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Fri, 23rd June 2017

Anirudh Sethi Report

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Archives of “June 16, 2017” Day

Baker Hughes oil rig count 747 vs 741 last week

Total rig count 933 vs 927 last week. Crude oil trades at $44.67.

The Baker Hughes rig counts continues to move in the positive direction. This week is the 22nd consecutive increase for total rigs and gas rigs.
  • Oil rigs 747 vs 741 last.
  • Gas rigs 186 vs 185 last
  • Total rigs 933 vs 927 last.

The increase this week is slow. These things don’t change on a dime. Decisions to drill a rig are not contigent so much on the spot price of crude oil.  Nevertheless, as the price of oil goes down, it does make the decision to drill, drill, drill, become more cautious.

The price of crude oil is little changed from pre-report levels.

European Indices end the session higher

Down on the week

The major European indices are ending the day with gains.
  • German Dax is up 0.4%
  • France’s CAC is up 0.7%
  • UK FTSE is up 0.5%
  • Spain’s Ibex is up 0.3%
  • Portugal PS120 up 0.18%
  • Italy FTSE MIB up 0.45%
For the week the fortunes were not so great:
  • Germany Dax was down -0.5%
  • France CAC -0.9%
  • UK FTSE -1.0%
  • Spain Ibex -2.1%
  • Italy FTSE MIB -1.2%
Today European 10 year yields are mixed
  • Germany 0.276%, unchanged
  • France 0.635%, unchanged
  • Italy 1.985%, up 1.8 bp
  • UK 1.015%, -1.7 bp
  • Spain 1.454%, +3.8 bp
  • Greece 5.678%, -19.6%.

Kyle Bass: “China’s Credit Bubble Metastasizing”, Still Short The Yuan

Hayman Capital’s Kyle Bass made a brief media appearance today, when he confirmed to Reuters that unlike some other “China tourist bears”, he remains staunchly negative on China, saying he is still short the Yuan because problems from China’s credit bubble are “metastasizing.”

Speaking to Reuters’ Jennifer Aboan, Bass said that “what the public narrative is and what they have been doing behind the scenes are two completely different stories,” and added that “China has been masterful controlling the public narrative. As a fiduciary, I have no idea how anyone can invest in China.

Discussing his specific trades, Bass said Hayman’s yuan short is a “core” position and has “always been meaningful.” He also identified “fresh” warning signs that China’s credit problems are spreading.

First, Bass pointed to the yield on five-year MTNs, which are trading at 5%, exceeding the bank loan rate, about 4.75%, for the first time. We first highlighted this paradoxical “cross” one month ago when we observed that “rising base funding costs and interbank credit risk concerns have pushed banks’ cost of borrowing beyond the rate they charge customers for loans for the first time in history.”

Bass then noted last month’s downgrade of China by Moody’s – the first since 1989 – which however did not have a material impact on China so far, aside from prompting a panicked response by Beijing which actually sent the Yuan surging as the PBOC engaged every trick in the book to prevent Yuan bears from gaining momentum, including the recent change in the Yuan fixing mechanism. Next, he discussed his concerns about China’s shadow-banking system and the country’s capital controls as “multi-nationals can’t get their money out.”

Indeed, CBRC vice-chairman Cao Yu said China established 12,836 creditor committees by the end of last year, to help manage credit of 14.85 trillion yuan. Bass said this amount represents 20 percent of the loans in Chinese banks, net of mortgages.

Going back to the original “bear” thsis, Bass also said he believes that non-performing loans at Chinese financial institutions are currently approximately 20%, not the 1.7% rate that has been widely reported. “14.85 trillion is more than all of the equity in the entire banking system,” he said. “The Chinese have masterfully swept all of this under the rug.”

Bass also addressed the recent change to China’s Yuan fixing mechanism and said Beijing has been looking to force out one-way bearish bets on the yuan with the previously discussed second change this year in how the currency’s guidance rate is calculated. “This fixing mechanism throws a bit of unknown into the calculation,” he said.

Still, he said he was not throwing in the towel on his short position. “The PBOC wants you to do that,” Bass said. “I don’t know how they can hold this all together. The numbers are telling me that we are right. The numbers are getting so bad so quickly.”

Finally, a couple other things Bass should have thrown in the mix are the recent reemergence of China’s “ghost collateral” as a major risk factor, one which as Reuters framed, “lax lending practices and overvalued collateral spurred the U.S. financial crisis in 2008. Now, banks in China face risks of their own as fraudulent borrowers and corrupt bankers burden the financial system with loans lacking genuine collateral.” There is also the recent, rapid rise in interest rates which as explained last night, has led to a record plunge in net corporate bond financing, as companies find it increasingly difficult to issue new and rollover existing debt, especially that maturing in under one year. 

Nikkei 225 closes up +0.56% at 19,943.26

positive tones as USDJPY finds demand again 16 June

  • Topix +0.5% at 1596.04
  • high 20015.16
  • low 19884.80
  • USDJPY 111.17

Expect offers/res into 111.30 and 111.50. More at 111.80 then 112.00

Demand into 111.00 and 110.80. Huge expiries rolling off today at 110.00

Australia S&P/ASX 200 closes up 0.09% at 5768.30

China’s holdings of US Treasuries bounce back to six-month high

China’s holdings of US Treasuries rose for the third straight month in April, reaching the highest level since October 2016 at $1.09tn, as weakness in the country’s currency has begun to show signs of stabilising.

It comes after a period of sustained selling by Beijing, with 2016 marking the largest cut to China’s treasury holdings on record. The cut to China’s holdings came as Beijing sought to support the renminbi and manage capital flight by intervening in foreign exchange markets.

So far this year the renminbi has strengthened and China has tentatively returned to the Treasury market, buying $41.1bn of securities since January, with $4.6bn added in April. Still, the country’s holdings remain well below levels at the same time last year of $1.24tn, leading to it slipping into second place behind Japan as the largest foreign holder of Treasuries.

Overall, foreign holders shed $28.6bn bring the total foreign ownership of Treasuries to $6.07tn.

Greece reaches deal with creditors to unlock bailout

Greece and its international creditors have reached a deal on the next stages of Athens’ €86bn bailout, removing the risk that it could default on over €7bn in debt repayments that fall due next month.

The deal ends months of uncertainty that have weighed on Greece’s recovery and spooked investors. But while shoring up the country’s immediate economic future, the agreement punts politically difficult discussions on debt relief into 2018.

People briefed on the talks said that the agreement would allow Athens to swiftly receive its next tranche of bailout aid, estimated at around €8.5bn euros.

Euclid Tsakalotos, Greece’s finance minister, told the FT that the deal was a “big step forward” compared with previous plans put forward by Athens’ international creditors.

Overnight US Market :Dow closed -15 points.Nasdaq down 29 points

Nasdaq continues to lead the downside

When is a down day, a relief?
When intraday levels were much lower.
For the 2nd day in a row, the tech heavy Nasdaq was down over -1% at the lows (the Nasdaq was down -1.4% at the lows today, only to recover and not feel as bad.  The Nasdaq is still leading the decline for the stocks today. It is down -0.49% at the close.
The summary for the major indices:
  • The S&P index is down -5.46 points or 0.22% to 2432.46. The high reached 2433.95. The low extended to 2418.53.
  • The Nasdaq is closing down -0.47% or -29.39 points to 6165.50. The high reached 6170.14. The low 6107.848
  • The Dow is closing down -14.66 points or -0.7% at 21359.90. The high reached 21367.28. The low 21261.87.