Thursday April 28 DailyMarket Primer

US stocks were mostly flat yesterday, as the market waited for the Fed.  As expected, the Fed held interest rates steady at the April meeting, and left the door open for a June increase, noting a somewhat stronger domestic economy and improved conditions overseas.  The Bank of Japan also met Thursday, and like the Fed they decided not make a change.  Unlike the Fed however, investors had expected the BOJ to announce even more quantitative  easing.  I guess negative interest rates and the current 80 trillion yen bond buying program are not enough for investors, as Japanese equities got hit, down 3.6%.  Chinese stocks were unaffected by the BOJ stance and were flat.  Markets in Europe followed through with drops from .5 10 1%,  and now the US market is opening down by about .75%, 0r 111 Dow points.

Wednesday

Thursday

US

Asia

Japan

Europe

Oil

China

Australia

Eurozone

UK

Germany

France

WTI

Brent

S&P

Dow

Nasdaq

Shanghai

HK

ASX200

Stoxx 600

FTSE

DAX

CAC

$     45.31

$       46.93

0.16%

0.28%

-0.51%

-0.27%

0.12%

0.73%

-3.61%

0.38%

-0.93%

-1.01%

-1.28%

-0.2%

0.4%

VIX:

0.77%

US 10 Yr:

1.863%

I think we found Apple’s missing market cap – at Facebook, which surged 11% after earning .77 per share vs the expectation of .62, as they continue to scoop online advertising dollars across multiple social platforms.   Facebook is becoming the Amazon of social media, except that Facebook actually makes money.  Facebook also announced it is creating a special class of non voting stock, which they can use for acquisitions and employee awards, and which will allow Mark Zuckerberg to  maintain control over the company as it continues to grow.  This is not a popular corporate governance move, but fast growing successful tech companies, including Alphabet (aka Google) and Facebook can get away with it. 

And speaking of tech titans using financial engineering, my favorite story yesterday was this one, on how Elon Musk has moved money between his three companies to provide unconventional and risky financing http://bit.ly/MuskFinance.

There is a big merger announcement this morning, as Abbott is buying St. Jude for $25 billion.   Big mergers are generally good for market sentiment. 

Here’s the news:

The BoJ does nothing

The Japanese central bank surprised the market overnight by doing nothing. Most economists surveyed by Bloomberg had expected more easing from the Bank of Japan in response to the strengthening yen, but Governor Haruhiko Kuroda has decided to wait to gauge the effect of negative interest rates before further action. The yen, which had been weakening as easing expectations rose, surged higher following the bank's announcement and was trading at 108.20 to the dollar at 5:28 a.m. ET, having traded at 111.68 ahead of the announcement. Stocks were also hit, with the Topix index dropping 3.2 percent. Yesterday the Federal Reserve kept policy unchanged, while the Bank of New Zealand also did nothing new.

Deutsche Bank earnings beat

Shares in Deutsche Bank were trading 4.25 percent higher at 5:29 a.m. ET after the bank announced a surprise profit for the first quarter of 2016. The bottom line was driven by falling legal expenses and a better than expected performance from the bank's trading business. Deutsche Bank Co-Chief Executive Officer John Cryan warned that the bank still has an awful lot to do this year to finish the restructuring of its operations, implying the lender is not out of the woods yet. Elsewhere in Germany, Volkswagen AG’s namesake car brand slumped to a fourth-quarter loss of €127 million ($144 million) as the emissions-cheating scandal tarnished its reputation and added to costs.

Facebook beats, slew of earnings due

Facebook Inc. escaped the tech rout this earnings season as its first-quarter results blew past analyst expectations. Shares in the social-media company, which seemingly can do no wrong at the moment, are 8.6 percent higher in premarket trading. Among companies on the slate for earnings today are LinkedIn Corp., Time Warner Cable Inc., Amazon.com Inc., Dow Chemical Company, and Ford Motor Company.

Stocks are lower

Overnight in Asia the MSCI Asia Pacific Index declined 0.2 percent with losses led by Japanese markets. Asia's two biggest markets, Japan's Topix index and China's Shanghai Composite Index (which have a combined value of almost $11 trillion) are vying for the ignominious prize of being the world's worst performing of 2016. In Europe, the Stoxx 600 Index was 1.7 percent lower at 5:55 a.m. ET as banks - with the clear exception of Deutsche Bank - tumbled following disappointing earnings. S&P 500 futures were 0.8 percent lower.

U.S. GDP

The Commerce Department is due to release its first estimate of U.S. first-quarter growth at 8:30 a.m. in Washington this morning. Expectations are for annualized 0.6 percent growth in the January-March period, which would be the economy's third successive awful start to the year. Initial jobless claims data, also due at 8:30 a.m., will be worth watching as the recent numbers there have been setting lows not seen since the early 1970s. The Reserve Bank of New Zealand says further rate cuts might be necessary. New Zealand's central bank held its benchmark interest rate at 2.25%, as expected. The key part of the RBNZ's statement was when it discussed a "material decline in shorter-term [inflation] expectations" and suggested further policy easing might be required. The New Zealand dollar is stronger by 1.6% at 0.6961. Abbott is buying St. Jude for $25 billion. The deal is worth about $85 a share, a 37% premium to Wednesday's closing price. St. Jude shareholders will receive $46.75 in cash and 0.8708 Abbott shares per St. Jude share. "Together, the company will compete in nearly every area of the cardiovascular market and hold the No. 1 or 2 positions across large and high-growth cardiovascular device markets," the statement said. Facebook crushed estimates. The social-media giant announced earnings of $0.77 a share, well ahead of the $0.62 that was expected. Revenue surged 52% year-over-year to $5.38 billion, beating out the $5.25 billion that Wall Street was looking for. Monthly active users came in at 1.65 billion, while monthly mobile active users totaled 1.51 billion. Facebook announced it would be offering a new C class of shares that wouldn't have voting rights. Bill Ackman and Valeant execs were grilled by a Senate committee. Outgoing Valeant CEO Michael Pearson, former interim Valeant CEO Howard Schiller, and hedge fund titan Bill Ackman appeared before a Senate committee to answer questions about the company's practice of buying drugs and then raising their prices. One of the highlights of the testimony was when ranking committee member Claire McCaskill, the Missouri Democrat, asked, "Can you find me one drug that Valeant didn't raise the price on?" Neither Pearson nor Ackman could answer the question. Deutsche Bank had a "challenging" quarter. The German investment bank saw first-quarter profit plunge 58% to €236 million ($268 million), beating the €249 million loss that was expected by a Reuters poll. "Financial markets were challenging during the first quarter, largely reflecting concerns about the outlook for the global economy," co-CEO John Cryan said. That was reflected in the numbers as debt sales and trading revenues tumbled 29% versus a year ago to €2 billion, and equity sales and trading revenues saw an identical 29% drop to €728 million. Anglo American is selling assets. The mining giant has agreed to sell its Niobium and Phosphates businesses to the state-owned China Molybdenum for $1.5 billion. The sale helps Anglo pay down some of its $12.9 billion debt pile. Back in February, the company said it would sell $5 billion to $6 billion worth of assets and reduce its staff by more than 50% in an effort to shrink its debt load below $10 billion. "This transaction confirms our commitment to creating the new Anglo American, positioned to deliver robust profitability and cash flows through the price cycle," CEO Mark Cutifani said in a statement. Earnings reporting remains heavy. Aetna, Altria, Bristol-Myers, CME Group, ConocoPhillips, Dunkin' Brands, Ford Motor, MasterCard, Sony, Time Warner, and UPS are among the names releasing their quarterly results ahead of the opening bell. Amazon, Banco Santander, Groupon, and LinkedIn highlight the companies reporting after markets close. Stock markets around the globe are mostly lower. Japan's Nikkei (-3.6%) led the losses overnight, while Australia's ASX (+0.7%) outperformed. In Europe, Spain's IBEX (-2.1%) paces the decline. S&P 500 futures are -16.50 at 2,074.25. US economic data flows. GDP and initial and continuing claims will cross the wires at 8:30 a.m. ET. US natural-gas inventories will be released at 10:30 a.m. ET. The US Treasury will hold a $28 billion seven-year-note auction at 1 p.m. ET.

The S&P 500 bull market is 2,607 days old, the second longest in history.

Oil is rallying, but Venezuela needs it to reach $121 to balance budget.

Even the world's largest steelmaker has no idea what's coming next.

China is considering starting trading of credit-default swaps.

Unemployment in Germany continues to fall.

As currency trading volume drops, a flash-crash becomes more likely.

Be afraid, be very afraid if you're investing for the long run.

Here's a slightly ominous sentence: "New York City just turned very quickly and more deeply than we expected.” That's from the chief operating officer of Equity Residential, a big landlord in New York City, who spoke on his company's conference call yesterday. Manhattan landlords are being forced to offer more and more inducements, such as a free month's rent, to get tenants to sign leases. Vacancy rates, meanwhile, are on the rise. The obvious culprit is a major supply glut. As anyone in NYC knows, there's been a ton of fresh development, particularly at the high-end of the market. At the same time, the huge banks aren't having the best run, which inevitably has an effect on the demand side for luxury dwelling in Manhattan. But it's not just this latest earnings report from Equity Residential that indicates a slowdown is here. The most recent S&P Case-Shiller home price report showed home prices in the New York Metropolitan Area rising by just 2.1 percent year-over-year vs. the national average of 5.3 percent. The Washington DC area, which had been one of the hottest markets in the country, only saw price appreciation of 1.4 percent. Whether the slowdown is just confined to a couple cities or proves to be something more widespread is unclear, but this does represent a shift from the post-crisis period, so it's definitely something to keep an eye on.

Source: Bloomberg, BI, WSJ

Monday April 25 Daily Market Primer

Stocks were flat in the US on Friday, but up for the week, with the S&P rising about .5% and the Dow .6% as earnings season got under way.  We’ve seen improvement in Chinese growth prospects over the last few weeks, which is helped rally commodities prices.   The big things to watch for the week include the Fed meeting on Tuesday and Wednesday and Bank of Japan meeting on Thursday, and continued earnings reports, including Apple, out tomorrow.  The market does not expect the Fed to raise rates, and we agree.  If you ever want to check the Fed’s meeting schedule for yourself, bookmark this link: http://bit.ly/FedMeetings.   In a measure of how much the market has stabilized since the rocky start to the year, the CBOE Volatility Index (aka the VIX) , which everyone including me likes to keep an eye on,  is down 21% year to date.  Stock futures are pointing to a slightly down open.

Friday
US
S&P	Dow	Nasdaq
0.01%	0.12%	-0.80%
VIX:	Futures:	0.18%
0.95%	US 10 Yr:	1.890%

Monday
Asia			Japan	Europe				Oil
China		Australia		Eurozone	UK	Germany	France	WTI	Brent
Shanghai	HK	ASX200		Stoxx 600	FTSE	DAX	CAC	$    43.56	$       44.83
-0.42%	-0.0076	-0.69%	-0.76%	-0.33%	-0.41%	-0.73%	-0.61%	0.9%	1.0%

Barron's’ ran an article highlighting a big rebound in MLPs, but also pointing out that substantial risks remain as they have turned out to be much more  correlated to crude prices than anyone expected http://bit.ly/MLPsStillRisky

Here’s the news:

Saudi Arabia prepares for post-oil world

Later today Saudi officials will reveal Deputy Crown Prince Mohammed bin Salman’s "Vision for the Kingdom of Saudi Arabia," a plan for reducing the country's reliance on crude oil revenues. It is already known the plan will include the creation of a $2 trillion sovereign wealth fund, by far the world's largest, which is intended to diversify into non-petroleum assets. In the shorter term, the problems faced by the Saudi administration were highlighted over the weekend as the key three-month Saudi Interbank Offered Rate rose to its highest level since January 2009 as low oil prices and increased government borrowing puts a strain on bank funding. 

Tokyo whale

The Bank of Japan has been buying Japanese equities via exchange-traded funds, and the scope of its purchase plan means the central bank is now a top 10 shareholder in 90 percent of the Nikkei 225, according to estimates compiled by Bloomberg. When it comes to ETFs the picture is even more stark, with the bank owning more than half of those instruments issued in Japan. Equities in Japan retreated from an 11-week high overnight.

Big week for central banks

Central banks are set to dominate markets this week, with the Federal Reserve announcing its latest monetary policy decision on Wednesday, the Bank of Japan meeting on Thursday, and a suite of euro-area data, including first-quarter GDP, possibly putting pressure on Draghi's easing policies at the European Central Bank. While the chances of a rate hike by the Fed this week are seen as zero by investors, the statement will be watched for signals of a hike in July. In Japan, further easing is expected by a slim majority of economists surveyed by Bloomberg in the wake of the recent earthquake and expectations of another year of sluggish growth.

Cruz and Kasich cut a deal

Overnight, the MSCI Asia Pacific Index dropped 0.3 percent while in Europe the Stoxx 600 Index was 0.7 percent lower at 5:00 a.m. ET following the release of disappointing German business confidence data. S&P 500 futures were unchanged. The bond market is quiet ahead of the central bank meetings this week, but the U.S. five-year breakeven rate climbing to a nine-month high is noteworthy as it points to increasing inflation expectations.

China's debt load is at a record high. The Financial Times reports China's debt total climbed to 237% of GDP in the first quarter, an all-time high. Data from the Bank of International Settlements shows China's debt load is far greater than emerging markets as a whole, which carry debt at an average of 175% of GDP. According to the FT, China's debt has exploded since 2007, when it was 148% of GDP.

German business climate slowed. Germany's Ifo Business Climate survey unexpectedly fell in April. The reading slipped to 106.6 from March's 106.7, and missed the 107.1 that economists had forecast. In the report, Dr. Clemens Fuest from Ifo said, "Firms at both levels of trade were less satisfied with both their current situation and their business outlook." The euro is up 0.2% at 1.1248.
Japan has announced an extra budget to repair earthquake damage. Japanese prime minister Shinzo Abe said he will create an additional budget to provide aid to Kumamoto, which was damaged earthquakes earlier this month. According to Bloomberg, Abe says the funds will go towards rebuilding homes, businesses, and infrastructure. "We will gather all strength of the government and work on the relief and reconstruction," Abe said. The Japanese yen is stronger by 0.6% at 111.17 per dollar.
Halliburton is delaying earnings. The oil services provider announced it's taking a $2.1 billion charge for the first quarter after cutting more than 600,000 jobs and taking a write off. Additionally, Bloomberg reports, Halliburton's earnings will be delayed from April 25 to May 3 in order to account for the Baker Hughes deal which is expected to close before the end of the month.
Goldman Sachs has entered online banking. The investment bank is now allowing ordinary citizens, not just the super-rich, to open a bank account. Goldman's digital savings account offers a rate of 1.05%, and can be opened for as little as $1. The bank accounts are available after Goldman acquired about 150,000 retail customers through its GE Capital deal that closed last week, according to the Financial Times.
Boots on the Ground
President Barack Obama is expected to announce today that he is sending up to 250 additional military personnel to Syria to help local forces fighting Islamic State. The new deployment will increase the total number of American military personnel operating on the ground inside Syria from 50 to about 300 and runs counter to Mr. Obama’s strong aversion to deepening U.S. involvement in global hot spots. Meanwhile, we chronicle the rise and deadly fall of Islamic State’s No. 2 oil executive, who was killed last May in a raid by U.S. Special Forces. The raid also captured a trove of proprietary data that explains how Islamic State became the world’s wealthiest terror group. We report on the recovered files and how international coalition strikes have dented but not destroyed the group’s multinational oil operation.
The Bond Market’s Groundhog Day
As the Federal Reserve’s policy-setting committee prepares to meet tomorrow, one signal suggests that investors believe the economy, and financial markets, may be finding a footing after a tumultuous start to the year. Government-bond yields are heading higher around the world, a move typically linked to rising expectations of economic growth and inflation. As investors drive down bond prices, yields rise. But many worry the recent bond selloff is just the latest in a series of false starts. In three of the last four years, bond prices have fallen sharply at the start of the year, only to surge later as economic and geopolitical concerns took over investors’ minds. And in other market news, the European Central Bank’s plan to buy corporate bonds has raised the question of whether easy access to money will let companies put off making hard choices.
Fear and Loathing in the Boardroom
Chief executives at big American companies are increasingly frustrated by the populist tone of the presidential campaign, and concerns are mounting in boardrooms and corner offices that anti-business rhetoric may solidify even after the November election. Executives worry the political climate could weigh on consumer confidence, thwart any immigration overhaul and derail the Trans-Pacific Partnership. Meanwhile, both Donald Trump and Hillary Clinton hold double-digit leads in Pennsylvania ahead of tomorrow’s primaries. But Mr. Trump’s two rivals, Sen. Ted Cruz and Ohio Gov. John Kasich, announced an alliance last night to divvy up the remaining primary states in an unprecedented last-ditch effort to stop the GOP front-runner. Mr. Cruz outflanked Mr. Trump in the delegate fight at state party conventions over the weekend, while in the Democratic race, Sen. Bernie Sanders adopted a more conciliatory tone toward Mrs. Clinton.

ECB, banks rethink CoCo bonds

Bank executives indicated to the Single Supervisory Mechanism that the complexity of contingent convertible bonds, meant to bolster capital in times of crisis, could in fact undermine stability.  Financial Times (tiered subscription model)

Earnings reports flow. Philips and Xerox are among the companies releasing their quarterly results ahead of the opening bell. Container Store and Express Scripts highlight the names reporting after markets close.
Stock markets around the world are in the red. Japan's Nikkei (-0.8%) lagged in Asia and Germany's DAX (-0.7%) leads the losses in Europe. S&P 500 futures are lower by 1.50 points at 2085.50.

US economic data is light. New home sales will be released at 10 a.m. ET and the Dallas Fed will cross the wires at 10:30 a.m. ET. The US 10-year yield is down 1 basis point at 1.88%.

It's dangerous out there in the bond market.

Mohammed El-Erian: Argentina's triumphant return to capital markets.

RBS sees China 'black swan' risk from loans for non-bank finance.

Inside on the world's most secretive iPhone factories.

U.K.'s BHS expects to enter administration, risking 11,000 jobs. 

Austria rocked by anti-EU party surge in presidency first round.

Billionaire farmers reap fortunes from Russia food sanctions.

Long-Term Costs of Cutting Emissions Grow Hazy

Obama, Merkel Urge Action on Trade Agreement

Department Stores Need to Cull Hundreds of Sites, Study Says

Oil Producers Lock In Once-Snubbed Prices

Warren Buffett’s Former Heir-Apparent Resurfaces as Activist Investor

The main events this week will take place on Wednesday and Thursday when we get back -to-back decisions from the Federal Reserve and the Bank of Japan. It's possible that of the two central banks, the BoJ will be the one that gets more attention. There's total agreement that the Fed is going to hold, and the only question really is whether the market comeback and the quietness out of China will affect the outlook at all. Meanwhile the BoJ is considering fresh measures to encourage bank lending, and with the yen having strengthened significantly this year, there may be some urgency to act further. Earlier this year, when the BoJ first dipped its toe into the negative rates waters, it was followed by a swift market selloff, with particular pain felt by the banks. Avoiding a repeat of that scenario is likely to be a major policy goal.

Source: Bloomberg,  BI, WSJ, Barron’s, Politico