Friday April 22 Daily Market Primer

 Happy Friday.  Stocks fell in the US yesterday, primarily on a Mario Draghi press conference that surprised the market with a dovish tone.   While the ECB held interest range unchanged as expected, he left interest rate cuts in play, and

relaxed the restrictions on the corporate bond buying program, adding Euro denominated bond of US subsidiaries, which allows the EC B to further expand quantitative easing.  Draghi also strongly defended ECB policies and answered critics.  Draghi said  “all policy tools” are on the table”, but European government bonds and stocks slid anyway, and the Euro appreciated against the dollar.  http://bit.ly/ECBDay2  Stocks are mixed in Asia and Europe, oil rose by 1%, and it looks like a flat opening here in the US.

Thursday

Friday

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

$    43.56

$       44.83

-0.52%

-0.63%

-0.05%

0.22%

-0.72%

-0.69%

1.20%

-0.33%

-1.14%

-0.43%

-0.35%

0.9%

1.0%

VIX:

Futures:

0.18%

0.4%

US 10 Yr:

1.880%

There to many earnings announcements to write about them all, but Alphabet (aka Google), Microsoft,  Starbucks, and Schlumberger all disappointed in one way or another (see stories).

I don’t know about you but I was listening to Prince music all last night, even though I can’t say I was a huge fan.  Since I didn’t hear any songs about capital markets or the economy, here’s the news:

Bank of Japan eyes negative rate loans

The Bank of Japan cut deposit rates for banks in January into negative territory in an effort to spur lending. Now, according to people familiar with the discussions, the BoJ is considering offering banks loans with a negative rate in a fresh attempt to spur lending. The policy under discussion is not dissimilar to the European Central Bank's latest Targeted Longer Term Refinancing Operation (TLTRO-II) which will charge negative interest on loans to banks once they achieve a required level of lending growth. Stocks in Tokyo rallied and the yen dropped the most in seven weeks to trade at 110.43 to the dollar at 5:27 a.m. ET 

Wall Street bonus pay restriction

New rules proposed as part of the Dodd-Frank Act would mean that Wall Street executives would have to wait at least four years to collect their bonus pay, and could force those executives to return that money if their companies lose big. Bloomberg's guide to the new rules breaks down the type of firms that would be covered by the proposed restrictions, and when they are likely to come into force.

The great ball of China money rolls on

The rally in global equities has had one notable absentee - Chinese stock markets. The Shanghai Composite Index has fallen 3.9 percent this week, making it the worst performing of the 93 global benchmark gauges tracked by Bloomberg. There are many theories behind the drop, but the move does come at the same time as Chinese speculators have moved into a new market - commodity futures. The volume of business in previously unglamorous products such as rebar futures is astonishing, with contracts on 223 million tons of the steel product - equal to half of China's yearly production - changing hands yesterday alone. The move has caused prices to surge, and overnight, regulators to step in to try to cool the market.

Stocks drop, bonds mixed

Japanese markets aside, global equities are ending the week on a low note so far. The MSCI Asia Pacific Index fell 0.4 percent overnight, while in Europe the Stoxx 600 Index was 0.6 percent lower at 5:50 a.m. ET. S&P 500 futures were 0.1 percent lower after the index fell yesterday following disappointing earnings data. European sovereign bonds recovered some of their losses from yesterday, as Markit's composite Purchasing Managers Index showed confidence is still slow in returning to the euro area. U.S. Treasuries are headed for a second weekly drop as odds of further rate hikes by the Federal Reserve this year increase. 

Obama's Brexit intervention

Much to the dislike of the campaign for the U.K. to leave the European Union, U.S. President Barack Obama has intervened in Britain's Brexit debate, praising the EU and Britain's place within that institution. The increasingly bitter campaign seems to be swinging firmly in favor of the 'remain' camp, with the probability of a 'leave' victory dropping to as low as 20 percent. The pound has risen for a sixth day against the euro as concerns ease.

Europe is stuck in a "slow growth rut." Markit's composite PMI reading slipped to 53.0 in April from 53.1 in March. The number missed the 53.2 print that economists were forecasting. Chris Williamson, Markit's chief economist said, "The eurozone economy remains stuck in a slow growth rut in April, with the PMI once again signaling GDP growth of just 0.3% at the start of the second quarter, broadly in line with the meagre pace of expansion seen now for a full year." Notable was the sharp contraction in French manufacturing, which fell to 48.3, its weakest since March 2015. On the other side of the spectrum, Germany's manufacturing number climbed to 51.9, its highest since December. The euro is little changed at 1.1275.

Talks between Greece and its creditors continue. Talks between Greece and its international creditors continue in Amsterdam, Netherlands on Friday. While there are reports that progress has been made, no deal is expected. "If we make progress on the content of the program and the next steps then we need to start the discussion on debt. We're only at the beginning of that discussion, so don't expect any deals today," Jeroen Dijsselbloem, the chairman of euro zone finance ministers, told reporters. Greece's 10-year yield is down 19 basis points at 8.27%.
The first tech IPO of 2016 is already a disappointment. Dell's spinoff SecureWorks priced its initial public offering at $14 per share. This was below the $15.50 to $17.50 range that the company was hoping for. The pricing gives the cybersecurity firm a market cap of about $1.13 billion. SecureWorks will trade on the Nasdaq under the ticker 'SCWX.'
Alphabet's earnings missed. Google's parent company earned an adjusted $7.50 per share, missing the $7.96 that was expected by a wide margin. Revenue grew 17.4% year-over-year to $20.35 billion, but that below the $20.38 billion Wall Street was looking for. The closely followed cost per click metric fell 9%, besting the 11% drop that analysts were expecting. Paid clicks jumped 29% year-over-year, but that missed the 32% gain that was anticipated. "We've long invested in building the best machine-learning team and tools, and we're seeing these efforts bear fruit in many ways," CEO Sundar Pichai said on the earnings call.

Microsoft guidance falls short. The company announced third quarter adjusted earnings of $0.62 per share, missing the $0.64 that Wall Street was anticipating. Non-GAAP revenue edged up 1.6% to $22.1 billion, which was just ahead of the $22.09 billion estimate. Revenue guidance for the fourth quarter was light, coming in at $21.7 billion to $22.4 billion versus analyst expectations of $23.1 billion. All three of the company's product lines (Intelligent Cloud, More Personal Computing, and Productivity & Business Services) showed subpar growth of between 1% and 3%.

Starbucks sales disappoint. The coffee giant earned $0.39 per share on revenue of $5.00 billion, pretty much dead on with analyst expectations. Global comparable sales were a bit light, coming in at up 6% versus a year ago when analysts were calling for 6.7% growth. Sales in all three regions (US; China and Asia-Pacific; and Europe, middle East, and Africa) disappointed. "Starbucks Q2 represented another quarter of solid growth, with the highest revenues of any non-holiday quarter in our history and excellent financial, operating and profit performance," said CFO Scott Mew in the earnings release.

Schlumberger has a bearish outlook for the oil industry. The world's largest oilfield services company announced earnings of $0.40 per share on revenue of $6.52 billion. While the numbers edged out Wall Street estimates, net income tumbled 63% compared to a year ago to $501 million, excluding charges and credits, as the oil crash took its toll. "This environment is expected to continue deteriorating over the coming quarter given the magnitude and erratic nature of the disruptions in activity," CEO Paal Kibsgaard said in the earnings release.

The Rules of the Game
The Republican Party is under pressure to change even the most basic rules for its July convention. Yesterday, the spring meeting of the Republican National Committee wrangled over a proposal to make it harder for party elders at the July convention to anoint a “white knight” candidate should delegates reach a deadlock over Donald Trump and Sen. Ted Cruz. The proposal was easily defeated after less than an hour’s debate, but could be just the first in a string of disputes as the divided party heads into the final months of battle over choosing the GOP nominee. While Mr. Cruz and Ohio Gov. John Kasich personally made the trip to Florida to woo party leaders, Mr. Trump sent top aides as emissaries. Meanwhile, the GOP front-runner has significantly increased his campaign spending, yet his efforts to build out his political operation continue to fall far short of those of his likely general-election opponent, Hillary Clinton.

Uber Victory
Uber has warded off a serious legal threat to its business model with a settlement that may end the debate over whether its drivers should be counted as independent contractors or employees. The ride-hailing company said it has settled two class-action labor disputes covering 385,000 drivers in California and Massachusetts, allowing it to continue classifying drivers as contractors. Uber agreed to pay up to $100 million to these drivers in two states and revise its practice of deactivating drivers from the popular app without much warning or recourse. The agreement spares the company from a jury trial in San Francisco that had been set for June. For a company that has raised more than $10 billion in debt and equity, the payment is a small concession. The settlement, if approved, however, doesn’t set a legal precedent.

Purple Reign
Prince, the singer, songwriter and master performer who blazed an innovative and fiercely independent path through the music world, establishing himself as both a global star and a defiant outsider in his own industry, died yesterday. The artist behind indelible hits such as “1999,” “Let’s Go Crazy,” and “Kiss” was 57 years old. The news comes less than a week after his private plane was forced to make an emergency landing so that he could receive medical treatment. Born Prince Rogers Nelson, he was a virtuoso of R&B, funk, rock and pop, whose omnivorous approach to music was epitomized by his 1984 masterwork “Purple Rain.” We take a look at Prince’s four-decade career, including his time as a movie star, and one editor fondly recalls attending school with the musical icon.

China's banks ordered to cut off loans to "zombie" firms

China's financial regulators jointly issued instructions to the country's banks warning them against making new loans to "zombie" coal and steel companies. Credit should only be given to companies that are competitive or are likely to achieve a successful turnaround, the regulators said. South China Morning Post (Hong Kong)

Stock markets around the world trade mixed. Japan's Nikkei (+1.2%) led in Asia and the UK's FTSE (-0.8%) lags in Europe. S&P 500 futures are up 3.00 points at 2086.00. 

Earnings reports continue to flow. American Airlines, AutoNation, Caterpillar, General Electric, Honeywell, Kimberly-Clark, and McDonald's are among the names releasing their quarterly reports ahead of the opening bell.

Clean power firm SunEdison seeks bankruptcy protection

SunEdison, a clean energy producer that took on huge debt to finance $3.1 billion in acquisitions, has filed for Chapter 11 bankruptcy protection. The company says it has $16.1 billion in debt. SunEdison says it faces more than $750 million in unsecured claims, which it plans to dispute.

Bloomberg (21 Apr.),  The San Diego Union-Tribune (21 Apr.) 

Banks won't have to hold more capital against rate risks

The Basel Committee on Banking Supervision has abandoned a rule requiring banks to hold additional capital as a cushion against a rapid increase in interest rates. Instead, the global regulatory panel will encourage national supervisors to monitor lenders' resilience to interest-rate risks. The change to the proposed Basel III rules is in response to industry opposition.

Reuters (21 Apr.), 

Reader Survey

Which of the following behavioral biases is the most useful for successful investment decision-making? Skepticism  72% Optimism  16% Status Quo  7% Pessimism  5% Visit the Enterprising Investor to learn about the behavioral bias that is most useful. Poll results are as of 8 a.m. EDT on Wednesday, with 792 respondents.

Shift in Rate View Upends Markets

The automaker testing scandal just keeps getting wider.

Gold miner ETFs are having the rally of a lifetime.

The $38 million CEO who out-earned his company last year.

The race to produce China's Tesla.

The Fed faces a skeptical market view of gradual rate hike pace.

Credit Suisse said to study novel bond sale to offload bank risk.

There have arguably been two main macro drivers that have pushed markets around the world higher since their February depths. One of them is the seeming rebound (or stability) of China, where the credit spigots have been opened once again in an effort to boost the wider economy. And in the U.S., the Federal Reserve has taken a more dovish turn from when it foresaw four hikes in 2016. In fact, the market is now pricing in only a 62.6 percent chance of another hike by the end of the year. We get another Fed meeting next week, and the market sees zero chance of any move at that meeting. And since it's not a press conference meeting, there won't be that much fresh material for investors to work with. But with China acting more stable, and the markets back near their all-time highs, some of the Fed's reasons for dovishness may be fading. So it will be interesting to see if there's any fresh, hawkish tilt, or if Yellen & Co. prefer to just wait and see.

Source: Bloomberg, BI, WSJ, CFAI Fin Newsbrief, Reuters, SCMP, FT