News > Capital Markets

Daily Scan: US stocks gain after holiday weekend; Kentucky clerk out of jail
Capital Markets
<p>U.S. stocks rallied after the Labor Day weekend, following gains in Europe and China. The Dow gained 2.4% at close, up from 1.6% midday. The Nasdaq gained 2.7%, and and the S&amp;P 500 was up 2.5%. The Stoxx Europe 600 closed with a 1.2% gain. Oil was down nearly 1%, closing at $45.66/barrel. In the U.S., the Fed's research department reported that the Labor Market Conditions Index rose to 2.1. It's not an official data point, but word is that Fed Chair Janet Yellen keeps on eye on the release, which gives more color to the jobs market. The message: Job formation is looking good.</p> <p>Here is what else to need to know...</p> <p>Kentucky clerk is out of jail. Kim Davis has been released from custody for her refusal to issue marriage licences following the legalization of same sex marriage in June. Davis' lawyers say she'll continue to block marriage licenses for gay couples when she's back at work. Talking Points Memo</p> <p>Baltimore proposes $6.4 million to settle suit from Freddie Gray's death. Gray was died of a spinal injury while in police custody in April. The city leaders will vote on the settlement this week. CNN</p> <p>Macy's to close underperforming stores. The department store operator will shut 35-40 stories in early 2016. The company operates 770 stores total. Reuters</p> <p>Obama backed with 41 votes for Iran deal. President Barack Obama has secured enough support in the Senate to reject the motion to disapprove of the U.S. nuclear deal with Iran. Democratic Sens. Gary Peters, Ron Wyden, and Richard Blumenthal make 41 votes behind Obama. Politico</p> <p>Williams sisters to face off in U.S. Open quarterfinals. Serena and older sister Venus are hitting the court tonight as Serena tries to nab another Grand Slam title, and the lower-ranked Venus attempts to cut her off. Talk about sibling rivalry. New York Post</p> <p>Tiny hedge fund buying 10s of billions in Treasurys.  Element Capital has only $6 billion in assets but has been the biggest buying of government notes and bonds for the past 10 months. Run by math brainiac Jeffrey Talpins, the government wants to know just what he is up to. Wall Street Journal (paywall)</p> <p>San Francisco Fed prez sees rate hike this year. John Williams has been an optimist all year -- but he is not sounding a note of caution on the strong dollar and rout in the oil markets. Sounds like September is a defnite maybe for rate lift-off.  MarketWatch</p> <p>Mining giant cuts debt by $10b, issues $2.5b stock. Glencore has announced plans t</p>
No Such Thing As Yuan Time…
Capital Markets
<p>No Such Thing As Yuan Time...<br /> It's now been about 10 months since I last wrote about the Chinese Renminbi (CNY). At the time, I was bearish and expecting a decline in the CNY (which has since happened).</p> <p>Now here's the thing about devaluations: when the structural forces say that a controlled currency should devalue - it usually does. It's rare to see a "one and done," especially when the currency is only allowed to devalue by a few percent - as it did in August.</p> <p>To review why the Yuan should go lower;<br /> -With the decline in commodity prices, China no longer needs a strong currency to pay for the importation of raw commodities, which removes the only real reason to have a strong currency</p> <p>-China is an export economy and the currencies of many of its trading partners have declined dramatically. Looking at a list of major world currencies, they all have declined by 10% to 30% against the dollar in the past year. The CNY is the only notable outlier as it is only down 2.5% during this time<br /> That's some serious loss of competitive strength. Will China allow it to continue?<br /> -The Chinese economy is clearly slowing following a massive misallocation of capital complete with a huge credit bubble which is now unwinding</p> <p> -The Chinese need to stimulate their economy and the easiest way to do that is to have a much weaker currency<br /> When a government chooses to fight against devaluation, the timing of the trade is made more difficult—however the first baby-devaluation shows that the direction is no longer towards a stronger CNY. History has repeatedly shown that once a currency changes direction, it usually goes much further than just a few percent. With China going through nearly 3% of its foreign reserves in August alone, clearly we’re entering a crescendo where the reserves will shrink faster and faster as locals realize that a larger devaluation is coming.<br /> It's starting to get expensive to defend the CNY<br /> For me, following a bit of a pull-back over the past two weeks, it now seems like “game time” for the CNY. While the timing of a much larger move is unsure, it is clear that the direction has changed and the next move is likely to be a much larger and sustained devaluation. Additionally, I’m quite bearish on the world economy and this trade seems like one of the best risk rewards out there to play a slowdown in China and hence the global economy. You can play through cash currency or OTC options where volatility still prices cheaply. This trade definitely feels like shorting the Japanese Yen a few years ago and we now appear to be at the inflection point where things start to accelerate rapidly.</p> <p>Put it this way--if the CNY was approximately fairly valued, the Chinese wouldn’t have spent almost US $100 billion in August to defend their currency from further depreciation... (to be continued)</p> <p>Disclosure: I’m short Chinese Yuan Renminbi</p> <p>This story originally appeared in ValueWalk.<br /> Photo: </p>
Fosun wants another piece of China’s new wealth
Capital Markets
<p>China’s richest man Wang Jianlin memorably lost $3.6 billion as the share price of his Dalian Wanda Commercial Property flagship sank on “Black Monday” (24 August). But, we shouldn’t forget that China is producing more and more millionaires each year. They want to spend their new wealth on luxuries and also invest it for big, long-term returns.</p> <p>Fosun International, the Shanghai conglomerate, knows its customers. It has already profited from supplying expensive pharmaceuticals and healthcare, offering up vacations at its Club Med resorts and entertainment at Cirque du Soleil.</p> <p>It now plans to buy small European private banks that are being squeezed out by the mighty wealth management operations run by titans such as UBS and Credit Suisse.</p> <p>Fosun is close to inking a deal to buy German private bank Hauck &amp; Aufhauser for $233 million, has made an offer to purchase half of Belgium’s BHF Kleinwort Benson and is pursuing Portugal’s Novo Banco.</p> <p>“We see that a lot of China’s middle class are looking for investments overseas, and if we have private banks we can offer wealthy Chinese families…direct access to [overseas] personalized financial products,” chief executive Liang Xinjun told The Wall Street Journal.</p> <p>It makes sense. The number of millionaires in China soared at a rate of 17% last year and the size of their chest of investible assets by 19%, according to the 2015 World Wealth Report by Capgemini and RBC Wealth Management. </p> <p>Sure, they were helped by 52% rise in Shanghai’s CSI300 stock index – and like Wang, many have recently taken a hit. But, all the more reason to diversify into less volatile assets.<br /> Photo: Dan Kristiansen<br /> &nbsp;</p>
Soothing China’s markets back to recovery
Capital Markets
<p>Unusual times require desperate measures. “War-war” on collapsing stock prices and malevolent investors gave way to “jaw-jaw” over the weekend, as China’s central bank governor tried to calm markets with soothing words.</p> <p>The “correction in the stock market is almost done” and China’s financial markets should become “more stable” after the currency steadies following last month’s devaluation, PBOC head Zhou Xiaochuan told G20 government finance leaders on Saturday (The Wall Street Journal).</p> <p>Here’s a recap of the main attempts by China, usually through the China Securities Finance Corp, to boss the markets during the past couple of months:</p> <p> Sets up stabilization fund to buy shares<br /> Lends cash to 21 local brokerages to prop up equity prices<br /> Announces massive monetary stimulus and state spending to boost the economy<br /> Cuts interest rates<br /> Allows about half of listed companies to halt trading in their shares<br /> Bans major shareholders from selling their stakes for six months<br /> Threatens short sellers with arrest<br /> Suspension of all IPOs<br /> Relaxes rules on collateral for margin trading - that had inflated the stock bubble in the first place<br /> Devalues the renminbi<br /> Finds scapegoats: identifies, parades or punishes malicious traders, journalists and foreign investors apparently responsible for the rout.<br /> Intends to install circuit-breakers on exchanges to prevent panic selling</p> <p>Posturing, waving the stick, intimidating, imposing arbitrary rules – all weapons of the blustering bully. Maybe charm and soft-soap will work instead and help the market gain a bit of confidence.<br /> Photo: 2 dogs</p>
Meet QT; QE's Evil Twin
Capital Markets
<p>There is a growing sense across the financial spectrum that the world is about to turn some type of economic page. Unfortunately no one in the mainstream is too sure what the last chapter was about, and fewer still have any clue as to what the next chapter will bring. There is some agreement however, that the age of ever easing monetary policy in the U.S. will be ending at the same time that the Chinese economy (that had powered the commodity and emerging market booms) will be finally running out of gas. While I believe this theory gets both scenarios wrong (the Fed will not be tightening and China will not be falling off the economic map), there is a growing concern that the new chapter will introduce a new character into the economic drama. As introduced by researchers at Deutsche Bank, meet "Quantitative Tightening," the pesky, problematic, and much less disciplined kid brother of "Quantitative Easing." Now that QE is ready to move out...QT is prepared to take over.<br /> For much of the past generation foreign central banks, led by China, have accumulated vast quantities of foreign reserves. In August of last year the amount topped out at more than $12 trillion, an increase of five times over levels seen just 10 years earlier. During that time central banks added on average $824 billion in reserves per year. The vast majority of these reserves have been accumulated by China, Japan, Saudi Arabia, and the emerging market economies in Asia (Shrinking Currency Reserves Threaten Emerging Asia, BloombergBusiness, 4/6/15). It is widely accepted, although hard to quantify, that approximately two-thirds of these reserves are held in U.S. dollar denominated instruments (COFER, Washington DC: Intl. Monetary Fund, 1/3/13), the most common being U.S. Treasury debt.<br /> Initially this "Great Accumulation" (as it became known) was undertaken as a means to protect emerging economies from the types of shocks that they experienced during the 1997-98 Asian Currency Crisis, in which emerging market central banks lacked the ammunition to support their free falling currencies through market intervention. It was hoped that large stockpiles of reserves would allow these banks to buy sufficient amounts of their own currencies on the open market, thereby stemming any steep falls. The accumulation was also used as a primary means for EM central banks to manage their exchange rates and prevent unwanted appreciation against the dollar while the Greenback was being depreciated through the Federal Reserve's QE and zero interest rate policies.<br /> The steady accumulation of Treasury debt provided tremendous benefits to the U.S. Treasury, which had needed to issue trillions of dollars in debt as a result of exploding government deficits that occurred in the years following the Financial Crisis of 2008. Without this buying, which kept active bids under U.S. Treasuries, long-term interest rates in the U.S. could have been much higher, which would have made the road to recovery much steeper. In addition, absent the accumulation, the declines in the dollar in 2009 and 2010 could have been much more severe, which would have put significant upward pressure on U.S. consumer prices.<br /> But in 2015 the tide started to slowly ebb. By March of 2015 global reserves had declined by about $400 billion in just about 8 months, according to data compiled by Bloomberg. Analysts at Citi estimate that global FX reserves have been depleted at an average pace of $59 billion a month in the past year or so, and closer to $100 billion per month over the last few months (Brace for QT...as China leads FX reserves purge, Reuters, 8/28/15). Some think that these declines stem largely by actions of emerging economies whose currencies ha</p>
Daily Scan: Summer comes to an end and it's time to face the reality of the markets
Capital Markets
<p>Good evening,</p> <p>In the U.S. we bid adieu to summer and prepare to return to reality. It doesn't seem all that pretty. China lowered its growth outlook to 7.3% from 7.4%, marginal but psychologically weighty. We also learned that Beijing spent nearly $100 billion to support the yuan last month. China still has plenty of currency reserves. But what a burn rate! European markets were mostly quiet on Monday with the U.S. closed but China closed down for the fourth consecutive day. And the outlook isn't pretty.</p> <p>Here's what else you need to know:</p> <p>Markets closed on Labor Day. If you weren't on the beach in the U.S., you may have been watching this video of President Obama singing "I Can't Feel My Face."</p> <p>British unleash drone attack on Syria. The attack followed word that ISIS terrorists, two of them Britons, were planning an attack on theRoyal Family with a bombing on VJ Day. Three terrorists were killed in an attackon Aug 21. New York Post<br /> N.Y. state lawyer to Governor Cuomo shot in head. The attack took place during an annual celebration in Brooklyn of West Indian American Day. The annual event has been marred by violence in the past. Carey Gabay, 43, was "not doing well," Cuomo told reporters. The New York Times (paywall)<br /> Amazon reportedly set to sell tablet for $50. What will they do on Black Friday, when prices go so low shoppers have been known to stampede stores. Quartz<br /> Apple TV getting a serious facelift. At least that's the buzz. Coming to one of the few sleepy products in the Apple lineup: games.  New product announcements are coming Wednesday. Stay tuned. The New York Times (payall)<br /> Mining giant cuts debt by $10b, issues $2.5b stock. Glencore has announced plans to slash its $30 billion debt by shelving dividends, selling assets and raising fresh equity, as the mining and metals behemoth wrestles with a slump in commodities that has battered its share price. The debt plan underscores the huge pain being inflicted on the mining sector by China’s economic slowdown. Financial Times (paywall)</p> <p>Migrant boat tragedy in Indonesia. Echoing the recent troubles in Europe, 61 bodies have been recovered after an overloaded wooden boat sank off coast of Malaysia carrying dozens of Indonesian immigrants. This follows another crisis in May when boats carrying thousands from Myanmar and Bangladesh were left at sea following a Thai crackdown. ABC<br /> Turkey vows to wipe out PKK rebels. Turkish Prime Minister Ahmet Davutoglu has pledged to "wipe out" Kurdish PKK rebels in their strongholds after a deadly bomb attack</p>
Daily Scan: China has last minute surge, Japan sinks
Capital Markets
<p>Disappointing trade data seemed to have less impact than expected as  Shanghai Composite ended the day 3% up, the Shenzhen Composite closed with a 4% gain, and Hong Kong's Hang Seng added 3.6% following a last hour buying spree. If anything this is a sign volatility is going nowhere as investors wonder whether the equity bubble has yet to fully deflate.</p> <p>Markets across Asia ended in positive territory - only South Korea’s Seoul Composite and Japan’s Nikkei 225 ended in the red. The Nikkei took the biggest pummeling, ending 2.43% down after a day of more disappointing figures: its economy shrank an annualized 1.2% in the second quarter despite ongoing government and central bank measures to support growth.</p> <p>Meanwhile, the broader global outlook is still grim with oil prices remained weak today as cooperation between oil producing countries to curb oversupply looking unlikely. Oil prices have fallen almost 60% since June last year. </p> <p>Here is what else to need to know...</p> <p>Chinese stock exchanges to bring in “circuit breakers” Mainland stock exchanges plan to install bourse-wide "circuit breakers" to stop panic selling after botched official efforts to stop plunges in the volatile A-share market. Under the new plan, Shanghai and Shenzhen will halt trading for 30 minutes when the CSI300 index jumps or slumps 5% in intraday trading. They will stop for the day if it soars or dives by 7%. SCMP (paywall)</p> <p>Koreas agree on family reunions.North and South Korea have agreed to hold rare reunions for families separated by the Korean War.The meetings will take place in October at a mountain resort in North Korea.The decision follows an agreement last month that de-escalated tensions sparked by a border mine explosion that injured two South Korean soldiers. BBC</p> <p>MBK-led consortium clinches South Korea Tesco deal. UK supermarket giant Tesco says  it has agreed to sell its South Korea business - Homeplus - for $6.1 billion in cash, the latest in a series of pullbacks by the chain. Tesco will get $5.1 billion after adjusting for tax and other costs. WSJ</p> <p>China foreign exchanges fall by $97b.  The August drop came as the country’s central bank sold down some of its massive stockpile to support the renminbi. It is the sharpest monthly fall in reserves on record, while in percentage terms it represented the biggest decline in more than three years. Reserves fell 2.6%  in August to $3.557 trillion. Financial Times (paywall)</p> <p>Amanda Knox acquitted of Italy murder. American Amanda Knox and her former Italian boyfriend Raffaele Sollecito have been acquitted of 2007 murder of the British student Meredith Kercher, following a botched investigation. Guardian</p> <p>Japan PM Abe secures new term as ruling party chief.  Shinzo Abe has won a second consecutive term as president of the ruling Liberal Democrats' Party (LDP). H</p>
The markets may have a better solution than ‘extend & pretend’ for troubled oil loans
Capital Markets
<p>Some bankers would have you believe that as they contend with souring credits from oil and gas issuers, the regulators are putting them in an unnecessary straightjacket.</p> <p>As some bankers have done before, these bankers are taking aim at the Office of the Comptroller of the Currency, the overseer of many of the biggest banks. The OCC appears to be pushing the banks to classify some oil loans as troubled assets. Perhaps some bankers think the OCC shouldn’t remember ‘extend and pretend’, a practice whereby at times of stress in the past, bankers have extended loans in order to prevent them from appearing to require classification or workout. Classification pretty much puts the kibosh on extension without some kind of significant quid pro quo from the borrower.</p> <p>The OCC is just too rigid, some of these bankers say, and isn’t taking into account the possibility (if not, in their view, probability) that oil prices will rally and borrowers will make good on their promises.</p> <p>As oil prices yee and yaw, every day there is a new reason for optimism or pessimism. All that should, of course, be reflected in the futures market. Any banker that thinks he is smarter than the futures market deserves the question “Why aren’t you rich beyond avarice?”</p> <p>The complaining bankers are not wrong about the OCC. But the OCC is not wrong about bankers in general, either. Lenders resist classifying loans as troubled. And they almost always are more optimistic about the chances of recovery than the market is. In the case of oil loans, just look at what has happened to the prices of publicly issued bonds. Large company bonds are okay, but smaller company bonds are selling at prices that indicate default is a material possibility.</p> <p>What should happen in this situation? In my opinion, the market should work to sort the realistic recovery chances from the fairy tales. These situations are perfect for new debt or equity that the capital markets can create.  The new money can take many forms, of course. It could be subordinated debt of the debtor or convertible debt or preferred stock; it could take out part of the bank’s debt, it could provide breathing room to service the debt. Or in some cases, it could be super-senior debt and in other cases, the bank debt might have to take a haircut to induce the new money to come in. Many structures are possible. In a bankruptcy, the full panoply of structures would be on the table. The same should be true when seeking to restructure downgraded credits.</p> <p>Often it is better to face reality and to restructure something early. The new money may have to come ahead of the bank debt (old money), but if there is value in the debtor, the parties can figure out how to enhance that value rather than allowing it to diminish further.</p> <p>Sometimes, of course, the market will, in effect, tell the bank and the debtor that bankruptcy is the most likely future course—the comeback is too improbable.</p> <p>Neither bankers nor debtors like having to listen to the bottom fishing market. But if investment bankers are earning their money, they will be working hard to create competitive alternatives. And they just might do a lot of good in the process. Please ride to the rescue.</p> <p>In my opinion, the best investment bankers will work to set up competitive bidding situations so that debtors and banks have options to choose from. Different investment bankers and different types of investors often see these situations differently from each other. Bringing together disparate views of the market to create the best transaction for the parties is what should get the kudos.</p> <p>Photo: Tim Evanson</p>
Numbers game: China’s essential indicators
Capital Markets
<p>All eyes are are on China. Is the country really headed for a historic crash, or is this just a bump in road as the government shepherds China from an investment-led economy to one that is driven by consumer-demand? Investors will be focusing on some key indicators to gauge the country’s prospects:<br /> GDP growth<br /> This perhaps provides the best overall picture. The impact of China’s recent decision to revise down 2014 growth to 7.3%, from 7.4%, raises concerns over the economy’s health. The change is small but nonetheless significant as China  is used to making upward revisions on GDP growth. According to the Financial Times, this revision was largely attributed to the decline in the service sector - the biggest contributor to GDP.<br /> PMI<br /> Representing the health of the country’s manufacturing sector, China’s Purchasing Manager’s Index (PMI) for August slumped to a three-year-low of 49.7 from 50.0 in July, according to the National Bureau of Statistics. But that was still better than the figure given by an independent survey by China media group Caixin: 47.1.  <br /> Retail sales growth<br /> Retail sales growth edged down to 10.5% in July from 10.6% in June - August’s numbers will be released on Sunday. The number is expected to hold at 10.5% for last month. If this turns out to be the case, in the light of everything, the consumer spending has held up quite well.   </p> <p>Exports </p> <p>China’s trade data will be released tomorrow (Tuesday). According to Reuters, China's National Bureau of Statistics expects exports to swing into positive growth for August from an 8.3% drop in July - a possible indication the economy is stabilizing. That said, analysts polled by Reuters expect August exports to drop 6% compared with a year earlier. </p> <p>Debt</p> <p>According to the South China Morning Post, new data shows a surge in the debt run up by regional and local governments (RLGs), and it is worrying ratings agency Moody's. Official data shows RLG debt surged by more than a third between June 2013 and December 2014 to top 24 trillion yuan ($3.7 trillion), or 38% of economic output. Perhaps more than any, this number threatens to undermine China’s growth prospects.<br /> Photo: up to 2011</p>
CSRC to crack down on automated trading
Capital Markets
<p>Well, it appears all those rumors were really true.</p> <p>After slamming the volatility it helped create, the CSRC told Xinhua (Chinese) over the weekend that it will indeed tighten its grip on automated trading and curb excess speculation in stock index futures. And not only that, they also plan to add a circuit breaker mechanism to temporarily shut down trading when things start getting hairy.</p> <p>How it defines “excess” and how it plans to regulate a construct of ones and zeroes is currently unclear however, though I did find this earlier tweet about it particularly delightful:</p> <p>CHINA MAY ASK ALGORITHMIC TRADERS TO REPORT IN ADVANCE: CAIXIN - have no idea how this works in principle<br /> — Chris Weston (@ChrisWeston_IG) August 31, 2015</p> <p>Joking aside, this is the nth time China is making a mistake in regards to their stock market, and just goes to show how badly they needed the “sea turtles” – the best and the brightest of the nation’s returnees – who ended up either unceremoniously ousted by the CSRC or forced to return to the private sector.</p> <p>With them gone, the watchdog has done nothing but omnishambolic policies and witchhunts that have sullied its own credibility, from allowing margin lending to grow unhindered to blaming “hostile foreigners” for the market’s crash.</p> <p>In tightening its grip on automated trading, not only has it made itself a laughing stock, it has also built more walls against the once-rushing tide of investments coming in from the outside world. Algorithmic trading adds a massive amount of liquidity in the market, a huge plus for foreign investors seeking to invest, and Peking University professor Christopher Balding also seems to have found another benefit of their presence:<br /> “…given their importance in the market whether it is stocks or currencies, there is evidence that algorithmic trading has played a significant role in stabilizing the markets.  After falling relatively sharply beginning on August 21 for a number of days, major markets outside of China began sharp recoveries that have returned them largely to the point they were on August 21.  While we cannot say with certainty that algorithms are responsible, the rapid rebound from a fear induced sell off would seem to seem to match with how many of those types of programs especially when many of the economic fundamentals of the major markets presented here are better than China.”<br /> And they couldn’t have done it at a worse time; liquidity in the Shanghai Hong Kong cross-border connect is already drying up, CDS’ on China are comparing it to MERS-plagued South Korea, and growth is starting to go the way of the dodo.</p> <p>It’s almost as if someone’s doing this just to get Premier Li out of office. But maybe that’s just me with my tinfoil hat on.<br /> Photo: Edgeworks Limited</p>