Tuesday, September 01, 2015

Wednesday Watch

Evening Headlines 
Bloomberg:  
  • China's Stocks Tumble Before Holiday on State Support Concern. China’s stocks slumped on their last trading day this week amid concern that government steps to prop up equities will fail as the economic slowdown deepens. The Shanghai Composite Index dropped 2.9 percent to 3,074.20 at 10:01 a.m. local time, adding to a two-day, 2 percent retreat. About 18 stocks fell for each that rose on the gauge. China’s financial markets will be closed for the rest of the week for holidays commemorating the end of World War II, which will be marked by a large-scale military parade in Beijing. The benchmark stock measure is extending its biggest two-month loss since 2008 after traders reduced holdings of shares purchased with borrowed money for an 11th day and an official factory gauge fell to the lowest reading in three years. Large-company shares rebounded in last trade over the past five days from session lows amid speculated purchases by state-backed funds. “The government seems to have been buying blue-chips these days to support the market but investors have lost confidence amid the ongoing deleveraging,” said Wu Kan, a Shanghai-based fund manager at JK Life Insurance Co. “The correction isn’t over yet." The CSI 300 Index slid 3 percent, led by technology and energy shares. Hong Kong’s Hang Seng China Enterprises Index retreated 1.6 percent to its lowest level since March 2014, while the Hang Seng Index slipped 1.1 percent.
  • Putin's Got a New Problem With China. Economic data tell a different story. Trade between the two nations fell 29 percent in the first half of this year to $30.6 billion. Russian government officials now say that there’s virtually no chance they will hit their target of $100 billion in trade turnover this year, a goal Putin publicly embraced as recently as October
  • After 39% Rout, China Stocks Still Cost Double Hong Kong Prices. For all the losses in Chinese stocks since the nation’s record bull market ended in June, shares on mainland exchanges are still more than twice as expensive as their identical counterparts in Hong Kong. Dual-listed companies traded at a 115 percent premium in China at the end of last month, within three percentage points of a four-year high in July, according to monthly data compiled by Bloomberg. The price differences have persisted even as a $4.6 trillion selloff dragged the Shanghai Composite down 39 percent from this year’s high.
  • China Rout Spells More Troubles for Battered Macau Casinos. China’s recent stock market rout is causing more troubles for Macau’s hard-luck casinos. As the city’s casino downturn entered a 15th month in August, Chinese stocks losing $5 trillion of their value hasn’t helped. For Macau junket operator Iao Kun Group Holding Co., that market turmoil is one of the key reasons why gamblers are holding back.
  • China Hedge Funds Face Worst Month in 16 Years After Carnage. China-focused hedge funds probably had their worst month in almost 16 years in August, with firms including Orchid Asia Group Management and APS Asset Management Pte suffering losses from the nation’s stock market collapse. Greater China hedge funds plunged an estimated 10 percent in August, putting them on track for their biggest decline since at least January 2000, according to preliminary estimates from Eurekahedge Pte. The Orchid China Master Fund, a $304 million strategy managed by Hong Kong-based Orchid, fell an estimated 7.3 percent, according to a month-end investor update obtained by Bloomberg News. APS’s Greater China Long/Short Fund declined 7.2 percent in the month through Aug. 28 as the firm’s China A Share Fund fell 5.5 percent as of Aug. 21, according to a month-end update.  
  • Australia’s Economy Grows at Half Pace of Forecast on China Woes. Australia’s economy expanded at a slower pace than economists forecast in the three months through June -- only propped up by government and household spending -- as a slowdown in key trading partner China weighed on growth. The currency slumped. Gross domestic product advanced 0.2 percent from the first three months of the year, when it rose 0.9 percent, government data showed Wednesday. That compared with the median of 27 estimates for a 0.4 percent gain.
  • Won Weakens as South Korea Surplus Shrinks, Stock Outflows Mount. South Korea’s won retreated from a three-week high as the current-account surplus narrowed and a selloff in global equities deterred risk-taking. The excess in the broadest measure of trade was $10.1 billion in July, down from June’s record, the Bank of Korea reported Wednesday. The figures come after data Tuesday showed exports tumbled last month by the most since 2009. The Kospi index of shares dropped after overseas investors cut their holdings on each of the last 19 trading days, pulling some $3.7 billion in the longest run of net sales in seven years.
  • Aussie Sinks Below 70 U.S. Cents as China Threatens Growth. The Australian dollar dropped below 70 U.S. cents for the first time in six years before a report forecast to show slowing domestic economic growth amid signs of a slump in China. The currency fell to as low as 69.98 cents Wednesday. It has dropped 4 percent over the past month, the biggest loss among Group-of-10 currencies after the New Zealand dollar, as stocks slid.  
  • Asia Stocks Follow U.S. Shares Lower Amid Global Growth Concern. Asian stocks fell, following a decline in U.S. shares, as weak American manufacturing data added to concern about a slowdown in global economic growth. The MSCI Asia Pacific Index dropped 0.7 percent to 125.97 as of 9:02 a.m. in Tokyo. Anemic demand from emerging markets including China translated into leaner factory order books in the U.S., data showed Tuesday. 
  • Steel CEO Who Called China Slowdown Bewildered by Cheery Miners. Producers of the steelmaking raw material including Rio Tinto Group, Vale SA and BHP Billiton Ltd. are expanding output in anticipation of China raising steel production to as high as 1 billion metric tons in the coming decades. “I do not have a clue how they drew up these figures or what the background for this optimism is,” said Wolfgang Eder, chief executive officer of Austria’s Voestalpine AG and chairman of the World Steel Association.Steel demand in China, consumer of half the world’s supplies, is expected to fall this year for the first time since 1995.
  • Wind-Power Producers Find Profits as Elusive as a Summer Breeze. Power producers who invested billions in turbines are finding that making money off the wind can be as unpredictable as the energy source itself. NextEra Energy Inc., NRG Yield Inc. and Duke Energy Corp. all said a lack of sufficiently windy days cut into second-quarter sales. And neither power generators nor forecasters seem to know exactly why.
Wall Street Journal:
  • China Boosts Efforts to Keep Money at Home. Efforts include cracking down on underground banks, money-transfer agents. China is imposing fresh controls to prevent too much money from leaving its shores, escalating its battle against a deepening slump in the world’s No. 2 economy. The country’s central bank said Tuesday that it will make it more expensive for investors to pressure the yuan to weaken against the U.S. dollar. A weaker currency generally prompts investors to look elsewhere to put their cash and would complicate the...
  • China’s Economic Woes Echo Across Asia. South Korean trade sinks, manufacturing softens in Malaysia and Vietnam, while Australia is expected to report a rare quarterly contraction. A startling plunge in South Korean exports sharpened the picture on Tuesday of how China’s economic slowdown is rippling across Asia. The 14.7% decline in August from a year earlier, driven in part by slack demand from South Korea’s largest trading partner, China, amounts to the first statistical evidence of regional trade’s decline since Beijing’s Aug. 11 currency devaluation. That move sparked...
  • For Stock Markets, the Moment When Humans Matter. Stock-pricing problems lead to questions about ‘Rule 48’. A string of messy stock-market openings in recent weeks has reinvigorated a debate about the relative effectiveness of humans versus machines in handling moments of extreme volatility and market uncertainty. On one side is NYSE Group, the Intercontinental Exchange Inc. unit that on Tuesday...
  • The EPA’s Next Big Economic Chokehold. Lowering ozone—from cars, trucks, factories and power plants—in the name of an imaginary health benefit. This fall the Environmental Protection Agency plans to take its next grand regulatory step, following the announcement of the EPA’s Clean Power Plan over the summer. The agency is likely to introduce stringent new standards for ground-level ozone, arguing that a lower allowable level of ozone—an important component of smog—will reduce asthma in the U.S., among other claimed health benefits. Yet the EPA ignores decades of data and studies, some under the agency’s auspices, that reveal no detectable causal relation between past reductions in ozone and better public health, including reductions in asthma cases.
  • Hillary and the Hackers. The former secretary of state’s private server hid her emails from the U.S. government, but not from China, Russia and other adversaries
MarketWatch.com: 
Zero Hedge:
Telegraph:
Shanghai Securities News: 
  • China Exports May Rise 2% in 2015; Imports Seen Down 10%. Chinese exports may rise about 2% y/y in 2015 while imports slide about 10%, according to a State Information Center and China Development Bank report.
Evening Recommendations 
  • None of note
Night Trading
  • Asian equity indices are -1.75% to -.25% on average.
  • Asia Ex-Japan Investment Grade CDS Index 138.75 +3.5 basis points.
  • Asia Pacific Sovereign CDS Index 84.75 +4.0 basis points.
  • S&P 500 futures +.70%.
  • NASDAQ 100 futures +.84%.

Earnings of Note
Company/Estimate
  • (GIII)/.20
  • (NAV)/.31
  • (VRA)/.11
  • (ABM)/.49
  • (FIVE)/.13
  • (HGR)/.45
  • (OXM)/1.23 
Economic Releases
8:15 am EST
  • The ADP Employment Change for August is estimated to rise to 200K versus 185K in July.
8:30 am EST
  • Final Non-Farm Productivity for 2Q is estimated to rise +2.9% versus a prior estimate of a +1.3% gain.
  • Final Unit Labor Costs for 2Q are estimated to fall -1.2% versus a prior estimate of a +.5% gain.
9:45 am:
  • The ISM New York for August.
10:00 am EST
  • Factory Orders for July are estimated to rise +.9% versus a +1.8% gain in June.
10:30 am EST
  • Bloomberg consensus estimates call for a weekly crude oil inventory build of +444,440 barrels versus a -5,452,000 barrel decline the prior week. Gasoline supplies are estimated to fall by -1,600,000 barrels versus a +1,660,000 barrel gain the prior week. Distillate supplies are estimated to rise by +944,440 barrels versus a +1,436,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to fall by -.45% versus a -.6% decline the prior week.
2:00 pm EST
  • Fed's Beige Book report.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Brazil rate decision, weekly MBA mortgage applications report, Australia trade balance, Sidoti Emerging Growth Conference, (EXPD) investor day, (SPW) investor event and the (STX) analyst meeting could also impact trading today.
BOTTOM LINE: Asian indices are lower, weighed down by financial and commodity shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 25% net long heading into the day.

Stocks Falling Substantially into Afternoon on China Bubble-Bursting Fears, Global Growth Worries, Emerging Markets Debt Angst, Financial/Technology Sector Weakness

Broad Equity Market Tone:
  • Advance/Decline Line: Substantially Lower
  • Sector Performance: Every Sector Declining
  • Volume: Above Average
  • Market Leading Stocks: Performing In Line
Equity Investor Angst:
  • Volatility(VIX) 31.61 +11.19%
  • Euro/Yen Carry Return Index 141.43 -.42%
  • Emerging Markets Currency Volatility(VXY) 11.67 +.17%
  • S&P 500 Implied Correlation 64.37 -.19%
  • ISE Sentiment Index 59.0 -45.4%
  • Total Put/Call 1.28 +9.4%
  • NYSE Arms 2.65 +124.36% 
Credit Investor Angst:
  • North American Investment Grade CDS Index 84.05 +2.76%
  • America Energy Sector High-Yield CDS Index 1,836.0 -1.77%
  • European Financial Sector CDS Index 85.38 +5.17%
  • Western Europe Sovereign Debt CDS Index 22.16 -.40%
  • Asia Pacific Sovereign Debt CDS Index 83.83 +3.88%
  • Emerging Market CDS Index 358.04 +3.50%
  • iBoxx Offshore RMB China Corporates High Yield Index 116.73 -.20%
  • 2-Year Swap Spread 13.25 -2.25 basis points
  • TED Spread 27.25 unch.
  • 3-Month EUR/USD Cross-Currency Basis Swap -22.0 +.25 basis point
Economic Gauges:
  • 3-Month T-Bill Yield .02% +2.0 basis points
  • Yield Curve 147.0 unch.
  • China Import Iron Ore Spot $56.59/Metric Tonne +.68%
  • Citi US Economic Surprise Index -12.6 -4.4 points
  • Citi Eurozone Economic Surprise Index 24.8 +9.6 points
  • Citi Emerging Markets Economic Surprise Index -18.6 -5.0 points
  • 10-Year TIPS Spread 1.58 -5.0 basis points
  • # of Months to 1st Fed Rate Hike(Morgan Stanley) 3.83 -.45
Overseas Futures:
  • Nikkei 225 Futures: Indicating -335 open in Japan 
  • China A50 Futures: Indicating -970 open in China
  • DAX Futures: Indicating -61 open in Germany
Portfolio: 
  • Slightly Higher: On gains in my index hedges and emerging markets shorts
  • Disclosed Trades: None
  • Market Exposure: 25% Net Long

Today's Headlines

Bloomberg: 
  • The $2 Trillion Emerging-Stock Drop Fixing All Eyes on China. (video) The August meltdown that wiped more value off emerging-market stocks than at any time since the collapse of Lehman Brothers Holdings Inc. has gotten investors more fixated than ever on China’s economic fortunes. As the shock Chinese yuan devaluation sent at least half of the main developing countries into bear-market territory last month, the capitalization of the 31 largest emerging equity markets slid by $2 trillion, according to data compiled by Bloomberg. The selloff continued on Tuesday as worse-than-expected manufacturing figures out of China sent the MSCI Emerging Markets Index tumbling 2.2 percent by 3:27 p.m. in London.
  • Is This the China Hard Landing Investors Fear? (video)
  • Is the China Carry Trade Unwinding? (video)
  • Lagarde Says Global Growth Outlook Weaker Than IMF July Forecast. International Monetary Fund Managing Director Christine Lagarde said the global expansion outlook is worse than the lender anticipated less than two months ago, with advanced and Asian economies growing more slowly than expected. “We expect global growth to remain moderate and likely weaker than we anticipated last July,” Lagarde said Tuesday in a speech in Jakarta. “This reflects two forces: a weaker than expected recovery in advanced economies, and a further slowdown in emerging economies, especially in Latin America.”
  • Brazil's Epic Era of Splurging Is Over. Higher taxes, loss of jobs and lower wages have cut into consumer spending. Gone are the days of Brazilians flooding Miami to spend millions on fast cars and bling.  An era of austerity has dawned in Latin America's largest economy as the country charts a course in fiscal tightening. “The good times are over,” Jankiel Santos, chief economist at BESI Brazil, said by phone. “Brazil is in a difficult situation, and needs to correct the excesses of the past.” These three charts illustrate the end of a decade-long consumption boom.
  • Petrobras Sinks With Ibovespa as UBS Cuts Profit Outlook by 80%. Shares of Petrobras extended a plunge over the past year to 62 percent, more than double the slide in the stock benchmark, after the Zurich-based bank said that a weaker currency may sap profitability. The Ibovespa has slumped 4.6 percent over the past three days, while the currency dropped to the lowest level since December 2002.
  • Will We See More Crises in Emerging Markets? (video)
  • Ruble Weakens as Morgan Stanley Forecasts Recession Through 2016. The ruble snapped four days of gains as oil declined and Morgan Stanley forecast the country’s recession will last another year. Russia’s currency weakened 1.5 percent to 65.1950 against the dollar by 1:52 p.m. in Moscow, starting September on a sour note after four consecutive months of declines. An index of manufacturing activity in August fell to 47.9 from 48.3 in July, the ninth straight month of contraction. The energy-dependent economy will contract 4.2 percent this year, according to Morgan Stanley, which joined Deutsche Bank AG in downgrading its outlook for Russia this week. That’s more than the 3.7 percent decline in gross domestic product forecast by 48 economists surveyed by Bloomberg. 
  • Dubai Property Prices Fall Most in the World, Knight Frank Says. Dubai property prices fell by 12.2 percent during the past year, the largest drop in the world, according to real estate consultancy Knight Frank. The decline in the twelve months through June was the biggest in 56 mainstream residential markets and larger than the 12 percent fall in real estate prices in Ukraine, which has been hit by almost two years of protests, a separatist insurgency, and political upheaval, Knight Frank said Tuesday in a report. Prices in Dubai fell 2.8 percent in the second quarter. Hong Kong was the best performing residential market, with prices up by 20.7 percent. 
  • Aussie Sinks to 6-Year Low as China Factory Gauge Clouds Outlook. The Australian dollar plunged to a six-year low as a decline in China’s official factory gauge eroded the outlook for commodities demand. The currency dropped as much as 1.1 percent to 70.37 U.S. cents, touching the cheapest since April 2009. China’s official Purchasing Managers’ Index dropped to 49.7 for August, the weakest in three years. Numbers below 50 indicate contraction. Australia’s central bank left interest rates unchanged Tuesday.
  • French Factory Drag Intensifies as Germany Leads Europe Recovery. France’s manufacturing industry shrank more than initially estimated last month, leaving Germany to take a greater share of the burden of driving the euro-area recovery. Markit Economics said its Purchasing Managers’ Index for France fell to 48.3 from 49.6 in July, lower than the 48.6 reading reported on Aug. 21. In contrast, the German gauge rose more than estimated and was well above the 50 level that divides expansion and contraction. The measure for the euro zone also signalled growth.
  • ECB Asset-Back Debt Holdings Fall Even With Renewed Buying Push. The European Central Bank’s holdings of asset-backed debt fell for the first time since January, even as the bank steps up purchasing efforts to help boost regional lending. The outstanding amount held in the ECB’s asset-backed securities purchase program declined by 106 million euros ($120 million) to 11.1 billion euros in the week ended Aug. 28, the Frankfurt-based institution said Monday. A spokesman declined to comment on the drop in holding of bonds backed by mortgages to auto loans. The decline is probably because the ECB can’t buy enough new bonds to replace maturing debt, said Gareth Davies, head of European asset-backed securities research at JPMorgan Chase & Co
  • Europe Stocks Selloff Deepens as Global Growth Worries Intensify. The plunge that led Europe’s equities to their biggest monthly losses since 2011 is showing no signs of easing. The Stoxx Europe 600 Index lost 2.8 percent at 4:32 p.m. in London, and dropped as much as 3.3 percent. The measure followed Asian stocks lower after a report showed China’s official factory gauge dropped to a three-year low, while separate data signaled manufacturing in the euro area shrank more than initially forecast and output in the U.S. expanded at the slowest pace since 2013. Miners again were the most hurt among European industry groups, sliding 5.7 percent as commodities resumed their declines. 
  • China Seen Driving Commodities Lower as Uncertainty Spreads. China will continue to hurt commodities in coming months as a volatile equity market and political uncertainty add to concern that economic growth is weakening, according to Citigroup Inc. Demand for raw materials will weaken while a spillover from financial markets adds further pressure on prices, analysts including Ivan Szpakowski wrote in a report Tuesday subtitled "Riding the Chinese Rollercoaster." Corruption investigations have also crippled investment by some state companies, particularly power grid operators that support copper demand, according to the bank.
  • Just the Mechanics of the Fed's Exit Strategy Could Boost the Dollar. But a stronger greenback could complicate matters. The U.S. dollar has risen 17 percent against the euro over the past year, as the Federal Reserve has drawn closer to raising interest rates for the first time since 2006. There could be further appreciation ahead for purely mechanical reasons, given the unique nature of the upcoming tightening cycle and the new tools the Fed will use to raise rates, according to Zoltan Pozsar, a director of U.S. economics at Credit Suisse Securities USA in New York.  
  • BofA Says its Clients Bought a Record Amount of Stocks Last Week. There was "buying across the board". According to Bank of America Merrill Lynch flow data, its clients were net buyers of $5.6 billion in U.S. equities last week, a record dating back to when the survey began in 2008.
  • Google(GOOG) Faces New Menace in EU as Hausfeld Eyes Damages Lawsuits. Perceived victims of Google Inc.’s alleged anti-competitive behavior have a new European dial-in number. U.S. law firm Hausfeld & Co. LLP and antitrust consulting company Avisa Partners set up a platform to evaluate potential damages suits as the European Union threatens the search-engine giant with antitrust fines.
Zero Hedge:

Bear Radar

Style Underperformer:
  • Large-Cap Value -3.01%
Sector Underperformers:
  • 1) Coal -8.52% 2) Banks -3.88% 3) Energy -3.68%
Stocks Falling on Unusual Volume:
  • DLTR, ZIV, SMCI, PTR, VRTS, RSO, WWE, W, OII, HRTX, NP, PAC, BXMT, XIV, GPRO, BR, APAM, TU, BLK, MIDD, ICFI, TARO, IIF, MELI, SAIC, OMER, HLS, RSO, JOY and TDOC
Stocks With Unusual Put Option Activity:
  • 1) KBH 2) XHB 3) EWA 4) IYR 5) DE
Stocks With Most Negative News Mentions:
  • 1) FCX 2) PBR 3) DLTR 4) GILD 5) UTX
Charts:

Bull Radar

Style Outperformer:
  • Small-Cap Growth -2.21%
Sector Outperformers:
  • 1) Gold & Silver -1.44% 2) Tobacco -1.64% 3) Restaurants -1.66%
Stocks Rising on Unusual Volume:
  • TRVN
Stocks With Unusual Call Option Activity:
  • 1) SYY 2) CVC 3) VNR 4) TJX 5) K
Stocks With Most Positive News Mentions:
  • 1) SUNE 2) OPK 3) TRVN 4) JCP 5) DOV
Charts:

Morning Market Internals

NYSE Composite Index: