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Russia wants to sell some bonds and President Obama isn’t happy about it.

Moscow is looking to issue “at least” $3 billion of foreign bonds in what amounts to the country’s first international issuance since the West imposed sanctions on The Kremlin in 2014 after the annexation of Crimea and Russia’s alleged role in “destabilizing” Ukraine (because it was very “stable” before).

Since the sanctions were imposed, relations between Moscow and Washington have only gotten more contentious and when Russia began flying combat missions from Latakia on September 30, it was trotted out as evidence that Vladimir Putin is indeed determined to reassert Russian influence by sheer force.

Meanwhile, the Russian economy is in trouble. Granted, Russia isn’t Brazil and Moscow isn’t running a double-digit budget deficit like Riyadh, but times are most assuredly tough. The ruble has plunged through 75 and will probably see the mid-80s if oil spends too much time in the 20s, inflation is running high, and collapsing crude threatens to weaken Moscow’s fiscal position.

All of that is just fine with Washington and its European allies who attribute a large part of the malaise to sanctions even though slumping crude probably plays a larger role.

It’s against this backdrop that Russia is set to sell $3 billion in debt and officials in the State Department and the Treasury are out warning US banks not to underwrite the deal. “The U.S. government has warned some top U.S. banks not to bid on a potentially lucrative but politically risky Russian bond deal, saying it would undermine international sanctions on Moscow,” WSJ reports, adding that “the rules don’t explicitly prohibit banks from pursuing the business, but U.S. State Department officials hold the view that helping finance Russia would run counter to American foreign policy.”

Russia has invited BofA, Citi, Goldman, JPMorgan, and Morgan Stanley to bid on the business, but Washington’s threats have left the Street in a rather tenuous position. In response to banks’ inquiries as to whether they are allowed to participate, John Kerry’s State Department said this: “It is essential that private companies—in the U.S., EU and around the world—understand that Russia will remain a high-risk market so long as its actions to destabilize Ukraine continue. [There will be] reputational risks of returning to business as usual with Russia.”

“Business as usual” was tens of billions in sovereign issuance and hundreds of millions in investment banking business for US financial institutions.

By warning of “reputational risks” it certainly appears as though Washinton is threatening to ostracize banks that help to arrange deals for the Russian government. Here’s Moscow’s sharp-tongued foreign ministry spokeswoman Maria Zakharova: “The US is trying to intimidate banks on our bonds.”

The worry, apparently, is that The Kremlin will channel the funds to companies currently under sanctions meaning banks “could run the risk of inadvertently violating the sanctions in spirit.” We’re not entirely sure the best way to promote global security is to forcibly compel banks to help freeze the Russians out of international debt markets at a time when the fate of international peace is effectively in Russian hands thanks to Putin’s intervention in Syria.

We’re also not entirely sure why the federal government feels like it has the right to dictate with whom private enterprises can do business. Besides, if John Kerry is really interested in curtailing the financial activities of nefarious actors, he should be warning the Russians not to do business with Wall Street – the bankers are much more dangerous than Vladimir Putin.

via Zero Hedge http://ift.tt/1LHDEc4 Tyler Durden

We have joked about it in the past: with equities around the globe all correlating tick for tick with the price of oil (supposedly “lower oil is good for the economy”, just don’t tell that to the stock market), instead of doing piecemeal interventions and monetizing stocks, something which as even Citigroup has noted no longer works, what central banks should do instead is monetize the source of all market problems: oil itself.

We first joked last January that the ECB should do it…

ECB’S COEURE SAYS MONETARY POLICY MUST REACT TO INFLATION DROP. Time for ECB to monetize barrels of oil

— zerohedge (@zerohedge) January 8, 2015

… that the Fed should do it…

YELLEN: WE SAW SUBSTANTIAL PRESSURE ON OIL PRICES, COMMODITIES. Why doesn’t the Fed just monetize oil?

— zerohedge (@zerohedge) September 17, 2015

… and that Canada, arguably the one developed nation most impacted by plunging oil, should certainly do it.

Canada Should Triple Deficit Target to Spark Growth: David Rosenberg. Atually the BOC should just monetize oil: that will fix everything

— zerohedge (@zerohedge) January 4, 2016

Key word, however, in all of the above is “joked.” After all, by now most traders, and even the Davos billionaires, not only admit, but agree they have all had enough with central bank market rigging and manipulation.

Which is why we were almost surprised when none other than the WSJ proposed that, because “central banks have gone down the rabbit hole… starting with record low interest rates, then purchases of government bonds and mortgage bonds, ultra-accommodative policy progressed in Japan to buying real-estate investment trusts and equity funds” and because “in the looking-glass world of modern central banking, almost nothing is taboo, with even the abolition of cash discussed seriously by top monetary wonks” that it is time to make precisely this joke part of actual monetary policy.

The WSJ’s modest proposal: “the Bank of Japan should print money to buy oil. It sounds beyond nonsense. But with central bankers believing six impossible things before breakfast, it no longer seems inconceivable, which is informative in itself.”

The WSJ “explains”:

Consider the BOJ’s problem. The central bank is creating ¥80 trillion ($700 billion) a year to buy mainly government bonds, one of the biggest programs of money printing in history. It already owns almost a third of the bond market, nearly 2% of equities and about half of exchange-traded funds by value.

 

Nonetheless, Japanese inflation remains quiescent. The yen has been strengthening despite the negative rates introduced last month, making it even harder to push prices up toward the BOJ’s 2% target.

The logic behind the proposal is… fragile.

Because the BOJ keeps digging itself into an ever deeper hole, and because “negative rates have unpleasant side-effects, hurting banks, while bond supply may be limited” and because Japan’s QE is running out of bonds to monetize (something we have warned about since 2013), “over the next three years only ¥236 trillion of bonds could be available to buy because banks and insurance companies are reluctant to sell many of their holdings—making it hard to ramp up purchases further… HSBC says that in a worst-case scenario the BOJ would have trouble filling its monthly purchases later on this year”, it is time to throw something, anything at the wall, and hope it sticks.

To be sure, the WSJ admits there are even more idiotic ideas available “such as direct financing of government spending, or abolishing bank notes so interest rates can go deeply negative. None is politically palatable.”

But, it adds, “compared with these, creating money to buy oil has several big advantages.”

First, it allows the BOJ directly to weaken the currency without dangerous diplomatic repercussions. Oil is denominated in dollars, so yen have to be sold to finance the purchase. But the U.S. could hardly object to Japan importing more oil.

 

Second, purchases by the BOJ would push up the price of crude. Japanese consumers may not see that as a good thing, but investors are fixated on the oil price as a measure of whether to take risk or not. Crude has this year become central to everything from equities to government bonds and currencies, as traders take their cue from the oil price—with the safe-haven yen tending to strengthen when oil falls, as it did again on Tuesday. This market effect gives oil purchases additional power in weakening the yen, compared with buying bonds, and could be particularly powerful.

 

Third, Japan imports almost all its oil and has fewer days’ reserves than the average importer. Building new oil storage would support investment, too.

 

Fourth, it is easy to argue that now is a good time to buy oil, with the price down to a quarter of its 2008 peak. (Although Brent crude at $33 a barrel on Tuesday was not far below the 30-year median of $38 a barrel, adjusted for inflation.)

To be sure the proposal is idiotic on more than one level: as the WSJ admits, “there just isn’t enough oil in the world to help the BOJ print money on the scale it wants for very long. Oil is a big market; the extra supply expected from Iran is worth about $8 billion a year. But $1 billion is no longer the unit of account for central banking. While the total oil market is worth roughly $1.2 trillion a year, Japan can buy only a fraction of that—though of course the higher it pushes the oil price, the more it can spend.”

Picture that: a world which is running out of assets for central banks to buy with money they create out of thin aire.

Still, we are glad that the WSJ closes on a somewhat so(m)ber tone:

HSBC Chief Economist Stephen King says, the BOJ might eventually move from debating what else it can buy to asking whether these unconventional policies work at all.

And while we can’t help but laugh at all of the above, simply because it confirms the epic failure of central planning intervention, something we have railed against since March 2009, we agree with the following: “We have come to the point in Japanese monetary policy—and soon perhaps in the West—where it is hard to tell sense from nonsense.“

Indeed we have.

via Zero Hedge http://ift.tt/1Qg3rxB Tyler Durden

For a minute, Sharp was saved.

The 100-year-old maker of LCD screens was once a consumer electronics powerhouse but has stumbled in the face of fierce price competition and ill-advised investments in advanced production plants. Earlier this month, Sharp reported a net loss of $208 million for for its fiscal Q3, bringing the nine month loss to nearly a billion as the company continues to lose market share to Samsung, LG, and other Asian competitors.

Foxconn founder Terry Gou sees Sharp’s dire straits as an opportunity for Hon Hai Precision to solidify its position and pricing power with Apple, which is seen adopting OLED screens for iPhones by 2018. Sharp hopes to become a global OLED supplier.

“The OLED sector is virtually a monopoly right now,” Lisa Li, vice president of Sigma Intell says, referencing Samsung’s iron grip on the space. “This must be something Apple is pretty concerned about.”

“An iPhone’s most expensive component is its touch screen display, making up more than 20% of manufacturing costs, which is why Mr. Gou is eager to supply them,” WSJ writes. “Sharp is one of three suppliers of iPhone screens.” 

“It’s widely understood that Hon Hai wants to consolidate Sharp in order to secure its dominant position in Apple’s supply chain; the combined group could provide EMS services as well as displays, touch panels, camera modules, metal casings, FPCBs and connectors,” BNP remarked, in a note out last week.

Gou has had his eyes on Sharp since 2012, when a deal for Foxconn to take a 10% stake fell apart due in part to Sharp’s abysmal operating performance.

Foxconn’s latest overture would have seen Sharp issue shares worth something like $4.3 billion which Hon Hai would buy, giving the Taiwanese contract manufacturer a 66% stake in the Japanese company. As Bloomberg notes, “Foxconn would also put down a 100 billion yen deposit that Sharp can keep if the sale, which is contingent on shareholder approval, doesn’t go through.”

There were already all kinds of questions swirling around about whether Foxconn was thinking too much about Apple and too little about how it planned to turn around the loss-making machine that Sharp has become. Now, it looks like Hon Hai may have gotten cold feet after realizing what bad shape the Japanese company is actually in.

Just hours after Sharp’s board agreed to a takeover – which WSJ notes marked something of a coup as “Japan has been reluctant to let a major domestic company go into foreign hands, and many people had argued that the 103-year-old Sharp should go to a Japanese buyer” – Foxconn put the deal on ice by releasing the following rather amusing statement:

We acknowledge receipt of a notice today from Sharp’s Board choosing us as their preferred partner. After receiving new material information from Sharp yesterday morning, we have accordingly informed Sharp last night [before their board meeting on 2/25] that we will have to postpone any signing of a Definitive Agreement until we have arrived at a satisfactory understanding and resolution of the situation.

Yes, Hon Hai needs to “arrive at a satisfactory understanding of new material information,” which, according to sources means Foxconn got a look at Sharp’s contingent liabilities and didn’t like what it saw.

Specifically, Sharp sent over a 100-item list that adds up to ¥350 billion, just “slightly” more than the ¥17.2 billion in such items spelled out in the company’s 2015 annual report. As WSJ goes on to detail, the list includes everything from costs tied to buying raw materials for solar cells to EU antitrust litigation to North American civil suits.

If that sounds like a lot of potential headaches to you, you’re apparently on the same page as Gou. Sharp had no immediate comment.

Foxconn reportedly hopes to clear the matter up as soon as possible, but perhaps shareholders should hope they don’t. Sharp said today it was looking to allocate some of the funds from Foxconn’s investment to things like robots and “auto-related cameras.” How Foxconn intends to run this company while simultaneously operating its own business is still largely a mystery. “Foxconn doesn’t have any experience in any of Sharp’s businesses,” Jefferies analyst Atul Goyal says. “In fact, it creates large conflicts of interest with this acquisition.” 

Of course the biggest “conflict of interest” here may be the “conflict” that occurs when you merge an unprofitable company with a profitable one and that may indeed be part of the reason why Foxconn is thinking twice. 

We close with a bit more commentary from BNP (who just downgraded Hon Hai) on the proposed deal.

From BNP

There’s a historical context involved here. In 2012, Hon Hai first offered to invest in Sharp but the talks stumbled after the Sharp management’s fear of losing IP control as well as the concerns over leakage of key technology outside of Japan. Hon Hai has been widely regarded as a company that has focused on vertical integration in supply chain and aggressive in expanding its business beyond the assembly of consumer electronics products, by adding a wider bunch of components to its services. Hence, the market‘s view is largely that by acquiring Sharp, one of the world’s leading players of displays in electronics components, Hon Hai could gain more business from Apple and other customers including some Chinese companies. In our view, Hon Hai is targeting Sharp’s IP and advanced technologies in both small and large size display (LTPS and IGZO), which will likely further enhance Hon Hai’s competitive advantage and bargaining power. Yet, the market is currently speculating that Apple is likely to adopt AMOLED in future product, compared to its Korean peers-Samsung and LGD, Sharp’s AMOLED development is much slower. We concerned about Sharp’s position in Apple’s display supply chain in this increasingly tough competitive environment for small LCDs. Aside from panel, Sharp is currently a major supplier for Apple’s camera module. However, we are witnessing competition from Sony, Cowell or even ASE continues to rise. Additionally, we think there is limited upside for Hon Hai to further gain shares in Apple’s camera module business.

It would take time for Hon Hai to turn Sharp around and the restructuring process may be challenging, in our view. Hon Hai currently trade at c9x of our 2016 EPS estimate and c1x 2016 PBR. We foresee no share price upside catalyst in the following months due to its muted sales outlook and uncertainties around the proposed Sharp deal. We also think its 5% dividend yield may not be sustainable due to its aggressive M&A strategy. We view the porposed transaction will take time to monetize the potential synergies while the Sharp deal appears to be counter-intuitive to Hon Hai’s financial position and financial performance in short-to-mid-term. Given our earnings cuts on muted demand outlook and potential risk on Sharp deal, we downgrade Hon Hai to Hold from Buy with a new TP of TWD74 (from TWD92), based on 8.5x PE, the historical mid-to-low end range (down from 10x PE, the historical mid-range) as the uncertainties around the Sharp deal will likely drive a de-rating of the stock, in our view.

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

• Europe shrugs off pre-G20 China stocks slump, sterling steadies (Reuters)
• China Unveils Its Deliverables for G-20 — And No Plaza Pact (BBG)
• Foreign Money Could Be Slow to Enter China’s Bond Markets (WSJ)
• China Urged to Stomach Much Higher Fiscal Deficit (WSJ)
• Trump’s Momentum Has Republicans in Congress Confused and Cowed (BBG)
• Obama weighs Republican for Supreme Court (Reuters)
• Apple to boost customers’ iCloud encryption (FT)
• Sears Posts $580 Million Fourth-Quarter Loss as Retailer Shrinks (BBG)
• This Obscure Fed Funds Metric Might Explain Market Tumult (BBG)
• Trump rides momentum into winner-take-all states (Hill)
• China’s Shadow Banking Evolves to Dodge Crackdown (BBG)
• Best Buy’s quarterly revenue falls 4.1 pct (Reuters)
• China’s Uber Competitor Didi Kuaidi Planning to Raise About $1 Billion (WSJ)
• What a Saudi Oil-Supply Freeze Would Really Mean for Markets (BBG)
• U.S. Hedge Fund Elliott Faces Probe into Samsung Stake (WSJ)
• Supersized Currency on Europe’s Fringes Defies Big Banknote Clamor (BBG)
• Japan Pension Funds Spent $4.5 Billion on Local Stocks Last Week (BBG)
• U.S. Readies New North Korea Sanctions for UN Security Council (BBG)

 

Overnight Media Digest

WSJ

– Sharp Corp’s board approved a plan Thursday for Apple Inc. assembler Foxconn Technology Group to take over the company for ¥700 billion ($6.24 billion), people familiar with the situation said, in a rare case of Japan Inc relinquishing a venerated brand to a foreign buyer. (http://on.wsj.com/1RoUxNg)

– Boeing Co announced the sudden retirement of Chris Chadwick as head of its defense-and-space unit after just over two years leading the $30 billion-a-year business. (http://on.wsj.com/1oIQMsX)

– Didi Kuaidi Joint Co is planning to raise about $1 billion from investors on terms that would value the Chinese car-hailing company at more than $20 billion, according to people familiar with the situation. (http://on.wsj.com/1T6YJ80)

– A senior Goldman Sachs Group Inc banker who helped the Wall Street firm win business with embattled Malaysian state investment fund 1Malaysia Development Bhd has formally left the bank. (http://on.wsj.com/1QzpMBY)

 

FT

Deutsche Boerse AG Chief Executive Carsten Kengeter would run the day-to-day operations of a new company formed by a possible merger with the London Stock Exchange Group Plc, according to people familiar with the matter.

Airbus Group SE Chief Executive Tom Enders said in statement on Wednesday that he did not see how a combination of Honeywell International Inc and United Technologies Corp would be in his company’s interests.

UK-based institutional stock broking firm Panmure Gordon & Co Plc said its Chief Executive Phillip Wale had stepped down and left the company.

 

NYT

– Apple engineers have begun developing new security measures that would make it impossible for the government to break into a locked iPhone using methods similar to those now at the center of a court fight in California, according to people close to the company and security experts.(http://nyti.ms/1p6kyHU)

– John Gleeson, a prominent federal judge and former prosecutor who handled one of Wall Street’s biggest criminal cases, is set to become a partner at Debevoise & Plimpton, according to people briefed on the matter.(http://nyti.ms/21i0nbe)

– An advisory committee of the Commodity Futures Trading Commission has recommended that the regulator abandon its plans to limit the number of futures contracts a trader can hold on certain commodities, including oil and natural gas, according to a copy of the recommendation that was reviewed by The New York Times.(http://nyti.ms/21sDQoJ)

– A broad plan being put forward by the Treasury Department to ease Puerto Rico’s financial crisis would put pension payments to retirees ahead of payments to bondholders – a move that some experts fear could rattle the larger municipal bond market.(http://nyti.ms/20WiLRF)

 

Canada

THE GLOBE AND MAIL

** For the first time since the early 1980’s, Alberta is expected to have an economic slump that lasts for two years as low oil prices persist, and the province’s Finance Minister Joe Ceci warned of a “once-in-a-generation” challenge reflected in a provincial deficit that could top C$10.4 billion ($7.59 billion) next year. (http://bit.ly/1R3Cjhu)

NATIONAL POST

** Canada’s medical marijuana industry is being thrown into new turmoil by a court ruling that threatens to undercut its business model. Federal court judge Michael Phelan gave patients the right to grow their own cannabis, arguing the current system restricts access to the drug. (http://bit.ly/1R3Df5A)

** Health Canada is advising anyone who bought a natural health product claiming to treat cancer called Novodalin B17 to contact their doctor for a followup. The federal agency said it is an unauthorized product and that it does not permit cancer treatment claims to be made for natural health products. (http://bit.ly/1QfJ4gw)

 

Britain

The Times

* Mine chiefs face murder charges over dam burst

BHP Billiton legal woes have worsened after it emerged that executives at its Brazilian joint venture have been accused of murder by police over the Samarco disaster that killed 19 people. (http://thetim.es/1LGHceX)

* Deutsche Boerse to appoint German

Deutsche Boerse is expected to transfer its headquarters to London if it succeeds in merging with the London Stock Exchange. Carsten Kengeter, the chief executive of Deutsche Borse and a former senior Goldman Sachs banker, is expected to become boss of the exchange if the merger goes through. (http://thetim.es/1LGHcLO)

The Guardian

* IMF urges UK to ease austerity should economy slow further

The International Monetary Fund has urged the UK to ease back on austerity should the economy slow further, as it warned finance ministers at the G20 summit in Shanghai to boost public spending on infrastructure to fuel global growth. (http://bit.ly/1OvoXca)

* Ryanair to campaign against Brexit

Ryanair Holdings Plc is to actively campaign for Britain to remain in the EU, branding its planes with pro-Europe slogans, as it warned UK fares could rise after a vote to leave. The chief executive of the budget carrier said Europe had allowed Britons to enjoy affordable holidays through deregulating the airline industry, and that Ryanair would invest less in the UK if it were outside the EU. (http://bit.ly/1WJaKhF)

The Telegraph

* Tata Steel’s European boss Karl Koehler quits

Karl Koehler managing director of struggling Tata Steel Europe has quit as the company holds crunch talks with a potential buyer for large parts if its UK operations, a deal which could save thousands of British jobs if it goes ahead. (http://bit.ly/1Q1ZoDN)

* Cyber-crime set to hit most British companies in the next two years

The spread of cyber-fraud has created a surge in economic crime against British companies, with more than half of all firms braced for an online attack, according to new research. (http://bit.ly/1R2E7aw)

Sky News

* Car making sees best January for eight years

More than 137,000 cars were built in the UK last month in the best January performance for eight years, industry figures show. The Society of Motor Manufacturers and Traders said the industry had enjoyed a “strong start” to 2016, continuing its impressive performance in recent years. (http://bit.ly/1Umkb8d)

* Business leaders take sides in EU debate

Two of the country’s most outspoken business leaders have entered the debate on Britain’s future in the European Union – on opposing sides. Ryanair chief executive Michael O’Leary came out in support of a vote to stay while JD Wetherspoon founder Tim Martin explained why he wanted to leave.(http://bit.ly/1R2F1nz)

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