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News & Views: Tuesday, August 5


What you need to know for today's trading day.

Crédit Agricole Takes $950 Million Charge on Portuguese Bank (NYTimes)

Apple Buybacks Pay Most Ever as CEOs Spend $211 Billion (Bloomberg)

RBA Holds Rate at Record Low to Spur Jobs Amid Rebalancing (Bloomberg)

Rajan Holds Rates for Third Meeting in India Inflation Fight (Bloomberg)

Murdoch's Fox expected to push for Time Warner deal on Wednesday (Reuters)

One dead fish has bubbled to the surface, so to speak, with the news that Credit Ag (ACA) is taking a $950mm writedown for its investment in Banco Espirito Santo (BES), where they assume to get zero. The bank held 14.7% of BES. The CEO had some not so nice things to say about the Espirito Santo family on its call, saying they were deceived, and may pursue legal action. The response has been for the stock to rally in excess of 6%, I assume because the loss is now being realized and is not worse than expected.

The Reserve Bank of India (RBI) held a monetary policy meeting last night. In it, Governor Rajan said that he plans to stoke inflation next by lowering the supply side and making it easier for banks to make loans, while at the same time tackling the bad loans that are already in the system. The first step is a cut to the statutory liquidity ratio (SLR) for banks, by 0.5%, which is essentially a deposit-coverage ratio. The next step will be to cut rates if disinflation proceeds - ie a slowing rate of inflation that creates an output gap. The market took this step as hawkish - Indian government bonds sold off - although my read is that it's much more dovish.

The result of the Reserve Bank of Australia's (RBA) kept its monetary policy statement unchanged, and left rates on hold. It still sees a likely period of interest-rate stability and at this point isn't seeing enough growth to turn more hawkish, even though inflation continues to run at the top edge of its inflation goal of 2%-3%. The AUDUSD spiked initially, by 15pips, but it's back to where it was as the USD has rallied due to EUR weakness later in the morning. Australia's employment report is due out tomorrow evening.

Israel pulled the rest of its troops out of Gaza last night after it said it had destroyed all of the tunnels Hamas militants were using to enter Israel. I would assume that it had that mandate from the US and UN to only pursue its mission to that goal. However, if rockets continue to fall in Israel - 50 to 60 on any given day - then they might go back into Gaza. Since the fighting had begun, 3,300 rockets have been fired into Israel and the Israeli army destroyed 32 tunnels used to stage attacks.

There were a number of services PMI reports overnight - the full breakdown is below. The China private survey fell to a record low. Conversely, the UK gauge posted a large jump. The risk in the UK now is that some BoE policymakers may dissent on a vote to hold rates unchanged at their meeting on Thursday as the economy is starting to increase its pace of expansion. This opinion was voiced by ex-BoE MPC member Danny Blanchflower, a monetary policymaker I have very high respect for. I think there is increased risk of this type of scenario coming around before now and year end, but said risk is well priced into the UK curve at this point. The main risk is that the BoE - specifically Carney - renegs on its equilbrium rate call of 2.5% (thereabouts wher the UK money curve is currently priced at).

Overnight Data:
- China HSBC services PMI (July) down to 50.0, prior 53.1
- Eurozone services PMI (July final) down to 54.2 vs 54.4 expected, initial 54.4
- UK services PMI up to 59.1 vs 58.0 exp, prior 57.7
- Australia trade balance (June) narrows to -1.683b AUD vs -2B exp, prior -2.043b
- Japan services PMI (July) up to 50.4, prior 49.0

US Economics (Time Zone: EST)

10:00 ISM Non-manufacturing (July) - expected 56.5, prior 56.0
10:00 Factory Orders - exp 0.6%, prior -0.5%
11:00 Treasury to sell 4-week bills


Archer-Daniels-Midland (ADM)
Emerson Electric (EMR)
Louisiana-Pacific (LPX)
CVS Caremark (CVS)
MGM Resorts (MGM)
Cablevision (CVC)
Regeneron (REGN)

Walt Disney (DIS)
Frontier Communications (FTR)
EOG Resources (EOG)
Activision (ATVI)
Continental Resources (CLR)
First Solar (FSLR)
Groupon (GRPN)
Rocket Fuel (FUEL)
FireEye (FEYE)

Office Depot (ODP)
Coach (COH)
Zillow (Z)
Liberty Media (LMCA)

Twitter: @MichaelSedacca

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No positions in stocks mentioned.

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