Govt reviewing capital mkt reform measures

A recent report on capital markets by a government appointed panel is being examined by the finance ministry and financial regulators, and some its suggestions could perhaps be incorporated in the upcoming 2016-17 Budget.

The report, by the standing council on international competitiveness of the Indian financial sector, was made public in early September and recommended a number of steps to reform derivatives markets for commodity, equity and currency.

Some of these recommendations include removal of securities transaction tax and stamp duties, especially for futures and options products, clarifying tax treatment in exchange-traded currency derivative markets and avoiding ban on any market segment, participant or product.

The report also suggests allowing access to all foreign participants as long as they meet financial Action task force requirements, clarifying regulatory positions on participatory notes, removing regulatory constraints on banks and mutual funds to participate in commodity futures, uniform KYC norms, internationalising the rupee, and a longer term move to a residence based taxation regime.

Senior government sources said that the finance ministry has asked all financial regulators to suggest which of the numerous suggestions, divided into short-term, medium-term, and long-term timelines, can be implemented. Once the government is in agreement with the likes of Reserve Bank of India and Securities and Exchange Board of India on which reforms can be implemented, these could be included in the Budget, they added.

"The various financial regulators have been asked to review these recommendations and suggest which can be implemented, and some of these cannot be carried out, then why not," said a senior official.

Number crunching: The impact of China's currency devaluation

In mid-August, China shocked markets by devaluing the yuan.

Today's infographic looks at the impact this had on global currencies using three different time frames:
1 day, 1 week, and 1 month.

In the grand scheme of things, China’s mid-August currency devaluation spree was a drop in the bucket. Since the Financial Crisis, countries have routinely printed money, kept rates pegged artificially low, and found other ways to get temporary competitive advantages with cheaper currency.

While the People’s Bank of China has made some questionable interventions, China’s currency itself has been pegged to the US dollar officially or unofficially since its early history. With the US dollar climbing wildly against most global currencies since mid-2014, the yuan climbed along with it. China’s currency appreciated against all other major Asian currencies, which erased the country’s manufacturing cost advantage and trade surplus. In retrospect, it is almost surprising that they kept the reference rate where it was for this long.

The strong reaction from markets and media was more from the angle that even slightest movement made by China can create a ripple effect on fragile global markets. China, for a better lack of an analogy, is a bull in a china shop. Its economy and currency are seen as important bellwethers and when the PBOC makes an announcement, people listen.

That’s why in mid-summer, markets got volatile in a hurry. China devalued its currency by 1.9% on August 11 and made some smaller changes since then. The country also announced adjustments to how it would calculate its onshore reference rate moving forward.

Today’s infographic looks at the reaction in currency markets in three timeframes after the event: 24 hours, one week, and one month after.

Some currencies, like the euro, appreciated against the Chinese Renminbi right away and maintained that momentum. The euro went up 2.06% in the first day, and then continued to appreciate to 5.73% by the end of 30 days. Others swung back and forth wildly: at first the South African rand was up 0.71%, but then it ended as the biggest loser against the yuan at -4.24% over the course of a month.

Despite the mixed reaction from different currency markets, the reason China did this was clear. The country wanted to promote convergence in its onshore and offshore rates, and it has also been trying to woo the IMF for some time to be included in the IMF’s basket of reserve currencies called Special Drawing Rights. The latter move is a part of China’s posturing to eventually better internationalize the yuan.

As a side benefit of the devaluation, China also gets temporary relief in promoting exports at a cheaper price – though this will only last until the next country takes action in the game of currency war hot potato.

Original graphic by: Inovance

Chinese Cash Flow Shocker: More Than Half Of Commodity Companies Can't Pay The Interest On Their Debt

Earlier today, Macquarie released a must-read report titled "Further deterioration in China’s corporate debt coverage", in which the Australian bank looks at the Chinese corporate debt bubble (a topic familiar to our readers since 2012) however not in terms of net leverage, or debt/free cash flow, but bottom-up, in terms of corporate interest coverage, or rather the inverse: the ratio of interest expense to operating profit. With good reason, Macquarie focuses on the number of companies with "uncovered debt", or those which can't even cover a full year of interest expense with profit.

The report's centerprice chart is impressive. It looks at the bond prospectuses of 780 companies and finds that there is about CNY5 trillion in total debt, mostly spread among Mining, Smelting & Material and Infrastructure companies, which belongs to companies that have a Interest/EBIT ratio > 100%, or as western credit analysts would write it, have an EBIT/Interest < 1.0x.

As Macquarie notes, looking at the entire universe of CNY22 trillion in corporate debt, the "percentage of EBIT-uncovered debt went up from 19.9% in 2013 to 23.6% last year, and the percentage of EBITDA-uncovered debt up from 5.3% to 7%. Therefore, there has been a further deterioration in financial soundness among our sample."

To be sure, both the size (the gargantuan CNY22 trillion) and the deteriorating quality (the surge in "uncovered debt" companies) of cash flows, was generally known.

What wasn't known were the specifics of just how severe this bubble deterioration was for the most critical for China, in the current deflationary bust, commodity sector.

We now know, and the answer is truly terrifying.

Macquarie lays it out in just three charts.

First, it shows the "debt-coverage" curve for commodity companies as of 2007. One will note that not only is there virtually no commodity sector debt to discuss, at not even CNY1 trillion in debt, but virtually every company could comfortably cover their interest expense with existing cash flow: only 4 companies - all in the cement sector - had "uncovered debt" 8 years ago.

Fast forward to 2013 when things get bad, as about a third of all corporations are now unable to cover their annual interest expense, even as the total addressable corporate debt has soared to CNY4 trillion for just the commodity sector.

And then in 2014, everything just falls apart. Quote Macquarie, "more than half of the cumulative debt in this sector was EBIT-uncovered in 2014, and all sub-sectors have their share in the uncovered part, particularly for base metals (the big gray bar on the right stands for Chalco), coal, and steel."

Compared with the situation in 2013, while almost all sub-sectors did worse in 2014, but things appear to have worsened faster for coal companies as more red bars have moved beyond the 100% critical level for EBIT-coverage.

It means that last year about CNY2 trillion in debt was in danger of imminent default.

The situation since than has dramatically deteriorated.

So are we now? Macquarie again: "Given the slumps in metal and coal prices so far this year, it’s quite likely the curve will have deteriorated further for commodity firms this year, with total debt getting better in the meantime."

In other words, it is safe to assume that up to two-third of Chinese commodity companies are now at imminent danger of default, as they can't even generate the cash to pay down the interest on their debt, let alone fund repayments.

We fully expect this to be the source of the next market freakout: when the punditry turns its attention away from macro China, which has more than enough problems to begin with, and starts to focus on the cash flow devastation in China at the micro, or corporate, level.

DAX Reverses Month-End Ramp, Suffers Worst Start-To-Q4 Since 2009

Germany's DAX has given back all of yesterday's exuberant month-end gains and more to suffer the worst start to Q4 since 2009 (and actually worse than 2007 and 2008)...

Early hope collapsed into reality...

Copper, Crude, Credit Crumble As Stocks, Bond Yields Tumble

Commodities terrible quarter in just one chart

Unless you were hiding out in rough rice or lean hogs, commodities were not your friend in the third quarter of 2015.

GoldCore compiled three-month relative performance of commodities with data from Finviz.com.

Worries out of Asia hurt commodities. China is rebalancing, emphasising consumption over investment. It's stock market gyrations also dragged down metals. The Shanghai Composite Index falling from the peak of 5,166 in mid-June to 3,038 at the end of September.

Copper price surges on South America supply cuts

On Wednesday copper futures staged a comeback from six year lows hit earlier in the week as supply disruptions from top producing countries Chile and Peru lift sentiment in beaten down sector.

On the Comex market in New York copper for delivery in December surged as much as 4.7% to a session high of $2.3575 or $5,200 a tonne. Today's advance lifted the red metal out of bear territory for 2015, but at a more than 17% drop since December 31 following a 16% retreat in 2014, no-one's celebrating a bottom yet.

Today's big jump in heavy volume came after news from top producing country Chile.  Output at one of the world's largest copper mines, Collahuasi, will be cut by 30,000 tonnes due to current market conditions.

The mine, owned by Anglo American and Glencore produced 470,000 tonnes of copper in 2014, roughly 2% of global output. Earlier this month Glencore announced it's idling mines in Zambia and the DRC that would remove more than 400,000 from the market.

Also on Tuesday Peru declared a state of emergency in the area around the Las Bambas mine after clashes between police and protesters left four people dead and 16 seriously injured.

Minmetals acquired Las Bambas from Glencore in April last year in a controversial $6 billion deal tied to the Swiss giant's merger with Xstrata

Las Bambas is majority owned by China's Minmetals and the 400,000 tonnes per year mine is set enter production in January next year. Minmetals acquired Las Bambas from Glencore in April last year in a controversial $6 billion deal tied to the Swiss giant's merger with Xstrata.

New mines in Peru coming on stream this year and 2016 would double production to 2.8 million tonnes, placing the Peru in second place globally behind Chile.

Copper's move higher gave a bit of a lift to beaten down copper stocks with Glencore's (LON:GLEN) jumping 14% as it continues to recover from a more than 30% fall in London in Monday. Anglo American (LON:AAL) shares also also traded up in New York but year to date declines at the diversified miner remain more than 50%.

Freeport-McMoRan (NYSE:FCX), which vies with Chile's state-owned Codelco as the world number one copper miner in terms of output, was trading 5% higher in early-afternoon dealings but investors in the the Phoenix Arizona based company are nursing a 59% decline since the start of the year. Freeport announced a month ago it is cutting in half output at is El Abra mine in Chile and idling two US mines.

The copper industry has a long history of these supply-side surprises.

Typical disruptions associated with adverse weather (Freeport has predicted lower output at the massive Grasberg mine in Indonesia related to El Niño weather patterns), technical problems, power shortages and labour activity coupled with falling grades and dirty concentrates at old mines (especially true in Chile) make forecasting a tough proposition.

The copper industry has a long history of these supply-side surprises

Add to those factors project deferrals, commissioning delays, slower ramp-ups, mothballing and downsizing of mine plans due to the declining price environment of the last two-three years and it becomes easier to understand why forecasts are all over the place.

Last week Goldman Sachs predicted the slump in the copper price could last years due to the slowdown in China and that prices will probably drop to $4,800 a metric ton by the end of December and $4,500 at the end of next year as the market suffers from oversupply of 530,000 tonnes next year 2016 rising through 2019 to reach 657,000 tonnes oversupply.

On the opposing side independent research house Capital Economics forecasts a strong pickup in the price of copper towards the end the year on the back of lower than expected mine supply growth and output disruptions.

Senior commodities economist Caroline Bain says Chile’s recent earthquake highlights these risk. Although output was only interrupted briefly, the earthquake and tsunami that struck the South American nation halted operations at the Los Pelambres and Andina mines, which together produce  600,000 tonnes of copper.

Apart from the effects of El Niño (low rainfall is behind the Grasberg output reduction, but on the other side of the ocean the occurrence causes flooding), ongoing strikes and protests, Bain also points to relatively low warehouse inventories which in the case of LME stocks represent only 2–3 weeks of annual consumption for the bullish case.

The house view at Capital Economics is for the price of copper to reach US$6,250 per tonne by end-year, rising to $7,000 by end-2016.