Equity Markets – pretty much down across the board as the European indices sink near their lows for the session on renewed concerns about growth out of Asia with China trimming some estimates for growth this year (see below) and Australia raising taxes on iron ore and coal even amid signs that steel production in china is slowing…not smart. The Straits Times and Bombay Sensitive did manage to keep their heads above water but faded hard in the last hour of trading. Domestic futures are at their lows for the session and the open looks destined to be down. This morning we get a good supply of housing news on starts and permits for February…housing market equities have been on a relative tear over the last several months and it could get really ugly if there is a miss here. I continue to believe that long vol is a steal at current levels but would only play the VXX for a short term trade (too much contango)…use the VXZ for longer term protection.
Macro, News & Events
Economic Releases
· February Housing Starts…700k v. 699k
· February Housing Starts (MoM)…+0.1% v. +1.5%
· February Building Permits…686k v. 682k (revised +6k)
· February Building Permits MoM%...+0.6% v. +0.7%
· Weekly API Crude oil inventories…last was +2,778k (barrels)
· Weekly API Cushing Crude oil inventories…last was 2,541k (barrels)
· Weekly API Gasoline inventories…last was -2,138k (barrels…42 gallons per)
Events
· The Senate Banking Committee will consider the presidential nominees Dr. Jeremy Stein (Harvard) and Jerome Power (undersecretary of Treasury) to the Federal Reserve Board of Governors. Also under consideration is Jeremiah Norton (JPMorgan) as director of the FDIC…should make for some interesting theater.
· Treasury Secretary Geithner will testify before the House Financial Services Committee on the International financial system
· Fed Chairman Bernanke will give the first of a series of four lectures at GWU
· Minneapolis Fed President Kocherlakota will lecture at Washington University (St. Louis) on the “limits of monetary policy”
Earnings – after today, only 20 companies will be left out of the S&P 500 to announce calendar Q4 earnings…
Asia, Europe & USA
· BHP Billiton, the world’s largest mining company said that Chinese steel production is slowing and that this pattern may well continue as the country begins to focus more resources on domestic consumers rather than infrastructure and export growth…having said that, BHP says that they still see positive growth through 2025. Rio Tinto echoed these same sentiments regarding their experience with growth in China (Rio Tinto is the world’s 2nd largest iron ore producer behind BHP)…the outlook for Chinese steel production growth this year could be as low as +4% as vehicle sales could be as low as +5% vs. the +8% estimate to start the year.
· China raised gasoline and diesel prices by the most in two years to combat trade deficits…this dovetails with alterations to the vehicle growth forecast for the year. Chinese refiners will charge 7% more for gasoline after profits at the state owned refineries fell 11% the first two months of the year
· RoK has said that they will ask for sanctions against North Korea if they follow through with the planned April rocket launch…
· Australia passed legislation that will raise taxes on Iron ore and coal by 30%...it should be good for US producers as the “leadership” in Australia just made their producers less competitive…it’s good to play against the feeble
· China has 4x the number of people with kidney disease as the US and health care costs there doubled from 2008 as health care coverage tripled vs. 2003…surging rates of chronic illnesses such as kidney disease, diabetes and others are raising health care costs. The costs to deal with end stage renal disease (ESRD) are currently $1.6 billion / year and could rise 7x if services are extended to all ESRD patients (currently 1.5mm and estimates have this number going to 3.0mm within 10 years)…the number of citizens with chronic kidney disease are estimated at 120 mm in China (ESRD requires dialysis or a transplant). Catastrophic health expense accounted for roughly 40% of income for the 13% of Chinese that paid for that coverage in 2011.
· Inflation in the UK slowed by 20 bps to an annualized rate of +3.4% from +3.6% in January…the median forecast was for +3.3% inflation in February…the +3.4% growth in prices was the least since November of 2010.
· German luxury car makers BMW and Daimler fell following the reduced growth estimates out of China…
· “Greece III” coming? The IMF is now saying that Greece may require additional bailout funds as the financial community admits that the “Greece II” bailout was just another “stop gap” move and did nothing to solve the underlying problems in that country or put Greece on a sustainable path to an ultimate economic recovery.
· ECB governing council member Nowotny says that Portugal is “in much better shape than Greece”…thank God for that, I hate to think that they were in worse shape…
· The manhunt in France is on following the murder of school children at a Jewish school in Toulouse…
· Spanish banks saw their ratio of bad loans rise to 7.91% of loans in January from 7.62% of loans in December…meanwhile lending shrank by 0.7% in January from December even as banks received emergency liquidity from the LTRO I.
Credit Markets –
· The EFSF raised €1.5 billion from sale of 20 year “rescue bonds”
· German legislator Altmaier (majority whip of the CDU party) said that the “fiscal pact” is closed and not open to renegotiation…this statement was in response to French presidential candidate Hollande who says that if elected he intends to seek pact amendments…
· PBOC research director says that China should buy more bonds from the EFSF which the PBoC believes are “relatively safe”…
Sovereign CDS – the Western European SOVX rolls today to series 7 from series 6 (June 2018 maturity) and Cyprus takes the place of Greece…Cyprus CDS began trading yesterday and is 40 basis points wider today as additional concerns arise about the state of the Greek economy and traders begin to assess how long until “Greece III”…spreads are wider across the board in Europe this morning as concerns arise once more about Chinese growth going forward as the government trims its auto growth numbers for 2012 (to +5% from +8%) and the largest iron ore producers say that they see Chinese steel production moderating to 4% growth in 2012.
US Corporate credit – the high yield CDS index led the way yesterday tighter by 16 bps (+525 bps) while the leveraged loan index tightened by 7 bps to +276 and investment grade was tighter by 4 bps to +85.
Energy Markets – crude markets are down this morning across the board as concerns about Chinese economic growth resurface following the government’s decision to trim its auto purchase forecast for 2012, slowing steel production and an announced 7% hike in refined products in the country…none of these are seen as good fundamental drivers of demand growth out of China going forward. The big question it seems is how far might oil fall given the continuing tensions in the MENA (Iran and Syria)…the decline in the US for WTI could be greater than that for other grades such as Brent but so far the peak in the gap between the two was around $28/barrel back in the fall of 2011 which could imply a mid-90’s level here in the US if prices change little in Brent due to the geopolitical risk premium.
Futures – natural gas futures are up slightly as the strip tries to get back to an average of $3/mcf over the next twelve months…future oil prices remain relatively subdued and the curve remains flat…the energy equivalence ratio is now under 6.2x at 6.16x.
