Wed, 26th October 2016

Anirudh Sethi Report


Archives of “Analysis” Category

ALERT- People’s Bank of China sets yuan reference rate at 6.7705 (vs. yesterday at 6.7744)

Your central rate for the USD/CNY, brought to you by the good people over at the PBOC!

But, they’re not done yet, here’s more!  ….  In OMOs today:
  • PBOC Inject 105bn yuan through 7-day reverse repos
  • PBOC Inject 75bn yuan through 14-day reverse repos
  • PBOC Inject 30bn yuan through 28-day reverse repos
A strengthening for the yuan against the USD today


PANIC : Oil Tumbles To 3 Week Lows After Unexpectedly Large Inventory Build

Having closed below $50 for the first time in 3 weeks, WTI Crude extended its losses to 3 week lows after API reported crude inventories rose by a bigger than expected 4.8mm barrels (more than double the 2mm expectation).


  • Crude +4.8mm (+2mm exp)
  • Cushing -2.3mm (-500k exp)
  • Gasoline +1.7mm (-1mm exp)
  • Distillates -940k

Crude inventories have drawn down for 6 of the last 7 weeks but rose notably this last week. Cushing inventories drewdown by the most since Feb 2014 (we suspect the spillage was the driver) and distillates inventories drew down for the 5th straight week). Gasoline inventories built notably despite expectaions of a sizable draw.

Overnight US Market :Dow closed -54 points

U.S. stocks fell Tuesday as investors digest an avalanche of corporate earnings that were mixed, with blue chip consumer-products maker Procter & Gamble faring well but others like heavy equipment maker Caterpillar disappointing Wall Street.

The Dow Jones industrial average fell 54 points, or 0.3%, to close at 18,169. The Standard & Poor’s 500 stock index fell 0.4% to 2143 and the Nasdaq composite was 0.5% lower to 5283.

Wall Street got a large slate of earnings reports from Dow components, including well-received reports from P&G (PG), which reported organic growth of 3%, as well as United Technologies (UTX), and drug maker Merck (MRK), which topped forecast with the help of strong sales of its cancer drug Keytruda.

But the good news was offset by weaker-than-expected results from companies like 3M (MMM) and Caterpillar (CAT), which cut its earnings view for the remainder of 2016, citing sluggish sales of its heavy equipment.

China & US Elections: Trump May Start a Trade War, But Clinton Could Begin WWIII

China, like the rest of the world, is keeping a close eye on the US presidential race, knowing full well that the outcome of the election will have a serious impact on every country in world. But which candidate would Beijing prefer to deal with?

Unlike Russian analysts, who have indicated that Moscow would probably prefer to deal with an American president with a pragmatic, rather than an ideological, approach to foreign policy, the choice for Chinese experts isn’t as simple. Their choice is further complicated by the knowledge that while pre-election talk is one thing, actual policy, backed by the behemoth that is the US foreign policy establishment, is something else entirely.

Commenting on China’s dilemma, PolitRussia contributor Ilya Novitsky suggested that at first glance, it may seem that China would prefer to deal with anyone except Donald Trump. “It’s generally accepted to consider Trump as Beijing’s traditional foe,” the analyst noted. “In the course of his campaign, Trump has repeatedly made harsh statements about the nature of the trade relationship between the US and China.”

“Specifically, Trump’s main gripe with the structure of US-China trade relations comes down to the fact that China enjoys favorable customs conditions, which give Chinese producers a privileged position in the US market. Trump quite rightly believes that the Middle Kingdom is putting ‘economic pressure’ on the US, simply forcing US producers out of the Chinese domestic market.” In response, the Republican candidate has effectively “promised to declare a trade war against China, and to completely revise the majority of existing trade agreements between the two countries.” In this situation, Novitsky noted that “it’s no wonder that political scientists around the world, almost in unison, have figured Trump as Beijing’s enemy, which creates a privileged position for Hillary Clinton in the Chinese context. However, this is not quite the case…”

In fact, the analyst explained, “if Clinton wins, China will find itself in a very unenviable position. She may not revise trade policy as radically as Trump proposes, but the military threat to East Asia created by the Democratic candidate is quite serious.”

With Clinton making little mention of her strategic plans in public, the analyst pointed to the treasure trove of information released by WikiLeaks, which has been publishing the leaked emails of Clinton campaign manager John Podesta all this month. In one such email, featuring a transcript of a private Clinton speech about North Korea in 2013, the former Secretary of State made her position on China very clear, saying that “we’re going to ring China with missile defense. We’re going to put more of our fleet in the area. So China, come on. You either control [North Korea] or we’re going to have to defend against them.” In a separate speech, Clinton slammed Beijing over its position in the South China Sea dispute. “I mean you claim [the South China Sea] based on pottery shards from, you know, some fishing vessel that ran aground in an atoll somewhere,” Clinton quipped. By this logic, she added, the US could have labeled the Pacific Ocean the “American Sea” following the Second World War.

Apple to report after the close

A less shiny Apple than in the past – but doing well lately – will report earnings after the close.
What is expected:
  • Earnings: $1.65 vs $1.96 a year earlier
  • Revenue: $46.9B vs $51.5B last year.  Revenues have declined the last 2 quarters after 13 years of advancess
  • iPhone sales: iPhone 7 sales are not expected to make a big impact as it was introduced at the end of the quarter.  In addition, the fallout from the Samsung Galaxy Note 7 is also too new to see the impact from crossovers into Apple.  The expectations for sales are 45 million compared to 42 million last year.  
  • Forecast for 4Q: The revenue guidance is expected to be $74.9B for 4Q. That quarter includes the holiday selling season. That is 1 B less than a year ago.  Analysts are saying that if the number is larger, it implies better sales for the iPhone7.

Other financials:

  • EPS: $8.56
  • P/E: $13.78
  • Dividend $2.28, Dividend yield is 1.93%.    
Apples stock is up 31% from the May low of $89.47.   The 50 day MA is at 111.9196 (the price is trading at $117.84 currently.  That will be key support on a dip.  The high from April was near that level.  On the topside, the 120.00 level were swing highs in Nov and Dec 2015. The high price in November extended to 123.82.  The high price for the stock came in at $134.84 on April 28, 2015.


Volkswagen gets final approval for $15bn clean-diesel settlement

The court overseeing US civil claims against Volkswagen gave final approval on Tuesday to one of the biggest consumer settlements in American history, bringing to a close a central chapter in the emissions scandal.

One week after a three-hour hearing in which more than 20 opponents to the settlement voiced their complaints, US District Court Judge Charles Breyer gave a thumbs up to the $15bn settlement, saying it met the court’s requirement of being fair and adequate

“Given the risks of prolonged litigation, the immediate settlement if this matter is far preferable,” he said in the ruling. “As the Court stated at the outset, the priority was to get the polluting cars off the road as soon as possible.”

The settlement, announced in June, was the result of negotiations between VW, several US regulators, and lawyers representing almost half-million car owners.

BOE’s Carney says monetary policy has been overburdened in many ways

BOE gov Carney’s testimony at the House of Lords underway 25 Oct

  • mon pol as been the principal if not sole vehicle to provide stimulus
  • its welcome that govt is signalling resetting of balance between mon and fiscal policy
  • BOE operational independence has stood the test of time
  • if independence were to be called into question then risk premium would be most prominent on ccy, gilts and inflation expectations
  • BOE will not change how its conducts its mon pol unless parliament changes its remit

Earlier I reported some rather intriguing remarks from fin min Hammond about QE that made me think there were some independence issues. Seems I’m not alone,

Meanwhile GBPUSD has bounced back off strong tech lines at 1.2080 and now 1.2111 while EURGBP gave up around the 0.8980 level

Is it me or does Carney just look a little tired of all that’s going on. Prices on him leaving as scheduled rather than extend his contract?