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.”
- 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.
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.
MarketWatch.com:
NY Times:
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
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.
- NASDAQ 100 futures +.55%.
Earnings of Note
Company/Estimate
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.
10:00 am EST
- Pending Home Sales for July are estimated to rise +1.0% versus a -1.8% decline in June.
11:00 am EST
- Kansas City Fed Manufacturing Activity for August is estimated to rise to -4 versus -7 in July.
Upcoming Splits
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.
