Tuesday May 31 Daily Market Primer

I hope  you had a nice Memorial Day weekend.  Stocks rose modestly on Friday,  bringing the US market to the biggest weekly gains in months, and approaching its all time high (last story).   It’s a good thing we didn’t “sell in May and go away”.  as the old Wall Street adage goes.  Trading was slow ahead of the long weekend, but the reaction to a slight upward revision of Q1 GDP to .8% from .5% was positive.  Janet Yellen did mention that a rate increase in the coming months is “appropriate” in her Harvard talk on Friday, reinforcing the Fed’s recent conditioning of the market.   Stocks in Asia were up Tuesday on better than expected Japanese industrial production and speculation that the government will delay a planned tax hike.  Chinese stocks jumped 3.3% on speculation that that A shares will be included in the MSCI global EM indexes starting June 14 (3^rd story).  S&P futures are pointing slightly up this morning.

	LAST	CHANGE	% CHG
DJIA	17873.22	44.93	0.25%
Nasdaq	4933.5	31.74	0.65%
S&P 500	2099.06	8.96	0.43%
Russell 2000	1150.45	10.7	0.94%
Global Dow	2349.02	3.62	0.15%
CBOE Volatility	13.8	0.68	5.18%
Japan: Nikkei 225	17234.98	166.96	0.98%
Stoxx Europe 600	349.5	-0.64	-0.18%
UK: FTSE 100	6271.71	0.92	0.01%
Australia: S&P/ASX 200	5378.6	-29.4	-0.54%
China: Shanghai Composite	2916.62	94.17	3.34%
Hong Kong: Hang Seng	20815.09	185.7	0.90%
India: S&P BSE Sensex	26667.96	-57.64	-0.22%
India: S&P BSE Sensex	26725.6	72	0.27%
Japan: Nikkei 225	17068.02	233.18	1.39%
Singapore: Straits Times	2796.75	-5.76	-0.21%
France: CAC 40	4520.78	-8.62	-0.19%
Germany: DAX	10315.02	-18.21	-0.18%
Italy: FTSE MIB	18198.17	-93.21	-0.51%
Spain: IBEX 35	9089.2
U.S. 2 Year	0.926	-1/32
U.S. 5 Year	1.406	-3/32
U.S. 10 Year	1.872	-8/32
U.S. 30 Year	2.662	-10.32
Crude Oil	49.61	0.28	0.57%
Brent Crude	50.23	-0.13	-0.26%
Natural Gas	2.189	0.02	0.92%

It was a quiet weekend for financial news, though I did see this article in the Financial Times which discusses the continuing shift toward low cost passive strategies in the money management industry http://bit.ly/PassiveMassive.  The article points out that over the last decade, passive strategies have grown 230% to $6 trillion vs active up 54%, to $24 trillion.

I forgot to mention Friday that Google won its epic $9 billion API battle with Oracle, based on the “fair use” doctrine, and software developers and companies were relieved at the lower threat of future lawsuits.  Oracle will appeal the judgement, which according to legal experts will be a steep uphill battle.

It’s a big week for economic data (first story), with May jobs due out on Friday and the ECB and OPEC meetings.

Here’s the news:

Huge week for economic data

This may be a shortened week for some, but what it lacks in working days, it makes up for in economic data. In the U.S. we have personal income and spending at 8:30 a.m. ET today, auto sales numbers for May are due tomorrow, and the daddy of data releases comes out on Friday, when nonfarm payrolls numbers for May are published. It's not just domestic economic developments that matter. Chinese PMI data due at 9:00 p.m. ET tonight will give some guidance on how that economy is performing, and Thursday sees the European Central Bank announce its latest monetary policy decision. While there is no expectation of a rate change at the meeting, the press conference will, as always, be worth watching. If all that is not enough to whet your appetite after the long weekend, there is also an OPEC meeting on Thursday. By the end of this week, markets may be closer to having an answer on the timing of the next Fed rate hike. 

Euro-area inflation, unemployment

The data-week has already kicked off in Europe, with the flash inflation estimate for May showing that consumer price-growth in the currency zone remains negative. A separate report showed that unemployment was stable at 10.2 percent, while in Germany the proportion of those out of work fell more than expected to a record post-reunification low of 6.1 percent. Confidence in the euro-area increased to a four-month high according to an index of executive and consumer sentiment released by the European Commission yesterday.

China stocks

A report from Goldman Sachs Group Inc. saying that MSCI Inc. will likely include Chinese shares in its global benchmark indexes, helped boost stocks, with the Shanghai Composite Index closing 3.3 percent higher, its biggest increase in almost three months. The rally in shares is not the biggest story out of Chinese equities overnight though, as there were some strange goings-on in the futures market. Futures plunged 10 percent before snapping back all in less than one mysterious minute of trading. Despite the overnight rally, Chinese equities are back in the sights of short sellers as the weakening of the yuan, which fell by the most in May since August's devaluation, puts pressure on stocks and bonds.

Markets update

The MSCI Asia Pacific Index added 0.7 percent overnight, with Japan's Topix index rising 1 percent amid optimism that the government will delay the planned sales-tax hike. In Europe the Stoxx 600 Index was 0.2 percent lower at 6:03 a.m. ET, with auto-related shares leading the losses following Volkswagen AG's report of a 86 percent slide in quarterly profit. S&P 500 futures were flat.

A naira confusion

A year after taking over as President of Nigeria, Muhammadu Buhari is facing an economy that is struggling. Hit by the collapse in oil prices and rebel activity in the Niger River delta, the country will soon enter recession. Against this, the central bank promised last week to allow 'increased flexibility' in the naira's currency peg — a peg that was a central pillar of Buhari's economic policy. Over the weekend the president — who once likened letting the currency weaken to “murder” — caused confusion when he emphasized the need for stability in the naira. He backed down a little from this position yesterday, but remains opposed to devaluation, according to his spokesman.

German unemployment is at a record low. The unemployment rate in Germany fell to 6% in May, down from 6.3% in April. According to the BBC, there remains a division between what was East Germany and West Germany. West Germany has an unemployment rate of 5.5%, while East Germany has an unemployment rate of 8.4%. The unemployment rate for the eurozone as a whole fell to 10.2%, down from 11% a year ago.
The eurozone is still in deflation. Consumer prices in the eurozone fell 0.1% year-over-year in May, according to the latest Eurostat data. The reading matched economist expectations, and it marked a slight uptick from the 0.2% decline experienced in April. Stripping out the volatility from food and energy prices, the core reading climbed 0.8% YoY, in-line with estimates. The euro is up 0.2% at 1.1155.
Remain is leading in the Brexit polls. An ORB poll conducted by The Telegraph showed that 51% of respondents supported Remain while 46% supported Leave. The referendum on whether Britain will leave the European Union is set to take place June 23. The British pound is little changed near 1.4625.
Investors are pulling their money out of Asia. HSBC data showed that Asian equity markets saw a net outflow of $3.2 billion from May 1 to May 24. Additionally, bond markets in places like Indonesia and South Korea have begun to see steady outflows over the past couple of months. Currencies in the region have also come under pressure amid talk of Fed rate hikes, Reuters says.
Jazz Pharmaceuticals is buying Celator. Jazz Pharmaceuticals says it will buy Celator Pharmaceuticals for $1.5 billion, or $30.25 a share. According to Reuters, the deal represents a 72.6% premium over Friday's closing price, and it should add to Jazz's non-GAAP earnings starting in 2018. "As Celator is currently preparing a regulatory submission in the US for Vyxeos, this acquisition would add a new orphan product with the potential for short- and long-term revenue generation and expansion of our international commercial platform," Jazz CEO Bruce Cozadd said in a statement.
The Verizon strike might be over. Verizon and the Communications Workers of America have reached a tentative deal that would end the nearly seven-week strike. The four-year agreement will give 40,000 network technicians and customer-service representatives a pay raise of at least 10.5% over the next four years and add 1,400 new jobs, Reuters says. Striking workers are set to return to work on Wednesday.
The former CEO of Zurich Insurance dies. Martin Senn killed himself six months after stepping down as CEO of Zurich Insurance "following a series of profit warnings and a botched takeover of British rival RSA," according to Reuters. Senn's death comes three years after Zurich's former CFO, Pierre Wauthier, took his own life. Senn was 59.
Taking Care of Business
The U.S.’s biggest business lobby will launch an initiative on Tuesday to deploy influential Republicans to raise funds for tight Senate races, hoping to help the GOP in its tough battle to keep control of the chamber in November. The Chamber of Commerce’s “Save the Senate” effort is being led by both Republicans who back Mr. Trump and those who have balked at doing so. Meanwhile, the search for an explanation of this year’s unusual political climate leads to a basic conclusion, writes our Washington bureau chief Gerald F. Seib: The recession that started in 2007 and the financial crisis of 2008 and 2009 scared and scarred the electorate more deeply and more permanently than has been recognized before. As Mr. Trump seeks to capitalize on these postrecession attitudes, he is hoping for a boost from Bernie Sanders supporters, though poll numbers indicate otherwise.
The Fight for Fallujah
Iraqi special forces advanced to the edge of Fallujah on Monday but struggled to enter the city, where Iraqi and U.S. officials said Islamic State extremists were amassing civilians to serve as human shields. The offensive aims to dislodge the Sunni extremists from the Iraqi city they have occupied the longest, and if successful could significantly weaken them ahead of an advance on the much-larger and symbolically more important target of Mosul. Winning Fallujah could also boost Prime Minister Haider al-Abadi, who has faced political upheaval in recent months. However, the operation carries big risks, including its overtly sectarian tone, as Shiite militias deeply resented by many Sunnis took the lead in the early stage of the offensive. Fallujah is almost exclusively Sunni and at least 50,000 civilians are believed to be trapped in the city.
What Is a Bank?
The sobering reality of banking in 2016 is that lenders are awash in new regulations, and growing armies of rule-interpreters and enforcers—for good or ill—are bringing striking changes to banks’ internal cultures. Some bankers view these compliance officials as nuns with guns—ultraconservative but still dangerous. We take a look inside the awkward, sometimes maddening, relationships between banks and their regulators and explore the simple, if beguiling, conundrum about banks today: What are they? And what will they become? For most global banks, it is no longer a viable strategy to try to be all things to all customers around the world. Our series on the existential crisis facing banks begins with an examination of the rise and retreat of the megabank, demonstrated by Citigroup’s evolution as the financial crisis ushered in a new phase for banking.
Data-Based Diagnosis
The chairman of medicine at a major New York hospital system is betting he can predict if a patient has strep, pneumonia or other ailments not by ordering traditional lab tests or imaging scans, but by calculating probabilities with a software program. The predictive tool, which pops up on the screen of electronic medical records, prompts the doctor to answer a short series of questions about the patient’s condition. Based on that information, a calculator predicts the probability that the person has the suspected ailment. It may also recommend a course of action. The goal of the tool is to reduce the use of unnecessary tests and antibiotics, while also expediting appropriate care. But as would be expected, many doctors balk at the idea of a computer program telling them how to do their job.
Stock markets around the world are mixed. China's Shanghai Composite (+3.3%) led the gains in Asia, and France's CAC (-0.3%) paces the decline in Europe. S&P 500 futures are up 1.00 point at 2,098.25.
Earnings reports trickle out. Medtronic will report ahead of the opening bell.

US economic data picks up. Personal income and spending and core PCE prices will all be released at 8:30 a.m. ET before the Case Shiller 20-city Index crosses the wires at 9 a.m. ET. Chicago PMI and consumer confidence will cross the wires at 9:45 a.m. ET and 10 a.m. ET, respectively. The US 10-year yield is up 3 basis points at 1.88%.

Yellen anticipates rate hike in coming months

Yellen (Chip Somodevilla/Getty Images)

The Federal Reserve is likely to increase interest rates in the next few months as the economy continues to improve, Chair Janet Yellen says. "It's appropriate ... for the Fed to gradually and cautiously increase our overnight interest rate over time, and probably in the coming months such a move would be appropriate," Yellen said.

Bloomberg (27 May.)

Era of global bank expansion appears to be ending

Major banks have begun to retreat after two decades of global expansion, eschewing their most challenging businesses. Reasons include regulatory changes, the financial crisis and political pressure.

The Wall Street Journal (tiered subscription model) (30 May.) 

Japanese industrial data boost Asian-Pacific markets

Most Asian-Pacific stock markets posted gains Tuesday after data showed that Japan's industrial output rose in April, despite the disruption of powerful earthquakes. Analysts had expected a decline. Japan's Nikkei 225 rose 1%. Hong Kong's Hang Seng Index gained 0.9%. Australia's S&P/ASX 200 fell 0.5%. China's Shanghai Composite surged 3.3%. South Korea's Kospi added 0.8%. India's Sensex was down 0.1%.

CNBC (31 May.), 

Bitcoin exchange makes progress

Former Citigroup futures trader Arthur Hayes discusses using the Chicago Mercantile Exchange as his inspiration to create the Bitcoin Mercantile Exchange. "Our goal is to let anyone bet on anything at any time," Hayes says.

Bloomberg (29 May.) 

China's slowdown spreads to neighboring economies

The economies close to China are starting to feel the effects of its slowdown. The commodities-driven boom in Mongolia is losing momentum. In this year's first quarter, the economies of Hong Kong, Macau and Taiwan contracted. Analysts expect the effects of slowing growth to spread farther.

Bloomberg (30 May.) 

Odd Lots Podcast: How finance took over the world. 

OPEC's cheap oil strategy lures drivers back into gas guzzlers.

FX trading is (finally) not just a boys' club.

The untold story behind Saudi Arabia's 41-year US debt secret.

Miner ends quest for gold to unearth world's strongest material.

Bayer’s Bid for Monsanto Disquiets St. Louis Area

European Confidence Firms Despite Political Uncertainty

Israel’s New Defense Minister Faces Rift With Disgruntled Military

Viacom Board Prepares for Fight With Redstones

Fueling Oil’s Push to $50: Fear Is Back

Noble Group Puts Unit Up for Sale; CEO Quits

After a massive week for U.S. markets, the S&P 500 is once again within spitting distance of the all-time high it made last summer. Markets are in a weird spot here. They've staged a vicious rally since mid-February, but very few investors seem eager to take on much risk. Instead, they're being advised to brace for a bumpy summer filled with headline risk including the Brexit referendum and the prospect of a U.S. interest rate rise. On the flipside, investors holding cash or developed market government bonds are getting paid virtually nothing. So will the market be able to punch through to new heights? This week should be very interesting as we get loads of data, starting with Personal Income & Spending, which is released today at 8:30 a.m. ET. Other data coming out this week include the ISM, Construction Spending, and of course the U.S. Non-Farm Payrolls Report on Friday. It's only a four day week, but it should be filled with action.

Source: Bloomberg, BI, WSJ, CFAI Fin. Newsbrief, CNBC