News & Views: Monday, August 18
What you need to know for today's trading day.
Dollar General Enters Bidding for Family Dollar at $8.95 Billion (WSJ)
Norway Fund Told to Forget Adding Risk Until Oversight Fixed (Bloomberg)
Bundesbank Warns of Slowing German Growth Amid Fallout From Ukraine Crisis (WSJ)
Kurdish, Iraqi forces in control of Mosul dam: spokesman (Reuters)
China Home Prices Fall in Majority of Cities on Weak Demand (Bloomberg)
One geopolitical region began to go from a boil to a simmer over the weekend with news that the Kurds and Iraqi government forces took back control of the Mosul dam from Islamic State fighters. I.S. had threatened to wash out the entire Mosul basin if the Kurds had advanced on the dam, but that risk appears to be alleviated for now. The other hot button in Ukraine, following the perceived shelling and attack of a Russian convoy by government forces on Friday afternoon. David Kotok at Cumberland Advisors called the potential fighting the "fog of war" because it could have easily been Russian APC's that were lent to rebels in the eastern part of the country, and the mistake was thinking they were manned by Russian soldiers. Now, Russian and Ukrainian foreign ministers are holding discussions about a potential ceasefire that could be effective within a week.
Home prices in both China and UK fell. This has been a continuing theme in China ever since local governments curbed mortgage lending at the end of last year. On a monthly basis, prices for new apartments fell in 64 of 70 cities, which is the largest decline I have in my data back to the beginning of 2011. Most of the prices in these cities fell by only a few tenths of a percent from the prior month. It's no wonder that governments have eased the same regulatory changes in more than 50 citiies over the past month. Prices for homes in London fell by 5.9%, the largest decline for a single month in six years, and nationwide prices fell 2.9%. The drop in home prices appears to be seasonal as UK prices tend to peak in April/May, bottom in August, rise into October, and then fall again until the end of the year. Financials and real-estate companies are some of the worst performers today in the UK FTSE 100 (UKX), so there may be a corresponding opportunity there.
In a front-page commentary in the Financial News (Translated Link), a journalist cited an unidentified PBoC official saying that a large-scale corporate bond default in China would be unlikely because it would cause market turbulence. The commentary states that they would not be allowed because the economy faces relatively heay downward pressure to begin with. The commentary states that 6.2b yuan corporate bonds will mature next quarter, the largest amount since private companies could begin issuing bonds. The takeaway from this article is that the PBoC is effectively saying that they will bail out any Chinese company or bank in the collateral chain if they need to because it will prevent a system wide credit crunch. They are clearly not worried about moral hazard. It also likely means that another full spectrum RRR cut is on the horizon, and the market is fully expecting it.
The foreign direct investment print from China in July is extremely troubling when matched with the large slowdown in new credit lending.
- Eurozone trade balance (June) narrows to 13.8B EUR vs 15B expected, prior 15.2B
- China foreign direct investment YoY (July) down 17.0% vs 0.8% exp, prior 0.2%
US Economics (Time Zone: EST)
10:00 NAHB Housing Market Index (Aug) - expected 53, prior 53
11:00 Fed purchasing $950m-$1.15b bonds in 22 to 30-year range
11:30 Treasury to sell $29b 3-month bills and $25b 6-month bills
Urban Outfitters (URBN)
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