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Wall Street at Breakfast

 

No Big Leap For Equities As February Winds Down

Shares across the globe are on the retreat after a weekend meeting of G20 finance chiefs ended without a plan to spur global growth, while investors fretted over renewed expectations for another Fed rate hike. U.S. economic data published on Friday showed solid consumer spending and underlying inflation picking up in January, while GDP growth for the fourth quarter was revised higher to a 1% annual rate. As February draws to a close: The S&P is slightly positive, the Dow is up 1%, and the Nasdaq is still negative.

Today’s Markets

In Asia, Japan -1% to 16027. Hong Kong -1.3% to 19112. China -2.9% to 2688. India -0.7% to 23002.
In Europe, at midday, London -0.6%. Paris -0.7%. Frankfurt -1.6%.
Futures at 6:20, Dow -0.5%. S&P -0.4%. Nasdaq -0.7%. Crude -0.2% to $32.72. Gold +1.2% to $1235.30.
Ten-year Treasury Yield -2 bps to 1.74%

Beijing cuts interest rates to support the real economy, but keeps some of its powder dry to avoid further damaging investor confidence

Beijing has taken action. After two days of painful stock market falls, the People’s Bank of China (PBoC) has seen enough. Interest rates have been cut to put a floor under share prices and support the real economy.

The reduction in borrowing costs was modest but significant. The one-year lending rate went down by a quarter point to 4.6%. The reserve requirement ratio (RRR), which determines how much banks can lend to the economy, has been cut by half a percentage point.

There are reasons for this. Capital has been leaving China at a rapid rate in recent weeks, and a big reduction in interest rates would have provided extra encouragement for investors to take their money elsewhere.

Slashing interest rates would have been seen as evidence that the economy was indeed suffering a hard landing and might have further damaged confidence.

Bourses in Europe all bounced despite the overnight drop in shares on the Shanghai stock exchange, and Wall Street is also on course to open higher. Intervention is at its most effective when markets have just turned, because central banks can encourage bargain hunters and hurt investors who have “shorted” the market by selling shares they do not actually hold in the hope of buying them later at a lower cost.

Gold

One asset classes that did not ignore the latest risk disappointment was gold which has again rebounded from recent lows around $1,200 and is headed for the biggest monthly advance in four years as a darkening global outlook spurred demand for haven assets. Bullion for immediate delivery added 0.9 percent to $1,234.09 an ounce. It’s up more than 10 percent in February, set for the biggest gain since January 2012.

MArkets Data:

  • S&P 500 futures down 0.2% to 1939
  • Stoxx 600 down 0.6% to 330
  • MSCI Asia Pacific down 0.4% to 119
  • US 10-yr yield down 2bps to 1.74%
  • Dollar Index up 0.03% to 98.18
  • WTI Crude futures down 0.5% to $32.63
  • Brent Futures up 0.7% to $35.35
  • Gold spot up 0.9% to $1,233
  • Silver spot up 0.7% to $14.80

Views from the US:

Economy

China led today’s equity losses as the PBOC guided the yuan to its weakest level in three weeks, triggering a 2.9% drop in the Shanghai Composite to levels not seen since late 2014. Following the plunge, China’s central bank cut its reserve requirement ratio by 50 bps to 17%, in an attempt to calm investor jitters over the world’s second largest economy. The move marks the fifth time since last February the PBOC has slashed its ratio, the last cut being on October 23.

So what transpired at the G20 summit? World leaders called for more fiscal measures and structural reforms to revive the global economy, citing a number of risks to growth, including a potential Brexit. “Monetary policies will continue to support economic activity and ensure price stability…but monetary policy alone cannot lead to balanced growth,” the world’s top economies declared in a joint communique. Participants also repeated previous pledges not to engage in competitive currency devaluations and promised to “consult closely” on exchange markets.

Billionaire investor Warren Buffett thinks the gloom is overdone, however, saying politicians are “dead wrong” on the U.S. economy. “For 240 years it’s been a terrible mistake to bet against America, and now is no time to start,” the Oracle disclosed in his closely watched annual letter to investors. Buffett also defended his ties to 3G capital and Clayton Homes, and revisited Berkshire’s (BRK.A, BRK.B) biggest takeover ever – Precision Castparts. Missing topics: No mention of a successor, the slump in commodity prices or recent market volatility.

Speaking in parliament today, Japanese Prime Minister Shinzo Abe said there were no plans to freeze or postpone a sales tax hike to 10% next year and he has no intention of calling a snap election. That’s despite one of the leader’s close advisers warning earlier this month that going ahead with the hike would risk failure for ‘Abenomics’ – Abe’s multi-pronged economic revival program.

Indian PM Narendra Modi wants his newly unveiled federal budget to appeal to the rural poor, in a strategy shift that could boost his ruling party in coming state elections but disappoint investors. Modi’s landslide election in 2014 raised hopes he would draw a line under India’s socialist past, cut welfare and reduce the government’s role in business. But rising rural distress after back-to-back droughts and a recent heavy election defeat in a largely agricultural state have upset that calculus.

Gold prices this month were bolstered by volatile moves across global stocks that sent investors flocking to safe haven assets including precious metals. According to Reuters data, gold is on track for its biggest monthly gain in four years since January 2012, and rallied by about 15% since the beginning of 2016. Bullion for immediate delivery +1.2% to $1235.30.

American and European officials are set to release details about the new trans-Atlantic data-sharing deal that would allow companies to move people’s digital information between the two regions. While the agreement was completed in early February, policy makers will now outline how the new structure will operate in practice. Some disagreement remains, however, regarding the level of protection people should be given over their digital privacy.

Brexit worries? British Prime Minister David Cameron on Sunday detailed his arguments about the economic benefits of remaining in the European Union, stating that an exit would mean swapping unfettered access to markets within the bloc for trade deals of lesser value and higher costs. How Britain’s economy would fare outside of the EU is a key battleground ahead of a membership referendum on June 23, with both sides offering sharply contrasting visions of a future in which the U.K. is no longer closely bound to Europe.

The inflation picture in the eurozone further deteriorated in February, giving ECB policymakers more bad news to digest just a week before their next meeting. Consumer prices in the 19-nation bloc declined to -0.2% from a positive reading of 0.3% in January, displaying its worst figure in the last year. Core inflation, which strips out volatile elements such as food and energy, was at 0.7%, down from 1% in the prior month.

Stocks

Yahoo’s board of directors is close to offering at least two seats to Starboard Value, as it looks to avert a looming proxy battle, according to theNY Post. The proposal, if made, could be seen as the board buckling after months of relentless attacks from the activist hedge fund, whose founder Jeff Smith is looking to oust CEO Marissa Mayer as he agitates for a sale of the company’s core Internet business. Insiders, however, are skeptical whether Starboard will accept anything less than majority control of Yahoo’s (NASDAQ:YHOO) board, which recently dwindled to seven seats.

Sharp has not set a specific deadline for finalizing a takeover deal with Foxconn Technology (OTC:FXCOF), but aims to do so “as soon as possible.” The Taiwanese firm put its offer on hold last week to clarify “new material information” – a list of liabilities that could exceed ¥300B ($2.6B). However, it’s too early to tell whether Foxconn will lower the value of its offer for Sharp (OTCPK:SHCAY) or change its bid in some other way.

Taking a cue from Disney’s falling stock price? The on-stage Oscar antics of droids C-3PO, R2-D2 and BB-8 may have charmed the Academy Awards audience, but Star Wars: The Force Awakens did not fare so well, failing to win any of its five nominations. The Disney-produced (NYSE:DIS) film, which was released in December and is the top-grossing film of all time in the U.S. and Canada, lost out in categories across film and sound editing, visual effects, sound mixing and music-original score.

Nissan rose as much as 12% overnight after stating it would buy back up to ¥400B ($3.5B) worth of its own shares by the end of the year. The stock was trailing peer Toyota and benchmark indexes, even as the company boosted earnings on rising sales in the U.S. and China. Separately, Renault (OTCPK:RNLSY) said that it would sell shares as part of the program to maintain its current 43.4% stake in Nissan, which in turn owns 15% of the French automaker.

The EPA is requesting information from Mercedes-Benz (OTCPK:DDAIF) following a lawsuit that claimed the luxury automaker made false representations of its BlueTEC vehicles, which were marketed as “the world’s cleanest and most advanced diesels.” A spokesman for Daimler said they are fully cooperating with the request for information, and that Mercedes-Benz cars conform with all rules and norms.

Looking to bolster its finances as it grapples with the fallout from a damaging accounting scandal, Toshiba (OTCPK:TOSYY) is planning to sell its entire medical equipment unit rather than just a controlling stake, Reuters reports. Aggressive offers from KKR, Canon (NYSE:CAJ), Fujifilm (OTCPK:FUJIY) and Konica Minolta (OTCPK:KNCAY), could value the business at much more than initial estimates of $3.5B. The deadline for the second round of bidding is Friday.

GlaxoSmithKline’s chairman is starting the process of seeking a new chief executive to succeed Andrew Witty, although a handover at the top of Britain’s largest drugmaker is not expected before 2017. According to people familiar with the matter, Glaxo’s (NYSE:GSK) Philip Hampton has held a number of meetings with shareholders during which he has made clear that succession planning will be a priority for the board over the next couple of years.

His tussle with pneumonia behind him, J. Michael Pearson is returning to Valeant Pharmaceuticals (NYSE:VRX) as CEO. Interim chief Howard Schiller will transition out but will continue to serve as a member of the board of directors. As a result of the move, Valeant has postponed this morning’s release of its Q4 results and withdrew its financial guidance for 2016.

Citigroup has received a subpoena in connection with the FIFA bribery scandal, making it the first major U.S. bank to disclose a link to probes involving soccer’s governing body. The summons came from the U.S. Attorney for the Eastern District of New York, asking about the lender’s connection to “certain individuals and entities identified as having had involvement with the alleged corrupt conduct.” Citigroup (NYSE:C) was also sued for fraud over the 2014 collapse of Mexican firm Oceanografia, which caused Dutch lender Rabobank Groep, with investors and creditors, to lose at least $1.1B.

Barclays’ new chief executive Jes Staely will likely announce Tuesday that the British bank has decided to exit its African operations to refocus on its core U.K. and U.S. markets, FT reports. The board has delegated authority to a subcommittee to examine the practicalities of how and when to sell Barclays Africa, one of its four main lines of business. Through the move, Barclays (NYSE:BCS) avoided having to disclose the decision immediately. Barclays Africa Group -5% in Johannesburg.

Amazon is stepping into the British fresh food market after striking a supply deal with grocer Morrisons, ramping up competition in the already cut-throat sector. Britain’s fourth largest supermarket said the deal would allow Amazon Prime Now and Amazon Pantry customers access to Morrisons’ ambient, fresh and frozen products in the coming months. Amazon (NASDAQ:AMZN) previously launched a U.K. packaged groceries service in November, but it stopped short of replicating its broader U.S. Amazon Fresh service, which offers about 20K items from local shops.

Starbucks is finally ready to take its Americanized version of Italian coffees back to Italy, with its first outlet set to open in early 2017. It’s a symbolic move for CEO Howard Schultz. On a business trip in the 1980s, he visited Milan and Verona and decided to bring espresso drinks to the U.S., eventually forming the world’s biggest coffee chain. “We’re going to try, with great humility and respect, to share what we’ve been doing and what we’ve learned,” the Starbucks (NASDAQ:SBUX) chief said in a statement.

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