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Wall Street at Breakfast

 

  • Global stocks slide as yen, euro gains question policy potency
  • EU Cuts Eurozone GDP Growth Forecast
  • Banks drag European stocks to 3-week lows

Eurozone growth will be slower than previously expected with subdued inflation in 2016, the European Commission announced in its spring economic forecast, warning of high risks to the bloc’s economy. The GDP of the 19-nation area is now predicted to expand just 1.6% this year, less than the 1.7% growth of 2015, while consumer prices are seen up 0.2%, significantly below the 0.5% increase projected in February. “The economic recovery in Europe continues but the global context is less conducive than it was,” Commission Vice President Valdis Dombrovskis said in a statement.

The U.S. dollar slid to its lowest against major currencies in well over a year on Tuesday, a move led by the yen’s continued march higher as investors grew doubtful about central banks’ ability to boost growth through aggressive policy easing.

That did not stop Australia’s central bank surprising markets by cutting interest rates to a record low of 1.75 percent, however, hitting the currency but lifting the country’s shares.

Today’s Markets

In Asia, Japan closed. Hong Kong -2% to 20645. China +1.9% to 2993. India-0.8% to 25230.
In Europe, at midday, London -1.2%. Paris -1.7%. Frankfurt -1.9%.
Futures at 6:20, Dow -0.6%. S&P -0.6%. Nasdaq -0.7%. Crude -1.3% to $44.21. Gold +0.2% to $1298.
Ten-year Treasury Yield -6 bps to 1.80%

Monday’s Key Earnings

AIG (NYSE:AIG) -3.2% AH stung by weak investment results.
Anadarko Petroleum (NYSE:APC) -1.3% AH as the rout in the oil sector continues.
SYSCO (NYSE:SYY) +5.5% after beating expectations.

Economy

Tensions between the ECB and Germany are continuing to escalate, after Mario Draghi suggested that Germans are responsible for a “global savings excess” that has led to ultra low interest rates. “There is a temptation to conclude that since very low rates generate these challenges, they are the problem. But they are not the problem. They are the symptom of an underlying problem, which is insufficient investment demand, across the world, to absorb all the savings available in the economy.”

The Reserve Bank of Australia has cut its official cash rate by 25 basis points to a historic low of 1.75%, the first reduction since May 2015, giving the country membership into the club of developed economies with ever-falling interest rates. “Quarterly data…together with ongoing very subdued growth in labor costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast,” RBA Governor Glenn Stevens said in a statement.

Following the record rate cut Down Under, the yen surged against the Australian dollar, pushing the greenback below ¥106 for the first time in about 18 months. The yen’s rise occurred in thin trading conditions with Japanese markets closed from Tuesday to Thursday for public holidays. The U.S. dollar last traded at ¥105.73, down 0.6% on the day.

Activity in China’s manufacturing sector slipped further last month, underscoring pockets of weakness in an economy weighed by overcapacity and weak external demand. The Caixin Manufacturing PMI fell to 49.4 from 49.7 in March, shrinking for the 14th straight month. “All of the index’s categories indicated conditions worsened…the economy lacks a solid foundation for recovery and is still in the process of bottoming out,” said He Fan, chief economist at Caixin Insight Group.

Spain’s King Felipe has called a repeat parliamentary election for June 26 in a bid to break the political stalemate following four months of failed efforts by leading parties to form a government. “Let’s hope we’ve all learned our lesson and that the next parliament reaches an agreement as soon as possible,” parliamentary speaker Patxi Lopez told a news conference.

Puerto Rico’s debt crisis has moved into a more perilous phase after it missed a $422M bond payment deadline for its Government Development Bank. A U.S. “taxpayer-funded bailout may become the only course available” if the proposed restructuring legislation isn’t approved, Treasury Secretary Jack Lew warned in a letter to Congress. The missed payment, the largest so far by the island, is widely viewed on Wall Street as foreshadowing additional defaults this summer, when more than $2B in bills are due.

Brazil’s embattled Dilma Rousseff may back calls for a fresh presidential election, which would allow a vote for a new leader this year, if she sees little chance of surviving a key impeachment vote in the Senate next week. But many say it’s unlikely that supporters of the measure could get the three-fifths majority required in both chambers of Congress to change the constitution, which currently states presidential elections can only be held every four years.

Stocks

While some insist that the correlation between oil prices and stocks are starting to decouple, Tom Pearce and his team at Deutsche Bank say it’s not so: “The historical price pattern suggests that the credit market’s sensitivity to oil only diminishes once the oil price rises above $55/bbl – and that the equity market’s strong positive correlation with the oil price only disappears when oil rises above $70/bbl…We are still concerned about the outlook for oil, given that the rebound in global growth momentum appears to be fading, dollar strength remains a risk and oil net speculative positions are already elevated.”

Germany’s DAX dipped below the 10,000 mark today, weighed down by the Q1 results of big corporate names including Lufthansa (OTCQX:DLAKY), BMW (OTCPK:BAMXY) and Commerzbank (OTCPK:CRZBY) (see below). Pricing pressure took its toll on Lufthansa, driving the airline to scale back its capacity growth plans, as the terror attacks in Paris and Brussels affected bookings. BMW managed to beat expectations on its margin level but missed on earnings before interest and tax, as a record quarter for luxury car sales failed to offset currency headwinds.

European bank earnings roundup: HSBC‘s first-quarter earnings fell 18.2%, but beat forecasts, as the British bank grappled with its Asia strategy. Profits also slumped at UBS, as its wealth-management business suffered and its investment bank failed to pick up the slack. BNP Paribas (OTCQX:BNPQF) reported a jump in net income despite difficult markets, following lower provisions against bad retail loans and a debt valuation adjustment. Market turbulence and low interest rates dragged down the earnings of Commerzbank (OTCPK:CRZBY), which posted a 52% drop in Q1 net profit.

Philips is spinning off its lighting division, the world’s largest maker of lights, selling a stake of at least 25% in the new company during the IPO, which will take place on Euronext Amsterdam. CEO Frans van Houten called the move a “historic” decision for Philips (NYSE:PHG), which began as a lighting company in 1891. Analysts have valued the unit as being worth roughly €5B ($5.8B).

Norway’s $872B sovereign wealth fund, the world’s largest, is backing shareholder proposals aimed at changing corporate governance and climate policies at Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX). “We encourage companies to outline their position on specific climate change regulation relevant to their business profitability and outlook,” Norges Bank Investment Management said in a statement. NBIM, which manages the fund, was the seventh largest shareholder of both firms at the end of 2015.

Energy Transfer Equity is taking steps that may enable it to renegotiate its $20B acquisition deal for Williams Cos. (NYSE:WMB), Reuters reports. The companies are seeking to reduce the number of days specified for completing some of the deal’s administrative requirements, which would give them time to engage in renegotiation of terms ahead of a June 28 closing deadline. Energy Transfer (NYSE:ETE) would also need to take on a heavy debt load to fund the $6B cash portion of the agreement under existing terms.

After fighting for more than two years to avoid paying almost $1B in oil spill damages to Gulf Coast shrimpers, oystermen and seafood processors it claimed didn’t exist, BP has thrown in the towel. The company’s subsea gusher pumped more than 4M barrels of crude into the Gulf of Mexico in 2010, closing fisheries and blackening the shores of five states.

Billionaires Warren Buffett and Bill Ackman couldn’t be further apart on Valeant Pharmaceuticals (NYSE:VRX). In back-to-back television interviews, Buffett lambasted the embattled firm over its price increases and business practices, building on his deputy Charles Munger’s weekend comments, which called the drugmaker “a sewer.” The business “makes a lot of very good products,” Ackman said in response. “It is not fair to indict an entire company based on the actions of a few.”

In the latest turn of the Sumner Redstone competency trial drama, the 92-year-old mogul won’t take the stand but will face a deposition on video, in his home, limited to 15 minutes. The trial is set to begin Friday, and while Redstone’s testimony is key to ex-girlfriend Manuela Herzer’s case over his healthcare wishes, it (and any testimony by Viacom chief Philippe Dauman) may have repercussions for the futures of Viacom (VIA, VIAB) and CBS.

According to a quarterly letter to investors, David Einhorn’s Greenlight Capital has built a stake in Yelp (NYSE:YELP), betting that the mobile app company can double its revenue by 2019. “The stock has suffered due to missed expectations and anxiety about an upcoming negative documentary,” the hedge fund wrote in the letter obtained by Bloomberg. Yelp shares, which have fallen 25% YTD, jumped 5.2% in after-hours trading on the news.

Following a three-week trial in Missouri, Johnson & Johnson (NYSE:JNJ) has been ordered to pay $55M to a woman who said that using the company’s talc-powder products for feminine hygiene caused her to develop ovarian cancer. The verdict, which J&J plans to appeal, was the second straight trial loss for the company, which is facing about 1,200 lawsuits accusing it of not adequately warning consumers about talc-based cancer risks.

Bankruptcy talk… Fairway Group Holdings (NASDAQ:FWM), which has lost money in every quarter since it went public in 2013, has filed for Chapter 11 bankruptcy in a New York court. The grocery chain operator listed assets and liabilities in the range of $100M-$500M, and is seeking approval for $55M of debtor-in-possession financing. Meanwhile, Aeropostale (NYSE:ARO), delisted by the NYSE just over a week ago, is said to be preparing a bankruptcy filing this week in which it would close more than 100 of its 800 stores.

In an interview with CNBC on Monday, BlackBerry (NASDAQ:BBRY) CEO John Chen sounded a bit more positive about the company’s hardware outlook. While repeating an earlier statement about a return to hardware profitability being key, Chen said that he’s “very close” to getting the company there, and “truly believes” that BlackBerry will remain in the business of making smartphones. He also confirmed plans to release two new phones later this year, and stated there’s “absolutely” a hardware plan that looks past that pair of devices.

Apple’s stock is in the midst of its longest losing streak in 18 years, having closed lower for the eighth consecutive session on Monday. The sell-off comes after the company reported its first-ever quarterly decline in iPhone sales last week. “Apple is not dead,” Tim Cook said during an appearance on Jim Cramer’s Mad Money, outlining that he’s still bullish on the iPhone market and expects big things in China, India, and for the Apple Watch. AAPL -0.5%premarket.

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