Tuesday August 16 Daily Market Primer

US stocks rose again on Monday, led by commodity-linked shares and small caps.  The Russell 2000 was up 1% compared to the S&P up .3%.   Stock markets rolled over in Asia after hitting one year highs yesterday, and followed suit overnight in Europe on weak UK economic data.  This morning, and the US market has opened down .4%  on flat consumer prices and lower than expected inflation.

DJIA	18636.05	59.58	0.32%
Nasdaq	5262.02	29.12	0.56%
S&P 500	2190.15	6.1	0.28%
Russell 2000	1241.86	12.04	0.98%
Global Dow	2449.29	-3.1	-0.13%
Japan: Nikkei 225	16596.51	-273.05	-1.62%
Stoxx Europe 600	343.81	-2.24
UK: FTSE 100	6913.35	-27.84	-0.40%
CBOE Volatility	12.26	0.45	3.81%
Australia: S&P/ASX 200	5532	-8	-0.14%
China: Shanghai Composite	3110.04	-15.16	-0.49%
Hong Kong: Hang Seng	22910.84	-21.67	-0.09%
India: S&P BSE Sensex	28064.61	-87.79	-0.31%
Japan: Nikkei 225	16596.51	-273.05	-1.62%
Singapore: Straits Times	2858.8	-8.41	-0.29%
Europe Dow	1568.42	-3.1	-0.20%
Stoxx Europe 600	343.81	-2.24	-0.65%
France: CAC 40	4463.65	-34.21	-0.76%
Germany: DAX	10664.69	-74.52	-0.69%
Italy: FTSE MIB	16838.36	-159.47	-0.94%
Spain: IBEX 35	8638.2	-82.4	-0.94%
U.S. 3 Month	0.279	0/32
U.S. 2 Year	0.746	-1/32
U.S. 5 Year	1.148	-0.0625
U.S. 10 Year	1.562	-0.03125
U.S. 30 Year	2.273	7/32
Germany 2 Year	-0.606	0/32
Germany 10 Year	-0.066	-0.03125
Crude Oil	46.01	0.27	0.59%
Brent Crude	48.55	0.2	0.41%
Natural Gas	2.638	0.009	0.34%
E-mini S&P 500	2181.25	-4.75	-0.22%

BHP Billiton, the worlds biggest miner, reported dismal results, reflecting erratic commodities demand and prices. Health care giant Aetna is exiting most of its public insurance exchange business (aka Obamacare),  basically saying that they only want to insure healthy people (Aetna is ditching, below).   The WSJ counted up how many times Tesla’s Elon Musk has set aggressive targets – and missed them.  Uh oh.  (Target Practice).  They yen broke below the 100 yen/$ mark in a continuing run of yen strength/dollar weakness.  The San Francisco Fed president John Williams is calling for a revamp of the Fed’s inflation targets, as the “U.S. economy is stuck in a new low-productivity, low-growth normal”.   (Fed Orthodoxy and New Policies). 

Here’s the news:

Markets stop guessing about Brexit's impact

After weeks of surveys, the U.K. got its first slew of official data since the EU referendum. Tuesday's release showed that in July, consumer-price inflation accelerated a whisker more than economists had expected to 0.6 percent, while the currency's weakness helped import costs to soar, with the 4.3 percent jump in prices marking an end to 32 months of declines. The pound strengthened off its three-year low against the euro and breached 1.298 against the dollar by 6 a.m. New York time, while U.K. stocks snapped an eight-day rally.

U.S. economic data

It's also a jam-packed day for U.S. statistics. Both the Consumer Price Index and housing data for July come out at 8:30 a.m. in New York, with economists expecting the inflation rate to slow 1 basis point to 0.9 percent versus last year, driven partly —in contrast to the U.K. — by falling import prices. Analysts expect last month's data to reveal a softening in housing starts and permits after a strong second quarter, and then at 9:15 a.m. industrial production is announced, with stronger-than-expected July payrolls pointing to a slight increase of 0.3 percent. Ahead of that data the dollar is losing steam against all of its major peers, with the Bloomberg Dollar Spot Index at its weakest since June. 

Fed orthodoxy under fire

The downward march of the U.S. currency drove the yen past 100 per dollar, a level it hasn't breached intraday since just after the Brexit vote in June. (On a closing basis, it hasn't been that strong since 2013.) Dollar weakness is also helping to fuel a rally in emerging-market stocks. That's happening as Federal Reserve officials increasingly sound the view that the U.S. economy is stuck in a new low-productivity, low-growth normal, with drastic implications for monetary policy. On Monday, Federal Reserve Bank of San Francisco President John Williams suggested rethinking inflation targets, citing the structurally low natural rate of interest. While Williams isn't a voting member of the policy-setting Federal Open Market Committee, he becomes the second U.S. policy maker in two months to advocate a major rethink of monetary policy norms, after St. Louis Fed president James Bullard in mid-June.

New policies needed for US economy, Fed's Williams says

Governments and central banks must come up with new economic policies if they are to avoid recessions that are deeper and more difficult to avert, Federal Reserve Bank of San Francisco President John Williams writes in the bank's Economic Letter. "There is simply not enough room for central banks to cut interest rates in response to an economic downturn when both natural rates and inflation are very low," he writes.

Reuters (15 Aug.),  Bloomberg (15 Aug.),  Federal Reserve Bank of San Francisco (15 Aug.) 

BHP Billiton Ltd. announces results

The world's largest mining company reported its first annual loss since 2001 as full-year underlying profit declined 81 percent to $1.2 billion in the year ended June 30, from $6.4 billion a year earlier. It follows rival Rio Tinto Group in posting lower profits after raw materials prices, including top earning iron ore, plunged to about half their 2011 peak due to oversupply and slower growth in China, the world's biggest buyer of commodities. Even so, Chief Executive Officer Andrew Mackenzie told reporters on Tuesday that commodity prices are no longer in freefall and Bloomberg calculations show the firm actually saw underlying profit jump 95 percent to $803 million for the six months ended June 30.

Aetna is ditching 70% of its Obamacare business. The company says its nearly $200 million pretax loss as a result of its public health-exchange business simply isn't worth sustaining. Going forward, Aetna's public-exchange options will be available mainly in Delaware, Iowa, Nebraska, and Virginia; it has served 15 states in 2016. "Providing affordable, high-quality healthcare options to consumers is not possible without a balanced risk pool," Aetna CEO Mark Bertolini said in the statement. "Fifty-five percent of our individual on-exchange membership is new in 2016, and in the second quarter we saw individuals in need of high-cost care represent an even larger share of our on-exchange population."

Volkswagen could face civil and criminal penalties because of its emissions scandal. The German automaker has been found liable for criminal wrongdoing by the US Department of Justice, CNBC reports. Volkswagen may be forced to pay damages that exceed Toyota's $1.2 billion settlement, the largest on record, for intentionally concealing acceleration problems. "As we have said previously, Volkswagen is cooperating with federal and state regulators in the United States, including the Department of Justice, and our discussions are continuing toward a resolution of remaining issues," a Volkswagen representative told Business Insider.

Warren Buffett's Q2 trades are out. According to a 13-F filing, Berkshire Hathaway bought 5.42 million shares of Apple in the second quarter, upping its stake to 15.2 million shares, or about $1.46 billion. On the other hand, Berkshire cut its stake in Walmart by 27%, dumping 15 million shares worth $2.94 billion.

German economic sentiment recovered. German investor confidence rose to 0.5 in August, up from the -6.8 print that was recorded shortly after the UK's vote to leave the European Union. "Political risks within and outside the European Union, however, continue to inhibit a more optimistic economic outlook for Germany. Furthermore, uncertainty about the resilience of the EU banking sector persists," ZEW president Achim Wambach said. The euro is higher by 0.8% at 1.1272.

UK inflation rose faster than expected. According to the Office for National Statistics, consumer prices in Britain rose 0.6% year-over-year in July, beating out the 0.5% gain that economists had forecast. Stripping out the volatility from food and energy, prices were up 1.3% YoY, but that was down slightly from June's print of up 1.4%. The British pound is up 0.7% at 1.2967.

Trump’s Antiterror Test
Donald Trump presented the contours of his foreign policy strategy, an approach that he said would be defined by the battle against radical Islam. Expanding on the provocative immigration ideas that have propelled his presidential candidacy, he proposed a new ideological test that would limit immigrants seeking admission to the U.S. to “those who share our values and respect our people.” The speech represented a response to his critics who have expressed doubts that Mr. Trump has the experience and temperament to lead the U.S. in a dangerous world. He backed down from past criticism of NATO, and few of the other policies he mentioned were significantly different from the antiterrorism strategy now being pursued. Meanwhile, Hillary Clinton is caught in a kind of political and ideological no-woman’s land, writes our Washington bureau chief Gerald F. Seib, as we report that the FBI is preparing to hand over to Congress interview notes from its probe of her emails.

Bank Shot
Activist investor ValueAct Capital Management disclosed on Monday that it has taken a $1.1 billion stake in Morgan Stanley, with 38 million shares representing about 2% of the shares outstanding in the bank. But unlike most activist positions, ValueAct says it is the market, not the company, that has it wrong. The stake could represent a catalyst for investors who have shunned bank stocks for years, due mainly to low interest rates that sap lending profits and tough postcrisis rules that have taken much of the risk—and profit—out of once-lucrative trading businesses. ValueAct, which manages $16 billion in assets, believes the market is overlooking Morgan Stanley’s current focus, with earnings now more geared toward giving advice to corporations and a massive wealth-management business in which brokers advise individuals.

Target Practice
Few chief executives aim as high or push as hard as Elon Musk. In the past five years, though, Tesla has fallen short of more than 20 projections made by Mr. Musk, ranging from car-production output to financial targets, according to our analysis. The company missed 10 of his stated goals by an average of nearly a year. So far, the expectations game on Wall Street hasn’t applied to Mr. Musk, but some analysts have begun to worry that his ambitious prognostications could haunt Tesla as the company tries to meet his goal of churning out a million cars a year by the end of 2020. Meanwhile, securities law gives executives leeway to prognosticate and issue targets, but a company could be held liable if its executives knew their projections had little or no chance of coming true.

New policies needed for US economy, Fed's Williams says

Governments and central banks must come up with new economic policies if they are to avoid recessions that are deeper and more difficult to avert, Federal Reserve Bank of San Francisco President John Williams writes in the bank's Economic Letter. "There is simply not enough room for central banks to cut interest rates in response to an economic downturn when both natural rates and inflation are very low," he writes.

Reuters (15 Aug.),  Bloomberg (15 Aug.),  Federal Reserve Bank of San Francisco (15 Aug.) 

BoJ on the way to becoming Japan's biggest shareholder

The Bank of Japan, through purchases of exchange-traded funds, is on track to be the biggest shareholder of 55 companies in the Nikkei 225 index before 2018. The central bank is accelerating investment in equity markets after doubling its annual target for ETF purchases.

Bloomberg (15 Aug.) 

Banks reportedly hasten timeline for moving jobs from UK

Major investment banks plan to move jobs out of the UK once Brexit is triggered, sources say. Executives reportedly are upset that the UK lacks a solid plan to protect London's role as a global financial center.

Bloomberg (15 Aug.) 

Bond funds deliver high yield

Investors are moving fast to get money into bond funds, which are giving better returns this year compared with equities. The Standard & Poor's 500 index has returned 8.32%, while the Morningstar US Long Core Total Return Bond Index has gained 12.59%.

InvestmentNews (15 Aug.) 

Commodity volumes on major Chinese exchanges decline

Chinese curbs on commodity trading to rein in speculation have led volumes on the three biggest exchanges to drop to their lowest level in months. "Fewer industry participants are trading commodities futures in China," said Xu Yongqi of CCB Futures.

Bloomberg (16 Aug.) 

There's a shift in the bond world's balance of power.

Banks may not stick around in the U.K to see how Brexit pans out.

Russia flips 'jobless recovery' on its head with an unemployment-free recession.

Don't look now, but metal prices are diverging.

It's the economy, stupid. But whose economy?

It costs the same to replace the U.K.'s Hinkley nuclear plant with offshore wind power.

The backlash to Turkey's coup backlash begins as company execs protest purge.

Six People Dead in Louisiana Flooding, 11,000 in Shelters

U.S.-Backed Forces Aim at Another Syrian Town

Hungary’s Fence Turns Trek Into Waiting Game

Some International Companies Cautiously Return to Iraq

Aetna to Drop Some Affordable Care Act Markets

AIG Reaches Deal to Sell Mortgage-Insurance Unit to Arch Capital for About $3.4 Billion

Central Banks Could Be This Market’s Pets.com

The Japanese yen is surging. Heavy buying has the yen higher by 1.2% at 100.07 per dollar. Tuesday's bid comes amid broad-based US dollar weakness and has the yen on track for its best close since November 2013.

Stock markets around the world are lower. Japan's Nikkei (-1.6%) led the losses in Asia, and Spain's IBEX (-0.5%) paces the decline in Europe. S&P 500 futures are down 3.25 points to 2,182.75.

Earnings reporting is light. Home Depot, Dick's Sporting Goods, and TJX Companies will report ahead of the opening bell, while Popeye's Louisiana Kitchen and Urban Outfitters will release their quarterly results after markets close.

US economic data is heavy. Housing starts, building permits, and CPI will all be released at 8:30 a.m. ET before industrial production and capacity utilization cross the wires at 9:15 a.m. ET. The US 10-year yield is down 3 basis points at 1.52%.

Coming up...

Those looking for rate-hike signals in today's U.S. economic data will get an even bigger dose of information to parse tomorrow, when the minutes of the July 27 meeting of the FOMC are released. Then later this week, there's job claims reports from both sides of the pond. 

One of the big themes for the year has been political risk (Turkey, Spanish elections, Brexit, the U.S. election), but it hasn't exactly played out like people might have guessed. Despite all of the surprise developments, markets have raced higher and volatility across asset classes has plunged. On Monday's What'd You Miss, David Woo, Bank of America Merrill Lynch's head of global rates and currencies research, also flagged the U.S. election as a key risk for investors, but he framed it in a slightly different way than usual. For him, the key thing to watch is whether either of the two candidates wins in sweeping fashion. As he sees it, the current market is banking on continued gridlock in Washington, and a continuation of tight fiscal policy with loose monetary policy. If either Trump or Clinton wins in decisive fashion, we'd likely get looser fiscal policy and an increase in rates. This would be particularly harmful for investors right now, because the dominant theme in markets is the simultaneous rally in both stocks and Treasuries, a phenomenon he ascribes to expectations of loose monetary policy. For evidence of how well the stocks plus Treasuries portfolio is doing, check out the BofA Merrill Lynch Multi Asset Strategy Index, a risk parity index which has been on a phenomenal tear since the beginning of the year, as expectations of tighter policy have come down dramatically.

Source: Bloomberg, BI, WSJ, CFAI Fin. Newsbrief, Reuters, SF Fed, Investment News