Tuesday, February 20, 2018

Markets retreat after US debt refunding

Dow tumbled 254 (finishing off the dreary lows in the last hour), decliners over advancers more than 2-1 & NAZ fell 5.  The MLP index was lost a fraction to the 269s.  Junk bond funds were sold again & Treasuries slid lower amid a massive sales of treasury debt at highest yields in a decade (more below).  Oil was flattish in the 61s (more below) & gold gave back a very big 24 to 1331.

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The Treasury sold $179B of securities as it works to rebuild its cash balance, with yields at its auctions of 3- & 6-month debt rising to levels unseen since 2008.  The gov began at Midday (NY time) by auctioning $51B of 3-month bills at a yield of 1.64%, 6 basis points more than similar-tenor debt sold on Feb 12 & $45B of 6-month bills at 1.82%.  Its $55B sale of 4-week notes at 1PM had a yield of 1.38%, with a gauge of demand known as the bid-to-cover ratio falling to 2.48, the lowest level since 2008.  The first coupon offering of the week, a $28B auction of 2-year notes, yielded 2.255%, the highest in almost a decade.  All told, the offerings saw decent demand, given the market is facing a deluge of sales following the recent US debt ceiling suspension.  The bid-to-cover ratios on the 3- & 6-month auctions were 2.74% & 3.11%, respectively.  The $258B slate of US auctions set for this week is helping to push up the rates investors demand.  Concerns about the US borrowing cap had forced the Treasury to trim the total number of bills it had outstanding, but with the latest debt-ceiling drama over, the gov is now busy ramping up issuance.  Financing estimates from Jan show that the Treasury expects to issue $441B in net marketable debt in the current qtr, with the bulk of that in the short-term market.  This is just the beginning of the US debt auction schedule.  The Treasury will sell 5- & 7-year maturities in the next 2 days, with both offerings larger than last month.  It will also issue $15B of 2-year floating-rate notes.

U.S. Floods the Market With $179 Billion of Debt in Just One Day

General Motors (GM) has offered to convert debt of around $2.2B owed by its ailing South Korean operation into equity in exchange for financial support & tax benefits from Seoul, according to leakers.  The restructuring proposal comes after the automaker announced last week that it would shut its plant in the city of Gunsan, southwest of Seoul, by May & decide the future of the remaining 3 plants in the country within weeks.  The debt for equity swap would allow GM's business in South Korea to continue operating.  It was not immediately clear how the deal would affect the interest of the state-run Korea Development Bank, which owns 17% of GM Korea.  GM's decision was the latest in a series of steps it has made to put profitability & innovation ahead of sales & volume.  Since 2015, GM has exited unprofitable markets including Europe, Australia, South Africa & Russia.  It was not immediately clear how much fresh capital GM has demanded from the South Korean gov to keep operating its Korean business, which employs nearly 16K.  But one source said GM had asked Seoul to provide financial support worth over $1B, while several sources said GM wanted its South Korea factory sites designated as special foreign investment zones that would make the company eligible for tax breaks for 7 years.  "GM says it will recapitalize its Korean unit, and in return it's asking South Korea to accept its packaged proposal that includes government support worth over $1 billion," the leaker said.  A GM Korea spokesman said the company would continue to work with the gov & labor union to secure support for its viability plan.  Today, Barry Engle, head of GM's intl operations, met with a task force headed by a ruling party lawmaker from Bupyeong, where GM Korea has its biggest manufacturing plant, to discuss its restructuring plan & Engle said the company wanted to stay in South Korea.  "It is certainly our preference to stay and to fix the business and continue to be an important part of the Korea economy," he said.  "I'm encouraged by the discussions and I am optimistic that that is an outcome that together we can achieve."  Engle told lawmakers that GM Korea would try to maintain output at the current level of around 500K vehicles a year, according to a spokesperson for the ruling party.  GM's South Korean unit produced 519K vehicles last year, compared with 942K a decade ago.  The stock fell 32¢.
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GM offers $2.2B debt for equity swap in return for Seoul's support

The latest discussions between OPEC & its oil-producer allies concluded that the supply glut is dissipating at a faster pace than previously anticipated, according to leakers.  After about 4 years of surplus, the global market will finally rebalance in Q2 or Q3, earlier than previously estimated, said the leakers.  This conclusion follows multiple signals of tighter supply, including Brent crude briefly surging above $70 a barrel & oil stockpiles in developed nations falling by the most in 6 years.  “We have seen a remarkable year in 2017 -- the market of crude has been restored and went to healthy numbers,” UAE Energy Minister Suhail Al Mazrouei said at the Intl Petroleum Week conference today.  “Ahead of us this year is the balance of supply and demand.”  OPEC & allies including Russia are going even further than their pledged 1.8M barrels a day of production cuts, giving “masive momentum” to the market, according to the cartel's Sec-General Mohammad Barkindo.  By some estimates, bloated oil stockpiles have already shrunk back to average levels, but the group shows no signing of easing off as Saudi Arabia seeks higher prices to buttress the historic initial public offering of its state energy producer.  The Joint Technical Committee (JTC), which includes officials from both OPEC nations & allies from outside the group, based its rebalancing scenario on the assumption that Libya & Nigeria keep output at Jan levels & other participants in the deal maintain compliance with cuts, leakers said.  The group of 24 nations implemented 133% of their pledged cuts in Jan, according to Barkindo.  Oil inventories in developed economies are about 74M barrels above the 5-year average, the JTC concluded.  Stockpiles are already back in line with that average using a method that considers how quickly they're likely to be consumed, known as forward demand cover.  While OPEC has maintained its 5-year-average inventory target since the cuts began in Jan 2016, it's now considering other measures that could change its view on whether the market is balanced.  The group is also drafting a charter that would allow continued cooperation with other producers beyond the expiry of the cuts at the end of 2018, Mazrouei said.

OPEC, Russia See Oil Glut Dissipating at a Faster Rate

Crude slipped on expectations for robust supply growth from US shale through the end of the decade.  The US benchmark fell slightly while Brent futures pushed 1.4% lower.  Comments by OPEC leaders about shrinking the worldwide crude glut & a post-2018 extension of output limits were overshadowed by prospects for unrelenting expansion in American shale fields.  US oil output is on track for “phenomenal,” growth, US Deputy Energy Sec Dan Brouillette said.  “We are optimistic about 2019 and 2020, too.”  Crude is holding above $60 a barrel, though futures are trading below last month's highs.  Although OPEC & allied producers have succeeded in whittling away most of the glut that triggered the worst market collapse in decades, American explorers have been pumping crude at record rates.  West Texas Intermediate for Mar delivery, which expires today, slid 4¢ to $61.64 a barrel.  The more active Apr contract traded at $61.68.  Brent for Apr settlement dropped 69¢ to $64.98 & the global benchmark traded at a $3.30 premium to Apr WTI.  After about 4 years of surplus, supplies will come back into balance with demand in Q2 or Q3, earlier than previously estimated.  Those calculations assume that Libya & Nigeria maintain output at Jan levels.

Walmart (WMT), a Dow stock & Dividend Aristocrat, finished down 10+ today (closing at session lows) after delivering a disappointing earnings report.  That decline, the worst in the history of WMT, cost the Dow about 70 points.  The US debt refunding, while not exciting & getting much attention, is important.  Interest rates are rising.  Today, junk bond funds & REITs, yield sensitive securities, felt selling pressure.  A month or 2 down the road, these prices will probably sink further with investors demanding higher yields.  The Dow is back below 25K & the outlook is gloomy, largely dimmed by rising interest rates.

Dow Jones Industrials

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