Market Snapshot
Asia: Japan -1.6% to 20393. Hong Kong -2.4% to 23916. China -1% to 3886. India -1.3% to 27512.
Europe: London -1.2%. Paris -2.3%. Frankfurt -2.1%.
Futures: Dow -0.9%. S&P -0.9%. Nasdaq -1%. Crude +1% to $43.49. Gold +0.8% to $1116.10.
Ten-year Treasury Yield -3 bps to 2.1%
Economic News
7:00 MBA Mortgage Applications
10:30 EIA Petroleum Inventories
1:00 PM Results of $24B, 10-Year Note Auction
Markets
Global stocks, currencies and government bond yields are all heading south after China allowed the yuan to fall sharply for a second day, triggering concerns over the country’s economic health. China set today’s yuan daily midpoint reference at 6.3306, even weaker than Tuesday’s devaluation, pushing the currency down 4% over the last two days. Meanwhile, the IMF has offered a cautious endorsement of the new pricing regime – which lets the market play a greater role in setting the value of the currency – in a step that may help Beijing win reserve currency status for the renminbi later this year.
The global oil glut will last through next year as surging demand and faltering supply growth fail to clear the surplus, the International Energy Agency warned in its widely followed monthly report. “While a rebalancing has clearly begun, the process is likely to be prolonged,” the agency declared, stating that stockpiles won’t be diminished until Q4 of 2016 or later if sanctions on Iranian crude are lifted. After plunging to six-year lows on Tuesday, crude prices are now up 1% to $43.49/bbl.
Just eight days after it defaulted on bond payments for the first time, Puerto Rico said it planned to issue $750M more in bonds for several construction and maintenance projects. Issuing new debt while planning to restructure pre-existing debt, and even letting certain bonds default, “reflects the individual financial circumstances of the various issuers across the commonwealth,” announced GDB President Melba Acosta. So far, little is known about the island’s debt restructuring proposal. Analysts have been waiting for the details to be made public at the end of this month.
Moody’s Investors Service has cut Brazil’s credit rating to near-junk status, citing weaker-than-expected economic performance, an upward trend in government spending, and lack of consensus on government reforms. Brazil’s government bond rating now stands at Baa3 with a stable outlook. “The numbers confirm that the authorities have been unable to deliver primary surpluses large enough to prevent an increase in debt ratios in 2015-2016,” Moody’s said.
Stocks
McDonald’s plans to shrink by 59 U.S. locations this year, attempting to reverse its worst sales slump in more than decade. According to a franchise operations document, the chain is closing 184 restaurants and opening 125 new ones in 2015. The move follows seven straight quarters of slumping sales across the nation, and marks the first time in 45 years McDonald’s (MCD) has closed more U.S. locations than it has opened.
Continuing its push away from finance, General Electric (GE) has agreed to sell its U.S. healthcare financial services business to Capital One (COF) for about $9B. The deal is expected to close in the fourth quarter. The sale also takes GE’s financial divestitures to about $78B, one step closer to achieving its target of shedding $100B worth of finance assets by the end of 2015.
Wells Fargo may divest its crop insurance business, one of the biggest in the U.S., as regulatory restrictions on banks force some to reconsider underwriting insurance policies. Wells Fargo (WFC) expects a price tag of about $1B for the unit, and has launched an auction for the business. Potential bidders are said to include PartnerRe (PRE), Axis Capital (AXS), and Allianz (OTCQX:AZSEY).
Berkshire Hathaway’s AA credit rating, along with that of its insurance subsidiaries, has been placed on CreditWatch Negative by Standard & Poor’s following its announced $37.2B acquisition of Precision Castparts (PCP). At issue is uncertainty over how the deal will be funded. S&P expects Berkshire (BRK.A, BRK.B) to use some capital resources at its insurance units, which could affect their ratios.
Bye-bye American Apparel? The loss-making clothing retailer doesn’t expect to get funds to keep its business alive for the next 12 months, and has warned shareholders about their investments if it cannot raise additional capital. American Apparel (APP), which is in talks with lenders and battling ousted CEO Dov Charney, has seen its stock price fall 80% since the beginning of the year.
Amazon is quietly shuttering its “product ads” business, a pay-per-click program that allowed sellers to divert traffic from the retailer’s platform to their own websites. Companies saw the option as a key feature because it provided a middle ground of being able to partner with Amazon (AMZN) but didn’t allow the firm to see all their transaction data. Amazon will permanently discontinue the program in October.
More Legionnaire’s disease concerns are surfacing after GlaxoSmithKline (GSK) shut down a North Carolina plant upon discovering the bacteria in a self-standing cooling tower. The closure is not expected to disrupt supplies of medicines made at the factory, which include Glaxo’s $7B-a-year inhaled respiratory drug Advair. About 400 of the 850 employees who work at the plant were told to stay away until the towers are cleaned.
Takata has proposed a plan to address concerns about the safety of its replacement parts – but the details are not available to the public. The strategy attempts to deal with two central questions: whether the air bag inflators being used to replace defective parts are safe, and for how long. American officials have described Takata’s (TKTDY) recall as the largest in U.S. history, involving tens of millions of vehicles made by 11 automakers.
Dark pools are getting darker. Credit Suisse (CS) and Barclays (BCS) have entered settlement negotiations with the SEC and NY attorney general over facilitating unfair advantages, incorrect stock pricing and other wrongdoing in their dark pools. Credit Suisse is in talks to pay a fine in the high tens of millions, which would be the largest fine ever levied against a private trading venue operator, while Barclays’ discussions also suggest a large fine.
U.S. prosecutors have separately announced charges against an insider-trading ring consisting of 32 traders and hackers, marking the first time criminal allegations have been brought for a securities fraud scheme involving hacked inside information. Stolen press releases gave the rogue traders $100M in illegal proceeds by allowing them to trade on news before it hit the wires. Hackers were then paid a flat fee or a percentage of the profits gained from the trading.
Pearson has agreed to sell its stake in The Economist for £469M ($731M), completing an exit from business publishing after disposing of The Financial Times last month. The sales will see Exor (EXOSF) pay £227.5M for 27.8% of The Economist Group’s ordinary shares and all of the B special shares for £59.5M. Pearson’s (PSO) remaining ordinary shares will be bought by The Economist Group for £182M.