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China joins Greece, Puerto Rico on top of biggest US investors' worry lists 

JUL 7, 20151:29 PM

[NEW YORK] Greece's full-blown debt crisis and Puerto Rico's unfolding one have dominated headlines all week, but some of the biggest US investors have China at the top of their worry lists.

Jeffrey Gundlach, Bill Gross, Dan Ivascyn, Mohamed El-Erian, and David Rosenberg are among the money managers keeping close watch of China where markets have been under severe selling pressure despite moves by regulators to restore confidence.

Chinese markets, which had risen as much as 110 per cent from November to a peak in June, have tumbled more than 20 per cent since June 12 in jaw-dropping volatility as money surges in and out of the market.

Shanghai's benchmark share index plunged below 4,000 points for the first time since April on Thursday."We discuss China in detail at every strategy meeting and we continue to consider it one of several risks we need to keep an eye on," said Dan Ivascyn, group chief investment officer at Pimco, one of the world's largest bond fund managers with US$1.59 trillion in assets under management as of March 31.

For his part, Mr Gundlach, who oversees US$73 billion in assets at DoubleLine Capital, said he bought "tons" of Treasuries and Ginnie Maes last Friday, partly because the Shanghai Stock Exchange Composite Index was "signaling trouble by collapsing after blowing off to the upside a la the Nasdaq back in 1999/2000." In fact, the US Treasuries rallied strongly on Monday, with yields falling to one-week lows, with new developments and concerns about Greece and Puerto Rico.

In past years, Mr Gundlach has said the Shanghai Composite was a leading indicator of US stocks. "Like I've said, Shanghai 2014-15 is like the NASDAQ 1999-00," Mr Gundlach said on Thursday.

Mr Gross, the legendary investor who has been long referred to as the 'Bond King,' raised warning flags again this week about the risks in China.

In his Investment Outlook report on Tuesday, Mr Gross said China was one of several events that could precipitate a run on the "new" US shadow banking system, which includes mutual funds, hedge funds and ETFs which are modern banks that are not required to maintain reserves or even emergency levels of cash."China - a riddle wrapped in a mystery, inside an enigma," Mr Gross said. "It is the 'mystery meat' of economic sandwiches - you never know what's in there. Credit has expanded more rapidly in recent years than any major economy in history, a sure warning sign." For years, prominent shortsellers like Jim Chanos of Kynikos Associates, have warned about a property, debt and investment bubble bursting in China only to see government officials engineer an economic soft landing.

Yet Mr Gross said investors should still hold an appropriate amount of cash "so that panic selling for you is off the table."

Mr El-Erian, the chief economic adviser at Allianz, said he continues to recommend a "barbell" approach, where investors should stay mostly in cash on one end of a portfolio and illiquid assets such as infrastructure, a portfolio of selective tech startups and certain private market opportunities in emerging countries on the other. "The stock market volatility is certainly notable in China," Mr El-Erian said.

Mr Rosenberg, chief economist and strategist of Canadian asset manager Gluskin Sheff, added: "The country is undergoing a huge deleveraging at a time of lousy demographics and an ambitious rebalancing of the economy." China's growth has slowed from as much as more than 14 per cent in 2007 to 7 per cent in the first three months of 2015, its slowest quarterly pace in six years.

Mr Ivascyn said Pimco has estimates of around 6 per cent in economic growth for this year. "China is a monster and is the world's second largest economy," David Kotok, chairman and chief investment officer of investment firm Cumberland Advisors in Sarasota, Florida. "It's not to be ignored, given how interconnected China is to global markets and economies."

REUTERS

      

Hedge funds who called treasuries wrong are now getting it right

JUL 7, 201510:21 AM

[SINGAPORE] Hedge funds, who proved to be experts on getting the Treasury market wrong earlier this year, are becoming better at getting it right.

Large speculators including hedge funds trimmed their short positions in 10-year notes to almost zero last week, according to the Commodity Futures Trading Commission. Investors who dropped their bets on bonds falling are reaping the reward as the market rises in July following a three-month rout. Greece's struggle to stay in the euro currency bloc and tumbling Chinese shares are driving demand for the relative safety of US debt.

"Just in case, we want to keep a small long position," said Hajime Nagata, who invests in Treasuries in Tokyo for Diam Co, which manages the equivalent of $141 billion. Diam's holdings have a longer duration than the benchmark it uses to gauge performance, he said. Having a longer duration means bond prices will move more relative to any change in yield.

The benchmark 10-year US yield rose two basis points to 2.31 per cent as of 10:55 am in Tokyo, according to Bloomberg Bond Trader data. The price of the 2.125 per cent note due in May 2025 fell 6/32, or US$1.88 per US$1,000 face amount, to 98 13/32.

Treasuries gave back some gains following a surge on Monday that sent 10-year yields down 10 basis points. US government securities started the week with a rally after Greece voted on Sunday to reject spending cuts that its creditors are demanding, increasing concern the nation will be forced out of the euro.

A 25 per cent plunge in the Shanghai Stock Exchange Composite Index during the past month is helping send investors to the safest assets.

Biggest Wager Speculators called Treasuries wrong earlier this year, increasing their net short position in 10-year notes to 261,282 contracts on the Chicago Board of Trade in the week ended Dec 30. It was the biggest wager against Treasuries since May 2010.

The 10-year yield slumped 53 basis points in January, the biggest monthly decline since August 2011.

Investors reduced their shorts in early February, and 10- year yields climbed 35 basis points that month, the biggest increase in a year and a half.

Their record improved throughout April, May and June as shorts outnumbered longs while Treasuries suffered a three-month selloff.

Now, with the short position at almost zero, Treasuries have advanced 0.4 per cent in July, based on the Bloomberg US Treasury Bond Index, vindicating those who gave up their bets on the securities falling.

BLOOMBERG

    
 

China: Stocks extend rout despite support measures as hundreds of companies ask for trading halts

PHOTO: AFP

JUL 7, 201511:50 AM

[SHANGHAI] Chinese stocks opened down on Tuesday, taking no comfort from a slew of support measures unleashed by Beijing in recent days, and unnerved by Chinese Premier Li Keqiang's failure to mention the market chaos in a statement on the economy.

Before the market opened, Mr Li said in comments on a government website that China had the confidence and ability to deal with challenges faced by its economy, but had nothing to say on the three-week plunge that has knocked around 30 per cent off Chinese shares since mid-June.

After a brief pause to the slide on Monday, the CSI300 index of the largest listed companies in Shanghai and Shenzhen fell 4.8 per cent in early trading on Tuesday, while the Shanghai Composite Index sank shed 3.4 per cent.

The ChiNext growth board, home to some of China's giddiest small-cap valuations, fell 5.1 per cent.

Traders are increasingly unnerved by the unusually large number of Chinese companies asking for their shares to be suspended from trading, fearing that many of them are looking for excuses to sit out the market turmoil.

About a quarter of the roughly 2,800 companies listed in Shanghai and Shenzhen had filed for a trading halt by the close on Monday, and on Tuesday the Securities Times said another 200 had announced a suspension.

Investors were also reacting to news of tightened restrictions on futures trading on a major small-cap index.

In an attempt to halt the slide, China has arranged a curb on new share issues and orchestrated brokerages and fund managers to buy massive amounts of stocks, helped by China's state-backed margin finance company, which in turn has a direct line of liquidity from the central bank.

The official Shanghai Securities News reported on Tuesday that China's major insurance firms ploughed tens of billions of yuan into blue-chip exchange-traded funds (ETF) and large caps on Monday.

China Life Insurance Co Ltd bought a net 10 billion yuan (S$2.17 billion) in index funds, while China Pacific Insurance Group and other insurers each invested more than 1 billion yuan, the newspaper said.

That helped the indexes rise just over 2 per cent on Monday, but the relief was shortlived.

Lei Mao, assistant professor of finance at Warwick Business School, said government measures to support the market distorted the allocation of funds and trading behaviour and could create the conditions for further sharp falls."Even an optimistic investor should not participate in the market for now," he said.

The rapid decline of China's previously booming stock market, which had more than doubled in the year to mid-June, had become a major headache for President Xi Jinping and China's top leaders, who are already struggling to avert a sharper economic slowdown.

Even China's bullish securities regulators admitted that markets had become too frothy before they turned down, but the slide quickly showed signs of getting out of hand.

A surprise interest-rate cut by the central bank at the end of June, relaxations in margin trading and other "stability measures" did little to calm investors, many of whom have borrowed heavily to play the stock market.

In a series of announcements on Saturday, China's top brokerages pledged to collectively buy at least 120 billion yuan of shares to help steady the market, and said they would not sell while the Shanghai Composite Index remained below 4,500, a level last seen on June 25.

Underlining scepticism beyond mainland China about the sustainability of the measures, Hong Kong listed shares of Chinese brokerages took a beating on Monday.

In addition, 28 companies that had been approved to launch IPOs announced they had suspended their plans.

REUTERS

    
 

Asia: Markets mostly up but Shanghai tumbles again 

Asian markets mostly recovered on Tuesday from the previous day's Greece-fuelled sell-off, but Shanghai sank again as analysts warned government measures to staunch a recent rout will likely not be enough.

PHOTO: AFP

JUL 7, 201511:19 AM

[HONG KONG] Asian markets mostly recovered on Tuesday from the previous day's Greece-fuelled sell-off, but Shanghai sank again as analysts warned government measures to staunch a recent rout will likely not be enough.

The euro held its ground after Greece's weekend vote against creditors' austerity proposals, with dealers hoping contagion will be limited if a bailout reform deal cannot be reached.

Crude prices also edged up after taking a hammering Monday on demand fears owing to the Greek crisis and China's struggles to stabilise its stock markets.

Tokyo rose 1.34 per cent, Sydney added 1.75 per cent, Hong Kong gained 0.62 per cent, Taipei advanced 0.50 per cent and Wellington put on 0.63 per cent. Seoul lost 0.52 per cent.

But Shanghai dived 3.21 per cent at the open, after Monday's uptick, before recovering to sit 1.45 per cent lower.

Eyes are on Europe, where Greece's Prime Minister Alexis Tsipras will unveil new proposals Tuesday at a hastily arranged emergency eurozone summit in Brussels.

Market tensions have risen as the European Central Bank ratcheted up pressure on Athens by tightening collateral conditions for liquidity funding to the country's commercial banks.

"It is now up to the government of Alexis Tsipras to make serious, credible proposals so that this willingness to stay in the eurozone can translate into a lasting programme," said French President Francois Hollande after crisis talks in Paris with German Chancellor Angela Merkel.

With the country's economy on the brink, the Greek government has extended an eight-day bank closure until Thursday on fears cash machines will run dry.

The European Central Bank, which has been keeping lenders afloat, announced it would maintain a key financial lifeline to them, but turned the screw by raising the bar for them to access the emergency funds.

Analysts said investors are now in a wait-and-see mode.

CHINA 'FALL-OUT' RISK

"I think it's going to be hard to get any real traction until we get some type of clarity," Walter Todd, a chief investment officer at Greenwood Capital Associates LLC in South Carolina, told Bloomberg News.

The euro stood its ground, buying US$1.1047 and 135.55 yen in Tokyo on Tuesday, compared with 1.1057 and 135.50 yen in New York.

The dollar was at 122.71 yen against 122.55 yen. Traders have edged out of the safe-bet yen as risk aversion subsides.

While US and European stocks slipped, the sell-off in leading markets was not painful.

On Wall Street the Dow eased 0.26 per cent, the S&P 500 shed 0.39 per cent and the Nasdaq dropped 0.34 per cent.

"Possibly what the market is saying is either the expectation for a 'No' vote and for an exit are already priced into the US market, or the expectation is whatever happens in Greece related to Europe won't adversely affect US growth," said Sam Stovall, chief investment strategist at S&P Capital IQ.

Paris fell 2.01 per cent and Frankfurt shed 1.52 per cent, while London was 0.76 per cent lower.

However, Shanghai volatility continues despite government measures at the weekend to halt initial public offerings (IPOs) - to stop liquidity drying up - and moves to pour billions of yuan into the market to end three weeks of plunging prices.

But analysts said the measures are not enough and could be causing problems.

"The more resources authorities commit to propping up the stock market, the more they ratchet up the potential fall-out risks should the market continue to collapse," said Andrew Wood, an analyst at BMI Research.

"This could give rise to a crisis of confidence in the authorities' ability to support both the stock market and the real economy."

Oil prices bounced back slightly after plunging almost eight per cent on Monday, with fresh oversupply worries as Iran's nuclear talks progress, raising the possibility sanctions on its exports could be removed.

US benchmark West Texas Intermediate for August delivery rose 49 cents to US$53.02 a barrel and Brent crude for August advanced 67 cents to US$57.21.

Gold fetched US$1,169.08 compared with US$1,167.50 late Monday.

AFP