Mike Kuta – Sweet Futures (09-30-14)

Published on 09-30-2014

Fed’s Powell rejects Treasury.

Federal Reserve board member Jerome Powell said today he feared any move for the Fed and the U.S. Treasury to cooperate on debt management and other issues would undermine the central bank’s independence and should be avoided. Powell was responding to research by a team of Harvard economists concluding that the Treasury’s effort to ramp up its sales of longer-term bonds in recent years undercut the Fed’s effort to bring down long-term rates through quantitative easing. The economists, including former Treasury Secretary Lawrence Summers, suggested the two agencies coordinate – particularly in a crisis – to be sure the government’s debt management plans and the Fed’s monetary policy are in synch. That proposal “seems to me to be fraught with risk for the Federal Reserve,” said Powell, noting that when the Fed and Treasury did cooperate in the years after World War Two it cut into the Fed’s independence. “There is considerable evidence that monetary policy independence leads to better macroeconomic outcomes. Any active collaboration between debt management and monetary policy, even in a crisis, would risk calling into question that independence,” Powell said. He downplayed the group’s conclusion that Treasury’s debt management undercut the impact of the Fed’s quantitative easing. He said, for example, that quantitative easing sent a strong signal to markets that the Fed would stand behind the economy, providing a psychological boost to markets.    

U.S. home prices rise less than expected in July.

U.S. single-family home prices rose in July on a year-over-year basis but fell short of expectations, a closely watched survey said today. The S&P/Case Shiller composite index of 20 metropolitan areas gained 6.7 percent in July year over year, shy of expectations for a 7.5 percent rise. On a seasonally adjusted monthly basis, prices in the 20 cities fell 0.5 percent in July. A Reuters poll of economists had forecast a flat reading. Non-seasonally adjusted prices rose 0.6 percent in the 20 cities on a monthly basis, disappointing expectations for a 1.1 percent rise. “The broad-based deceleration in home prices continued in the most recent data,” David Blitzer, chairman of the index committee at S&P Dow Jones Indices, said in a statement. “While the year-over-year figures are trending downward, home prices are still rising month-to-month although at a slower rate than what we are used to seeing over the past couple of years.” A broader measure of national housing market activity that S&P/Case-Shiller is now releasing on a monthly basis rose at a slower pace year over year, coming in at 5.6 percent. The seasonally adjusted 10-city gauge fell 0.5 percent in July versus a 0.2 percent decline in June, while the non-adjusted 10-city index rose 0.6 percent in July compared to a 1.0 percent rise in June. Year over year, the 10-city gauge also rose 6.7 percent.

U.S. pending home sales fall more than expected in August.

Contracts to purchase previously owned U.S. homes fell more than expected in August, pointing to a still shaky housing sector. The National Association of Realtors said today its Pending Home Sales Index, based on contracts signed last month, fell 1.0 percent to 104.7. Economists polled by Reuters had expected a decline of just 0.1 percent. Despite the drop, pending sales were still at the second-highest level of the year. In July, sales had risen 3.2 percent, a touch softer than the previously reported 3.3 percent gain. The index plunged last year after mortgage interest rates spiked, but have been on a rising trend since this past March. Contracts signed last month declined in all major regions, except in the West, where they rose for a fourth straight month, the NAR said.

Oil Set for Biggest Quarterly Drop Since 2012 on Adequate Supply.

Brent and West Texas Intermediate headed for the biggest quarterly decline in more than two years as abundant crude supplies offset the risk of disruption from conflict in the Middle East. Futures were up 0.1 percent in London, trimming a drop of 13 percent since the beginning of July. The U.S. and its European and Arab allies have conducted thousands of air missions since starting a bombing campaign to counter Islamic State militants in Syria and Iraq, OPEC’s second-largest producer. U.S. crude stockpiles probably expanded by 1.5 million barrels last week, a Bloomberg News survey showed before an Energy Information Administration report tomorrow. “There’s plenty of supply but no demand,” said Michael Hewson, a London-based market analyst at CMC Markets Plc, who forecasts that Brent could drop to $90 a barrel and WTI fall as low as $85 next quarter. “We have weak growth, with China and Europe slowing down, while U.S. air-strikes are protecting oil supplies in the Middle East. The momentum is certainly for a lower oil price.” Brent for November settlement was at $97.32 a barrel on the London-based ICE Futures Europe exchange, up 12 cents. The contract climbed 20 cents to $97.20 yesterday. The volume of all futures traded was 12 percent above the 100-day average for the time of day. Prices have decreased 12 percent this year. WTI for November delivery was 18 cents lower at $94.39 a barrel in electronic trading on the New York Mercantile Exchange. Prices have lost 10 percent this quarter, the most since June 2012. The U.S. benchmark crude was at a discount of $2.93 to Brent on ICE, compared with $2.63 yesterday, which was the narrowest closing price since Aug. 9, 2013.

Syrian Exodus:

In northern Syria, Islamic State’s offensive against the town of Kobani sparked an exodus of tens of thousands of Syrian Kurds, raising concern that the conflict would widen. Tensions increased yesterday after errant shells fired by Islamic State militants landed inside Turkey, injuring five people, Turkish Kurdish officials said. Turkey “can’t stay out” of the campaign, President Recep Tayyip Erdogan said on Sept. 28, indicating that his nation is ready to join the U.S.-led coalition. Increasing U.S. crude production has helped keep oil prices more stable than in previous periods of Middle East conflict, according to Hong Sung Ki, a senior commodities analyst at Samsung Futures Inc.

Mideast Tension:

Brent advanced 15 percent in the third quarter of 2012 as Western sanctions against Iran over its nuclear program disrupted oil supplies from what was then the second-largest producer in the Organization of Petroleum Exporting Countries. In the first three months of 2011, a rebellion against the regime of Muammar Qaddafi halted almost all of Libya’s output, sending futures 24 percent higher. “Compared with 2011 and 2012 when we had issues with Libya and Iran, which resulted in a sharp rise in oil prices, we’re quite stable now despite the geopolitical conflicts,” Ki said by phone from Seoul. In China, a manufacturing gauge slid from an initial figure a week ago as a property slump weighed on the world’s second-largest oil consumer. The Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics for September was at 50.2, below the preliminary 50.5 and unchanged from a three-month low for August. Readings above 50 signal expansion.

U.S. Stockpiles:

Crude stockpiles in the U.S., the world’s biggest oil consumer, probably expanded to 359.5 million barrels in the week ended Sept. 26, according to the median estimate in the Bloomberg survey of six analysts. Production previously increased to 8.87 million barrels a day, the highest level since March 1986. Gasoline inventories are forecast to have fallen by 600,000 barrels to 209.7 million, the survey showed. Distillate fuels, including heating oil and diesel, are projected to be unchanged after gaining the prior five weeks to 128.6 million. The American Petroleum Institute in Washington will publish separate supply data today. The industry group collects information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the EIA, the Energy Department’s statistical arm.

Hong Kong’s Dollar Seen Protected in Face of Civil Unrest.

For a gauge of how markets view Hong Kong’s worst civil unrest since the 1960s, take a look at the local dollar, where volatility is a fraction of its levels during the global financial crisis. While a measure of price swings jumped to 0.73 percent today, it failed to breach a high in October 2012, when the Hong Kong Monetary Authority intervened to defend the currency’s peg to the U.S. dollar. The measure climbed to 1.6 percent during the global financial meltdown in 2008, after peaking at 3.5 percent in the 1990s Asian crisis. Tens of thousands of pro-democracy protesters have flooded Hong Kong’s streets in recent days to demand free and open elections and the resignation of Chief Executive Leung Chun-ying. Still, Hong Kong’s dollar has strengthened versus all but two of its 31 most-traded peers tracked by Bloomberg this month, and is about 1 percent away from the weaker end of its trading range of HK$7.75 to HK$7.85 per U.S. dollar. “It’s just political noise,” Tim Condon, the Singapore-based head of Asia research at ING Groep NV, said by phone. “If the protests die out, then volatility will decrease and the Hong Kong dollar will go back to HK$7.75.” Hong Kong’s currency traded at HK$7.7676 per U.S. dollar as of 8:02 a.m. in New York, after falling yesterday to HK$7.77, the lowest since May 2012. The currency trades under a pegged exchange-rate system, with the city’s monetary authority buying and selling greenbacks to maintain its level.

Closing Doors:

The exchange rate compares with a low in August 2007 of HK$7.8305, before the current trading band started operating. Three-month implied volatility has risen 0.33 percentage point since the end of last week to the highest on a closing basis since Oct. 24, 2012, when it climbed to 0.82 percent. While on a historical basis the impact on the Hong Kong dollar may be relatively muted, the protests are hurting trade in the former British colony and gateway to mainland China. Hong Kong’s benchmark Hang Seng Index (HSI) of stocks sank 1.3 percent today and 1.9 percent yesterday, its biggest two-day loss since February. Jewelry stores have been forced to shut in the run-up to Golden Week, a Chinese holiday when hundreds of thousands of mainlanders travel to Hong Kong. The HKMA, the city’s de facto central bank, said 47 branches of 24 banks were shut as of 7 a.m. today because of the protests. It pledged to provide funds to the banking system if needed. The interbank market has functioned normally and the banking sector has ample liquidity, the HKMA said. A spokeswoman couldn’t immediately be reached for further comment outside office hours.

Historical Levels:

Hong Kong dollar historical volatility versus the greenback increased 0.2 percent this month, compared with gains of 1.9 percent for Australia’s dollar and the euro, data compiled by Bloomberg show. It isn’t necessary to go back to the crisis of the 1990s to find periods in Hong Kong’s history when implied volatility exceeded current levels. The measure surged to 3.95 percent in 2003, when a half-million people protested against plans to impose harsh new security laws and the SARS epidemic hit the city. Volatility reached 1.47 percent in September 2011, when money fled emerging markets as an economic slowdown in China showed signs of worsening. This week’s slide in the Hong Kong dollar extended its loss in September to 0.2 percent, the most since January 2011. That compares with a 0.7 percent drop from Oct. 9, 2009, to May 21, 2010, as Europe’s debt crisis prompted a flight to safety away from Asian currencies. Then, from November 2010 to August 2011, the Hong Kong dollar tumbled as much as 0.8 percent as the U.S. debt downgrade undermined its appeal compared with the higher-yielding Chinese yuan.

‘Full Confidence’

“Over the last 30 years, the Hong Kong dollar has withstood a number of challenges,” David Loevinger, a former U.S. Treasury Department official who’s now a Los Angeles-based analyst at TCW Group Inc., said by phone. “We have full confidence that it will withstand this one. The HKMA has plenty of tools to support the currency.” Few are suggesting the Hong Kong dollar’s peg with its U.S. counterpart is in jeopardy, either. The city has $331 billion in foreign-currency reserves to help it maintain the link with the greenback, which has survived financial crises for the past three decades. Hong Kong linked its exchange rate to the U.S. dollar in 1983, when negotiations between China and the U.K. over the city’s return to Chinese rule spurred capital outflows. The HKMA has said the peg is critical to maintaining the stability of the local economy. “I don’t think anyone’s talking about a real run on the peg,” Win Thin, the global head of emerging-market strategy at private bank and brokerage Brown Brothers Harriman & Co., said yesterday by phone from New York. “They defended rates very successful back in 1997 during the Asian financial crisis. They have a lot of credibility.”

Canada’s Economy Unexpectedly Stalled in July on Oil Decline.

Canada’s gross domestic product was little changed in July as a drop in oil and gas production offset gains in manufacturing. Output remained close to an annualized C$1.63 trillion ($1.46 trillion) in July following six monthly increases, Statistics Canada said today in Ottawa. The median forecast in a Bloomberg economist survey with 14 responses was for output to expand 0.3 percent. The report supports Bank of Canada Governor Stephen Poloz, who said this month more time is needed to assess early recovery signs. Poloz held the central bank’s benchmark rate on overnight loans between commercial banks at 1 percent and said a recent jump in exports must be sustained before it triggers the business investment needed to bring the economy to full capacity over the next two years. Oil and gas extraction fell by 1.6 percent in July, and “support activities” for energy production fell by 0.9 percent. Cooler-than-normal temperatures curbed the output of utilities by 2.3 percent, Statistics Canada said. Norway’s Statoil ASA said Sept. 25 it would postpone work on its Corner field project in the Canadian oil sands as mounting costs reduce the potential for profit, following a similar delay announced by Total SA in May. Statoil said it plans to push back the project in northern Alberta by at least three years and expects to cut 70 jobs. The decision “is consistent with our stepwise approach to the oil sands,” Statoil Canada President Staale Tungesvik said in a statement.

Factory Output:

Manufacturing rose by 1 percent in July led by durable goods such as transportation equipment, electronics and furniture, Statistics Canada said. Output was also boosted by a 0.5 percent gain in the public sector, led by education. Other parts of the economy are showing mixed signs of slack. Job growth has slowed since the start of 2013 while inflation has quickened this year on gains in energy costs that the central bank says are temporary. The Bank of Canada has frozen its key lending rate since September 2010, the longest pause since the 1950s. The central bank’s key interest rate will probably remain at 1 percent until the second half of next year according to economists surveyed by Bloomberg News. In a separate report, Statistics Canada said the industrial product price index rose 0.2 percent in August, and the raw materials price index dropped 2.2 percent. The median forecast of economists surveyed by Bloomberg was for industrial prices to fall 0.2 percent and the raw materials index to fall 1.5 percent.

Walgreen Says Sales Reach Record as Drug Business Grows.

Walgreen Co. (WAG), the largest U.S. pharmacy chain by revenue, today said fiscal year sales rose to a record $76.4 billion after the company’s prescription drug business grew, especially from the U.S. government. Walgreen’s pharmacy business has expanded as more people join Medicare, the U.S. insurance program for the elderly and disabled, as the American population ages. Walgreen is taking a bigger share of those customers and filled a record 856 million prescriptions in fiscal 2014, the Deerfield, Illinois-based company said in a statement reporting fourth-quarter results. Excluding one-time items, fourth-quarter earnings were 74 cents a share, matching an average of analysts’ estimates. Walgreen reported a net loss of $239 million, or 25 cents a share, compared with net income of $657 million, or 69 cents, a year earlier. “Our fourth-quarter performance was in line with our expectation, recognizing we have much more to do,” said Walgreen Chief Executive Officer Greg Wasson. The pharmacy chain is in the middle of its biggest deal ever, the purchase of the rest of European health beauty chain Alliance Boots GmbH for $15.3 billion after buying a stake in the company in 2012. The company said the deal will save the combined business $650 million next fiscal year, up from $491 million this fiscal year. Investors have been disappointed by pharmacy companies this year, including Walgreen’s competitor Rite Aid Corp. (RAD), as profits have been hurt by lower reimbursement rates for drugs and rising prices of generic medicines. Walgreen said the reductions were partially offset by more generics coming to market this quarter than a year ago.

Sales Grow:

Fourth-quarter sales grew 6.2 percent to $19.1 billion, while same-store sales rose 5.4 percent. For the full fiscal year, sales grew 5.8 percent. “Ultimately today’s result does little to change our thesis on shares,” said Ross Muken, an analyst with ISI Group LLC in New York, in a note to clients. “We would expect the stock to rally today given recent pressure.” Walgreen shares increased 2.5 percent to $61.11 at 8:02 a.m. in New York. The stock has gained 3.8 percent this year, as of yesterday’s close. As Walgreen completes its merger with the Bern, Switzerland-based Alliance Boots, about half of the top executive roles are being filled by Alliance Boot managers. Alliance Boots’ Chairman Stefano Pessina has become Walgreen’s biggest shareholder, with a board seat and a hand in strategy and deal-making. Walgreen owns 45 percent of Alliance Boots and said last month it plans to buy all of the company and base the new business in Chicago.

Russia Loan Market Shut Down by Sanctions Squeeze Funding.

Russian companies are facing a squeeze in funding as sanctions targeting industries smother lending to all borrowers, including those that aren’t blacklisted. “As long as those sanctions measures remain in force, one anticipates there will be very little international lending,” Philip Hanson, an associate fellow at the Chatham House research group in London, said yesterday by telephone. “They’d rather just play safe and avoid the risk.” Syndicated loans plunged 53 percent this quarter from a year earlier to $2.68 billion, the lowest level in at least five years, according to data compiled by Bloomberg. Coal miner Siberian Anthracite’s $250 million deal was the only international one signed this month, the smallest number for any September since at least 2008. Banks are weighing the consequences of doing business with Russia after BNP Paribas SA was fined a record $8.97 billion in June for circumnavigating U.S. embargoes on Sudan, Iran and Cuba. Dutch lender ING Groep NV pulled out of a loan sought by Techsnabexport JSC even though the Russian nuclear exporter isn’t among companies targeted by the penalties, two people familiar with the matter said Sept. 12. The ING decision came about a month after U.S. and European Union sanctions on VTB Group prevented the second-biggest Russian bank by market value from signing a $1.5 billion loan with a syndicate led by Barclays Plc.

‘Basically Closed’

Swiss energy trader Vitol Group’s plan to raise $2 billion to buy oil from state-owned producer OAO Rosneft was put on hold after the world’s largest publicly traded oil producer by volume was slapped with U.S. sanctions on July 16, according to two people familiar with that transaction. The U.S. and Europe widened penalties in July after travel bans and asset freezes aimed at President Vladimir Putin’s inner circle failed to end the conflict in Ukraine. The sanctions, which target Russia’s biggest state-run banks, energy companies and defense firms, block lending for public-sector investment projects and prevent targeted companies including OAO Gazprombank and OAO Novatek from accessing equity or debt markets for new long-term financing. “The Russian loan market is basically closed,” Timothy Ash, the chief economist for emerging markets at Standard Bank Group Ltd. in London, said by e-mail on Sept. 25. “The message from investment banks is there is not much being done as financing conditions tighten.”

Unsanctioned Loans:

Deutsche Bank AG and ING were among banks that entered the market last month when they agreed to lend $425 million to Evraz Plc, Russia’s largest steel producer. EuroChem Mineral & Chemical Co. also signed a $750 million loan in August with lenders including HSBC Holdings Plc and Societe Generale SA, according to data compiled by Bloomberg. Evraz, which along with EuroChem isn’t sanctioned, paid an interest margin of 350 basis points, or 3.50 percentage points, more than benchmark rates for internationally syndicated loans in the third quarter, according to data compiled by Bloomberg. That compares with an average of 287 basis points paid by Russian companies in the second quarter of this year. “It’s an attractive, big market,” Thomas Haedicke, the Vienna-based head of loan syndication and distribution at Raiffeisen Bank International AG, said by phone on Sept 15. “We were there before the Russian crisis broke out, we’ve been there during the crisis, and we are still there now.”

‘Long Haul’

The sanctions affect a small number of companies compared with all the transactions undertaken in Russia, said Haedicke, whose company was a mandated arranger on the Evraz deal. Even so, they have helped push Russia’s $2 trillion economy to the brink of recession. German Chancellor Angela Merkel said yesterday the EU and the U.S. may be in for a “long haul” in their face-off with Russia, with Europe being “very far” from withdrawing sanctions because political pressure must be kept up on the country. Russia will hold its second straight ruble-bond auction tomorrow, according to a statement on the finance ministry’s website. The ministry will offer 15 billion rubles ($380 million) of local-currency securities due in January 2028 following its first sale last week after nine cancellations. The loan market in Russia will probably stay closed in the near term, said Rachel Ziemba, the London-based director for emerging markets research at Roubini Global Economics. “There might be the odd deal with banks testing the waters, assuming there isn’t a re-escalation of sanctions,” she said by phone on Sept. 26.

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