Friday May 27 Daily Market Primer

Happy Memorial Day weekend. Stocks were flat in the US yesterday and the two day rally ran out of steam on a dearth of market moving news and economic data as we move into a long weekend.  Like stocks, crude oil reversed a two day rally and fell below $50, and its down a bit more this morning.   Revised Q1 GDP is out, and shows a +.8% print, slightly better than before, and it has the market opening up modestly.   Stocks are mixed around the world as you can see from the returns table.

	LAST	CHANGE	% CHG
DJIA	17828.29	-23.22	-0.13%
Nasdaq	4901.77	6.88	0.14%
S&P 500	2090.1	-0.44	-0.02%
Russell 2000	1139.75	-1.27	-0.11%
Global Dow	2340.48	6.53	0.28%
CBOE Volatility	13.55	0.12	0.89%
Australia: S&P/ASX 200	5405.9	17.8	0.33%
China: Shanghai Composite	2821.05	-1.4	-0.05%
Hong Kong: Hang Seng	20576.77	179.66	0.88%
India: S&P BSE Sensex	26653.6	286.92	1.09%
France: CAC 40	4498.27	-14.37	-0.32%
Germany: DAX	10275.33	2.62	0.03%
Italy: FTSE MIB	18138.46	-78.46	-0.43%
Spain: IBEX 35	9084.3	5.1	0.06%
U.S. 2 Year	0.879	0/32
U.S. 5 Year	1.356	-1/32
U.S. 10 Year	1.835	-1/32
U.S. 30 Year	2.644	-2/32
Crude Oil	48.84	-0.64	-1.29%
Brent Crude	49.48	-0.69	-1.38%
Natural Gas	2.153	0.002	0.09%
E-mini S&P 500	2089.5	-0.25	-0.01%

Everyone’s favorite unicorn, Venice Beach, LA, based Snapchat scored an additional $1.8 billion in funding in a Series F round from private investors.  This puts Snapchat’s valuation at about $18 billion.  That’s a lot of snaps.   http://bit.ly/SnapchatCash.  The G7 wrapped up their meeting in Japan without any market moving pronouncements.   Donald Trump can take Memorial day weekend off after wrapping up the Republican nomination yesterday.  Janet Yellen is speaking at Harvard today, and traders and investors everywhere will be paying close attention before taking off for the long weekend.

I saw “the reigning bond king”, as he was modestly introduced by the president of his own company, Jeff Gundlach, speak in Los Angeles last night, and he certainly lived up to his reputation as a compelling and controversial speaker.  Among his many calls is that Trump will win the election, a prediction he went public with in January in a Barron’s article.  He sais his fellow Barron’s Roundtable participants made fun of him at the time.  Jeff thinks it’s a big mistake for the Fed raise rates anytime soon.  I was going to summarize the talk here, but I found that a Bloomberg reporter did it for me http://bit.ly/GundlachBH.   

Here’s the news:

Yellen's conversation

Traders hoping to get away early for their Memorial Day weekend will have to hang around a little longer than they might like today as Fed Chair Janet Yellen is due to give a speech at an event in Massachusetts at 1:15 p.m. ET. The event, billed as a conversation with Harvard professor Greg Mankiw, will be closely watched for any signs that would inform the market's view on the likelihood of a June rate hike. Jeffrey Gundlach has said that he expects the remarks to be dovish, with the U.S. dollar's best month in 16 likely to be derailed if he is right. Current market-based expectations for a hike in June are at 28 percent, rising to 51 percent by the July meeting.

Group-of-seven leaders meeting

World leaders meeting at the G-7 summit in Japan have tangled over the recipe of measures needed to boost global growth. While the group's statement said the nations would use "all policy tools -- monetary, fiscal and structural" there was disagreement between Germany, who favor reform, and both Japan and Canada who favor more stimulus. Risks to global growth cited at the summit included the upcoming Brexit referendum, the slowdown in China, as well as that country's South China Sea ambitions — but Japanese Prime Minister Shinzo Abe, the host of the event, failed in his bid to have the G-7 warn of the risk of full-blown global economic crisis.

Oil slipping

Crude is falling again this morning, with West Texas Intermediate for July delivery trading at $49:04 a barrel at 5:51 a.m. ET in New York. Unusually, Brent for July settlement was trading at the exact same price at that time in London. The failure of the commodity to hold the $50 level, reached for the first time this year yesterday, means that a sustainable rise to the mid-$50s which would make explorers start to feel secure may be some way off yet.

Markets flat

The MSCI Asia Pacific Index gained 0.7 percent overnight while in Europe the Stoxx 600 Index was 0.2 percent higher at 6:00 a.m. ET. S&P 500 futures were 0.1 percent higher. It seems markets are waiting on Yellen for direction.

Election anxiety creeps in

U.S. presidential politics are starting to influence investors, with measures of expected volatility in options tied to the S&P 500 Index showing a spike around the time of the Republican National Convention in July and the election itself in November. On the campaign trail in North Dakota, Republican presidential candidate Donald Trump said that he would rescind the Obama administration's environmental actions within 100 days of being elected.

China's industrial profits are up. Industrial profits in China rose 4.2% year-over-year in April to 502 billion yuan ($76.6 billion). That's a big improvement from the 11.1% drop that was recorded in March. The profit rebound has coincided with a surge in Chinese credit growth and infrastructure investment.

Japan is reportedly looking to delay its sales-tax increase. Japanese Prime Minister Shinzo Abe is likely to delay his planned national sales tax hike, three sources with knowledge of the matter told Reuters. The sales tax had been scheduled to increase to 10% from 8% in April 2017. The delay is expected to last one to three years.

Consumer prices in Japan are still sliding. Consumer prices in Japan fell 0.3% year-over-year in April, slightly better than the 0.4% drop that economists had forecast. The closely watched reading for prices in Tokyo fell 0.5% YoY, missing the 0.4% decline that was expected. The Japanese yen is little changed near 109.65.

Google won its legal battle against Oracle. A jury has decided that Google's use of Oracle's application programming interfaces for Android was "fair use." Google used about 11,000 lines of code from Oracle's Java within its millions of lines of code for Android and refused to pay a licensing fee, which is what led to the lawsuit. Oracle was expected to ask for as much as $9 billion if the verdict were favorable.

Valeant rejected a takeover bid during the spring. The embattled pharmaceutical company rejected a joint takeover bid by Japan's Takeda Pharmaceutical Co. Ltd and TPG Capital Management, people familiar with the matter told Reuters. The company reportedly turned down the offer as it wanted to give new CEO Joseph Papa time to turn things around. Shares of Valeant were up more than 6% in Thursday's after-hours session.

Snapchat might be preparing for an IPO. In a regulatory filing, Snapchat named Stan Meresman to its board of directors. On his personal website, Meresman says he "advises CEOs & CFOs on preparing to become a public reporting company, IPO process, operating as a public company, and scaling the company for rapid growth." Companies Meresman has helped go public include LinkedIn, Zynga, Riverbed Technology, and Polycom.
Stock markets around the world are mixed. Hong Kong's Hang Seng (+0.9%) led the gains overnight, and Germany's DAX (+0.1%) hangs on to small gains in Europe. S&P 500 futures are up 1.50 points at 2,091.25.

US economic data flows. The second estimate for first-quarter gross domestic product will be released at 8:30 a.m. ET, and University of Michigan consumer confidence will cross the wires at 10 a.m. ET. The US 10-year yield is unchanged at 1.83%.

The Sweet Spot
The most powerful oil rally in seven years pushed crude prices above $50 a barrel on Thursday, a level that eases pressure on producers while being low enough to keep consumers happy at the gas pump. A sustained price at or slightly above $50 isn’t high enough to spur energy companies to spend again on big projects but offers some relief after almost two years of swooning prices. Such a recovery could also be enough to relieve pressure on central bankers in the U.S. and around the world, allowing the Federal Reserve to slowly increase interest rates. Since hitting a 13-year low in February, U.S. crude has climbed 89% in 73 trading days, the sharpest rise since an increase of 92% between February and May of 2009, momentum that has made crude the new hot trade for some individual investors.

Trump Card
Donald Trump secured the delegates he needs to become the Republican Party’s presidential nominee Thursday and gave a rollicking news conference to mark the occasion. He dialed back his idea of imposing a temporary ban Muslims entering the U.S., softened his once-unconditional support for federal subsidies for ethanol and reupped an invitation to Sen. Bernie Sanders to debate him, but only if Mr. Sanders or television networks produce a $10 million charitable donation. Meanwhile, House Speaker Paul Ryan is holding firm so far in not endorsing Mr. Trump after speaking with him Wednesday night. Also yesterday, Hillary Clinton defended her use of a private email server while secretary of state, a day after a critical report from a government watchdog, though she called it a mistake.

Valeant Attempt
After firing Valeant’s CEO Michael Pearson and pushing his way onto the company’s board, William Ackman now finds himself on the other side, defending a company under attack by dubious investors and others. As recently as last August, Valeant ranked as the most valuable holding of Mr. Ackman’s hedge fund, Pershing Square. His stake was worth about $5 billion. But mounting questions about its drug pricing, growth strategies, debt and accounting drove the stock down 90%, leaving Mr. Ackman’s reputation as a shrewd investor as much on the line as the company’s future. We chronicle Mr. Ackman’s attempt to turn Valeant around. He secured backing from J.P. Morgan Chase and other banks, wooed a new chief executive and with his fellow board members spurned a takeover approach. While early investor feedback was encouraging, the outlook has since grown cloudier.

Global code of conduct issued for FX market

The Foreign Exchange Working Group, established by the Bank for International Settlements Markets Committee, has released the first phase of a global code of conduct for the foreign exchange market. The document, which takes ideas from regional codes, bans lying, false rumors and other practices that have damaged the market. More stipulations will follow the first phase, although no enforcement mechanism appears to exist.

Reuters (26 May.), 

Digital theft from Asian banks traced to North Korea

Security researchers at Symantec say they have found software code that links the digital theft of money from banks in the Philippines, Vietnam and Bangladesh to North Korea. The code has been seen before only in hacks on Sony Pictures Entertainment in 2014 and South Korean media and financial companies in 2013. "We've never seen an attack where a nation-state has gone in and stolen money," researcher Eric Chien said. "This is a first."

The New York Times (free-article access for SmartBrief readers)

Officials boost oversight of fin-tech industry

US bank regulators and the Obama administration are increasing oversight of the rapidly growing financial-technology sector to fend off risk from untested business models.

Financial Times (tiered subscription model) (26 May.) 

G-7 Notes Downside Risks to Global Economy, Calls for Balanced Policy Mix

Goldman Sachs to Stop Rating Employees With Numbers

 Microsoft, Facebook to build a cable under the Atlantic for faster internet.

Currency traders look beyond the pound to combat Brexit turmoil.

Central banks can't go it alone anymore.

An emerging market beef bond is about to escape the herd.

Private equity's midlife crisis.

Francois Hollande picked a bad day to complain about FX volatility.

Neoliberalism. Though the word means different things to different people, the thing that's rarely disputed on is its association with the policies of competition and austerity championed by the IMF. That a deliberation on its failings was published yesterday by none other than the IMF's own economists amounts to a seemingly bombshell moment of apostasy. The paper sees the IMF go cold on hot money flows, amongst other things, with authors Jonathan Ostry, Prakash Loungani and Davide Furceri questioning everything from the free movement of capital to the blind pursuit of growth. With more orthodox aspects on the IMF agenda making the news over the last week, the impact of this contrarian opinion is the inevitable question. Does "Neoliberalism: Oversold" mean Greek bondholders can rip up their paper; does it pull the red carpet out from under the feet of G-7 leaders meeting to talk strategies for growth in Japan? Like neoliberalism's merits, so too the shock of the paper can be oversold: it treads very delicately around the G-word - and anyway it was the IMF who, earlier this month, was urging European leaders to be gentler on debt relief to the struggling economy. At best, it cautions against "one size fits all." In any case, the paper doesn't amount to the IMF itself renouncing austerity - but three guys at the organisation stirring up the debate. As far as the day's news, goes, the key takeaway might be this: "the duality of benefits and risks is inescapable in the real world," they quote Maurice Obstfeld as saying. Janet Yellen, who's due to speak today, take note.

 Source: Bloomberg, BI, WSJ, CFAI Fin. Newsbrief, NYT, Reuters