Wall Street Breakfast: China Plunges As Market Rout Continues

by: Wall Street Breakfast
Wall Street Breakfast
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China's fickle stock markets sold off sharply today, amid concerns about capital outflows, a renewed selloff in oil, and caution ahead of the Fed's monetary policy decision. News that the PBOC conducted its biggest daily open markets operation in three years failed to lift sentiment, as the central bank injected 360B yuan into money markets ahead of the country's Lunar New Year holiday. Investors also remain wary about further weakness in the yuan, despite assurances from Beijing that it has no intention of pushing the currency lower. Shanghai -6.4%; Shenzhen -7.1%.


Equities across the globe are heading lower for a second day as Chinese markets slumped and oil fell back below $30/bbl overnight, following news that Iraq's output hit a record high and Saudi Arabia pledged to maintain energy investment. "Oil is the canary in the coal mine," said John Manley, chief equity strategist for Wells Fargo Funds Management. Expectations are also high that U.S. stockpiles data will intensify concerns over the global glut. Official data by the EIA will be released on Wednesday.

The Export-Import Bank is working hard with oil businesses to beat the sector's downturn, the bank's chief Fred Hochberg told CNBC. "It's very tough...everybody's got to compete much harder and sharpen their pencils to get those orders. Where we step in is making sure they have the financial tools to compete effectively." The bank operated for only nine months in the 2015 fiscal year, after congressional critics allowed the bank's authorization to lapse.

The Federal Reserve had always planned to pause after raising interest rates in December, but the question now is how long that break will last. Initial expectations were that the FOMC would raise rates again this March, but a downturn in the equity markets, a stronger dollar and weak inflation have led some to predict that another move may be months away. Investors may get some more insight as Fed officials gather today for their first policy-making meeting of 2016.

ECB president Mario Draghi came out swinging late Monday, stating that the central bank must fulfill its inflation mandate in order to maintain its credibility. "Time and again, the critics of our decisions have been proved wrong...but what I never hear them discuss is the risks of doing nothing," he proclaimed. ECB policymakers have less than seven weeks until a March 10 meeting when they'll decide whether their €1.5T bond-buying program and negative interest rates are enough to meet an inflation goal of just under 2%.


Huntington Bancshares has agreed to acquire smaller rival FirstMerit (NASDAQ:FMER) for $3.4B in a tie-up of two Ohio-based lenders. Regional banks have seen a steady consolidation since the global financial crisis, as mergers help spread costs over a broader revenue base. Excluding one-time expenses, Huntington (NASDAQ:HBAN) expects the cash-and-stock deal to add to its earnings per share in 2017. FMER +10.5% premarket.

David Einhorn's Greenlight Capital, which has been in talks with SunEdison (SUNE) regarding a board seat, is looking to sell the solar company's assets or even the company itself. The hedge fund also held discussions with the firm regarding changes in senior management, but an agreement has not yet been reached. As of Jan. 15, Einhorn had a 6.8% holding in SunEdison, while Greenlight held a 4% stake.

JPMorgan has agreed to pay the remnants of Lehman Brothers $1.42B in cash to settle most of the failed investment bank's $8.6B lawsuit over claims that it illegally siphoned billions of dollars from Lehman before its collapse. The payment doesn't settle every claim, but resolves the bulk of the suit, and allows post-bankruptcy Lehman to make another $1.5B distribution to its creditors. The settlement is not expected to have a material impact on JPMorgan's (NYSE:JPM) upcoming results.

Europe earnings roundup: Contactless cards helped Visa Europe clock record revenues of €2.3B for the year (Visa (NYSE:V) agreed to acquire Visa Europe for up to €21.2B in November). Siemens (OTCPK:SIEGY) is on the rise after raising its full year guidance on the back of a 42% increase in first quarter net profit. Philips (NYSE:PHG) is following close behind after beating Q4 EBITA expectations. That's despite swinging to a loss in the fourth quarter due to one-time charges. PHG +6.2% premarket.

Tax inversions are still on the loose. Johnson Controls is set to become the latest American company to move abroad in search of savings upon merging with Tyco (NYSE:TYC) and taking on its Irish tax address. The deal is at least the 12th inversion since the U.S. Department of the Treasury moved to curb the tax-reducing deals in September 2014 - roughly the same number in the 16 months before the legislation. According to S&P Capital IQ, Tyco paid 12% of its profit in taxes over the past three years vs. an average of 29% by Johnson Controls (NYSE:JCI).

Poland's $3B provisional deal with Airbus (OTCPK:EADSY) for 50 EC-725 Caracal army helicopters, which was agreed to by the country's previous centrist government, is "very likely" to be canceled. Poland may be better off scrapping the deal and paying a potential fine - which may reach hundreds of millions of zlotys - than accepting the losses the contract would impose, deputy defense minister Bartosz Kownacki told the Rzeczpospolita daily.

European Union antitrust regulators will decide by Feb. 29 whether to nod through U.S. computer maker Dell's $67B bid for data storage company EMC Corp. (EMC) or open a full-scale investigation. The EU competition watchdog can either clear the deal with or without conditions in the preliminary review or launch a five-month probe if it has serious doubts.

In a letter to employees, Valeant Pharmaceuticals (NYSE:VRX) CEO Michael Person said he was on the road to recovery, but the timing of his return to the company was still uncertain. Pearson was hospitalized in late December with what the company described as a severe case of pneumonia. Board member Howard Schiller has been serving as interim chief executive in his absence.

U.S. Bankruptcy Judge Brendan Shannon has approved the Chapter 11 exit plan of American Apparel (OTCPK:APPCQ), handing the retailer over to its bondholders and dashing former CEO Dov Charney's hopes of regaining control of the company he founded. The plan, which had been unanimously approved by creditors nearly two weeks ago, will swap $230M in debt for equity with bondholders, wiping out Charney's stake.

More woes at Sprint...The wireless carrier plummeted 12.5% on Monday after axing 2,500 jobs (7% of total staff) as part of its plan to cut $2.5B in costs. The layoffs, mostly in customer service, also include 574 positions at Sprint's (NYSE:S) headquarters at Overland Park, Kansas. Investors have been concerned that the company is burning cash at an alarming rate to acquire users and upgrade its network.

Sony is sharpening its focus on streaming and online game services with a consolidation of its PlayStation hardware, software and network operations under one roof. Sony Interactive Entertainment will begin operations from April 1, based in San Mateo, California; Andrew House will head the new unit. Sony (NYSE:SNE) also disclosed the $212M purchase of Israel's Altair Semiconductor, stepping up its investment in chip technology after strong sales of camera sensors.

With U.S. customers still in the dark about when and how their cars will be fixed and hundreds of lawsuits looming, Volkswagen's (OTCPK:VLKAY) top committee will meet for the third time in three weeks on Feb. 3. The German company is mired in the biggest business crisis in its history after admitting in September that it rigged diesel emissions tests in the U.S. and installed defeat devices in 11M vehicles worldwide.

Apple has implemented a hiring freeze for its electric car effort (codenamed Project Titan) after "executives became unhappy with the project's direction and progress," sources told AppleInsider. The report shortly follows one from the WSJ stating Steve Zadesky, the Ford (NYSE:F) vet in charge of Titan, is leaving the company for "personal reasons." Apple (NASDAQ:AAPL) is believed to have over 1,000 people working on Titan, and has hired engineers and execs from Tesla (NASDAQ:TSLA), Mercedes-Benz (OTCPK:DDAIF), and other automakers.

Monday's Key Earnings

D.R. Horton (NYSE:DHI) -4.7% on slowing price gains.
Halliburton (NYSE:HAL) -3% following a big drop in Q4 revenues.
Kimberly-Clark (NYSE:KMB) -3.3% after guidance fell short.
McDonald's (NYSE:MCD) +0.7% on increasing comparable-store sales.

Today's Markets

In Asia, Japan -2.4% to 16709. Hong Kong -2.5% to 18861. China -6.4% to 2749. India closed.
In Europe, at midday, London -0.7%. Paris -0.5%. Frankfurt -0.5%.
Futures at 6:20, Dow -0.3%. S&P -0.2%. Nasdaq -0.2%. Crude flat at $30.34. Gold +0.7% to $1112.70.
Ten-year Treasury Yield -2% to 1.99%

Today's Economic Calendar

FOMC meeting begins
8:55 Redbook Chain Store Sales
9:00 FHFA House Price Index
9:00 S&P Case-Shiller Home Price Index
9:45 PMI Services Index Flash
10:00 Richmond Fed Mfg.
10:00 Consumer Confidence
10:00 State Street Investor Confidence Index
1:00 PM Results of $26B, 2-Year Note Auction

Companies reporting earnings today