Monday July 25 Daily Market Primer

The Daily Market Primer is baaack after a two week hiatus.  While I was on vacation, we’ve had a new British Prime Minister, an attempted coup in Turkey, the Republican National Convention, several terrorist attacks around the world, and very negative reports on the post Brexit UK economy, just to mention a few.   Still, its been a “risk on” two weeks, with the S&P 500 up 3.5%, the Global Dow Index up 4.5%, and the US Ten Year yield up to 1.57% from 1.38%.  The correlation between stocks and crude oil we saw earlier this year may be broken, as oil prices are down about 9% over the same period.

US stocks had a good day on Friday, with the S&P up about ½%, and most world markets were flat to up on Monday, where Germany set the pace for Europe, with the DAX up .8%.

LAST CHANGE % CHG DJIA 18570.85 53.62 0.29% Nasdaq 5100.16 26.26 0.52% S&P 500 2175.03 9.86 0.46% Russell 2000 1212.89 9.03 0.75% Global Dow 2398.67 2.8 0.12% Japan: Nikkei 225 16620.29 -6.96 -0.04% Stoxx Europe 600 341.59 1.26 0.37% UK: FTSE 100 6725.4 -5.08 -0.08% CBOE Volatility 12.8 0.78 6.49% China: Shanghai Composite 3015.83 3.01 0.10% Hong Kong: Hang Seng 21993.44 29.17 0.13% India: S&P BSE Sensex 28095.34 292.1 1.05% Japan: Nikkei 225 16620.29 -6.96 -0.04% Singapore: Straits Times 2929.85 -15.5 -0.53% France: CAC 40 4397.47 16.37 0.37% Germany: DAX 10226.55 79.09 0.78% Italy: FTSE MIB 16775.71 -2.96 -0.02% Spain: IBEX 35 8594 -5.9 -0.07% UK: FTSE 100 6726.03 -4.45 -0.07% U.S. 3 Month 0.322 0/32 U.S. 2 Year 0.711 0/32 U.S. 5 Year 1.131 -1/32 U.S. 10 Year 1.567 0/32 U.S. 30 Year 2.284 0/32 Germany 2 Year -0.606 -1/32 Germany 10 Year -0.033 2/32 Crude Oil 43.51 -0.68 -1.54% Brent Crude 45.05 -0.64 -1.40% S&P GSCI 346.81 -2.22 -0.64% E-mini S&P 500 2166.75 -0.75 -0.03%

I didn’t have much time to read the financial news over the weekend, but I did see this interesting article from Barron’s on low volatility ETFs: http://bit.ly/LowVolETFs

The news leaked out this weekend that Verizon won the bidding for Yahoo and will buy it for about $4.8 billion.  Yahoo’s internet properties include the very popular Yahoo Finance and fantasy sports sites, photo site Flickr,  social multi-media blog Tumblr, which Yahoo paid about $1 billion for, Yahoo Mail, and many others.  Remember that Verizon also bought AOL (remember “You’ve got mail”?), which incudes the Huffington Post and leading tech blog TechCrunch, among its many internet properties.   To put this deal in context, Microsoft offered to by Yahoo for $45 billion in 2008, showing that timing is everything.

This Chart of the Week from Goldman Sachs shows that they are very much in line with our low for long interest rate thesis in a post-Brexit world.

We’re off to another exciting week in the global capital markets as the DNC starts in Philadelphia and there are rumors that Russia may be behind the DNC email hack that lead the resignation of Chairwoman Debbie Wasserman Schultz http://bit.ly/RusHack.  The S&P500 opened down .3%.  Here’s the news:

Verizon to buy Yahoo, Nintendo slumps

Verizon Communications Inc. will announce plans to buy Yahoo’s core assets for a bit more than $4.8 billion before the market opens this morning, according to two people with direct knowledge of the situation. The deal will also likely end the reign of Yahoo Chief Executive Officer Marissa Mayer who was appointed from Google in 2012 to revive the company's flagging fortunes. In Japan, shares of Nintendo Co. plunged by 18 percent - the maximum one-day fall allowed by the exchange - after the company said late on Friday that its effective economic stake in Pokemon Go developer Niantic Inc. and Pokemon Co. is just 13 percent, and that the financial impact from the global smash hit would be limited. Shares in Nintendo had more than doubled in the two-weeks to July 19. Apple Inc., Google parent Alphabet Inc., and Facebook Inc. are also due to report earnings this week. 

Oil back under $44

A barrel of West Texas Intermediate for September delivery was trading at $43.92 at 5:59 a.m. ET, near the lowest closing level since early May. On Friday, Baker Hughes Inc. said that U.S. oil producers had added rigs for the fourth consecutive week in the longest streak of increases since August of last year. Oil bulls are also facing seasonal demand problems, with U.S. gasoline consumption typically dropping in August and September, while stockpiles are at their highest seasonal level since 1990.

Fed, Bank of Japan and stress tests

On Wednesday, the Federal Reserve's Open Market Committee will announce its latest rate decision, with the majority of investors expecting the bank to continue its 2016 streak of making no changes to key rates. Expectations are much higher for Friday's Bank of Japan meeting, with 78 percent of economists surveyed by Bloomberg predicting an expansion of the bank's asset purchase program to be announced. On Friday morning the European Banking Authority will publish the results of its latest stress-tests of European banks. All eyes will be on Italian lenders as worries over non-performing loans are keeping pressure on their stock prices.

Overnight, the MSCI Asia Pacific Index gained 0.1 percent thanks to those expectations for the Bank of Japan to expand its stimulus measures in its meeting at the end of the week. In Europe, the Stoxx 600 Index was 0.6 percent higher at 6:05 a.m. ET in a broad-based rally following survey data showing German business sentiment deteriorated less than expected in July. S&P 500 futures were flat.

Democratic convention starts

The Democratic convention kicks off in Philadelphia today and is set to ratify Hillary Clinton as the party's presidential candidate. Clinton, who last Friday announced Senator Tim Kaine of Virginia as her running mate, will have to face some internal party strife as the convention risks being overshadowed by controversy as leaked emails showed Democratic staffers favored Clinton over Bernie Sanders during the primaries.

LVMH is selling Donna Karan to G-III Apparel. The French luxury goods giant LVMH is selling Donna Karan International to G-III Apparel for $650 million. "Selling DKNY is a way to get rid of a problem, at a time when the market is tough and luxury companies would be right to show less leniency with underperforming businesses," Exane BNP Paribas analyst Luca Solca wrote. The deal will be funded through new debt and by issuing $75 million of G-III common stock to be issued to LVMH, Reuters reports.
Trump says the US could leave the WTO if he's elected. Appearing on NBC's "Meet the Press," Republican presidential nominee Donald Trump suggested that the US could pull out of the World Trade Organization. According to AFP, Trump told host Chuck Todd: "We'll renegotiate or pull out. These trade deals are a disaster, Chuck. World Trade Organization is a disaster."
German business climate slipped. Business confidence in Germany slipped to 108.3 in July, according to the Ifo Institute. The reading was ahead of the 107.7 that economists were expecting but showed "far less optimistic business expectations on the part of companies" after the UK's decision to leave the European Union. Construction was once again a bright spot, however, with assessment of the current business situation hitting a record high. The euro is up 0.1% at 1.0990.
Britain's divorce from Europe will begin by 2020. Newly named Conservative Party Chairman Patrick McLoughlin says Article 50, which formally starts the UK's exit from Europe, will be triggered before the 2020 election. Appearing on the BBC's "Marr Show," McLoughlin said the UK must secure its borders and get immigration under control, Reuters reports. "I'm quite clear that the referendum result is binding on Parliament," McLoughlin said. The British pound is higher by 0.2% at 1.3132.
G-20 says terrorism threatens the global economy. Finance chiefs from around the world met in Chengdu, China, over the weekend and said terrorism was a growing threat to the global economy. "The world has already experienced terrorist attacks — the world experiences regional destabilizations," French finance minister Michel Sapin told AFP. "But today the frequency of attacks creates a new situation of uncertainty, which is at least as damaging as regional destabilizations or a regional conflict."
Democratic Disorder
Democrats gathering in Philadelphia for their national convention this week got off to a turbulent start in their efforts to begin unifying the party around Hillary Clinton. The week began with the resignation of DNC chairwoman Debbie Wasserman Schultz following the disclosure of a trove of hacked emails showing DNC officials working to undermine Sen. Bernie Sanders’s campaign. Ms. Wasserman Schultz, a congresswoman from Florida, said she would step down after the convention ends—meaning she will still have to face pro-Sanders delegates there. The convention’s opening night is expected to be an overture to the party's liberal wing, with speeches by Mr. Sanders, Sen. Elizabeth Warren and first lady Michelle Obama. Meanwhile, we report that Mrs. Clinton is set to take command of a party that has little in common with the one she and her husband rode to the White House a quarter-century ago.
Crude Estimates
The historic fall in oil prices has created a pileup of inventories, and millions of barrels of oil are flowing to locations outside the scope of industry trackers. Some countries, such as Russia and China, choose not to report their oil-storage levels, and traders and oil companies that park supertankers have no obligation to make public their supply. This makes for more cryptic and volatile oil markets. How much crude is in these locations, and how quickly it can be resold into the market, can affect oil prices. And inventories have become more critical as OPEC has increased its production to pump at nearly full tilt. Meanwhile, keeping track of inventories has become more complicated as developing countries store and consume more oil. With little hard data on certain storage spots, analysts piece together estimates using a patchwork of public information.
Shared Concerns
Beijing has managed to let the yuan slide against the dollar without sparking strong protests from its trading partners this year. Now, though, a bigger depreciation against a broader group of currencies is increasingly getting attention. At the two-day meeting of Group of 20 finance chiefs over the weekend, officials from some of China’s major trading rivals expressed concern over the yuan’s declines this year. The remarks show China’s exchange rate remains a source of uncertainty for global policy makers and investors. Two rounds of yuan devaluations in the past year triggered panic selling in markets world-wide and exacerbated the flow of money out of China. Meanwhile, seeing a surge in protectionist tendencies, G-20 finance ministers and central bankers are now featuring “shared” growth as a key priority as they craft their domestic economic policies.
Debate Over U.S. Debt Changes Tone
Donald Trump Aims to Rain on Hillary Clinton’s Parade
Best-Paid CEOs Run Some of Worst-Performing Companies
Tech Giants Boast an Edge in Music Streaming
Cash-Strapped Governments Enjoy a Windfall in Low Borrowing Costs
Stock Investors Pay Up for Peace of Mind
Stock markets around the world are mostly higher. Australia's ASX (+0.6%) led the overnight gains, and Germany's DAX (+0.8%) paces the advance in Europe. S&P 500 futures are down 0.25 points at 2,167.25.
Earnings reporting is slow. Kimberly-Clark and Sprint are among the companies reporting ahead of the opening bell while Gilead Sciences, Las Vegas Sands, and Texas Instruments highlight the names releasing their quarterly results after markets close.

US economic data is light. Dallas Fed manufacturing activity will be reported at 9:45 a.m. ET. The US 10-year yield is higher by 2 basis points at 1.59%.

Has Wall Street been tamed?

Japan’s economy has been in trouble for decades.

It's time to start worrying about the U.S. deficit again.

Study published by the Federal Reserve casts doubt on yuan's haven potential.

Nervous investors are watching U.K. banks this week.

The Bank of England's great inflation divide.

Why we should let raging wildfires burn.

It's become trendy to talk about ways of "fixing" globalization. The main point often made is that world trade is good and makes people richer, but that domestically in developed countries the benefits are sharply skewed and so you need internal wealth transfers and investment to make sure everyone benefits. Sounds simple, right? Unfortunately it's not that easy. In 1997, Harvard Economist Dani Rodrik published the book, Has Globalization Gone Too Far? It argues that in addition to the distributional impact of trade, globalization also weakens the ability of governments to tend to domestic matters. Cross-border mobility of capital reduces the tax base to fund this redistribution. Furthermore, various treaty rules limit the ability of governments to invest in and bolster domestic industries. So it's not enough to say that governments need to do more to counteract the negative effects of world trade, since those same trends, Rodrik argues, limit the ability of governments to act. In a new column at EconomicPrincipals.com, David Warsh predicts: "[Rodrik] is likely to be the next economist to enter the pantheon of those who went to school in the ’70s whom much of the public knows today” - a list that includes Paul Krugman, Larry Summers, and Ben Bernanke. That book is a very quick read, so you might as well get a head start now and check it out before everybody else has.

Source: Bloomberg, BI, WSJ, Goldman Sachs