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China: Why Did the PBoC Cut? (Will It Even Matter?)

Takeaway: The PBoC’s surprise rate cut confirms our bearish thesis on the Chinese economy, but may portend brighter days ahead.

Editor's note: This was originally published November 21, 2014 at 13:26 in Macro. To learn more about becoming an individual subscriber click here.

Chartreuse and Spoos: The Global Central Planning Spree Continues

As you can probably tell by the overnight action in the spoos, a central bank in Asia eased monetary policy. This time, it was China – i.e. the economy responsible for 16% of global GDP and 30% of global GDP growth (on a PPP basis). Yes, the same China where 2014 Real GDP growth is tracking at the slowest pace since 1990!


From a forward-looking perspective, this is a good thing only if it signals a sustained move away from the “proactive fiscal policy and prudent monetary policy” they’ve been guiding to and implementing for over two years now. Recall that amid incessant cries for Western-style monetary easing, the PBoC has refrained from cutting interest rates since July of 2012 (excluding the removal of the lending rate floor). It has not [broadly] lowered RRRs since May of 2012.


China: Why Did the PBoC Cut? (Will It Even Matter?) - DD1


In and of itself, this rate cut will hardly do anything to arrest the rate of decline in Chinese economic growth; nor will it offset the “increasing downward pressure” upon the Chinese economy over the NTM, as most recently reiterated Xu Shaoshi (head of the National Development and Reform Commission) just two days ago.


Chinese growth is effectively crashing at this point. Our model points to a continued slowdown of Real GDP to +7.1% YoY in 4Q – and that’s being polite (i.e. conceding their made-up numbers). The reality is that Chinese growth is far shy of that number, making the 2nd derivative impact much more severe for economies and businesses that rely on Chinese demand. Pull up a 2Y chart of Standard Chartered (STAN) if you want the real story on Chinese growth. 


So Why Cut Now?

There are two primary reasons why the PBoC surprised everyone by cutting rates today (-25bps on the benchmark household deposit rate; -40bps on the benchmark lending rate):


  • Economic growth – which had already been slowing precipitously, as evidenced by the sea of red in the table below – fell off a cliff in October. This is most easily confirmed by the rate of change in Total Social Financing growth and Macau’s mass business, which was down -8% YoY (from +15% in September). That was the first annual decline in mass revenues in over five years!
  • Amid increasingly large capital outflows (see: declining FX reserves and negative “hot money” flows) and trending disinflation, the real cost of 1Y capital in the Chinese banking system has actually risen to fairly high level of late, rising to roughly 1.4% from ~0% at the start of the year.


China: Why Did the PBoC Cut? (Will It Even Matter?) - CHINA High Frequency GIP Data Monitor


China: Why Did the PBoC Cut? (Will It Even Matter?) - China Iron Ore  Rebar and Coal YoY vs. GDP


China: Why Did the PBoC Cut? (Will It Even Matter?) - China Real Interest Rate


Again, the PBoC’s decision to cut rates today makes a ton of sense to us, given China’s sustained #Quad4 setup, which calls for a dovish response from fiscal and monetary policymakers. We just didn’t see it coming given their official guidance; it's worth noting that Beijing is notorious for sticking to the script.


China: Why Did the PBoC Cut? (Will It Even Matter?) - CHINA


Cyclical Outlook: Still Very Negative, But Potentially Positive

You’ll note that in that our GIP Model has China going into #Quad1 for the first quarter. That’s primarily because of seasonality (fiscal expenditures and credit growth tend to be front-end loaded) and, obviously, very easy comps. That being said, China had these things working in its favor at the start of this year, but obviously the tightening we saw in the early part of 2014 trumped that setup (to the downside).


China: Why Did the PBoC Cut? (Will It Even Matter?) - China GDP Seasonality


A continued “recovery” in the Chinese property market – which had been truly crashing – is also supportive of any positive 2nd derivative delta for the Chinese economy in 1H15.


China: Why Did the PBoC Cut? (Will It Even Matter?) - CHINA Property Market Monitor


It’ll be interesting to see if the rebound in property development (read: fixed asset investment) is actually sustainable amid home price deflation accelerating to the downside on a trending basis. For now, it’s too early to tell; what we do know is that Chinese policymakers are very concerned about this segment of the economy and have ratcheted up support for the sector in recent months.


Investment Conclusions

All told, the PBoC’s surprise rate cut confirms our bearish thesis on the Chinese economy, but may portend brighter days ahead from a cyclical perspective.


That being said, long-term investors should NOT get involved with any “China recovery” trade that may percolate from this. China’s structural economic imbalances and official rebalancing agenda imply continued slowing over the long-term TAIL.


Feel free to ping us w/ any follow-up questions. Have a great weekend,




Darius Dale

Associate: Macro Team

The Biggest Currency Crisis Since 1998

Editor's note: This is an excerpt from Hedgeye morning research. To learn more about how you can become a subscriber to America's fastest growing independent research firm click here.

*  *  *  *  *  *  *

The Russian Ruble is down -6% since Friday. It’s plunged -40% year-to-date. This is the biggest crash in currency land since 1998.


For the record, global macro market #Intereconnectedness mattered then, and it does now.


The Biggest Currency Crisis Since 1998  - 12.01.14 Chart


As Hedgeye analyst Matt Hedrick observed earlier today:


Russia remains a major area of global risk exposure...Energy still accounts for 20-25% of Russia's GDP, and energy prices have fallen ~30% in the last two months. Multiplying those two weightings would imply that Russia's economy is at risk of suffering a decline of 6-7.5%. 


Meanwhile... Russian stocks? They are down another -3.4% today to over -32% year-to-date.


#NoWorries right? Right?

Keith's Macro Notebook 12/1: Oil | Russia | Italy


Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.

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European Banking Monitor: Oil Move Priced Into Russian Financials Swaps

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email 




Key Takeaway:

Russia remains a major area of global risk exposure. Russia's largest bank, Sberbank, which holds roughly half of all retail deposits for the country, is now trading at over 400 bps on its credit default swaps. The "danger zone" is generally regarded as anything north of 300 bps. With oil continuing to plunge following OPEC's move to drive marginal shale producers out of business, the embedded risk in Russia's banking system is growing quickly. Consider this simple example. Energy still accounts for 20-25% of Russia's GDP, and energy prices have fallen ~30% in the last two months. Multiplying those two weightings would imply that Russia's economy is at risk of suffering a decline of 6-7.5%. Compare that with the 8.2% decline experienced by the US Economy in 4Q08 during the height of the US Great Recession.


European Financial CDS - Swaps also were mostly tighter in Europe last week. At the median, European swaps tightened by -8.5%.  Only Greek and Russian bank CDS widened modestly: Greece by about 3.1% and Russia by 2.5%. We would call out Russia's Sberbank, which is now north of 400 bps, reflecting the rising risk in the Russian economy.


European Banking Monitor: Oil Move Priced Into Russian Financials Swaps - chart1 euro financials CDS


Sovereign CDS – Sovereign swaps mostly tightened over last week. Spanish sovereign swaps tightened by -12.5% (-13 bps to 91 ) and American sovereign swaps widened by 8.9% (1 bps to 18).


European Banking Monitor: Oil Move Priced Into Russian Financials Swaps - chart2 sovereign CDS


European Banking Monitor: Oil Move Priced Into Russian Financials Swaps - chart3 sovereign CDS


European Banking Monitor: Oil Move Priced Into Russian Financials Swaps - chart4 sovereign CDS


Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 2 bps to 8 bps.


European Banking Monitor: Oil Move Priced Into Russian Financials Swaps - chart5 euribor OIS spread


Matthew Hedrick



Ben Ryan





Commodities Weekly Sentiment Tracker

Note: Using the z-score in the tables below as a coefficient of variation for standard error helps us flag the relative market positioning of the commodities in the CRB Index. It is not intended as a predictive signal for the reversion to trailing twelve month historical averages. For week-end price data, please refer to “Commodities: Weekly Quant” published at the end of the previous week. Feel free to ping us for additional color.    



1.       CFTC Net Futures and Options Positioning CRB Index: The Commodities Futures Trading Commission (CFTC) releases “Commitments of Traders Reports” at 3:30 p.m. Eastern Time on Friday. The release usually includes data from the previous Tuesday (Net Positions as of Tuesday Close), and includes the net positions of “non-commercial” futures and options participants. A “Non-Commercial” market participant is defined as a “speculator.” We observe the weekly marginal changes in the overall positioning of “non-commercial” futures and options positions to assess the directionally-biased capitulation risk among those with large, speculative positions.


The CFTC did not report its weekly positioning data with the shortened week. The table below represents the data released Friday, November 19th.


Commodities Weekly Sentiment Tracker - chart1 sentiment


2.       Spot – Second Month Basis Differential: Measures the market expectation for forward looking prices in the near-term.

  • The CORN, SUGAR, AND SOYBEANS markets are positioned for HIGHER PRICES near-term
  • The LEAN HOGS, COTTON, AND COPPER markets are positioned for LOWER PRICES near-term

Commodities Weekly Sentiment Tracker - chart2 spot 2nd month basis


3.       Spot – 1 Year Basis Differential: Measures the market expectation for forward-looking prices between spot and the respective contract expiring 1-year later.


  • The CORN, SUGAR, AND ORANGE JUICE markets are positioned for HIGHER PRICES in 1-year  
  • The LEAN HOGS, LIVE CATTLE, AND SOYBEANS markets are positioned for LOWER PRICES in 1-year  

Commodities Weekly Sentiment Tracker - chart3 spot 1 Yr basis


4.       Open Interest: Aggregate open interest measures the amount of opened positions in all actively traded futures contract months. Open interest can be thought of as “naked” or “directionally-biased” contracts as opposed to hedgers scalping and providing liquidity. Most of the open interest is created from large speculators or participants who are either: 1) Producers/sellers of the physical commodity hedging their cash market exposure or 2) Large speculators who are directionally-biased on price.


Commodities Weekly Sentiment Tracker - chart4 aggregate open interest         


Ben Ryan


LEISURE LETTER (12/01/2014)

Tickers:  FLL, IKGH, CCL


  • Dec 2: 11 am ISLE Q2 2015 earnings
  • Dec 8: 10:30 MTN Q1 2015 earnings
  • Dec 8: Golden Nugget Lake Charles grand opening?
  • Dec 12: Trump Taj Mahal Closing
  • Dec 15: CoD Manila opening?
  • Dec 17:  Upstate NY casino decision


FLL – Announced the appointment of Daniel R. Lee as Chief Executive Officer and the favorable resolution of issues with its stockholder group -- the Board has been increased from five to nine members and the Company accepted the resignations of Andre M. Hilliou and Mark J. Miller as directors and entered into Separation Agreements with respect to their employment. To fill the resulting six vacancies, W.H. Baird Garrett, Raymond Hemmig, Ellis Landau, Daniel R. Lee, Bradley M. Tirpak and Craig W. Thomas have been appointed to serve as directors, each subject to normal and customary regulatory approvals. Mr. Lee will replace Mr. Hilliou as the Company’s Chief Executive Officer.

Takeaway: Mr. Lee makes his return to public company gaming, this time in a turnaround role at FLL.


IKGH – reported Q3 2014 results including EPS of ($0.02), revenues of $51.9 million and rolling chip turnover of $4.3 billion.  The company noted full year 2014 rolling chip turnover guidance of $16.8 billion to $17.5 billion, down from $17 billion to $19 billion.

Takeaway: Disappointing VIP rolling chip trends prevail 


CCL – Seabourn ordered a second ultra-luxury ship from Fincantieri, through the exercise of the option which was included in the order for the first vessel in early 2014. The ship, due to join the Seabourn fleet in spring 2018 and will be a sister ship to the newbuild announced earlier this year, scheduled for delivery in late 2016. These ships will continue the fleet modernization that began in 2009. The all-suite ship will be approximately 40,350 gross tons, 210 meters long and 28 meters wide and will be able to reach a cruising speed of 18.6 knots. It will carry up just 604 guests, accommodated in 302 spacious suites, all with a private balcony. 

Takeaway:  After transferring 3 Seabourn ships to Xanterra in 2013, Seabourn is back on the growth track.  Ultra-luxury is one cruising segment where demand growth is outpacing supply growth.


Virgin Cruises Government Investment Corporation of Singapore (GIC) will join the buyout firm Bain Capital as a founding shareholder in Virgin Cruises and will invest a 'substantial amount'.  At least one Middle East sovereign wealth fund and a number of family offices and high net worth individuals are also believed to be investing, according to private equity sources.  A statement about Bain Capital's involvement, revealed by Sky News last month , is expected to be made this week.


Sources said that Virgin Group would itself invest more than $100m (£63m) in shares in Virgin Cruises, using funds recycled from the proceeds of the two recent flotations.  Details of the launch plans for Virgin Cruises remain sketchy, although it is thought likely to be targeting a maiden voyage in 2019 and be based in Miami. Bankers said it would raise approximately £500m in equity and a debt package worth substantially more - possibly as much as £1bn.

Article HERE

Takeaway:  Virgin Cruises gets another important investor.  



Macau VIP Gaming Segment in Ruin – Junkets are on the hook for a surge in bad debts as China's economic slowdown and a crackdown on corruption chase some VIP gamblers away. With little access to credit and slow repayments, the capital to fund the business isn't flowing. Heng Sheng, one of the largest junket operators, told investors in October that 30% of the outstanding debt owed to its agents was over a year old. Many gamblers were making monthly installments rather than the normal practice of paying in full. Wealthy coal baron Lu Zhong Lou, ranked among China's wealthiest tycoons by Forbes, the 49-year-old from Shanxi province frequented luxurious casinos including Wynn Macau Ltd's caramel-hued VIP parlors and Galaxy Entertainment Group's diamond-encrusted saloons, owes junkets and Chinese businessmen as much as $HK3.5 billion ($451 million), according to his creditors and local media. 

Article HERE

Takeaway: Junket bad debt and lack of funding capital could lead to a more severe and protracted downturn in VIP gaming revenue. 


November Macau GGR – Nov GGR totaled HKD 23.562bn, down 19.6% YoY and down 13.4% versus October.  Market shares as follows:

  • SJM:  22.6%
  • Sands China:  22.6% 
  • Galaxy:  21.5%
  • MPEL:  13.5%
  • MGM China:  11.0%
  • Wynn Macau:  8.9% 

Article HERE

Takeaway:  Nov was in-line with recently revised (lower) Street expectations.


New Macau Secretary for Economy & Finance – Lionel Leong Vai Tac was confirmed on Monday as Macau’s next Secretary for Economy and Finance, the official that oversees the city’s gaming industry. Mr Leong replaces Francis Tam Pak Yuen, who has been in the post since Macau’s handover from Portuguese administration in 1999.

Article HERE

Takeaway: Widely expected as we noted in our November 11 Leisure Letter. We look forward to Mr. Leong Vai Tac's policy platform and stance given his prior relationships with the Macau casinos and hotels.


Macau Property Values Forecasted to Drop – Midland Realty (Macau) Ltd forecasts that real estate prices will fall by 5% next year Midland Realty's CEO Ronald Cheung, said the rise in prices is slowing as the gaming business slumps and investors seek property over the border on Hengqin Island. “Visa restrictions have been tightened for mainlanders, gaming revenue is dropping and interest rates have been raised. All these factors have contributed to the instability of the real estate market,” Mr Cheung said.

Article HERE


Hong Kong Protests Escalate – Last night and early this morning in Hong Kong, protesters fought police armed with pepper spray, batons and water hoses on Lung Wo Road in Admiralty. Earlier today, an injunction was granted to clear an area just west of the main Admiralty protest site. That sparked fears of more violence after what was already some of the worst unrest in two months of protests.

Article HERE


Communist Party of China Crackdown – The Chinese Government has commissioned an 'adultery map' of cheating members of the Communist Party, to name and shame officials and civil servants embroiled in scandals. The map was created by the People's Daily, the Communist Party's flagship newspaper, based on information obtained from the Central Commission for Discipline Inspection (CCDI), China's anti-corruption unit. The CCDI has been tasked by Chinese President Xi Jinping to weed out corruption, extravagance and breaches of Communist Party discipline – of which adultery is one.

Article HERE

Takeaway: The crackdown widens beyond corruption and extravagance.


China H7N9 Bird Flu – China confirmed a new human infection of the deadly H7N9 avian influenza virus, state news agency Xinhua said, the first case this winter in the southern province of Guangdong. A 31-year-old woman from the provincial city of Dongguan, was confirmed on Friday to have been infected with the virus, Guangdong's health and family commission said in a statement on its website. The patient, in critical condition, is being treated in the provincial capital of Guangzhou, it added. The H7N9 bird flu first infected three people in China in March 2013. Since then, it has since infected more than 450 people, killing 175 of them.

Article HERE

Takeaway: Bird flu headlines have taken a backseat lately


Cyprus Casino Expansion – Various gaming operators have indicated Interest in building and opening a integrated resort and casino on the Greek-controlled southern half of Cyprus, including Caesars Entertainment, Genting and Las Vegas Sands. The proposed casino legislation and regulations will be submitted to the Cypriot House of Representatives in early 2015 with the aim of selecting a casino operator by August 2015. The bill calls for a casino with at least 100 gaming tables, 1,000 electronic gaming machines and an accompanying 500-room hotel. The casino will pay 15% tax on gross gaming revenue, with annual license fees of €2.5m per year for the first four years, rising to €5m per year in years four to eight. Fees for subsequent years, as well as the initial license fee, have yet to be determined.

Article HERE

Takeaway:  What was once a 5k EGM opportunity has been shrunk to 1k.


Foxwoods Seeks Liquor Exemption – Foxwoods Resort Casino CEO Felix Rappaport says Connecticut’s casinos are at a disadvantage in the region because they have to stop service at 1 a.m. on weekdays and 2 a.m. on weekends even though they offer gambling at all hours. He wants the state to grant an exemption to casinos. Atlantic City casinos serve alcohol 24/7, and liquor is served until 4 a.m. at New York’s gambling facilities. Rappaport says he expects Massachusetts casino developers will lobby for changes to the law cutting off service there at 2 a.m.

Article HERE


Illinois Video Gaming – Since video gambling began in Illinois two years ago, the slot-like terminals have shown up in places lawmakers never imagined - floral shops, laundromats, liquor stores and gas stations. They’re also now the main attraction at dozens of storefront bistros and cafes geared toward women. Video gambling has become big business for the state, but it’s also raised some second thoughts in the process.
Article HERE

Takeaway:  IL VGT market will be peaking soon anyway, probably around 22.5-23k units.



China Official November manufacturing PMI 50.3 vs 50.6 consensus and 50.8 in October


Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015. Following CCL's F3Q 2014 earnings release, we recently turned negative on those stocks based on the negative European thesis. 


Hedgeye Macro Team remains negative on consumer spending and believes in muted inflation, a Quad4 set-up.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.