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"We Face Huge Pressure" - China"s Developer Cash Crunch Spreads To Sunac

"We Face Huge Pressure" - China's Developer Cash Crunch Spreads To Sunac By Sofia Horta e Costa, Bloomberg markets commentator and analyst, who follows up on our Friday article "The Housing Market Is Almost Frozen" - An Even Bigger Problem Emerges For China" in which we discussed the spread of Evergrande's contagion to Sunac Sunac has become the latest Chinese developer to run into liquidity issues, underscoring the challenging environment for the industry as the nation’s property slowdown deepens. The Hong Kong-listed real estate firm asked authorities in the city of Shaoxing for assistance after local housing curbs affected sales at one of the company’s projects, according to a letter from a subsidiary seen by Bloomberg. The market is almost frozen, the company said in the letter, addressing the local government. "We face huge pressure." Sunac’s plea for help shows the urgency of the cash crunch affecting the country’s indebted developers as the central government maintains rules to cut leverage in the industry and cool housing activity. China’s home prices are at risk of “meaningful downside” regardless of what happens to Evergrande, Citigroup analysts wrote in a recent note. Sunac’s dollar bonds slumped on Friday after the letter circulated among credit traders, with the 5.95% note due 2024 dropping to the lowest price on record. Sunac has the third-biggest weighting on a Bloomberg index of Chinese high yield dollar bonds, after Kaisa and a riskier note sold by ICBC this month. Sunac’s shares have slumped 50% this year, cutting the wealth of billionaire founder and chairman Sun Hongbin. He had a 44% shareholding in the company as of June, according to the data compiled by Bloomberg. The Tianjin-based business reported revenue of 230.6 billion yuan ($33 billion) in 2020. The property market fallout is hurting companies in a stronger financial position than Evergrande. Sunac, which has high speculative-grade ratings at the three global credit risk accessors, has about half the liabilities of its larger peer Evergrande. Sunac complies with two of China’s debt metrics known as the three red lines, and it’s looking to sell assets including its indoor ski parks business to raise cash. The Sunac group as a whole has “run into big hurdles and difficulties in terms of cash flow and liquidity,” it said in the letter. Tyler Durden Sun, 09/26/2021 - 23:00.....»»

Category: dealsSource: nytSep 26th, 2021

Futures Slide On Growing Stagflation Fears As Treasury Yields Surge

Futures Slide On Growing Stagflation Fears As Treasury Yields Surge US index futures, European markets and Asian stocks all turned negative during the overnight session, surrendering earlier gains as investors turned increasingly concerned about China's looming slowdown - and outright contraction - amid a global stagflationary energy crunch, which sent 10Y TSY yields just shy of 1.50% this morning following a Goldman upgrade in its Brent price target to $90 late on Sunday. At 745 a.m. ET, S&P 500 e-minis were down 4.75 points, or 0.1% after rising as much as 0.6%, Nasdaq 100 e-minis were down 83 points, or 0.54% and Dow e-minis were up 80 points, or 0.23%. The euro slipped as Germany looked set for months of complex coalition talks. While the market appears to have moved beyond the Evergrande default, the debt crisis at China's largest developer festers (with Goldman saying it has no idea how it will end), and data due this week will show a manufacturing recovery in the world’s second-largest economy is faltering faster. A developing energy crisis threatens to crimp global growth further at a time markets are preparing for a tapering of Fed stimulus. The week could see volatile moves as traders scrutinize central bankers’ speeches, including Chair Jerome Powell’s meetings with Congressional panels. “Most bad news comes from China these days,” Ipek Ozkardeskaya, a senior analyst at Swissquote Group Holdings, wrote in a note. “The Evergrande debt crisis, the Chinese energy crackdown on missed targets and the ban on cryptocurrencies have been shaking the markets, along with the Fed’s more hawkish policy stance last week.” Oil majors Exxon Mobil and Chevron Corp rose 1.5% and 1.2% in premarket trade, respectively, tracking crude prices, while big lenders including JPMorgan, Citigroup, Morgan Stanley and Bank of America Corp gained about 0.8%.Giga-cap FAAMG growth names such as Alphabet, Microsoft, Amazon.com, Facebook and Apple all fell between 0.3% and 0.4%, as 10Y yield surged, continuing their selloff from last week, which saw the 10Y rise as high as 1.4958% and just shy of breaching the psychological 1.50% level. While growth names were hit, value names rebounded as another market rotation appears to be in place: industrials 3M Co and Caterpillar Inc, which tend to benefit the most from an economic rebound, also inched higher (although one should obviously be shorting CAT here for its China exposure). Market participants have moved into value and cyclical stocks from tech-heavy growth names after the Federal Reserve last week indicated it could begin unwinding its bond-buying program by as soon as November, and may raise interest rates in 2022. Here are some other notable premarket movers: Gores Guggenheim (GGPI US) shares rise 7.2% in U.S. premarket trading as Polestar agreed to go public with the special purpose acquisition company, in a deal valued at about $20 billion. Naked Brand (NAKD US), one of the stocks caught up in the first retail trading frenzy earlier this year, rises 11% in U.S. premarket trading, extending Friday’s gains. Among other so-called meme stocks in premarket trading: ReWalk Robotics (RWLK) +6.5%, Vinco Ventures (BBIG) +18%, Camber Energy (CEI) +2.9% Pfizer (PFE US) and Opko Health (OPK US) in focus after they said on Friday that the FDA extended the review period for the biologics license application for somatrogon. Opko fell 3.5% in post-market trading. Aspen Group (ASPU) climbed 10% in Friday postmarket trading after board member Douglas Kass buys $172,415 of shares, according to a filing with the U.S. Securities & Exchange Commission. Seaspine (SPNE US) said spine surgery procedure volumes were curtailed in many areas of the U.S. in 3Q and particularly in August. Tesla (TSLA US) and other electric- vehicle related stocks globally may be active on Monday after Germany’s election, in which the Greens had their best-ever showing and are likely to be part of any governing coalition. Europe likewise drifted lower, with the Stoxx Europe 600 Index erasing earlier gains and turning negative as investors weighed the risk to global growth from the China slowdown and the energy crunch. The benchmark was down 0.1% at last check. Subindexes for technology (-0.9%) and consumer (-0.8%) provide the main drags while value outperformed, with energy +2.4%, banks +2% and insurance +1.3%.  The DAX outperformed up 0.5%, after German election results avoided the worst-case left-wing favorable outcome.  U.S. futures. Rolls-Royce jumped 12% to the highest since March 2020 after the company was selected to provide the powerplant for the B-52 Stratofortress under the Commercial Engine Replacement Program. Here are some of the other biggest European movers today IWG rises as much as 7.5% after a report CEO Mark Dixon is exploring a multibillion-pound breakup of the flexible office-space provider AUTO1 gains as much as 6.1% after JPMorgan analyst Marcus Diebel raised the recommendation to overweight from neutral Cellnex falls as much as 4.3% to a two-month low after the tower firm is cut to sell from neutral at Citi, which says the stock is “priced for perfection in an imperfect industry” European uranium stocks fall with Yellow Cake shares losing as much as 6% and Nac Kazatomprom shares declining as much as 4.7%. Both follow their U.S. peers down following weeks of strong gains as the price of uranium ballooned For those who missed it, Sunday's closely-watched German elections concluded with the race much closer than initially expected: SPD at 25.7%, CDU/CSU at 24.1%, Greens at 14.8%, FDP at 11.5%, AfD at 10.3% Left at 4.9%, the German Federal Returning Officer announced the seat distribution from the preliminary results which were SPD at 206 seats, CDU/CSU at 196. Greens at 118, FDP at 92, AfD at 83, Left at 39 and SSW at 1. As it stands, three potential coalitions are an option, 1) SPD, Greens and FDP (traffic light), 2) CDU/CSU, Greens and FDP (Jamaica), 3) SPD and CDU/CSU (Grand Coalition but led by the SPD). Note, option 3 is seen as the least likely outcome given that the CDU/CSU would be unlikely willing to play the role of a junior partner to the SPD. Therefore, given the importance of the FDP and Greens in forming a coalition for either the SPD or CDU/CSU, leaders of the FDP and Greens have suggested that they might hold their own discussions with each other first before holding talks with either of the two larger parties. Given the political calculus involved in trying to form a coalition, the process is expected to play out over several months. From a markets perspective, the tail risk of the Left party being involved in government has now been removed due to their poor performance and as such, Bunds trade on a firmer footing. Elsewhere, EUR is relatively unfazed due to the inconclusive nature of the result. We will have more on this in a subsequent blog post. Asian stocks fell, reversing an earlier gain, as a drop in the Shanghai Composite spooked investors in the region by stoking concerns about the pace of growth in China’s economy.  The MSCI Asia Pacific Index wiped out an advance of as much as 0.7%, on pace to halt a two-day climb. Consumer discretionary names and materials firms were the biggest contributors to the late afternoon drag. Financials outperformed, helping mitigate drops in other sectors.  “Seeing Shanghai shares extending declines, investors’ sentiment has turned weak, leading to profit-taking on individual stocks or sectors that have been gaining recently,” said Shoichi Arisawa, an analyst at Iwai Cosmo Securities. “The drop in Chinese equities is reminding investors about a potential slowdown in their economy.”  The Shanghai Composite was among the region’s worst performers along with Vietnam’s VN Index. Shares of China’s electricity-intensive businesses tumbled after Beijing curbed power supplies in the country’s manufacturing hubs to cut emissions. The CSI 300 still rose, thanks to gains in heavily weighted Kweichow Moutai and other liquor makers. Asian equities started the day on a positive note as financials jumped, tracking gains in U.S. peers and following a rise in Treasury yields. Resona Holdings was among the top performers after Morgan Stanley raised its view on the stock and Japanese banks. The regional market has been calmer over the past few trading sessions after being whipsawed by concerns over any fallout from China Evergrande Group’s debt troubles. While anxiety lingers, many investors expect China will resolve the distressed property developer’s problems rather than let them spill over into an echo of 2008’s Lehman crisis. Japanese equities closed lower, erasing an earlier gain, as concerns grew over valuations following recent strength in the local market and turmoil in China. Machinery and electronics makers were the biggest drags on the Topix, which fell 0.1%. Daikin and Bandai Namco were the largest contributors to a dip of less than 0.1% in the Nikkei 225. Both gauges had climbed more 0.5% in morning trading. Meanwhile, the Shanghai Composite Index fell as much as 1.5% as industrials tumbled amid a power crunch. “Seeing Shanghai shares extending declines, investors’ sentiment has turned weak, leading to profit-taking on individual stocks or sectors that have been gaining recently,” said Shoichi Arisawa, an analyst at Iwai Cosmo Securities Co. “The drop in Chinese equities is reminding investors about a potential slowdown in their economy. That’s why marine transportation stocks, which are representative of cyclical sectors, fell sharply.” Shares of shippers, which have outperformed this year, fell as investors turned their attention to reopening plays. Travel and retail stocks gained after reports that the government is making final arrangements to lift all the coronavirus state of emergency order in the nation as scheduled at the end of this month. Australia's commodity-heavy stocks advanced as energy, banking shares climb. The S&P/ASX 200 index rose 0.6% to close at 7,384.20, led by energy stocks. Banks also posted their biggest one-day gain since Aug. 2. Travel stocks were among the top performers after the prime minister said state premiers must not keep borders closed once agreed Covid-19 vaccination targets are reached. NextDC was the worst performer after the company’s CEO sold 1.6 million shares. In New Zealand, the S&P/NZX 50 index. In FX, the U.S. dollar was up 0.1%, while the British pound, Australian dollar, and Canadian dollar lead G-10 majors, with the Swedish krona and Swiss franc lagging. •    The Bloomberg Dollar Spot Index was little changed and the greenback traded mixed versus its Group-of-10 peers o    Volatility curves in the major currencies were inverted last week due to a plethora of central bank meetings and risk-off concerns. They have since normalized as stocks stabilize and traders assess the latest forward guidance on monetary policy •    The yield on two-year U.S. Treasuries touched the highest level since April 2020, as tightening expectations continued to put pressure on front-end rates and ahead of debt sales later Monday •    The pound advanced, with analyst focus on supply chain problems as Prime Minister Boris Johnson considers bringing in army drivers to help. Bank of England Governor Andrew Bailey’s speech later will be watched after last week’s hawkish meeting •    Antipodean currencies, as well as the Norwegian krone and the Canadian dollar were among the best Group-of-10 performers amid a rise in commodity prices •    The yen pared losses after falling to its lowest level in six weeks and Japanese stocks paused their rally and amid rising Treasury yields   In rates, treasuries extended their recent drop, led by belly of the curve ahead of this week’s front-loaded auctions, which kick off Monday with 2- and 5-year note sales.  Yields were higher by up to 4bp across belly of the curve, cheapening 2s5s30s spread by 3.2bp on the day; 10-year yields sit around 1.49%, cheaper by 3.5bp and underperforming bunds, gilts by 1.5bp and 0.5bp while the front-end of the curve continues to sell off as rate-hike premium builds -- 2-year yields subsequently hit 0.284%, the highest level since April 2020. 5-year yields top at 0.988%, highest since Feb. 2020 while 2-year yields reach as high as 0.288%; in long- end, 30-year yields breach 2% for the first time since Aug. 13. Auctions conclude Tuesday with 7-year supply. Host of Fed speakers due this week, including three scheduled for Monday. In commodities, Brent futures climbed 1.4% to $79 a barrel, while WTI futures hit $75 a barrel for the first time since July, amid an escalating energy crunch across Europe and now China. Base metals are mixed: LME copper rises 0.4%, LME tin and nickel drop over 2%. Spot gold gives back Asia’s gains to trade flat near $1,750/oz In equities, Stoxx 600 is up 0.6%, led by energy and banks, and FTSE 100 rises 0.4%. Germany’s DAX climbs 1% after German elections showed a narrow victory for social democrats, with the Christian Democrats coming in a close second, according to provisional results. S&P 500 futures climb 0.3%, Dow and Nasdaq contracts hold in the green. In FX, the U.S. dollar is up 0.1%, while the British pound, Australian dollar, and Canadian dollar lead G-10 majors, with the Swedish krona and Swiss franc lagging. Base metals are mixed: LME copper rises 0.4%, LME tin and nickel drop over 2%. Spot gold gives back Asia’s gains to trade flat near $1,750/oz Investors will now watch for a raft of economic indicators, including durable goods orders and the ISM manufacturing index this week to gauge the pace of the recovery, as well as bipartisan talks over raising the $28.4 trillion debt ceiling. The U.S. Congress faces a Sept. 30 deadline to prevent the second partial government shutdown in three years, while a vote on the $1 trillion bipartisan infrastructure bill is scheduled for Thursday. On today's calendar we get the latest Euro Area M3 money supply, US preliminary August durable goods orders, core capital goods orders, September Dallas Fed manufacturing activity. We also have a bunch of Fed speakers including Williams, Brainard and Evans. Market Snapshot S&P 500 futures down 0.1% to 4,442.50 STOXX Europe 600 up 0.3% to 464.54 MXAP little changed at 200.75 MXAPJ little changed at 642.52 Nikkei little changed at 30,240.06 Topix down 0.1% to 2,087.74 Hang Seng Index little changed at 24,208.78 Shanghai Composite down 0.8% to 3,582.83 Sensex up 0.2% to 60,164.70 Australia S&P/ASX 200 up 0.6% to 7,384.17 Kospi up 0.3% to 3,133.64 German 10Y yield fell 3.1 bps to -0.221% Euro down 0.3% to $1.1689 Brent Futures up 1.2% to $79.04/bbl Gold spot little changed at $1,750.88 U.S. Dollar Index up 0.15% to 93.47 Top Overnight News from Bloomberg House Speaker Nancy Pelosi put the infrastructure bill on the schedule for Monday under pressure from moderates eager to get the bipartisan bill, which has already passed the Senate, enacted. But progressives -- whose votes are likely vital -- are insisting on progress first on the bigger social-spending bill Olaf Scholz of the center-left Social Democrats defeated Chancellor Angela Merkel’s conservatives in an extremely tight German election, setting in motion what could be months of complex coalition talks to decide who will lead Europe’s biggest economy China’s central bank pumped liquidity into the financial system after borrowing costs rose, as lingering risks posed by China Evergrande Group’s debt crisis hurt market sentiment toward its peers as well Global banks are about to get a comprehensive blueprint for how derivatives worth several hundred trillion dollars may be finally disentangled from the London Interbank Offered Rate Economists warned of lower economic growth in China as electricity shortages worsen in the country, forcing businesses to cut back on production Governor Haruhiko Kuroda says it’s necessary for the Bank of Japan to continue with large-scale monetary easing to achieve the bank’s 2% inflation target The quant revolution in fixed income is here at long last, if the latest Invesco Ltd. poll is anything to go by. With the work-from-home era fueling a boom in electronic trading, the majority of investors in a $31 trillion community say they now deploy factor strategies in bond portfolios A more detailed look at global markets courtesy of Newsquawk Asian equity markets traded somewhat mixed with the region finding encouragement from reopening headlines but with gains capped heading towards month-end, while German election results remained tight and Evergrande uncertainty continued to linger. ASX 200 (+0.6%) was led higher by outperformance in the mining related sectors including energy as oil prices continued to rally amid supply disruptions and views for a stronger recovery in demand with Goldman Sachs lifting its year-end Brent crude forecast from USD 80/bbl to USD 90/bbl. Furthermore, respectable gains in the largest weighted financial sector and details of the reopening roadmap for New South Wales, which state Premier Berijiklian sees beginning on October 11th, further added to the encouragement. Nikkei 225 (Unch) was kept afloat for most of the session after last week’s beneficial currency flows and amid reports that Japan is planning to lift emergency measures in all areas at month-end, although upside was limited ahead of the upcoming LDP leadership race which reports noted are likely to go to a run-off as neither of the two main candidates are likely to achieve a majority although a recent Kyodo poll has Kono nearly there at 47.4% of support vs. nearest contender Kishida at 22.4%. Hang Seng (+0.1%) and Shanghai Comp. (-0.8%) were varied with the mainland choppy amid several moving parts including back-to-back daily liquidity efforts by the PBoC since Sunday and with the recent release of Huawei’s CFO following a deal with US prosecutors. Conversely, Evergrande concerns persisted as Chinese cities reportedly seized its presales to block the potential misuse of funds and its EV unit suffered another double-digit percentage loss after scrapping plans for its STAR Market listing. There were also notable losses to casino names after Macau tightened COVID-19 restrictions ahead of the Golden Week holidays and crypto stocks were hit after China declared crypto activities illegal which resulted in losses to cryptoexchange Huobi which dropped more than 40% in early trade before nursing some of the losses, while there are also concerns of the impact from an ongoing energy crisis in China which prompted the Guangdong to ask people to turn off lights they don't require and use air conditioning less. Finally, 10yr JGBs were flat but have clawed back some of the after-hour losses on Friday with demand sapped overnight amid the mild gains in stocks and lack of BoJ purchases in the market. Elsewhere, T-note futures mildly rebounded off support at 132.00, while Bund futures outperformed the Treasury space amid mild reprieve from this month’s losses and with uncertainty of the composition for the next German coalition. Top Asian News Moody’s Says China to Safeguard Stability Amid Evergrande Issues China’s Tech Tycoons Pledge Allegiance to Xi’s Vision China Power Crunch Hits iPhone, Tesla Production, Nikkei Reports Top Netflix Hit ‘Squid Game’ Sparks Korean Media Stock Surge Bourses in Europe have trimmed the gains seen at the open, albeit the region remains mostly in positive territory (Euro Stoxx 50 +0.4%; Stoxx 600 +0.2%) in the aftermath of the German election and amid the looming month-end. The week also sees several risk events, including the ECB's Sintra Forum, EZ CPI, US PCE and US ISM Manufacturing – not to mention the vote on the bipartisan US infrastructure bill. The mood in Europe contrasts the mixed handover from APAC, whilst US equity futures have also seen more divergence during European trade – with the yield-sensitive NQ (-0.3%) underperforming the cyclically-influenced RTY (+0.4%). There has been no clear catalyst behind the pullback since the Cash open. Delving deeper into Europe, the DAX 40 (+0.6%) outperforms after the tail risk of the Left party being involved in government has now been removed. The SMI (-0.6%) has dipped into the red as defensive sectors remain weak, with the Healthcare sector towards to bottom of the bunch alongside Personal & Household Goods. On the flip side, the strength in the price-driven Oil & Gas and yield-induced Banks have kept the FTSE 100 (+0.2%) in green, although the upside is capped by losses in AstraZeneca (-0.4%) and heavy-weight miners, with the latter a function of declining base metal prices. The continued retreat in global bonds has also hit the Tech sector – which resides as the laggard at the time of writing. In terms of individual movers, Rolls-Royce (+8.5%) trades at the top of the FTSE 100 after winning a USD 1.9bln deal from the US Air Force. IWG (+6.5%) also extended on earlier gains following reports that founder and CEO Dixon is said to be mulling a multibillion-pound break-up of the Co. that would involve splitting it into several distinct companies. Elsewhere, it is worth being cognizant of the current power situation in China as the energy crisis spreads, with Global Times also noting that multiple semiconductor suppliers for Tesla (Unch), Apple (-0.4% pre-market) and Intel (Unch), which have manufacturing plants in the Chinese mainland, recently announced they would suspend their factories' operations to follow local electricity use policies. Top European News U.K. Relaxes Antitrust Rules, May Bring in Army as Pumps Run Dry Magnitude 5.8 Earthquake Hits Greek Island of Crete German Stocks Rally as Chances Wane for Left-Wing Coalition German Landlords Rise as Left’s Weakness Trumps Berlin Poll In FX, the Aussie is holding up relatively well on a couple of supportive factors, including a recovery in commodity prices overnight and the Premier of NSW setting out a timetable to start lifting COVID lockdown and restrictions from October 11 with an end date to completely re-open on December 1. However, Aud/Usd is off best levels against a generally firm Greenback on weakness and underperformance elsewhere having stalled around 0.7290, while the Loonie has also run out of momentum 10 pips or so from 1.2600 alongside WTI above Usd 75/brl. DXY/EUR/CHF - Although the risk backdrop is broadly buoyant and not especially supportive, the Buck is gleaning traction and making gains at the expense of others, like the Euro that is gradually weakening in wake of Sunday’s German election that culminated in narrow victory for the SPD Party over the CDU/CSU alliance, but reliant on the Greens and FDP to form a Government. Eur/Usd has lost 1.1700+ status and is holding a fraction above recent lows in the form of a double bottom at 1.1684, but the Eur/Gbp cross is looking even weaker having breached several technical levels like the 100, 21 and 50 DMAs on the way down through 0.8530. Conversely, Eur/Chf remains firm around 1.0850, and largely due to extended declines in the Franc following last week’s dovish SNB policy review rather than clear signs of intervention via the latest weekly Swiss sight deposit balances. Indeed, Usd/Chf is now approaching 0.9300 again and helping to lift the Dollar index back up towards post-FOMC peaks within a 93.494-206 range in advance of US durable goods data, several Fed speakers, the Dallas Fed manufacturing business index and a double dose of T-note supply (Usd 60 bn 2 year and Usd 61 bn 5 year offerings). GBP/NZD/JPY - As noted above, the Pound is benefiting from Eur/Gbp tailwinds, but also strength in Brent to offset potential upset due to the UK’s energy supply issues, so Cable is also bucking the broad trend and probing 1.3700. However, the Kiwi is clinging to 0.7000 in the face of Aud/Nzd headwinds that are building on a break of 1.0350, while the Yen is striving keep its head afloat of another round number at 111.00 as bond yields rebound and curves resteepen. SCANDI/EM - The Nok is also knocking on a new big figure, but to the upside vs the Eur at 10.0000 following the hawkish Norges Bank hike, while the Cnh and Cny are holding up well compared to fellow EM currencies with loads of liquidity from the PBoC and some underlying support amidst the ongoing mission to crackdown on speculators in the crypto and commodity space. In commodities, WTI and Brent front-month futures kicked the week off on a firmer footing, which saw Brent Nov eclipse the USD 79.50/bbl level (vs low 78.21/bbl) whilst its WTI counterpart hovers north of USD 75/bbl (vs low 74.16/bbl). The complex could be feeling some tailwinds from the supply crunch in Britain – which has lead petrol stations to run dry as demand outpaces the supply. Aside from that, the landscape is little changed in the run-up to the OPEC+ meeting next Monday, whereby ministers are expected to continue the planned output hikes of 400k BPD/m. On that note, there have been reports that some African nations are struggling to pump more oil amid delayed maintenance and low investments, with Angola and Nigeria said to average almost 300k BPD below their quota. On the Iranian front, IAEA said Iran permitted it to service monitoring equipment during September 20th-22nd with the exception of the centrifuge component manufacturing workshop at the Tesa Karaj facility, with no real updates present regarding the nuclear deal talks. In terms of bank commentary, Goldman Sachs raised its year-end Brent crude forecast by USD 10 to USD 90/bbl and stated that Hurricane Ida has more than offset the ramp-up in OPEC+ output since July with non-OPEC+, non-shale output continuing to disappoint, while it added that global oil demand-deficit is greater than expected with a faster than anticipated demand recovery from the Delta variant. Conversely, Citi said in the immediate aftermath of skyrocketing prices, it is logical to be bearish on crude oil and nat gas today and forward curves for later in 2022, while it added that near-term global oil inventories are low and expected to continue declining maybe through Q1 next year. Over to metals, spot gold and silver have fallen victim to the firmer Dollar, with spot gold giving up its overnight gains and meandering around USD 1,750/oz (vs high 1760/oz) while spot silver briefly dipped under USD 22.50/oz (vs high 22.73/oz). Turning to base metals, China announced another round of copper, zinc and aluminium sales from state reserves – with amounts matching the prior sales. LME copper remains within a tight range, but LME tin is the outlier as it gave up the USD 35k mark earlier in the session. Finally, the electricity crunch in China has seen thermal coal prices gain impetus amid tight domestic supply, reduced imports and increased demand. US Event Calendar 8:30am: Aug. Cap Goods Ship Nondef Ex Air, est. 0.5%, prior 0.9% 8:30am: Aug. Cap Goods Orders Nondef Ex Air, est. 0.4%, prior 0.1% 8:30am: Aug. -Less Transportation, est. 0.5%, prior 0.8% 8:30am: Aug. Durable Goods Orders, est. 0.6%, prior -0.1% 10:30am: Sept. Dallas Fed Manf. Activity, est. 11.0, prior 9.0 Central Banks 8am: Fed’s Evans Speaks at Annual NABE Conference 9am: Fed’s Williams Makes Opening Remarks at Conference on... 12pm: Fed’s Williams Discusses the Economic Outlook 12:50pm: Fed’s Brainard Discusses Economic Outlook at NABE Conference DB's Jim Reid concludes the overnight wrap Straight to the German elections this morning where unlike the Ryder Cup the race was tight. The centre-left SPD have secured a narrow lead according to provisional results, which give them 25.7% of the vote, ahead of Chancellor Merkel’s CDU/CSU bloc, which are on 24.1%. That’s a bit narrower than the final polls had suggested (Politico’s average put the SPD ahead by 25-22%), but fits with the slight narrowing we’d seen over the final week of the campaign. Behind them, the Greens are in third place, with a record score of 14.8%, which puts them in a key position when it comes to forming a majority in the new Bundestag, and the FDP are in fourth place currently on 11.5%. Although the SPD appear to be in first place the different parties will now enter coalition negotiations to try to form a governing majority. Both Olaf Scholz and the CDU’s Armin Laschet have said that they will seek to form a government, and to do that they’ll be looking to the Greens and the FDP as potential coalition partners, since those are the most realistic options given mutual policy aims. So the critical question will be whether it’s the SPD or the CDU/CSU that can convince these two to join them in coalition. On the one hand, the Greens have a stronger policy overlap with the SPD, and governed with them under Chancellor Schröder from 1998-2005, but the FDP seems more in line with the Conservatives, and were Chancellor Merkel’s junior coalition partner from 2009-13.  So it’s likely that the FDP and the Greens will talk to each other before talking to either of the two biggest parties. For those wanting more information, our research colleagues in Frankfurt have released a post-election update (link here) on the results and what they mean. An important implication of last night’s result is that (at time of writing) it looks as though a more left-wing coalition featuring the SPD, the Greens and Die Linke would not be able for form a majority in the next Bundestag. So the main options left are for the FDP and the Greens to either join the SPD in a “traffic light” coalition or instead join the CDU/CSU in a “Jamaica” coalition. The existing grand coalition of the SPD and the CDU/CSU would actually have a majority as well, but both parties have signalled that they don't intend to continue this. That said, last time in 2017, a grand coalition wasn’t expected after that result, and there were initially attempts to form a Jamaica coalition. But once those talks proved unsuccessful, discussions on another grand coalition began once again. In terms of interesting snippets, this election marks the first time the SPD have won the popular vote since 2002, which is a big turnaround given that the party were consistently polling in third place over the first half of this year. However, it’s also the worst ever result for the CDU/CSU, and also marks the lowest combined share of the vote for the two big parties in post-war Germany, which mirrors the erosion of the traditional big parties we’ve seen elsewhere in continental Europe. Interestingly, the more radical Die Linke and AfD parties on the left and the right respectively actually did worse than in 2017, so German voters have remained anchored in the centre, and there’s been no sign of a populist resurgence. This also marks a record result for the Greens, who’ve gained almost 6 percentage points relative to four years ago, but that’s still some way down on where they were polling earlier in the spring (in the mid-20s), having lost ground in the polls throughout the final weeks of the campaign. Markets in Asia have mostly started the week on a positive note, with the Hang Seng (+0.28%), Nikkei (+0.04%), and the Kospi (+0.25%) all moving higher. That said, the Shanghai Comp is down -1.30%, as materials (-5.91%) and industrials (-4.24%) in the index have significantly underperformed, which comes amidst power curbs in the country. In the US and Europe however, futures are pointing higher, with those on the S&P 500 up +0.37%, and those on the DAX up +0.51%. Moving onto another big current theme, all the talk at the moment is about supply shocks and it’s not inconceivable that things could get very messy on this front over the weeks and months ahead. However, I think the discussion on supply in isolation misses an important component and that is demand. In short we had a pandemic that effectively closed the global economy and interrupted numerous complicated supply chains. The global authorities massively stimulated demand relative to where it would have been in this environment and in some areas have created more demand than there would have been at this stage without Covid. However the supply side has not come back as rapidly. As such you’re left with demand outstripping supply. So I think it’s wrong to talk about a global supply shock in isolation. It’s not as catchy but this is a “demand is much higher than it should be in a pandemic with lockdowns, but supply hasn't been able to fully respond” world. If the authorities hadn’t responded as aggressively we would have plenty of supply for the demand and a lot of deflation. Remember negative oil prices in the early stages of the pandemic. So for me every time you hear the phrase “supply shock” remember the phenomenal demand there is relative to what the steady state might have been. This current “demand > supply” at lower levels of activity than we would have had without covid is going to cause central banks a huge headache over the coming months. Should they tighten due to what is likely to be a prolonged period of higher prices than people thought even a couple of months ago or should they look to the potential demand destruction of higher prices? The risk of a policy error is high and the problem with forward guidance is that markets demand to know now what they might do over the next few months and quarters so it leaves them exposed a little in uncertain times. This problem has crept up fast on markets with an epic shift in sentiment in the rates market after the BoE meeting Thursday lunchtime. I would say they were no more hawkish than the Fed the night before but the difference is that the Fed are still seemingly at least a year from raising rates and a lot can happen in that period whereas the BoE could now raise this year (more likely February). That has focused the minds of global investors, especially as Norway became the first central bank among the G-10 currencies to raise rates on the same day. Towards the end of this note we’ll recap the moves in markets last week including a +15bps climb in US 10yr yields in the last 48 hours of last week. One factor that will greatly influence yields over the week ahead is the ongoing US debt ceiling / government shutdown / infrastructure bill saga that is coming to a head as we hit October on Friday - the day that there could be a partial government shutdown without action by the close on Thursday. It’s a fluid situation. So far the the House of Representatives has passed a measure that would keep the government funded through December 3, but it also includes a debt ceiling suspension, so Republicans are expected to block this in the Senate if it still includes that. The coming week could also see the House of Representatives vote on the bipartisan infrastructure bill (c.$550bn) that’s already gone through the Senate, since Speaker Pelosi had previously committed to moderate House Democrats that there’d be a vote on the measure by today. She reaffirmed that yesterday although the timing may slip. However, there remain divisions among House Democrats, with some progressives not willing to support it unless the reconciliation bill also passes. In short we’ve no idea how this get resolved but most think some compromise will be reached before Friday. Pelosi yesterday said it “seems self-evident” that the reconciliation bill won’t reach the $3.5 trillion hoped for by the administration which hints at some compromise. Overall the sentiment has seemingly shifted a little more positively on there being some progress over the weekend. From politics to central banks and following a busy week of policy meetings, there are an array of speakers over the week ahead. One of the biggest highlights will be the ECB’s Forum on Central Banking, which is taking place as an online event on Tuesday and Wednesday, and the final policy panel on Wednesday will include Fed Chair Powell, ECB President Lagarde, BoE Governor Bailey and BoJ Governor Kuroda. Otherwise, Fed Chair Powell will also be testifying before the Senate Banking Committee on Tuesday, alongside Treasury Secretary Yellen, and on Monday, ECB President Lagarde will be appearing before the European Parliament’s Committee on Economic and Monetary Affairs as part of the regular Monetary Dialogue. There are lots of other Fed speakers this week and they can add nuances to the taper and dot plot debates. Finally on the data front, there’ll be further clues about the state of inflation across the key economies, as the Euro Area flash CPI estimate for September is coming out on Friday. Last month's reading showed that Euro Area inflation rose to +3.0% in August, which was its highest level in nearly a decade. Otherwise, there’s also the manufacturing PMIs from around the world on Friday given it’s the start of the month, along with the ISM reading from the US, and Tuesday will see the release of the Conference Board’s consumer confidence reading for the US as well. For the rest of the week ahead see the day-by-day calendar of events at the end. Back to last week now and the highlight was the big rise in global yields which quickly overshadowed the ongoing Evergrande story. Bonds more than reversed an early week rally as yields rose for a fifth consecutive week. US 10yr Treasury yields ended the week up +8.9bps to finish at 1.451% - its highest level since the start of July and +15bps off the Asian morning lows on Thursday. The move saw the 2y10y yield curve steepen +4.5bps, with the spread reaching its widest point since July as well. However, at the longer end of the curve the 5y30y spread ended the week largely unchanged after a volatile week. It was much flatter shortly following the FOMC and steeper following the BoE. Bond yields in Europe moved higher as well with the central bank moves again being the major impetus especially in the UK. 10yr gilt yields rose +7.9bps to +0.93% and the short end moved even more with the 2yr yield rising +9.4bps to 0.38% as the BoE’s inflation forecast and rhetoric caused investors to pull forward rate hike expectations. Yields on 10yr bunds rose +5.2bps, whilst those on the OATs (+6.3bps) and BTPs (+5.7bps) increased substantially as well, but not to the same extent as their US and UK counterparts. While sovereign debt sold off, global equity markets recovered following two consecutive weeks of declines. Although markets entered the week on the back foot following the Evergrande headlines from last weekend, risk sentiment improved at the end of the week, especially toward cyclical industries. The S&P 500 gained +0.51% last week (+0.15% Friday), nearly recouping the prior week’s loss. The equity move was primarily led by cyclicals as higher bond yields helped US banks (+3.43%) outperform, while higher commodity prices saw the energy (+4.46%) sector gain sharply. Those higher bond yields led to a slight rerating of growth stocks as the tech megacap NYFANG index fell back -0.46% on the week and the NASDAQ underperformed, finishing just better than unchanged (+0.02). Nonetheless, with four trading days left in September the S&P 500 is on track for its third losing month this year, following January and June. European equities rose moderately last week, as the STOXX 600 ended the week +0.31% higher despite Friday’s -0.90% loss. Bourses across the continent outperformed led by particularly strong performances by the IBEX (+1.28%) and CAC 40 (+1.04%). There was limited data from Friday. The Ifo's business climate indicator in Germany fell slightly from the previous month to 98.8 (99.0 expected) from 99.4 on the back a lower current assessment even though business expectations was higher than expected. In Italy, consumer confidence rose to 119.6 (115.8 expected), up just over 3pts from August and at its highest level on record (since 1995). Tyler Durden Mon, 09/27/2021 - 08:09.....»»

Category: personnelSource: nytSep 27th, 2021

"We Face Huge Pressure" - China"s Developer Cash Crunch Spreads To Sunac

"We Face Huge Pressure" - China's Developer Cash Crunch Spreads To Sunac By Sofia Horta e Costa, Bloomberg markets commentator and analyst, who follows up on our Friday article "The Housing Market Is Almost Frozen" - An Even Bigger Problem Emerges For China" in which we discussed the spread of Evergrande's contagion to Sunac Sunac has become the latest Chinese developer to run into liquidity issues, underscoring the challenging environment for the industry as the nation’s property slowdown deepens. The Hong Kong-listed real estate firm asked authorities in the city of Shaoxing for assistance after local housing curbs affected sales at one of the company’s projects, according to a letter from a subsidiary seen by Bloomberg. The market is almost frozen, the company said in the letter, addressing the local government. "We face huge pressure." Sunac’s plea for help shows the urgency of the cash crunch affecting the country’s indebted developers as the central government maintains rules to cut leverage in the industry and cool housing activity. China’s home prices are at risk of “meaningful downside” regardless of what happens to Evergrande, Citigroup analysts wrote in a recent note. Sunac’s dollar bonds slumped on Friday after the letter circulated among credit traders, with the 5.95% note due 2024 dropping to the lowest price on record. Sunac has the third-biggest weighting on a Bloomberg index of Chinese high yield dollar bonds, after Kaisa and a riskier note sold by ICBC this month. Sunac’s shares have slumped 50% this year, cutting the wealth of billionaire founder and chairman Sun Hongbin. He had a 44% shareholding in the company as of June, according to the data compiled by Bloomberg. The Tianjin-based business reported revenue of 230.6 billion yuan ($33 billion) in 2020. The property market fallout is hurting companies in a stronger financial position than Evergrande. Sunac, which has high speculative-grade ratings at the three global credit risk accessors, has about half the liabilities of its larger peer Evergrande. Sunac complies with two of China’s debt metrics known as the three red lines, and it’s looking to sell assets including its indoor ski parks business to raise cash. The Sunac group as a whole has “run into big hurdles and difficulties in terms of cash flow and liquidity,” it said in the letter. Tyler Durden Sun, 09/26/2021 - 23:00.....»»

Category: dealsSource: nytSep 26th, 2021

How Evergrande Became Too Big To Fail And Why Beijing Will Have To Bail It Out

How Evergrande Became Too Big To Fail And Why Beijing Will Have To Bail It Out While the world is obsessing with the fate of Evergrande, and more importantly when, or if, Beijing will bail it out, another just as interesting question is how did the company many call "China's Lehman" get to the point of no return and become a global systematic risk. For a fascinating look into how we got here, we turn our readers' attention to a recent article from Caixin titled "How Evergrande Could Turn Into ‘China’s Lehman Brothers'," and which provides one of the most comprehensive insights into why Beijing will have to, even if it is kicking and screaming, bail out Evergrande which, at its core, is just one giant shadow-banking black box whose time has finally run out. * * * For the past two months, hundreds of people have been gathering at the 43-floor Zhuoyue Houhai Center in Shenzhen, where China Evergrande Group’s headquarters occupy 20 floors. They held banners demanding repayment of overdue loans and financial products. Police with riot shields had to be on site to keep things under control. The demonstrators are construction workers at the property developer’s housing projects, suppliers providing construction materials and investors in the company’s wealth management products (WMPs). From paint suppliers to decoration and construction companies, Evergrande owes more than 800 billion yuan ($124 billion) due within one year, while it has only a 10th of that amount of cash on hand. As of the end of June, Evergrande had nearly 2 trillion yuan ($309 billion) of debts on its books, plus an unknown amount of off-books debt. The property giant is on the verge of a dramatic debt restructuring or even bankruptcy, many institutions believe. A bankruptcy would amount to a financial tsunami, or as some analysts put it, “China’s Lehman Brothers.” The venerable American investment bank’s 2008 collapse helped trigger a global financial crisis. Certainly Evergrande, one of China’s three biggest developers, has a giant footprint in China. Unfinished residential buildings at Evergrande Oasis, a housing complex developed by Evergrande Group, in Luoyang, China September 16, 2021 Its liabilities are equivalent to about 2% of China’s GDP. It has more than 200,000 employees, who themselves and many of their families have invested billions of yuan in the company’s WMPs. The company has more than 800 projects under construction, more than half of them halted due to its cash crunch. There are thousands of upstream and downstream companies that rely on Evergrande for business, creating more than 3.8 million jobs every year. Like many of China’s “too big to fail” conglomerates, Evergrande’s crisis has fueled speculation over whether the government will step in for a rescue. Several state-owned enterprises, including Shenzhen Talents Housing Group Co. Ltd. and Shenzhen Investment Ltd., both controlled by the Shenzhen State-owned Assets Supervision and Administration Commission (SASAC), are in talks with Evergrande on its Shenzhen projects, according to people close to the talks. But so far, no deals have been reached. In a statement last week, Evergrande denied rumors that it will go bankrupt. While the developer faces unprecedented difficulties, it is fulfilling its responsibilities and is doing everything possible to restore normal operations and protect the legitimate rights and interests of customers, according to a statement on its website. The company hired financial advisers to explore “all feasible solutions” to ease its cash crunch, warning that there’s no guarantee the company will meet its financial obligations. It has repeatedly signaled that it will sell equity and assets including but not limited to investment properties, hotels and other properties and attract investors to increase the equity of Evergrande and its affiliates. Growth on borrowed money Over the years, Evergrande has faced liquidity pressure several times, but every time it dodged the bullet. This time, the crisis of cash flow and trust is unprecedented. Evergrande shares in Hong Kong plummeted to a 10-year low. Its onshore bonds fell to what investors call defaulted bond level. All three global credit rating companies and one domestic rating company have downgraded Evergrande’s debt. For many years, Chinese developers were driven by the “three carriages” — high turnover, high gross profit and high leverage. Developers use borrowed money to acquire land, collect presale cash before projects even start, and then borrow more money to invest in new projects. In 2018, Evergrande reported record profit of 72 billion yuan, more than double the previous year’s net. But behind that, it spent more than 100 billion yuan a year on interest. Even in good years, the company usually had negative operating cash flow, with not enough cash on hand to cover short-term loans due within a year with and presale revenue not enough to pay suppliers. In addition to borrowing from banks, Evergrande also borrows from executives and employees. When developers seek funds from banks, lenders often require personal investments from the developers’ executives as a risk-control measure, a former employee at Evergrande’s asset management department told Caixin. “At times like this, Evergrande would have an internal fund-raising campaign,” the manager said. “Either the executives would pay out of their own pockets, or they would set a goal for each division.” One crowdfunding product issued to executives was called “Chaoshoubao,” which means “super return treasure.” In 2017, Evergrande tried to obtain project financing from state-owned China Citic Bank in Shenzhen, which required personal investment from Evergrande’s executives. The company then issued Chaoshoubao to employees, promising 25% annual interest and redemption of principal and interest within two years. The minimum investment was 3 million yuan. China Citic Bank eventually agreed to provide 40 billion yuan of acquisition funds to Evergrande. In 2020, Chen Xuying, former vice president of China Citic Bank and head of the bank’s Shenzhen branch from 2012 to 2018, was sentenced to 12 years in prison for accepting bribes after issuing loans. A senior executive at Evergrande said he personally invested 1.5 million yuan and mobilized his subordinates to invest 1.5 million yuan into Chaoshoubao. Some employees would even borrow money to invest in the product because the 25% return was much higher than loan rates. When the Chaoshoubao was due for redemption in 2019, the company asked employees who bought the product to agree to a one-year extension for repayment. Then in 2020, the company asked for another one-year extension. One investor said buyers received an annualized return of 4% to 5% in the last four years, far below the 25% promised return. When Evergrande’s cash flow crisis was exposed, the company chose to repay principal only to current executives. From late August to early September, the company repaid current executives and employees about 2 billion yuan but still owed 200 million yuan to former employees, including Ren Zeping, former chief economist of Evergrande who joined Soochow Securities Co. in March. Evergrande’s wealth division also sells WMPs to the public. Most of these WMPs offer a return of 5% to 10%, with a minimum investment of 100,000 yuan, the former employee at Evergrande’s asset management department said. As the return is higher than WMPs typically sold at banks, many of Evergrande’s employees bought them and persuaded their families and friends to invest, an employee said. Usually, a 20 million yuan WMP could be sold out within five days, the employee said. The company also sells WMPs to construction partners. Evergrande would require construction companies to buy WMPs whenever it needed to pay them, a former employee at Evergrande’s construction division told Caixin. “If the construction companies are owed 1 million or 2 million yuan, we would ask them to buy 100,000–200,000 yuan of WMPs, or about 10% of their receivables,” the former employee said. Although it was not mandatory for construction companies to buy WMPs, they often would do so for the sake of maintaining a good relationship with Evergrande, the former employee said. In addition, Evergrande property owners were also buyers of the company’s WMPs. About 40 billion yuan of the WMPs are now due. “It is difficult for Evergrande to make all of the repayments at once at this moment,” said Du Liang, general manager of Evergrande’s wealth division. Evergrande initially proposed to impose lengthy repayment delays, with investments of 100,000 yuan and above to be repaid in five years. After heated protests by investors, the company tweaked its plan last week, offering three options. Investors can accept cash installments, purchase Evergrande’s properties in any city at a discount, or waive investors’ payables on residential units they have purchased. Some investors opposed the “property for debt” option, as many projects of Evergrande have been halted and there is a risk of unfinished projects in the future. “The proposals are insincere,” a petition signed by some Guangdong investors said. “It’s like buying nonperforming assets with a premium.” The petition urged the government to freeze Evergrande’s accounts and assets and demanded cash repayment of all principal and interest. Some investors chose to accept the payment scheme proposed by Evergrande. They selected Evergrande projects located in hot cities in the hope of making up for losses by resale in the future. As Evergrande owed large amounts to construction companies, more than 500 of Evergrande’s 800-plus projects across the country are now halted. The company has at least several hundred thousand units that have been presold and not delivered. It needs at least 100 billion yuan to complete construction and deliver the units, Caixin learned. Whether and how to repay WMP investors or deliver housing is Evergrande’s dilemma. Debt to construction partners and suppliers In August, the construction company that was contracted to build Evergrande’s Taicang cultural tourism city in Nantong, Jiangsu province, announced the halt of the project due to bills unpaid by Evergrande. The company, Jiangsu Nantong Sanjian Construction Group Co. Ltd., said it put 500 million yuan of its own funds into the project and Evergrande paid it less than 290 million yuan. Sanjian has other construction contracts with Evergrande and its subsidiaries. As of September, Evergrande owes the Nantong company about 20 billion yuan. As of August 2020, Evergrande had 8,441 upstream and downstream companies it was working with. If the flow of Evergrande cash stops, the normal operation of these companies will be disrupted, and some would even face the risk of bankruptcy. In Ezhou, Hubei province, five of Evergrande’s projects have been halted for more than a month, and it owes contractors about 500 million yuan. “Housing delivery involves not only hundreds of thousands of families, but also local social stability,” a banker said. The housing authorities in Guangdong province are coordinating with Evergrande and its construction partners, trying to resume construction, the banker said. Evergrande relies heavily on commercial paper to pay construction partners and suppliers. Among payments it made to Sanjian, only 8% was in cash and the rest in commercial paper. Initially, the commercial paper borrowings were mostly six-month notes with annualized interest rates of 15%–16%. Now most carry interest rates of more than 20%. Holders of such commercial paper can sell the notes at a discount to raise cash. In 2017–18, the discount rate on Evergrande paper could reach 15%–20%. Since May 2021, the few Evergrande notes that could still be sold have been discounted as much as 55%, according to a person familiar with such transactions. For small and medium-sized suppliers, holding a large amount of overdue Evergrande notes is a burden too heavy to bear. In recent months, a number of suppliers sued Evergrande for breach of contract but often settled the cases. A lawyer who represented Evergrande in related cases told Caixin that many plaintiffs chose to negotiate with Evergrande while fighting in court. Evergrande also offered a “property for debt” option to its commercial paper holders. The company said it’s in talks with suppliers and construction contractors to delay payment or offset debt with properties. From July 1 to Aug. 27, Evergrande sold properties to suppliers and contractors to offset a total of 25 billion yuan of debt. Selling assets, but not land Meanwhile, Evergrande has been offloading its assets to raise cash. Its biggest assets are its land reserves. As of June 30, it had 778 land reserve projects with a total planned floor area of 214 million square meters and an original value of 456.8 billion yuan. Additionally, it has 146 urban redevelopment projects. In the past three months, Evergrande has been in talks with China Overseas Land and Investment Ltd., China Vanke Co. Ltd. and China Jinmao Holdings Group Ltd. for possible asset sales. Shenzhen and Guangzhou SASACs have arranged for several state-owned enterprises to conduct due diligence on Evergrande’s urban redevelopment projects, a person close to the matter said. Evergrande has approached every possible buyer in the market, the person said. However, no deals have been reached. Several real estate developers that have been in contact with Evergrande told Caixin that while some of Evergrande’s projects look good on the surface, there are complex creditors’ rights that make them difficult to dispose of. Some potential buyers have said they could consider a debt-assumption acquisition, but Evergrande was reluctant to sell at a loss, Caixin learned. At an emergency staff meeting Sept. 10, the wealth management general manager Du said in a speech that most of Evergrande’s land reserve is not for sale, reflecting the position of his boss, founder and Chairman Xu Jiayin. “In China, land reserves are the most valuable assets,” Du said. “This is Evergrande’s biggest asset and last resort. “For example, for a land parcel, Evergrande’s acquisition cost is 1 billion yuan, and the land itself is worth 2 billion yuan, but the buyer may only offer 300 million yuan,” Du said. “If we sold at a loss, we would have no capital to revive.” For his part, Xu maintained that Evergrande could repay all its debts and recover as long as it turns land into houses and sells them. But even if Evergrande can quickly sell its houses, the revenue would be far from enough to pay down debt. The chance that Evergrande won’t be able to pay interest due in the third quarter is 99.99%, estimated by a banker whose employer has billions of yuan of exposure to the company. As of the end of June, Evergrande had total assets of 2.38 trillion yuan and total liabilities of 1.97 trillion yuan. Of the nearly 2 trillion yuan of debt, interest-bearing debt was 571.7 billion yuan, down about 145 billion yuan from the end of 2020. The decrease in interest-bearing debt was mostly achieved by deferred payables to suppliers. In addition to the 571.7 billion yuan of interest-bearing debt on its books, it’s not a secret that developers like Evergrande have huge off-balance sheet debt. But the amount at Evergrande is not known. In the early stage of projects, developers need to invest a lot of money, which could significantly increase the debt on the balance sheet. Companies often place these debts off their balance sheet through a variety of means. After the pre-sale of the project, or even after the cash flow of the project turns positive, these debts would be consolidated into the balance sheet in the form of equity transfer, according to a property industry insider. For example, 40 billion yuan of acquisition funds Evergrande obtained from China Citic Bank were invested in multiple projects. Among them, 10.7 billion yuan was used by Shenzhen Liangyang Industrial Co. Ltd. to acquire Shenzhen Duoji Investment Co. Ltd. As Evergrande doesn’t have an equity relationship with the two companies, this item was not required to be consolidated into Evergrande’s financial statement. Evergrande used leveraged funds to acquire equities in 10 projects, and none of them were included in its financial statement, the prospectus of its Chaoshoubao shows. Evergrande has sold equity in subsidiaries to strategic investors and promised to buy back the stakes if certain milestones can’t be reached in the future. Such equity sales are actually a form of borrowing, too. In March, Evergrande sold a stake in its online home and car sales platform Fangchebao for HK$16.4 billion ($2.1 billion) in advance of a planned U.S. share sale by the unit. If the online sales unit doesn’t complete an initial public offering on Nasdaq or any other stock exchange within 12 months after the completion of the stake sale, the unit is required to repurchase the shares at a 15% premium. Evergrande’s hidden debts also include unpaid payments to acquire equities. Dozens of small property companies have sued Evergrande demanding cancellation of their equity sales agreements with the company because Evergrande failed to pay them. They are Evergrande’s partners in local development projects. Evergrande usually paid them 30% down for equities but declined to pay the rest even after the project was completed, according to the lawsuits. A plaintiff’s lawyer told Caixin that Evergrande’s project subsidiaries don’t want to go sour with local partners, but they have no money to pay as sales from the projects have been transferred to the parent company. A total of 49 of Evergrande’s wholly owned local subsidiaries have been sued since April, according to Tianyancha, a database of publicly available corporate information. Evergrande also owes land transfer fees to some local governments. Some 20 Evergrande affiliates have not yet made payments to the city government of Lanzhou, the capital of Northwest China’s Gansu province, according to a list of 41 such firms issued in July by the city’s natural resources department. A potential default by Evergrande could spread to markets outside China as it has huge, high-interest offshore bonds. Some of its offshore bonds carry interest rates as high as 15%, a person close to the Hong Kong capital market said. UBS estimates that $19 billion of Evergrande’s liabilities are made up of outstanding offshore bonds. Evergrande has been frantically selling properties at discounts this year. In late May, it offered certain homebuyers 30% to 40% off if they paid entirely in cash. In the first half, the company reported 356 billion yuan of contracted sales, slightly higher than 349 billion yuan for the same period last year. Average selling prices in the first six months declined 11.2%. Meanwhile, payables increased 14.7% to 951 billion yuan, and sales and marketing expenses increased 30% to 17.8 billion yuan. In response to the market environment, the company increased sales commissions and marketing expenses, the company said. Compared with its competitors, Evergrande has higher capital and human costs but lower selling prices, an industry participant said. “How can it make money?” the person said. The developer reported a 29% slide in profit for the first half. Its 10.5 billion yuan of profit mainly reflected an 18.5 billion yuan gain from the sale of some shares and marked-to-market holding in internet unit Henten Networks. It reported a loss in its core property business of 4 billion yuan. Evergrande’s extremely high debt ratio, high financing cost and repeated delays in payments to suppliers, partners and local government show that its liquidity has always been tight, but on the other hand, the fact that it has survived years under this model indicates that it has always been able to generate money, a veteran investor said. Now everyone is watching whether it can dodge the bullet once again. Tyler Durden Mon, 09/20/2021 - 22:00.....»»

Category: blogSource: zerohedgeSep 21st, 2021

Futures Jump On Profit Optimism As Oil Tops $85; Bitcoin Nears $60,000

Futures Jump On Profit Optimism As Oil Tops $85; Bitcoin Nears $60,000 One day after the S&P posted its biggest one-day surge since March, index futures extended this week’s gains, helped by a stellar bank earnings, while the latest labor market data and inflation eased stagflation fears for the time being. . The 10-year Treasury yield rose and the dollar was steady. Goldman Sachs reports on Friday. At 715 a.m. ET, Dow e-minis were up 147 points, or 0.42%, S&P 500 e-minis were up 16.5 points, or 0.37%, and Nasdaq 100 e-minis were up 42.75 points, or 0.28%. Oil futures topped $85/bbl, jumping to their highest in three years amid an energy crunch that’s stoking inflationary pressures and prices for raw materials. A gauge of six industrial metals hit a record high on the London Metal Exchange.  Energy firms including Chevron and Exxon gained about half a percent each, tracking Brent crude prices that scaled the 3 year high. Solid earnings in the reporting season are tempering fears that rising costs and supply-chain snarls will hit corporate balance sheets and growth. At the same time, the wider debate about whether a stagflation-like backdrop looms remains unresolved. “We don’t sign up to the stagflation narrative that is doing the rounds,” said Hugh Gimber, global strategist at the perpetually optimistic J.P. Morgan Asset Management. “The economy is being supported by robust consumer balance sheets, rebounding business investment and a healthy labor market.” “After a choppy start to the week, equity markets appear to be leaning towards a narrative that companies can continue to grow profits, despite the combined pressures of higher energy prices and supply chain disruptions,” said Michael Hewson, chief market analyst at CMC Markets in London. Bitcoin and the crypto sector jumped after Bloomberg reported late on Thursday that the Securities and Exchange Commission is poised to allow the first U.S. Bitcoin futures exchange-traded fund to begin trading in a watershed moment for the cryptocurrency industry. Bitcoin traded off session highs having tested $60k during Asian hours, but will likely rise to new all time highs shortly. Also overnight, Joe Biden signed a bill providing a short-term increase in the debt limit, averting the imminent threat of a financial calamity. But it only allows the Treasury Department to meets its financial obligations until roughly Dec. 3, so the can has been kicked for less than two months - brace for more bitter partisan battles in the coming weeks. This week’s move into rate-sensitive FAAMG growth names looked set to continue, with their shares inching up. Moderna rose 3.0% after a U.S. FDA panel voted to recommend booster shots of its COVID-19 vaccine for Americans aged 65 and older and high-risk people. Western Digital slipped 2.5% as Goldman Sachs downgraded the storage hardware maker’s stock to “neutral” from “buy”. Here are some of the key premarket movers on Friday morning: Virgin Galactic (SPCE US) shares slump as much as 23% in U.S. premarket trading as the firm is pushing the start of commercial flights further into next year after rescheduling a test flight, disappointing investors with the unexpected delay to its space tourism business plans Cryptocurrency-exposed stocks rise in U.S. premarket trading after a report that the Securities and Exchange Commission is poised to allow the first U.S. Bitcoin futures exchange-traded fund to begin trading.  Bit Digital (BTBT US) +6.7%, Riot Blockchain (RIOT US) +4.6%, Marathon Digital (MARA US) +3.6% Alcoa (AA US) shares jump 5.6% in thin volumes after co. reported profits that beat the average analyst estimate and said it will be paying a dividend to its shareholders Moderna (MRNA US) extends Thursday’s gains; Piper Sandler recommendation on Moderna Inc. to overweight from neutral, a day after co.’s Covid-19 booster got FDA nod for use in older, high-risk people Duck Creek Technologies (DCT US) shares fell 12% in Thursday postmarket trading after the software company projected 2022 revenue that fell short of the average analyst estimate 23andMe Holdings (ME US) soared 14% in Thursday postmarket trading after EMJ Capital founder Eric Jackson called the genetics testing company “the next Roku” on CNBC Corsair Gaming (CRSR US) shares fell 3.7% in post-market trading after it cut its net revenue forecast for the full year Early on Friday, China's PBOC broke its silence on Evergrande, saying risks to the financial system are controllable and unlikely to spread. Authorities and local governments are resolving the situation, central bank official Zou Lan said. The bank has asked lenders to keep credit to the real estate sector stable and orderly. In Europe, gains for banks, travel companies and carmakers outweighed losses for utilities and telecommunications industries, pushing the Stoxx Europe 600 Index up 0.3%. Telefonica fell 3.3%, the most in more than four months, after Barclays cut the Spanish company to underweight. Temenos and Pearson both slumped more than 10% after their business updates disappointed investors. Here are some of the biggest European movers today: Devoteam shares rise as much as 25% after its controlling shareholder, Castillon, increased its stake in the IT consulting group to 85% and launched an offer for the remaining capital. QinetiQ rises as much as 5.4% following a plunge in the defense tech company’s stock on Thursday. Investec upgraded its recommendation to buy and Berenberg said the shares now look oversold. Hugo Boss climbs as much as 4.4% to the highest level since September 2019 after the German apparel maker reported 3Q results that exceeded expectations. Jefferies (hold) noted the FY guidance hike also was bigger than expected. Mediclinic rises as much as 7.7% to highest since May 26 after 1H results, which Morgan Stanley says showed strong underlying operating performance with “solid metrics.” Temenos sinks as much as 14% after the company delivered a “mixed bag” with its 3Q results, according to Baader (sell). Weakness in Europe raises questions about the firm’s outlook for a recovery in the region, the broker said. Pearson declines as much as 12%, with analysts flagging weaker trading in its U.S. higher education courseware business in its in-line results. Earlier in the session, Asian stocks headed for their best week in more than a month amid a list of positive factors including robust U.S. earnings, strong results at Taiwan Semiconductor Manufacturing Co. and easing home-loan restrictions in China.  The MSCI Asia Pacific Index gained as much as 1.3%, pushing its advance this week to more than 1.5%, the most since the period ended Sept. 3. Technology shares provided much of the boost after chip giant TSMC announced fourth-quarter guidance that beat analysts’ expectations and said it will build a fabrication facility for specialty chips in Japan. Shares in China rose as people familiar with the matter said the nation loosened restrictions on home loans at some of its largest banks.  Conditions are good for tech and growth shares now long-term U.S. yields have fallen following inflation data this week, Shogo Maekawa, a strategist at JPMorgan Asset Management in Tokyo. “If data going forward are able to provide an impression that demand is strong too -- on top of a sense of relief from easing supply chain worries -- it’ll be a reason for share prices to take another leap higher.”  Asia’s benchmark equity gauge is still 10% below its record-high set in February, as analysts stay on the lookout for higher bond yields and the impact of supply-chain issues on profit margins.  Japanese stocks rose, with the Topix halting a three-week losing streak, after Wall Street rallied on robust corporate earnings. The Topix rose 1.9% to close at 2,023.93, while the Nikkei 225 advanced 1.8% to 29,068.63. Keyence Corp. contributed the most to the Topix’s gain, increasing 3.7%. Out of 2,180 shares in the index, 1,986 rose and 155 fell, while 39 were unchanged. For the week, the Topix climbed 3.2% and the Nikkei added 3.6%. Semiconductor equipment and material makers rose after TSMC said it will build a fabrication facility for specialty chips in Japan and plans to begin production there in late 2024.  U.S. index futures held gains during Asia trading hours. The contracts climbed overnight after a report showed applications for state unemployment benefits fell last week to the lowest since March 2020.  “U.S. initial jobless claims fell sharply, and have returned to levels seen before the spread of the coronavirus,” said Nobuhiko Kuramochi, a market strategist at Mizuho Securities in Tokyo. “The fact that more people are returning to their jobs will help ease supply chain problems caused by the lack of workers.” Australian stocks also advanced, posting a second week of gains. The S&P/ASX 200 index rose 0.7% to close at 7,362.00, with most sectors ending higher.  The benchmark added 0.6% since Monday, climbing for a second week. Miners capped their best week since July 16 with a 3% advance. Hub24 jumped on Friday after Evans & Partners upgraded the stock to positive from neutral. Pendal Group tumbled after it reported net outflows for the fourth quarter of A$2.3 billion. In New Zealand, the S&P/NZX 50 index fell 0.3% to 13,012.19 In rates, the U.S. 10-year Treasury yield rose over 3bps to 1.54%. Treasuries traded heavy across long-end of the curve into early U.S. session amid earning-driven gains for U.S. stock futures. Yields are higher by more than 3bp across long-end of the curve, 10- year by 2.8bp at about 1.54%, paring its first weekly decline since August; weekly move has been led by gilts and euro-zone bonds, also under pressure Friday, with U.K. 10-year yields higher by 3.3bp. Today's bear-steepening move pares the weekly bull-flattening trend. U.S. session features a packed economic data slate and speeches by Fed’s Bullard and Williams.   In FX, the Bloomberg Dollar Spot Index was little changed even as the greenback weakened against most of its Group-of-10 peers; the euro hovered around $1.16 while European and U.S. yields rose, led by the long end. Norway’s krone led G-10 gains as oil jumped to $85 a barrel for the first time since late 2018 amid the global energy crunch; the currency rallied by as much as 0.6% to 8.4015 per dollar, the strongest level since June. New Zealand’s dollar advanced to a three-week high as bets on RBNZ’s tightening momentum build ahead of Monday’s inflation data; the currency is outperforming all G-10 peers this week. The yen dropped to a three-year low as rising equities in Asia damped demand for low-yielding haven assets. China’s offshore yuan advanced to its highest in four months while short-term borrowing costs eased after the central bank added enough medium-term funds into the financial system to maintain liquidity at existing levels. In commodities, crude futures trade off best levels. WTI slips back below $82, Brent fades after testing $85. Spot gold slips back through Thursday’s lows near $1,786/oz. Base metals extend the week’s rally with LME nickel and zinc gaining over 2%. Today's retail sales report, due at 08:30 a.m. ET, is expected to show retail sales fell in September amid continued shortages of motor vehicles and other goods. The data will come against the backdrop of climbing oil prices, labor shortages and supply chain disruptions, factors that have rattled investors and have led to recent choppiness in the market. Looking at the day ahead now, and US data releases include September retail sales, the University of Michigan’s preliminary consumer sentiment index for October, and the Empire State manufacturing survey for October. Central bank speakers include the Fed’s Bullard and Williams, and earnings releases include Charles Schwab and Goldman Sachs. Market Snapshot S&P 500 futures up 0.3% to 4,443.75 STOXX Europe 600 up 0.4% to 467.66 German 10Y yield up 2.4 bps to -0.166% Euro little changed at $1.1608 MXAP up 1.3% to 198.33 MXAPJ up 1.2% to 650.02 Nikkei up 1.8% to 29,068.63 Topix up 1.9% to 2,023.93 Hang Seng Index up 1.5% to 25,330.96 Shanghai Composite up 0.4% to 3,572.37 Sensex up 0.9% to 61,305.95 Australia S&P/ASX 200 up 0.7% to 7,361.98 Kospi up 0.9% to 3,015.06 Brent Futures up 1.0% to $84.83/bbl Gold spot down 0.5% to $1,787.54 U.S. Dollar Index little changed at 93.92 Top Overnight News from Bloomberg China’s central bank broke its silence on the crisis at China Evergrande Group, saying risks to the financial system stemming from the developer’s struggles are “controllable” and unlikely to spread The ECB has a good track record when it comes to flexibly deploying its monetary instruments and will continue that approach even after the pandemic crisis, according to policy maker Pierre Wunsch Italian Ministry of Economy and Finance says fourth issuance of BTP Futura to start on Nov. 8 until Nov. 12, according to a statement The world’s largest digital currency rose about 3% to more than $59,000 on Friday -- taking this month’s rally to over 35% -- after Bloomberg News reported the U.S. Securities and Exchange Commission looks poised to allow the country’s first futures-based cryptocurrency ETF Copper inventories available on the London Metal Exchange hit the lowest level since 1974, in a dramatic escalation of a squeeze on global supplies that’s sent spreads spiking and helped drive prices back above $10,000 a ton A more detailed look at global markets courtesy of Newsquawk Asia-Pac stocks traded higher amid tailwinds from the upbeat mood across global peers including the best day for the S&P 500 since March after strong US bank earnings, encouraging data and a decline in yields spurred risk appetite. The ASX 200 (+0.7%) was positive as the tech and mining sectors continued to spearhead the advances in the index in which the former took impetus from Wall St where the softer yield environment was conducive to the outperformance in tech, although mining giant Rio Tinto was among the laggards following weaker quarterly production results. The Nikkei 225 (+1.8%) was buoyed as exporters benefitted from the JPY-risk dynamic but with Fast Retailing failing to join in on the spoils despite an 88% jump in full-year net as its profit guidance underwhelmed with just 3% growth seen for the year ahead, while Taiwan's TAIEX (+2.2%) surged with the spotlight on TSMC earnings which reached a record high amid the chip crunch and with the Co. to also build a factory in Japan that could receive JPY 500bln of support from the Japanese government. The Hang Seng (+1.5%) and Shanghai Comp. (+0.4%) were initially indecisive amid the overhang from lingering developer default concerns although found some mild support from reports that China is to relax banks' mortgage limits through the rest of 2021. Focus was also on the PBoC which announced a CNY 500bln MLF operation, although this just matched the amount maturing this month and there are mixed views regarding prospects of a looming RRR cut with ANZ Bank's senior China strategist recently suggesting the potential for a 50bps cut in RRR or targeted MLF as early as today, although a recent poll showed analysts had pushed back their calls for a RRR cut from Q4 2021 to Q1 2022. Finally, 10yr JGBs marginally pulled back from this week’s advances after hitting resistance at the 151.50 level, with demand hampered amid the firm gains in Japanese stocks and the lack of BoJ purchases in the market today. Top Asian News Hong Kong Probes Going Concern Reporting of Evergrande U.S. Futures Hold Gains as Oil Hits 3-Year High: Markets Wrap Toyota Cuts November Outlook by 15% on Parts Shortage, Covid Yango Group Wires Repayment Fund for Onshore Bond Due Oct. 22 Bourses in Europe have held onto the modest gains seen at the cash open (Euro Stoxx 50 +0.4%; Stoxx 600 +0.3%), but the region is off its best levels with the upside momentum somewhat faded heading into the US open, and amidst a lack of fresh newsflow. US equity futures have remained in positive territory, although the latest leg lower in bonds has further capped the tech-laden NQ (+0.2%), which underperforms vs the ES (+0.3%), YM (+0.3%) and RTY (+0.7%), with traders on the lookout for another set of earnings, headlined by Goldman Sachs at 12:25BST/07:25EDT. Back to Europe, bourses see broad-based gains, whilst sectors are mostly in the green with clear underperformance experienced in defensives, with Telecoms, Utilities, Healthcare and Staples at the foot of the bunch. On the flipside, Banks reap rewards from the uptick in yields, closely followed by Travel & Leisure, Autos & Parts and Retail. Renault (+4%) drives the gains in Autos after unveiling a prototype version of the Renault Master van that will go on sale next year. Travel & Leisure is bolstered by the ongoing reopening trade with potential tailwinds heading into the Christmas period. Retail meanwhile is boosted by Hugo Boss (+1.8%) topping forecasts and upgrading its guidance. Top European News Autumn Heat May Curb European Gas Demand, Prices Next Week Bollore Looking for Buyers for Africa Logistics Ops: Le Monde U.K. Offers Foreign Butchers Visas After 6,000 Pigs Culled Europe’s Car-Sales Crash Points to Worse Year Than Poor 2020 In FX, the Greenback was already losing momentum after a relatively tame bounce on the back of Thursday’s upbeat US initial claims data, and the index failed to sustain its recovery to retest intraday highs or remain above 94.000 on a closing basis. However, the Buck did reclaim some significant and psychological levels against G10, EM currencies and Gold that was relishing the benign yield environment and the last DXY price was marginally better than the 21 DMA from an encouraging technical standpoint. Nevertheless, the Dollar remains weaker vs most majors and in need of further impetus that may come via retail sales, NY Fed manufacturing and/or preliminary Michigan Sentiment before the spotlight switches to today’s Fed speakers featuring arch hawk Bullard and the more neutral Williams. GBP/NZD/NOK - Sterling has refuelled and recharged regardless of the ongoing UK-EU rift over NI Protocol, though perhaps in part due to the fact that concessions from Brussels are believed to have been greeted with welcome surprise by some UK Ministers. Cable has reclaimed 1.3700+ status, breached the 50 DMA (at 1.3716 today) and yesterday’s best to set a marginal new w-t-d peak around 1.3739, while Eur/Gbp is edging closer to 0.8450 having clearly overcome resistance at 1.1800 in the reciprocal cross. Similarly, the Kiwi continues to derive impetus from the softer Greenback and Aud/Nzd flows as Nzd/Usd extends beyond 0.7050 and the Antipodean cross inches nearer 1.0500 from 1.0600+ highs. Elsewhere, the Norwegian Crown is aiming to add 9.7500 to its list of achievements relative to the Euro with a boost from Brent topping Usd 85/brl at one stage and a wider trade surplus. CAD - The Loonie is also profiting from oil as WTI crude rebounds through Usd 82 and pulling further away from 1.5 bn option expiry interest between 1.2415-00 in the process, with Usd/Cad towards the base of 1.2337-82 parameters. EUR/AUD/CHF/SEK - All narrowly mixed and rangy vs the Greenback, or Euro in the case of the latter, as Eur/Usd continues to straddle 1.1600, Aud/Usd churn on the 0.7400 handle, the Franc meander from 0.9219 to 0.9246 and Eur/Sek skirt 10.0000 having dipped below the round number briefly on Thursday. In commodities, WTI and Brent front month futures remain on a firmer footing, aided up the overall constructive risk appetite coupled with some bullish technical developments, as WTI Nov surpassed USD 82/bbl (vs 81.39/bbl low) and Brent Dec briefly topped USD 85/bbl (vs 84.16/bbl low). There has been little in terms of fresh fundamental catalysts to drive the price action, although Russia's Gazprom Neft CEO hit the wires earlier and suggested that reserve production capacity could meet the increase in oil demand, whilst a seasonal decline in oil consumption is possible and the oil market will stabilise in the nearest future. On the Iranian JCPOA front, Iran said it is finalising steps to completing its negotiating team but they are absolutely decided to go back to Vienna discussions and conclude the negotiations, WSJ's Norman. The crude complex seems to have (for now) overlooked reports that the White House is engaged in diplomacy" with OPEC+ members regarding output. UK nat gas prices were higher as European players entered the fray, but prices have since waned off best levels after Russian Deputy PM Novak suggested that gas production in Russia is running at maximum capacity. Elsewhere, spot gold has been trundling amid yield-play despite lower despite the Buck being on the softer side of today’s range. Spot gold failed to hold onto USD 1,800/oz status yesterday and has subsequently retreated below its 200 DMA (1,794/oz) and makes its way towards the 50 DMA (1,776/oz). LME copper prices are on a firmer footing with prices back above USD 10,000/t – supported by technicals and the overall risk tone, although participants are cognizant of potential Chinese state reserves releases. Conversely, Dalian iron ore futures fell for a third straight session, with Rio Tinto also cutting its 2021 iron ore shipment forecasts due to dampened Chinese demand. US Event Calendar 8:30am: Sept. Retail Sales Advance MoM, est. -0.2%, prior 0.7% 8:30am: Sept. Retail Sales Ex Auto MoM, est. 0.5%, prior 1.8% 8:30am: Sept. Retail Sales Control Group, est. 0.5%, prior 2.5% 8:30am: Sept. Retail Sales Ex Auto and Gas, est. 0.3%, prior 2.0% 8:30am: Oct. Empire Manufacturing, est. 25.0, prior 34.3 8:30am: Sept. Import Price Index MoM, est. 0.6%, prior -0.3%; YoY, est. 9.4%, prior 9.0% 8:30am: Sept. Export Price Index MoM, est. 0.7%, prior 0.4%; YoY, prior 16.8% 10am: Aug. Business Inventories, est. 0.6%, prior 0.5% 10am: Oct. U. of Mich. 1 Yr Inflation, est. 4.7%, prior 4.6%; 5-10 Yr Inflation, prior 3.0% 10am: Oct. U. of Mich. Sentiment, est. 73.1, prior 72.8 10am: Oct. U. of Mich. Current Conditions, est. 81.2, prior 80.1 10am: Oct. U. of Mich. Expectations, est. 69.1, prior 68.1 DB's Jim Ried concludes the overnight wrap A few people asked me what I thought of James Bond. I can’t say without spoilers so if anyone wants my two sentence review I will cut and paste it to all who care and reply! At my age I was just impressed I sat for over three hours (including trailers) without needing a comfort break. By the time you email I will have also listened to the new Adele single which dropped at midnight so happy to include that review as well for free. While we’re on the subject of music, risk assets feel a bit like the most famous Chumbawamba song at the moment. They get knocked down and they get up again. Come to think about it that’s like James Bond too. Yesterday was a strong day with the S&P 500 (+1.71%) moving back to within 2.2% of its all-time closing high from last month. If they can survive all that has been thrown at them of late then one wonders where they’d have been without any of it. The strong session came about thanks to decent corporate earnings releases, a mini-collapse in real yields, positive data on US jobless claims, as well as a further fall in global Covid-19 cases that leaves them on track for an 8th consecutive weekly decline. However, inflation remained very much on investors’ radars, with a range of key commodities taking another leg higher, even as US data on producer prices was weaker than expected. Starting with the good news, the equity strength was across the board with the S&P 500 experiencing its best daily performance since March, whilst Europe’s STOXX 600 (+1.20%) also put in solid gains. It was an incredibly broad-based move higher, with every sector group in both indices rising on the day, with a remarkable 479 gainers in the S&P 500, which is the second-highest number we’ve seen over the last 18 months. Every one of the 24 S&P 500 industry groups rose, led by cyclicals such as semiconductors (+3.12%), transportation (+2.51%) and materials (+2.43%). A positive start to the Q3 earnings season buoyed sentiment, as a number of US banks (+1.45%) reported yesterday, all of whom beat analyst estimates. In fact, of the nine S&P 500 firms to report yesterday, eight outperformed analyst expectations. Weighing in on recent macro themes, Bank of America Chief, Brian Moynihan, noted that the current bout of inflation is “clearly not temporary”, but also that he expects consumer demand to remain robust and that supply chains will have to adjust. I’m sure we’ll hear more from executives as earnings season continues today. Alongside those earnings releases, yesterday saw much better than expected data on the US labour market, which makes a change from last week’s underwhelming jobs report that showed the slowest growth in nonfarm payrolls so far this year. In terms of the details, the weekly initial jobless claims for the week through October 9, which is one of the most timely indicators we get, fell to a post-pandemic low of 293k (vs. 320k expected). That also saw the 4-week moving average hit a post-pandemic low of 334.25k, just as the continuing claims number for the week through October 2 hit a post-pandemic low of 2.593m (vs. 2.670m expected). We should get some more data on the state of the US recovery today, including September retail sales, alongside the University of Michigan’s consumer sentiment index for October. That optimism has fed through into Asian markets overnight, with the Nikkei (+1.43%), the Hang Seng (+0.86%), the Shanghai Comp (+0.29%) and the KOSPI (+0.93%) all moving higher. That came as Bloomberg reported that China would loosen restrictions on home loans amidst the concerns about Evergrande. And we also got formal confirmation that President Biden had signed the debt-limit increase that the House had passed on Tuesday, which extends the ceiling until around December 3. Equity futures are pointing to further advances in the US and Europe later on, with those on the S&P 500 (+0.30%) and the STOXX 50 (+0.35%) both moving higher. Even with the brighter news, inflation concerns are still very much with us however, and yesterday in fact saw Bloomberg’s Commodity Spot Index (+1.16%) advance to yet another record high, exceeding the previous peak from early last week. That was partly down to the continued rise in oil prices, with WTI (+1.08%) closing at $81.31/bbl, its highest level since 2014, just as Brent Crude (+0.99%) hit a post-2018 high of $84.00/bbl. Both have posted further gains this morning of +0.58% and +0.61% respectively. Those moves went alongside further rises in natural gas prices, which rose for a 3rd consecutive session, albeit they’re still beneath their peak from earlier in the month, as futures in Europe (+9.14%), the US (+1.74%) and the UK (+9.26%) all moved higher. And that rise in Chinese coal futures we’ve been mentioning also continued, with their rise today currently standing at +13.86%, which brings their gains over the week as a whole to +39.02% so far. As well as energy, industrial metals were another segment where the recent rally showed no sign of abating yesterday. On the London metal exchange, a number of multi-year milestones were achieved, with aluminum prices (+1.60%) up to their highest levels since 2008, just as zinc prices (+3.73%) closed at their highest level since 2018. Separately, copper prices (+2.56%) hit a 4-month high, and other winners yesterday included iron ore futures in Singapore (+1.16%), as well as nickel (+1.99%) and lead (+2.43%) prices in London. With all this momentum behind commodities, inflation expectations posted further advances yesterday. Indeed, the 10yr US Breakeven closed +1.0bps higher at 2.536%, which is just 3bps shy of its closing peak back in May that marked its highest level since 2013. And those moves came in spite of US producer price data that came in weaker than expected, with the monthly increase in September at +0.5% (vs. +0.6% expected). That was the smallest rise so far this year, though that still sent the year-on-year number up to +8.6% (vs. +8.7% expected). That rise in inflation expectations was echoed in Europe too, with the 10yr UK breakeven (+5.6bps) closing at its highest level since 2008, whilst its German counterpart also posted a modest +0.7bps rise. In spite of the rise in inflation expectations, sovereign bonds posted gains across the board as the moves were outweighed by the impact of lower real rates. By the end of yesterday’s session, yields on 10yr Treasuries were down -2.6bps to 1.527%, which came as the 10yr real yield moved back beneath -1% for the first time in almost a month. Likewise in Europe, yields pushed lower throughout the session, with those on 10yr bunds (-6.3bps), OATs (-6.2bps) and BTPs (-7.1bps) all moving aggressively lower. To the day ahead now, and US data releases include September retail sales, the University of Michigan’s preliminary consumer sentiment index for October, and the Empire State manufacturing survey for October. Central bank speakers include the Fed’s Bullard and Williams, and earnings releases include Charles Schwab and Goldman Sachs. Tyler Durden Fri, 10/15/2021 - 07:50.....»»

Category: personnelSource: nytOct 15th, 2021

Futures Rebound From Overnight Slide As Oil Keeps Rising

Futures Rebound From Overnight Slide As Oil Keeps Rising US equity-index futures erased earlier declines, rebounding from a loss of as much as 0.8% helped by the start of the European session and easing mounting concerns about stagflation from rising energy prices, signs of widening regulatory scrutiny by China, and the upcoming third-quarter earnings which is expected to post a sharply slower pace of growth and beats than recent record quarters. At 730am ET, Dow e-minis were up 5 points, or 0.1%, S&P 500 e-minis were up 7.25 points, or 0.16%, and Nasdaq 100 e-minis were up 46.75points, or 0.31%. Oiil rose 0.3% to $83.86/bbl while the dollar dipped and 10Y yield drifted back under 1.60%. Gains in tech stocks kept Nasdaq futures afloat on Tuesday, while energy names rose as Brent resumed gains, trading around $84/bbl on expectations that a power crisis from Asia to Europe will lift demand and tighten global balances. Higher oil prices and supply chain disruptions have set off alarm bells for businesses and consumers ahead of the third-quarter reporting season that kicks off on Wednesday with JPMorgan results.  "We believe that market participants could stay concerned over high energy prices translating into further acceleration in inflation, and thereby faster tightening by major central banks," said Charalambos Pissouros, head of research at JFD Group. In the pre-market, Tesla rose 0.7% after data showed the electric vehicle maker sold 56,006 China-made vehicles in September, the highest since it started production in Shanghai about two years ago. Oil firms including Exxon Mobil and Chevron Corp gained 0.1% and 0.3%, respectively, as Brent crude hit a near-three year high on energy crunch fears. Here are the notable movers: China’s Internet sector is one of the “most undervalued” in Morningstar’s coverage, says Ivan Su, an analyst, adding that Tencent (TCEHY US) and Netease (NTES US) are top picks MGM Resorts (MGM US) rises 2% in U.S. premarket trading after stock was upgraded to outperform from neutral and price target more than doubled to a Street-high $68 at Credit Suisse Quanterix (QTRX US) jumped 20% in Monday postmarket trading after the digital-health company announced that its Simoa phospho-Tau 181 blood test has been granted breakthrough device designation by the U.S. FDA as an aid in diagnostic evaluation of Alzheimer’s disease Relay Therapeutics (RLAY US) fell 7% in Monday postmarket trading after launching a $350 million share sale via Goldman Sachs, JPMorgan, Cowen, Guggenheim Securities Westwater Resources (WWR US) rose as much as 26% in Monday postmarket trading after its board of directors approved construction of the first phase of a production facility in Alabama for battery ready graphite products TechnipFMC (FTI US) in focus after co. was awarded a substantial long-term charter and services contract by Petrobras for the pipelay support vessel Coral do Atlântico Fastenal, which was one of the first companies to report Q3 earnings, saw its shares fall 2.4% in premarket trading on Tuesday, after the industrial distributor said the Covid-related boost was fading. The company said growth in the quarter was slightly limited by either slower expansion or contraction in sales of certain products related to the pandemic, when compared to the previous year quarter. While there was an uptick in sales of certain Covid-related supplies, the unit price of many products was down significantly, the company said in a statement.  Third-quarter sales and profit were in line with the average analyst estimate "While investors want to believe the narrative that stock markets can continue to move higher, this belief is bumping up against the reality of how the continued rise in energy prices, as well as supply-chain pressures, are likely to impact company profit margins,” said Michael Hewson, chief market analyst at CMC Markets in London. In Europe, losses led by basic resources companies and carmakers outweighed gains for utilities and tech stocks, pulling the Stoxx Europe 600 Index down 0.1%. Metals miner Rio Tinto was among the worst performers, dropping 2.7%. European equities climbed off the lows having lost over 1% in early trade. Euro Stoxx 600 was down -0.35% after dropping as much as 1.3% initially, led by basic resources companies and carmakers outweighed gains for utilities and tech stocks. The DAX is off 0.3%, FTSE 100 underperforms in a quiet morning for news flow. Miners, banks and autos are the weakest sectors after China reported a sharp drop in auto sales; utilities, tech and real estate post modest gains. European tech stocks slide, with the Stoxx Tech Index dropping as much as 1.4% in third straight decline, as another broker downgrades TeamViewer, while Prosus and chip stocks come under pressure. TeamViewer shares fall as much as 5.1% after Deutsche Bank downgrades the remote software maker to hold from buy following recent guidance cut. Asian stocks fell, halting a three-day rally as uncertainty over earnings deepened amid elevated inflation, higher bond yields and the risk of a widening Chinese crackdown on private industry. The MSCI Asia Pacific Index slid as much as 1.2%, led by technology and communication shares. Alibaba plunged 3.9% following a rally over the past week, while Samsung Electronics tumbled to a 10-month low after at least five brokers slashed their price targets, as China’s power crisis is seen worsening supply-chain disruptions. “Given the run-up in tech so far, it’s not difficult for investors to harvest profits first before figuring out if techs can maintain their growth when yields rise,” said Justin Tang, head of Asian research at United First Partners. Shares in Hong Kong and the mainland were among the worst performers after Chinese authorities kicked off an inspection of the nation’s financial regulators and biggest state-run banks in an effort to root out corruption. The MSCI Asia Pacific Index is down 12% from a February peak, with a global energy crunch lifting input prices and the debt crisis at China Evergrande Group weighing on the financial sector. Investors are waiting to see how this impacts earnings, according to Jun Rong Yeap, a market strategist at IG Asia.  “Increasing concerns on inflation potentially being more persistent have started to show up,” he said. “This comes along with the global risk-off mood overnight, as investors look for greater clarity from the earnings season on how margins are holding up, along with the corporate economic outlook.” Japan’s Topix index also fell, halting a two-day rally, amid concerns about a global energy crunch and the possibility of a widening Chinese crackdown on private industry. The Topix fell 0.7% to 1,982.68 at the 3 p.m. close in Tokyo, while the Nikkei 225 declined 0.9% to 28,230.61. SoftBank Group Corp. contributed the most to the Topix’s drop, decreasing 2.4%. Out of 2,181 shares in the index, 373 rose and 1,743 fell, while 65 were unchanged. “Market conditions were improving yesterday, but pushing for higher prices got tough when the Nikkei 225 approached its key moving averages,” said Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management.  The Nikkei’s 75-day moving average is about 28,500 and the 200-day moving average is about 28,700, so some investors were taking profits, he said. Japan’s spot power price increased to the highest level in nine months, as the global energy crisis intensifies competition for generation fuel before the winter heating season. In FX, the Bloomberg Dollar Spot Index reversed an overnight gain as the greenback slipped against all of its Group-of-10 peers. Risk sensitive Scandinavian currencies led gains, followed by the New Zealand and Australian dollars. The pound was little changed while speculators ramped up wagers on sterling’s decline at the fastest rate in more than two years, Commodity Futures Trading Commission data show, further breaking the link between anticipated rate increases and currency gains. The yen steadied after three days of declines. The Turkish lira extended its slide to a record low after President Recep Tayyip Erdogan hinted at a possible military offensive into neighboring Syria. Fixed-income was quiet by recent standards: Treasury futures were off lows of the day, improving as S&P 500 futures pare losses during European morning, and as cash trading resumed after Monday’s holiday. The 10Y yield dipped from 1.61% to 1.59% after hitting 1.65% based on futures pricing on Monday, but the big mover was on the front end, where 2-year yields climbed as much as 4bps to 0.35% the highest level since March 2020 reflecting increased expectations for Fed rate hikes, as Treasury cash trading resumed globally. Two coupon auctions during U.S. session -- of 3-and 10-year notes -- may weigh on Treasuries however.  Treasury and gilt curves bull-flatten with gilts outperforming at the back end. Bunds have a bull-steepening bias but ranges are narrow. Peripheral spreads tighten a touch with long-end Italy outperforming peers. In commodities, Crude futures drift higher in muted trade. WTI is up 0.25% near $80.70, Brent trades just shy of a $84-handle. Spot gold remains range-bound near $1,760/oz. Base metals are mixed with LME lead and nickel holding small gains, copper and aluminum in the red. Looking at the day ahead, central bank speakers include the Fed’s Vice Chair Clarida,Bostic and Barkin, as well as theECB’s President Lagarde, Makhlouf, Knot, Villeroy, Lane and Elderson. Data highlights from the US include the JOLTS job openings for August, and the NFIB’s small business optimism index for September which came in at 99.1, below last month's 100.1. The IMF will be releasing their latest World Economic Outlook. Market Snapshot S&P 500 futures little changed at 4,351.50 STOXX Europe 600 down 0.6% to 454.90 MXAP down 0.9% to 194.41 MXAPJ down 1.0% to 635.42 Nikkei down 0.9% to 28,230.61 Topix down 0.7% to 1,982.68 Hang Seng Index down 1.4% to 24,962.59 Shanghai Composite down 1.2% to 3,546.94 Sensex little changed at 60,149.85 Australia S&P/ASX 200 down 0.3% to 7,280.73 Kospi down 1.4% to 2,916.38 German 10Y yield fell 6 bps to -0.113% Euro up 0.1% to $1.1565 Brent Futures up 0.4% to $84.01/bbl Gold spot up 0.2% to $1,757.84 U.S. Dollar Index little changed at 94.29 Top Overnight Headlines from Bloomberg The EU drew record demand for its debut green bond, in the sector’s biggest-ever offering. The bloc registered more than 135 billion euros ($156 billion) in orders Tuesday for a sale of 12 billion euros of securities maturing in 2037 Investors are dumping negative-yielding debt at the fastest pace since February as concerns about inflation and reduced central bank stimulus propel global interest rates higher French President Emmanuel Macron unveiled a 30-billion-euro ($35 billion) plan to create the high-tech champions of the future and reverse years of industrial decline in the euro area’s second-largest economy British companies pushed the number of workers on payrolls above pre-coronavirus levels last month, an indication of strength in the labor market that may embolden the Bank of England to raise interest rates. As the Biden administration and governments around the world celebrate another advance toward an historic global tax accord, an obscure legal question in the U.S. threatens to tear it apart Chinese property developers are suffering credit rating downgrades at the fastest pace in five years, as a recent slump in new-home sales adds to concerns about the sector’s debt woes German investor confidence declined for a fifth month in October, adding to evidence that global supply bottlenecks and a surge in inflation are weighing on the recovery in Europe’s largest economy Social Democrat Olaf Scholz’s bid to succeed Angela Merkel as German chancellor is running into its first test as tensions emerge in talks to bridge policy differences with the Greens and pro-business Free Democrats A more detailed breakdown of global markets from Newsquawk Asian equity markets traded mostly lower following the indecisive mood stateside where the major indices gave back initial gains to finish negative amid lingering inflation and global slowdown concerns, with sentiment overnight also hampered by tighter Beijing scrutiny and with US equity futures extending on losses in which the Emini S&P retreated beneath its 100DMA. ASX 200 (-0.3%) was subdued as weakness in energy, tech and financials led the declines in Australia and with participants also digesting mixed NAB business survey data. Nikkei 225 (-0.9%) was on the backfoot after the Japan Center for Economic Research noted that GDP contracted 0.9% M/M in August and with retailers pressured after soft September sales updates from Lawson and Seven & I Holdings, while the KOSPI (-1.4%) was the laggard on return from holiday with chipmakers Samsung Electronics and SK Hynix subdued as they face new international taxation rules following the recent global minimum tax deal. Hang Seng (-1.4%) and Shanghai Comp. (-1.3%) adhered to the downbeat picture following a continued liquidity drain by the PBoC and with Beijing scrutinising Chinese financial institutions’ ties with private firms, while default concerns lingered after Evergrande missed yesterday’s payments and with Modern Land China seeking a debt extension on a USD 250mln bond to avoid any potential default. Finally, 10yr JGBs eked minimal gains amid the weakness in stocks but with demand for bonds limited after the recent subdued trade in T-note futures owing to yesterday’s cash bond market closure and following softer results across all metrics in the 30yr JGB auction. Top Asian News Alibaba Stock Revival Halted on Concerns of Rising Bond Yields Iron Ore Rally Pauses as China Steel Curbs Cloud Demand Outlook China’s Star Board Sees Rough Start to Fourth Quarter: ECM Watch Citi Lists Top Global Stock Picks for ‘Disruptive Innovations’ European bourses kicked the day off choppy but have since drifted higher (Euro Stoxx 50 -0.4%; Stoxx 600 Unch) as the region remains on standby for the next catalyst, and as US earnings season officially kicks off tomorrow – not to mention the US and Chinese inflation metrics and FOMC minutes. US equity futures have also nursed earlier losses and reside in relatively flat territory at the time of writing, with broad-based performance seen in the ES (Unch), NQ (+0.2%), RTY (-0.2%), YM (Unch). From a technical standpoint, some of the Dec contracts are now hovering around their respective 100 DMAs at 4,346 for the ES, 14,744 for the NQ, whilst the RTY sees its 200 DMA at 2,215, and the YM topped its 21 DMA at 34,321. Back to Europe, cash markets see broad-based downside with the SMI (-0.1%) slightly more cushioned amid gains in heavyweight Nestle (+0.6%). Sectors kicked off the day with a defensive bias but have since seen a slight reconfiguration, with Real Estate now the top performer alongside Food & Beverages, Tech and Healthcare. On the flip side, Basic Resources holds its position as the laggard following yesterday's marked outperformance and despite base metals (ex-iron) holding onto yesterday's gains. Autos also reside at the bottom of the bunch despite constructive commentary from China's Auto Industry Body CAAM, who suggested the chip supply shortage eased in China in September and expected Q4 to improve, whilst sources suggested Toyota aims to make up some lost production as supplies rebound. In terms of individual movers, GSK (+2.3%) shares spiked higher amid reports that its USD 54bln consumer unit has reportedly attracted buyout interest, according to sources, in turn lifting the FTSE 100 Dec future by 14 points in the immediacy. Elsewhere, easyJet (-1.9%) gave up its earlier gains after refraining on guidance, and despite an overall constructive trading update whereby the Co. sees positive momentum carried into FY22, with H1 bookings double those in the same period last year. Co. expects to fly up to 70% of FY19 planned capacity in FY22. In terms of commentary, the session saw the Germany ZEW release, which saw sentiment among experts deteriorate, citing the persisting supply bottlenecks for raw materials and intermediate products. The release also noted that 49.1% of expects still expect inflation to rise further in the next six months. Heading into earnings season, experts also expect profits to go down, particularly in export-tilted sectors such a car making, chemicals and pharmaceuticals. State-side, sources suggested that EU antitrust regulators are reportedly likely to open an investigation into Nvidia's (+0.6% Pre-Mkt) USD 54bln bid from Arm as concessions were not deemed sufficient. Top European News Soybeans Near 10-Month Low as Supply Outlook Expected to Improve EasyJet Boosts Capacity as Travel Rebound Gathers Pace Currency Traders Are Betting the BOE Is About to Make a Mistake Citi Lists Top Global Stock Picks for ‘Disruptive Innovations’ In FX, the Buck has reclaimed a bit more lost ground in consolidatory trade rather than any real sign of a change in fundamentals following Monday’s semi US market holiday for Columbus Day and ahead of another fairly light data slate comprising NFIB business optimism and JOLTS. However, supply awaits the return of cash Treasuries in the form of Usd 58 bn 3 year and Usd 38 bn 10 year notes and Fed commentary picks up pace on the eve of FOMC minutes with no less than five officials scheduled to speak. Meanwhile, broad risk sentiment has taken a knock in wake of a late swoon on Wall Street to give the Greenback and underlying bid and nudge the index up to fresh post-NFP highs within a 94.226-433 band. NZD/AUD - A slight change in fortunes down under as the Kiwi derives some comfort from the fact that the Aud/Nzd has not breached 1.0600 to the upside and Nzd/Usd maintaining 0.6950+ status irrespective of mixed NZ electric card sales data, while the Aussie takes on board contrasting NAB business conditions and confidence readings in advance of consumer sentiment, with Aud/Usd rotating either side of 0.7350. EUR/CAD/GBP/CHF/JPY - All rangy and marginally mixed against their US counterpart, as the Euro straddles 1.1560, the Loonie meanders between 1.2499-62 with less fuel from flat-lining crude and the Pound tries to keep sight of 1.3600 amidst corrective moves in Eur/Gbp following a rebound through 0.8500 after somewhat inconclusive UK labour and earnings data, but hardly a wince from the single currency even though Germany’s ZEW survey missed consensus and the institute delivered a downbeat assessment of the outlook for the coming 6 months. Elsewhere, the Franc continues to hold within rough 0.9250-90 extremes and the Yen is striving to nurse outsize losses between 113.00-50 parameters, with some attention to 1 bn option expiries from 113.20-25 for the NY cut. Note also, decent expiry interest in Eur/Usd and Usd/Cad today, but not as close to current spot levels (at the 1.1615 strike in 1.4 bn and between 1.2490-1.2505 in 1.1 bn respectively). SCANDI/EM - The Nok and Sek have bounced from lows vs the Eur, and the latter perhaps taking heed of a decline in Sweden’s registered jobless rate, but the Cnh and Cny remain off recent highs against the backdrop of more Chinese regulatory rigour, this time targeting state banks and financial institutions with connections to big private sector entities and the Try has thrown in the towel in terms of its fight to fend off approaches towards 9.0000 vs the Usd. The final straw for the Lira appeared to be geopolitical, as Turkish President Erdogan said they will take the necessary steps in Syria and are determined to eliminate threats, adding that Turkey has lost its patience on the attacks coming from Syrian Kurdish YPG controlled areas. Furthermore, he stated there is a Tal Rifaat pocket controlled by YPG below Afrin and that an operation could target that area which is under Russian protection. However, Usd/Try is off a new ATH circa 9.0370 as oil comes off the boil and ip came in above forecast. In commodities, WTI and Brent front-month futures are choppy and trade on either side of the flat mark in what is seemingly some consolidation and amid a distinct lack of catalysts to firmly dictate price action. The complex saw downticks heading into the European cash open in tandem with the overall market sentiment at the time, albeit the crude complex has since recovered off worst levels. News flow for the complex has also remained minimal as eyes now turn to any potential intervention by major economies in a bid to stem the pass-through of energy prices to consumers heading into winter. On that note, UK nat gas futures have been stable on the day but still north of GBP 2/Thm. Looking ahead, the weekly Private Inventory data has been pushed back to tomorrow on account of yesterday's Columbus Day holiday. Tomorrow will also see the release of the OPEC MOMR and EIA STEO. Focus on the former will be on any updates to its demand forecast, whilst commentary surrounding US shale could be interesting as it'll give an insight into OPEC's thinking on the threat of Shale under President Biden's "build back better" plan. Brent Dec trades on either side of USD 84/bbl (vs prev. 83.13-84.14 range) whilst WTI trades just under USD 81/bbl after earlier testing USD 80/bbl to the downside (USD 80-80.91/bbl range). Over to metals, spot gold and silver hold onto modest gains with not much to in the way of interesting price action, with the former within its overnight range above USD 1,750/oz and the latter still north of USD 22.50/oz after failing to breach the level to the downside in European hours thus far. In terms of base metals, LME copper is holding onto most of yesterday's gains, but the USD 9,500/t mark seems to be formidable resistance. Finally, Dalian and Singapore iron ore futures retreated after a four-day rally, with traders citing China's steel production regaining focus. US Event Calendar 6am: Sept. SMALL BUSINESS OPTIMISM 99.1,  est. 99.5, prior 100.1 10am: Aug. JOLTs Job Openings, est. 11m, prior 10.9m 11:15am: Fed’s Clarida Speaks at IIF Annual Meeting 12:30pm: Fed’s Bostic Speaks on Inflation at Peterson Institute 6pm: Fed’s Barkin Interviewed for an NPR Podcast DB's Jim Reid concludes the overnight wrap It’s my wife’s birthday today and the big treat is James Bond tomorrow night. However, I was really struggling to work out what to buy her. After 11.5 years together, I ran out of original ideas at about year three and have then scrambled round every year in an attempt to be innovative. Previous innovations have seen mixed success with the best example being the nearly-to-scale oil portrait I got commissioned of both of us from our wedding day. She had no idea and hated it at the closed eyes big reveal. It now hangs proudly in our entrance hall though. Today I’ve bought her a lower key gamble. Some of you might know that there is a US website called Cameo that you can pay famous people to record a video message for someone for a hefty fee. Well, all her childhood heroes on it were seemingly too expensive or not there. Then I saw that the most famous gymnast of all time, Nadia Comăneci, was available for a reasonable price. My wife idolised her as a kid (I think). So after this goes to press, I’m going to wake my wife up with a personalised video message from Nadia wishing her a happy birthday, saying she’s my perfect ten, and praising her for encouraging our three children to do gymnastics and telling her to keep strong while I try to get them to play golf instead. I’m not sure if this is a totally naff gift or inspired. When I purchased it I thought the latter but now I’m worried it’s the former! My guess is she says it’s naff, appreciates the gesture, but calls me out for the lack of chocolates. Maybe in this day and age a barrel of oil or a tank of petrol would have been the most valuable birthday present. With investor anticipation continuing to build ahead of tomorrow’s CPI release from the US, yesterday saw yet another round of commodity price rises that’s making it increasingly difficult for central banks to argue that inflation is in fact proving transitory. You don’t have to be too old to remember that back in the summer, those making the transitory argument cited goods like lumber as an example of how prices would begin to fall back again as the economy reopened. But not only have commodity aggregates continued to hit fresh highs since then, but lumber (+5.49%) itself followed up last week’s gains to hit its highest level in 3 months. Looking at those moves yesterday, it was a pretty broad-based advance across the commodity sphere, with big rises among energy and metals prices in particular. Oil saw fresh advances, with WTI (+1.47%) closing above $80/bbl for the first time since 2014, whilst Brent Crude (+1.53%) closed above $83/bbl for the first time since 2018. Meanwhile, Chinese coal futures (+8.00%) hit a record after the flooding in Shanxi province that we mentioned in yesterday’s edition, which has closed 60 of the 682 mines there, and this morning they’re already up another +6.41%. So far this year, the region has produced 30% of China’s coal supply, which gives you an idea as to its importance. And when it came to metals, aluminium prices (+3.30%) on the London Metal Exchange rose to their highest level since the global financial crisis, whilst Iron Ore futures in Singapore jumped +7.01% on Monday, and copper was also up +2.13%. The one respite on the inflation front was a further decline in natural gas prices, however, with the benchmark European future down -2.73%; thus bringing its declines to over -47% since the intraday high that was hit only last Wednesday. With commodity prices seeing another spike and inflation concerns resurfacing, this proved bad news for sovereign bonds as investors moved to price in a more hawkish central bank reaction. Yields in Europe rose across the continent, with those on 10yr bunds up +3.0bps to 0.12%, their highest level since May. The rise was driven by both higher inflation breakevens and real rates, and leaves bund yields just shy of their recent post-pandemic closing peak of -0.10% from mid-May. If they manage to surpass that point, that’ll leave them closer to positive territory than at any point since Q2 2019 when they last turned negative again. It was a similar story elsewhere, with 10yr yields on OATs (+2.6bps), BTPs (+3.9bps) and gilts (+3.1bps) likewise reaching their highest level in months. The sell-off occurred as money markets moved to price in further rate hikes from central banks, with investors now expecting a full 25 basis point hike from the Fed by the end of Q3 2022. It seems like another era, but at the start of this year before the Georgia Senate race, investors weren’t even pricing in a full hike by the end of 2023, whereas they’re now pricing in almost 4. So we’ve come a long way over 2021, though pre-Georgia the consensus CPI forecast on Bloomberg was just 2.0%, whereas it now stands at 4.3%, so it does fit with the story of much stronger-than-expected inflation inducing a hawkish response. Yesterday’s repricing came alongside a pretty minimal -0.15% move in the Euro versus the dollar, but that was because Europe was also seeing a similar rates repricing. Meanwhile, the UK saw its own ramping up of rate hike expectations, with investors pricing in at least an initial 15bps hike to 0.25% happening by the December meeting in just two months’ time. Overnight in Asia, stocks are trading in the red with the KOSPI (-1.46%), Shanghai Composite (-1.21%), Hang Seng (-1.20%), the Nikkei (-0.93%) and CSI (-0.82%) all trading lower on inflation concerns due to high energy costs and aggravated by a Wall Street Journal story that Chinese President Xi Jinping is increasing scrutiny of state-run banks and big financial institutions with inspections. Furthermore, there were signs of a worsening in the Evergrande debt situation, with the firm missing coupon payments on a 9.5% note due in 2022 and a 10% bond due in 2023. And there were fresh indications of a worsening situation more broadly, with Sinic Holdings Group Co. saying it doesn’t expect to pay the principal or interest on a $250m bond due on October 18. Separately in Japan, Prime Minister Fumio Kishida said on Monday that he will raise pay for public workers and boost tax breaks to firms that boost wages to try and improve the country’s wealth distribution. Back to yesterday, and the commodity rally similarly weighed on thin-volume equity markets, though it took some time as the S&P 500 had initially climbed around +0.5% before paring back those gains to close down -0.69%. Before the late US sell-off, European indices were subdued, but the STOXX 600 still rose +0.05%, thanks to an outperformance from the energy sector (+1.49%), and the STOXX Banks Index (+0.13%) hit a fresh two-year high as the sector was supported by a further rise in yields. On the central bank theme, we heard from the ECB’s chief economist, Philip Lane, at a conference yesterday, where he said that “a one-off shift in the level of wages as part of the adjustment to a transitory unexpected increase in the price level does not imply a trend shift in the path of underlying inflation.” So clearly making a distinction between a more persistent pattern of wage inflation, which comes as the ECB’s recent forward guidance commits them to not hiking rates “until it sees inflation reaching two per cent well ahead of the end of its projection horizon and durably for the rest of the projection horizon”, as well as having confidence that “realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at two per cent over the medium term”. Turning to the political scene, Brexit is likely to be in the headlines again today as the UK’s Brexit negotiator David Frost gives a speech in Lisbon where he’s expected to warn that the EU’s proposals on the Northern Ireland Protocol are insufficient. That comes ahead of a new set of proposals that are set to come from the EU tomorrow, with the two sides disagreeing on the extent of border controls required on trade from Northern Ireland with the rest of the UK. Those controls were put in place as part of the Brexit deal to prevent a hard border being put up between Northern Ireland and the Republic of Ireland, whilst also preserving the integrity of the EU’s single market. But the UK’s demands for adjustments have been met with opposition by the EU, and speculation has risen that the UK could trigger Article 16, which allows either side to take unilateral safeguard measures, if the protocol’s application “leads to serious economic, societal or environmental difficulties that are liable to persist, or to diversion of trade”. On the data front, there wasn’t much data to speak of with the US holiday, but Italy’s industrial production contracted by -0.2% in August, in line with expectations. To the day ahead now, andcentral bank speakers include the Fed’s Vice Chair Clarida,Bostic and Barkin, as well as theECB’s President Lagarde, Makhlouf, Knot, Villeroy, Lane and Elderson. Data highlights from the US include the JOLTS job openings for August, and the NFIB’s small business optimism index for September. In Europe, there’s also UK unemployment for August and the German ZEW Survey for October. Lastly, the IMF will be releasing their latest World Economic Outlook.     Tyler Durden Tue, 10/12/2021 - 07:56.....»»

Category: personnelSource: nytOct 12th, 2021

Futures Surge On Debt Ceiling Reprieve, Slide In Energy Prices

Futures Surge On Debt Ceiling Reprieve, Slide In Energy Prices The nausea-inducing rollercoaster in the stock market continued on Thursday, when US index futures continued their violent Wednesday reversal - the biggest since March - and surged with Nasdaq futures up more than 1%, hitting a session high, as Chinese technology stocks rebounded from a record low, investors embraced progress on the debt-ceiling impasse in Washington, a dip in oil prices eased worries of higher inflation and concerns eased about the European energy crisis fueled a risk-on mood. At 7:30am ET, S&P futures were up 44 points or 1.00% and Dow futures were up 267 points or 0.78%. Oil tumbled as much as $2, dragging breakevens and nominal yields lower, while the dollar dipped and bitcoin traded around $54,000. Wednesday's reversal started after Mitch McConnell on Wednesday floated a plan to support an extension of the federal debt ceiling into December, potentially heading off a historic default, a proposal which Democrats have reportedly agreed to after Senate Majority Leader Chuck Schumer suggested an agreement would be in place by this morning. While the deal is good news for markets worried about an imminent default, it only kicks the can to December when the drama and brinksmanship may run again. Markets have been rocked in the past month by worries about the global energy crisis, elevated inflation, reduced stimulus and slower growth. Meanwhile, the prospect of a deal to boost the U.S. debt limit into December is easing concern over political bickering, while Friday’s payrolls report may shed light on the the Federal Reserve’s timeline to cut bond purchases. “We have several things that we are watching right now -- certainly the debt ceiling is one of them and that’s been contributing to the recent volatility,” Tracie McMillion, head of global asset allocation strategy at Wells Fargo Investment Institute, said on Bloomberg Television. “But we look for these 5% corrections to add money to the equity markets.” Tech and FAAMG stocks including Apple (AAPL US +1%), Nvidia (NVDA +2%), Microsoft (MSFT US +0.9%), Tesla (TSLA US 0.8%) led the charge in premarket trading amid a dip in 10-year Treasury yields on Thursday, helped by a slide in energy prices on the back of Putin's Wednesday announcement that Russia could ramp up nat gas deliveries to Europe, something it still has clearly not done. Perhaps sensing that not all is at Putin said, after plunging on Wednesday UK nat gas futures (NBP) from 407p/therm to a low of 209, prices have ominously started to rise again. As oil fell, energy stocks including Chevron, Exxon Mobil and APA led declines with falls between 0.6% and 2.1%. Here are some of the other big movers today: Twitter (TWTR US) shares rise 2% in U.S. premarket trading after it agreed to sell MoPub to AppLovin for $1.05 billion in cash Levi Strauss (LEVI US) rises 4% in U.S. premarket trading after it boosted its adjusted earnings per share forecast for the full year; the guidance beat the average analyst estimate NRX Pharmaceuticals (NRXP US) drops in U.S. premarket trading after Relief Therapeutics sued the company, alleging breach of a collaboration pact Osmotica Pharmaceuticals (OSMT US) declined 28% in premarket trading after launching an offering of shares Rocket Lab USA (RKLB US) shares rose in Wednesday postmarket trading after the company announced it has been selected to launch NASA’s Advanced Composite Solar Sail System, or ACS3, on the Electron launch vehicle U.S. Silica Holdings (SLCA US) rose 7% Wednesday postmarket after it started a review of strategic alternatives for its Industrial & Specialty Products segment, including a potential sale or separation Global Blood Therapeutics (GBT US) climbed 2.6% in Wednesday after hours trading while Sage Therapeutics (SAGE US) dropped 3.9% after Jefferies analyst Akash Tewari kicked off his biotech sector coverage On the geopolitical front, a senior U.S. official said President Joe Biden’s plans to meet virtually with his Chinese counterpart before the end of the year. Tensions are escalating between the two countries, with U.S. Secretary of State Antony Blinken criticizing China’s recent military maneuvers around Taiwan. European equities rebounded, with the Stoxx 600 index surging as much as 1.3% boosted by news that the European Central Bank was said to be studying a new bond-buying program as emergency programs are phased out. Also boosting sentiment on Thursday, ECB Governing Council member Yannis Stournaras said that investors shouldn’t expect premature interest-rate increases from the central bank. Here are some of the biggest European movers today: Iberdrola shares rise as much as 6.8% after an upgrade at BofA, and as Spanish utilities climbed following a report that the Ministry for Ecological Transition may suspend or modify the mechanism that reduces the income received by hydroelectric, nuclear and some renewables in relation to gas prices. Hermes shares climb as much as 3.8%, the most since February, after HSBC says “there isn’t much to worry about” from a possible slowdown in mainland China or questions over trend sustainability in the U.S. Edenred shares gain as much as 5.2%, their best day since Nov. 9, after HSBC upgrades the voucher company to buy from hold, saying that Edenred, along with Experian, offers faster recurring revenue growth than the rest of the business services sector. Valeo shares gain as much as 4.9% and is Thursday’s best performer in the Stoxx 600 Automobiles & Parts index; Citi raised to neutral from sell as broker updated its model ahead of 3Q results. Sika shares rise as much as 4.2% after company confirms 2021 guidance, which Baader said was helpful amid market concerns of sequentially declining margins due to rising raw material prices. Centrica shares rise as much as 3.6% as Morgan Stanley upgrades Centrica to overweight from equalweight, saying the utility provider will add market share as smaller U.K. companies fail due to the spike in wholesale energy prices. Earlier in the session, Asian stocks rallied, boosted by a rebound in Hong Kong-listed technology shares and optimism over the progress made toward a U.S. debt-ceiling accord. The MSCI Asia Pacific Index climbed as much as 1.3%, on track for its biggest jump since Aug. 24. Alibaba, Tencent and Meituan were among the biggest contributors to the benchmark’s advance. Equity gauges in Hong Kong and Taiwan led a broad regional gain, while Japan’s Nikkei 225 also rebounded from its longest losing run since 2009. Thursday’s rally in Asia came after U.S. stocks closed higher overnight on a possible deal to boost the debt ceiling into December. Focus now shifts to the reopening of mainland China markets on Friday following the Golden Week holiday, and also the U.S. nonfarm payrolls report due that day. READ: China Tech Gauge Posts Best Day Since August After Touching Lows “Risk off sentiment has persisted due to a number of negative factors, but worry over some of these issues has been alleviated for the near term,” said Shogo Maekawa, a strategist at JPMorgan Asset Management in Tokyo. “One is that concern over stagflation has abated, with oil prices pulling back.” Sentiment toward risks assets was also supported as a senior U.S. official said President Joe Biden plans to meet virtually with Chinese President Xi Jinping before the end of the year. Of note, holders of Evergrande-guaranteed Jumbo Fortune bonds have yet to receive payment; the holders next step would be to request payment from Evergrande. The maturity of the bond in question was Sunday October 3rd, with a Monday October 4th effective due data, though the bond does have a five-day grace period only in the event that payment failure is due to an administrative/technical error. Australia's S&P/ASX 200 index rose 0.7% to close at 7,256.70. All subgauges finished the day higher, with the exception of energy stocks as Asian peers tumbled with a retreat in crude oil prices.  Collins Foods was among the top performers after the company signed an agreement to become KFC’s corporate franchisee in the Netherlands. Whitehaven tumbled, dropping the most for a session since June 17.  In New Zealand, the S&P/NZX 50 index fell 0.5% to 13,104.61. Oil extended its decline from a seven-year high as U.S. stockpiles grew more than expected, and European natural gas prices tumbled on signals from Russia it may increase supplies to the continent. The yield on the U.S. 10-year Treasury was 1.526%, little changed on the day after erasing a 2.4bp increase; bunds outperformed by ~1.5bp, gilts by less than 1bp; long-end outperformance flattened 2s10s, 5s30s by ~0.5bp each. Treasuries pared losses during European morning as fuel prices ebbed and stocks gained. Bunds and gilts outperform while Treasuries curve flattens with long-end yields slightly richer on the day. WTI oil futures are lower after Russia’s offer to ease Europe’s energy crunch. Negotiations on a short-term increase to U.S. debt-ceiling continue.    In FX, the Bloomberg Dollar Spot Index was little changed and the greenback was weaker against most Group-of-10 peers, though moves were confined to relatively tight ranges. The U.S. jobs report Friday is the key risk for markets this week as a strong print could boost the dollar. Options traders see a strong chance that the euro manages to stay above a key technical support, at least on a closing basis. Risk sensitive currencies such as the Australian and New Zealand dollars as well as Sweden’s krona led G-10 gains, while Norway’s currency was the worst performer as European natural gas and power prices tumbled early Thursday after signals from Russia it may increase supplies to the continent. The pound gained against a broadly weaker dollar as concerns over the U.K. petrol crisis eased and focus turned to Bank of England policy. A warning shot buried deep in the BoE’s policy documents two weeks ago indicating that interest rates could rise as early as this year suddenly is becoming a more distinct possibility. Australia’s 10-year bonds rose for the first time in two weeks as sentiment was bolstered by a short-term deal involving the U.S. debt ceiling. The yen steadied amid a recovery in risk sentiment as stocks edged higher. Bond futures rose as a debt auction encouraged players to cautiously buy the dip. Looking ahead, investors will be looked forward to the release of weekly jobless claims data, likely showing 348,000 Americans filed claims for state unemployment benefits last week compared with 362,000 in the prior week. The ADP National Employment Report on Wednesday showed private payrolls increased by 568,000 jobs last month. Economists polled by Reuters had forecast a rise of 428,000 jobs. This comes ahead of the more comprehensive non-farm payrolls data due on Friday. It is expected to cement the case for the Fed’s slowing of asset purchases. We'll also get the latest August consumer credit print. From central banks, we’ll be getting the minutes from the ECB’s September meeting, and also hear from a range of speakers including the ECB’s President Lagarde, Lane, Elderson, Holzmann, Schnabel, Knot and Villeroy, along with the Fed’s Mester, BoC Governor Macklem and PBoC Governor Yi Gang. Market Snapshot S&P 500 futures up 1% to 4,395.5 STOXX Europe 600 up 1.03% to 455.96 MXAP up 1.2% to 193.71 MXAPJ up 1.8% to 633.78 Nikkei up 0.5% to 27,678.21 Topix down 0.1% to 1,939.62 Hang Seng Index up 3.1% to 24,701.73 Shanghai Composite up 0.9% to 3,568.17 Sensex up 1.2% to 59,872.01 Australia S&P/ASX 200 up 0.7% to 7,256.66 Kospi up 1.8% to 2,959.46 Brent Futures down 1.8% to $79.64/bbl Gold spot up 0.0% to $1,762.96 U.S. Dollar Index little changed at 94.19 German 10Y yield fell 0.6 bps to -0.188% Euro little changed at $1.1563 Top Overnight News from Bloomberg Democrats signaled they would take up Senate Republican leader Mitch McConnell’s offer to raise the U.S. debt ceiling into December, alleviating the immediate risk of a default but raising the prospect of another bruising political fight near the end of the year The European Central Bank is studying a new bond-buying program to prevent any market turmoil when emergency purchases get phased out next year, according to officials familiar with the matter Market expectations for interest-rate hikes “are not in accordance with our new forward guidance,” ECB Governing Council member Yannis Stournaras said in an interview with Bloomberg Television Creditors have yet to receive repayment of a dollar bond they say is guaranteed by China Evergrande Group and one of its units, in what could be the firm’s first major miss on maturing notes since regulators urged the developer to avoid a near-term default Boris Johnson’s plan to overhaul the U.K. economy is a 10-year project he wants to see out as prime minister, according to a senior official. The time frame, which has not been disclosed publicly, illustrates the scale of Johnson’s gamble that British voters will accept a long period of what he regards as shock therapy to redefine Britain The U.K.’s surge in inflation has boosted the cost of investment-grade borrowing in sterling to the most since June 2020. The average yield on the corporate notes climbed just past 2%, according to a Bloomberg index A more detailed look at global markets courtesy of Newsquawk Asia-Pac stocks traded positively as the region took impetus from the mostly positive close in the US where the major indices spent the prior session clawing back opening losses, with sentiment supported amid a potential Biden-Xi virtual meeting this year, and hopes of a compromise on the debt ceiling after Senate Republican Leader McConnell offered a short-term debt limit extension to December. The ASX 200 (+0.7%) was led higher by strength in the tech sector and with risk appetite also helped by the announcement to begin easing restrictions in New South Wales from next Monday. The Nikkei 225 (+0.5%) attempted to reclaim the 28k level with advances spearheaded by tech and amid reports Tokyo is to lower its virus warning from the current top level. The Hang Seng (+3.1%) was the biggest gainer owing to strength in tech and property stocks, with Evergrande shareholder Chinese Estates surging in Hong Kong after a proposal from Solar Bright to take it private. Reports also noted that the US and China reportedly reached an agreement in principle for a Biden-Xi virtual meeting before year-end and with yesterday’s talks in Zurich between senior officials said to be more meaningful and constructive than other recent exchanges. Finally, 10yr JGBs retraced some of the prior day’s after-hours rebound with haven demand hampered by the upside in stocks and after the recent choppy mood in T-notes, while the latest enhanced liquidity auction for longer-dated JGBs resulted in a weaker bid-to-cover. Top Asian News Vietnam Faces Worker Exodus From Factory Hub for Gap, Nike, Puma Japan’s New Finance Minister Stresses FX Stability Is Vital Korea Lures Haven Seekers With Bonds Sold at Lowest Spread Africa’s Free-Trade Area to Get $7 Billion in Support From AfDB Bourses in Europe hold onto the gains seen at the cash open (Euro Stoxx 50 +1.5%; Stoxx 600 +1.1%) following on from an upbeat APAC handover, albeit the upside momentum took a pause shortly after the cash open. US equity futures are also firmer across the board but to a slightly lesser extent, with the tech-laden NQ (+1.0%) getting a boost from a pullback in yields and outperforming its ES (+0.7%), RTY (+0.6%) and YM (+0.6%). The constructive tone comes amid some positive vibes out of the States, and on a geopolitical note, with US Senate Minority Leader McConnell offered a short-term debt ceiling extension to December whilst US and China reached an agreement in principle for a Biden-Xi virtual meeting before the end of the year. Euro-bourses portray broad-based gains whilst the UK's FTSE 100 (+1.0%) narrowly lags the Euro Stoxx benchmarks, weighed on by its heavyweight energy and healthcare sectors, which currently reside at the foot of the bunch. Further, BoE's Chief Economist Pill also hit the wires today and suggested that the balance of risks is currently shifting towards great concerns about the inflation outlook, as the current strength of inflation looks set to prove more long-lasting than originally anticipated. Broader sectors initially opened with an anti-defensive bias (ex-energy), although the configuration since then has turned into more of a mixed picture, although Basic Resource and Autos still reside towards the top. Individual movers are somewhat scarce in what is seemingly a macro-driven day thus far. Miners top the charts on the last day of the Chinese Golden Week Holiday, with base metal prices also on the front foot in anticipation of demand from the nation – with Antofagasta (+5.1%), Anglo American (+4.2%) among the top gainers, whist Teamviewer (-8.2%) is again at the foot of the Stoxx 600 in a continuation of the losses seen after its guidance cut yesterday. Ubisoft (-5.1%) are also softer, potentially on a bad reception for its latest Ghost Recon game announcement. Top European News ECB’s Stournaras Reckons Investor Rate-Hike Bets Are Unwarranted Shell Flags Financial Impact of Gas Market Swings, Hurricane Johnson’s Plans for Economy Signal Ambitions for Decade in Power U.K. Grid Bids to Calm Market Saying Winter Gas Supply Is Enough In FX, the latest upturn in broad risk sentiment as the pendulum continues to swing one way then the other on alternate days, has given the Aussie a fillip along with news that COVID-19 restrictions in NSW remain on track for being eased by October 11, according to the state’s new Premier. Aud/Usd is eyeing 0.7300 in response to the above and a softer Greenback, while the Aud/Nzd cross is securing a firmer footing above 1.0500 in wake of a slender rise in AIG’s services index and ahead of the latest RBA FSR. Conversely, the Pound is relatively contained vs the Buck having probed 1.3600 when the DXY backed off further from Wednesday’s w-t-d peak to a 94.102 low and has retreated through 0.8500 against the Euro amidst unsubstantiated reports about less hawkish leaning remarks from a member of the BoE’s MPC. In short, the word is that Broadbent has downplayed the prospects of any fireworks in November via a rate hike, but on the flip-side new chief economist Pill delivered a hawkish assessment of the inflation situation in the UK when responding to a TSC questionnaire (see 10.18BST post on the Headline Feed for bullets and a link to his answers in full). Back to the Dollar index, challenger lay-offs are due and will provide another NFP guide before claims and commentary from Fed’s Mester, while from a technical perspective there is near term support just below 94.000 and resistance a fraction shy of 94.500, at 93.983 (yesterday’s low) and the aforementioned midweek session best (94.448 vs the 94.283 intraday high, so far). NZD - Notwithstanding the negative cross flows noted above, the Kiwi is also taking advantage of more constructive external and general factors to secure a firmer grip of the 0.6900 handle vs its US counterpart, but remains rather deflated post-RBNZ on cautious guidance in terms of further tightening. EUR/CHF/CAD/JPY - All narrowly mixed against their US peer and mostly well within recent ranges as the Euro reclaims 1.1500+ status in the run up to ECB minutes, the Franc consolidates off sub-0.9300 lows following dips in Swiss jobless rates, the Loonie weighs up WTI crude’s further loss of momentum against the Greenback’s retreat between 1.2600-1.2563 parameters awaiting Canada’s Ivey PMIs and a speech from BoC Governor Macklem, and the Yen retains an underlying recovery bid within 111.53-23 confines before a raft of Japanese data. Note, little reaction to comments from Japanese Finance Minister, when asked about recent Jpy weakening, as he simply said that currency stability is important, so is closely watching FX developments, but did not comment on current levels. In commodities, WTI and Brent front month futures are on the backfoot, in part amid the post-Putin losses across the Nat Gas space, with the UK ICE future dropping some 20% in early trade. This has also provided further headwinds to the crude complex, which itself tackles its own bearish omens. WTI underperforms Brent amid reports that the US was mulling a Strategic Petroleum Reserve (SPR) release and did not rule out an export ban. Desks have offered their thoughts on the development. Goldman Sachs says a US SPR release would likely be of up to 60mln barrels, only representing a USD 3/bbl downside to the year-end USD 90/bbl Brent forecast and stated that relief would only be transitory given structural deficits the market will face from 2023 onwards. GS notes that any larger price impact that further hampers US shale activity would lead to elevated US nat gas prices in 2022, and an export ban would lead to significant disruption within the US oil market, likely bullish retail fuel price impact. RBC, meanwhile, believes that these comments were to incentivise OPEC+ to further open the taps after the producers opted to maintain a plan to hike output 400k BPD/m. On that note, sources noted that the OPEC+ decision against a larger supply hike at Monday's meeting was partly driven by concern that demand and prices could weaken – this would be in-fitting with sources back in July, which suggested that demand could weaken early 2022. The downside for crude prices was exacerbated as Brent Dec fell under USD 80/bbl to a low of near 79.00/bbl (vs 81.14/bbl), whilst WTI Nov briefly lost USD 75/bbl (vs high 77.23/bbl). Prices have trimmed some losses since. Metals in comparison have been less interesting; spot gold is flat and only modestly widened its overnight range to the current 1,756-66 range, whilst spot silver remains north of USD 22.50/bbl. Elsewhere, the risk tone has aided copper prices, with LME copper still north of USD 9,000/t, whilst some also cite supply concerns as a key mining road in Peru (second-largest copper producer) was blocked, with the indigenous community planning to continue the blockade indefinitely, according to a local leader. It is also worth noting that Chinese markets will return tomorrow from their Golden Week holiday. US Event Calendar 7:30am: Sept. Challenger Job Cuts YoY, prior -86.4% 8:30am: Oct. Initial Jobless Claims, est. 348,000, prior 362,000; Continuing Claims, est. 2.76m, prior 2.8m 9:45am: Oct. Langer Consumer Comfort, prior 54.7 11:45am: Fed’s Mester Takes Part in Panel on Inflation Dynamics 3pm: Aug. Consumer Credit, est. $17.5b, prior $17b DB's Jim Reid concludes the overnight wrap On the survey, given how fascinating markets are at the moment I think the results of this month’s edition will be especially interesting. However the irony is that when things are busy less people tend to fill it in as they are more pressed for time. So if you can try to spare 3-4 minutes your help would be much appreciated. Many thanks. It was a wild session for markets yesterday, with multiple asset classes swinging between gains and losses as investors sought to grapple with the extent of inflationary pressures and potential shock to growth. However US equities closed out in positive territory and at the highs as the news on the debt ceiling became more positive after Europe went home. Before this equities had lost ground throughout the London afternoon, with the S&P 500 down nearly -1.3% at one point with Europe’s STOXX 600 closing -1.03% lower. Cyclical sectors led the European underperformance, although it was a fairly broad-based decline. However after Europe went home – or closed their laptops in many cases – the positive debt ceiling developments saw risk sentiment improve throughout the rest of New York session. The S&P rallied to finish +0.41% and is now slightly up on the week, as defensive sectors such as utilities (+1.53%) and consumer staples (+1.00%) led the index while US cyclicals fell back like their European counterparts. Small cap stocks didn’t enjoy as much of a boost as the Russell 2000 ended the day -0.60% lower, while the megacap tech NYFANG+ index gained +0.82%. Risk sentiment improved following reports that Senate Minority Leader Mitch McConnell was willing to negotiate with Democrats to resolve the debt ceiling impasse and allow Democrats to raise the ceiling until December. This means President Biden and Congressional Democrats would be able to finish their fiscal spending package – now estimated at around $1.9-2.2 trillion – and include a further debt ceiling raise into one large reconciliation package near year-end. Senate Majority Leader Schumer has not publicly addressed the deal yet, but Democrats have signaled that they’ll accept the deal, although they’ve also indicated they’d still like to pass the longer-term debt ceiling bill under regular order in a bipartisan manner when the time came near year-end. Interestingly, if we did see the ceiling extended until December, this would put another deadline that month, since the government funding extension only went through to December 3, so we could have yet another round of multiple congressional negotiations in just a few weeks’ time. The news of a Republican offer coincided with President Biden’s virtual meeting with industry leaders, where the President implored them to join him in pressuring legislators to raise the debt limit. Treasury Secretary Yellen also attended the meeting, and re-emphasised her estimate for the so-called “drop dead date” to be October 18. Potentially at risk Treasury bills maturing shortly thereafter rallied a few basis points, signaling investors took yesterday afternoon’s debt ceiling developments as positive and credible. This was a far cry from where markets opened the London session as turmoil again gripped the gas market. UK and European natural gas futures both surged around +40% to reach an intraday high shortly after the open. However, energy markets went into reverse following comments from Russian President Putin that the country was set to supply more gas to Europe and help stabilise energy markets, with European futures erasing those earlier gains to actually end the day down -6.75%, with their UK counterpart similarly reversing course to close -6.96% too. The U.K. future traded in a stunning 255 to 408 price range on the day. We shouldn’t get ahead of ourselves here though, since even with the latest reversal, prices are still up by more than five-fold since the start of the year, and this astonishing increase over recent weeks has attracted attention from policymakers across the world as governments look to step in and protect consumers and industry. In the EU, the Energy Commissioner, Kadri Simson, said that the price shock was “hurting our citizens, in particular the most vulnerable households, weakening competitiveness and adding to inflationary pressure. … There is no question that we need to take policy measures”. However, the potential response appeared to differ across the continent. French President Macron said that more energy capacity was required, of which renewables and nuclear would be key elements, while Italian PM Draghi said that joint EU gas purchases had wide support. However, Hungarian PM Orban took the opportunity to blame the European Commission, saying that the Green Deal’s regulations were “indirect taxation”, which shows how these price spikes could create greater resistance to green measures moving forward. Elsewhere, blame was also cast on carbon speculators, with Spanish environment minister Rodriguez saying that “We don’t want to be hostages of external financial investors”, and outside the EU, Serbian President Vucic said that his country could ban power exports if there were further issues, which just shows how energy has the potential to become a big geopolitical issue this winter. Those declines in natural gas prices were echoed across the energy complex, with both Brent Crude (-1.79%) and WTI (-1.90%) oil prices subsiding from their multi-year highs the previous day, just as coal also fell -10.20%. In turn, that served to alleviate some of the concerns about building price pressures and helped measures of longer-term inflation expectations decline across the board. Indeed by the close, the 10yr breakeven in the US had come down -1.4bps, and the equivalent measures in Germany (-4.6bps), Italy (-6.1bps) and the UK (-4.2bps) had likewise seen declines of their own. In spite of those moves for inflation expectations, this proved little consolation for European sovereign bonds as higher real rates put them under continued pressure, even if yields had pared back some of their gains from the morning. Yields on 10yr bunds (+0.6bps), OATs (+0.9bps) and BTPs (+3.2bps) were all at their highest levels in 3 months, whilst those on Polish 10yr debt were up +13.7bps after the central bank there unexpectedly became the latest to raise rates, with the 40bps hike to 0.5% marking the first increase since 2012. However, for the US it was a different story, with yields on 10yr Treasuries down -0.5bps to 1.521%, having peaked at 1.57% earlier in the London morning. There was a late story in Europe that could bear watching in the coming weeks as Bloomberg reported that the ECB is studying a new bond-buying tool that could help ease market volatility if a “taper tantrum”-esque move were to happen when the PEPP purchases end in March. The plan would reportedly target purchases selectively if there were to be a larger selloff in more heavily indebted economies, which differs from the existing programs that buys debt in relation to the size of each member’s economy. Asian stocks overnight have performed strongly, with the Hang Seng (+2.28%), Nikkei (+1.68%) and KOSPI (+1.61%) all advancing after the positive news on the debt-ceiling, as well on news that US President Biden was set to meeting with Chinese President Xi by the end of the year. All the indices were lifted by the IT and consumer discretionary sectors, and the Hang Seng Tech index has rebounded by +3.29% this morning. Separately, Evergrande-related news has been subsiding in recent days, but China Estates, a company controlled by a backer of Evergrande, rose 30% after the company disclosed an offer to take it private for $245mn. Otherwise, US futures are pointing to a positive start later, with those on the S&P 500 (+0.50%) and DAX (+1.19%) both advancing. Turning to Germany, exploratory talks will be commencing today between the centre-left SPD, the Greens and the Liberal FDP, who together would make up a so-called “traffic-light” coalition. That marks a boost for the SPD, who beat the CDU/CSU bloc into first place in the September 26 election, although CDU leader Armin Laschet said that his party were “still ready to hold talks”. However, the CDU/CSU have faced internal tensions after they slumped to their worst-ever election result, whilst a Forsa poll out on Tuesday said that 53% of voters wanted a traffic-light coalition, versus just 22% who favoured the Jamaica option led by the CDU/CSU. So momentum seems clearly behind the traffic light option for now. Looking at yesterday’s data, in the US the ADP’s report at private payrolls came in at an unexpectedly strong +568k (vs. +430k expected), which is the highest in their series for 3 months and comes ahead of tomorrow’s US jobs report. However in Germany, factory orders in August fell by -7.7% (vs. -2.2% expected) amidst various supply issues. To the day ahead now, and data releases include German industrial production and Italian retail sales for August, whilst in the US we’ve got the weekly initial jobless claims and August’s consumer credit.From central banks, we’ll be getting the minutes from the ECB’s September meeting, and also hear from a range of speakers including the ECB’s President Lagarde, Lane, Elderson, Holzmann, Schnabel, Knot and Villeroy, along with the Fed’s Mester, BoC Governor Macklem and PBoC Governor Yi Gang. Tyler Durden Thu, 10/07/2021 - 07:57.....»»

Category: blogSource: zerohedgeOct 7th, 2021

Futures Rebound As Yields Drop

Futures Rebound As Yields Drop U.S. index futures rebounded on Tuesday from Monday's stagflation-fear driven rout as an increase in Treasury yields abated and the greenback dropped from a 10 month high while Brent crude dropped from a 3 year high of $80/barrel after API showed a surprise stockpile build across all products. One day after one of Wall Street’s worst selloff of this year which saw the S&P's biggest one-day drop since May, dip buyers made yet another another triumphal return to global markets, with Nasdaq 100 futures climbing 130 points or 0.9% after the tech-heavy index tumbled the most since March on Tuesday as U.S. Treasury yields rose on tapering and stagflationconcerns. S&P 500 futures rose 28 points or 0.6% after the underlying gauge also slumped amid mounting concern over the debt-ceiling impasse in Washington. A key catalyst for today's easing in financial conditions was the 10-year yield shedding four basis points and the five-year rate falling below 1%. In the past five sessions, the 10Y yield rose by a whopping 25 basis point, a fast enough move to trigger VaR shocks across risk parity investors. "We think (10-year treasury yields) are likely to around 1.5% to 1.75%, so they obviously still have room to go," said Daniel Lam, senior cross-asset strategist at Standard Chartered, who added that the rise in yields was driven by the fact that the United States was almost definitely going to start tapering its massive asset purchases by the end of this year, and that this would drive a shift from growth stocks into value names. Shares of FAAMG gigatechs rose between 1% and 1.3% in premarket trading as the surge in yields eased. Oil firms and supermajors like Exxon and Chevron dipped as a rally in crude prices petered out. The S&P energy sector has gained 3.9% so far this week and is on track for its best monthly performance since February. Among stocks, Boeing rose 2.5% after it said 737 MAX test flight for China’s aviation regulator last month was successful and the planemaker hopes a two-year grounding will be lifted this year. Cybersecurity firm Fortinet Inc. led premarket gains among S&P 500 Index companies. Here are some of the other big movers this morning: Micron (MU US) shares down more than 3% in U.S. premarket trading after the chipmaker’s forecast came in well below analyst expectations. Co. was hurt by slowing demand from personal-computer makers Lucid (LCID US) shares rise 9.7% in U.S. premarket trading after the electric-vehicle company said it has started production on its debut consumer car EQT Corp. (EQT US) shares fell 4.8% in Tuesday postmarket trading after co. reports offering by certain shareholders who received shares as a part of its acquisition of Alta Resources Development’s upstream and midstream units PTK Acquisition (PTK US) rises in U.S. premarket trading after the blank-check company’s shareholders approved its combination with the Israel-based semiconductor company Valens Cal-Maine (CALM US) shares rose 4.4% postmarket Tuesday after it reported net sales for the first quarter that beat the average analyst estimate as well as a narrower-than-estimated loss Sherwin-Williams (SHW US) dropped 3.5% in Tuesday postmarket trading after its forecasted adjusted earnings per share for the third quarter missed the average analyst estimate Boeing (BA US) and Spirit Aerosystems (SPR US) climb as much as 3% after being upgraded to outperform by Bernstein on travel finally heading to inflection point The S&P 500 is set to break its seven-month winning streak as fears about non-transitory inflation, China Evergrande’s default, potential higher corporate taxes and a sooner-than expected tapering of monetary support by the Federal Reserve clouded investor sentiment in what is usually a seasonally weak month. Meanwhile, Senate Democrats are seeking a vote Wednesday on a stopgap funding bill to avert a government shutdown, but without a provision to increase the federal debt limit. On Tuesday, Jamie Dimon said a U.S. default would be “potentially catastrophic” event, in other words yet another multibillion bailout for his bank. “Many things are in flux: the pandemic is not over, the supply chain bottlenecks we are seeing are affecting all sorts of prices and we’ll need to see how it plays out because the results are not clear in terms of inflation,” Belita Ong, Dalton Investments chairman, said on Bloomberg Television. Europe’s Stoxx 600 gauge rebounded from a two-month low, rising 0.9% and reversing half of yesterday's losses. Semiconductor-equipment company ASM International posted the biggest increase on the index amid positive comments by analysts on its growth outlook. A sharp rebound during the European session marked a turnaround from the downbeat Asian session, when equities extended losses amid concerns over stagflation and China Evergrande Group’s debt crisis. Sentiment improved as a steady flow of buyers emerged in the Treasury market, ranging from foreign and domestic funds to leveraged accounts.  Here are some of the biggest European movers today: Academedia shares rise as much as 6.9% in Stockholm, the most since June 1, after the company said the number of participants for its higher vocational education has increased 25% y/y. ASM International jumps as much as 7.3%, rebounding from a three-day sell-off, boosted by supportive analyst comments and easing bond yields. GEA Group gains as much as 4.7% after the company published new financial targets through 2026, which Citigroup says are above analysts’ consensus and an encouraging signal. DSV bounces as much as 4.4% as JPMorgan upgrades to overweight, saying the recent pullback in the shares presents an opportunity. Genova Property Group falls as much as 10% in Stockholm trading after the real estate services company placed shares at a discount to the last close. ITM Power drops as much as 6.4% after JPMorgan downgrades to neutral from overweight on relative valuation, with a more mixed near-term outlook making risk/reward seem less compelling. Royal Mail slides as much as 6.2% after UBS cuts its rating to sell from buy, expecting U.K. labor shortages and wage inflation pressures to hurt the parcel service company’s profit margins. Earlier in the session, Asian equities slumped in delayed response to the US rout. MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.43% with Australia off 1.5%, and South Korea falling 2.06%. The Hong Kong benchmark shed 1.2% and Chinese blue chips were 1.1% lower. Japan's Nikkei shed 2.35% hurt by the general mood as the country's ruling party votes for a new leader who will almost certainly become the next prime minister ahead of a general election due in weeks.  Also on traders' minds was cash-strapped China Evergrande whose shares rose as much as 12% after it said it plans to sell a 9.99 billion yuan ($1.5 billion) stake it owns in Shengjing Bank. Evergrande is due to make a $47.5 million bond interest payment on its 9.5% March 2024 dollar bond, having missed a similar payment last week, but it said in the stock exchange filing the proceeds of the sale should be used to settle its financial liabilities due to Shengjing Bank. Chinese real estate company Fantasia Holdings Group is struggling to avoid falling deeper into distress, just as the crisis at China Evergrande flags broader risks to other heavily indebted developers. In Japan, the country's PGIF, or Government Pension Investment Fund, the world’s largest pension fund, said it won’t include yuan- denominated Chinese sovereign debt in its portfolio. In rates, as noted above, Treasuries lead global bonds higher, paring large portion of Tuesday’s losses with gains led by intermediates out to long-end of the curve. Treasury yields richer by up to 4bp across long-end of the curve with 10s at around 1.50%, outperforming bunds and gilts both by 2bp; front-end of the curve just marginally richer, flattening 2s10s spread by 3.2bp with 5s30s tighter by 0.5bp. Futures volumes remain elevated amid evidence of dip buyers emerging Tuesday and continuing over Wednesday’s Asia hours. Session highlights include a number of Fed speakers, including Chair Powell.     In FX, the Bloomberg Dollar Spot Index was little changed after earlier advancing, and the dollar slipped versus most of its Group-of-10 peers. The yen was the best G-10 performer as it whipsawed after earlier dropping to 111.68 per dollar, its weakest level since March 2020. The Australian dollar also advanced amid optimism over easing of Covid-related restrictions while the New Zealand dollar was the worst performer amid rising infections. The euro dropped to an 11-month low while the pound touched its weakest level since January against the greenback amid a bout of dollar strength as the London session kicked off. Confidence in the euro-area economy unexpectedly rose in September as consumers turned more optimistic about the outlook and construction companies saw employment prospects improve. The yen climbed from an 18-month low as a decline in stocks around the world helps boost demand for the currency as a haven. Japanese bonds also gained. In commodities, oil prices dropped after touching a near three-year high the day before. Brent crude fell 0.83% to $78.25 per barrel after topping $80 yesterday; WTI dipped 1.09% to $74.47 a barrel. Gold edged higher with the spot price at $1,735.6 an ounce, up 0.1% from the seven-week low hit the day before as higher yields hurt demand for the non interest bearing asset. Base metals are under pressure with LME aluminum and copper lagging. Looking at the day ahead, the biggest highlight will be a policy panel at the ECB forum on central banking featuring ECB President Lagarde, Fed Chair Powell, BoJ Governor Kuroda and BoE Governor Bailey. Other central bank speakers include ECB Vice President de Guindos, the ECB’s Centeno, Stournaras, Makhlouf, Elderson and Lane, as well as the Fed’s Harker, Daly and Bostic. Meanwhile, data releases include UK mortgage approvals for August, the final Euro Area consumer confidence reading for September, and US pending home sales for August. Market Snapshot S&P 500 futures up 0.7% to 4,371.75 STOXX Europe 600 up 0.8% to 455.97 MXAP down 1.2% to 197.38 MXAPJ down 0.7% to 635.17 Nikkei down 2.1% to 29,544.29 Topix down 2.1% to 2,038.29 Hang Seng Index up 0.7% to 24,663.50 Shanghai Composite down 1.8% to 3,536.29 Sensex down 0.4% to 59,445.57 Australia S&P/ASX 200 down 1.1% to 7,196.71 Kospi down 1.2% to 3,060.27 Brent Futures down 0.7% to $78.53/bbl Gold spot up 0.4% to $1,740.79 U.S. Dollar Index little changed at 93.81 German 10Y yield fell 1.1 bps to -0.210% Euro down 0.2% to $1.1664 Top Overnight News from Bloomberg China’s central bank governor said quantitative easing implemented by global peers can be damaging over the long term and vowed to keep policy normal for as long as possible China’s central bank injected liquidity into the financial system for a ninth day in the longest run since December as it sought to meet a surge in seasonal demand for cash China stepped in to buy a stake in a struggling regional bank from China Evergrande Group as it seeks to limit contagion in the financial sector from the embattled property developer The Chinese government is considering raising power prices for industrial consumers to help ease a growing supply crunch Japan’s Government Pension Investment Fund, the world’s largest pension fund, said it won’t include yuan-denominated Chinese sovereign debt in its portfolio. The decision comes as FTSE Russell is set to start adding Chinese debt to its benchmark global bond index, which the GPIF follows, from October Fumio Kishida is set to become Japan’s prime minister, after the ex-foreign minister overcame popular reformer Taro Kono to win leadership of the country’s ruling party, leaving stock traders feeling optimistic ECB Governing Council member Gabriel Makhlouf said policy makers must be ready to respond to persistently higher inflation that could result from lasting supply bottlenecks Inflation accelerated in Spain to the fastest pace in 13 years, evidence of how surging energy costs are feeding through to citizens around the euro-zone economy Sterling-debt sales by corporates exceeded 2020’s annual tally as borrowers rushed to secure ultra-cheap funding costs while they still can. Offerings will top 70 billion pounds ($95 billion) through Wednesday, beating last year’s total sales by at least 600 million pounds, according to data compiled by Bloomberg A more detailed look at global markets courtesy of Newsquawk Asian equity markets were pressured on spillover selling from global peers which saw the S&P 500 suffer its worst day since May after tech losses were magnified as yields climbed and with sentiment also dampened by weak data in the form of US Consumer Confidence and Richmond Fed indexes. ASX 200 (-1.1%) was heavily pressured by tech and with mining-related stocks dragged lower by weakness in underlying commodity prices, with the mood also clouded by reports that Queensland is on alert for a potential lockdown and that Australia will wind down emergency pandemic support payments within weeks. Nikkei 225 (-2.1%) underperformed amid the broad sell-off and as participants awaited the outcome of the LDP leadership vote which saw no candidate win a majority (as expected), triggering a runoff between vaccine minister Kono and former foreign minister Kishida to face off in a second round vote in which Kishida was named the new PM. KOSPI (-1.2%) was heavily pressured by the tech woes and after North Korea confirmed that yesterday’s launch was a new type of hypersonic missile. Hang Seng (+0.7%) and Shanghai Comp. (-1.8%) conformed to the broad risk aversion with tech stocks hit in Hong Kong, although the losses were milder compared to regional peers with Evergrande shares boosted after it sold CNY 10bln of shares in Shengjing Bank that will be used to pay the developer’s debt owed to Shengjing Bank, which is the Co.’s first asset sale amid the current collapse concerns although it still faces another USD 45.2mln in interest payments due today. In addition, the PBoC continued with its liquidity efforts and there was also the absence of Stock Connect flows to Hong Kong with Southbound trading already closed through to the National Holidays. Finally, 10yr JGBs were slightly higher as risk assets took a hit from the tech sell-off and with T-notes finding some reprieve overnight. Furthermore, the BoJ were also in the market for nearly JPY 1tln of JGBs mostly in 3yr-10yr maturities and there were notable comments from Japan’s GPIF that it is to avoid investments in Chinese government bonds due to concerns over China market. Top Asian News L&T Is Said in Talks to Merge Power Unit With Sembcorp India Prosecutors Seek Two Years Jail for Ghosn’s Alleged Accomplice Japan to Start Process to Sell $8.5 Billion Postal Stake Gold Climbs From Seven Week Low as Yields Retreat, Dollar Pauses Bourses in Europe are attempting to claw back some ground lost in the prior session’s global stocks rout (Euro Stoxx 50 +0.9%; Stoxx 600 +0.8%). The upside momentum seen at the cash open has somewhat stabilised amid a lack of news flow and with a busy agenda ahead from a central bank standpoint, with traders also cognizant of potential month-end influence. US equity futures have also been gradually drifting higher since the reopen of electronic trade. As things stand, the NQ (+1.0%) narrowly outperforms the ES (+0.7%), RTY (+0.8%) and YM (+0.6%) following the tech tumble in the prior session, and with yields easing off best levels. Back to European cash, major regional bourses see broad-based gains with no standout performers. Sectors are mostly in the green; Oil & Gas resides at the foot of the bunch as crude prices drift lower and following two consecutive sessions of outperformance. On the flip side, Tech resides among today’s winners in what is seemingly a reversal of yesterday’s sector configuration, although ASML (+1.3%) may be offering some tailwinds after upping its long-term outlook whilst suggesting ASML and its supply chain partners are actively adding and improving capacity to meet this future customer demand – potentially alleviating some concerns in the Auto sector which is outperforming at the time of writing. Retail also stands strong as Next (+3.0%) upped its guidance whilst suggesting the longer-term outlook for the Co. looks more positive than it had been for many years. In terms of individual movers, Unilever (+1.0%) is underpinned by source reports that the Co. has compiled a shortlist of at least four bidders for its PG Tips and Lipton Iced Tea brands for some GBP 4bln. HeidelbergCement (-1.4%) is pressured after acquiring a 45% stake in the software firm Command Alko. Elsewhere, Morrisons (+1.3%) is on the front foot as the takeover of the Co. is to be decided via an auction process as touted earlier in the month. Top European News Makhlouf Says ECB Must Be Ready to Act If Inflation Entrenched ASML to Ride Decade-Long Sales Boom After Chip Supply Crunch Spanish Inflation at 13-Year High in Foretaste of Regional Spike U.K. Mortgage Approvals Fall to 74,453 in Aug. Vs. Est. 73,000 In FX, the yield and risk backdrop is not as constructive for the Dollar directly, but the index has posted another marginal new y-t-d best, at 93.891 compared to 93.805 yesterday with ongoing bullish momentum and the bulk of the US Treasury curve remaining above key or psychological levels, in contrast to other global bond benchmarks. Hence, the Buck is still elevated and on an upward trajectory approaching month end on Thursday, aside from the fact that hedge rebalancing flows are moderately positive and stronger vs the Yen. Indeed, the Euro is the latest domino to fall and slip to a fresh 2021 low around 1.1656, not far from big barriers at 1.1650 and further away from decent option expiry interest at the 1.1700 strike (1 bn), and it may only be a matter of time before Sterling succumbs to the same fate. Cable is currently hovering precariously above 1.3500 and shy of the January 18 base (1.3520) that formed the last pillar of support for the Pound before the trough set a week earlier (circa 1.3451), and ostensibly supportive UK data in the form of BoE mortgage lending and approvals has not provided much relief. AUD/JPY - A rather odd couple in many ways given their contrasting characteristics as a high beta or activity currency vs traditional safe haven, but both are benefiting from an element of corrective trade, consolidation and short covering relative to their US counterpart. Aud/Usd is clinging to 0.7250 in advance of Aussie building approvals on Thursday and Usd/Jpy is retracing from its new 111.68 y-t-d pinnacle amidst the less rampant yield environment and weighing up the implications of ex-Foreign Minister Kishida’s run-off win in the LDP leadership contest and the PM-in-waiting’s pledge to put together a Yen tens of trillion COVID-19 stimulus package before year end. CHF/CAD/NZD - All relatively confined vs their US rival, as the Franc continues to fend off assaults on the 0.9300 level with some impetus from a significant improvement in Swiss investor sentiment, while the Loonie is striving to keep its head above 1.2700 ahead of Canadian ppi data and absent the recent prop of galloping oil prices with WTI back under Usd 75/brl from Usd 76.67 at best on Tuesday. Elsewhere, the Kiwi is pivoting 0.6950 pre-NZ building consents and still being buffeted by strong Aud/Nzd headwinds. SCANDI/EM - Not much purchase for the Sek via upgrades to Swedish GDP and inflation forecast upgrades by NIER as sentiment indices slipped across the board, but some respite for the Try given cheaper crude and an uptick in Turkish economic confidence. Conversely, the Cnh and Cny have not received their customary fillip even though the PBoC added liquidity for the ninth day in a row overnight and China’s currency regulator has tightened control over interbank trade and asked market makers to narrow the bid/ask spread, according to sources. In commodities, WTI and Brent front month futures have been trimming overnight losses in early European trade. Losses overnight were seemingly a function of profit-taking alongside the bearish Private Inventory Report – which showed a surprise build in weekly crude stocks of 4.1mln bbls vs exp. -1.7mln bbls, whilst the headline DoE looks for a draw of 1.652mln bbls. Further, there have been growing calls for OPEC+ to further open the taps beyond the monthly 400k BPD hike, with details also light on the White House’s deliberations with OPEC ahead of the decision-making meeting next week. Despite these calls, it’s worth bearing in mind that OPEC’s latest MOMR stated, “increased risk of COVID-19 cases primarily fuelled by the Delta variant is clouding oil demand prospects going into the final quarter of the year, resulting in downward adjustments to 4Q21 estimates. As a result, 2H21 oil demand has been adjusted slightly lower, partially delaying the oil demand recovery into 1H22.” Brent Dec dipped back under USD 78/bbl (vs low 763.77/bbl) after testing USD 80/bbl yesterday, whilst WTI Nov lost the USD 75/bbl handle (vs low USD 73.37/bbl). Over to metals, spot gold and silver have seen somewhat of divergence as real yields negate some effects of the new YTD peak printed by the Dollar index, whilst spot silver succumbs to the Buck. Over to base metals, LME copper trade is lacklustre as the firmer dollar weighs on the red metal. Shanghai stainless steel meanwhile extended on losses, notching the fourth session of overnight losses with desks citing dampened demand from the Chinese power crunch. US Event Calendar 7am: Sept. MBA Mortgage Applications, prior 4.9% 10am: Aug. Pending Home Sales YoY, est. -13.8%, prior -9.5% 10am: Aug. Pending Home Sales (MoM), est. 1.3%, prior -1.8% Central Bank speakers 9am: Fed’s Harker Discusses Economic Outlook 11:45am: Powell Takes Part in ECB Forum on Central Banking 11:45am: Bailey, Kuroda, Lagarde, Powell on ECB Forum Panel 1pm: Fed’s Daly Gives Speech to UCLA 2pm: Fed’s Bostic Gives Remarks at Chicago Fed Payments DB's Jim Reid concludes the overnight wrap The main story of the last 24 hours has been a big enough rise in yields to cause a major risk-off move, with 10yr Treasury yields up another +5.0bps to 1.537% yesterday, and this morning only seeing a slight -0.3bps pullback to 1.534%. At the intraday peak yesterday, they did climb as high as 1.565% earlier in the session, but this accelerated the risk off and sent yields somewhat lower intraday as a result, which impacted the European bond closes as we’ll see below. All told, US yields closed at their highest level in 3 months and up nearly +24bps since last Wednesday’s close, shortly after the FOMC meeting. That’s the largest 4-day jump in US yields since March 2020, at the outset of the pandemic and shortly after the Fed announced their latest round of QE. This all led to the worst day for the S&P 500 (-2.04%) since mid-May and the worst for the NASDAQ (-2.83%) since mid-March. The S&P 500 is down -4.06% from the highs now – trading just below the Evergrande (remember that?) lows from last week. So the index still has not seen a -5% sell-off on a closing basis for 228 days and counting. If we make it to Halloween it will be a full calendar year. Regardless, the S&P and STOXX 600 remain on track for their worst monthly performances so far this year. Those moves have continued this morning in Asia, where the KOSPI (-2.05%), Nikkei (-1.64%), Hang Seng (-0.60%), and the Shanghai Comp (-1.79%) are all trading lower. The power crisis in China is further dampening sentiment there, and this morning Bloomberg have reported that the government are considering raising prices for industrial users to ease the shortage. Separately, we heard that Evergrande would be selling its stake in a regional bank at 10 billion yuan ($1.55bn) as a step to resolve its debt crisis, and Fitch Ratings also downgraded Evergrande overnight from CC to C. However, US equity futures are pointing to some stabilisation later, with those on the S&P 500 up +0.49%. Running through yesterday’s moves in more depth, 23 of the 24 industry groups in the S&P 500 fell back yesterday with the lone exception being energy stocks (+0.46%), which gained despite the late pullback in oil prices. In fact only 53 S&P constituents gained on the day. The largest losses were in high-growth sectors like semiconductors (-3.82%), media (-3.08%) and software (-3.05%), whilst the FANG+ index was down -2.52% as 9 of the 10 index members lost ground – Alibaba’s +1.47% gain was the sole exception. Over in Europe it was much the same story, with the STOXX 600 (-2.18%) falling to its worst daily performance since July as bourses across the continent fell back, including the German DAX (-2.09%) and France’s CAC 40 (-2.17%). Back to bonds and the rise in 10yr Treasury yields yesterday was primarily led by higher real rates (+2.1bps), which hit a 3-month high of their own, whilst rising inflation breakevens (+2.3bps) also offered support. In turn, higher yields supported the US dollar, which strengthened +0.41% to its highest level since November last year, though precious metals including gold (-0.92%) fell back as investors had less need for the zero-interest safe haven. Over in Europe the sell-off was more muted as bonds rallied into the close before selling off again after. Yields on 10yr bunds (+2.4bps), OATs (+3.0bps) and BTPs (+6.1bps) all moved higher but were well off the peaks for the day. 10yr Gilts closed up +4.2bps but that was -6.6bps off the high print. And staying with the UK, sterling (-1.18%) saw its worst day this year and fell to its lowest level since January 11 as sentiment has increasingly been knocked by the optics of the fuel crisis here. Given this and the hawkish BoE last week many are now talking up the stagflation risk. On the petrol crisis it’s hard to know how much is real and how much is like an old fashion bank run fuelled mostly by wild speculation. Regardless it doesn’t look good to investors for now. All this came against the backdrop of yet further milestones on inflation expectations, as the German 10yr breakeven hit a fresh 8-year high of 1.690%, just as the Euro Area 5y5y forward inflation swap hit a 4-year high of its own at 1.789%. Meanwhile 10yr UK breakevens pulled back some, finishing -6bps lower on the day after initially spiking up nearly +5bps in the opening hours of trading. This highlights the uncertainty as to the implications of a more hawkish BoE last week. As we’ve discussed over recent days, part of the renewed concerns about inflation have come from a fresh spike in energy prices, and yesterday saw Brent crude move above $80/bbl in regards intraday trading for the first time since 2018. Furthermore, natural gas prices continued to hit fresh highs yesterday, with European futures up +2.69% to a fresh high of €78.56 megawatt-hours. That said, oil prices did pare back their gains later in the session as the equity selloff got underway, with Brent crude (-0.55%) and WTI (-0.21%) both closing lower on the day, and this morning they’ve fallen a further -1.49% and -1.54% respectively. Yesterday, Fed Chair Powell and his predecessor Treasury Secretary Yellen appeared jointly before the Senate Banking Committee. The most notable moment came from Senator Warren who criticized Chair Powell for his track record on regulation, saying he was a “dangerous man” and then saying on the record that the she would not support his re-nomination ahead of his term ending in February. Many senators, mostly Republicans, voiced concerns over inflationary pressures, but both Yellen and Powell maintained their stances that the current high level of inflation was temporary and due to the supply chain issues from Covid-19 that they expect to be resolved in time. Lastly, both Powell and Yellen warned the Senators that a potential US default would be “catastrophic” and Treasury Secretary Yellen said in a letter to Congress that the Treasury Department now estimated the US would hit the debt ceiling on October 18. So we’ve got an important few days and weeks coming up. Last night, Senate Majority Leader Schumer tried to pass a vote that would drop the threshold from 60 to a simple majority to suspend the debt limit, but GOP Senator Cruz amongst others blocked this and went forward with forcing Democrats to use the budget reconciliation measure instead. Some Democrats have pushed back saying that the budget process would take too long and increases the risk of a default. While this is all going on we’re now less than 48 hours from a US government shutdown as it stands, though there seems to be an agreement on the funding measure if it were to be raised as clean bill without the debt ceiling provisions. There is also other business in Washington due tomorrow, with the bipartisan infrastructure bill with $550bn of new spending up for a vote. While the funding bill is the higher short-term priority, there was news yesterday that progressive members of the House of Representatives may try and block the infrastructure bill if it comes up ahead of the budget reconciliation vote. That was according to Congressional Progressive Caucus Chair Jayapal who said “Progressives will vote for both bills, but a majority of our members will only vote for the infrastructure bill after the President’s visionary Build Back Better Act passes.” The infrastructure bill could be tabled once again as there is no real urgency to get it voted on until the more pressing debt ceiling and funding bill issues are resolved. Democratic leadership is trying to thread a needle and the key sticking point appears to be if the moderate and progressive wing can agree on the budget quickly enough to beat the clock on the US defaulting on its debt. Shifting back to central bankers, ECB President Lagarde warned against withdrawing stimulus too rapidly as a response to inflationary pressures. She contested that there are “no signs that this increase in inflation is becoming broad-based across the economy,” and continued that the “key challenge is to ensure that we do not overreact to transitory supply shocks that have no bearing on the medium term.” Similar to her US counterpart, Lagarde cited higher energy prices and supply-chain breakdowns as the root cause for the current high inflation data and argued these would recede in due time. The ECB continues to strike a more dovish tone than the Fed and BoE. Speaking of inflation, DB’s chief European economist, Mark Wall, has just put out a podcast where he discusses the ECB, inflation and the value of a flexible asset purchase programme. He and his team have a baseline assumption that the ECB will double the pace of their asset purchases to €40bn per month to smooth the exit from the Pandemic Emergency Purchase Programme, but the upward momentum in the inflation outlook and the latest uncertainty from recent supply shocks puts a premium on policy flexibility. You can listen to the podcast "Focus Europe: Podcast: ECB, inflation and the value of a flexible APP" here. In Germany, there weren’t a great deal of developments regarding the election and coalition negotiations yesterday, but NTV reported that CSU leader Markus Söder had told a regional group meeting of the party that he expected the next government would be a traffic-light coalition of the SPD, the Greens and the FDP. Speaking to reporters later in the day, he went onto say that the SPD’s Olaf Scholz had the best chance of becoming chancellor, and that the SPD had the right to begin coalition negotiations. Running through yesterday’s data, the Conference Board’s consumer confidence reading in the US for September fell to 109.3 (vs. 115.0 expected), which marks the third consecutive decline in the reading and the lowest it’s been since February. Meanwhile house prices continued to rise, with the FHFA’s house price index for July up +1.4% (vs. +1.5% expected), just as the S&P CoreLogic Case-Shiller index saw a record +19.7% increase in July as well. To the day ahead now, and the biggest highlight will be a policy panel at the ECB forum on central banking featuring ECB President Lagarde, Fed Chair Powell, BoJ Governor Kuroda and BoE Governor Bailey. Other central bank speakers include ECB Vice President de Guindos, the ECB’s Centeno, Stournaras, Makhlouf, Elderson and Lane, as well as the Fed’s Harker, Daly and Bostic. Meanwhile, data releases include UK mortgage approvals for August, the final Euro Area consumer confidence reading for September, and US pending home sales for August. Tyler Durden Wed, 09/29/2021 - 07:42.....»»

Category: blogSource: zerohedgeSep 29th, 2021

Futures Slide, Nasdaq Plunges As Yields Surge And Oil Tops $80

Futures Slide, Nasdaq Plunges As Yields Surge And Oil Tops $80 For much of 2021, a vocal contingent of market bulls had claimed that there is no way the broader market could sell off as long as the gigacap tech "general" refused to drop. Well, it looks like that day is finally upon us because this morning US equity futures are sliding again, continuing their Monday drop as yields from the US to Germany again, the 10Y TSY rising as high as 1.55%, driven to an extent by Fed tapering fears but mostly by the surge in oil which has pushed Brent above $80, the highest price since late 2018. The dollar gained amid the deteriorating global supply crunch from oil to semiconductors. The surge in oil sparked a new round of stagflation fears, sending Nasdaq futures down 240 points or 1.3% as the yield on the benchmark 10-year U.S. Treasury climbed sharply. S&P 500 and Dow Jones futures also retreated, with spoos sliding below 4,400 as to a session low of 4,390. Rising bond yields prompted a shift from growth to cyclical stocks in the United States, in a move that analysts expect could become more permanent after a prolonged period of supressed bond yields. The premarket selloff was led by semiconductor stocks which tracked similar falls for European peers, as a rising 10-year Treasury yield puts pressure on the tech sector. Applied Materials Inc. led a slump in chip stocks in New York premarket trading while Nvidia was down 2.6%, AMD -2.1%, Applied Materials -2.9%, Micron -1.6%. Meanwhile retail trader favorite meme stock Naked Brand Group, an underwear and swimwear retailer, rises again after having surged 40% in the past two trading sessions after Chairman Justin Davis-Rice said in a letter to shareholders that he believes the company has found a “disruptive” potential acquisition in the clean technology sector. Frequency Electronics also soared after being awarded a contract by the Office of Naval Research to develop an atomic clock. Chinese stocks listed in the U.S. were mixed and semiconductor stocks declined. Here are some of the other notable U.S. movers today: iPower (IPW US) shares rise as much as 61% in U.S. premarket trading after the online hydroponics equipment retailer posted 4Q and FY21 earnings Alibaba (BABA US) rises 2.5% in U.S. premarket trading after the company’s shares listed in Hong Kong rose, adding to the Hang Seng Tech Index’s gains Frequency Electronics (FEIM US) soars 20% in U.S. premarket trading after being awarded a contract by the Office of Naval Research to develop an atomic clock Concentrix (CNXC) jumped 5.9% in Monday after hours trading after setting its first dividend payment and buyback program since being spun off from from Synnex in December Brookdale Senior Living (BKD US) shares fell in extended trading on Monday after announcing a $200 million convertible bond offering Altimmune (ALT US) rose as much as 4.2% in Monday postmarket trading on plans to announce results for an early stage study of ALT-801 in overweight people on Tuesday Ziopharm Oncology (ZIOP US) fell in extended trading after company said it cut about 60 positions, or a more than 50% reduction in personnel, to extend its cash runway into 1H 2023 Montrose Environmental Group (MEG US) was down 2.8% Monday postmarket after offering shares via JPMorgan, BofA Securities, William Blair The main catalyst for the stock selloff was the continued drop in Treasurys which sent the 10-year Treasury rising as high as 1.55% while shorter-dated rates surged toward pre-pandemic levels. This in turn was driven by the relentless meltup in commodities: overnight Brent roared above $80 a barrel - on its way to Goldman's revised $90 price target - on louder signs that demand is running ahead of supply and depleting inventories as the world finds itself in an unprecedented energy crisis. The international crude benchmark extended a recent run of gains to hit the highest since October 2018, while West Texas Intermediate also climbed. Oil’s latest upswing has come with a flurry of bullish price predictions from banks and traders, forecasts for surging demand this winter, and speculation the industry isn’t investing enough to maintain supplies. The jump to $80 also is adding inflationary pressure to the global economy at a time when prices of energy commodities are soaring. European natural gas, carbon permits and power rose to fresh records Tuesday, with little sign of the rally slowing. As Bloomberg notes, traders have begun reassessing valuations amid multiplying global risks, while Fed officials have communicated increasingly hawkish signals in recent days as supply-chain bottlenecks threaten to keep inflation elevated. China’s growth slowdown which saw Goldman lower its q/q Q3 GDP forecast to a flat 0.0%, and a debt crisis in the nation’s property market.have also fueled the risk-off shift. "Central bankers have set out how they want to normalize monetary policy for some time,” Chris Iggo, chief investment officer for core investments at AXA Investment Managers, said in a note. “That process could start soon. The realization of this has the potential to provoke some volatility in rates and equities." Elsewhere, European stocks also declined with the Stoxx Europe 600 dragged down most by technology shares. Europe’s Stoxx Tech Index drops as much as 2.8% to a five-week low after falling 1.5% on Monday having previously touched its highest level since 2000 earlier in the month. Single-stock downgrades also weighed. Stocks which performed particularly well this year are among the biggest fallers, with chip equipment makers BE Semi -4.6% and ASML -4.4%, and chipmaker Nordic Semi down 4.2%. Among other laggards, Logitech drops as much as 8.5% after being downgraded to underweight at Morgan Stanley. Earlier in the session, Asian stocks fell for the first time in four days as declines in technology names overshadowed a rally in energy shares.  The MSCI Asia Pacific Index dropped as much as 0.7%, with a jump in U.S. Treasury yields weighing on richly-valued tech stocks. That’s even as the region’s oil and gas shares climbed amid signs of a global energy crunch. Chipmakers Taiwan Semiconductor Manufacturing and Samsung Electronics were the biggest drags on the Asian benchmark. “The climb in yields led to the selling of growth stocks that have been strong, with investors rotating into names that are sensitive to business cycles - not unlike what happened in U.S. equities,” said Shutaro Yasuda, an analyst at Tokai Tokyo Research Center.  Asian equities have been recovering after being whipsawed by concerns over any fallout from China Evergrande Group’s debt troubles. As worries over the distressed property developer abate, the pace of rise in Treasury yields and global inflation data are being closely watched for clues on the U.S. Federal Reserve’s policy stance. Australia’s equity benchmark was among the biggest losers in Asia Tuesday, dragged down by losses in mining and healthcare stocks. Still, broad-based gains in oil explorers and refiners helped mitigate the Asian market’s retreat. In South Korea, importers and distributors of liquefied petroleum gas and liquefied natural gas rallied as the price of natural gas jumped. The future of Evergrande is being forensically scrutinized by investors after the company last Friday did not meet a deadline to make an interest payment to offshore bond holders. Evergrande has 30 days to make the payment before it falls into default and Shenzen authorities are now investigating the company's wealth management unit. Without making reference to Evergrande, the People's Bank of China (PBOC) said Monday in a statement posted to its website that it would "safeguard the legitimate rights of housing consumers". Widening power shortages in China, meanwhile, halted production at a number of factories including suppliers to Apple Inc and Tesla Inc and are expected to hit the country's manufacturing sector and associated supply chains. Analysts cautioned the ongoing blackouts could affect the country's listed industrial stocks. "What we see in China with the developers and the blackouts is going to be a negative weight on the Asian markets," Tai Hui, JPMorgan Asset Management's Asian chief market strategist told Reuters. "Most people are trying to work out the potential contagion effect with Evergrande and how far and wide it could go. We keep monitoring the policy response and we have started to see some shift towards supporting homebuyers which is what we have been expecting." In rates, as noted above, the selloff in Treasuries gathered pace in Asia, early Europe session leaving yields cheaper by 3.5bp to 5.5bp across the curve with 20s and 30s extending above 2% and 10-year through 1.50%. Treasury 10-year yields traded around 1.53%, cheaper by 4.5bp on the day after topping at 1.55%, highest since mid-June; in front- and belly, 2- and 5-year yields remain near cheapest levels in at least 18 months; in 10-year sector, gilts lag by 3bp vs. Treasuries while German yields are narrowly richer. Gilts underperformed further, where long-end yields are cheaper by up to 7.5bp on the day. Treasury futures volumes over Asia, early European session were at more than twice usual levels, with most activity seen in 10-year note contract; eurodollar futures volumes were also well above recent average. With recent aggressive move higher in yields, threat of convexity hedging has exacerbated moves as rate hike premium continues to filter into the curve after last week’s FOMC. Auctions conclude Tuesday with 7-year note sale, while busy Fed speaker slate includes Fed Chair Powell. In FX, the Bloomberg dollar index reached the highest level in more than a month as rising energy costs drove up Treasury yields for a fourth session. The dollar gained against all its peers; Japan’s currency slid for a fifth day against the greenback before a speech Tuesday from Fed Chair Jerome Powell who will say inflation is elevated and is likely to remain so in coming months, according to prepared remarks. Treasury two-year yields rose to the highest since March 2020. “Dollar-yen saw the clearest expression of Treasury yield increases and we attributed this divergence to the surge in energy prices,” says Christopher Wong, senior foreign-exchange strategist at Malayan Banking in Singapore. U.S. natural gas futures soared to their highest since February 2014 on concern over tight inventories. Brent oil topped $80 a barrel amid signs demand is outrunning supply. The euro slipped to hit its lowest level since Aug. 20, nearing the year-to-date low of $1.1664. The Treasury yield curve bear steepened; euro curves followed suit, with the yield on U.K. 10-year notes soaring past 1% for the first time since March 2020 on the prospects for Bank of England policy tightening. In commodities, Crude futures extend Asia’s gains. WTI rises as much as 1.6% to highs of $76.67 before stalling. Brent holds above $80. Spot gold trades around last week’s lows near $1,740/oz. Base metals are mixed: LME aluminum outperforming, rising as much as 1.1%; nickel and copper are in the red. Looking at the day ahead, one of the main highlights will be the appearance of Fed Chair Powell, and Treasury Secretary Yellen at the Senate Banking Committee. Otherwise, central bank speakers include ECB President Lagarde, Vice President de Guindos, and the ECB’s Schnabel, Panetta and Kazimir, along with the BoE’s Mann and the Fed’s Evans, Bowman and Bostic. US data highlights include the US Conference Board’s consumer confidence indicator for September and the FHFA house price index for July. Market Snapshot S&P 500 futures down 0.7% to 4,403.50 STOXX Europe 600 down 1.2% to 456.83 MXAP down 0.4% to 200.06 MXAPJ down 0.4% to 641.05 Nikkei down 0.2% to 30,183.96 Topix down 0.3% to 2,081.77 Hang Seng Index up 1.2% to 24,500.39 Shanghai Composite up 0.5% to 3,602.22 Sensex down 1.4% to 59,209.94 Australia S&P/ASX 200 down 1.5% to 7,275.55 Kospi down 1.1% to 3,097.92 Brent Futures up 0.8% to $80.15/bbl Gold spot down 0.4% to $1,742.61 U.S. Dollar Index up 0.20% to 93.57 German 10Y yield rose 2.7 bps to -0.196% Euro down 0.1% to $1.1681 Top Overnight News from Bloomberg Chinese authorities are striving to signal to traders that whatever happens to China Evergrande Group, its debt crisis won’t spiral out of control or derail the economy Brent oil roared above $80 a barrel, the latest milestone in a global energy crisis, on signs that demand is running ahead of supply and depleting inventories As the dust settles on Germany’s election, control over the finances of Europe’s largest economy could fall to a 42-year-old former tech entrepreneur who wants to lower taxes and tighten spending Wells Fargo agreed to pay $37 million in penalties and forfeiture to settle U.S. claims that it overcharged almost 800 commercial customers that used its foreign exchange services, the latest in a series of scandals at the bank A more detailed look at global markets courtesy of Newsquawk Asian equity markets traded mixed following on from a Wall Street lead where value outperformed growth and tech suffered as yields rose. ASX 200 (-1.5%) was the laggard with losses in healthcare, gold miners and tech frontrunning the declines which dragged the index beneath 7300. Nikkei 225 (-0.2%) was lacklustre and briefly approached 30k to the downside but then bounced off worse levels amid a softer currency, while the KOSPI (-1.1%) also declined following a suspected North Korean ballistic missile launch and with a recent South Korean court order to sell seized Mitsubishi Heavy assets as compensation for wartime forced labour, threatening a flare up of tensions between Japan and South Korea. Hang Seng (+1.2%) and Shanghai Comp. (+0.5%) were underpinned after the PBoC continued to inject liquidity ahead of the approaching National Day holidays and with Hong Kong led higher by strength in property names after the PBoC stated it will safeguard legitimate rights and interests of housing consumers which also provided Evergrande-related stocks further reprieve from their recent sell-off. Finally, 10yr JGBs retreated on spillover selling from T-notes after yields rose on the back of further Fed taper rhetoric and with prices not helped by the uninspiring 2yr and 5yr auctions stateside, while weaker results at the 40yr JGB auction also provided a headwind for prices. Top Asian News Top-Performing Global Luxury Stock Seen Cooling After 680% Gain China Power Price Hike Sought Amid Supply Crunch: Energy Update Macau Evacuates Airport Quarantine Hotel After Outbreak Iron Ore Dips Again as China Power Crisis Adds to Steel Curbs Bourses in Europe extended on the losses seen at the cash open and trade lower across the board (Euro Stoxx 50 -1.7%; Stoxx 600 -1.7%) as sentiment retreated from a mixed APAC handover as month-end looms alongside tier 1 data and a slew of central bank speakers. US equity futures have also succumbed to the mood in Europe alongside the surge in global yields – which takes its toll on the NQ (-1.5%) vs the ES (-0.8%), YM (-0.4%) and RTY (-0.3%). From a more technical standpoint, ESZ1 fell under its 50 DMA (4,431) and tested the 4,400 level to the downside, whilst NQZ1 briefly fell under 15k and the YMZ1 inches towards its 100 DMA (34,489). Back to Europe, the FTSE 100 (-0.4%) sees losses to a lesser extent vs its European peers as energy prices and yields keep the index oil giants and banks supported – with some of the top gainers including Shell (+2.8%), BP (+2.1%). Sectors in Europe are predominantly in the red, but Oil & Gas buck the trend. Sectors also portray more of a defensive bias, whilst the downside sees Tech, Real Estate, and Travel & Leisure at the foot of the bunch, with the former hit by the rise in yields, which sees the US 10yr further above 1.50%, the 20yr above 2.00% and the UK 10yr hitting 1.00% for the first time since March 2020. In terms of individual movers, Smiths Group (+3.8%) is at the top of the Stoxx 600 following encouraging earnings. ING (+0.3%) holds onto gains after sources noted SocGen's (-0.6%) interest in ING's retail banking arm. Finally, chip-maker ASM International (-3.5%) has succumbed to the broader tech weakness despite upping its guidance and announcing capacity expansion by early 2023. Top European News U.K. 10-Year Yield Rises Past 1% for First Time Since March 2020 Goldman’s Petershill Unit Valued at $5.5 Billion in U.K. IPO Go-Ahead Sinks as U.K. Takes Over Southeastern Rail Franchise Hedge Funds and Private Equity Are Targeting European Soccer In FX, It took a while for the index to breach resistance ahead of 93.500, but when US Treasuries resumed their bear-steepening run and the intensity of the moves in futures and cash picked up pace the break beyond the half round number was relatively quick and decisive. Indeed, the DXY duly surpassed its post-FOMC peak (93.526) and a prior recent high from August 19 (93.587) on the way to reaching 93.619 amidst almost all round Dollar gains, as 5, 10, 20 and 30 year yields all rallied through or further above psychological levels (such as 1%, 1.5% and 2% in the case of the latter two maturities). However, petro and a few other commodity currencies are displaying varying degrees of resilience in the face of general Greenback strength that is compounded by buy signals for September 30 rebalancing on spot month, quarter and half fy end. Ahead, trade data, consumer confidence, more regional Fed surveys, speakers and the 7 year auction. NZD/CHF/JPY/AUD - The Kiwi was already losing altitude above 0.7000 vs its US counterpart and 1.0400 against the Aussie on Monday, so the deeper retreat is hardly surprising to circa 0.6975 and 1.0415 awaiting some independent impetus that may come via NZ building consents tomorrow. Meanwhile, the Franc has recoiled towards 0.9300 in advance of comments from SNB’s Maechler and the Yen continues to suffer on the aforementioned rampant yield and steeper curve trajectory on top of a more pronounced 1+ sd portfolio hedge selling requirement vs the Buck, with Usd/Jpy meandering midway between 110.94-111.42 parameters irrespective of renewed risk aversion due to same bond rout dynamic. Back down under, Aud/Usd has faded from around 0.7311 to the low 0.7260 area, though holding up a bit better in wake of not quite as weak as forecast final retail sales overnight. CAD/EUR/GBP - All softer against their US rival, but the Loonie putting up a decent fight with ongoing help from WTI crude that has now topped Usd 76.50/brl, and Usd/Cad also has decent option expiry interest to keep an eye on given 1.2 bn rolling off at 1.2615 and an even heftier 3 bn at 1.2675 compared to current extremes spanning 1.2693-1.2652. Elsewhere, the Euro has lost its battle to stay afloat of multiple sub-1.1700 lows even though EGBs are tumbling alongside USTs and the same goes for Sterling in relation to the 1.3700 handle irrespective of the 10 year Gilt touching 1% for the first time since March 2020. SCANDI/EM - Brent’s advances on Usd 80 brl have been offset to an extent by soft Norwegian retail sales data, as the Nok pares more of its post-Norges Bank gains, while the Sek looks somewhat caught between stalls following a recovery in Swedish consumption, but big swing in trade balance from surplus to larger deficit. However, the Try is taking no delight from the costlier price of oil or remarks from Turkey’s Deputy Finance Minister contending that interest rates can move lower by reducing the current account and budget deficits, or conceding that Dollarisation is a problem and steps need to be taken to enhance confidence in the Lira. Conversely, the Cnh and Cny are still holding a firm line following another net injection of 2 week funds from the PBoC and the Governor saying that China will lengthen the period for the implementation of normal monetary policy, adding that it has conditions to keep a normal and upward yield curve, as it sees no need to purchase assets at present. In commodities, WTI and Brent futures have extended on the gains seen during APAC hours, which saw the Brent November contract topping USD 80/bbl, albeit the volume and open interest has migrated to the December contract – which topped out just before the USD 80/bbl mark. WTI November meanwhile advanced past the USD 76/bbl mark to a current peak at USD 76.67/bbl (vs low USD 75.21/bbl). Desks have been attributing the leg higher to tight supply – with the UK fuel situation further deteriorating amid a shortage of drivers coupled with panic buying. It's worth bearing in mind that the demand side of the equation has also seen supportive, with the US announcing the lifting of international travel curbs recently alongside the economic resilience to the Delta variant heading into the winter period. Traders would also be keeping an eye on the electricity situation in China, which in theory would provide tailwinds for diesel demand via generators, although this could be offset by a slowdown in economic activity due to power outages. There has also been growing noise for OPEC+ to hike output beyond the monthly plan of 400k BPD, with some African nations also struggling to ramp up production due to maintenance issues and lack of investments. Ministers recently noted that the plan would be maintained at next week's confab. As a reminder, the OPEC World Oil Outlook is set to be released at 13:30BST/08:30EDT, although the findings may be stale given the recent developments in crude dynamics. Major banks have also provided commentary on Brent following Goldman Sachs' bullish call recently, with Barclays upping its forecast for both benchmarks due to supply deficits, whilst Morgan Stanley maintained its forecast but suggested that the USD 85/bbl Brent scenario clearly exists. MS also noted that oil inventories continue to draw at high rates and suggest that the market is more undersupplied than generally perceived; the analysts see the market undersupplied into 2022 amid its expectation for further OPEC discipline. Nat gas also remains in focus, with prices +11% at one point, whilst Russia's Kremlin said Russia remains the safeguard of natural gas to Europe and Gazprom is ready to discuss new gas supply contracts with increased volumes to meet rising European demand. It's also worth being aware of the increasing likelihood of state intervention at these levels as nations attempt to save or at least cushion consumers and company margins. Elsewhere, precious metals are under pressure as the Buck remains buoyant, with spot gold still under USD 1,750/oz as it inches closer to the 11th August low of USD 1,722/oz. Spot silver remains within recent ranges above USD 22/oz. Overnight Chinese nickel and tin prices extended losses with traders citing subdued demand, whilst coking coal and coke futures leapt on tight supply. US Event Calendar 8:30am: Aug. Advance Goods Trade Balance, est. -$87.3b, prior -$86.4b, revised -$86.8b 8:30am: Aug. Retail Inventories MoM, est. 0.5%, prior 0.4%; Wholesale Inventories MoM, est. 0.8%, prior 0.6% 9am: July S&P CS Composite-20 YoY, est. 20.00%, prior 19.08% 9am: July S&P/CS 20 City MoM SA, est. 1.70%, prior 1.77% 9am: July FHFA House Price Index MoM, est. 1.5%, prior 1.6% 10am: Sept. Conf. Board Consumer Confidence, est. 115.0, prior 113.8 Expectations, prior 91.4 Present Situation, prior 147.3 10am: Sept. Richmond Fed Index, est. 10, prior 9 Central Bank Speakers 9am: Fed’s Evans Makes Welcome Remarks at Payments Conference 10am: Powell and Yellen Appear Before Senate Banking Panel 1:40pm: Fed’s Bowman Speaks at Community Bank Event 3pm: Fed’s Bostic Discusses the Economic Outlook 7pm: Fed’s Bullard Discusses U.S. Economy and Monetary Policy DB's Jim Reid concludes the overnight wrap What a difference a week makes. You hardly hear the word Evergrande now. We asked in a flash poll last week whether we would still be talking about it in a month or whether it would be a distant memory by then. Maybe we should have narrowed the time frame to a week! We’ve quickly moved on to rate hikes and rising bond yields as the topic de jour. A further rise in the Bloomberg Commodity Spot Index (+1.87%) to a fresh high for the decade helped reinforce the move. Indeed, sovereign bond yields moved higher once again yesterday amidst a sharp rise in inflation expectations, with those on 10yr Treasury yields rising +3.6bps to 1.487%, their highest level in over 3 months. Meanwhile the 2yr yield rose +0.8bps to 0.278%, its highest level since the pandemic began, which comes on the back of last week’s Fed meeting that prompted investors to price in an initial rate hike from the Fed by the end of 2022. The moves in Treasury yields were almost entirely driven by higher inflation breakevens, with 10yr breakevens up +3.7bps. That echoed similar moves in Europe, where the German 10yr breakeven (+4.7bps) hit a post-2013 high of 1.653%, and their Italian counterparts (+3.9bps) hit a post-2011 high. The biggest move was in the UK however, where the 10yr breakeven (+13.2bps) reached its highest level since 2008, which comes amidst a continued fuel shortage in the country, alongside another rise in UK natural gas futures, which were up +8.20% yesterday to £190/therm, exceeding the previous closing peak set a week earlier. We were waiting for the wind to blow in this country to get alternatives back on stream and boy did it blow yesterday but with no impact yet on gas prices. Lower real rates dampened the rise in yields across the continent, though yields on 10yr bunds (+0.5bps), OATs (+0.9bps), BTPs (+1.3bps) and gilts (+2.7bps) had all moved higher by the close of trade. Those spikes in commodity prices were evident more broadly yesterday, with energy prices in particular seeing a major increase. Brent crude oil prices were up +1.84% to $79.53/bbl, marking their highest closing level since late-2018, and this morning in trading they have now exceeded the $80/bbl mark with a further +0.94% increase. It was much the same story for WTI (+1.99%), which closed at $75.45/bbl, which was its own highest closing level since 2018 too. And those pressures in UK natural gas prices we mentioned above were seen across Europe more broadly, where futures were up +8.92%. With yields moving higher and inflationary pressures growing stronger, tech stocks struggled significantly yesterday, with the NASDAQ down -0.52%. The megacap tech FANG+ index fell -0.15% on the day, but was initially down as much as -1.7% in early trading. The NASDAQ underperformed the S&P 500, which was only down -0.28%, but that masked significant sectoral divergences, with interest-sensitive growth stocks struggling, just as cyclicals more broadly posted fresh gains. More specifically, energy (+3.43%), bank (+2.29%) and autos (+2.19%) led the S&P, while biotech (-1.65%) and software (-1.39%) shares were among the largest laggards. European equities were also pretty subdued, with the STOXX 600 down -0.19%, though the DAX was up +0.27% following the results of the German election, which removed the tail risk outcome of a more left-wing coalition featuring the SPD, the Greens and Die Linke. Staying on the political scene, we are now less than 72 hours away from a potential US government shutdown as it stands. As was expected, Republicans in the Senate blocked the House-passed measure to fund the government for another 2 months and raise the debt ceiling for 2 years. While Democrats have not put forward their alternative strategy if Republicans refuse to vote to lift the debt ceiling, their only option would be to attach it to the budget reconciliation plan that currently makes up much of the Biden economic agenda. In an effort to keep all party members on board, Speaker Pelosi moved the vote on the $550bn bipartisan infrastructure bill to Thursday in order to give all sides more time to finish the larger budget bill and pass both together. It is a going to be a very busy Thursday, since Congress will have to also pass the funding bill that day. Republicans and Democrats already agree on a funding bill to keep the government open that does not include the debt ceiling increase so it is just a matter of how exactly the debt ceiling provision goes through without a Republican Senate vote. Overnight in Asia, equity indices are seeing a mixed performance. On the one hand, most of the region including the Nikkei (-0.24%) and KOSPI (-0.80%) are trading lower as investors begin to price in tighter monetary policy from the Fed. However, the Hang Seng (+1.50%), Shanghai Composite (+0.53%) and CSI (0.38%) have all advanced after the People’s Bank of China said that they would ensure a “healthy property market”. Looking forward, US equity futures are pointing to little change, with those on the S&P 500 down just -0.05%, and 10yr Treasury yields have risen +1.9bps this morning to trade above 1.50% again. Back to the German election, where the aftermath yesterday saw various party leaders assess the results and stake their claims to participate in a new coalition. As a reminder, the SPD came in first place with 25.7%, but the CDU/CSU weren’t far behind on 24.1%, making it mathematically possible for either to form a government in a coalition with the Greens and the FDP. The SPD’s chancellor candidate, Finance Minister Olaf Scholz, appealed for the Greens and FDP to join him in forming a government, and told the media that he wanted to form a coalition before Christmas. Meanwhile Green co-leader Robert Habeck said that “Of course there is a certain priority for talks with the SPD and the FDP”, but said that this didn’t mean they wouldn’t speak with the CDU/CSU either. As the SPD were calling for an alliance, the tone sounded more negative from the CDU’s leadership, even though Armin Laschet said that he had not given up on the idea of forming a government. Notably, Laschet said that no party was able to draw a clear mandate from the result, including the SPD, and this echoed remarks from the CSU leader Markus Söder, who said that the conservatives had no mandate to form a government, though they could “make an offer out of a sense of responsibility for the country.” Meanwhile, attention will turn to the FDP and the Greens to see which way they’re leaning when it comes to forming a government. FDP leader Lindner said that he would hold preliminary talks with the Greens, after which they would be open to invitations from either the SPD or the CDU/CSU for further discussions. Back on the UK, there was an interesting speech from BoE Governor Bailey yesterday, where he echoed the line from the MPC minutes last week, saying that “all of us believe that there will need to be some modest tightening of policy to be consistent with meeting the inflation target sustainable over the medium-term”. However, he also said that their view was that “the price pressures will be transient”, and that “monetary policy will not increase the supply of semi-conductor chips … nor will it produce more HGV drivers.” He then further added that tighter policy “could make things worse in this situation by putting more downward pressure on a weakening recovery of the economy”. So a bit of a mixed message of backing rate hike expectations but warning about its impact on growth. Over in the US we heard from a host of Fed speakers with Governor Brainard saying that while “employment is still a bit short of the mark” of “substantial further progress”, she expects that the labour market will recover enough to start tapering asset purchases soon. Separately on the inflation debate, Minneapolis Fed President Kashkari argued that this year’s pickup in US inflation has been a byproduct of the supply disruptions associated with Covid and that policy makers should not react to it just yet. He cited the need to get US employment back up as the Fed’s “highest priority”. New York Fed President Williams agreed with his colleague, saying that “this process of adjustment may take another year or so to complete as the pandemic-related swings in supply and demand gradually recede.” And Chicago Fed President Evans is even worried about downside inflation risks, as he is " more uneasy about us not generating enough inflation in 2023 and 2024 than the possibility that we will be living with too much.” Lastly, news came out yesterday that Boston Fed President Rosengren will retire this week due to health concerns. He was due to step down in June regardless as there is a mandatory retirement age of 65. Dallas Fed President Kaplan also announced his retirement yesterday, which will take effect October 8th. Both officials have drawn scrutiny in recent days stemming from their recent disclosure of trading activity over the last year, though the activity did not violate the Fed’s ethics code even as Fed Chair Powell announced an official review of those rules. The Boston Fed President will be a voting member on the FOMC next year, and the Dallas Fed President in 2023. Running through yesterday’s data, the preliminary reading for US durable goods orders in August showed growth of +1.8% (vs. +0.7% expected), and the previous month was also revised up to show growth of +0.5% (vs. -0.1% previously). Meanwhile core capital goods orders grew by +0.5% (vs. +0.4% expected), and the previous month’s growth was revised up two-tenths. Finally, the Dallas Fed’s manufacturing activity index for September came in at 4.6 (vs. 11.0 expected) – its lowest reading since July 2020. To the day ahead now, and one of the main highlights will be the appearance of Fed Chair Powell, and Treasury Secretary Yellen at the Senate Banking Committee. Otherwise, central bank speakers include ECB President Lagarde, Vice President de Guindos, and the ECB’s Schnabel, Panetta and Kazimir, along with the BoE’s Mann and the Fed’s Evans, Bowman and Bostic. US data highlights include the US Conference Board’s consumer confidence indicator for September and the FHFA house price index for July. Tyler Durden Tue, 09/28/2021 - 07:52.....»»

Category: blogSource: zerohedgeSep 28th, 2021

"The Endgame Of Communist Rule Has Begun": Evergrande"s Fall Shows How Xi Has Created A China Crisis

"The Endgame Of Communist Rule Has Begun": Evergrande's Fall Shows How Xi Has Created A China Crisis Authored by Niall Ferguson, op-ed via Bloomberg.com, The developer’s collapse isn’t leading to global contagion, but China’s looming economic disaster might... A major mistake of the Cold War was the tendency of Western observers to overestimate the Soviet Union. I have often wondered if the same mistake is being repeated with the People’s Republic of China. Then again, for every article over the last 10 years that predicted China’s economy would overtake that of the U.S., there were at least two prophesying a “China crisis.” “The endgame of Chinese communist rule has now begun,” wrote David Shambaugh in 2015. Wisely, he added: “Its demise is likely to be protracted.”  That same year, Jim Chanos of Kynikos Associates warned, “We’re getting inexorably to a tipping point in China.” Last week began with yet another China tipping point. The impending collapse of the giant property developer China Evergrande Group, we were warned, could be China’s “Lehman Moment.” For 24 hours, global stock markets retreated by a couple of percentage points. By Tuesday morning, however, the story appeared to be over. The jitters subsided and investors got back to parsing the utterances of U.S. Federal Reserve Chair Jay Powell to make sure that nothing he said was surprising. So if the China crisis never happens — no matter how many times China permabears like Chanos predict it — does China eventually overtake the U.S.? Thus far, it has done so only in terms of gross domestic product adjusted on the basis of “purchasing power parity,” which allows for the fact that a meal in Chongqing is quite a bit cheaper than one in Chicago. On a current dollar basis, China’s GDP last year was still just 72% of U.S. GDP, even with Hong Kong included. Will China surpass America? No, I don’t think so. Nearly three years ago, in the heat of a lively debate in Seoul, I bet the Chinese economist Justin Yifu Lin 20,000 yuan (roughly $3,000) that China’s economy — defined as GDP in current dollars — would not overtake that of the U.S. in the next 20 years. I am sticking with that bet, even if the Lehman Moment for the Chinese financial system never comes. Here’s why. Let’s begin by recalling how many experts believed the Soviets would overtake America. In successive editions, the economist Paul Samuelson’s hugely influential economics textbook carried a chart projecting that the gross national product of the Soviet Union would exceed that of the U.S. at some point between 1984 and 1997. The 1967 edition suggested that the great overtaking could happen as early as 1977. By the 1980 edition, the time frame had been moved forward to 2002-2012. The graph was quietly dropped after that. Samuelson was by no means the only American scholar to make this mistake. A late as 1984, Harvard’s liberal guru John Kenneth Galbraith could still insist that “the Russian system succeeds because, in contrast with the Western industrial economies, it makes full use of its manpower.” Economists who discerned the miserable realities of the planned economy, such as G. Warren Nutter of the University of Virginia, were few and far between — almost as rare as historians, such as Robert Conquest, who grasped the enormity of the Soviet system’s crimes against its own citizens. We know now how wrong Samuelson, Galbraith et al. were. After 1945, according to the late Angus Maddison’s estimates, the Soviet economy was never more than 44% the size of that of the U.S. By 1991, Soviet GDP was less than a third of U.S. GDP. China has of course learned lessons from the Soviet experience. Beginning in the late 1970s with Deng Xiaoping, China’s leaders understood that the Communist Party could harness market forces for the perpetuation of their own power, but they must never relax the party’s political grip. If there is one thing the CCP can be relied on never to produce, it is a Chinese Mikhail Gorbachev. In the same way, the Chinese have learned from the American experience. I remember vividly how, in the wake of the 2008 collapse of Lehman Brothers, eminent Chinese economists visited Harvard (where I taught at the time) and doubtless many other institutions to research the causes of the global financial crisis. Somewhere in President Xi Jinping’s office there must be a copy of the report they subsequently wrote. If there is another thing the CCP can be relied on never to produce, it is a Chinese Lehman Moment. Yet, as the great English historian A.J.P. Taylor once observed of the French Emperor Napoleon III, he “learned from the mistakes of the past how to make new ones.” As I contemplate Xi, I find myself wondering if the Communist Party has inadvertently produced a Chinese version of Napoleon III, whose reign was also marked by rampant real estate development. (The Paris you see today was in large measure the achievement of his prefect of the Seine, Georges-Eugene Haussmann.) Evergrande is mainly significant as an illustration of how the Chinese economic model has evolved over the past decades of urbanization on steroids. It is China’s second-largest property developer, with an estimated $355 billion of assets across 1,300 developments. It has around 200,000 employees, and usually hires 3-4 million laborers a year for construction work. It is also the most-indebted property developer in the world, with on-balance-sheet liabilities equivalent to nearly 2% of China’s annual GDP, and off-balance-sheet obligations equal to another 1%. Among its liabilities are $37 billion in bills and trade payables owed to suppliers and contractors, and an estimated $6 billion in high-yielding wealth management products, which it has sold to more than 80,000 retail investors. Evergrande is just one of many such leveraged real estate companies in China. It just happens to be the most overstretched, so it was the first to get in trouble when the government introduced its “three red lines.” These specified that a property developer’s ratio of liabilities to assets must be below 70%; its ratio of net debt to equity below 100%; and its ratio of cash to short-term debt at least 100%. Evergrande was on the wrong side of all three lines, but it was in good company. Of the country’s 15 biggest developers, only one is fully compliant with the new rules, according to data in the South China Morning Post. When the Chinese government decides to make an example of an over-leveraged player, we know what happens next, and it’s not a global financial crisis — not even a domestic one. There will be some more brinkmanship, as there was last week, with some bondholders (onshore) getting paid and others (offshore) being asked to wait. But at some point soon — probably before the October holiday — the government will force through a formal restructuring and bankruptcy process. Those considered politically important will get off lightly; the politically disposable will lose their shirts; a few top executives will face jail. That was what happened with the travel conglomerate HNA Group Co. in 2018. It was what happened to Baoshang Bank Co. in May 2019. The most sanguine take I read last week came from the always interesting MacroPolo series of papers published by the Paulson Institute, founded by former Treasury Secretary Hank Paulson (himself something of an authority on Lehman Moments). According to Houze Song, the Evergrande crisis was the result of a policy error, because “China’s financial regulators … preoccupied with stifling a property and land sales bubble … mandated banks to cut back on mortgage loans.” Fewer mortgages drove down housing prices, pushing Evergrande to the brink of insolvency. However, everything will turn out fine because: 1) The central bank will further relax mortgage policy to alleviate the liquidity crunch for the property sector; 2) Property sales will rebound as demand for housing remains healthy; 3) The more vulnerable firms will be able to sell their assets (e.g., land) to raise cash. “These dynamics will be mutually reinforcing,” he concludes, “and will help to stabilize the property sector as it muddles through this year.” The People’s Bank of China has already taken action. On Thursday, it sought to alleviate the financial stress with the equivalent of $17 billion in the form of seven- and 14-day reverse repurchase agreements, its largest open-market operation since January. Evergrande shares in Hong Kong duly rallied. Crisis over. Stand down the plunge protection team. All this goes to show that a Lehman Moment was never in the cards. China’s state-controlled financial system has state-controlled crises, which are targeted at particular firms “pour encourager les autres”— not to trigger the kind of generalized bank run that drove the global financial system to the point of collapse in the winter of 2008-2009.  Nevertheless, it is possible to avoid financial contagion without necessarily avoiding a more insidious macroeconomic contagion. As the Harvard economist Ken Rogoff showed last year in a paper co-authored with Yuanchen Yang of Beijing’s Tsinghua University, real estate plays an even bigger role in China’s economy today than it did in the U.S. economy on the eve of the financial crisis. The impact of real estate-related activities amounted to 18.9% of U.S. GDP in 2005, its pre-crisis peak. The equivalent figure for China in 2016 was 28.7%. None of the 10 other countries in their sample come close, except Spain on the eve of the financial crisis (28.7% in 2006). The detail is eye-popping. In all, around 27% of Chinese bank loans come from the real estate sector. Real estate is the main form of collateral for loan securitization. In 2017, almost 18% of the urban labor force was employed in real estate and related industries. In 2018, the sale of land by local governments accounted for as much as 35% of their revenues. Much as happened in Japan in the housing bubble of the late 1980s, the market value of China’s housing stock is now more than double that of the U.S. and triple that of Europe. This means that housing wealth forms a significantly larger share of overall assets in China (78%) than it does in the U.S. (35%). Rogoff and Yang conclude that Chinese households’ consumption is therefore “significantly more sensitive to a decline in housing prices” than that of their American and Japanese counterparts. A “20% fall in real estate activity could lead to a 5-10% fall in GDP, even without amplification from a banking crisis, or accounting for the importance of real estate as collateral.” To put it simply, China’s growth has been boosted for many years by the construction of an excess supply of housing units. This has been financed by an unsustainable mountain of debt. As the Beijing-based economist Michael Pettis noted last week, “China’s official debt-to-GDP ratio has soared by nearly 45 percentage points in the past five years, leaving it with among the highest debt ratios for any developing country in history.” Relative to the size of the economy, nonfinancial corporate debt in China is now even bigger than it was in Japan in the late 1980s. And both tower blocks and debts have been going up at a time when the Chinese workforce has begun to come down. With the birthrate falling, the total population is forecast by the United Nations to shrink by around 25% by the end of the century — conceivably even by 50%. The result is not so much the proverbial bridges to nowhere as homes for no one. Between a fifth and a quarter of Chinese housing stock is estimated to be empty. Last week, the Rhodium Group’s Logan Wright estimated that there was enough empty property in China to house more than 90 million people. Of course, no “China crisis” article for the past 20 years has been complete without images of uninhabited ghost cities. But there was always the counterargument: “If you build it, they will come.” Well, they built 15 high-rise apartment blocks in the southwestern city of Kunming back in 2013. Unfortunately, the developer ran out of money and the buildings turned out to be defective. Last month, “Sunshine City II” was spectacularly demolished in a succession of controlled explosions. That one video clip impressed me more than all the ghost city videos I’ve seen over the years. Nothing says “wealth destruction” quite like toppling tower blocks. The crisis in real estate has much wider ramifications than the inevitable restructuring of Evergrande. Other developers are under pressure (the fact that one is called Fantasia says it all). Housing sales are down. So are land sales by local governments. Exposed banks are under pressure, as are the steel producers and iron-ore exporters who for so long grew rich on Chinese construction. And, as falling apartment prices reduce household wealth — just as Rogoff and Yang foresaw — we can expect a significant impact on consumption. The August data already showed a decline in year-on-year retail sales growth from 8.5% in July to 2.5%, though this partly reflected the effects of anti-Covid restrictions. That slowdown seems likely to persist through September and October. For years, Pettis and others have argued that China’s growth rates were artificially inflated and that the steroid-free growth rate was probably half the official target. Some China economists quoted in the press last week suggested a growth rate closer to 4% in the coming decade. Leland Miller, of China Beige Book, even suggested a rate of 1% or 2% 10 years from now. It will be interesting to see if the International Monetary Fund revises down its growth projections for China in next month’s World Economic Outlook. Back in the summer of 2020, the IMF thought China’s economy would grow 9.2% this year and 5.7% next year. The 2021 figure has since been lowered to 8.1%. The most recent 2023 projection was 5.4%. All these numbers look on the high side to me, even allowing for the unreliability of Chinese statistics.  (Thank heavens the managing director of the IMF would never contemplate overstating China’s economic performance! Oh wait, that’s precisely what Kristalina Georgieva is accused of having done when she was at the World Bank.) Many foreign investors have been on the wrong side of all this. In the 15 months through June 2021, they poured $527 billion into Chinese stocks and bonds. A good deal of that money found its way via the offshore dollar bond market into high-yielding real estate debt. Among the funds known to hold Evergrande debt are Fidelity International Ltd., UBS Asset Management, Amundi Asset Management SA, and BlackRock Inc. Last week it fell to Ray Dalio of Bridgewater Associates to rally the China bulls. The Evergrande crisis was “all manageable,” he said. The system would be “protected.” But it Is striking that on Aug. 3, George Soros warned investors in China that they faced “a rude awakening,” and on Sept. 6, he called out “BlackRock’s China Blunder.” When Soros and Kyle Bass are on the same side, things get interesting. (Bass’s fund, Hayman Capital Management, has been short China for years.) “The regime which is destroyed by a revolution is almost always an improvement on its immediate predecessor,” wrote Alexis de Tocqueville in “The Old Regime and the Revolution.” “And experience teaches that the most critical moment for bad governments is the one which witnesses their first steps toward reform.” I often thought of that passage as I watched Gorbachev inadvertently destroy the Soviet Union by trying to reform it. Only recently did it occur to me that it might also apply to Xi, the anti-Gorbachev. Although his reforms go in the opposite direction from Gorbachev’s — turning back the political clock to Marxism-Leninism, rather than forward to liberalism — the effect may be the same. Xi’s crackdown on the property developers is just the latest blow he has struck against “capitalism with Chinese characteristics.” First in line were the big tech companies —  Alibaba Group Holding Ltd., Tencent Holdings Ltd. and ride-sharing leader Didi Global Inc. Then it was the turn of the for-profit education sector. All of this reflects Xi’s conviction that China needs to move from “fictional growth” to “genuine growth,” and his determination to make the old CCP slogan of “common prosperity” a meaningful antidote to the rampant inequality of the “get rich quick” era. Investors who have ignored this anticapitalist turn in China have only themselves to blame if they have lost money. Likewise, analysts who continue to predict a Chinese economic takeover of the world have only themselves to blame if they have failed to learn the lessons of the Soviet collapse. Perhaps, to paraphrase Taylor, Xi has learned from the crises of others only how to make a crisis of his own. Tyler Durden Mon, 09/27/2021 - 17:40.....»»

Category: blogSource: zerohedgeSep 27th, 2021

Futures Rise On Taper, Evergrande Optimism

Futures Rise On Taper, Evergrande Optimism US index futures jumped overnight even as the Fed confirmed that a November tapering was now guaranteed and would be completed by mid-2022 with one rate hike now on deck, while maintaining the possibility to extend stimulus if necessitated by the economy. Sentiment got an additional boost from a strong showing of Evergrande stock - which closed up 17% - during the Chinese session, which peaked just after Bloomberg reported that China told Evergrande to avoid a near-term dollar bond default and which suggested that the "government wants to avoid an imminent collapse of the developer" however that quickly reversed when the WSJ reported, just one hour later, that China was making preparations for Evergrande's demise, and although that hammered stocks, the report explicitly noted that a worst-case scenario for Evergrande would mean a partial or full nationalization as "local-level government agencies and state-owned enterprises have been instructed to step in only at the last minute should Evergrande fail to manage its affairs in an orderly fashion." In other words, both reports are bullish: either foreign creditors are made whole (no default) as per BBG or the situation deteriorates and Evergrande is nationalized ("SOEs step in") as per WSJ. According to Bloomberg, confidence is building that markets can ride out a pullback in Fed stimulus, unlike 2013 when the taper tantrum triggered large losses in bonds and equities. "Investors are betting that the economic and profit recovery will be strong enough to outweigh a reduction in asset purchases, while ultra-low rates will continue to support riskier assets even as concerns linger about contagion from China’s real-estate woes." That's one view: the other is that the Fed has so broken the market's discounting ability we won't know just how bad tapering will get until it actually begins. “The Fed has got to be pleased that their communication on the longer way to tapering has avoided the dreaded fear of the tantrum,” Jeffrey Rosenberg, senior portfolio manager for systematic fixed income at BlackRock Inc., said on Bloomberg Television. “This is a very good outcome for the Fed in terms of signaling their intent to give the market information well ahead of the tapering decision.” Then there is the question of Evergrande: “With regards to Evergrande, all those people who are waiting for a Lehman moment in China will probably have to wait another turn,” said Ken Peng, an investment strategist at Citi Private Bank Asia Pacific. “So I wouldn’t treat this as completely bad, but there are definitely a lot of risks on the horizon.” In any case, today's action is a continuation of the best day in two months for both the Dow and the S&P which staged a strong recovery from two-month lows hit earlier in the week, and as of 745am ET, S&P 500 E-minis were up 25.25 points, or 0.6%, Dow E-minis were up 202 points, or 0.59%, while Nasdaq 100 E-minis were up 92.0 points, or 0.60%. In the premarket, electric vehicle startup Lucid Group rose 3.1% in U.S. premarket trading. PAVmed (PVM US) jumps 11% after its Lucid Diagnostics unit announced plans to list on the Global Market of the Nasdaq Stock Market.  Here are some of the biggest movers today: U.S.-listed Chinese stocks rise in premarket trading as fears of contagion from China Evergrande Group’s debt crisis ease. Blackberry (BB US) shares rise 8.7% in premarket after co.’s 2Q adjusted revenue beat the average of analysts’ estimates Eargo (EAR US) falls 57% in Thursday premarket after the hearing aid company revealed it was the target of a Justice Department criminal probe and withdrew its forecasts for the year Amplitude Healthcare Acquisition (AMHC US) doubled in U.S. premarket trading after the SPAC’s shareholders approved the previously announced business combination with Jasper Therapeutics Steelcase (SCS US) fell 4.8% Wednesday postmarket after the office products company reported revenue for the second quarter that missed the average analyst estimate Vertex Energy Inc. (VTNR US) gained 2.1% premarket after saying the planned acquisition of a refinery in Mobile, Alabama from Royal DutVTNR US Equitych Shell Plc is on schedule Synlogic (SYBX US) shares declined 9.7% premarket after it launched a stock offering launched without disclosing a size HB Fuller (FUL US) climbed 2.7% in postmarket trading after third quarter sales beat even the highest analyst estimate Europe's Stoxx 600 index rose 0.9%, lifted by carmakers, tech stocks and utilities, which helped it recover losses sparked earlier in the week by concerns about Evergrande and China’s crackdown on its property sector. The gauge held its gain after surveys of purchasing managers showed business activity in the euro area lost momentum and slowed broadly in September after demand peaked over the summer and supply-chain bottlenecks hurt services and manufacturers. Euro Area Composite PMI (September, Flash): 56.1, consensus 58.5, last 59.0. Euro Area Manufacturing PMI (September, Flash): 58.7, consensus 60.3, last 61.4. Euro Area Services PMI (September, Flash): 56.3, consensus 58.5, last 59.0. Germany Composite PMI (September, Flash): 55.3, consensus 59.2, last 60.0. France Composite PMI (September, Flash): 55.1, consensus 55.7, last 55.9. UK Composite PMI (September, Flash): 54.1, consensus 54.6, last 54.8. Commenting on Europe's PMIs, Goldman said that the Euro area composite PMI declined by 2.9pt to 56.1 in September, well below consensus expectations. The softening was broad-based across countries but primarily led by Germany. The peripheral composite flash PMI also weakened significantly in September but remain very high by historical standards (-2.4pt to 57.5). Across sectors, the September composite decline was also broad-based, with manufacturing output softening (-3.3pt to 55.6) to a similar extent as services (-2.7pt to 56.3). Supply-side issues and upward cost and price pressures continued to be widely reported. Expectations of future output growth declined by less than spot output on the back of delta variant worries and supply issues, remaining far above historically average levels. Earlier in the session, Asian stocks rose for the first time in four sessions, as Hong Kong helped lead a rally on hopes that troubled property firm China Evergrande Group will make progress on debt repayment. The MSCI Asia Pacific Index climbed as much as 0.5%, with Tencent and Meituan providing the biggest boosts. The Hang Seng jumped as much as 2.5%, led by real estate stocks as Evergrande surged more than 30%. Hong Kong shares later pared their gains. Asian markets were also cheered by gains in U.S. stocks overnight even as the Federal Reserve said it may begin scaling back stimulus this year. A $17 billion net liquidity injection from the People’s Bank of China also provided a lift, while the Fed and Bank of Japan downplayed Evergrande risks in comments accompanying policy decisions Wednesday. Evergrande’s stock closed 18% higher in Hong Kong, in a delayed reaction to news a unit of the developer had negotiated interest payments on yuan notes. A coupon payment on its 2022 dollar bond is due on Thursday “Investors are perhaps reassessing the tail risk of a disorderly fallout from Evergrande’s credit issues,” said Chetan Seth, a strategist at Nomura. “However, I am not sure if the fundamental issue around its sustainable deleveraging has been addressed. I suspect markets will likely remain quite volatile until we have some definite direction from authorities on the eventual resolution of Evergrande’s debt problems.” Stocks rose in most markets, with Australia, Taiwan, Singapore and India also among the day’s big winners. South Korea’s benchmark was the lone decliner, while Japan was closed for a holiday In rates, Treasuries were off session lows, with the 10Y trading a 1.34%, but remained under pressure in early U.S. session led by intermediate sectors, where 5Y yield touched highest since July 2. Wednesday’s dramatic yield-curve flattening move unleashed by Fed communications continued, compressing 5s30s spread to 93.8bp, lowest since May 2020. UK 10-year yield climbed 3.4bp to session high 0.833% following BOE rate decision (7-2 vote to keep bond-buying target unchanged); bunds outperformed slightly. Peripheral spreads tighten with long-end Italy outperforming. In FX, the Bloomberg Dollar Spot Index reversed an earlier gain and dropped 0.3% as the dollar weakened against all of its Group-of-10 peers apart from the yen amid a more positive sentiment. CAD, NOK and SEK are the strongest performers in G-10, JPY the laggard.  The euro and the pound briefly pared gains after weaker-than-forecast German and British PMIs. The pound rebounded from an eight-month low amid a return of global risk appetite as investors assessed whether the Bank of England will follow the Federal Reserve’s hawkish tone later Thursday. The yield differential between 10-year German and Italian debt narrowed to its tightest since April. Norway’s krone advanced after Norges Bank raised its policy rate in line with expectations and signaled a faster pace of tightening over the coming years. The franc whipsawed as the Swiss National Bank kept its policy rate and deposit rate at record lows, as expected, and reiterated its pledge to wage currency market interventions. The yen fell as a unit of China Evergrande said it had reached an agreement with bond holders over an interest payment, reducing demand for haven assets. Turkey’s lira slumped toa record low against the dollar after the central bank unexpectedly cut interest rates. In commodities, crude futures drifted lower after a rangebound Asia session. WTI was 0.25% lower, trading near $72; Brent dips into the red, so far holding above $76. Spot gold adds $3.5, gentle reversing Asia’s losses to trade near $1,771/oz. Base metals are well bid with LME aluminum leading gains. Bitcoin steadied just below $44,000. Looking at the day ahead, we get the weekly initial jobless claims, the Chicago Fed’s national activity index for August, and the Kansas City fed’s manufacturing activity index for September. From central banks, there’ll be a monetary policy decision from the Bank of England, while the ECB will be publishing their Economic Bulletin and the ECB’s Elderson will also speak. From emerging markets, there’ll also be monetary policy decisions from the Central Bank of Turkey and the South African Reserve Bank. Finally in Germany, there’s an election debate with the lead candidates from the Bundestag parties. Market Snapshot S&P 500 futures up 0.7% to 4,413.75 STOXX Europe 600 up 1.1% to 468.32 MXAP up 0.5% to 200.57 MXAPJ up 0.9% to 645.76 Nikkei down 0.7% to 29,639.40 Topix down 1.0% to 2,043.55 Hang Seng Index up 1.2% to 24,510.98 Shanghai Composite up 0.4% to 3,642.22 Sensex up 1.4% to 59,728.37 Australia S&P/ASX 200 up 1.0% to 7,370.22 Kospi down 0.4% to 3,127.58 German 10Y yield fell 5.6 bps to -0.306% Euro up 0.4% to $1.1728 Brent Futures up 0.3% to $76.39/bbl Gold spot up 0.0% to $1,768.25 U.S. Dollar Index down 0.33% to 93.16 Top Overnight News from Bloomberg Financial regulators in Beijing issued a broad set of instructions to China Evergrande Group, telling the embattled developer to focus on completing unfinished properties and repaying individual investors while avoiding a near-term default on dollar bonds China’s central bank net-injected the most short- term liquidity in eight months into the financial system, with markets roiled by concerns over China Evergrande Group’s debt crisis Europe’s worst energy crisis in decades could drag deep into the cold months as Russia is unlikely to boost shipments until at least November Business activity in the euro area “markedly” lost momentum in September after demand peaked over the summer and supply chain bottlenecks hurt both services and manufacturers. Surveys of purchasing managers by IHS Markit showed growth in both sectors slowing more than expected, bringing overall activity to a five-month low. Input costs, meanwhile, surged to the highest in 21 years, according to the report The U.K. private sector had its weakest month since the height of the winter lockdown and inflation pressures escalated in September, adding to evidence that the recovery is running into significant headwinds, IHS Markit said The U.K.’s record- breaking debut green bond sale has given debt chief Robert Stheeman conviction on the benefits of an environmental borrowing program. The 10 billion-pound ($13.7 billion) deal this week was the biggest-ever ethical bond sale and the country is already planning another offering next month A more detailed look at global markets courtesy of Newsquaw Asian equity markets traded mostly positive as the region took its cue from the gains in US with the improved global sentiment spurred by some easing of Evergrande concerns and with stocks also unfazed by the marginally more hawkish than anticipated FOMC announcement (detailed above). ASX 200 (+1.0%) was underpinned by outperformance in the commodity-related sectors and strength in defensives, which have more than atoned for the losses in tech and financials, as well as helped markets overlook the record daily COVID-19 infections in Victoria state. Hang Seng (+0.7%) and Shanghai Comp. (+0.6%) were also positive after another respectable liquidity operation by the PBoC and with some relief in Evergrande shares which saw early gains of more than 30% after recent reports suggested a potential restructuring by China’s government and with the Co. Chairman noting that the top priority is to help wealth investors redeem their products, although the majority of the Evergrande gains were then pared and unit China Evergrande New Energy Vehicle fully retraced the initial double-digit advances. KOSPI (-0.5%) was the laggard as it played catch up to the recent losses on its first trading day of the week and amid concerns that COVID cases could surge following the holiday period, while Japanese markets were closed in observance of the Autumnal Equinox Day. China Pumps $17 Billion Into System Amid Evergrande Concerns China Stocks From Property to Tech Jump on Evergrande Respite Philippines Holds Key Rate to Spur Growth Amid Higher Prices Taiwan’s Trade Deal Application Sets Up Showdown With China Top Asian News European equities (Stoxx 600 +0.9%) trade on the front-foot and have extended gains since the cash open with the Stoxx 600 now higher on the week after Monday’s heavy losses. From a macro perspective, price action in Europe has been undeterred by a slowdown in Eurozone PMIs which saw the composite metric slip to 56.1 from 59.0 (exp. 58.5) with IHS Markit noting “an unwelcome combination of sharply slower economic growth and steeply rising prices.” Instead, stocks in the region have taken the cue from a firmer US and Asia-Pac handover with performance in Chinese markets aided by further liquidity injections by the PBoC. Some positivity has also been observed on the Evergrande front amid mounting expectations of a potential restructuring at the company. That said, at the time of writing, it remains unclear what the company’s intentions are for repaying its USD 83.5mln onshore coupon payment. Note, ING highlights that “missing that payment today would still leave a 30-day grace period before this is registered as a default”. The most recent reports via WSJ indicate that Chinese authorities are asking local governments to begin preparations for the potential downfall of Evergrande; however, the article highlights that this is a last resort and Beijing is reluctant to step in. Nonetheless, this article has taken the shine off the mornings risk appetite, though we do remain firmer on the session. Stateside, as the dust settles on yesterday’s FOMC announcement, futures are firmer with outperformance in the RTY (+0.8% vs. ES +0.7%). Sectors in Europe are higher across the board with outperformance in Tech and Autos with the latter aided by gains in Faurecia (+4.6%) who sit at the top of the Stoxx 600 after making an unsurprising cut to its guidance, which will at least provide some clarity on the Co.’s near-term future; in sympathy, Valeo (+6.6) is also a notable gainer in the region. To the downside, Entain (+2.6%) sit at the foot of the Stoxx 600 after recent strong gains with the latest newsflow surrounding the Co. noting that MGM Resorts is considering different methods to acquire control of the BetMGM online gambling business JV, following the DraftKings offer for Entain, according to sources. The agreement between Entain and MGM gives MGM the ability to block any deal with competing businesses; MGM officials believe this grants the leverage to take full control of BetMGM without spending much. Top European News BOE Confronts Rising Prices, Slower Growth: Decision Guide La Banque Postale Eyes Retail, Asset Management M&A in Europe Activist Bluebell Raises Pressure on Glaxo CEO Walmsley Norway Delivers Rate Lift-Off With Next Hike Set for December In FX, not much bang for the Buck even though the FOMC matched the most hawkish market expectations and Fed chair Powell arguably went further by concluding in the post-meeting press conference that substantial progress on the lagging labour front is all but done. Hence, assuming the economy remains on course, tapering could start as soon as November and be completed my the middle of 2022, though he continued to play down tightening prospects irrespective of the more hawkish trajectory implied by the latest SEP dot plots that are now skewed towards at least one hike next year and a cumulative seven over the forecast horizon. However, the Greenback only managed to grind out marginally higher highs overnight, with the index reaching 93.526 vs 93.517 at best yesterday before retreating quite sharply and quickly to 93.138 in advance of jobless claims and Markit’s flash PMIs. CAD/NZD/AUD - The Loonie is leading the comeback charge in major circles and only partially assisted by WTI keeping a firm bid mostly beyond Usd 72/brl, and Usd/Cad may remain contained within 1.2796-50 ahead of Canadian retail sales given decent option expiry interest nearby and protecting the downside (1 bn between 1.2650-65 and 2.7 bn from 1.2620-00). Meanwhile, the Kiwi has secured a firmer grip on the 0.7000 handle to test 0.7050 pre-NZ trade and the Aussie is looking much more comfortable beyond 0.7250 amidst signs of improvement in the flash PMIs, albeit with the services and composite headline indices still some way short of the 50.0 mark. NOK/GBP/EUR/CHF - All firmer, and the Norwegian Crown outperforming following confirmation of the start of rate normalisation by the Norges Bank that also underscored another 25 bp hike in December and further tightening via a loftier rate path. Eur/Nok encountered some support around 10.1000 for a while, but is now below, while the Pound has rebounded against the Dollar and Euro in the run up to the BoE at midday. Cable is back up around 1.3770 and Eur/Gbp circa 0.8580 as Eur/Usd hovers in the low 1.1700 area eyeing multiple and a couple of huge option expiries (at the 1.1700 strike in 4.1 bn, 1.1730 in 1 bn, 1.1745-55 totalling 2.7 bn and 1.8 bn from 1.1790-1.1800). Note, Eurozone and UK flash PMIs did not live up to their name, but hardly impacted. Elsewhere, the Franc is lagging either side of 0.9250 vs the Buck and 1.0835 against the Euro on the back of a dovish SNB Quarterly Review that retained a high Chf valuation and necessity to maintain NIRP, with only minor change in the ordering of the language surrounding intervention. JPY - The Yen is struggling to keep its head afloat of 110.00 vs the Greenback as Treasury yields rebound and risk sentiment remains bullish pre-Japanese CPI and in thinner trading conditions due to the Autumn Equinox holiday. In commodities, WTI and Brent have been choppy throughout the morning in-spite of the broadly constructive risk appetite. Benchmarks spent much of the morning in proximity to the unchanged mark but the most recent Evergrande developments, via WSJ, have dampened sentiment and sent WTI and Brent back into negative territory for the session and printing incremental fresh lows at the time of publication. Back to crude, newsflow has once again centred around energy ministry commentary with Iraq making clear that oil exports will continue to increase. Elsewhere, gas remains at the forefront of focus particularly in the UK/Europe but developments today have been somewhat incremental. On the subject, Citi writes that Asia and Europe Nat. Gas prices could reach USD 100/MMBtu of USD 580/BOE in the winter, under their tail-risk scenario. For metals, its very much a case of more of the same with base-metals supportive, albeit off-best given Evergrande, after a robust APAC session post-FOMC. Given the gas issues, desks highlight that some companies are being forced to suspend/reduce production of items such as steel in Asian/European markets, a narrative that could become pertinent for broader prices if the situation continues. Elsewhere, spot gold and silver are both modestly firmer but remain well within the range of yesterday’s session and are yet to recovery from the pressure seen in wake of the FOMC. US Event Calendar 8:30am: Sept. Initial Jobless Claims, est. 320,000, prior 332,000; Continuing Claims, est. 2.6m, prior 2.67m 8:30am: Aug. Chicago Fed Nat Activity Index, est. 0.50, prior 0.53 9:45am: Sept. Markit US Composite PMI, prior 55.4 9:45am: Sept. Markit US Services PMI, est. 54.9, prior 55.1 9:45am: Sept. Markit US Manufacturing PMI, est. 61.0, prior 61.1 11am: Sept. Kansas City Fed Manf. Activity, est. 25, prior 29 12pm: 2Q US Household Change in Net Wor, prior $5t DB's Jim Reid concludes the overnight wrap My wife was at a parents event at school last night so I had to read three lots of bedtime stories just as the Fed were announcing their policy decision. Peppa Pig, Biff and Kipper, and somebody called Wonder Kid were interspersed with Powell’s press conference live on my phone. It’s fair to say the kids weren’t that impressed by the dot plot and just wanted to join them up. The twins (just turned 4) got their first reading book homework this week and it was a bit sad that one of them was deemed ready to have one with words whereas the other one only pictures. The latter was very upset and cried that his brother had words and he didn’t. That should create even more competitive tension! Back to the dots and yesterday’s Fed meeting was on the hawkish side in terms of the dots and also in terms of Powell’s confidence that the taper could be complete by mid-2022. Powell said that the Fed could begin tapering bond purchases as soon as the November FOMC meeting, in line with our US economists’ forecasts. He left some room for uncertainty, saying they would taper only “If the economy continues to progress broadly in line with expectations, and also the overall situation is appropriate for this.” However he made clear that “the timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff.” The quarterly “dot plot” showed that the 18 FOMC officials were split on whether to start raising rates next year or not. In June, the median dot indicated no rate increases until 2023, but now 6 members see a 25bps raise next year and 3 members see two such hikes. Their inflation forecasts were also revised up and DB’s Matt Luzzetti writes in his FOMC review (link here) that “If inflation is at or below the Fed's current forecast next year of 2.3% core PCE, liftoff is likely to come in 2023, consistent with our view. However, if inflation proves to be higher with inflation expectations continuing to rise, the first rate increase could well migrate into 2022.” Markets took the overall meeting very much in its stride with the biggest impact probably being a yield curve flattening even if US 10yr Treasury yields traded in just over a 4bp range yesterday and finishing -2.2bps lower at 1.301%. The 5y30y curve flattened -6.7bps to 95.6bps, its flattest level since August 2020, while the 2y10y curve was -4.2bps flatter. So the market seems to believe the more hawkish the Fed gets the more likely they’ll control inflation and/or choke the recovery. The puzzle is that even if the dots are correct, real Fed funds should still be negative and very accommodative historically for all of the forecasting period. As such the market has a very dim view of the ability of the economy to withstand rate hikes or alternatively that the QE technicals are overpowering everything at the moment. In equities, the S&P 500 was up nearly +1.0% 15 minutes prior to the Fed, and then rallied a further 0.5% in the immediate aftermath before a late dip look it back to +0.95%. The late dip meant that the S&P still has not seen a 1% up day since July 23. The index’s rise was driven by cyclicals in particular with energy (+3.17%), semiconductors (-2.20%), and banks (+2.13%) leading the way. Asian markets are mostly trading higher this morning with the Hang Seng (+0.69%), Shanghai Comp (+0.58%), ASX (+1.03%) and India’s Nifty (+0.81%) all up. The Kospi (-0.36%) is trading lower though and is still catching up from the early week holidays. Japan’s markets are closed for a holiday today. Futures on the S&P 500 are up +0.25% while those on the Stoxx 50 are up +0.49%. There is no new news on the Evergrande debt crisis however markets participants are likely to pay attention to whether the group is able to make interest rate payment on its 5 year dollar note today after the group had said yesterday that it resolved a domestic bond coupon by negotiations which was also due today. As we highlighted in our CoTD flash poll conducted earlier this week, market participants are not too worried about a wider fallout from the Evergrande crisis and even the Hang Seng Properties index is up +3.93% this morning and is largely back at the levels before the big Monday sell-off of -6.69%. Overnight we have received flash PMIs for Australia which improved as parts of the country have eased the coronavirus restrictions. The services reading came in at 44.9 (vs. 42.9 last month) and the manufacturing print was even stronger at 57.3 (vs. 52.0 last month). Japan’s flash PMIs will be out tomorrow due to today’s holiday. Ahead of the Fed, markets had continued to rebound from their declines earlier in the week, with Europe’s STOXX 600 gaining +0.99% to narrowly put the index in positive territory for the week. This continues the theme of a relative outperformance among European equities compared to the US, with the STOXX 600 having outpaced the S&P 500 for 5 consecutive sessions now, though obviously by a slim margin yesterday. Sovereign bonds in Europe also posted gains, with yields on 10yr bunds (-0.7bps), OATs (-1.0bps) and BTPs (-3.2bps) all moving lower. Furthermore, there was another tightening in peripheral spreads, with the gap in Italian 10yr yields over bunds falling to 98.8bps yesterday, less than half a basis point away from its tightest level since early April. Moving to fiscal and with Democrats seemingly unable to pass the $3.5 trillion Biden budget plan by Monday, when the House is set to vote on the bipartisan infrastructure bill, Republican leadership is calling on their members to vote against the bipartisan bill in hopes of delaying the process further. While the there is still a high likelihood the measure will eventually get passed, time is becoming a factor. Congress now has just over a week to get a government funding bill through both chambers of congress as well as raise the debt ceiling by next month. Republicans have told Democrats to do the latter in a partisan manner and include it in the reconciliation process which could mean that a significant portion of the Biden economic agenda – mostly encapsulated in the $3.5 trillion over 10 year budget – may have to be cut down to get the entire Democratic caucus on board. Looking ahead, an event to watch out for today will be the Bank of England’s policy decision at 12:00 London time, where our economists write (link here) that they expect no change in the policy settings. However, they do expect a reaffirmation of the BoE’s updated forward guidance that some tightening will be needed over the next few years to keep inflation in check, even if it’s too early to expect a further hawkish pivot at this stage. Staying on the UK, two further energy suppliers (Avro Energy and Green Supplier) ceased trading yesterday amidst the surge in gas prices, with the two supplying 2.9% of domestic customers between them. We have actually seen a modest fall in European natural gas prices over the last couple of days, with the benchmark future down -4.81% since its close on Monday, although it’s worth noting that still leaves them up +75.90% since the start of August alone. There wasn’t much data to speak of yesterday, though US existing home sales fell to an annualised rate of 5.88 in August (vs. 5.89m expected). Separately, the European Commission’s advance consumer confidence reading for the Euro Area unexpectedly rose to -4.0 in September (vs. -5.9 expected). To the day ahead now, the data highlights include the September flash PMIs from around the world, while in the US there’s the weekly initial jobless claims, the Chicago Fed’s national activity index for August, and the Kansas City fed’s manufacturing activity index for September. From central banks, there’ll be a monetary policy decision from the Bank of England, while the ECB will be publishing their Economic Bulletin and the ECB’s Elderson will also speak. From emerging markets, there’ll also be monetary policy decisions from the Central Bank of Turkey and the South African Reserve Bank. Finally in Germany, there’s an election debate with the lead candidates from the Bundestag parties. Tyler Durden Thu, 09/23/2021 - 08:13.....»»

Category: blogSource: zerohedgeSep 23rd, 2021

BTFD Arrives: Futures Rebound, Europe Surges While Asia Slumps On Evergrande Fears

BTFD Arrives: Futures Rebound, Europe Surges While Asia Slumps On Evergrande Fears Even though China was closed for a second day, and even though the Evergrande drama is nowhere closer to a resolution with a bond default imminent and with Beijing mute on how it will resolve the potential "Lehman moment" even as rating agency S&P chimed in saying a default is likely and it does not expect China’s government “to provide any direct support” to the privately owned developer, overnight the BTFD crew emerged in full force, and ramped futures amid growing speculation that Beijing will rescue the troubled developer... Algos about to go on a rampage — zerohedge (@zerohedge) September 21, 2021 ... pushing spoos almost 100 points higher from their Monday lows, and European stock were solidly in the green - despite Asian stocks hitting a one-month low - as investors tried to shake off fears of contagion from a potential collapse of China’s Evergrande, although gains were capped by concerns the Federal Reserve could set out a timeline to taper its stimulus at its meeting tomorrow. The dollar dropped from a one-month high, Treasury yields rose and cryptos rebounded from yesterday's rout. To be sure, the "this is not a Lehman moment" crowed was out in full force, as indicated by this note from Mizuho analysts who wrote that “while street wisdom is that Evergrande is not a ‘Lehman risk’, it is by no stretch of the imagination any meaningful comfort. It could end up being China’s proverbial house of cards ... with cross-sector headwinds already felt in materials/commodities.” At 7:00 a.m. ET, S&P 500 e-minis were up 34.00 points, or 0.79% and Nasdaq 100 e-minis 110.25 points, or 0.73%, while futures tracking the Dow  jumped 0.97%, a day after the index tumbled 1.8% in its worst day since late-July,  suggesting a rebound in sentiment after concerns about contagion from China Evergrande Group’s upcoming default woes roiled markets Monday. Dip-buyers in the last hour of trading Monday helped the S&P 500 pare some losses, though the index still posted the biggest drop since May. The bounce also came after the S&P 500 dropped substantially below its 50-day moving average - which had served as a resilient floor for the index this year - on Monday, its first major breach in more than six months. Freeport-McMoRan mining stocks higher with a 3% jump, following a 3.2% plunge in the S&P mining index a day earlier as copper prices hit a one-month low. Interest rate-sensitive banking stocks also bounced, tracking a rise in Treasury yields. Here are some of the biggest U.S. movers today: U.S.-listed Chinese stocks start to recover from Monday’s slump in premarket trading as the global selloff moderates. Alibaba (BABA US), Baidu (BIDU US), Nio (NIO US), Tencent Music (TME US)and Bilibili (BILI US) are among the gainers Verrica Pharma (VRCA US) plunges 30% in premarket trading after failing to get FDA approval for VP-102 for the treatment of molluscum contagiosum ReWalk Robotics (RWLK US) shares jump 43% in U.S. premarket trading amid a spike in volume in the stock. Being discussed on StockTwits Aprea Therapeutics gains 21% in U.S. premarket trading after the company reported complete remission in a bladder cancer patient in Phase 1/2 clinical trial of eprenetapopt in combination with pembrolizumab Lennar (LEN US) shares fell 3% in Monday postmarket trading after the homebuilder forecast 4Q new orders below analysts’ consensus hurt by unprecedented supply chain challenges ConocoPhillips (COP US) ticks higher in U.S. premarket trading after it agreed to buy Shell’s  Permian Basin assets for $9.5 billion in cash, accelerating the consolidation of the largest U.S. oil patch SmileDirect (SDC US) slightly higher in premarket trading after it said on Monday that it plans to enter France with an initial location in Paris KAR Global (KAR US) shares fell 4.6% in post-market trading on Monday after the company withdrew is full-year financial outlook citing disruption caused by chip shortage Sportradar (SRAD US) shares jumped 4.5% in Monday postmarket trading, after the company said basketball legend Michael Jordan will serve as a special adviser to its board and also increase his investment in the sports betting and entertainment services provider, effective immediately Orbital Energy Group (OEG US) gained 6% postmarket Monday after a unit won a contract  to construct 1,910 miles of rural broadband network in Virginia. Terms were not disclosed “So much of this information is already known that we don’t think it will necessary set off a wave of problems,” John Bilton, head of global multi-asset strategy at JPMorgan Asset Management, said on Bloomberg TV. “I’m more concerned about knock-on sentiment at a time when investor sentiment is a bit fragile. But when we look at the fundamentals -- the general growth, and direction in the wider economy -- we still feel reasonably confident that the situation will right itself.” Aside from worries over Evergrande’s ability to make good on $300 billion of liabilities, investors are also positioning for the two-day Fed meeting starting Tuesday, where policy makers are expected to start laying the groundwork for paring stimulus.  Europe's Stoxx 600 index climbed more than 1%, rebounding from the biggest slump in two months, with energy companies leading the advance and all industry sectors in the green. Royal Dutch Shell rose after the company offered shareholders a payout from the sale of shale oil fields. Universal Music Group BV shares soared in their stock market debut after being spun off from Vivendi SE. European airlines other travel-related stocks rise for a second day following the U.S. decision to soon allow entry to most foreign air travelers as long as they’re fully vaccinated against Covid-19; British Airways parent IAG soars as much as 6.9%, extending Monday’s 11% jump. Here are some of the biggest European movers today: Stagecoach shares jump as much as 24% after the company confirmed it is in takeover talks with peer National Express. Shell climbs as much as 4.4% after selling its Permian Basin assets to ConocoPhillips for $9.5 billion. Bechtle gains as much as 4.3% after UBS initiated coverage at buy. Husqvarna tumbles as much as 9% after the company said it is suing Briggs & Stratton in the U.S. for failing to deliver sufficient lawn mower engines for the 2022 season. Kingfisher slides as much as 6.4% after the DIY retailer posted 1H results and forecast higher profits this fiscal year. The mood was decidedly more sour earlier in the session, when Asian stocks fell for a second day amid continued concerns over China’s property sector, with Japan leading regional declines as the market reopened after a holiday. The MSCI Asia Pacific Index was down 0.5%, headed for its lowest close since Aug. 30, with Alibaba and SoftBank the biggest drags. China Evergrande Group slid deeper in equity and credit markets Tuesday after S&P said the developer is on the brink of default. Markets in China, Taiwan and South Korea were closed for holidays. Worries over contagion risk from the Chinese developer’s debt problems and Beijing’s ongoing crackdowns, combined with concern over Federal Reserve tapering, sent global stocks tumbling Monday. The MSCI All-Country World Index fell 1.6%, the most since July 19. Japan’s stocks joined the selloff Tuesday as investor concerns grew over China’s real-estate sector as well as Federal Reserve tapering, with the Nikkei 225 sliding 2.2% - its biggest drop in three months, catching up with losses in global peers after a holiday - after a four-week rally boosted by expectations for favorable economic policies from a new government. Electronics makers were the biggest drag on the Topix, which declined 1.7%. SoftBank Group and Fast Retailing were the largest contributors to a 2.2% loss in the Nikkei 225. Japanese stocks with high China exposure including Toto and Nippon Paint also dropped. “The outsized reaction in global markets may be a function of having too many uncertainties bunched into this period,” Eugene Leow, a macro strategist at DBS Bank Ltd., wrote in a note. “It probably does not help that risk taking (especially in equities) has gone on for an extended period and may be vulnerable to a correction.” “The proportion of Japan’s exports to China is greater than those to the U.S. or Europe, making it sensitive to any slowdown worries in the Chinese economy,” said Hideyuki Ishiguro, a senior strategist at Nomura Asset Management in Tokyo. “The stock market has yet to fully price in the possibility of a bankruptcy by Evergrande Group.” The Nikkei 225 has been the best-performing major stock gauge in the world this month, up 6.2%, buoyed by expectations for favorable policies from a new government and an inflow of foreign cash. The Topix is up 5.3% so far in September. In FX, the Bloomberg Dollar Spot Index inched lower and the greenback fell versus most of its Group-of-10 peers as a selloff in global stocks over the past two sessions abated; the euro hovered while commodity currencies led by the Norwegian krone were the best performers amid an advance in crude oil prices. Sweden’s krona was little changed after the Riksbank steered clear of signaling any post-pandemic tightening, as it remains unconvinced that a recent surge in inflation will last. The pound bucked a three-day losing streak as global risk appetite revived, while investors look to Thursday’s Bank of England meeting for policy clues. The yen erased earlier gains as signs that risk appetite is stabilizing damped demand for haven assets. At the same time, losses were capped due to uncertainty over China’s handling of the Evergrande debt crisis. In rates, Treasuries were lower, although off worst levels of the day as U.S. stock futures recover around half of Monday’s losses while European equities trade with a strong bid tone. Yields are cheaper by up to 2.5bp across long-end of the curve, steepening 5s30s spread by 1.2bp; 10-year yields around 1.3226%, cheaper by 1.5bp on the day, lagging bunds and gilts by 1bp-2bp. The long-end of the curve lags ahead of $24b 20-year bond reopening. Treasury will auction $24b 20-year bonds in first reopening at 1pm ET; WI yield ~1.82% is below auction stops since January and ~3bp richer than last month’s new-issue result In commodities, crude futures rose, with the front month WTI up 1.5% near $71.50. Brent stalls near $75. Spot gold trades a narrow range near $1,765/oz. Base metals are mostly in the green with LME aluminum the best performer Looking at the day ahead now, and data releases include US housing starts and building permits for August, along with the UK public finances for September. From central banks, we’ll hear from ECB Vice President de Guindos. Otherwise, the General Debate will begin at the UN General Assembly, and the OECD publishes their Interim Economic Outlook. Market Snapshot S&P 500 futures up 1.0% to 4,392.75 STOXX Europe 600 up 1.1% to 459.10 MXAP down 0.5% to 200.25 MXAPJ up 0.2% to 640.31 Nikkei down 2.2% to 29,839.71 Topix down 1.7% to 2,064.55 Hang Seng Index up 0.5% to 24,221.54 Shanghai Composite up 0.2% to 3,613.97 Sensex up 0.4% to 58,751.30 Australia S&P/ASX 200 up 0.4% to 7,273.83 Kospi up 0.3% to 3,140.51 Brent Futures up 1.6% to $75.13/bbl Gold spot down 0.1% to $1,761.68 U.S. Dollar Index little changed at 93.19 German 10Y yield fell 5.0 bps to -0.304% Euro little changed at $1.1729 Top Overnight News from Bloomberg Lael Brainard is a leading candidate to be the Federal Reserve’s banking watchdog and is also being discussed for more prominent Biden administration appointments, including to replace Fed chairman Jerome Powell and, potentially, for Treasury secretary if Janet Yellen leaves Federal Reserve Chair Jerome Powell will this week face the challenge of convincing investors that plans to scale back asset purchases aren’t a runway to raising interest rates for the first time since 2018 ECB Vice President Luis de Guindos says there is “good news” with respect to the euro-area recovery after a strong development in the second and third quarter The ECB is likely to continue purchasing junk-rated Greek sovereign debt even after the pandemic crisis has passed, according to Governing Council member and Greek central bank chief Yannis Stournaras U.K. government borrowing was well below official forecasts in the first five months of the fiscal year, providing a fillip for Chancellor of the Exchequer Rishi Sunak as he prepares for a review of tax and spending next month U.K. Business Secretary Kwasi Kwarteng warned the next few days will be challenging as the energy crisis deepens, and meat producers struggle with a crunch in carbon dioxide supplies The U.K.’s green bond debut broke demand records for the nation’s debt as investors leaped on the long-anticipated sterling asset. The nation is offering a green bond maturing in 2033 via banks on Tuesday at 7.5 basis points over the June 2032 gilt. It has not given an exact size target for the sale, which has attracted a record of more than 90 billion pounds ($123 billion) in orders Germany cut planned debt sales in the fourth quarter by 4 billion euros ($4.7 billion), suggesting the surge in borrowing triggered by the coronavirus pandemic is receding Contagion from China Evergrande Group has started to engulf even safer debt in Asia, sparking the worst sustained selloff of the securities since April. Premiums on Asian investment-grade dollar bonds widened 2-3 basis points Tuesday, according to credit traders, after a jump of 3.4 basis points on Monday Swiss National Bank policy makers watching the effects of negative interest rates on the economy are worrying about the real-estate bubble that their policy is helping to foster Global central banks need to set out clear strategies for coping with inflation risks as the world economy experiences faster-than-expected cost increases amid an uneven recovery from the pandemic, the OECD said A quick look at global markets courtesy of Newsquawk Asian equities traded cautiously following the recent downbeat global risk appetite due to Evergrande contagion concerns which resulted in the worst day for Wall Street since May, with the region also contending with holiday-thinned conditions due to the ongoing closures in China, South Korea and Taiwan. ASX 200 (+0.2%) was indecisive with a rebound in the mining-related sectors counterbalanced by underperformance in utilities, financials and tech, while there were also reports that the Byron Bay area in New South Wales will be subject to a seven-day lockdown from this evening. Nikkei 225 (-1.8%) was heavily pressured and relinquished the 30k status as it played catch up to the contagion downturn on return from the extended weekend with recent detrimental currency inflows also contributing to the losses for exporters. Hang Seng (-0.3%) was choppy amid the continued absence of mainland participants with markets second-guessing whether Chinese authorities will intervene in the event of an Evergrande collapse, while shares in the world’s most indebted developer fluctuated and wiped out an early rebound, although affiliate Evergrande Property Services and other property names fared better after Sun Hung Kai disputed reports of China pressuring Hong Kong developers and with Guangzhou R&F Properties boosted by reports major shareholders pledged funds in the Co. which is also selling key assets to Country Garden. Finally, 10yr JGBs were higher amid the underperformance in Japanese stocks and with the Japan Securities Dealers Association recently noting that global funds purchased the most ultra-long Japanese bonds since 2014, although upside was limited amid softer demand at the enhanced liquidity auction for 2yr-20yr maturities and with the BoJ kickstarting its two-day policy meeting. Top Asian News Richest Banker Says Evergrande Is China’s ‘Lehman Moment’ Hong Kong Tycoons, Casino Giants Find Respite in Stock Rebound Taliban Add More Male Ministers, Say Will Include Women Later Asian Stocks Drop to Lowest Level This Month; Japan Leads Losses European equities (Stoxx 600 +1.1%) trade on a firmer footing attempting to recoup some of yesterday’s losses with not much in the way of incremental newsflow driving the upside. Despite the attempt to claw back some of the prior session’s lost ground, the Stoxx 600 is still lower by around 1.6% on the week. The Asia-Pac session was one characterised by caution and regional market closures with China remaining away from market. Focus remains on whether Evergrande will meet USD 83mln in interest payments due on Thursday and what actions Chinese authorities could take to limit the contagion from the company in the event of further troubles. Stateside, futures are also on a firmer footing with some slight outperformance in the RTY (+1.2%) vs. peers (ES +0.8%). Again, there is not much in the way of fresh positivity driving the upside and instead gains are likely more a by-product of dip-buying; attention for the US is set to become increasingly geared towards tomorrow’s FOMC policy announcement. Sectors in Europe are firmer across the board with outperformance in Oil & Gas names amid a recovery in the crude complex and gains in Shell (+4.4%) after news that the Co. is to sell its Permian Basin assets to ConocoPhillips (COP) for USD 9.5bln in cash. Other outperforming sectors include Tech, Insurance and Basic Resources. IAG (+4.1%) and Deutsche Lufthansa (+3.8%) both sit at the top of the Stoxx 600 as the Co.’s continue to enjoy the fallout from yesterday’s decision by the US to allow travel from vaccinated EU and UK passengers. Swatch (-0.7%) is lagging in the luxury space following a downgrade at RBC, whilst data showed Swiss watch exports were +11.5% Y/Y in August (prev. 29.1%). Finally, National Express (+7.7%) is reportedly considering a takeover of Stagecoach (+21.4%), which is valued at around GBP 370mln. Top European News U.K. Warns of Challenging Few Days as Energy Crisis Deepens Germany Trims Planned Debt Sales as Pandemic Impact Recedes U.K.’s Green Bond Debut Draws Record Demand of $123 Billion Goldman Plans $1.5 Billion Petershill Partners IPO in London In FX, all the signs are constructive for a classic turnaround Tuesday when it comes to Loonie fortunes as broad risk sentiment improves markedly, WTI consolidates within a firm range around Usd 71/brl compared to yesterday’s sub-Usd 70 low and incoming results from Canada’s general election indicate victory for the incumbent Liberal party that will secure a 3rd term for PM Trudeau. Hence, it’s better the devil you know as such and Usd/Cad retreated further from its stop-induced spike to just pips short of 1.2900 to probe 1.2750 at one stage before bouncing ahead of new house price data for August. Conversely, the Swedish Krona seems somewhat reluctant to get carried away with the much better market mood after the latest Riksbank policy meeting only acknowledged significantly stronger than expected inflation data in passing, and the repo rate path remained rooted to zero percent for the full forecast horizon as a consequence. However, Eur/Sek has slipped back to test 10.1600 bids/support following an initial upturn to almost 10.1800, irrespective of a rise in unemployment. NOK/AUD/NZD - No such qualms for the Norwegian Crown as Brent hovers near the top of a Usd 75.18-74.20/brl band and the Norges Bank is widely, if not universally tipped to become the first major Central Bank to shift into tightening mode on Thursday, with Eur/Nok hugging the base of a 10.1700-10.2430 range. Elsewhere, the Aussie and Kiwi look relieved rather than rejuvenated in their own right given dovish RBA minutes, a deterioration in Westpac’s NZ consumer sentiment and near reversal in credit card spending from 6.9% y/y in July to -6.3% last month. Instead, Aud/Usd and Nzd/Usd have rebounded amidst the recovery in risk appetite that has undermined their US rival to top 0.7380 and 0.7050 respectively at best. GBP/CHF/EUR/JPY/DXY - Sterling is latching on to the ongoing Dollar retracement and more supportive backdrop elsewhere to pare losses under 1.3700, while the Franc continues its revival to 0.9250 or so and almost 1.0850 against the Euro even though the SNB is bound to check its stride at the upcoming policy review, and the single currency is also forming a firmer base above 1.1700 vs the Buck. Indeed, the collective reprieve in all components of the Greenback basket, bar the Yen on diminished safe-haven demand, has pushed the index down to 93.116 from 93.277 at the earlier apex, and Monday’s elevated 93.455 perch, while Usd/Jpy is straddling 109.50 and flanked by decent option expiry interest either side. On that note, 1.4 bn resides at the 109.00 strike and 1.1 bn between 109.60-70, while there is 1.6 bn in Usd/Cad bang on 1.2800. EM - Some respite across the board in wake of yesterday’s mauling at the hands of risk-off positioning in favour of the Usd, while the Czk has also been underpinned by more hawkish CNB commentary as Holub echoes the Governor by advocating a 50 bp hike at the end of September and a further 25-50 bp in November. In commodities, WTI and Brent are firmer in the European morning post gains in excess of 1.0%, though the benchmarks are off highs after an early foray saw Brent Nov’21 eclipse USD 75.00/bbl, for instance. While there has been newsflow for the complex, mainly from various energy ministers, there hasn’t been much explicitly for crude to change the dial; thus, the benchmarks are seemingly moving in tandem with broader risk sentiment (see equities). In terms of the energy commentary, the Qatar minister said they are not thinking of re-joining OPEC+ while the UAE minister spoke on the gas situation. On this, reports in Russian press suggests that Russia might allow Rosneft to supply 10bcm of gas to Europe per year under an agency agreement with Gazprom “as an experiment”, developments to this will be closely eyed for any indication that it could serve to ease the current gas situation. Looking ahead, we have the weekly private inventory report which is expected to post a headline draw of 2.4mln and draws, albeit of a smaller magnitude, are expected for distillate and gasoline as well. Moving to metals, spot gold is marginally firmer while silver outperforms with base-metals picking up across the board from the poor performance seen yesterday that, for instance, saw LME copper below the USD 9k mark. Note, the action is more of a steadying from yesterday’s downside performance than any notable upside, with the likes of copper well within Monday’s parameters. US Event Calendar 8:30am: Aug. Building Permits MoM, est. -1.8%, prior 2.6%, revised 2.3% 8:30am: Aug. Housing Starts MoM, est. 1.0%, prior -7.0% 8:30am: Aug. Building Permits, est. 1.6m, prior 1.64m, revised 1.63m 8:30am: Aug. Housing Starts, est. 1.55m, prior 1.53m 8:30am: 2Q Current Account Balance, est. -$190.8b, prior -$195.7b DB's Jim Reid concludes the overnight wrap Global markets slumped across the board yesterday in what was one of the worst days of the year as an array of concerns about the outlook gathered pace. The crisis at Evergrande and in the Chinese real estate sector was the catalyst most people were talking about, but truth be told, the market rout we’re seeing is reflecting a wider set of risks than just Chinese property, and comes after increasing questions have been asked about whether current valuations could still be justified, with talk of a potential correction picking up. Remember that 68% of respondents to my survey last week (link here) thought they’d be at least a 5% correction in equity markets before year end. So this has been front and centre of people’s mind even if the catalyst hasn’t been clear. We’ve all known about Evergrande’s woes and how big it was for a while but it wasn’t until Friday’s story of the Chinese regulatory crackdown extending into property that crystallised the story into having wider implications. As I noted in my chart of the day yesterday link here Chinese USD HY had been widening aggressively over the last couple of months but IG has been pretty rock solid. There were still no domestic signs of contagion by close of business Friday. However as it stands, there will likely be by the reopening post holidays tomorrow which reflects how quickly the story has evolved even without much new news. Before we get to the latest on this, note that we’ve still got a bumper couple of weeks on the calendar to get through, including the Fed decision tomorrow, which comes just as a potential government shutdown and debt ceiling fight are coming into view, alongside big debates on how much spending the Democrats will actually manage to pass. There has been some respite overnight with S&P 500 futures +0.58% higher and 10y UST yields up +1.5bps to 1.327%. Crude oil prices are also up c. 1%. On Evergrande, S&P Global Ratings has said that the company is on the brink of default and that it’s failure is unlikely to result in a scenario where China will be compelled to step in. The report added that they see China stepping in only if “there is a far-reaching contagion causing multiple major developers to fail and posing systemic risks to the economy.” The Hang Seng (-0.32%) is lower but the Hang Seng Properties index is up (+1.59%) and bouncing off the 5 plus year lows it hit yesterday. Elsewhere the ASX (+0.30%) and India’s Nifty (+0.35%) have also advanced. Chinese and South Korean markets are closed for a holiday but the Nikkei has reopened and is -1.80% and catching down to yesterday’s global move. Looking at yesterday’s moves in more depth, the gathering storm clouds saw the S&P 500 shed -1.70% in its worst day since May 12, with cyclical industries leading the declines and with just 10% of S&P 500 index members gaining. There was a late rally at the end of the US trading session that saw equity indices bounce off their lows, with the S&P 500 (-2.87%) and NASDAQ (-3.42%) both looking like they were going to register their worst days since October 2020 and late-February 2021 respectively. However, yesterday was still the 5th worst day for the S&P 500 in 2021. Reflecting the risk-off tone, small caps suffered in particular with the Russell 2000 falling -2.44%, whilst tech stocks were another underperformer as the NASDAQ lost -2.19% and the FANG+ index of 10 megacap tech firms saw an even bigger -3.16% decline. For Europe it was much the same story, with the STOXX 600 (-1.67%) and other bourses including the DAX (-2.31%) seeing significant losses amidst the cyclical underperformance. It was the STOXX 600’s worst performance since mid-July and the 6th worst day of the year overall. Unsurprisingly, there was also a significant spike in volatility, with the VIX index climbing +4.9pts to 25.7 – its highest closing level since mid-May – after trading above 28.0pts midday. In line with the broader risk-off move, especially sovereign bonds rallied strongly as investors downgraded their assessment of the economic outlook and moved to price out the chances of near-term rate hikes. By the close of trade, yields on 10yr Treasuries had fallen -5.1bps to 1.311%, with lower inflation breakevens (-4.1bps) leading the bulk of the declines. Meanwhile in Europe, yields on 10yr bunds (-4.0bps), OATs (-2.6bps) and BTPs (-0.9bps) similarly fell back, although there was a widening in spreads between core and periphery as investors turned more cautious. Elsewhere, commodities took a hit as concerns grew about the economic outlook, with Bloomberg’s Commodity Spot Index (-1.53%) losing ground for a third consecutive session. That said, European natural gas prices (+15.69%) were the massive exception once again, with the latest surge taking them above the peak from last Wednesday, and thus bringing the price gains since the start of August to +84.80%. Here in the UK, Business Secretary Kwarteng said that he didn’t expect an emergency regarding the energy supply, but also said that the government wouldn’t bail out failed companies. Meanwhile, EU transport and energy ministers are set to meet from tomorrow for an informal meeting, at which the massive spike in prices are likely to be discussed. Overnight, we have the first projections of the Canadian federal election with CBC News projecting that the Liberals will win enough seats to form a government for the third time albeit likely a minority government. With the counting still underway, Liberals are currently projected to win 156 seats while Conservatives are projected to win 120 seats. Both the parties are currently projected to win a seat less than last time. The Canadian dollar is up +0.44% overnight as the results remove some election uncertainty. Turning to the pandemic, the main news yesterday was that the US is set to relax its travel rules for foreign arrivals. President Biden announced the move yesterday, mandating that all adult visitors show proof of vaccination before entering the country. Airline stocks outperformed strongly in response, with the S&P 500 airlines (+1.55%) being one of the few industry groups that actually advanced yesterday. Otherwise, we heard from Pfizer and BioNTech that their vaccine trials on 5-11 year olds had successfully produced an antibody response among that age group. The dose was just a third of that used in those aged 12 and above, and they said they planned to share the data with regulators “as soon as possible”. Furthermore, they said that trials for the younger cohorts (2-5 and 6m-2) are expected as soon as Q4. In Germany, there are just 5 days left until the election now, and the last Insa poll before the vote showed a slight tightening in the race, with the centre-left SPD down a point to 25%, whilst the CDU/CSU bloc were up 1.5 points to 22%. Noticeably, that would also put the race back within the +/- 2.5% margin of error. The Greens were unchanged in third place on 15%. Staying with politics and shifting back to the US, there was news last night that Congressional Democratic leaders are looking to tie the suspension of the US debt ceiling vote to the spending bill that is due by the end of this month. If the spending bill is not enacted it would trigger a government shutdown, and if the debt ceiling is not raised it would cause defaults on federal payments as soon as October. Senate Majority Leader Schumer said the House will pass a spending bill that will fund the government through December 3rd and that the “legislation to avoid a government shutdown will also include a suspension of the debt limit through December 2022.” Republicans may balk at the second measure, given that it would take the issue off the table until after the 2022 midterm elections in November of that year. There wasn’t a great deal of data out yesterday, though German producer price inflation rose to +12.0% in August (vs. +11.1% expected), marking the fastest pace since December 1974. Separately in the US, the NAHB’s housing market index unexpectedly rose to 76 in September (vs. 75 expected), the first monthly increase since April. To the day ahead now, and data releases include US housing starts and building permits for August, along with the UK public finances for September. From central banks, we’ll hear from ECB Vice President de Guindos. Otherwise, the General Debate will begin at the UN General Assembly, and the OECD will be publishing their Interim Economic Outlook. Tyler Durden Tue, 09/21/2021 - 07:45.....»»

Category: blogSource: zerohedgeSep 21st, 2021

Rickards: Systemic Risk Is Greater Than Ever

Rickards: Systemic Risk Is Greater Than Ever Authored by James Rickards via DailyReckoning.com, Contagion! There has been a litany of bad news recently, including the U.S. August humiliation in Afghanistan, China’s aggressive actions against Taiwan and increased tensions with Iran, North Korea and Russia. It will take the U.S. years, possibly decades, to recover from the debacle of August 2021 and the collapse of American prestige. All of these geopolitical events combine to undermine confidence in U.S. power. When that happens, a loss of confidence in the U.S. dollar is not far behind. And, perhaps most importantly of all recent bad news, is a market meltdown and slowing growth in China. Greatest Ponzi Ever I’ve long advised my readers that the Chinese wealth management product (WMP) system is the greatest Ponzi in the history of the world. Retail investors are led to believe that WMPs are like bank deposits and are backed by the bank that sells them. They’re not. They’re actually unsecured units in blind pools that can be invested in anything the pool manager wants. Most WMP funds have been invested in the real estate sector. This has led to asset bubbles in real estate (at best) and wasted developments that cannot cover their costs (at worst). When investors wanted their money back, the sponsor would simply sell more WMPs and use the money to pay back the redeeming investors. That’s what gave the product its Ponzi characteristic. The total amount invested in WMPs is now in the trillions of dollars used to finance thousands of projects sponsored by hundreds of major developers. Chinese investors are all-in with WMPs. Now the entire edifice is collapsing as I predicted it would. The largest property developer in China, Evergrande, is quickly headed for bankruptcy. That’s a multibillion-dollar fiasco on its own. Evergrande losses will arise in WMPs, corporate debt, unpaid contractor bills, equity markets and unfinished housing projects. China’s entire property and financial system is on the verge of a world-historic crack-up. And it won’t remain limited to China. It comes back to contagion. Financial Contagions Are Like Biological Contagions Unfortunately, since early last year, the world has learned a painful lesson in biological contagions. A similar dynamic applies in financial panics. It can begin with one bank or broker going bankrupt as the result of a market collapse (a “financial patient zero”). But the financial distress quickly spreads to banks that did business with the failed entity and then to stockholders and depositors of those other banks and so on until the entire world is in the grip of a financial panic as happened in 2008. Disease contagion and financial contagion both work the same way. The nonlinear mathematics and system dynamics are identical in the two cases even though the “virus” is financial distress rather than a biological virus. And unfortunately, each crisis is bigger than the one before and requires more intervention by the central banks. The reason has to do with the system scale. In complex dynamic systems such as capital markets, risk is an exponential function of system scale. Increasing market scale correlates with exponentially larger market collapses. Today, systemic risk is more dangerous than ever because the entire system is larger than before. This means that the larger size of the system implies a future global liquidity crisis and market panic far larger than the Panic of 2008. Too-big-to-fail banks are bigger than ever, have a larger percentage of the total assets of the banking system and have much larger derivatives books. Contagion and The Old Man and the Sea To understand the risk of contagion, you can think of the marlin in Hemingway’s The Old Man and the Sea. The marlin started out as a prize catch lashed to the side of the fisherman Santiago’s boat. But once there was blood in the water, every shark within miles descended on the marlin and devoured it. By the time Santiago got to shore, there was nothing left of the marlin but the bill, the tail and some bones. An even greater danger for markets is when these two kinds of contagion converge. This happens when market losses spill over into broader markets, and then those losses give rise to systematic trading against a particular instrument or hedge fund. When the targeted instrument or fund is driven under, credit losses spread to a wider group of fund counterparts that then fall under suspicion themselves. Soon a marketwide liquidity panic emerges in which “everybody wants his money back.” This is exactly what happened during the Russia/Long Term Capital Management (LTCM) crisis in 1998. To the Brink of Collapse It was an international monetary crisis that started in Thailand in June 1997, spread to Indonesia and Korea and then finally to Russia by August 1998. It was exactly like dominoes falling. LTCM wasn’t a country, although it was a hedge fund as big as a country in terms of its financial footings. I was right in the middle of that crash. I was the general counsel of that firm. I negotiated that bailout. The importance of that role is that I had a front-row seat. I was in the conference room, in the deal room, at a big New York law firm. There were hundreds of lawyers. There were 14 banks in the LTCM bailout fund. There were 19 other banks in a $1 billion unsecured credit facility. Included were Treasury officials, Federal Reserve officials, other government officials, Long Term Capital and our partners. I was on point for one side of the deal and had to coordinate all that. Wall Street Bailed out Itself It was a $4 billion all-cash deal, which we put together in 72 hours with no due diligence. Anyone who’s raised money for his or her company or done deals can think about that and imagine how difficult it would be to get a group of banks to write you a check for $4 billion in three days. Systematic pressure on LTCM persisted until the fund was almost broke. As Wall Street attacked the fund, they missed the fact that they were also the creditors of the fund. By breaking LTCM, they were breaking themselves. That’s when the Fed intervened and forced Wall Street to bail out the fund. Those involved can say they bailed out Long Term Capital. But if Long Term Capital had failed, and it was on the way to failure, $1.3 trillion of derivatives would’ve been flipped back to Wall Street. In reality, Wall Street bailed out itself. The panic of 2008 was an even more extreme version of 1998. We were days, if not hours, from the sequential collapse of every major bank in the world. The 2008 panic had its roots in subprime mortgages but quickly spread to debt obligations of all kinds, especially money market funds and European bank commercial paper. Think of the dominoes again. What had happened there? You had a banking crisis. Except in 2008, Wall Street did not bail out a hedge fund; instead, the central banks bailed out Wall Street. Systemic Risk Is Greater Than Ever The point, again, is that today systemic risk is more dangerous than ever, and each crisis is bigger than the one before. Remember, too-big-to-fail banks are bigger than ever, have a larger percentage of the total assets of the banking system and have much larger derivatives books. The ability of central banks to deal with a new crisis is highly constrained by low interest rates and bloated balance sheets, which have exploded even higher in response to the pandemic. The Fed’s balance sheet is currently about $8.5 trillion. Last March it was $4.2 trillion. In September 2008, it was under $1 trillion, so that just shows you how bloated the Fed’s balance sheet has become since the Great Financial Crisis. The threat of contagion is a scary reminder of the hidden linkages in modern capital markets. The conditions are in place. But you can’t wait for the shock to occur because by then it will be too late. You won’t be able to get your money out of the market in time because it’ll be a mad rush to the exits. The solution for investors is to have some assets outside the traditional markets and outside the banking system. Tyler Durden Thu, 10/14/2021 - 08:22.....»»

Category: blogSource: zerohedgeOct 14th, 2021

Futures Surge As Banks Report Stellar Earnings; PPI On Deck

Futures Surge As Banks Report Stellar Earnings; PPI On Deck US equity futures, already sharply higher overnight, jumped this morning as a risk-on mood inspired by stellar bank earnings, overshadowed concern that supply snarls. a China property crunch, a tapering Fed and stagflation will weigh on the global recovery. Nasdaq futures jumped 1%, just ahead of the S&P 500 which was up 0.9%. 10-year Treasury yields ticked lower to about 1.5%, and with the dollar lower as well, oil jumped. Bitcoin and the broader crypto space continued to rise. Shares in Morgan Stanley, Citi and Bank of America jumped as their deal-making units rode a record wave of M&A. On the other end, Boeing shares fell more than 1% after a Dow Jones report said the plane maker is dealing with a new defect on its 787 Dreamliner. Here are some of the biggest other U.S. movers today: Occidental (OXY US) rises 1.6% in U.S. premarket trading after it agreed to sell its interests in two Ghana offshore fields for $750m to Kosmos Energy and Ghana National Petroleum Plug Power (PLUG US) rises 3.3% premarket, extending gains from Wednesday, when it announced partnership with Airbus SE and Phillips 66 to find ways to harness hydrogen to power airplanes, vehicles and industry Esports Entertainment (GMBL US) shares rise 16% in U.S. premarket trading after the online gambling company reported its FY21 results and reaffirmed its FY22 guidance Perrigo  (PRGO US) gains 2.8% in premarket trading after Raymond James upgrades to outperform following acquisition of HRA Pharma and recent settlement of Irish tax dispute AT&T (T US) ticks higher in premarket trading after KeyBanc writes upgrades to sector weight from underweight, saying it seems harder to justify further downside from here Avis Budget (CAR US) may be active after getting its only negative rating among analysts as Morgan Stanley cuts to underweight with risk/reward seen pointing toward downside OrthoPediatrics (KIDS US) dipped 2% Wednesday postmarket after it said 3Q revenue was hurt by the surge in cases of Covid-19 delta variant and RSV within children’s hospitals combined with staff shortage Investors continue to evaluate the resilience of economic reopening to supply chain disruptions, a jump in energy prices and the prospect of reduced central bank support. In the earnings season so far, executives at S&P 500 companies mentioned the phrase “supply chain” about 3,000 times on investor calls as of Tuesday -- far higher than last year’s then-record figure. “Our constructive outlook for growth means that our asset allocation remains broadly pro-risk and we continue to be modestly overweight global equities,” according to Michael Grady, head of investment strategy and chief economist at Aviva Investors. “However, we have scaled back that position marginally because of growing pains which could impact sales and margins.” Europe's Stoxx 600 index reached its highest level in almost three weeks, boosted by gains in tech shares and miners. The Euro Stoxx 50 rose over 1% to best levels for the week. FTSE 100 rises 0.75%, underperforming at the margin. Miners and tech names are the strongest sectors with only healthcare stocks in small negative territory. Here are some of the biggest European movers today: THG shares advance as much as 10%, snapping a four-day losing streak, after a non-executive director bought stock while analysts at Goldman Sachs and Liberum defended their buy recommendations. Steico gains as much as 9.9%, the most since Jan., after the insulation manufacturer reported record quarterly revenue, which Warburg says “leaves no doubt” about underlying market momentum. Banco BPM climbs as much as 3.6% and is the day’s best performer on the FTSE MIB benchmark index; bank initiated at buy at Jefferies as broker says opportunity to internalize insurance business offers 9%-16% possible upside to 2023 consensus EPS and is not priced in by the market. Hays rises as much as 4.3% after the recruiter posted a jump in comparable net fees for the first quarter. Publicis jumps as much as 3.7%, the stock’s best day since July, with JPMorgan saying the advertising company’s results show a “strong” third quarter, though there are risks ahead. Kesko shares rise as much as 6.1%. The timing of this year’s third guidance upgrade was a surprise, Inderes says. Ubisoft shares fall as much as 5.5% after JPMorgan Cazenove (overweight) opened a negative catalyst watch, citing short-term downside risk to earnings ahead of results. Earlier in the session, Asian stocks advanced, boosted by a rebound in technology shares as traders focused on the ongoing earnings season and assessed economic-reopening prospects in the region. The MSCI Asia Pacific Index gained as much as 0.7%, as a sub-gauge of tech stocks rose, halting a three-day slide. Tokyo Electron contributed the most to the measure’s climb, while Taiwan Semiconductor Manufacturing Co. closed up 0.4% ahead of its earnings release. India’s tech stocks rose following better-than-expected earnings for three leading firms in the sector. Philippine stocks were among Asia’s best performers as Manila began easing virus restrictions, which will allow more businesses in the capital to reopen this weekend. Indonesia’s stock benchmark rallied for a third-straight day, as the government prepared to reopen Bali to tourists. READ: Commodities Boom, Tourism Hopes Fuel Southeast Asia Stock Rally Ilya Spivak, head of Greater Asia at DailyFX, said FOMC minutes released overnight provided Asian markets with little direction, which may offer some opportunity for recouping recent losses. The report showed officials broadly agreed last month they should start reducing pandemic-era stimulus in mid-November or mid-December. U.S. 10-year Treasury yields stayed below 1.6%, providing support for tech stocks.  “Markets seemed to conclude the near-term narrative is on pause until further evidence,” Spivak said. Shares in mainland China fell as the country reported factory-gate prices grew at the fastest pace in almost 26 years in September. Singapore’s stock benchmark pared initial losses as the country’s central bank unexpectedly tightened policy. Hong Kong’s equity market was closed for a holiday In rates, Treasuries were steady to a tad higher, underperforming Bunds which advanced, led by the long end.  Fixed income is mixed: gilts bull steepen with short dates richening ~2.5bps, offering only a muted reaction to dovish commentary from BOE’s Tenreyro. Bunds rise with 10y futures breaching 169. USTs are relatively quiet with 5s30s unable to crack 100bps to the upside. Peripheral spreads widen slightly. In FX, the Turkish lira was again the overnight standout as it weakened to a record low after President Recep Tayyip Erdogan fired three central bankers. The Bloomberg Dollar Spot Index fell and the greenback slipped against all of its Group-of-10 peers apart from the yen, with risk-sensitive and resource-based currencies leading gains; the euro rose to trade above $1.16 for the first time in a week.  The pound rose to more than a two-week high amid dollar weakness as traders wait for a raft of Bank of England policy makers to speak. Sweden’s krona temporarily came off an almost eight-month high against the euro after inflation fell short of estimates. The euro dropped to the lowest since November against the Swiss franc as banks targeted large option barriers and leveraged sell-stops under 1.0700, traders said; Currency traders are responding to stagflation risks by turning to the Swiss franc. The Aussie advanced to a five-week high versus the greenback even as a monthly jobs report showed employment fell in September; the jobless rate rose less than economists forecast. The kiwi was a among the top performers; RBNZ Deputy Governor Geoff Bascand said inflation pressures were becoming more persistent China’s yuan declined from a four-month high after the central bank signaled discomfort with recent gains by setting a weaker-than-expected reference rate. In commodities, crude futures extend Asia’s gains with WTI up ~$1 before stalling near $81.50. Brent regains a $84-handle. Spot gold drifts through Wednesday’s highs, adding $4 to print just shy of the $1,800/oz mark. Base metals are well bid with LME copper and aluminum gaining as much as 3%.  Looking at the day ahead, we’ve got central bank speakers including the Fed’s Bullard, Bostic, Barkin, Daly and Harker, the ECB’s Elderson and Knot, along with the BoE’s Deputy Governor Cunliffe, Tenreyro and Mann. Data releases from the US include the September PPI reading along with the weekly initial jobless claims. Lastly, earnings releases will include UnitedHealth, Bank of America, Wells Fargo, Morgan Stanley, Citigroup, US Bancorp and Walgreens Boots Alliance. Market Snapshot S&P 500 futures up 0.6% to 4,382.50 STOXX Europe 600 up 0.9% to 464.38 MXAP up 0.7% to 196.12 MXAPJ up 0.6% to 642.66 Nikkei up 1.5% to 28,550.93 Topix up 0.7% to 1,986.97 Hang Seng Index down 1.4% to 24,962.59 Shanghai Composite little changed at 3,558.28 Sensex up 0.7% to 61,190.63 Australia S&P/ASX 200 up 0.5% to 7,311.73 Kospi up 1.5% to 2,988.64 Brent Futures up 1.0% to $83.98/bbl Gold spot up 0.2% to $1,796.13 U.S. Dollar Index down 0.25% to 93.84 German 10Y yield fell 1.5 bps to -0.143% Euro little changed at $1.1615 Brent Futures up 1.0% to $84.13/bbl Top Overnight News from Bloomberg A flattening Treasury yield curve signals increasing concern Federal Reserve efforts to keep inflation in check will derail the recovery in the world’s largest economy China’s factory-gate prices grew at the fastest pace in almost 26 years in September, potentially adding to global inflation pressure if local businesses start passing on higher costs to consumers. Turkish President Recep Tayyip Erdogan fired monetary policy makers wary of cutting interest rates further, driving the lira to record lows against the dollar with his midnight decree Singapore’s central bank unexpectedly tightened its monetary policy settings, strengthening the local dollar, as the city-state joins policymakers globally concerned about risks of persistent inflation Shortages of natural gas in Europe and Asia are boosting demand for oil, deepening what was already a sizable supply deficit in crude markets, the International Energy Agency said A tropical storm that’s lashing southern China mixed with Covid-related supply chain snarls is causing a ship backlog from Shenzhen to Singapore, intensifying fears retail shelves may look rather empty come Christmas A more detailed look at global markets courtesy of Newsquawk A constructive mood was seen across Asia-Pac stocks with the region building on the mild positive bias stateside where the Nasdaq outperformed as tech and growth stocks benefitted from the curve flattening, with global risk appetite unfazed by the firmer US CPI data and FOMC Minutes that suggested the start of tapering in either mid-November of mid-December. The ASX 200 (+0.5%) traded higher as tech stocks found inspiration from the outperformance of US counterparts and with the mining sector buoyed by gains in underlying commodity prices. The Nikkei 225 (+1.5%) was the biggest gainer amid currency-related tailwinds and with the latest securities flow data showing a substantial shift by foreign investors to net purchases of Japanese stocks during the prior week. The KOSPI (+1.5%) conformed to the brightening picture amid signs of a slowdown in weekly infections, while the Singapore’s Straits Times Index (+0.3%) lagged for most of the session following weaker than expected Q3 GDP data, and after the MAS surprisingly tightened its FX-based policy by slightly raising the slope of the SGD nominal effective exchange rate (NEER). The Shanghai Comp. (U/C) was initially kept afloat but with gains capped after slightly softer than expected loans and financing data from China and with participants digesting mixed inflation numbers in which CPI printed below estimates but PPI topped forecasts for a record increase in factory gate prices, while there was also an absence of Stock Connect flows with participants in Hong Kong away for holiday. Finally, 10yr JGBs were higher after the recent curve flattening stateside and rebound in T-notes with the US longer-end also helped by a solid 30yr auction, although gains for JGBs were capped amid the outperformance in Tokyo stocks and mostly weaker metrics at the 5yr JGB auction. Top Asian News Chinese Developer Shares Fall on Debt Crisis: Evergrande Update Japan’s Yamagiwa Says Abenomics Fell Short at Spreading Wealth China Seen Rolling Over Policy Loans to Keep Liquidity Abundant Malaysia’s 2020 Fertility Rate Falls to Lowest in Four Decades Bourses in Europe have modestly extended on the upside seen at the European cash open (Euro Stoxx 50 +1.1%; Stoxx 600 +0.9%) in a continuation of the firm sentiment experienced overnight. US equity futures have also conformed to the broader upbeat tone, with gains seen across the ES (+0.7%), NQ (+0.8%), RTY (+0.8%) and YM (+0.7%). The upside comes despite a lack of overly pertinent newsflow, with participants looking ahead to a plethora of central bank speakers. The major indices in Europe also see a broad-based performance, but the periphery narrowly outperforms, whilst the SMI (Unch) lags amid the sectorial underperformance seen in Healthcare. Overall, the sectors portray somewhat of a cyclical tilt. The Basic Resources sector is the clear winner and is closely followed by Tech and Financial Services. Individual moves are scarce as price action is largely dictated by the macro picture, but the tech sector is led higher by gains in chip names after the world's largest contract chipmaker TSMC (+3.1% pre-market) reported strong earnings and upgraded its revenue guidance. Top European News German 2021 Economic Growth Forecast Slashed on Supply Crunch U.K. Gas Shipper Stops Supplies in Another Blow to Power Firms Christmas Toy Shortages Loom as Cargo Clogs a Major U.K. Port Putin Is Back to Building Financial Fortress as Reserves Grow In FX, the Dollar and index by default have retreated further from Tuesday’s 2021 peak for the latter as US Treasury yields continue to soften and the curve realign in wake of yesterday’s broadly in line CPI data and FOMC minutes that set the schedule for tapering, but maintained a clear differential between scaling down the pace of asset purchases and the timing of rate normalisation. Hence, the Buck is losing bullish momentum with the DXY now eying bids and downside technical support under 94.000 having slipped beneath an early October low (93.804 from the 5th of the month vs 93.675 a day earlier) and the 21 DMA that comes in at 93.770 today between 94.090-93.754 parameters before the next IJC update, PPI data and a heavy slate of Fed speakers. NZD/AUD - No real surprise that the Kiwi has been given a new lease of life given that the RBNZ has already taken its first tightening step and put physical distance between the OCR and the US FFR, not to mention that the move sparked a major ‘sell fact’ after ‘buy rumour’ reaction. However, Nzd/Usd is back on the 0.7000 handle with additional impetus via favourable tailwinds down under as the Aud/Nzd cross is now nearer 1.0550 than 1.0600 even though the Aussie is also taking advantage of the Greenback’s fall from grace to reclaim 0.7400+ status. Note, Aud/Usd may be lagging somewhat on the back of a somewhat labour report overnight as the employment tally fell slightly short of expectations and participation dipped, but the jobless rate fell and full time jobs rose. Moreover, RBA Deputy Governor Debelle repeated that circumstances are different for Australia compared to countries where policy is tightening, adding that employment is positive overall, but there is not much improvement on the wage front. CAD/GBP/CHF - The next best majors in terms of reclaiming losses vs their US counterpart, with the Loonie also encouraged by a firm bounce in oil prices and other commodities in keeping with a general recovery in risk appetite. Usd/Cad is under 1.2400, while Cable is now over 1.3700 having clearly breached Fib resistance around 1.3663 and the Franc is probing 0.9200 for a big figure-plus turnaround from recent lows irrespective of mixed Swiss import and producer prices. EUR/JPY - Relative laggards, but the Euro has finally hurdled chart obstacles standing in the way of 1.1600 and gradually gathering impetus to pull away from decent option expiry interest at the round number and just above (1.5 bn and 1 bn 1.1610-20), and the Yen regrouping around the 113.50 axis regardless of dovish BoJ rhetoric. In short, board member Noguchi conceded that the Bank may have little choice but to extend pandemic relief support unless it becomes clear that the economy has returned to a pre-pandemic state, adding that more easing may be necessary if the jobs market does not improve from pent-up demand, though he doesn't see and immediate need to top up stimulus or big stagflation risk. In commodities, WTI and Brent front month futures are continuing the grind higher seen since the European close yesterday as the risk tone remains supportive and in the aftermath of an overall bullish IEA oil market report. The IEA upgraded its 2021 and 2022 oil demand forecasts by 170k and 210k BPD respectively, which contrasts the EIA STEO and the OPEC MOMR – with the former upping its 2021 but cutting 2022 forecast, whilst the OPEC MOMR saw the 2021 demand forecast cut and 2022 was maintained. The IEA report however noted that the ongoing energy crisis could boost oil demand by 500k BPD, and oil demand could exceed pre-pandemic levels in 2022. On this, China has asked Russia to double electricity supply between November-December. The morning saw commentary from various energy ministers, but perhaps the most telling from the Russian Deputy PM Novak who suggested Russia will produce 9.9mln BPD of oil in October (in-line with the quota), but that Russia has no problem in increasing oil output which can go to 11.3mln BPD (Russia’s capacity) and even more than that, but output will depend on market situation. Long story short, Russia can ramp up output but is currently caged by the OPEC+ pact. WTI Nov extended on gain about USD 81/bbl to a current high of USD 81.41/bbl (vs 80.41/bbl low) while its Brent counter topped USD 84.00/bbl to a USD 84.24/bbl high (vs 83.18/bbl low). As a reminder, the weekly DoEs will be released at 16:00BST/11:00EDT on account of the Columbus Day holiday. Gas prices have also moved higher in intraday, with the UK Nat Gas future +5.5% at the time of writing. Returning to the Russian Deputy PM Novak who noted that Nord Stream 2 will be ready for work in the next few days, still expects certification to occur and commercial supplies of gas via Nord Stream 2 could start following certification. Elsewhere, spot gold and silver have been drifting higher as the Buck wanes, with spot gold topping its 200 DMA (1,7995/oz) and in striking distance of its 100 DMA (1,799/oz) ahead of the USD 1,800/oz mark. Over to base metals, LME copper is again on a firmer footing, owing to the overall constructive tone across the market. Dalian iron ore meanwhile fell for a second straight day in a continuation of the downside seen as Beijing imposed tougher steel output controls for winter. World Steel Association also cut its global steel demand forecast to +4.5% in 2021 (prev. forecast +5.8%); +2.2% in 2022 (prev. forecast 2.7%). US Event Calendar 8:30am: Sept. PPI Final Demand MoM, est. 0.6%, prior 0.7%; YoY, est. 8.6%, prior 8.3% 8:30am: Sept. PPI Ex Food and Energy MoM, est. 0.5%, prior 0.6%; YoY, est. 7.1%, prior 6.7% 8:30am: Sept. PPI Ex Food, Energy, Trade MoM, est. 0.4%, prior 0.3%; YoY, est. 6.5%, prior 6.3% 8:30am: Oct. Initial Jobless Claims, est. 320,000, prior 326,000; Continuing Claims, est. 2.67m, prior 2.71m 9:45am: Oct. Langer Consumer Comfort, prior 53.4 Central Banks 8:35am: Fed’s Bullard Takes Part in Virtual Discussion 9:45am: Fed’s Bostic Takes Part in Panel on Inclusive Growth 12pm: New York Fed’s Logan Gives Speech on Policy Implementation 1pm: Fed’s Barkin Gives Speech 1pm: Fed’s Daly Speaks at Conference on Small Business Credit 6pm: Fed’s Harker Discusses the Economic Outlook DB's Jim Reid concludes the overnight wrap Inflation dominated the conversation yet again for markets yesterday, after another upside surprise from the US CPI data led to the increasing realisation that we’ll still be talking about the topic for some time yet. Equities were pretty subdued as they looked forward to the upcoming earnings season, but investor jitters were evident as the classic inflation hedge of gold (+1.87%) posted its strongest daily performance since March, whilst the US dollar (-0.46%) ended the session as the worst performer among the G10 currencies. Running through the details of that release, headline US consumer prices were up by +0.4% on a monthly basis in September (vs. +0.3% expected), marking the 5th time in the last 7 months that the figure has come in above the median estimate on Bloomberg, though core prices were in line with consensus at +0.2% month-over-month. There were a number of drivers behind the faster pace, but food inflation (+0.93%) saw its biggest monthly increase since April 2020. Whilst some pandemic-sensitive sectors registered soft readings, housing-related prices were much firmer. Rent of primary residence grew +0.45%, its fastest pace since May 2001 and owners’ equivalent rent increased +0.43%, its strongest since June 2006. These housing gauges are something that Fed officials have signposted as having the potential to provide more durable upward pressure on inflation. The CPI release only added to speculation that the Fed would be forced to hike rates earlier than previously anticipated, and investors are now pricing in almost 4 hikes by the end of 2023, which is over a full hike more than they were pricing in just a month earlier. In response, the Treasury yield curve continued the previous day’s flattening, with the prospect of tighter monetary policy seeing the 2yr yield up +2.0bps to a post-pandemic high of 0.358%, whilst the 10yr decreased -4.0bps to 1.537%. That move lower in the 10yr yield was entirely down to lower real rates, however, which were down -7.4bps, suggesting investors were increasingly concerned about long-term growth prospects, whereas the 10yr inflation breakeven was up +3.3bps to 2.525%, its highest level since May. Meanwhile in Europe, 10yr sovereign bond yields took a turn lower alongside Treasuries, with those on bunds (-4.2bps), OATs (-4.0bps) and BTPs (-2.3bps) all falling. Recent inflation dynamics and issues on the supply-side are something that politicians have become increasingly attuned to, and President Biden gave remarks last night where he outlined efforts to address the supply-chain bottlenecks. This followed headlines earlier in the session that major ports in southern California would move to a 24/7 schedule to unclog delivery backlogs, and Mr. Biden also used the opportunity to push for the passage of the infrastructure plan. That comes as it’s also been reported by Reuters that the White House has been speaking with US oil and gas producers to see how prices can be brought lower. We should hear from Mr. Biden again today, who’s due to give an update on the Covid-19 response. On the topic of institutions that care about inflation, the September FOMC minutes suggested staff still remained optimistic that inflationary pressures would prove transitory, although Committee members themselves were predictably more split on the matter. Several participants pointed out that pandemic-sensitive prices were driving most of the gains, while some expressed concerns that high rates of inflation would feed into longer-term inflation expectations. Otherwise, the minutes all but confirmed DB’s US economists’ call for a November taper announcement, with monthly reductions in the pace of asset purchases of $10 billion for Treasuries and $5 billion for MBS. Markets took the news in their stride immediately following the release, reflecting how the build-up to this move has been gradually telegraphed through the year. Turning to equities, the S&P 500 managed to end its 3-day losing streak, gaining +0.30% by the close. Megacap technology stocks led the way, with the FANG+ index up +1.13% as the NASDAQ added +0.73%. On the other hand, cyclicals such as financials (-0.64%) lagged behind the broader index following flatter yield curve, and JPMorgan Chase (-2.64%) sold off as the company’s Q3 earnings release showed muted loan growth. Separately, Delta Air Lines (-5.76%) also sold off along with the broader S&P 500 airlines index (-3.51%), as they warned that rising fuel costs would threaten earnings over the current quarter. European indices posted a more solid performance than the US, with the STOXX 600 up +0.71%, though the sectoral balance was similar with tech stocks outperforming whilst the STOXX Banks index (-2.05%) fell back from its 2-year high the previous session. Overnight in Asia equities have put in a mixed performance, with the KOSPI (+1.17%) and the Nikkei (+1.01%) moving higher whilst the Shanghai Composite (-0.25%) and the CSI (-0.62%) have lost ground. Those moves follow the release of Chinese inflation data for September, which showed producer price inflation hit its highest in nearly 26 years, at +10.7% (vs. +10.5% expected), driven mostly by higher coal prices and energy-sensitive categories. On the other hand, the CPI measure for September came in slightly below consensus at +0.7% (vs. +0.8% expected), indicating that higher factory gate prices have not yet translated into consumer prices. Meanwhile, equity markets in the US are pointing to a positive start later on with S&P 500 futures up +0.32%. Of course, one of the drivers behind the renewal of inflation jitters has been the recent surge in commodity prices across the board, and we’ve seen further gains yesterday and this morning that will only add to the concerns about inflation readings yet to come. Oil prices have advanced yet again, with Brent Crude up +0.69% this morning to be on track to close at a 3-year high as it stands. That comes in spite of OPEC’s monthly oil market report revising down their forecast for world oil demand this year to 5.8mb/d, having been at 5.96mb/d last month. Elsewhere, European natural gas prices were up +9.24% as they continued to pare back some of the declines from last week, and a further two energy suppliers in the UK collapsed, Pure Planet and Colorado Energy, who supply quarter of a million customers between them. Otherwise, copper (+4.4x%) hit a 2-month high yesterday, and it up a further +1.01% this morning, Turning to Brexit, yesterday saw the European Commission put forward a set of adjustments to the Northern Ireland Protocol, which is a part of the Brexit deal that’s caused a significant dispute between the UK and the EU. The proposals from Commission Vice President Šefčovič would see an 80% reduction in checks on animal and plant-based products, as well as a 50% reduction in paperwork by reducing the documentation needed for goods moving between Great Britain and Northern Ireland. It follows a speech by the UK’s David Frost on Tuesday, in which he said that Article 16 of the Protocol, which allows either side to take unilateral safeguard measures, could be used “if necessary”. Mr. Frost is due to meet with Šefčovič in Brussels tomorrow. Running through yesterday’s other data, UK GDP grew by +0.4% in August (vs. +0.5% expected), and the July number was revised down to show a -0.1% contraction (vs. +0.1% growth previously). The release means that GDP in August was still -0.8% beneath its pre-pandemic level back in February 2020. To the day ahead now, and on the calendar we’ve got central bank speakers including the Fed’s Bullard, Bostic, Barkin, Daly and Harker, the ECB’s Elderson and Knot, along with the BoE’s Deputy Governor Cunliffe, Tenreyro and Mann. Data releases from the US include the September PPI reading along with the weekly initial jobless claims. Lastly, earnings releases will include UnitedHealth, Bank of America, Wells Fargo, Morgan Stanley, Citigroup, US Bancorp and Walgreens Boots Alliance. Tyler Durden Thu, 10/14/2021 - 08:29.....»»

Category: blogSource: zerohedgeOct 14th, 2021

China has at least 65 million empty homes - enough to house the population of France. It offers a glimpse into the country"s massive housing-market problem.

In the US and Japan, abandoned homes have earned cities the titles of "ghost towns." But China's are different - they're not abandoned, just empty. Unfinished buildings and vacant streets in Xiangluo Bay. Yujiapu & Xiangluo Bay, a new central business district under construction in Tianjin, was been expected to be China's Manhattan. Now it's a Ghost city. Zhang Peng / Contributor / Getty Images One-fifth of the homes in China - at least 65 million units - are empty. That amount of empty real estate is enough to house the population of France. The ghost cities are a testament to China's reliance on real estate as a driver of economic growth. See more stories on Insider's business page. If you drive an hour or two outside Shanghai or Beijing, you'll find something odd. The cities are still tall, and they're still modern. They're also, generally, in good condition. But unlike their bustling, Tier 1-city counterparts, they're basically empty.These are China's ghost cities.Their existence has been well-documented. In one prominent example, CBS' "60 Minutes" ran a 2013 segment on China's ghost towns that opened with the correspondent Lesley Stahl on a major road at rush hour with barely a car in sight.But as China's real-estate market has risen to the forefront of the global conversation with Evergrande's $300 billion debt looming large, so, too, have ghost cities become a renewed source of interest. While they're a testament to China's reliance on real estate as a driver of economic growth and in its belief in the sector as a safe investment, their exact quantity is hard to define.Li Gan is a professor of economics at Texas A&M University and the director of the Survey and Research Center for China Household Finance at Chengdu's Southwestern University of Finance and Economics. He's also considered one of the top experts on China's housing market. When I asked him how many ghost towns there were in China, he didn't have an answer."I don't know if there's any definition of 'ghost town,'" he said. "So I don't know if there's any number."What are China's ghost towns?The best known of China's ghost cities may be Ordos New Town, also known as Kangbashi, in the region of Inner Mongolia.The city was intended in the early 2000s to eventually house a million people, a number that was later scaled back to 300,000. But as of 2016, a mere 100,000 people lived in it. Kangbashi eventually managed to lure residents after China moved some of its top schools into the city, Nikkei reported earlier this year.In 2015, the photographer Kai Caemmerer traveled to China to explore ghost cities. His photos show endless rows of high-rises with barely any indication of human life. They're photos, in fact, that might remind people of what locked-down cities around the world looked like during the coronavirus pandemic.These unoccupied units constitute a significant portion of China's enormous housing market, which is twice the size of the US residential market and hit $52 trillion in value in 2019. Data from the most recently published China Household Finance Survey, which Gan runs, shows that 21% of homes - some 65 million - were vacant as of 2017, The Wall Street Journal reported.That many empty units could house the population of France.But unlike parts of the US and Japan, where homes in various states of abandonment and decay have prompted cities and regions to be called ghost towns, China's are different. They're not abandoned; they're just unoccupied.As Gan put it, these ghost cities are "a unique China phenomenon." The empty street in the Kangbashi district of Inner Mongolia, China, in February 2017. South China Morning Post / Contributor How did China end up with all this empty real estate?The first thing to understand about China's ghost cities is that they are not cities in states of disrepair. Instead, they are full of new builds that were bought as investments. They're also a symptom of mismatched supply and demand."These homes being empty means they are sold out to investors and buyers, but not occupied by either the owners or renter," Xin Sun, a senior lecturer in Chinese and East Asian business at King's College London, told Insider.On the supply side, Sun said, the government gets big sales revenue from leasing out land to developers. "This gives the government very strong incentive to encourage development instead of limiting it," he said.Every year, China starts building 15 million new homes - five times as many as the US and Europe combined, The Economist reported in January.In addition to the government promoting development and driving supply up, there's the matter of China's urbanization rate. Data from the World Bank indicates that 61% of China's population lived in cities as of last year, up from 35.8% just two decades earlier.Gan said there were flaws in China's urbanization-rate metrics, however, one of which is tied to reclassified areas. When rural areas are reclassified as urban, the people in those areas already have houses. So while they never moved, and won't need a new place to live, they still contribute to the urbanization rate, he said."Part of the problem is that China overestimated its urbanization rate - how many people would want to move from rural to urban areas," Gan said.A culture of real-estate investmentOn the demand side, the general upward trend of house prices has spawned huge demand for second and third properties, Sun said."Within two decades, house prices have grown multiple times in many places, including major cities," Sun said. "Most people in China haven't experienced a substantial real-estate bubble burst like what the US experienced in 2008 or Japan in the 1990s.""This leads to a strong popular belief that real estate is the best way to preserve and generate wealth," Sun said. "And this stimulates the demand for buying additional properties."Homeownership rates in China are high: More than 90% of households are homeowners, according to a January research paper on homeownership in China from the National Center for Biotechnology Information. More than 20% of homeowners in China own more than one home. The US, for comparison, has a 65% homeownership rate. Real-estate holdings also account for an outsize proportion of household wealth in China: 70% of household assets - far higher than what you'd find in Western economies - are held in real estate.Demand for units, however - and this is where the mismatch comes into play - has been affected by a series of factors, said Bernard Aw, an economist overseeing Asia Pacific for Coface. Among these factors is the increasing unaffordability of homes, an aging population, and slowing population growth. Aw pointed to China's 2020 census, which recorded the slowest population growth since the 1970s."They built an oversupply, and then they sold it," Gan said. "And that's why you see the vacancies." Residential buildings in which only few people actually lived in Kangbashi in 2017. South China Morning Post / Contributor While the Evergrande crisis looms, China has ways of mitigating risk - including stopping home salesEvergrande has more than 1,300 developments spread across 280 cities in China, which collectively house more than 12 million people, its website says.But Evergrande also has $300 billion in debt, making it the most indebted company in the world; it has 1.6 million undelivered apartments hanging in the balance, and it keeps missing its bond payments.Despite the size of Evergrande's scale and debt, the developer accounts for only a fraction of China's housing woes. "Evergrande is linked to the vacancy problem, but you cannot blame them for it," Gan said. "Their market share in China is still small.""They're both part of a big problem," Gan added, pointing to Evergrande and the vacancy rate. An aerial view from a drone of the Evergrande City last month in Wuhan, China. Getty Images In 2017, Bloomberg described Beijing's nightmare scenario as one in which people rush to sell off their second properties if cracks in the market appear, thereby sending prices on a downward spiral. When I asked Gan whether this was the scenario now unfolding in China, he said it wasn't - but not because there aren't cracks in the market.Instead, the government is making it so difficult to complete a sale that it's dissuading homeowners from selling, Gan said."China can stop a transaction. The government can change the number of years you have to own a home. Or if prices are too low, the government won't give you a certificate of sale," Gan said. "That is what's happening now.""You won't see the price drop substantially, but you will see the transaction volume drop massively," he added. "They'll stop the sale. By doing that, they can prevent the look of a massive price drop. They can prevent the crash."This very move - suppressing home sales - stands to hurt those who need to sell their homes to access cash, Gan said. "Real estate is a massive chunk of people's wealth," he said. "If they need that wealth for education, or health problems, or retirement, the liquidity sellers will suffer."Gan stressed that the stopping of sales was not singularly, or even directly, linked to Evergrande's debt crisis: "This was happening before Evergrande became evident," he said.Heightened contagion fearsIn addition to liquidity sellers, households that own only one home are thought to face the greatest risk."People who own one home, because of high prices and low income, they have some risk," Gan said. "For many of them, their down payment is borrowed from friends, from relatives - not from banks."It's a different story for well-off families with money invested in second and third properties, Sun said: "The risk of default for these families is relatively low unless a massive, unprecedented economic crisis leads to massive unemployment.""But aside from that worst-case scenario, the risk of default is relatively low," Sun added. On a broader scale, Evergrande poses a risk to the larger Chinese economy. Experts say Evergrande's debt problems could affect other property developers in China and might create a new wave of defaults. Just last week, the Chinese property developer Fantasia missed a $206 million repayment deadline. And a leaked letter from September 2020 shows the company's debts are tied to at least 128 banks, Reuters reported.Another danger is that the Evergrande crisis stands to change China's perception of real estate as a safe investment, Sun said. That's a problem when the real-estate sector makes up 29% of the country's gross domestic product."The government is heavily reliant on households continuing to invest in real estate," Sun said. "So if the bubble bursts, it will inevitably compromise people's confidence in real estate and undermine their perception of real estate as the best way to preserve and generate wealth."That means a slowdown in real estate will cause a deterioration of economic growth and government finance."Read the original article on Business Insider.....»»

Category: topSource: businessinsiderOct 14th, 2021

China has at least 65 million empty homes - enough to house the entire population of France. It offers a glimpse into the country"s massive housing market problem.

In the US and Japan, abandoned homes have earned cities the titles of "ghost towns." But China's are different - they're not abandoned, just empty. Unfinished buildings and vacant streets in Xiangluo Bay. Yujiapu & Xiangluo Bay, a new central business district under construction in Tianjin, was been expected to be China's Manhattan. Now it's a Ghost city. Zhang Peng / Contributor / Getty Images One-fifth of the homes in China - at least 65 million units - are empty. That means there's enough empty real estate in the country to house the entire population of France. China's ghost cities are a sprawling testament to its reliance on real estate as a driver of economic growth, and in its belief in the sector as a safe investment. See more stories on Insider's business page. If you drive an hour or two outside of Shanghai or Beijing, you'll find something odd. The cities are still tall, and they're still modern. They're also, generally, in good condition. But unlike their bustling, Tier 1-city counterparts, they're basically empty.These are China's "ghost cities."Their existence has been well-documented. In one prominent example, CBS' 60 Minutes ran a 2013 segment on China's ghost towns that opened with correspondent Lesley Stahl on a major road at rush hour with barely a car in sight.But as China's real-estate market has risen to the forefront of the global conversation with Evergrande's $300 billion debt looming large, so, too, have ghost towns become a renewed source of interest. While they're a testament to China's reliance on real estate as a driver of economic growth and in its belief in the sector as a safe investment, their exact quantity is hard to define.Li Gan is a professor of economics at Texas A&M University and the director of the Survey and Research Center for China Household Finance at Chengdu's Southwestern University of Finance and Economics. He's also considered one of the top experts on China's housing market. When I asked him how many ghost towns there are in China, he didn't have an answer."I don't know if there's any definition of 'ghost town,'" he said. "So I don't know if there's any number." What are China's ghost towns?The most famous of China's ghost towns may be Ordos New Town, also known as Kangbashi, in Inner Mongolia.The city was designed to house one million people, a number that was later scaled back to 300,000, Insider's Melia Robinson previously reported. But as of 2016, a mere 100,000 people lived in it. Kangbashi eventually managed to lure in residents after China moved some of its top schools into the city, prompting students and their families to follow suit, Nikkei reported earlier this year.In 2015, photographer Kai Caemmerer traveled to China to explore ghost cities. His photos showcase endless rows of high-rises with barely any indication of human life. They're photos, in fact, that might remind people of what locked-down cities around the world looked like during the pandemic.These unoccupied units constitute a significant portion of China's enormous housing market, which is twice the size of the US residential market and hit $52 trillion in value in 2019. Data from the most recently published China Household Finance Survey, which Gan runs, shows that 21% of homes - some 65 million homes - were vacant as of 2017, The Wall Street Journal reported.That means there are enough empty units in China to house the entire population of France.But unlike parts of the US and Japan, where unoccupied homes in various states of abandonment and decay have earned cities and regions the titles of "ghost towns," China's are different. They're not abandoned - they're just unoccupied.As Gan put it, these ghost cities are "a unique China phenomenon." The empty street in Kangbashi district, Ordos city, Inner Mongolia, on Feb. 16, 2017. A large number of new style buildings were built, but many were suspended due to lack of continuous financial support. South China Morning Post / Contributor How did China end up with all this empty real estate?The first thing to understand about China's ghost cities is that these are not cities in states of disrepair. Instead, they are full of new builds that were bought as investments. They're also a symptom of mismatched supply and demand."These homes being empty means they are sold out to investors and buyers, but not occupied by either the owners or renter," Dr. Xin Sun, a senior lecturer in Chinese and East Asian Business at King's College London, told Insider.On the supply side, Sun said, the government gets big sales revenue from leasing out land to developers. "This gives the government very strong incentive to encourage development instead of limiting it," he said.Every year, China starts building 15 million new homes - five times as many as the US and Europe combined, the Economist reported in January.In addition to the government promoting development and driving supply up, there's the matter of China's urbanization rate. As of 2020, 61% of China's population lives in cities, up from 35.8% of its population 20 years earlier, data from the World Bank shows. However, Gan said there are flaws in China's urbanization rate metrics, one of which is tied to reclassified areas. When rural areas are reclassified as urban, the people in those areas already have houses. So while they never moved, and won't need a new place to live, they still contribute to the urbanization rate, he said."Part of the problem is that China overestimated its urbanization rate - how many people would want to move from rural to urban areas," Gan said.A culture of real-estate investmentOn the demand side, the general upward trend of house prices has spawned huge demand for second and third properties, Sun said."Within two decades, house prices have grown multiple times in many places, including major cities," Sun said. "Most people in China haven't experienced a substantial real-estate bubble burst like what the US experienced in 2008 or Japan in the 1990s.""This leads to a strong popular belief that real estate is the best way to preserve and generate wealth," Sun said. "And this stimulates the demand for buying additional properties."Homeownership rates in China are high: More than 90% of households are homeowners, according to a January research paper on homeownership in China from the National Center for Biotechnology Information. More than 20% of homeowners in China own more than one home. The US, for comparison, has a 65% homeownership rate. Real-estate holdings also account for an outsized proportion of household wealth in China: 70% of household assets - far higher than what you'd find in western economies - are held in real estate.However - and this is where the mismatch comes into play - demand for units has been affected by a series of factors, said Bernard Aw, an economist overseeing Asia Pacific for Coface. Amongst these factors is the increasing unaffordability of homes, an aging population, and slowing population growth. Aw pointed to China's 2020 census, which recorded the slowest population growth since the 1970s."They built an oversupply, and then they sold it," Gan said. "And that's why you see the vacancies." Residential buildings in which only few people actually living in Kangbashi district, Ordos city, Inner Mongolia, on Feb. 16, 2017. South China Morning Post / Contributor While the Evergrande crisis looms, China has ways of mitigating risk - including stopping home salesEvergrande has more than 1,300 developments spread across 280 cities in China, which collectively house more than 12 million people, its website states. As Insider's Matthew Loh recently reported, that means more people live in Evergrande properties than in entire countries, like Greece, Portugal, or Sweden.But Evergrande also has $300 billion in debt, making it the most indebted company in the world; it has 1.6 million undelivered apartments hanging in the balance; and it keeps missing its bond payments.Despite the enormity of both Evergrande's scale and debt, the developer accounts for a fraction of China's housing woes. "Evergrande is linked to the vacancy problem, but you cannot blame them for it," Gan said. "Their market share in China is still small.""They're both part of a big problem," Gan added, pointing to Evergrande and the vacancy rate. An aerial view from a drone of the Evergrande City on September 24,2021 in Wuhan, Hubei Province, China. Getty Images In 2017, Bloomberg described Beijing's nightmare scenario as one in which people rush to sell off their second properties if cracks in the market appear, thereby sending prices on a downward spiral. When I asked Gan if this is the scenario currently unfolding in China, he said it's not - but not because there aren't cracks in the market.Instead, the government is making it so difficult to complete a sale that it's dissuading homeowners from selling, Gan said."China can stop a transaction. The government can change the number of years you have to own a home. Or if prices are too low, the government won't give you a certificate of sale," Gan said. "That is what's happening now.""You won't see the price drop substantially, but you will see the transaction volume drop massively," he added. "They'll stop the sale. By doing that, they can prevent the look of a massive price drop. They can prevent the crash."This very move - suppressing home sales - stands to hurt those who need to sell their homes to access cash, Gan said. "Real estate is a massive chunk of peoples' wealth," he said. "If they need that wealth for education, or health problems, or retirement, the liquidity sellers will suffer."Gan stressed that the stopping of sales is not directly, or singularly, linked to Evergrande's debt crisis: "This was happening before Evergrande became evident," he said.Heightened contagion fearsIn addition to liquidity sellers, households who own only one home face the greatest risk, the experts said."People who own one home, because of high prices and low income, they have some risk. For many of them, their down payment is borrowed from friends, from relatives - not from banks," Gan said.It's a different story for well-off families with money invested in second and third properties, Sun said: "The risk of default for these families is relatively low unless a massive, unprecedented economic crisis leads to massive unemployment.""But aside from that worst-case scenario, the risk of default is relatively low," Sun added. On a broader scale, Evergrande poses a contagion risk to the entire Chinese economy. Experts say Evergrande's debt problems could affect other property developers in China and potentially create a whole new wave of defaults. Just last week, Chinese property developer Fantasia missed a $206 million repayment deadline. And a leaked letter from September 2020 shows the company's debts are tied to at least 128 banks, Reuters reported.Another very real danger is that the Evergrande crisis stands to change China's perception of real estate as a safe investment, Sun said. Given that the real estate sector makes up 29% of the country's GDP, a softening of trust could send shockwaves through the Chinese economy. "The government is heavily reliant on households continuing to invest in real estate. So if the bubble bursts, it will inevitably compromise peoples' confidence in real estate and undermine their perception of real estate as the best way to preserve and generate wealth," Sun said. "That means a slowdown in real estate will cause a deterioration of economic growth and government finance."Read the original article on Business Insider.....»»

Category: worldSource: nytOct 14th, 2021

Inflation Worries Prevail: ETF Strategies to Play

ETF strategies to play the rise in U.S. inflation. While some suggested that the latest rise in inflation is temporary, the latest views indicate that the trend may be persistent. Talks of rising inflation in the United States have been rife since the passage of the $1.9-trillion stimulus bill under the Biden administration. Meanwhile, widespread vaccination and a prolonged period of a dovish Fed have also fueled the inflationary pressure. While some suggested that the latest rise in inflation is temporary, the latest views indicate that the trend may be persistent.Analysts pointed out some historical evidences of higher inflation in the aftermath of the fiscal and monetary stimulus. The deflationary trend from 1930 to 1933 was snapped then thanks to that stimulus and more normal inflation rates followed from 1934 to 1937. A similar trend was seen during World War II, per a Morningstar article.Energy and commodity prices maintained a march higher. U.S. West Texas intermediate crude oil futures set a fresh seven-year high and crossed $82 per barrel. The supply crunch and higher fuel demand pushed the long-ailing oil prices higher providing a boost to inflation. Plus, aluminum prices increased to their highest level since 2008, and copper prices continued the latest rally.Against this backdrop, investors can track the below-mentioned ETF strategies to fight inflation.Precious Metals – Inflation Protected AssetsThe inflationary backdrop in the United States is favorable for gold as the metal is historically viewed as a hedge against inflation. Rising inflation often lowers the value of the concerned currency, meaning a subdued greenback. If the greenback remains subdued, gold will gain some glitter back.The theory holds good for silver, platinum and palladium also. While white metals often act as precious metals, these also have extensive industrial usages. The role in the industrial sector makes the case for white metal investing stronger as economic reopening would boost the industrial metal prices.SPDR Gold Shares (GLD), iShares Silver Trust (SLV), Aberdeen Standard Platinum Shares ETF (PPLT) and Aberdeen Standard Physical Palladium Shares ETF (PALL) are the ETFs to track such metals.Time for Floating Rate & TIPS Bonds?When inflation rises steadily, rates normally rise. Such a situation should be helpful for floating rate bond ETFs like iShares Floating Rate Bond ETF FLOT . Floating rate notes are investment grade bonds that do not pay a fixed rate to investors but have variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of issuers. Since the coupons of these bonds are adjusted periodically, they are less sensitive to an increase in rates compared to the traditional bonds (see all Investment Grade Corporate Bond ETFs here).Meanwhile, TIPS ETFs like iShares TIPS Bond ETF TIP is another bet. These offer exposure to U.S. TIPS, which are government bonds whose face value rises with inflation. TIPS ETFs offer robust real returns during inflationary periods unlike its unprotected peers in the fixed-income world.These securities pay an interest on an inflated-principal amount (principal rises with inflation) and when the securities mature, investors get either the inflation-adjusted principal or the original principal, whichever is greater. As a result, both principal amount and interest payments will keep on increasing with rising consumer prices.Bet on Value ETFsInvestopedia explains that rising inflation pushes input prices higher; consumers are likely to buy lesser number of goods; companies’ revenues and profits decline, and the economy slows for some time. Still, rising rates are good for value stocks than the growth ones as the latter’s cash flows come way out in the future, as indicated by New York University finance professor Aswath Damodaran, as quoted on CNBC. Vanguard Value ETF VTV is thus a good bet.Play Inflation-Protected ETFsThanks to the growing reach of the ETF industry, we now have several ETFs that offer exposure to tackle the inflationary pressure. These ETFs are ProShares Inflation Expectations ETF RINF, Horizon Kinetics Inflation Beneficiaries ETF (INFL) and Quadratic Interest Rate Volatility and Inflation ETF IVOL.Real Estate Prices Are SoaringWith higher demand and an uptrend in inflation, home prices have been uphill. In the fourth quarter of 2011, the median sale price was about $221,000 while at the end of first quarter of 2021, it had jumped to $347,500. Goldman Sachs economists are forecasting a 16% increase in home prices by the end of 2022 from the current rates.Thanks to rising home prices, affordability is falling. Demand for renting has been increasing, which in turn is giving a push to shelter costs. This means exposure to real estate could be inflation-beating.Real Estate Select Sector SPDR ETF XLRE is a good ETF play here. Zacks Names "Single Best Pick to Double" From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all. You know this company from its past glory days, but few would expect that it's poised for a monster turnaround. Fresh from a successful repositioning and flush with A-list celeb endorsements, it could rival or surpass other recent Zacks' Stocks Set to Double like Boston Beer Company which shot up +143.0% in a little more than 9 months and Nvidia which boomed +175.9% in one year.Free: See Our Top Stock and 4 Runners Up >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report iShares TIPS Bond ETF (TIP): ETF Research Reports Vanguard Value ETF (VTV): ETF Research Reports Real Estate Select Sector SPDR ETF (XLRE): ETF Research Reports iShares Floating Rate Bond ETF (FLOT): ETF Research Reports ProShares Inflation Expectations ETF (RINF): ETF Research Reports Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL): ETF Research Reports To read this article on Zacks.com click here......»»

Category: topSource: zacksOct 13th, 2021

Transcript: Chamath Palihapitiya

     The transcript from this week’s, MiB: Chamath Palihapitiya on Venture Investing, is below. You can stream and download our full conversation, including the podcast extras on iTunes, Spotify, Google, Bloomberg, and Acast. All of our earlier podcasts on your favorite pod hosts can be found here. ~~~ RITHOLTZ: This week on the… Read More The post Transcript: Chamath Palihapitiya appeared first on The Big Picture.      The transcript from this week’s, MiB: Chamath Palihapitiya on Venture Investing, is below. You can stream and download our full conversation, including the podcast extras on iTunes, Spotify, Google, Bloomberg, and Acast. All of our earlier podcasts on your favorite pod hosts can be found here. ~~~ RITHOLTZ: This week on the podcast, man, strap yourself in. This is really one of the old-time greats. Chamath Palihapitiya, Founder of Social Capital, very successful venture capitalist, part-owner of the Golden State Warriors, and all-around insightful investor social critic, and tech wonk. If you’re interested in anything from technology to social media, to venture investing, startups, entrepreneurship, I don’t know what else to say other than strap yourself in. This is a great one. With no further ado, my conversation with Chamath Palihapitiya. VOICE-OVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio. RITHOLTZ: I’m Barry Ritholtz. You’re listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Chamath Palihapitiya. He is the Founder of Social Capital, one of the more interesting and successful venture capitalist out in Palo Alto. He is also an Engineer and Team Leader working at places like AOL, Facebook, and Slack. He has been known as the SPAC King for his numerous successful deals in that space. And he is also a 10 percent owner of the Golden State Warriors. Chamath Palihapitiya, welcome to Bloomberg. PALIHAPITIYA: Barry, thanks. RITHOLTZ: I’ve been looking forward to having this conversation for a while. Let’s — normally, I start with people’s backgrounds and we go chronologically, but you have some quotes that I love, and I want to ask you about them and let you run wild with them, “Starting with venture capital properly deployed can solve the biggest problems filling the void left by the shrinking scientific ambitions of governments, foundations, and international organizations. Explain. PALIHAPITIYA: Well, if you look at what’s happening in California or what’s happening at the federal level of the United States currently, there’s a really interesting thing that’s happened, which is we have effectively single-party rule. You have a, you know, elected leader that’s of one party. You have a Senate that’s of that same party, a House and then, you know, in the case of California, mayors as well, all democratic in this case. And what’s interesting is it also happens to be a moment in time where the societal problems that we’ve been facing are the worst they’ve ever been. Climate change is worse than it’s ever been. We have a water crisis. We have an impending food crisis, homelessness, crime. And you have to ask yourself, well, if a single party like — you know, when you have a typical normal, you know, political set-up, you have these two opposing forces and you have to find common ground. And each party says the exact thing, which is, well, if we had complete control, this would all be fixed. And it turns out that two examples where you have complete control, in fact, nothing gets fixed, even less gets fixed than what got fixed before. So why is that? It’s that the toolkit of policy and the toolkit of societies has changed. It’s no longer as much about laws necessarily, but it’s about technology. It’s about code. It’s about very specific inventions of science. And the problem with that then, well, then you would say, “Well, great. Well, that’s the solution to all of our problems. If we go in and figure out how to actually, you know, just have more of all of that stuff, everything will be solved.” OK, well, then — then you go in and you decompose that problem to first principles. And what you find is, for example, in places like core scientific research, people care more about citations, and papers, and research, and it’s also highly politicized and infested with all kinds of infighting. And so, foundations can’t fund the work that they used to. Universities aren’t nearly as good and actually promoting massive breakthroughs. So more and more of this responsibility gets put on for-profit enterprises, but to be very specific, they have to be for profit and they have to be technical. And when you see it that way, the venture capitalist all of a sudden has this critical role in society that they didn’t have before because they are a translator. They are, you know, in a technical meeting the smartest business person, but in a business meeting the smartest technical person. And they’re able to put these things together to solve problems. And so, that’s what I was trying to get across, which is we need more people building for-profit technical businesses, organizing resources against problems. RITHOLTZ: So — so let’s stay with the concept of — of venture capital being organized to solve problem and talk a little bit about Social Capital. Tell us about your first couple of venture investments and who were your first limited partners. PALIHAPITIYA: So, I was a Facebook at the time, and I had been doing a bunch of angel investing. And this is maybe 2008 or ’09, but I was the first solo G.P., I think, in many ways. I was putting some money to work of my own money, small checks, Barry, $10,000, $15,000. RITHOLTZ: Early seed round, right? PALIHAPITIYA: Early seed rounds in, you know, 2007 and ’08, basically all the money that I had. And I had to win. I met a guy named Rick Thompson, an amazing entrepreneur, who started a gaming company. And I jumped in with two feet. I invested my money. I spent a little bit of time there helping him, you know, sort of — I mean, as a — as a part-timer, obviously, because I was working at Facebook at the time. And the company gets bought by Disney for like 750 million bucks and I made a few million bucks. And I thought, “This is it.” I have my — I have my escape velocity. And at the time at Facebook, they were all these people that were trying to invest in the company. And Zuck basically said to me, “Hey, can you help sort out whose money we should take?” I mean, I was running Facebook platform, I was building Facebook Mobile, I was doing all of these products so — but I was like, “Yeah, sure, I guess.” And I met the guys at Tiger Global, Chase Coleman specifically, and we built a relationship and then, you know, Tiger ended up investing in the business. And along the way, you know, I said, “Hey, I’m thinking of, you know, investing a little bit of capital on the side.” And he goes, “Well, if you organize a little LLC, you know, I’m happy to kick in a, you know, a few shovels.” And so, all of a sudden, I had this little group of me and my friends, and I just organized about 11 million bucks, you know, and I was like three or four of it and like, you know, other couple of folks jumped in for 50K there, 500K there, a million there, whatever. And so, while I was a full-time employee at Facebook, I was a part-time investor. And that’s how I started and so those are my first LPs, wonderful guys, Reid Hoffman, you know, a whole list of kind of like … RITHOLTZ: Who — who’s the rest of that list because already I am loving this group? PALIHAPITIYA: The list was pretty impressive. I want to say it was like Peter Thiel, Reid Hoffman, Chase Coleman. I’d have to look at the slides, I can’t … RITHOLTZ: But it’s a murderous row pretty much. PALIHAPITIYA: Yeah, Dave Goldberg, you know, Zander Lurie who is the CEO of Momentum A.I., so a bunch of really great entrepreneurs, and CEOs, and investors. Anyways, I put the money to work and, you know, it was non-obvious that that fund was good. I was learning. And most of the investments I made were way too ambitious, and I was deeply undercapitalized, right? So, you — in 2008 and ’09, in hindsight, it was really dumb to make a bunch of deep tech investments. Now, some of them have come home to roost, and that fund has now (inaudible), but we got very lucky and it did very well, but it took an enormously long period of time. So, I put the money to work and I learned. I learned, hey, portfolio construction is important. I didn’t get that right. I was way undercapitalized, like, hey, wait a minute, like I needed way more reserves to defend these companies. And I had to think about duration, meaning I can’t solve 20 of your problems in a 10-year fund. I need to solve five of your problems in a 10-year fund if I want to be in the fund business. And, you know, that obviously changed in 2016 and ’17 when I just basically consolidated with my own money. But so – then I left Facebook in 2011 and I went back to these same folks. And I said, “Guys, let’s go much bigger. I think I know what I’m doing.” And we created — my first fund was 250 or 60 million bucks. I put up 60, and then it was really like, you know, John Doerr, Peter Thiel, Reid Hoffman, Li Ka-shing, you know, just — I ran the table of Jorge Paulo Lemann like incredible people. And a handful of really great institutions, Mayo Clinic, you know, folks that I was really proud to make money for. And I said, “This is like a great intersection of entrepreneurs and, you know, investors, and philanthropists, and foundations.” And, you know, I’m going to go and try to find great businesses, and that’s how it started. RITHOLTZ: So, from there, what was the subsequent funds that came out of that because that, you know, funds that run a seven or a 10-year lifespan. And some companies, some VCs will just do Fund 2, Fund 3, Fund 4, you didn’t exactly go in that direction. PALIHAPITIYA: You know, I can tell you — so like the returns as of this last quarter because I just — I had a — I had a little advisory board meeting, you know, I put about a billion one in the ground. That is worth today just a little under $5 billion. RITHOLTZ: And this was the 2016? PALIHAPITIYA: No. So, yeah, this was … RITHOLTZ: Or 2011? PALIHAPITIYA: I — I raised about $1 billion over four funds — over five funds, sorry, in the first five years basically, so a $260 million fund, another $260 million, a $500 million, and then I had a small $100 million fund and then a $30 million opportunities fund kind of — so about $1.1 billion. And, you know, so far, we’ve returned a little — almost a little under 2X of capital, so cash-on-cash, we’ve returned about two some odd billion. The curing value is a little under $5 billion. And I think that, you know, when I look in the next — in the next few years that will turn one more time. So basically, you know, one billion will turn into $10 billion and the returns are, you know, probably — well, right now they’re in the high 20’s nets. RITHOLTZ: That’s great. PALIHAPITIYA: And it’ll be in the — probably the low 30’s. That’s when it’s all … RITHOLTZ: So, as all that comes up, are you just going to roll that over into another fund or … PALIHAPITIYA: So … RITHOLTZ: … are you looking to spread this into different spaces because I am aware you are a man of many interests. You’re not just — I — I find the world … PALIHAPITIYA: Right. RITHOLTZ: … really fascinating and curious. And — and looking at what you invest in, I can tell you approach the universe the same way. PALIHAPITIYA: Right. So, along the way, I think in 2016 what I realized was running funds doesn’t accomplish my goal. And it took me some number of years to figure that out. I loved working inside of these companies. I loved trying to make some of these businesses work. I loved taking really big moon shots on technical problems that I wanted to solve. I didn’t like the constraints of a fund. I didn’t like managing L.P. relations because by that point, you know, as you know, Barry, when you’re in the fund to business, then it’s all about quantity of LPs. And so, the LPs had grown beyond my cohort of people, right, because it’s not as if their money is infinite either. RITHOLTZ: Right. PALIHAPITIYA: Right? And so, then we have fund of funds and other organizations who are in the business of, you know, being investors in these organizations. And it became very administrative. And a lot of my time was spent fundraising and managing those relationships as opposed to investing or starting companies. And so, that was one big error of judgment that I felt I needed to fix. The other one was I was looking at myself thinking like, well, am I going to be able to defend the ownership of these best companies? And think about what happens in a fund. If you make an investment and it’s working, you have all this pressure to double down. But when there’s something smaller and more technical where there’s way more asymmetric risk, it’s much harder to convince others that you should continue to invest in that as well. RITHOLTZ: So, let’s stay with that a second because that’s — there’s some really interesting things. When I hear someone like you say double down, what I’m usually thinking of is, hey, we made a small investment in the seed round and now it’s the A or the B round, and we’re going to have to step-up. And $500,000 is now a $50 million or $2 million becomes $100 million. Is that what you mean by double down versus … PALIHAPITIYA: No, I mean, the following decision, which is very hard. So, let’s just say — and — and we use explicit examples because it’s easier. So, let’s just say we invested in the crypto business and the software-as-a-service start up on the same day. $10 million in each. The SaaS business has a much higher probability of short-term progress. I sold, you know, X amount of software, here’s my bookings, here’s my revenue. RITHOLTZ: High probability of modest success. PALIHAPITIYA: High probability of modest success. Most people are, you know, enraptured with that. RITHOLTZ: That’s what — well, that’s what the S&P 500 is for. If you want a high probability amount of success, go by the spiders. But I … PALIHAPITIYA: Sure. RITHOLTZ: … imagine people come to venture because — hey, I have all my … PALIHAPITIYA: No. RITHOLTZ: … conservative stuffs. PALIHAPITIYA: No, not true. RITHOLTZ: I’m looking for you to … PALIHAPITIYA: Not true. RITHOLTZ: … hit me the 100X. PALIHAPITIYA: It’s not true. It … RITHOLTZ: Really? PALIHAPITIYA: … it may be — listen. So there — there are two conundrums here. The conundrum number one is if you’re a limited partner. If you’re a limited partner right now sitting inside of a foundation or a pension fund and you have to return capital, and you have to get over your hurdle, you need an allocation into venture, but those allocations are minuscule. Nobody is getting, you know, huge allocations into Sequoia, right? RITHOLTZ: Because the capacity is that’s limited as it is. PALIHAPITIYA: Nobody — nobody is getting huge allocations in the benchmark. You know, these are $500 million funds, you know. And I — you know, in my example, I was 30 percent of all the capital, so there’s just not a lot of room for other. RITHOLTZ: Right. PALIHAPITIYA: Number one. And then the more insidious problem is actually the human capital inside the funds themselves. And what I mean by that is not that they’re bad people, they are wonderful people, but they are products of a very specific and very rigid hierarchy. You know, they typically went to a handful of schools. RITHOLTZ: Right. PALIHAPITIYA: They typically are educated in exactly the same way. They typically, you know, have the exact same kind of risk tolerance as a result of all those things. And so, when the rubber meets the road, this Harvard MBA or the Stanford MBA, they want to treat the venture capital organization as their version of the S&P 500. Very predictable, Steady Eddie. Let me make, you know, a good salary. Don’t rock the boat. So, what happens? Crypto stuff gets underfunded until it’s obvious. You know, hard tech and — and, you know, life sciences get underfunded until it’s obvious. SaaS gets overfunded until it’s obvious. And that’s the whipsaw that you face now. Now, there are a handful of organizations that have fought against that and have done it brilliantly. So, when you look, for example, like Founders Fund, I’ll pick an example. Incredible set of investors who are iconoclasts to the one. Atypical in every dimension. There’s not a single drop of real pedigree amongst them, except they are all incredible entrepreneurs. If you look at Coastal Ventures, same situation. Incredibly atypical in their intellectual makeup, and the way they think, and what they value. And to a one, they’re generally great entrepreneurs, so you see this recurring theme. So, you know, for me, what I’ve tried to do is recalibrate my time around that realization. I have a fixed amount of capital. If I surround myself with these good — they’re good people, it will lead me astray because I will get risk off. And the whole goal of this business, as you exactly well put it, is to be 100 percent massively risk on. And so, that’s how I live my life. I have a small allocation of capital in case all of this goes to zero, but otherwise 99 percent of my net worth and wealth is massive risk on. RITHOLTZ: That’s quite, quite fascinating. I — I keep wanting to go to some of my questions, but you keep saying things that make me have to respond. I’m still kind of struck by your LPs, meaning management. And what I mean by that is someone runs a successful fund. There’s a very limited amount of slots for money to come in. I just imagine it’s like here’s the deal. I have a slot for 100 for you. I’ll send you the annual updates, we’ll have an annual meeting, and I don’t want to hear from you the rest of the year. PALIHAPITIYA: You can’t take — it’s not … RITHOLTZ: It’s the approach. It doesn’t work that way? PALIHAPITIYA: … it’s not that — well, it’s not that easy even for the best organizations. You know, when you’re dealing with these large pools of capital, they are large bureaucracies. And in fairness to these bureaucracies, there’s — there’s really important guardrails of risk management, right, and legal and operational due diligence that they have to do because again, it’s the fireman’s pension, it’s the teachers’ pension, it’s the … RITHOLTZ: Right. PALIHAPITIYA: … you know, it’s the foundation. It’s the — they’re all doing good work, right? So, it’s not like, you know, they have a right to be cavalier, but it creates an infrastructure of folks that approach their job in a very specific way that, for me, didn’t make sense. For others, I think it does make a ton of sense because, you know, they — look, there’s a tradeoff. Today, that tradeoff, by the way, has rewarded them more than me. And what is the tradeoff? When you’re a successful investor, you’ll get to a fork in the road at a certain level of assets where you have to go on the path well-traveled or the path less traveled. The path less traveled is what I’ve taken. You’re alone … RITHOLTZ: Meaning …by yourself, more risk … PALIHAPITIYA:  you’re by yourself … all your own money, all risk gone. The path well-traveled says syndicate the risk, let the — let the returns decay, build an AUM machine, monetize the fee income, sell a percentage to dial or to whomever, and then eventually sell the G.P. to somebody and you’re done. And, you know, if you have enough capital at some point, you’re like, well, what do I need any more money? This is a safer route to take. RITHOLTZ: Right. PALIHAPITIYA: I am of this different view, which is I want very specific kinds of progress that will not happen unless I am a tip of the spear on a bunch of things that I want to change. And I’m using my money as a mechanism of showing the change that I want to see in the world with the idea that if free markets are ultimately efficient, other money will follow. And it will unlock and create change. SPACs are a perfect example. RITHOLTZ: We’re going to talk about SPACs in a little bit. I’m fascinated by the path less traveled. And I — I’m kind of reminded of an old joke a friend used to say, what’s the difference between having $1 billion or having $2 billion? And the answer is really nothing. PALIHAPITIYA: Nothing. RITHOLTZ: Right, there’s not — what is the difference? PALIHAPITIYA: Nothing. RITHOLTZ: So — so once you wrap your head around that, why build an AUM machine? Why take a G.P. and do all the things you don’t want to do just so you can sell it in the road? PALIHAPITIYA: Well, look, I mean — I think there’s something very valiant in building a company of any kind. I don’t care what it is because you end up hiring people, you end up creating your own little economy. You know, by hiring good people and paying them, you’re giving them a path. You’re giving them, you know, some amount of purpose in their lives. So, you know, any form of company building, I think, is heroic, the person that uses to build a company. I don’t care what it is. It could be a garbage business, an AUM business. You know, they’re all to me where I look at the founders of those things like you, and you’re in a class of hero for me. Everybody may not be with the same, you know, sometimes now founders, unfortunately, sometimes can get vilified for being an entrepreneur. But in general, I think they’re heroic. But again, that’s not what I was trying to do. My returns in society, I wanted to be expressed by a different kind of change and a different kind of purpose, which was a practical problem solved. You know, I want reforestation to be, you know, done differently. I want a gene editing solution to be so cheap and so fast the available we can eradicate, you know, the 32,000 inherited Mendelian diseases. You know, I want to figure out how to get, you know, sub $100 solar on everybody’s roof and to build a massive distributed energy utility in America. It turns out I’m doing all those things. Now, I can do that with my capital and that’s really great. That capital may go to zero … RITHOLTZ: But you’re saying … PALIHAPITIYA: … but it may not … RITHOLTZ: … you couldn’t do that if you had these institutional endowments and other … PALIHAPITIYA: Maybe not. RITHOLTZ: … large more conservative investors who are more concerned about IRR than moving the needle. PALIHAPITIYA: Short-term IRR because, you know, again they have a job to do. They have pension obligations to make. They have, you know, other things that they’re funding. They have the lifestyle they want to pay for. They have their own annual reviews and bonuses and things. So, you know, it’s not to debate the validity of it, it just exists, and I’m not willing to sign up for that because duration. And, by the way, you can see that certain funds have realized that that durational limitation doesn’t work in tech anymore, right, so now you’re seeing these 15-year funds, right? Some of these climate funds are really long-dated so that they can take huge long risk with very sticky money. I think that’s moving.....»»

Category: blogSource: TheBigPictureOct 12th, 2021

"It"s A Disastrous Day" - All Hell Breaks Loose In China"s Bond Markets

"It's A Disastrous Day" - All Hell Breaks Loose In China's Bond Markets The US bond market may be closed, but it was fully open in China, and locals took advantage of this fact to do one thing: sell. In the aftermath of our viral post ""Catastrophic" Property Sales Mean China's Worst Case Scenario Is Now In Play", China property firms bonds were hit with another wrecking ball on Monday as Evergrande was set to miss its third round of (offshore) bond payments in as many weeks and rival Modern Land became the latest scrambling to delay deadlines. Having already suffered the fastest drop on record, Chinese junk bond markets - where property developer issuers dominate - were routed once again as fears about fast-spreading contagion in the $5 trillion sector, which drives a sizable chunk of the Chinese economy, continued to savage sentiment. Meanwhile, China Evergrande Group's offshore bondholders still had not received interest payment by a Monday deadline Asia time, Reuters reported citing sources. But while Evergrande's default is now just semantics, and one week after Fantasia shocked bondholders with a surprise announcement it too would stuff creditors just weeks after it had said its liquidity was fine, which sent its bond plunging from par to 74 cents in seconds... ... other signs of stress included smaller rival Modern Land asking investors to push back by three months a $250 million bond payment due on Oct. 25 in part "to avoid any potential payment default." This was not expected, and Modern Land's April 2023 bond plunged more than 50% to 30 cents on the day. Elsewhere, Xinyuan Real Estate proposed paying just 5% of principal on a note due Oct. 15 and swapping that debt for bonds due 2023. Fitch Ratings called the move a distressed debt exchange while downgrading the firm to C. At least the two companies are relatively small: Modern Land and Xinyuan have $1.35 billion and $760 million of dollar bonds outstanding, respectively, according to data compiled by Bloomberg. In comparison, Evergrande has $19.2 billion. Among the declines for high-yield issuers, China Aoyuan Group’s 6.35% note due 2024 dropped 13.2 cents on the dollar to 57.5 cents; Sunac's 6.5% dollar bond due 2026 declined 9.4 cents to 57.9 cents, leaving both poised to close at the lowest-ever levels. Kaisa Group, which was the first Chinese property developer to default back in 2015, also saw some of its bonds slump to less than half their face value while supposedly "safe" names such as R&F Properties, and Greenland Holdings, which both have prestige projects in global cities like London, were also widely sold. Yields on Chinese junk-rated dollar bonds surged 291 basis points to 17.54% last week, the highest level in about a decade, according to a Bloomberg index. And just to add insult to injury, China's10-year government bond futures declined to a three-month low as the central bank’s latest liquidity draining weakened expectations of fresh monetary policy easing. Futures contracts on 10-year notes fall 0.4% to 99.14, the lowest level since July 12. 10-year sovereign bond yields rose 5bps, the biggest gains in two months, to 2.96%. "It's a disastrous day," Clarence Tam, fixed income PM at Avenue Asset Management in Hong Kong, told Reuters, highlighting how even some supposedly safer "investment grade" firms had now seen 20% wiped off their bonds. "We think it's driven by global fund outflow .... Fundamentally, we are worried the mortgage management onshore hits the developers' cash flow hard," he added, referring to concerns people could stop putting deposits down on new homes. In other words, the dynamic we discussed over the weekend in which we explained why "China's Worst Case Scenario Is Now In Play" is spreading from the biggest rotten apples - i.e., Evergrande, Fantasia - to collapsing confidence in the property sector, to credits that until now were seen as healthy and immune from a property implosion. In short, the bursting of the US housing bubble has moved to China, and yes - that culminated with the original Lehman moment. Meanwhile, JPMorgan analysts highlighted how international investors were now demanding the highest ever premium to buy or hold 'junk'-rated Chinese debt. There is now a whopping 1,200 basis point difference between the bank's closely-followed JACI China high yield index and a similar index of investment grade AA-rated local Chinese market bonds, known as "onshore" bonds. The option-adjusted spread on the ICE BofA Asian Dollar High Yield Corporate China Issuers Index (.MERACYC) is also at its widest ever. "Evergrande's contagion risk is now spreading across other issuers and sectors," JPMorgan's analysts said, demonstrating a rare talent for observing the obvious. And while today may have been "disastrous" it could get far, far worse if the market loses faith that Beijing will bail out the bond market. "We believe policymakers have zero tolerance for systemic risk to emerge and are aiming to maintain a stable property market, and policy support could be forthcoming if the deterioration in property activity levels worsen," said Goldman head of Asia Credit Kenneth Ho. Overnight we saw the first sign of such an implicit support in Harbin, the capital of northeastern Heilongjiang province, which became one of the first cities in China to announce measures to support property developers and their projects. According to a report on a website run by Harbin Daily, the city will offer as much as 100,000 yuan home-purchase subsidy to “talents” that meet certain requirements. The city would also make more existing homes eligible for housing provident fund loans to buyers; the moves are aimed at promoting stable and healthy development of the city’s property market, according to the document. The cash-strapped property developer's troubles and contagion worries have sent shockwaves across global markets and the firm has already missed payments on dollar bonds, worth a combined $131 million, that were due on Sept. 23 and Sept. 29. While China's property sector turmoil has so far been contained to the bond market, tensions amid offshore bonds could soon create headaches for the country’s equity traders, according to Gilbert Wong, head of Asia quantitative research at Morgan Stanley. High-yield credit spreads over comparable Treasuries are the widest on record -- at about 1,866 basis points on an option-adjusted basis, data compiled by Bloomberg as of Friday show.  But a measure of stock volatility has actually fallen so far this month. Still, the pair has shown a close relationship in recent years, which suggests their divergence may not last. In the end, a crash in the stock market, where hundreds of millions of Chinese residents are invested, may be just the kick Beijing needs to wake it out of its no bailout stupor. Tyler Durden Mon, 10/11/2021 - 13:05.....»»

Category: dealsSource: nytOct 11th, 2021

Futures Slide As Soaring Oil Nears $85

Futures Slide As Soaring Oil Nears $85 While cash bonds may be closed today for Columbus Day, which may or may not be a holiday - it's difficult to know anymore with SJW snowflakes opinions changing by the day - US equity futures are open and they are sliding as soaring oil prices add to worries over growing stagflation (Goldman and Morgan Stanley both slashed their GDP estimates over the weekend even as they both see rising inflation), fueling concern that a spreading energy crisis could hamper economic recovery (as a reminder, yesterday we had one, two, three posts on stagflation, showing just how freaked out Wall Street suddenly is). Rising raw material costs, labor shortages and other supply chain bottlenecks have raised concerns of elevated prices hammering corporate profits while rising rates are suggesting that a tidal wave of inflation is coming. And while cash bonds may be closed, one can easily extrapolate where they would be trading based on TSY futures which are currently trading at a 1.65% equivalent. But while cash bonds may be closed, the big mover on Monday was oil, with WTI surging nearly 3% and touched a seven-year high as an energy crisis gripping the major economies showed no sign of easing. Meanwhile, Brent rose just shy of $85, rising to the highest since late 2018 when the Fed abruptly reversed tightening course. Over in China, coal futures reached a record as flooding shuttered mines. The surge in oil lifted shares of Chevron Corp, Exxon Mobil Corp and APA Corp between 1.2% and 3% in premarket trading. At the same time, rising rates hit FAAMGs, with Apple, Microsoft and Amazon all falling between 0.6% and 0.8%. The surge above 1.6% for 10-year Treasury yields is intensifying debate among strategists over how to position investor portfolios amid anxiety over whether transitory inflation is transitioning into stagflation. Lucid Group rose 2.2% and Occidental Petroleum climbed 3.1%, leading gains in the U.S. premarket session. Here are some of the biggest movers and stocks to watch today: U.S.-listed Chinese tech stocks soar 2% to 5% in premarket trading, extending their recent rebound. Rally supported by Beijing slapping a smaller-than-expected fine on food delivery giant Meituan and last week’s news that U.S. President Joe Biden was planning to meet with Xi Jinping before the end of the year. Alibaba (BABA US +5%) leads gains, while JD.com (JD US) and Baidu (BIDU US) rise 2% apiece Watch U.S. energy stocks as oil surges past $80 a barrel as the global power crunch rattled a market in which OPEC+ has only been restoring output at a modest pace. Exxon Mobil (XOM US +1.1%), Chevron (CVX US +1%) and Occidental (OXY US +3.1%) among top risers in premarket trading. Robinhood (HOOD US) dropped 2%; the company was under pressure in U.S. premarket trading as a looming share sale by early investors and a toughening regulatory environment for cryptocurrencies are adding to the headwinds in the stock market for the darling of the U.S. retail trading mania. ChemoCentryx (CCXI US) up 2% in U.S. premarket trading, adding to Friday’s massive gains after the drug developer won U.S. approval for Tavneos as a treatment for a rare autoimmune disorder Cloudflare (NET US) slides 1.8% in U.S. premarket trading after Piper Sandler downgraded stock to neutral Akerna Corp. (KERN US) gained in Friday postmarket trading after Matthew Ryan Kane, a board member, bought $346,032 of shares, according to a filing with the U.S. Securities & Exchange Commission. “We see rising risks to global growth and evidence of more persistent inflation, which makes us more cautious on the outlook for global markets overall,” Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International, wrote in a note to clients. In Europe, the Stoxx 600 Index fell 0.2%, led by declines in travel and property firms. Miners and energy stocks were the two strongest-performing sectors in Europe on Monday on rising prices for iron ore and oil. The Stoxx 600 Basic Resources Index climbed as much as 2.4%, while the Energy Index gains as much as 1.5% to the highest since Feb. 24, 2020. European banking stocks also advanced on Monday, following four weeks of gains, and traded about 1.3% below pre-pandemic high. The sector has gained 36% ytd, is the best performer among 20 European sectors in 2021. Up 0.7% today, outperforming a slightly weaker broader Stoxx 600 Index and as investors tilt toward cyclical sectors. Earlier in the session, Asian stocks jumped, buoyed by Hong Kong-listed technology shares including Meituan, which was consigned a lower-than-expected regulatory fine. The MSCI Asia Pacific Index climbed as much as 0.9%, driven by the consumer-discretionary and communication sectors. Alibaba and Meituan were the top contributors to the gauge, each surging about 8% in the first trading in Hong Kong after the food-delivery giant was handed a $533 million fine for violating anti-monopolistic practices.  The result of the investigation into Meituan is “a relief and likely to provide closure to the share price overhang,” Citigroup analysts wrote in a note Friday, when the penalty was announced.  Hong Kong’s stock gauge was among the top performing in the region. Japan’s benchmarks also climbed as the yen weakened to an almost three-year low against the dollar and new Prime Minister Fumio Kishida said he’s not considering changes to the country’s capital-gains tax at present. Improved sentiment in China is providing much-needed support to Asian equities, which declined for four straight weeks amid uncertainty circling global markets. Power shortages in China and India, supply-chain woes, inflation risks and rising bond yields are all on the radar as the earnings season kicks off. “We are still in a market that is very, very concerned about the growth outlook,” said Kyle Rodda, market analyst at IG Markets. These sort of rallies that appear almost inexplicable are “symptomatic of the market still trying to piece together all pieces of the puzzle,” he added. Australia The S&P/ASX 200 index fell 0.3% to close at 7,299.80, with most subgauges taking a hit. Miners advanced, posting gains for a third session, offsetting losses in healthcare and consumer discretionary stocks.  Star Entertainment was the worst performer after a report saying the company had enabled suspected money laundering, organized crime and fraud at its Australian casinos for years. Fortescue surged after the company said it plans to build a green energy factory to rival China.  In New Zealand, the S&P/NZX 50 index dropped 0.5% to 13,019.37. In FX, the pound crept higher to touch an almost 2-week high versus the dollar and the Gilt curve shifted higher, led by the front-end, after the Bank of England’s Michael Saunders, one of the most hawkish members of the Monetary Policy Committee, suggested in remarks published Saturday that investors were right to bring forward bets on rate hikes. Hours earlier, Governor Andrew Bailey warned of a potentially “very damaging” period of inflation unless policy makers take action. Australia’s dollar led gains among G-10 currencies on the back of increases in oil, natural gas and iron ore prices and as Sydney emerges from a 15- week lockdown on Monday. Iron ore futures extended gains as improved rebar margins at Chinese steel mills buoyed demand prospects. The yen dropped against the dollar, with analysts forecasting more weakness ahead as the nation’s yield differentials widen. As noted above, treasury futures slumped in U.S. trading Monday, with the cash market closed for Columbus Day; they implied a yield of 1.65% on the 10Y. 10-year note futures price is down 8+/32, a price change equivalent to a yield increase of about 3bp. Benchmark 10-year yield ended Friday at 1.615%, its highest closing level since June, as investors focused on the inflationary aspects in mixed September employment data. China's10-year government bond futures declined to a three-month low while the yuan advanced as the central bank’s latest liquidity draining weakened expectations of fresh monetary policy easing. Futures contracts on 10-year notes fall 0.4% to 99.14, the lowest level since July 12. It dropped 0.4% on Friday. 10-year sovereign bond yields rose 5bps, the biggest gains in two months, to 2.96%. Looking ahead, upcoming reports on third-quarter company profits which start this week are seen as the next potential pressure point in a market already under siege from slowing global growth, sticky inflation and tighter monetary policies. Global earnings revisions are sliding - an omen for U.S. stocks that have taken their cue from rising earnings estimates all year. “The coming earnings’ season in the U.S. will be heavily scrutinized for pricing power, margins and clues on the shortage situation, as well as wage pressures,” according to Geraldine Sundstrom, a portfolio manager at  Pacific Investment Management Co. in London. “Already a number of large multinationals have issued warnings about production cuts and downgraded their Q3 outlook due to supply chain and labor shortages.” Market Snapshot S&P 500 futures down 0.3% to 4,371.25 STOXX Europe 600 down 0.2% to 456.41 German 10Y yield up 1.5 bps to -0.135% Euro little changed at $1.1568 MXAP up 0.8% to 196.45 MXAPJ up 0.7% to 642.13 Nikkei up 1.6% to 28,498.20 Topix up 1.8% to 1,996.58 Hang Seng Index up 2.0% to 25,325.09 Shanghai Composite little changed at 3,591.71 Sensex up 0.5% to 60,358.30 Australia S&P/ASX 200 down 0.3% to 7,299.79 Kospi down 0.1% to 2,956.30 Brent Futures up 1.9% to $83.98/bbl Gold spot down 0.1% to $1,755.02 U.S. Dollar Index up 0.11% to 94.17 Top Overnight News from Bloomberg The U.S. labor market will see “ups and downs” as the pandemic lingers, but it’s premature to judge that the recovery is in peril, said San Francisco Federal Reserve President Mary Daly Treasury Secretary Janet Yellen said she expects Congress to take action soon to bring the U.S. into line with a global minimum tax agreed on last week by 136 countries Chinese builders are looking to payment extensions or debt exchanges to avoid default on imminent bond obligations as liquidity conditions tighten for the real estate sector Austria will get a new chancellor, though the career diplomat stepping into Sebastian Kurz’s shoes is a close ally of the departing conservative leader who resigned over a corruption scandal Just because pandemic inflation is transitory doesn’t mean it’s going away anytime soon. That’s the awkward conclusion that policy makers and investors are arriving at, as prices accelerate all over the world. European natural gas has climbed 25% in two weeks, and oil topped $80 for the first time since 2014. Fertilizers hit a record on Friday, which means food prices -- already at a 10- year peak -- will likely rise even higher A more detailed summary of overnight news from Newsquawk Asia-Pac stocks traded mostly positive but ended the day somewhat mixed after having shrugged off the early weakness stemming from last Friday’s lacklustre performance stateside and disappointing NFP jobs data. Note, markets in Taiwan and South Korea were closed. ASX 200 (-0.3%) was the laggard with underperformance in tech, consumer stocks and defensives overshadowing the gains in commodities and with Star Entertainment the worst hit with losses of more than 20% after media outlets alleged that it enabled suspected money laundering, organised crime, fraud and foreign interference which the Co. said were misleading reports. However, downside for the index was limited as New South Wales businesses reopened from the lockdown that lasted for over three months. Nikkei 225 (+1.6%) reversed opening losses as exporters cheered a weaker currency and with the government mulling over JPY 100bln financial support for chip factory construction. Hang Seng (+2.0%) and Shanghai Comp. (Unch) were both positive following talks between China's Vice Premier Liu He and USTR Tai on Saturday in which China was said to be negotiating for a cancellation of tariffs and sanctions. The advances in Hong Kong were led by tech stocks including Meituan despite the Co. being fined CNY 3.4bln by China’s market regulator for monopolistic behaviour, as the amount was seen to be a slap on the wrist, while the gains in the mainland were only mild as participants also reflected on the substantial liquidity drains by the PBoC totalling a net CNY 510bln since Saturday. Finally, 10yr JGBs were pressured amid the gains in Japanese stocks and lack of BoJ purchases in the market, while price action was also not helped by the continued weakness in T-note futures amid the semi-holiday conditions in US for Columbus Day in which the NYSE and the Nasdaq will open but bonds trading will remain shut. Top Asian News Australian IPOs Heading for Biggest Haul Since 2014: ECM Watch Syngenta’s Shanghai IPO Proposal Suspended For Earnings Update China Junk-Rated Dollar Bond Rout Deepens Amid Builder Worries China’s 10-Year Bond Yield Jumps By The Most Since August Bourses in Europe are mostly but modestly lower (Euro Stoxx 50 -0.1%, Stoxx 600 -0.2%) whilst the FTSE 100 (+0.2%) bucks the trend, owing to firm performances in its heavyweight sectors. US equity futures meanwhile trade within tight ranges with broad-based losses of some 0.3-0.4%. Fresh fundamental catalysts have remained light, although inflation and stagflation remain on traders' minds heading into this week's US and Chinese inflation metrics and against the backdrop of rising energy prices. Thus, the sector configuration sees Basic Resources, Oil & Gas and Banks at the top of the bunch, whilst the downside sees Travel & Leisure, Real Estate and Retail, with no overarching theme to be derived. Basic Resources is the marked outperformer as base metals are bolstered in what seems to be a function of the coal shortage in Asia, with iron ore contracts also surging overnight and copper following suit, in turn boosting the likes of Rio Tino (+3.2%), Antofagasta (+3.1%), Glencore (+3.1%), BHP (+2.8%). The top of the Stoxx 600 is dominated by metal names. In terms of individual movers, Carrefour (-2.2%) is softer after sources stated that exploratory talks over a Carrefour-Auchan tie-up ended due to the complexity of the deal. Evotec (+0.7%) holds onto gains as it seeks a Nasdaq listing. Roche (+0.6%) and Morphosys (+3.7%) underpin the health sector after the Cos received Breakthrough Therapy Designation from the US FDA for gantenerumab for the treatment of Alzheimer's disease. Top European News BOE Officials Double Down on Signals of Imminent Rate Hike Brexit Clash on Northern Ireland Means Headaches for Johnson Asos CEO Beighton Steps Down as Sales Growth Slows Adler Shares Flounder After Asset Disposal Plan, Past M&A Report In FX, the Aussie has secured a considerably firmer grip of the 0.7300 handle vs its US rival as COVID-19 restrictions are relaxed in NSW and base metals tread water after a mostly positive APAC equity session overnight. However, Aud/Usd is also firmer on the back of ongoing Greenback weakness and long liquidation from what some are calling ‘stretched’ levels of IMM positioning going in to Friday’s NFP release, while the Aud/Nzd cross has rebounded further above 1.0550 in wake of a rise in NZ virus cases that has prompted the PM to keep Auckland on level 3 alert for another week pending review. Hence, Nzd/Usd is capped around 0.6950 and continues to lag on the unwinding of Kiwi longs built up in advance of last week’s universally anticipated 25 bp RBNZ hike. Back to the Buck, but looking at the index in relation to where it was before and after the latest BLS report, 94.000 is providing some underlying support on Columbus Day that is not a full US market holiday, but will see cash Treasuries remain closed. Moreover, the DXY is gleaning momentum within a narrow 94.028-214 range via marked Yen underperformance amidst the latest rout in bonds and more pronounced technical impulses as Usd/Jpy extends beyond 112.50 and sets yet another 2021 peak around 112.95. GBP - Sterling is taking up post-payrolls Dollar slack as well, but firmer in its own right too as comments from BoE Governor Bailey and MPC member Saunders add to the growing expectation that rate hikes may be delivered sooner than had been expected before the former revealed that policy-setters were evenly divided at 4-4 in August on the subject of minimum criteria being achieved for tightening. Cable is hovering under 1.3650 and Eur/Gbp is sub-0.8500 in response, with the latter not really fazed by the UK-EU rift on NI protocol. CAD/NOK - The Loonie remains firm against its US peer after the stellar Canadian jobs data and Usd/Cad continues to probe support/bids at 1.2450 against the backdrop of strength in oil prices that is also keeping the Norwegian Krona afloat and Eur/Nok eyeing deeper sub-10.0000 lows irrespective of marginally mixed vs consensus inflation metrics. CHF/EUR/SEK - All rather rangy, aimless and looking for inspiration or clearer direction as the Franc straddles 0.9275 vs the Greenback, but remains firmer against the Euro above 1.0750 following only a faint rise in Swiss domestic bank sight deposits. Meanwhile, the Euro is pivoting 1.1575 vs the Buck and looks hemmed in by decent option expiry interest just outside the range given.1 bn rolling off between 1.1540-50 and 1.6 bn from 1.1590-1.1600 at the NY cut. Elsewhere, the Swedish Crown is slipping on risk-off grounds towards 10.1250 having tested resistance circa 10.1000. In commodities, WTI and Brent front-month futures continue the upward trajectory seen during the APAC session, with the complex underpinned heading into the winter period and against the backdrop of higher gas prices. The gains have been more pronounced in the US counterpart vs the global benchmark with no clear catalysts behind the outperformance, although this may be a continuation of the unwind seen after reports suggested a release of the US SPR (Strategic Petroleum Reserve) is unlikely. For context, reports of such a release last week took the WTI-Brent arb to almost USD 4.2/bbl vs USD 2.7/bbl at the time of writing. Furthermore, there have also been reports of lower US production under President Biden's "build back better" initiative, which puts more weight on renewable energy, with some energy analysts also suggesting that OPEC+ sees less of a threat from a "shale boom" as a result. Back to price action, WTI has been in the limelight after topping the USD 80/bbl overnight and extending gains to levels north of USD 81.50/bbl (vs low 79.55/bbl), whilst the Brent Dec contract topped USD 84.00/bbl (vs low USD 82.50/bbl). In terms of other news flow, sources suggested the fire at Lebanon's Zahrani fuel tank has been put out after the energy minister suggested the fire was contained – the cause of the fire is not yet known. Gas prices also remain elevated with UK nat gas futures relatively flat on the day but still north of GBP 2/Thm vs GBP 1/Thm mid-August and vs GBP 4/Thm last week, whilst the Qatari Energy Minister said he is unhappy about gas prices being high amid negative follow-through to customers. Over to metals, spot gold and silver are somewhat lacklustre, but with magnitudes of price action contained, with the former meandering just north of USD 1,750/oz and the latter above USD 22.50/oz heading into this week's key risk events. Overnight, iron ore futures were bolstered some 10% in Dalian and Singapore Exchanges amid fears of coking coal supply shortages - coking coal is an essential input to produce iron and steel. Traders should also be cognizant of the Chinese metrics released this week as another elevated PPI metric could see the release of more state reserves, as had been the case over the recent months. Using the Caixin PMIs as a proxy for the release, the PMI suggested sharp increases in both input costs and output prices – largely owed to supply chain delays, with the "rate of inflation was the quickest seen for four months, amid reports of greater energy and raw material costs. This, in turn, led to a solid increase in prices charged". The measure for output prices its highest in three months, whilst "the pressure of rising costs was partly transmitted downstream to consumers, as the demand was not weak." US Event Calendar Nothing major scheduled DB's Jim Reid concludes the overnight wrap A reminder that it’s Columbus Day today where US bond markets are closed. Equity markets are open but expect it to be quiet. Ahead of this, this morning we have published our latest monthly survey results covering over 600 global market participants. See here for more. For the first time since June, the biggest perceived risk to markets is now higher yields and inflation, whilst direct Covid-19 risks are out of the top 3 for the first time. A further equity correction before YE remains the consensus now. 71% expect at least another 5% off equities at some point before YE (68% correctly suggested that last month). A very overwhelming 84% thought the next 25bps move in 10yr US Treasury yields would be up. Of some additional interest is that the definition of stagflation is varied but that the majority think it’s a high or very high risk for the next 12 months. The extreme of this view surprised me. While I’ve long thought the market has underestimated the inflation risks I would still say there is enough of a growth cushion for 2022. However it’s clear the risks have built. Anyway, lots more in the survey. Thanks for filling it in and see the results for details. The week ahead will centre around the US CPI release on Wednesday but it might be a touch backward looking given that energy has spiked more recently and that used car prices are again on the march after a late summer fall that will likely be captured in this week’s release. Elsewhere, we’ve got a potentially more challenging US earnings season than that seen over the last year will commence with the big financials from Wednesday. In addition minutes from the last FOMC will give clues to the latest taper thinking on Wednesday as well. The IMF/World Bank meetings will generate plenty of headlines this week with their latest world outlook update tomorrow the highlight. The best of the rest data wise consists of JOLTS (Tuesday),which we think is a better labour market indicator than payrolls albeit a month behind, US PPI (Thursday) which will give a scale of building pipeline price pressures, US retail sales and UoM consumer sentiment (Friday), and China’s CPI and PPI (Thursday). With all that to look forward to, markets have started the week on a strong note, with equity indices including the Hang Seng (+2.02%), Nikkei (+1.57%), CSI (+0.32%) and Shanghai Composite (+0.32%) all moving higher, whilst the Kospi (-0.11%) has seen a slight decline. Japanese stocks have been buoyed by comments from new PM Kishida over the weekend that he isn’t currently considering changes to the country’s capital-gains tax. That comes with just 20 days remaining until the country’s general election. Separately in China, the country’s energy woes continue with 60 of 682 coal mines closed in the Shanxi province due to heavy floods, with Chinese coal futures up +8.00% this morning. And the property market issues are continuing to persist, with a new Chinese developer Modern Land seeking a 3 month extension to a $250 million dollar bond due to mature on October 25. By the end of last week, a Bloomberg index of Chinese junk-rated dollar bonds had seen yields climb to a decade-high above 17%, so clearly one to still look out for. Unlike in Asia, equity futures are pointing lower in the US and Europe this morning, with those on the S&P 500 down -0.21%. In terms of the main highlight it’s clearly US CPI mid-week. Given my views that inflation risks have been massively understated this year I’ve been saying for months that these reports have potentially been the most important monthly data we have seen for years. But since they mostly come and go with a “meh… mostly transitory” and a relative whimper, I’ve clearly been wrong to over hype them. So ignore me when I say that this month’s report might not be that interesting. With energy soaring over the last month and signs of inflation pressures continuing to build elsewhere then I’m not sure we can read too much into this month’s figures. Take used cars. Given the 2-3 month lag between actual prices and their CPI impact, this month will more than likely reflect a softening of prices in the summer. However September saw prices rise +5.4% so this will probably show up towards the end of the year along with the recent rise in energy costs. Our economists expect a +0.41% headline (vs. +0.27% previously) and +0.27% core (vs. +0.10%) mom rate. This is a bit above consensus and would take the yoy rate to 5.4% (up a tenth) and 4.1% (unch) respectively. Speaking of inflationary pressures, this morning has seen energy prices take a further leg higher, with WTI oil (+1.90%) moving back above $80/bbl for the first time since late 2014, whilst Brent crude (+1.42%) has moved above $83/bbl. European natural gas prices will continue to be an important one to follow amidst the astonishing price surge there, but the declines at the end of last week mean prices finished the week down by more than -45% since their intraday peak on Wednesday, before the comments from Russian President Putin that brought down prices. The rest of the day-by-day calendar is at the end as usual but although it’s a second tier release normally, tomorrow’s JOLTS will be interesting in as far as it might confirm that the main labour problems in August were a lack of supply rather than demand. The report’s full value is reduced by it being a number of weeks out of date but there’s a reasonable argument for saying that this is a better gauge of the state of the labour market than the payroll release. We go through Friday’s mixed report at the end when looking back at last week. Outside of data, it’s that time again as earnings season gets going, with a number of US financials kicking things off from mid-week. In terms of the highlights, we’ll hear from JPMorgan Chase, BlackRock and Delta Air Lines on Wednesday. Then on Thursday, we’ll get UnitedHealth, Bank of America, Wells Fargo, Morgan Stanley, Citigroup, US Bancorp and Walgreens Boots Alliance. Finally on Friday, we’ll hear from Charles Schwab and Goldman Sachs. For more info on the upcoming earnings season, you can read DB’s equity strategists Q3 S&P 500 preview here. Back to markets, it was interesting over the weekend that the BoE’s Saunders chose to endorse market expectation of an earlier start to the hiking cycle in the UK rather than push back against it. He is on the more hawkish end of the spectrum but it was an important statement. Earlier, Governor Bailey suggested that there could potentially be a very damaging period of higher inflation ahead if policy makers didn’t react. Interestingly our survey showed that the market thinks the BoE is likely to make a policy error by being too hawkish so a battle seems likely to commence over policy here in the UK over the coming weeks and months. The November meeting appears live. Those comments have helped to support the pound this morning, which is up by +0.16% against the US Dollar. Looking back to last week now, risk sentiment was supported in the first full week of Q4 by easing European energy prices and a cease fire on the debt ceiling that avoided disaster and bought Washington lawmakers 8 weeks to find a more permanent solution. Global equity indices thus gained on the week: the S&P 500 picked up +0.79%, with a slight -0.19% pullback on Friday, and European equities kept pace with the STOXX 600 rallying +0.97% (-0.28% on Friday). Cyclical stocks led the way on both sides of the Atlantic; energy stocks were among the best performers whist financials benefitted from higher yields and a steeper curve. Speaking of which, US 10yr Treasury yields gained a punchy +14.1bps to close the week at 1.603%, their highest levels since early June. The benchmark gradually increased 3.0bps after Friday’s employment data. Inflation compensation continued to drive rate increases, as US 10yr breakevens gained +13.5 bps to finish the week at 2.515%. We need to go back to May to find higher levels. The sovereign yield increases were global in nature, with German bunds gaining +7.3bps and UK gilts +15.6bps higher. German 10yr breakevens gained +3.9bps while UK breakevens were +12.0bps higher. US nonfarm payrolls increased +194k in September, well below consensus expectations of a +500k gain, though private payrolls increased +317k and net two month revisions were up +169k. The unemployment rate ticked down to a post-pandemic low of 4.8% on the back of a declining labour force participation rate. Average hourly earnings were robust, increasing +0.6% mom (+0.4% expected). Taken in concert, the print likely cleared the (admittedly low) bar to enable the FOMC to announce tapering at the November meeting, whilst also feeding the creeping stagflation narrative (see survey results). Elsewhere, building on a preliminary July deal, the OECD said 136 nations have signed up to implement a 15% minimum global tax rate to address adequate taxation of multinational tech firms. As part of the deal, countries agreed not to impose any additional digital services taxes.       Tyler Durden Mon, 10/11/2021 - 08:12.....»»

Category: blogSource: zerohedgeOct 11th, 2021

Is GM a "Buy" After Setting Ambitious Growth Targets?

While General Motors (GM) impresses investors with ambitious financial targets laid out during its Investor Day, the stock still does not hold a 'Buy' rating. Read on to know more. General Motors’ GM two-day investor event, which began on Oct 6, seems to have managed to woo investors. Shares of the U.S. auto giant rose 4.7% to close the session at $56.44 yesterday, as the firm laid out a detailed roadmap to become the frontrunner in the auto industry, both in terms of technology development and profitability. CEO Marry Barra made a bold claim indicating that General Motors is on track to become the U.S. market share leader in the electric vehicle (EV) space. Despite all the buzz, the company still currently carries a Zacks Rank #4 (Sell). Why is that so? Does the growth target seem a bit far-fetched? Or is it just the right time to take profits in the stock as General Motors may decline (on temporary headwinds like a global chip crunch and rising costs) before it sees an upside again? Before delving into all that, here’s what the company stated about future growth plans during the much-awaited Investor Day event.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.Golden Nuggets From the EventGeneral Motors believes that its compelling hardware and software platforms, electrification strides as well as aggressive autonomous vehicle (AV) development will result in major revenue growth by the end of the decade. The auto giant aims to double its five-year average annual revenues of $140 billion by 2030, with software and new businesses witnessing a CAGR of 50% through the decade-end. To that end, the company expects $80 billion in new revenues from software-enabled services, Cruise unit, BrightDrop business and OnStar insurance line.Revenues from the software and services platform are expected in the range of $20-$25 billion per year from an estimated 30 million connected vehicles. Part of the software and services revenue growth will stem from its OnStar subscription business, which is projected to generate annual sales of $6 billion by 2030. Last month, General Motors unveiled the Ultifi platform, a new end-to-end software platform in vehicles starting from 2023, built to unleash new vehicle experiences and seamlessly integrate customers’ digital lives. Its BrightDrop unit has the potential of generating $5 billion revenues by mid-decade and $10 billion by 2030-end. With the roll-out of the BrightDrop delivery business, General Motors is able to capitalize on the surging demand for urban last-mile delivery, while reducing carbon impact on the planet. Furthermore, the automaker has provided a one-stop-shop solution for commercial customers, enabling them to deliver goods in an efficient and more sustainable manner. This new business unit has unlocked fresh opportunities in the B2B sector for the company. BrightDrop recently completed the first production builds of the EV600 van and has planned to add a second van, the EV410, to its vehicle line-up in 2023. General Motors’ AV unit — Cruise — anticipates generating $50 billion in revenues as it scales up operations over the next couple of years. Last month, Cruise received a driverless deployment permit in California, becoming the first autonomous ride-hail company to secure the same. The company plans to charge for rides as early as next year, with a modified version of the Chevrolet Bolt electric car. Meanwhile, taking its AV game a notch higher, General Motors recently unveiled Ultra Cruise — an all-new technology enabling true hands-free drivingin 95% of scenarios that will be available in a handful of high-end vehicles starting 2023.Meanwhile, General Motors projects annual EV revenues to scale from $10 billion in 2023 to $90 billion by the decade-end. As stated earlier this year, the automaker plans to roll out 30 fresh EV models by 2025-end and transition to an all-electric fleet by 2035. The firm’s own modular battery platform, the Ultium Drive system, will aid in the transition to an all-electric portfolio down the road. The array of Ultium-powered EVs will include popular models, including a $30,000 Chevrolet crossover, Buick crossovers, Chevrolet trucks, GMC Hummer EV and Cadillac Lyriq crossover EV. The company will also offer an electric version of GMC’s Sierra pickup truck. General Motors plans to set up two new battery cell manufacturing plants in the United States by mid-decade, in addition to the facilities in Ohio and Tennessee. It recently set the stage for battery tech innovation with the announcement of establishing a new research facility in Michigan — Wallace Battery Innovation Center.Will GM be Able to Overtake the EV King?The fact that General Motors is eying to take the leadership position in the U.S. EV market share basically implies that the company believes that it can overtake Tesla’s TSLA crown in the coming years. With a market cap of around $78 billion, General Motors is currently far behind Tesla, which boasts a market value of $775 billion. Though General Motors is only second to Tesla in terms of U.S. EV sales, the latter leads by a huge margin. While the legacy auto giant claims to have transformed from an automaker to a platform innovator and is indeed putting out all the stops to stay ahead of much of the competition in electrification, software technology and driverless capabilities, will it be able to surpass Tesla’s EV prowess? General Motors also stated that 50% of its plants in North America and China will be capable of EV production by 2030 and become all-electric only by 2035. While the target in itself seems good enough, but since the company plans to beat Tesla’s market share, would that be sufficient? Well, it’s still too early to say if it would manage to overtake Tesla in the EV space. Jefferies analyst Philippe Houchois is of the opinion that “it may take time for markets to digest how realistic GM's roadmap is.” This indicates that its expectations might be too lofty.Temporary Hurdles in PathWhile General Motors manages to tick all the boxes to make the most out of the electrified and autonomous future while successfully attempting to transform itself into a technology play, its near-term prospects don’t seem too bright.Currently, General Motors ——which shares space with other auto biggies like Ford F, Toyota TM and Volkswagen VWAGY among others— is battling the global shortage of semiconductor supply. The company had already warned during the second-quarter earnings call that it expects challenges in the second half of 2021 due to plant downtime. Importantly, General Motors’ third-quarter sales took a nasty hit amid supply constraints and historically low inventories. Sales plummeted 33% year over year to 446,997 vehicles. Per U.S. Automotive News, this marks the company's lowest three-month tally since its 2009 bankruptcy. While General Motors’ big spending of $35 billion through 2025 for EV and AV development will prove beneficial in the long term, it is likely to strain the company’s near-term financials. As it is, the firm’s total debt to capitalization stands at 65%. Its long-term automotive debt at quarter-end increased to $16.4 billion from $16.2 billion as of Dec 31, 2020. It envisions 2021 adjusted automotive free cash flow in the band of $1-$2 billion, indicating a decline from $2.6 billion recorded in 2020. Capex for 2021 is anticipated between $9 billion and $10 billion, including $2 billion of deferred capex from 2020 as well as ramped-up EV spending. The forecast implies a significant uptick from the 2020 capex of $5.2 billion. This will hurt the company’s cash flows, especially at a time when sales are under pressure amid chip deficit. It should also be noted here that General Motors anticipates operating margins of 12-14% by 2030, implying just a modest improvement from 12.8% recorded in the first half of 2021.Last WordIndeed, General Motors might be hitting the right notes, but it’s a stock with quite a few short-term headwinds. So, it might not be the right time to hit the buy button on the stock. Instead, you can cash in on the share price gains currently, and buy it at an opportune time when the price dips. Infrastructure Stock Boom to Sweep America A massive push to rebuild the crumbling U.S. infrastructure will soon be underway. It’s bipartisan, urgent, and inevitable. Trillions will be spent. Fortunes will be made. The only question is “Will you get into the right stocks early when their growth potential is greatest?” Zacks has released a Special Report to help you do just that, and today it’s free. 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Category: topSource: zacksOct 8th, 2021