Month: January 2016

Last week, we noted that Italy is rushing to defuse a €200 billion time bomb in the country’s banking sector as investors fret over banks’ exposure to souring loans.

“Italian banks’ share prices have been volatile YTD, given the market’s renewed fears over asset quality and potential developments on a possible bad bank creation,” Citi wrote, in a note analyzing which Italian banks are most exposed. “Total gross NPLs in Italy have increased by c160% since 2009 and now represents c18% of loans (vs c8% in 2009).”

Essentially, Italy was slow to tackle its NPL problem relative to other countries and the chickens have now come home to roost.

The idea was to create a “bad bank” for the “assets” (because that’s worked so well in other countries), but the plan was stalled by the European Commission due to concerns about whether Italy was set to run afoul of restrictions around when countries can provide state aid to the financial sector.

In short, creditors at Italy’s banks would need to take a hit before PM Matteo Renzi’s government would be allowed to extend state aid. That is unless Italy could devise some kind of end-around, which is precisely what Renzi was attempting to do last week.

As a reminder, this would have been easier had it been negotiated last year before new rules on bank resolutions came into effect in 2016. That’s why Portugal pushed through the Novo Banco bail-in and the Banif rescue in December.

In any event, Italy has indeed managed to strike a deal with Brussels to help alleviate banks’ NPL burden.

Essentially, Italian banks will securitize their souring loans, sell them to investors, and the government will guarantee the senior tranches of the new paper.

“The price of the guarantee [will] be set based on the price of credit default swaps on Italian issuers with similar risk profiles to the loans in question,” FT writes, adding that “ the price would gradually increase, to reflect the growing risk of holding bad loans over time, and to incentivise buyers of the non-performing loans.”

Now obviously, that’s not as comprehensive a “solution” as a traditional bad bank scheme, which is presumably why some Italian banks have plunged and were halted limit down. 

• UBI BANCA HALTED, LIMIT DOWN AFTER FALLING 5.6% IN MILAN
• UNICREDIT HALTED, LIMIT DOWN AFTER FALLING 3.7% IN MILAN
• POP. MILANO HALTED, LIMIT DOWN AFTER FALLING 2.7% IN MILAN

Beleaguered Monte Pashci – whose shares are worth a tiny fraction of their 2007 highs – managed to rally on the news but the FTSE Italia All-Share Banks Index traded down as much as 2.6%. 

“The new scheme aims at helping banks free up capital and liquidity to increase lending and support the recovery [but] its effectiveness remains to be ascertained,” Citi wrote this morning. “The details of the new framework are still lacking, in particular the price banks will have to pay for the state guarantees, which will be crucial to assess the effectiveness of the whole scheme.”

In other words, Italy’s hands were tied here thanks to restrictions around state aid and the market isn’t happy with what’s being viewed as a watered down version of a traditional bank rescue. Here’s more from Citi:

“A too high price [for the fees banks pay to the government for the guarantees] would make the transfer of the NPLs to the bad bank not convenient for the banks and it would potentially open up new capital shortfalls. A too-low price would violate the state-aid rules and involve losses for banks’ investors (and potentially for depositors). It is important to note that the Italian version of the “bad bank” is very different from those set up in other EU countries since 2008 (e.g., in Spain, Ireland) where banks were forced to sell part of (or all) their bad loans at a set price to the government-backed bad bank vehicle. The Italian scheme is a much lighter version and as such it is likely to have a more muted impact on banks’ balance sheets, in our view.”

Right. Of course it also remains to be seen if this scheme actually ends up being riskless for the Italian public. “This intervention will not create any burdens for our public finances,” the Italian finance ministry said on Wednesday.

Maybe, but that depends on whether losses – and make no mistake, there will be losses – reach the senior tranches of these deals. Italy is confident that won’t happen. In fact, the finance ministry thinks they’re going to turn a profit off of this. “We predict that the commissions paid to us will exceed the costs, and therefore there will be positive net revenues,” a spokesperson says.

Make a mental note of that assertion because it could end up being comedy gold at some point in the not-so-distant future.

A year from now, when the cost of insuring these securitizations ends up adding a few percentage points to Italy’s budget deficit, we’ll be interested to see if the European Commission will be in a forgiving mood given that they approved this new scheme. 

via Zero Hedge http://ift.tt/1QrWOH5 Tyler Durden

The bounce of the last few days has investors wondering if the bottom is in.

 

Unfortunately, it very likely is not.

 

High Yield bonds have lead stocks to the upside. They are now leading to the downside, and the High Yield bond market indicates we have further to fall.

 

 

If this is not compelling enough consider that the microcap index, the Russell 2000, which leads the S&P 500 indicates stocks have a LONG ways to fall.

 

 

Finally, consider that the S&P 500 has broken its bull market trendline going back to 2009 AND cut through critical support (green line) on a monthly basis.

 

 

Another Crisis is coming. Smart investors are preparing now.

 

We just published a 21-page investment report titled Stock Market Crash Survival Guide.

 

In it, we outline precisely how the crash will unfold as well as which investments will perform best during a stock market crash.

 

We are giving away just 1,000 copies for FREE to the public.

 

To pick up yours, swing by:

http://ift.tt/1HW1LSz

 

Best Regards

 

Graham Summers

Chief Market Strategist

Phoenix Capital Research

 

 

 

 

via Zero Hedge http://ift.tt/1QrWRCx Phoenix Capital Research

Apple's guidance was considerably worse than expected, but always spinning positively, analysts proclaim somehows that it was "better than feared." It appears not as AAPL is now down almost 4% despite every sell-side analyst's pleas that "the bottom is in." The ultimate "no brainer" stock is now down over 28% from its highs last year and analyst targets are still at $137 on average – a nearly 50% gain from here. And finally, as if a crashing stock was not enough, Apple's Safari browser is reportedly crashing if users attempt to search – not a great day for Tim Cook.

It appears Tim Cook forgot to email Jim Cramer about how bad China had become…

We know the conditions in China have been a source of concern for many investors. Last summer, while many companies were experiencing weakness in their China-based results, we were seeing just the opposite with incredible momentum for iPhone, Mac, and the App Store in particular. In the December quarter, despite the turbulent environment, we produced our best results ever in Greater China with revenue growing 14% over last year, 47% sequentially and 17% year-over-year in constant currency. These great results were fueled by our highest-ever quarterly iPhone sales and record App Store performance. Notwithstanding these record results, we began to see some signs of economic softness in Greater China earlier this month, most notably in Hong Kong.

Here's Goldman…

AAPL reported 1Q earnings post close. The bottom line from our trading desk (not GS research): “Results are pretty much smack in line with how most of the street previewed the stock. Our sense is the reaction to the print will be somewhat muted.”

Hhhmmm no…

 

A smattering of Wall Street "Bullish" advice…

FBR (Daniel H. Ives)

AAPL’s March guidance “better than feared"; co. likely has ‘‘tough’’ qtrs ahead of iPhone 7 introduction later this yr
Co.’s software ecosystem, services segment remains ‘‘core advantage"; likely to help gross margins, profitability in next 12-18 months
Rates outperform, cuts PT to $130 from $150

PACIFIC CREST (Andy Hargreaves)

Sustained pricing power, recovering iPhone unit growth in FY17 likely to result in margin expansion, increased profit
Strong iPhone prices show consumers likely not ‘‘trading down’’ to cheaper models as smartphone market matures
Customers still ‘‘extremely loyal”
Rates overweight, PT $132

BARCLAYS (Mark Moskowitz)

1Q results, 2Q outlook “not as bad as investors feared”
Stock likely attractive to L-T investors in case of any near-term weakness; sees iPhone 7 prototypes in 2Q, expanded capital allocation in 3Q as potential catalysts
Rates overweight, cuts PT to $142 from $150

MACQUARIE (Ben Schachter)

Sees March qtr as “bottom” for iPhone unit growth; iPhone 7 likely to return AAPL to growth
Co. likely to continue to gain share, especially if it introduces products that create new “use cases” for iPhone, other devices
Rates outperform, PT $117

RAYMOND JAMES (Tavis C. McCourt)

Weaker 2Q guidance reflects maturing smartphone mkt, forex concerns
Shares likely to stay within “recent range” until growth trends stabilize
Rates market perform

And finally, if it weas not enbough that the stock was crashing, now the browser is too…

Apple's Safari search browser is crashing for some users when they run a search from the address bar in both iOS and OS X devices, the Verge reported.

 

The problem appears to be affecting iOS and OS X devices worldwide, the Verge reported on Wednesday.

 

Apple's iPhones and iPads run on iOS, while its Mac computers operate on OS X.

 

The problem, which is related to Safari's search suggestions feature, can be rectified temporarily by disabling the feature or using the private mode option in the browser, the Verge reported, citing an iOS developer Steven Troughton-Smith.

Meanwhile, this is what really happened:

iPhone units were < 75M, but that included 3.3M of incremental units into channel inventory (a year ago, Channel Inventory came down) – so, sell through was down 4% Y/Y on reported Flat Sell-In.   Apparently, the email to Cramer alerting him to the slowing in China over the last few weeks, which Cook copped to on the call, got caught in the spam folder.

iPads were pretty bad too,  with units at least 2M below the consensus, and Y/Y declined worsened to ~ 25% from ~ 20% last quarter. This is with something like 3M iPad Pro’s shipped, quasi-new product to the category.

Apple’s Mac figure was down like 4% Y/Y, IDC had Mac’s up like 4% Y/Y. This is 2nd straight quarter of relevant delta between these figures, again no idea why.

Guidance

The sellside had been cutting like crazy over the last month, and yet nobody got down < $53B in Sales vs. the guided mid-point of ~ $51.5B. Guide implies < 50M iPhone Units, which is where people were starting to model, although not clear what Apple plans for Channel Inventory.

 

via Zero Hedge http://ift.tt/1Sj5m4W Tyler Durden

It must have been scary for Boeing for those few months in which the all important Ex-Im bank was taken offline. The result: moments ago BA announced Q4 earnings which while beating expectations (which were sharply lowered in recent months) of $1.27, were still a 31% drop compared to Q4 of last year, driven by a 4% drop in the top line, leading to a substantial decline in gross profit from $3.8 billion to just 2.9 billion, and a whopping 38% plunge in operating cash flow to just $3.1 billion (and $2.5 biliion in FCF).

The sharp decline took place even as Boeing benefited generously from America’s numerous wars around the globe, leading to a 7% increase in military aircraft revenue in the fourth quarter, however it was not enough to offset a 7% drop in commercial aircraft deliveries, which at 182 were 13 lower from the 195 a year ago.

But the biggest hit to Boeing was its slashed guidance, which came in far below consensus estimates:

• Boeing’s 2016 Core EPS guidance of between $8.15 and $8.35 was far below the $9.42 expected;
• Boeing’s 2016Revenue of $93-$95 billion was also well below the $97.3 billion expected.

The rest of the guidance was uneventful:

 

But the cherry on top was a reported that came not in the earnings report but a few hours earlier, when the Seattle Times announced that “Boeing is likely to announce Wednesday morning another production rate cut, this time for the 777 program, according to a senior executive with a 777 customer whom Boeing consulted as it prepared its plan.

Just last week Boeing announced that due to slow sales it would cut the rate on the 747 jumbo jet program, starting in September, to one plane every two months. The company said it would book an $885 million pretax write-off as a result of that rate cut.

 

Another multimillion-dollar charge would need to be added if the 777 is cut. A second source also indicated that the announcement could come Wednesday, when the company reports its quarterly earnings.

 

Boeing currently doesn’t have enough sales to fill all the 777 delivery slots between now and when production of the new 777X kicks into high gear after the turn of the decade. Most Wall Street analysts have been predicting a 777 rate cut from the current 100 jets per year — but after the 747 cut, they’ve assumed a 777 announcement wouldn’t come until later in the year.

Which explains our confusion when one month ago we reported that a “Used Boeing 777 Sells For 97% Off List Price“

In short, it is clear that the manufacturing recession is now hitting such Dow Jones stalwarts as Boeing, and speaking of “hit”, BA was down almost 6% at last check, and since it accounts for 5.4% of the Dow Jones, the aircraft maker will weigh on the entire market for the rest of today’s session.

But the biggest surprise is that BA did not announce some massive debt-funded buyback program: is management, or its bankers,  getting worried that levering up massively to repurchase stock is no longer the smartest strategy.

via Zero Hedge http://ift.tt/1PjhuBW Tyler Durden

• Global stocks, dollar struggle ahead of Fed as oil falters (Reuters)
• Bond Bulls Bank on Fed Mention of Market Chaos as Drag on Growth (BBG)
• Fees on Mutual Funds and ETFs Tumble Toward Zero (WSJ)
• China Climbs Back Up Janet Yellen’s Worry List (BBG)
• The World’s Favorite New Tax Haven Is the United States (BBG)
• New Jersey Gov. Christie backs Atlantic City takeover plan (Reuters)
• U.S. Universities Raised a Record $40.3 Billion Last Year (BBG)
• With China weakening, Apple turns to India (Reuters)
• Cash Is King as Europe Adapts to Negative Interest Rates (BBG)
• Trump pulls out of Republican debate in Iowa (Reuters)
• French Justice Minister Taubira Quits Over Constitutional Change (BBG)
• Clock ticks down on EU passport free travel dream (AFP)
• Yuan Bears Denounced as Delusional, Doomed by China State Media (BBG)
• States Asks High Court to Delay EPA Carbon-Emissions Rule (WSJ)
• AIG Passes JPMorgan, Approaches Wells Fargo on Buybacks (BBG)
• NYSE’s $2 Trillion ETF Business Sees Heightened Competition (BBG)
• World’s Biggest Wealth Fund Speaks Out on Liquidity Banks Miss (BBG)

 

Overnight Media Digest

WSJ

– A group of 26 states on Tuesday filed a last-ditch request at the Supreme Court seeking the delay of a key Obama administration environmental rule to cut carbon emissions from power plants. (http://on.wsj.com/1Sa4BwF)

– A jury found John Bills, former assistant transportation commissioner, guilty of fraud, bribery and extortion charges for receiving hundreds of thousands of dollars in cash and perks in exchange for helping Redflex Traffic Systems Inc build Chicago’s red-light ticketing system into the one of the largest in the nation. (http://on.wsj.com/1Sa4FwE)

– Apple Inc said iPhone sales grew at the slowest pace since its introduction in 2007 and forecast that revenue in the current quarter will decline for the first time in 13 years, signaling an end to its recent period of hypergrowth. (http://on.wsj.com/1Sa4SQj)

– Iran is pushing to find new ways to extract and export its vast natural-gas reserves, including developing facilities to liquefy the commodity and ship it to Europe in two years, now that Western sanctions have been lifted, according to a top Iranian official. (http://on.wsj.com/1Sa54iF)

– Federal regulators soon are expected to propose overhauling rules for television set-top boxes, a move aimed at lowering bills for cable viewers and providing more access to Internet-based programming. (http://on.wsj.com/1Sa5be2)

 

FT

Cupertino, California-based Apple Inc has forecast first ever decline in sales for the iPhone due to growing volatility in some markets, including China.

Social networking site Facebook Inc is resisting attempts by tax authorities in Britain to coax it into paying back-taxes, a move that may increase public anger against the Palo Alto, California-based company.

Elzbieta Bienkowska, the European commissioner responsible for car industry regulation, said she would relentlessly pursue German car giant Volkswagen AG to pay compensation to millions of car owners in Europe affected by the diesel emissions scandal.

Dixons Carphone is scheduled to close more than 130 of its stores in Britain as it embarks on its plan to merge its three main brands in one store.

 

NYT

– Despite global economic turmoil, many economists argue that the American currency’s rise is mostly a good thing. But there are downsides, and not all in the United States. (http://nyti.ms/1SiBfKM)

– If accepted, Fox Searchlight’s offer for “The Birth of a Nation,” about Nat Turner, would be one of the highest prices ever paid for a film making its debut at the film festival. (http://nyti.ms/1OY8K0G)

– Apple Inc’s quarterly revenue fell short of Wall Street forecasts, and it issued a disappointing forecast for the current period. (http://nyti.ms/1KElJTe)

– The insurance giant American International Group Inc brushed aside Carl Icahn’s push for a breakup, saying it would sell or spin off some businesses and create nine operating units. (http://nyti.ms/1PiUyCM)

 

Canada

THE GLOBE AND MAIL

** Canadian National Railway on Tuesday beat analysts’ expectations with an 11 percent rise in fourth-quarter profit and raised its dividend by 20 percent. (http://bit.ly/1NzX3v9)

** Alberta suffered its worst year for employment losses since the dark days of the national energy program and early 1980’s recession, according to revised labor figures from Statistics Canada. (http://bit.ly/1NzX95S)

** The Ontario government has reached inward for the next leader of the Ontario Securities Commission, nominating the agency’s executive director, Maureen Jensen, to replace departed chair Howard Wetston. (http://bit.ly/1NzXg1c)

NATIONAL POST

** The office of federal environment commissioner, Julie Gelfand, said in a report Tuesday that the National Energy Board has a serious problem tracking whether pipeline companies meet conditions for project approvals. (http://bit.ly/1NzXt4s)

** Food price inflation has been driving Canadians into the frozen food aisles, according to the CEO of grocery chain Metro Inc, Eric La Flèche. (http://bit.ly/1nnda9X)

** Quebec City Mayor Régis Labeaume supports the Energy East pipeline project but he blasted the promoter Tuesday for an “incompetent” sales job. (http://bit.ly/1NzXSUE)

 

Britain

The Times

EasyJet has conceded that it will achieve its lowest rate of profit growth this year since the arrival of Dame Carolyn McCall as its chief executive in 2010. (http://thetim.es/1OXm45h)

Mark Carney may remain as the governor of the Bank of England for a full eight-year term, despite pledging to serve just five. Yesterday he revealed that he had not made up his mind but would “by the end of the year”, causing consternation among MPs. (http://thetim.es/1Si3RDY)

The Guardian

MPs have launched an inquiry into the UK’s tax system after the government was accused of allowing Google to pay too little in a £130 mln deal. (http://bit.ly/1PNNhHq)

Brakes Group, one of the UK’s largest food distributors, is understood to have postponed plans for a stock market flotation in London that could have valued it at up to £2.5 bln. (http://bit.ly/1WMIIT3)

The Telegraph

The spread-betting group CMC Markets is seeking a value of between £678m and £794m as it prepares to join the London stock market.(http://bit.ly/1ZRqy2r)

Tesco investors are set to launch a huge damages claim, saying they lost tens of millions because of the accounting scandal at the supermarket. (http://bit.ly/1VpyR4k)

Sky News

Denmark’s parliament has voted in favour of seizing the assets of asylum seekers to help pay for their stay while their claims are processed.(http://bit.ly/1TlRoQG)

A patent holder is demanding $500m (£351m) from Apple because it says the firm has used its intellectual property without permission. (http://bit.ly/23rYc3q)

The Independent

Two former Disney employees have filed separate class-action lawsuits against the entertainment giant claiming they conspired to replace their jobs with cheaper immigrant workers on temporary U.S. work visas. (http://ind.pn/1ZRrzHM)

Twitter is experimenting with not showing ads to some of its most “high value” users. (http://ind.pn/1PAmWSW)

via Zero Hedge http://ift.tt/1PDJe6g Tyler Durden

There were many excuses in Bill Ackman’s annual letter to shareholders, in fact some 13 pages worth, which sought to explain how “Pershing Square funds suffered their greatest peak-to-trough decline and worst annual performance ever.”

To be sure, Ackman is quick to point out that the 21% plunge in P&L in 2015 was not just due to his infamous tryst with Valeant, although that’s where it started:

“the inception of the portfolio’s decline began with Valeant in August. We have discussed at length the events at Valeant which catalyzed the stock’s initial decline: political attention on drug pricing and the industry, regulatory scrutiny, attacks by short sellers, and the termination of a distribution arrangement representing ~7% of Valeant’s sales. But, we would never have expected that the cumulative effect of these events would have caused a nearly 70% decline in the stock, nor do we believe that they will permanently impair Valeant’s intrinsic value.”

It quickly went downhill from there:

Contemporaneous with the decline of Valeant, the rest of our portfolio went into free fall which has continued up until the present.

Ah yes, words to warm the heart of any LP. The ongoing collapse of Perishing Square is confirmed by the followng table:

There are many more excuses and accusations, but the most notable one in our view is Bill Ackman blaming hedge fund groupthink for his deplorable performance, something he calls the “Pershing Square Correlation”:

The companies in our portfolio that have suffered the largest peak-to-trough declines are Valeant, Platform, Nomad, and Fannie and Freddie. The inherent relative risk of their underlying businesses and their more leveraged capital structures partially explain their greater declines in market value as markets moved to a “risk off” mentality. But their massive declines in value, in our view substantially more than can be accounted for due to fundamental issues in their respective businesses, cannot, we believe, be attributed to these factors. Importantly, none of these companies is in any of the important market indexes. Their shareholder bases are, therefore, largely comprised of hedge funds and other active managers, which we believe has contributed to their underperformance.

 

The Pershing Square Correlation

 

Perhaps the largest correlation in our portfolio is one that we have not previously considered; that is, the fact that we own large stakes in each of these companies. We have had the benefit of a “following” of investors who track and own many of our holdings. This has given us significantly greater clout than is reflected by our percentage ownership of these companies, and we believe that it is partially what has caused the “pop” in market price when we announce a new active investment. As a result, these active managers’ performance is often closely tied with ours. When Valeant’s stock price collapsed, our performance, and that of Pershing Square followers, were dramatically affected. Nearly all of these investment managers are subject to daily, monthly, and quarterly redemptions, and therefore, many were likely forced to liquidate substantial portions of their holdings which overlap with our own.

 

The vulnerability of a company to an overall market decline, a short seller attack, or negative headlines is highly correlated with the nature of the investors who are the principal holders.

The punchline:

“While it is impossible to know for sure, we believe that our continued negative outperformance in the first few weeks of the year relates primarily to forced selling of our holdings by investors whose stakes overlap with our own.“

So let’s get this straight: Ackman eagerly trots out 300-slide presentations and speaks for hours to get all the hedge fund managers on his side, has people from his team attend every “idea dinner” imaginable to pitch trades he already has on his books, and is otherwise delighted when the “hedge” fund piggybackers do what he does on the way up… but on the way down it’s all their fault when his ideas fizzle as they ultimately do, and the hedge fund hotel burns down?

Brilliant.

Finally, something amusing: Ackman tries to earn some brownie points for correctly predicting the Yuan devaluation. There is just one problem…

Last summer, we built large notional short positions in the Chinese yuan through the purchase of puts and put spreads in order to protect the portfolio in the event of unanticipated weakness in the Chinese economy. We also purchased puts on the Saudi Riyal as an inexpensive way to hedge against a continued decline in energy prices. Both of these currencies are pegged to the U.S. dollar, and therefore were inexpensive to hedge against the dollar as the pegs reduced volatility and the cost of put options. Two days after we began to build our position in the Chinese yuan, China did a 2% surprise devaluation which substantially increased the cost of the options we had intended to continue purchasing. We continued to build the position thereafter by buying slightly more out of the money puts and selling further out of the money puts so as to keep the cost and risk/reward ratio of the position attractive.

… he hasn’t actually made money:

To date, despite the large notional size of this currency/market hedge and continued weakness in the yuan and growing pressure on the Saudi Riyal, we have made only a modest profit on these investments…. Our currency puts, therefore, have not, to date, served to be a useful hedge against declines in our portfolio as our investments have declined much more dramatically than we would have expected in light of their limited exposure to the Chinese economy and oil prices.

All this and much more demonstrating why hedge levered-beta funds are now a dying asset class, in the full Ackman letter below.

via Zero Hedge http://ift.tt/1ZSCuBb Tyler Durden

While the focus in the overnight session has traditionally been about two things, namely oil and China, today one can also throw in AAPL which is down 4% in the pre-market after its disappointing earnings yesterday in which it confirmed our channel-checked warnings about China from last summer, and the Fed which is set to release the January FOMC statement this afternoon.

Unlike yesterday, when the National Team allowed stocks to tumble, today the Chinese Plunge Protection Team intervened, and with the Shanghai Composite down as low at 2,638, the benchmark stock index pared the loss of as much as 4.1%, spurred by rallies for PetroChina, ICBC and other shares that are long considered favorite holdings of state-linked rescue funds. The result was a -0.52% drop in the composite, preventing what could have been the latest two-day -10% correction.  Still, after today’s close the index dropped to the lowest since December 2014.

With the Fed set to take center stage today, the dollar’s prospects – which increasingly many recognize needs to somehow decline to avoid a worsening global recession – rest on the wording of the Fed’s policy statement. Since the U.S. central bank raised interest rates on Dec.16 for the first time in almost a decade, a Bloomberg gauge tracking the dollar against 10 of its leading global peers has risen 1.5 percent, touching a record high on Friday. Those gains have been fueled in part by indications from the Fed that there will be four rate hikes in 2016. Investors are watching for any deviation from that plan. Traders have been more dovish than the Fed, pricing in roughly one rate increase this year. At the end of December the odds of a March move were 51 percent. Fed fund futures now put the probability at 25 percent.

Elsewhere, Apple showed that contrary to Tim Cook’s email to Jim Cramer, the tech company isn’t immune to China’s troubles. The world’s biggest company is beginning to see “economic softness” in Greater China, which includes Taiwan and Hong Kong. Apple also projected its first quarterly sales decline since 2003

The negative sentiment weighed in on crude, and after yesterday’s gargantuan 11.4 million barrel API inventory build, oil resumed declines amid further evidence of a global glut, dragging European stocks and U.S. equity index futures lower before the Federal Reserve’s first policy statement this year. European bonds gained and the yen strengthened.

West Texas Intermediate crude fell toward $30 a barrel after U.S. industry data showed stockpiles increased. European stocks deepened a monthly rout as disappointing earnings reports reignited investor concern about global growth prospects, with Apple Inc. forecasting its first drop in sales since 2003. Yields on Treasuries due in a decade held at around 2 percent and German note yields fell to record lows, while Malaysia’s ringgit climbed to a seven-week high as Prime Minister Najib Razak was cleared in a corruption probe.

Today it wasn’t just about crude: as Bloomberg adds, Iron ore will will be the worst performing metal this year. That’s the verdict of the World Bank, which cites low-cost supply outstripping consumption. The Washington-based lender says prices will average $42 a metric ton in 2016, a drop of 25 percent from 2015. Ore with 62 percent content delivered to Qingdao, a global benchmark, sank to a record low of $38.30 in December, having lost almost half its value last year. The slowdown in China has restricted demand from the world’s biggest user. At the same time the biggest mining companies are raising production to build market share. The World Bank forecasts nickel may fall 16 percent in 2016, while copper may drop 9 percent.

“Nobody is really sure where we go from here, and nobody is brave enough to make the call,” Peter Dixon, Commerzbank AG’s global equities economist in London told Bloomberg. “Corporate earnings season won’t provide much of a support – markets may find a floor if the Fed is extremely dovish tonight. At least investors will have time to think and reassess valuations.”

Looking at markets around the globe, we start in Asia, where stocks traded mostly higher following the firm close on Wall St. where strong earnings and a rebound in the energy complex supported risk sentiment. Nikkei 225 (+2.7%) was led higher by the telecoms sector after index giant Softbank rose the most in 21 months following strong earnings report from its Sprint unit, while the ASX 200 (-1.2%) traded lower as it played catch up to yesterday’s regional losses on its return from holiday. Shanghai Comp. (-0.5%) initially underperformed after Chinese industrial profits printed its largest decline in 4 months and 4th consecutive monthly decline, however, the index was granted some reprieve heading into the EU open amid support for energy names. 10yr JGBs traded higher despite the inflows into riskier assets, while the BoJ also entered the market to purchase JPY 1.26tr1 in government bonds.

European stocks opened lower this morning despite a generally positive close from their Asian counterparts. With somewhat damp sentiment, and without large swings in Asian equities, earnings from European majors have managed to dictate price action. Heavy weight Novartis (-3.0%) missed on its headline sales and EPS figures, and as a result weighs upon the SMI (-0.8%). The fallout from Novartis’ poor fourth quarter has also been felt in other defensive sectors across Europe, who have failed to benefit from a lack of risk-on. Elsewhere, BASF (-3.0%) and RBS (-2.9%) issued warnings of upcoming EUR 600mln and GBP 500mln impairment charges respectively. To round it off the premier company of the IBEX, Santander (-1.0%), posted virtually zero Q4 net.

Apple’s (-3.2%) Frankfurt listing trades lower following fears about iPhone sales growth, despite the company posting a beat on EPS. iPhone sales grew just 1% from a year earlier, the slowest ever rate for the device, sluggishness which, according to the company’s own projections is set to continue. Furthermore, the company projected the first revenue decline in over a decade, although CEO Tim Cook said was indicative of a slowdown in global economic growth.

In FX, extremely tight trade seen in FX this morning, with the majors well contained by familiar limits. Oil/stock watching dominates, but we had some brief excitement with AUD/USD breaking higher through the .7000’s on better than expected CPI, but the move ran out of steam around .7050. This coincided with a turn in risk sentiment, though Asia was mixed. Oil lower again though, holding off the $29.0 handle, but enough to pull the CAD a cent off the 1.4040 highs vs the USD. USD/JPY confined to the 118.00 handle, finding support at the figure level in Asia and since. EUR/USD is trying to break higher, but upper 1.0900’s well offered. GBP is losing its shine.

In commodities, WTI and Brent trade lower as the supply glut continues, with yesterday’s API inventories showing a substantial build of 11.4 min bbl; if the official data out later today shows a similar rise, it would be the largest weekly gain in stocks since May 1996. With this is mind however, Brent remains above USD 31.00 level and WTI above USD 30.00, with comments yesterday from Iraq’s Oil Minister in regards to production, seemingly preventing a further slide in prices.

Spot gold ticked down from 3 months highs overnight, amid a relatively quiet session in Europe, with similar lack of price action in USD, as participants await today’s FOMC. The yellow metal hit after hit USD 1,123.06 in yesterday’s session, its highest level since November 3rd, and as of this morning remains higher by 5.3% since the start of the year, as the beneficiary of safe haven bids.

Elsewhere, copper prices have seen subdued trade, with LME copper now around the level of its Kerb close yesterday, seemingly quite comfortable above that important USD 4,500 handle. Some have speculated that this is because short positions are closing ahead of the Chinese New year, as an uptick is demand is expected after Chinese participants return from their week long-hiatus and businesses complete their first quarter copper tender in March.

Finally, Iron ore has continued its rebound with prices rallying to a 3-week high. This comes despite the World Bank forecasting iron ore to be the worst performing among metals this year, citing increasing output by the industry leaders and low cost supply continuing to overshadow demand.

Datawise in the US today the only release of note will be the December new home sales data. That’s before we turn to the main event of the day of course with the conclusion of the two-day FOMC meeting at 7.00pm GMT. Away from this we’ve got a number of ECB board members due to speak including Coeure, Mersch and Lautenschlaeger at various points this morning. Earnings season rumbles on and today sees 33 S&P 500 companies report including Facebook (after-market), eBay (after-market) and Boeing (pre-market open).

 

Bulletin Headline Summary from Bloomberg and RanSquawk

• European equities trade lower amid a raft of weak earnings and impairments, Apple’s (-4.0%) Frankfurt listing trades lower following fears around i Phone sales growth
• Extremely tight trade seen in FX this morning, with the majors well contained by familiar limits
• Today’s highlights: US new home sales, DoE inventories, FOMC & RBNZ rate decisions, comments from BoE’s Shafik, ECB’s Lane, Mersche & Lautenschlaeger
• Treasuries lower overnight ahead of FOMC rate decision at 2pm ET; week’s U.S. auctions continue today with $35b 5Y notes, WI yield 1.44%, compares with 1.785% awarded in Dec., highest 5Y auction stop since 1.800% in Sept. 2014.
• When Fed Chair Yellen looks for an update on China she’ll find little reason for cheer. The Shanghai Composite Index has tumbled to a 13-month low as a rout that started in the middle of 2015 shows no signs of easing up. Capital is leaving at a record pace
• Last year, Chinese policy makers watched $1t in capital head for the exits. Now, the question is what exactly will President Jinping’s economic team do about it. One option is capital controls
• China’s leading state media are becoming more vociferous in their support for the yuan; short sellers “haven’t done their homework,” the state-run Xinhua News Agency said on Wednesday, while the People’s Daily declared that such trades will undoubtedly fail
• The Italian government and the European Commission agreed on a plan to help banks offload bad debt in a deal that won’t count as state aid because Italy’s backing will be priced at market rates
• Royal Bank of Scotland dropped after taking a £3.6b ($5.2b) hit to the value of its assets and set aside more money for past misconduct, overshadowing CEO Ross McEwan’s efforts to resume dividend payments
• Bank of America isn’t waiting to see if trading revenue rebounds from a tough 2015. CEO Thomas Montag is increasing pressure on deputies to lower expenses across his trading and investment banking world, according to people with knowledge of the initiative
• Canadian PM Trudeau has pledged to keep the country’s debt declining in relation to the size of the economy, even as he drives up the deficit with infrastructure spending
• After years of lambasting other countries for helping rich Americans hide their money offshore, the U.S. is emerging as a leading tax and secrecy haven for rich foreigners by resisting new global disclosure standards
• Sovereign 10Y bond yields mostly steady. Asian stocks mostly higher, European stocks drop; U.S. equity-index futures drop. Crude oil falls, copper and gold drop

US Event Calendar

• 7:00am: MBA Mortgage Applications, Jan. 22 (prior 9%)
• 10:00am: New Home Sales, Dec., est. 500k (prior 490k)
• New Home Sales m/m, Dec., est. 2% (prior 4.3%)
• 1:00pm: U.S. to sell $35b 5Y notes
• 2:00pm: FOMC rate decision, est. 0.25%-0.5% (prior 0.25%-0.5%)

DB’s Jim Reid completes the overnight wrap

Having struck an intraday low of $29.25/bbl early yesterday morning, WTI staged a comeback post the Asia close, rising steadily through much of the European and US sessions after headlines concerning potential supply cuts from OPEC and Russia gained traction. That saw Oil hit an intraday high of $32.41/bbl (an 11% swing from the day’s low) but the momentum faded slightly into the close with prices settling back down at $31.45/bbl and still nearly a dollar off where we closed Friday. As you’ll see below that fading momentum has continued into the Asia session. The earlier moves were enough to see equity markets rebound and close broadly higher yesterday with decent gains for the S&P 500 (+1.41%), Dow (+1.78%), Stoxx 600 (+0.87%) and DAX (+0.89%).

Post the US close we saw Apple report which given its size is becoming a macro event. While earnings came in slightly ahead of estimates and sales a smidgen behind, the bigger news was the guidance for the current quarter where management is forecasting the first quarterly drop in sales since 2003 (to between $50bn to $53bn). That’s also below Wall St forecasts for $55.5bn with Apple’s CFO highlighting some softness in China and Hong Kong this month in particular. The news saw shares down a couple of percent in extended trading while US equity index futures are looking up to 1% lower.

US futures are not being helped by another turnaround in Asia with the majority of bourses cooling off after opening strongly. The Nikkei (+2.24%), Kospi (+1.03%) and Hang Seng (+0.47%) appear to be following much of the lead from the US although have pared much greater gains, while there’s been another steep fall for bourses in China (Shanghai Comp -3.52%), while the ASX is also down -1.20%. Oil continues to reverse last night’s high mark with WTI down -1.00% at $31.13/bbl in trading this morning. The weakness in China this morning may also be reflecting some soft industrial profits data, with profits falling for a seventh consecutive month in December (-4.7% yoy) after being at -1.4% in November.

These moves come ahead of the main event of today – the FOMC meeting. Leading into it, futures markets are actually pricing a greater chance of a cut than a hike (4% versus 0%) from the Fed. The important takeaway however will be what hints we get from the committee about forward policy guidance. It would be no great surprise to see the FOMC leave the door for a March move open, but clearly the news since the December meeting doesn’t lend itself to a March move. As DB’s Peter Hooper points out, financial conditions have deteriorated enough to subtract as much as half a percent point from GDP growth if sustained and the committee has emphasized the importance of incoming data to their decisions going forward. As a result they will have the delicate task of acknowledging the recent deterioration in economic and financial conditions while at the same time leaving the door open for a March move if recent deterioration proves to be temporary. We continue to be of the view that the Fed should be on hold for now however and so would not be surprised to see a more dovish message out of today. Of potentially more relevance could be Fed Chair Yellen’s monetary policy testimony in a couple weeks. By then we will have had the December consumer spending and inflation data, Q4 GDP, Q4 ECI data, January employment data and the Q1 Fed Senior Loan Officer Survey.

Moving on and quickly recapping the rest of markets yesterday. As well as that bounce in Oil some better than expected corporate earnings results from Procter & Gamble, Johnson & Johnson and 3M contributed to the much better tone for risk. US consumer confidence data also attracted some attention after we saw the print unexpectedly jump 1.8pts this month to 98.1 (vs. 96.5 expected), marking a three-month high in the process. This was surprising in the context of the big slump for equities this month which has been seemingly overshadowed by the resilient labour market and consumer benefits from lower energy prices. The rest of the data yesterday offered few surprises. The flash US services PMI came in a touch below expectations at 53.7 (vs. 54.0 expected), a decline of 0.6pts from December. The Richmond Fed manufacturing index print declined 4pts to 2 as expected. Meanwhile the S&P/Case-Shiller house price was up +0.9% mom in November (vs. +0.8% expected), while the FHFA house price index rose in line with the market at +0.5% mom.

There was no data out of Europe yesterday but that didn’t stop Europe sovereign bond yields edging lower once more. 10y Bund yields finished 2.5bps lower and are now sitting around 0.445% which is the lowest since the end of October last year after starting the year closer to 0.628%. Meanwhile 2y Bunds have quietly gone about extending their move deeper into negative territory, moving another basis point lower yesterday to -0.460% and in the process setting a fresh record all time low. The latest leg lower in part helped by some more affirmative words from ECB President Draghi who reiterated the need for the ECB to achieve its inflation mandate.
Staying in Europe, the systemic euro peripherals are both in focus at the moment. In Spain the probability of a left-wing PSOE-Podemos government has increased materially according to DB’s Marco Stringa. There is a significant risk that an eventual agreement will include the reversal of the labour market reform. A left-wing government would probably be highly unstable as it will likely fall short of an absolute majority and would likely require the collaboration of more than seven parties. Overall, the three main options continue to be: (i) a left-wing government, (ii) a last-minute temporary Grand Coalition or (iii) a new election to be called probably in April. Although uncertainty is very high, options (i) and (iii) seems the more likely. Overall Marco continues to think that an early election at a national level is a question of when rather than if.

Moving to Italy, last Friday, Marco and DB bank analyst Paola Sabbione published a report on the country and its banks. There is the risk that recent events put upward pressure on bank funding costs, above all for the small credit institutions. But this will not compromise the stability of the Italian banking sector in their view. The recent ECB request for additional information on NPLs is not a sign of a new risk in asset quality. Italy could undertake a significant institutional makeover via the Senate reform. A referendum should take place in October. Were it to be rejected, it would likely trigger the fall of Renzi’s government. h

Turning over to today’s calendar now, we’re kicking off this morning in Europe with various consumer confidence readings out of Germany, France and Italy along with house price data out of the UK. Datawise in the US this afternoon the only release of note will be the December new home sales data. That’s before we turn to the main event of the day of course with the conclusion of the two-day FOMC meeting at 7.00pm GMT. Away from this we’ve got a number of ECB board members due to speak including Coeure, Mersch and Lautenschlaeger at various points this morning. Earnings season rumbles on and today sees 33 S&P 500 companies report including Facebook (after-market), eBay (after-market) and Boeing (pre-market open).

via Zero Hedge http://ift.tt/1Kao9hw Tyler Durden