Evening Headlines
Bloomberg:
- China Meltdown So Large That Losses Eclipsed BRICS Peers, Twice. Take the combined size of all stocks traded in Brazil, Russia, India and South Africa, multiply by two, and you’ll get a sense of how much China’s market value has slumped since the meltdown started. Shanghai-listed equities erased $5 trillion since reaching a seven-year high in June, half their value, as margin traders closed out bullish bets and concern deepened that valuations were unjustified by the weak economic outlook. The four other countries in the BRICS universe have a combined market capitalization of $2.8 trillion, according to data compiled by Bloomberg. China has accounted for 41 percent of equity declines worldwide since mid-June, with the scale of the drop also exceeding the entire size of the Japanese stock market. “China has been the single most important source of growth in the world for several years, hence such a sharp slowdown has a profound impact on trade,” Nathan Griffiths, a senior emerging-market equities manager who helps oversee about $1.2 billion at NN Investment Partners in The Hague, said by e-mail.
- China Brings Back High-Risk Debt Structures to Increase Leverage. Remember putable bonds? Or debt insurers that collapsed in the U.S. in the wake of the global financial crisis? They’re back -- in China. Oceanwide Holdings Co. earlier this month sold the largest dollar-denominated putable security from Asia since 2003. Investors can demand the Beijing developer buy the notes back in three years, even if it doesn’t want to. HNA Capital Holding Co., a Beijing-based investment bank, sold $200 million of bonds Aug. 11 guaranteed by a Chinese insurer whose exposure to troubled debt doubled last year.
- Analyst Who Saw China Rout Says Emerging Stocks Not Cheap Enough. Emerging-market equities aren’t the bargain they appear to be, even after valuations fell to an 11-year low relative to their developed peers, according to John-Paul Smith, who has been warning of a China-led selloff for more than a year. “Sometimes cheap isn’t enough,” said Smith, an ex-Deutsche Bank AG strategist who now works at Ecstrat in London and also predicted the Russian debt crisis in 1998. The selloff is “about to get much worse given the recent massive falls in commodity prices” and deteriorating economies across the board, he said.
- Cadillac Purchases Put on Hold in China Amid Stock Plunge. The rout in China stocks is posing another threat to the world’s biggest car market, jeopardizing growth plans for companies from Volkswagen AG to General Motors Co. Chinese equities have suffered the biggest plunge since 1996, leaving would-be buyers with less cash to spend. Dealers are already reporting lost sales from the stock tumult and automakers are bracing for more pain after a slowdown in the once-hot car market. “Dealers are gritting their teeth,” said Zhu Kongyuan, secretary general of the China Auto Dealers Chamber of Commerce, a Beijing-based trade group. “People won’t buy cars if they think their money bags will shrink. There are no magic tricks here.” Global automakers have plowed billions of dollars into Chinese factories.
- Beloved European Stock Loses Luster as China Boom Turns to Pain. Europe’s highest-flying stock this year is seeing the knock-on effect from the exodus in emerging markets. After more than doubling earlier this year, wind-turbine maker Gamesa Corp. Tecnologica SA has tumbled 22 percent as the outlook for global growth deteriorated and energy prices plunged further. Investors, who piled into the stock to benefit from the surging demand in China, Brazil and India, are now heading for the exit. “People are nervous about emerging markets,” said Jose Manuel Arroyas, a Madrid-based analyst at Exane BNP Paribas. “This stock is priced for future growth. If there’s no growth, then the stock is expensive.”
- China Doing What Greece Didn't as Traders Give Up on Europe ETFs. All through the equity plunge that culminated in a bloodbath on Monday, exchange-traded funds tracking European equities held on to investments. That might be changing now. The WisdomTree Europe Hedged Equity Fund and Vanguard FTSE Europe ETF both had their first withdrawals in months. Investors are capitulating as they start to question their bets that Europe’s stocks would rally with an economic recovery, according to Nicola Marinelli of Pentalpha Capital Ltd.“It’s the sudden realization that assumptions about the global economy were too optimistic,” said Marinelli, a fund manager who helps oversee 114 million euros ($130 million) of assets at Pentalpha in London.
- Australia Says South China Sea Tensions May Threaten Interests. Tensions in the South China Sea have the potential to threaten Australia’s interests, Defense Minister Kevin Andrews said as he pledged to bolster the nation’s military alliance with the U.S. “Competing claims for territory and natural resources in the South China Sea will continue to be a source of tension in the region,” Andrews said in the draft of a speech to be delivered in Canberra Thursday. “Combined with growth in military capability, this backdrop has the potential to destabilize the region and threaten Australia’s interests.”
- Asian Stocks Rise as U.S. Equity Rout Halted; China Futures Gain. Asian stocks rose for a second day after U.S. shares halted a six-day rout. The MSCI Asia Pacific Index gained 0.9 percent to 127.93 as of 9:05 a.m. in Tokyo.
- Oil Industry Needs to Find Half a Trillion Dollars to Survive. (graph) At a time when the oil price is languishing at its lowest level in six years, producers need to find half a trillion dollars to repay debt. Some might not make it. The number of oil and gas company bonds with yields of 10 percent or more, a sign of distress, tripled in the past year, leaving 168 firms in North America, Europe and Asia holding this debt, data compiled by Bloomberg show. The ratio of net debt to earnings is the highest in two decades. If oil stays at about $40 a barrel, the shakeout could be profound, according to Kimberley Wood, a partner for oil mergers and acquisitions at Norton Rose Fulbright LLP in London.
- Goldman(GS) Distressed-Debt Traders Ensnared in Market Turmoil. Even Goldman Sachs Group Inc. hasn’t been left unscathed by the carnage in the market for distressed debt this year. Goldman Sachs has lost $50 million to $60 million on its distressed-trading desk in 2015, according to people familiar with the performance. The unit suffered losses on its position in Verso Corp., a paper producer whose bonds lost two-thirds of their value this year, as well as on debt of energy companies, said the people, who asked not to be named discussing the information because it isn’t public. Banks and investors who buy debt that mainstream money managers jettison have had a tough year making profits. Not only are they chasing a limited number of opportunities, they’re losing out on usually successful strategies. Commodities-linked debt has been disastrous.
- Warning Signs Ahead for U.S.Stocks. (video)
Wall Street Journal:
- Insurers Win Big Health-Rate Increases. Some state regulators say new costs justify hefty increases under the Affordable Care Act. At a July town hall in Nashville, Tenn., President Barack Obama played down fears of a spike in health insurance premiums in his signature health law’s third year. “My expectation is that they’ll come in significantly lower than what’s being requested,” he said, saying Tennesseans had to work to ensure the state’s insurance commissioner “does their job in not just passively reviewing the rates, but really asking, ‘OK, what is it...
- Hedge Funds Bruised by Stocks’ Meltdown. A tumble in share prices stunned many hedge-fund managers and erased the year’s gains for some. Hedge-fund managers like to promise their investors protection from market swings. In the recent stock swoon, many were caught off guard.
- Margin Calls Bite Investors, Banks. Loans backed by investment portfolios have become a booming business for Wall Street brokerages, but the bill is coming due.
- An Informed Vote on the Iran Deal. Congress has the right to see the full negotiating record, not just the final product or strategically leaked details.
MarketWatch.com:
- Williams-Sonoma(WSM) shares fall on weak outlook. Williams-Sonoma shares fell 4.2% to $79.63.
CNBC:
- Why I'm still bearish on oil: Stephen Schork. (video) Oil has lost a third of its value since June, and well-known energy analyst Stephen Schork doesn't see a reason for it to turn around right now.
Business Insider:
- ECONOMIST: Someone who has Janet Yellen's ear may have just tipped the Fed's hand. Ian Shepherdson, one of the top economic forecasters on Wall Street, has changed his forecast and thinks the Federal Reserve will wait until December to raise rates for the first time since July 2006. And his tweaked outlook is all because of what New York Fed President Bill Dudley said Wednesday.
NY Times:
- China Falters, and the Global Economy Is Forced to Adapt. With deepening economic fears about China, multinational corporations and countries are having to respond to a new reality as a once sure bet becomes uncertain.
USA Today:
Reuters:
- Workday(WDAY) shares fall on weak billings forecast. Workday Inc, a provider of cloud applications for finance and human resources, forecast third-quarter billings below expectations, saying it would receive less money in advance for newer contracts in the quarter, sending its shares down after the bell. The company said billings were also affected, as it took a lion's share of the money upfront for some older contracts, resulting in smaller billings now. Workday's shares traded down 7.2 percent at $67.20 after-the-bell.
- Ten automakers are sued in U.S. over 'deadly' keyless ignitions. Ten of the world's biggest automakers were sued on Wednesday by U.S. consumers who claim they concealed the risks of carbon monoxide poisoning in more than 5 million vehicles equipped with keyless ignitions, leading to 13 deaths. According to the complaint filed in federal court in Los Angeles, carbon monoxide is emitted when drivers leave their vehicles running after taking their electronic key fobs with them, under the mistaken belief that the engines will shut off.
Sydney Morning Herald:
- BHP Billiton's(BHP rating at risk as China's slowdown slashes its earnings. The plunge in commodity prices is putting BHP Billiton's credit rating at risk. The cost of insuring the Australian miner's debt against non-payment rose to a three-year high of 108 basis points, a level Deutsche Bank AG says is consistent with a downgrade, after this week's profit report. While it's the highest-rated non-bank borrower in the iTraxx Australia index, the price of BHP's credit-default swaps exceeds those of nine other non-financial companies in the 25-member gauge.
Financial News:
- China Rate Cut Can't Change Stock Fundamentals. Rate and RRR cuts can boost short-term confidence but can't change the fundamentals of China's stock market, according to commentary written by Ma Meiruo.
Evening Recommendations
- None of note
Night Trading
- Asian equity indices are +1.25% to +2.0% on average.
- Asia Ex-Japan Investment Grade CDS Index 133.75 -4.75 basis points.
- Asia Pacific Sovereign CDS Index 79.75 -2.75 basis points.
- S&P 500 futures +.41%.
- NASDAQ 100 futures +.55%.
Earnings of Note
Company/Estimate
- (DG)/.94
- (SJM)/1.23
- (MIK)/.16
- (MOV)/.42
- (PDCO)/.54
- (SIG)/1.15
- (TIF)/.91
- (TD)/1.17
- (ARO)/-.55
- (ADSK)/.17
- (GME)/.24
- (MRVL)/.11
- (OVTI)/.39
- (SWHC)/.23
- (ULTA)/1.12
- (ZOES)/.04
Economic Releases
8:30 am EST
- 2Q GDP is estimated to rise +3.2% versus a prior estimate of a +2.3% gain.
- 2Q Personal Consumption is estimated to rise +3.1% versus a +2.9% prior estimate.
- 2Q GDP Price Index is estimated to rise +2.0% versus a prior estimate of a +2.0% gain.
- 2Q Core PCE is estimated to rise +1.8% versus a prior estimate of a +1.8% gain.
- Initial Jobless Claims are estimated to fall to 274K versus 277K the prior week.
- Continuing Claims are estimated to fall to 2248K versus 2254K prior.
- Pending Home Sales for July are estimated to rise +1.0% versus a -1.8% decline in June.
- Kansas City Fed Manufacturing Activity for August is estimated to rise to -4 versus -7 in July.
- None of note
Other Potential Market Movers
- The Jackson Hole Fed Conference Day 1, China Industrial Profits report, Japan Unemployment data, $29B 7Y T-Note auction, Bloomberg weekly Consumer Comfort Index and the weekly EIA natural gas inventory report could also impact trading today.
BOTTOM LINE: Asian indices are higher, boosted by industrial and technology shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.