BETWEEN THE HEDGES

Thursday, July 28, 2016

Friday Watch

Posted by Gary .....at 9:20 PM

Evening Headlines
Bloomberg:

China Steps Up Campaign to Curb Rising Financial Sector Risks. China is stepping up efforts to rein in risks in the financial sector, curbing banks’ use of complex financial products and resisting lobbying to relax the rules governing bad-loan buffers. China’s banking regulator is pushing back against requests from the country’s largest banks to reduce the 150 percent minimum ratio for bad-loan provisions, a move that is likely to curb their profits, people familiar with the matter said Thursday. Banks whose ratios are already below that level are being urged by the China Banking Regulatory Commission to take steps to restore their buffers, said the people, who asked not to be named discussing private information. "Tightening WMP is something we want to see and will reduce risks in the banking system," said Sophie Jiang, a Hong Kong-based analyst at Nomura International (HK) Ltd. "Understandably, the regulator is doing this out of prudence and maintaining financial stability," she added.
Japan’s Consumer Prices Decline Before BOJ’s Policy Decision. Japan’s consumer prices dropped for a fourth consecutive month, showing how far prices are from the Bank of Japan’s 2 percent inflation target. In a slew of key economic indicators being released just hours before the BOJ announces any changes in monetary policy, household spending slumped while industrial production rose more than economists forecast.
Nintendo Set for Worst Week in 27 Years as App Gain Fades: Chart.
Global Turmoil Becomes a Power Play for Putin. If Vladimir Putin were scripting ways to weaken NATO, he couldn’t do much better than what’s happening right now. In the U.S., Republican candidate Donald Trump is questioning the alliance’s basic principle and hinting at recognizing Putin’s annexation of Crimea. In Turkey, officials led by President Recep Tayyip Erdogan’s chief adviser are blaming the U.S. for a failed coup by rogue officers in NATO’s second-largest military, fueling a surge of anti-Americanism that Putin is rushing to exploit. Suddenly, with little effort, the KGB veteran is reaping a surprise windfall from the internal politics of two pillars of Europe’s collective defense structure. “Putin has the luck of the devil,” said Mark Galeotti, a visiting fellow at the European Council on Foreign Relations. “He can just sit back and watch this richer, more powerful and legitimate values-based bloc tear itself apart.”
India’s $3.4 Billion Bank Boost Fails to Soothe Credit Investors. India’s plan to inject more capital into state-owned banks is doing little to alleviate investor concern that lenders’ credit profiles are deteriorating. The cost of insuring bonds issued by State Bank of India, IDBI Bank Ltd. and Bank of India have risen this week, credit default swap data compiled by Bloomberg show. The increases come even after the finance ministry said earlier this month that 13 public sector lenders would receive a 229.2 billion rupee ($3.4 billion) capital boost from the government.
Sydney Auctions Show Cracks Emerge After Property Boom: Chart.
Asian Stocks Fluctuate as Investors Await BOJ Policy Decision. Asian stocks swung between gains and losses as the yen strengthened in volatile trading before the Bank of Japan’s policy decision. The MSCI Asia Pacific Index rose 0.1 percent to 134.97 as of 9:06 a.m. in Tokyo, after dropping as much as 0.1 percent.
Oil Heads for Biggest Monthly Loss in a Year Amid Inventory Glut. Oil headed for the biggest monthly decline in a year as brimming crude and fuel inventories stifle a price recovery. Futures dropped as much as 0.5 percent in New York, down 15 percent for the month. U.S. crude inventories rose for the first time since May while gasoline stockpiles expanded through July 22, swelling a surplus of supplies that are at the highest seasonal level in at least two decades. Libya’s biggest oil ports are reopening after a dispute with guards at the facilities was settled. Oil has slipped about 20 percent since early June after almost doubling from a 12-year low in February as supply disruptions from Nigeria to Canada trimmed a worldwide surplus. Producers including BP Plc, Royal Dutch Shell Plc and Total SA reported sharp declines in second-quarter earnings as lower prices continued to take their toll. “There is too much oil in the market, there’s an incredible amount,” said Jonathan Barratt, the chief investment officer at Ayers Alliance Securities in Sydney. “Oil is in a range of $40 to $50 a barrel and prices below $40 a barrel are going to be a problem.”

Wall Street Journal:

Clinton’s Image Among Democrats at a Historic Low. Hillary Clinton heads into the biggest speech of her political life Thursday night suffering from a more negative image within her own party than any previous Democratic nominee on the eve of the party convention in the last quarter century, a new analysis of Wall Street Journal/NBC News polling shows.
New York Fed to Relocate Examiners Out of Banks. Move comes amid criticism that regulator has grown too close to lenders. The Federal Reserve Bank of New York is moving scores of regulators out of their offices inside big banks amid criticism that it has grown too close to the institutions it supervises. The New York Fed expects that all of its nearly 250 on-site bank examiners—about a third of its bank-supervision group—will be relocated to newly refurbished central-bank offices in lower Manhattan by the end of 2017, people familiar with the matter...
5 Things to Watch in Second-Quarter GDP Report.

Fox News:

D NC Convention: Live Blog.
Bags banned from Cannes beaches over terror attack fears in country. The mayor of Cannes announced Thursday that, due to the terror threat in France, bags have been banned from the city’s world-famous beaches. The Sun reported that sunbathers were told to carry transparent bags if needed or face arrest. Security officials told the newspaper they had serious concern attackers could smuggle "weapons or explosives" onto the beaches.

MarketWatch:

Here’s the key factor pushing oil prices to $35 a barrel.

CNBC:

Companies have a $10 trillion bill that is coming due. (video) The corporate debt pile is continuing to pile up, with a $10 trillion bill coming due over the next several years. That's how much of the $51 trillion in global company IOUs is maturing between now and 2021, according to data from S&P Global Ratings, which warns of potential dangers ahead.
Jim Bianco: Fed is letting inmates run the asylum. CNBC's Rick Santelli and Jim Bianco, president of Bianco Research, discussed how investors have figured out they can control the Federal Reserve's actions as the central bank won't move if asset prices are falling. "Inmates are running the asylum. And the inmates have figured out now if they don't price it in [a rate hike], the Fed's too afraid of bad financial markets ... so they won't move," Bianco said.
We are in the last innings of the auto cycle, Morgan Stanley analyst says. (video) Ford's earnings miss Thursday not only reflects problems for the automaker, it could be a watershed moment for the industry, Morgan Stanley's Adam Jonas said. "We think we are in the extra innings, perhaps the 11th inning, of a 14-inning ballgame when it comes to the auto cycle. We are at a point where you have to make it worth someone's while to get into a dealership," Jonas, head of global auto research for Morgan Stanley, told CNBC's "Power Lunch" on Thursday. The industry is already ramping up incentives, with Ford's up 20 percent in July.
Google(GOOG) parent Alphabet's earnings: $8.42 per share, vs. expected EPS of $8.04. (video)

Zero Hedge:

Business Insider:

Financial Times:

US oil in bear market territory: 5 things to watch. Crude oil’s quiet slide from its 2016 high sharpens questions about the outlook. The major US crude oil benchmark has fallen into a bear market, heaping more pressure on oil companies and major producing countries that had hoped the worst of the rout was over.

Telegraph:

IMF admits disastrous love affair with the euro, apologises for the immolation of Greece.

Night Trading

Asian equity indices are -.50% to unch. on average.
Asia Ex-Japan Investment Grade CDS Index 120.0 unch.
Asia Pacific Sovereign CDS Index 48.75 -.25 basis point.
Bloomberg Emerging Markets Currency Index 71.95 +.03%.
S&P 500 futures -.05%.
NASDAQ 100 futures +.05%.

Morning Preview Links

Earnings of Note
Company/Estimate

(AXL)/.81
(BUD)/1.22
(MT)/.03
(AN)/1.04
(B)/.60
(CVX)/.32
(CI)/2.39
(XOM)/.64
(MRK)/.91
(NWL)/.72
(PSX)/.93
(SNE)/-9.54
(TYC)/.53
(UPS)/1.43

Economic Releases
8:30 am EST

The 2Q Employment Cost Index is estimated to rise +.6% versus a +.6% gain in 1Q.
Advance 2Q GDP QoQ is estimated to rise +2.6% versus a +1.1% gain in 1Q.
Advance 2Q Personal Consumption is estimated to rise +4.3% versus a +1.5% gain in 1Q.
Advance 2Q GDP Price Index is estimated to rise +1.9% versus a +.4% gain in 1Q.

9:45 am EST

The Chicago Purchasing Manager Index for July is estimated to fall to 54.0 versus a reading of 56.8 in June.

10:00 am EST

Final Univ. of Mich. Consumer Sentiment for July is estimated to rise to 90.2 versus 89.5 in June.

Upcoming Splits

None of note

Other Potential Market Movers

The Fed's Williams speaking, Fed's Kaplan speaking, BOJ rate decision and the Eurozone CPI report could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by technology and industrial shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day.

Stocks Reversing Slightly Higher into Final Hour on Central Bank Hopes, Earnings Optimism, Short-Covering, Gaming/Road & Rail Sector Strength

Posted by Gary .....at 3:19 PM

Broad Equity Market Tone:

Advance/Decline Line: Slightly Lower

Sector Performance: Mixed

Volume: Around Average

Market Leading Stocks: Performing In Line

Equity Investor Angst:

Volatility(VIX) 12.64 -1.48%

Euro/Yen Carry Return Index 121.92 +.09%

Emerging Markets Currency Volatility(VXY) 9.76 -.91%

S&P 500 Implied Correlation 49.11 -1.01%

ISE Sentiment Index 89.0 -4.3%

Total Put/Call .95 +4.4%

NYSE Arms 1.20 -10.15%

Credit Investor Angst:

North American Investment Grade CDS Index 73.99 +.78%

America Energy Sector High-Yield CDS Index 777.0 +1.65%

European Financial Sector CDS Index 95.43 +.71%

Western Europe Sovereign Debt CDS Index 25.72 +.19%

Asia Pacific Sovereign Debt CDS Index 48.78 -.63%

Emerging Market CDS Index 265.06 +1.81%

iBoxx Offshore RMB China Corporate High Yield Index 131.20 +.03%

2-Year Swap Spread 21.27 -.5 basis point

TED Spread 45.0 +1.5 basis points

3-Month EUR/USD Cross-Currency Basis Swap -52.5 -2.75 basis points

Economic Gauges:

Bloomberg Emerging Markets Currency Index 71.93 +.07%
3-Month T-Bill Yield .23% -5.0 basis points

Yield Curve 79.0 unch.

China Import Iron Ore Spot $60.70/Metric Tonne +3.53%

Citi US Economic Surprise Index 36.50 -1.7 points

Citi Eurozone Economic Surprise Index 25.5 +9.4 points

Citi Emerging Markets Economic Surprise Index -7.70 -.1 point

10-Year TIPS Spread 1.52% +2.0 basis points
27.6% chance of Fed rate hike at Nov. 2 meeting, 44.9% chance at Dec. 14 meeting

Overseas Futures:

Nikkei 225 Futures: Indicating +174 open in Japan
China A50 Futures: Indicating +15 open in China

DAX Futures: Indicating +55 open in Germany

Portfolio:

Slightly Higher: On gains in my biotech/tech/medical sector longs

Disclosed Trades: None

Market Exposure: 50% Net Long

Today's Headlines

Posted by Gary .....at 2:55 PM

Bloomberg:

Erdogan’s Putsch Purge Spreads Into Media, Energy, Finance. (video) Turkey’s post-putsch purge of dissent reached deeper into the economy as authorities shuttered scores of media outlets, detained the head of a major company and banned the chief strategist of a leading brokerage. More than 130 media organizations, including 16 television broadcasters and 45 newspapers, were ordered closed in a decree published late Wednesday. The Cihan news agency, which has more than 500 employees, and the newspapers Taraf, Zaman and its English-language Today’s Zaman were among them. Turkey has suspended or removed at least 60,000 people from jobs in the military, security services, judiciary, Finance Ministry and academia since the failed July 15-16 coup left more than 250 dead. Another 1,600 soldiers, including 149 generals and admirals, were dismissed just hours after President Recep Tayyip Erdogan huddled with the chief of the armed forces. “More than 40 percent of Turkey’s highest ranking officers have been discharged, suggesting that this coup attempt had considerable support, or acceptance, from the highest levels of the armed forces,” said Aaron Stein, resident senior fellow at the Washington-based Atlantic Council. “The implication is that they either were supportive of the coup attempt, or that the top civilian leaders felt that they couldn’t be trusted. Both are bad.”
Households on the Hook for Italy’s Next Bailout. Vincenzo Imperatore wants you to know he was just following orders: Selling risky bonds to customers seeking safe retirement nest eggs was only part of the job. When financial markets shut during the financial crisis, depositors were Italian banks’ most reliable source of funding. “I was getting five, six calls a day from my bosses pushing me to sell them,” says Imperatore, who helped sell products to retail customers for six years at UniCredit SpA in the Naples region and has written two tell-all books about his experiences. “I was instructing the local salesmen to do the same.” The households that helped prop up the nation’s banks during the crisis are again on the front line of efforts to bolster Italy’s tottering financial system. The subordinated debt they hold may be first to take losses in a government-orchestrated recapitalization now being negotiated in Rome and Brussels. It’s a popularity-destroying outcome Prime Minister Matteo Renzi is trying to avoid before a referendum later this year to overhaul the political system -- a vote he needs to win to stay in power.
Merkel Faces Critics After Attacks Leave Germans Stunned. Chancellor Angela Merkel is breaking off her vacation to defend herself against renewed criticism of her refugee policies following a rash of violent attacks in Germany. Merkel, who had planned to remain out of public view during the summer break, will answer questions on Thursday afternoon for the first time since the four assaults -- a shooting spree, ax attack, suicide bombing and machete assault -- left 13 dead this month. Three of the attacks were committed by asylum seekers. “The chancellor certainly can’t keep her head low after such events,” said Ulrich Sarcinelli, a politics professor at the University of Koblenz-Landau. While Merkel will have to address the terror threat, “she’ll do everything not to escalate the general agitation.”
China Bank Regulator Said to Resist Push to Cut Loan Buffers. China’s banking regulator is resisting lobbying by the nation’s biggest lenders to lower a minimum threshold for bad-loan buffers which some of them breached earlier this year, people with knowledge of the matter said. The China Banking Regulatory Commission is instead urging banks whose provisions for covering nonperforming loans are below the 150 percent minimum ratio to take steps to restore their buffers, said the people, who asked not to be named discussing private information. The CBRC’s move is another signal that China’s regulators are toughening their stance on curbing risks in the country’s highly-leveraged financial system. Credit has roughly doubled as a proportion of gross domestic product over the past eight years to stand at 243 percent by the end of 2015, according to Fitch Ratings.
China Politburo Flags Caution on Property Stimulus, Goldman Says. China’s top leaders signaled this week that they’re likely to be cautious on further easing measures even if the property market continues to cool. That’s the analysis by Goldman Sachs Group Inc. economists of a statement released this week following a Politburo meeting led by President Xi Jinping. The leaders also pledged to curb asset bubbles, according to a report from official Xinhua News Agency. "The mention of asset bubbles was new for a Politburo statement," Song Yu, the Beijing-based chief China economist at Beijing Gao Hua Securities Co., the mainland joint-venture partner of Goldman Sachs, wrote in a research note Thursday. "The near-term implication of such a view is that the government is likely to be very cautious with property loosening measures in the future even if the property market continues to cool down, and financial regulators might be increasingly hawkish to minimize the risks of asset bubbles."
Deutsche Bank: Not Even Fiscal Stimulus Will Save Global Growth. The fiscal policy we need is not the fiscal policy we're likely to get. While monetary policy may be at — or beyond — the limits of its usefulness in stoking global growth, economists at Deutsche Bank AG say fiscal stimulus is unlikely to be much more effective. At least, not the kind that is politically possible.
Shell Earnings Tumble to 11-Year Low on Oil, Weaker Refining. Royal Dutch Shell Plc reported the lowest quarterly earnings in 11 years and missed estimates by more than $1 billion as a mix of lower energy prices, weaker refining margins and production halts weighed on Europe’s largest oil company. Profit adjusted for one-time items and inventory changes sank 72 percent from a year earlier to $1.05 billion, The Hague-based Shell said Thursday. Analysts had expected a $2.16 billion result. Chief Executive Officer Ben Van Beurden, who this year completed Shell’s record purchase of BG Group Plc, has vowed to boost savings from the acquisition following a two-year slump in crude. While Brent’s 25 percent rebound last quarter provided some prospect of relief, the rally is now fading while the safety net provided by refining hasgiven way. Production shutdowns in Nigeria, Canada and the Netherlands increased the pain for Shell. “This is a very big surprise from Shell,” said Brendan Warn, a managing director at BMO Capital Markets in London. “Things are not looking up in the third quarter either, with weakness in the industry’s refining environment and Shell’s oil production still under pressure.”
Europe Stocks Fall From 1-Month High Amid Lloyds, Shell Earnings. (video) European stocks dropped as investors assessed a slew of earnings reports and lenders fell before Friday’s stress-test results. Lloyds Banking Group Plc and Royal Dutch Shell Plc fell after releasing results, while Rolls-Royce Holdings Plc and Adidas AG rose. On one of the busiest day for earnings updates this season, with more than 70 companies reporting, the Stoxx Europe 600 Index lost 0.9 percent at the close. Banks posted the biggest declines among groups, before regulators publish their latest health check on the industry.
Goldman(GS) Sees Oil Hurt by Dollar Gain, Not Gasoline Glut. (video) Ignore the gasoline glut, a stronger U.S. dollar presents the most risk to oil prices in the near term, according to Goldman Sachs Group Inc. Further dollar strength on economic uncertainty outside the U.S., along with a potential interest-rate increase by the Federal Reserve could push oil prices lower, Goldman analysts including Damien Courvalin said in an e-mailed report. The gain in gasoline stockpiles is not a catalyst for further price declines because it is supply and not demand driven.
Hidden Message in Fed's Statement: U.S. Is at Full Employment. (video) Shift in language suggests slack in labor market has finally evaporated.
Wall Street Said to Face Renewed Pressure on Risky Lending. Wall Street banks are facing renewed pressure from federal regulators on their lending standards for risky corporate loans just as credit markets roar back, according to people with knowledge of the matter. Bankers who generally retreated from the riskiest corner of the leveraged lending market since new guidelines were issued three years ago are now being queried on their plans for loans that just sneak in as acceptable under the measures, the people said. Regulators are questioning how such loans would perform under adverse conditions, one of the people said, asking not to be identified as the information isn’t public.
Ford(F) Profit Miss Imperils 2016 Target as U.S. Demand Stalls. (video) Ford Motor Co.’s second-quarter profit fell short of analysts’ estimates, driving shares down the most in 11 months, after the company warned that a stalling U.S. auto market threatens its full-year earnings target. “We’re committed to meeting our guidance, but it is at risk,” Chief Financial Officer Bob Shanks told reporters Thursday. The company now says it’s unlikely that U.S. vehicle sales will break last year’s record, and Shanks predicted further contraction in 2017. “We don’t see growth, at least in the near term.” Ford fell 9.5 percent to $12.52 at 12:05 p.m. New York time. The stock dropped as much as 10 percent, the most since Aug. 24 of last year. The shares had slipped 1.8 percent this year through yesterday.