacity on Oct. 24, blaming weak metal prices caused by low-priced exports from China. It will "completely idle the plant" on Oct. 31, a spokesman said.
- U.S. slashes forecast for 2015 farm incomes. U.S. farm incomes will drop by more than half from their peak two years ago, according to U.S. Department of Agriculture estimates issued on Tuesday that signal deeper pain for sellers of agricultural equipment and land. The USDA projected farm incomes this year will drop by 36 percent from 2014 to $58.3 billion due to declining crop and livestock prices. The forecast is down 20 percent from the USDA's February estimate of $73.6 billion.
- BHP Billiton(BHP) expects China's growth to "drift down" in coming years. China's economic growth will cool from the 7 percent forecast for 2015, curbing demand for some commodities as the country completes investments in major construction projects, BHP Billiton chief Andrew Mackenzie said on Tuesday. The mining group's underlying net profit was more than halved in the year to June, part of a succession of bad numbers from a sector feeling the down-draft of plunging prices for iron ore, copper, coal and oil.
- Brazil real weakens to 3.6 per dollar for 1st time in 12 years. The Brazilian real slid 1.5 percent late on Tuesday and crossed the psychologically important level of 3.6 per dollar for the first time in more than 12 years as traders worried about a growing political crisis in Latin America's largest economy. The Brazilian currency extended losses even as other emerging market currencies steadied following a decision by the Chinese central bank to cut interest rates.
- Gloomy reality dawns on Brazil. Roberto Setubal, the head of Brazil’s biggest private bank, sees a long period of gloom for Brazil’s economy as unemployment rises and Congress is roiled by corruption scandals. However, he does not believe Dilma Rousseff, the president, will be impeached.
Telegraph:
- Chinese alarm over? No, this is merely a pause in an ongoing debt crisis. Six years after the global financial crisis, the world economy still looks as unstable, unbalanced, uncoordinated and ultimately unsustainable as ever.
- China cuts rates to stem crisis, but doubts grow on foreign reserve buffer. 'There are reasons to question the robustness of China’s reserves,' said Citigroup. Contrary to general belief, China has one of the lowest reserve ratios among emerging markets.
China Daily:
- China Rate Cuts Don't Signal Monetary Policy Shifts: PBOC's Ma. The recent interest rate and reserve requirement ratio cuts don't represent a shift in China's prudent monetary policy, citing Ma Jun, the chief economist with PBOC's research bureau.
Evening Recommendations
- None of note
Night Trading
- Asian equity indices are -.75% to +.25% on average.
- Asia Ex-Japan Investment Grade CDS Index 138.5 +2.5 basis points.
- Asia Pacific Sovereign CDS Index 82.5 -4.5 basis points.
- S&P 500 futures -.07%.
- NASDAQ 100 futures -.24%.
Earnings of Note
Company/Estimate
- (ANF)/-.04
- (BF/B)/.75
- (CHS)/.22
- (FRO)/.19
- (GES)/.15
- (PVH)/1.29
- (WSM)/.58
- (WDAY)/-.06
Economic Releases
8:30 am EST
- Durable Goods Orders for July are estimated to fall -.4% versus a +3.4% gain in June.
- Durables Ex Transports for July are estimated to rise +.3% versus a +.8% gain in June.
- Cap Goods Orders Non-Defense Ex Air for July are estimated to rise +.4% versus a -.1% decline in June.
- Bloomberg consensus estimates call for a weekly crude oil inventory build of +944,440 barrels versus a +2,630,000 barrel gain the prior week. Gasoline supplies are estimated to fall by -611,110 barrels versus a -2,708,000 barrel decline the prior week. Distillate inventories are estimated to rise by +1,343,330 barrels versus a +594,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to fall by -.48% versus a -1.0% decline prior.
- None of note
Other Potential Market Movers
- The Fed's Dudley speaking, $35B 5Y T-Note auction, Japan Foreign Buyers data and the weekly MBA Mortgage Applications report could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by financial and commodity 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.