Tuesday August 2 Daily Market Primer

US stocks kicked off the week slightly lower on Monday, as oil moved under $40 and energy stocks dropped, with the S&P500 energy sector down 3.4%.   Overnight, equities followed suit in most markets.  The Hong Kong exchange was closed for a typhoon.  This morning, stocks are off to another bad start on disappointing BOJ stimulus plan, more bad news for European banks, and volatile oil prices.

As of 5:00 am Pacific:

DJIA	18404.51	-27.73	-0.15%
Nasdaq	5184.2	22.06	0.43%
S&P 500	2170.84	-2.76	-0.13%
Russell 2000	1219.12	-0.82	-0.07%
Global Dow	2393.65	-11.37	-0.47%
Japan: Nikkei 225	16391.45	-244.32	-1.47%
Stoxx Europe 600	336.39	-3.47	-1.02%
UK: FTSE 100	6660.28	-33.67	-0.50%
CBOE Volatility	12.96	0.52	4.18%
Australia: S&P/ASX 200	5540.5	-46.9	-0.84%
China: Shanghai Composite	2971.28	17.89	0.61%
Hong Kong: Hang Seng	22129.14	237.77	1.09%
India: S&P BSE Sensex	27981.71	-21.41	-0.08%
Singapore: Straits Times	2856.67	-35.85	-1.24%
France: CAC 40	4340.19	-68.98	-1.56%
Germany: DAX	10188	-142.52	-1.38%
Italy: FTSE MIB	16199.74	-355.09	-2.14%
Spain: IBEX 35	8319.5	-193.9	-2.28%
U.S. 3 Month	0.277	0/32
U.S. 2 Year	0.699	-1/32
U.S. 5 Year	1.094	-3/32
U.S. 10 Year	1.553	-8/32
U.S. 30 Year	2.302	-22/32
Germany 2 Year	-0.595	-1/32
Germany 10 Year	-0.035	-21/32
Crude Oil	40.43	0.37	-39.69
Brent Crude	42.76	0.62	-41.52
S&P GSCI	45.09	0.87	-43.35
E-mini S&P 500	47.42	1.12	-45.18

The Royal Bank of Australia got in on the central banks easy money party, cutting the reference rate by 25 basis points to an all time low of 1.5%.  Abenomics is back as the Japanese government announced another $45 billion stimulus plan, and the stock market fell anyway.  European bank stress tests are in and the results are mediocre, but most banks did pass.  Deutsche Bank and Credit Suisse were dropped from the Stoxx 50 index of Euro large cap stocks, and Germany’s second largest bank, Commerzbank, scrapped its 2016 profit forecast, which hit share prices. Oil seems to be bottoming around $40, at least for now, and a Bloomberg survey of 20 oil price forecasts is seeing a consensus number of $57 for next year.  I’m not sure why Verizon is buying Fleetmatics, maker of fleet vehicle management software, but its probably because our cell phone bills are too high.

Sorry to get this out so late, you’ve probably already read all the news by now, but just in case, here’s the news:

Fiscal disappointment

Japan’s government has announced 4.6 trillion yen ($45 billion) in extra spending during the current fiscal year, as part of the 28 trillion yen stimulus package Prime Minister Shinzo Abe flagged in a speech last week. The yen climbed to the highest level in three weeks following the release of the spending details, which only amounted to a small part of the headline number, and was trading at 101.72 to the dollar at 5:52 a.m. ET. Former Japanese Vice Finance Minister Eisuke Sakakibara warned that the currency could strengthen to 90 against the dollar in an interview on Monday. Japan's Topix index fell, closing 1.6 percent lower, as reports of the stimulus details emerged. 

Reserve Bank of Australia cuts rates

Monetary policy still holds sway in Australia, where the RBA cut its benchmark rate by 25 basis points to a record-low 1.5 percent. The Australian dollar initially sank following the rate decision, but changed course to trade as much as 0.2 percent higher by 6:05 a.m. ET as analysts say the cut could signal the end of the central bank's easing cycle. The yield premium of Australian bonds over Treasuries fell to the lowest in 15 years following the decision. 

European banks hit again

The Euro Stoxx banks index was 3 percent lower at 6:01 a.m. ET as investors continue to digest the results of the European Banking Authority’s stress tests of 51 lenders and react to news from Commerzbank AG, Germany's second-biggest lender, that it is scrapping its full-year profit target. There was bad news for Deutsche Bank AG and Credit Suisse AG as both banks were deleted from the Stoxx 50 Index. Commerzbank was 8 percent lower at 6:10 a.m., Deutsche was down 3.3 percent, and Credit Suisse had dropped 5.3 percent.

Oil recovery coming?

Crude continues to trade near $40 a barrel this morning, with a barrel of West Texas Intermediate for September delivery at $40.45 at 6:17 a.m. ET. Analysts are looking beyond the current slump, with the median estimate of at least 20 forecasts compiled by Bloomberg seeing the price of oil rallying to an average $57 a barrel in 2017. The price rise will be driven by further reduction of the supply glut that has seen the price of the commodity fall by 22 percent since its June high.

Autosales data

While the big data point this week for the U.S. economy is Friday's payrolls number, today investors get a look at the health of the consumer. At 8:30 a.m. ET personal income and spending numbers for June are released, with economists expecting both to increase 0.3 percent. Also today, autosales data for July is due, with total vehicle sales expected to increase to 17.3 million units, up from June's 16.61 million.

Oil is flirting with $40. Early selling pressured West Texas Intermediate crude oil to a low of $39.85 a barrel, its weakest price since mid-April. Trade has rebounded to session highs, however, and sits up 0.8% near $40.40.
Britain's construction sector shrinks post-Brexit. Construction PMI slipped to 45.9 in July, down from 46.0 in June. While better than the 43.8 that economists had forecast, the sector is shrinking at its fastest pace since the financial crisis. The British pound is higher by 0.5% at 1.3242.
Goldman Sachs says sell stocks. A note written by Goldman strategist Christian Mueller-Glissmann moved his team's weighting on stocks to "underweight" from "neutral" for its three-month asset allocation. "In our view, equities remain in their 'fat and flat' range and are now just near the upper end," Mueller-Glissmann said. The team remains neutral on the market for the next 12 months.
European bank stocks are getting crushed. The sector remains under pressure after the results of the European Banking Association stress tests were released after markets closed on Friday. Europe's STOXX Banking Index trades lower by 3.7%, with Germany's Commerzbank pacing the decline among individual names, down 7.9%.
Yahoo isn't planning to lay off any employees before its sale closes. Additionally, all unvested stock options will vest immediately, but restricted stock units will continue on their existing schedule. The sale is expected to close in the first quarter of 2017.
Tablet sales are in free fall. Sales tumbled 12.3% year-over-year in the second quarter, VentureBeat says, citing data from the research firm IDC. The tablet space has now seen sales decline for seven consecutive quarters.
ISIS Assault
The U.S. conducted airstrikes against Islamic State’s primary stronghold in Libya for the first time on Monday, deepening American involvement in efforts to defeat the group in North Africa. U.S. aircraft struck Islamic State vehicles and a tank in the coastal city of Sirte, a critical base for the extremist group outside its self-declared caliphate in Iraq and Syria, a Pentagon spokesman said. The U.N.-backed Libyan government has been fighting in a campaign alongside local militias to oust Islamic State from Sirte. By Monday, the group had been isolated to a roughly 3.1-mile radius in the city, according to the head of military intelligence for the militias.
Rio Regrets
Rio de Janeiro’s Olympics woes have soured the International Olympic Committee on cities in the developing world playing host to the world’s biggest sporting event. The organization is now backing away from a previous goal of opening up the Games to a broader selection of cities: Ambitions to hold the Olympics in Africa or India appear shelved indefinitely. Rio, the first South American city to host the event, was supposed to mark the dawn of a new, more adventurous era for the IOC. It is, instead, shaping up as a cautionary tale, with Brazil’s worst recession in decades, lagging construction, cost overruns, heavy pollution and negative local sentiment. Meanwhile, severe congestion jammed Rio’s streets on Monday as authorities closed off lanes for Olympics-related traffic, raising questions about the city’s transit plans four days before the opening ceremony.
Verizon’s Big Gamble
With revenue growth and profits flat in the wireless industry, Verizon is looking to Hollywood and Silicon Valley. We chronicle the wireless carrier’s more than $10 billion gamble to build a digital-media business to compete with Facebook and Google for advertising dollars. The plan is to own and distribute online content and use data collected from mobile phones to target advertising to tens of millions of users. Verizon gained some ad technology and websites last year by buying AOL, and it doubled down in July by agreeing to pay $4.8 billion for Yahoo. It is a radical move for a corporate giant long treated by investors as a utility with a safe dividend, and is a strategy that has previously stymied other players, including Yahoo itself. Meanwhile, Verizon said Monday that it agreed to acquire mobile workforce-solutions company Fleetmatics for $2.4 billion.

Elon’s Empire

http://bit.ly/MuskEmpire

Tesla on Monday said it had reached a deal to buy SolarCity for less than the price it originally proposed, as Elon Musk takes the next step forward with his plan to combine his electric-car and solar-energy companies. The all-stock deal values SolarCity at about $2.6 billion. Bond investors bet on BoE stimulus Investment-grade corporate bonds in the UK are posting strong returns despite the country's decision to exit the EU. Many investors are banking on stimulus from the Bank of England. The Wall Street Journal (tiered subscription model) Verizon to pay $2.4B for car-tracking firm Fleetmatics Verizon Communications says its $2.4 billion acquisition of GPS vehicle-tracking company Fleetmatics Group will accelerate its entry into fleet management and the connected-vehicle business. The transaction price of $60 a share is about a 40% premium to Fleetmatics' closing price Friday. Reuters (01 Aug.)

Stock markets around the world are mostly lower. Spain's IBEX (-1.8%) paces the decline in Europe after Japan's Nikkei (-1.5%) led the losses in Asia. S&P 500 futures are down 3.50 points at 2,161.00.
Earnings reporting picks back up. Aetna, Archer-Daniels-Midland, CVS Health, Ferrari, Molson Coors, and Pfizer are among the names reporting ahead of the opening bell, while American International Group, Caesars Entertainment, Etsy, and Sturm Ruger highlight the names releasing their quarterly results after markets close.

US economic data is light. Auto sales will be released throughout the day. The US 10-year yield is higher by 2 basis points at 1.54%.

Government spending is making a comeback.

Brexit imperils Britain's £405 billion infrastructure boom.

Draghi's liquidity drowns out European companies' Brexit woes.

Bottled water to outsell soda in the U.S. for the first time this year.

Anthrax spewing zombie deer are the least of your planet warming worries. 

Trump calls Clinton "the devil."

Further questions about Chinese GDP.

Aleppo Conditions Worsen Under Siege

Russian Helicopter Shot Down in Syria

Uber’s Efforts to Build Chinese Business Ultimately Fail Against Homegrown Rival Didi

Warning From Tokyo: Don’t Let Bank Regulators Create Another Japan

Aramco Buyer Beware: The Risky Track Record of Government Oil

After years of hearing politicians and international organizations warn about the dangers of too-high deficits, the script is now being flipped as more and more countries are coming around to the idea that some fiscal stimulus is warranted. Between sluggish economic growth, sovereign borrowing costs at record lows, and several years of central bank easing with only so-so results, it makes sense that more government spending is finally getting a fresh look. Perhaps most surprisingly, one of the clearest calls for more government spending is coming from the GOP's candidate for president, Donald Trump, who told the New York Times that more borrowing and spending would be a boon for the economy. "It's called priming the pump," he said. "Sometimes you have to do that a little bit to get things going." That comment prompted Stephanie Kelton, an economist who had served as an adviser to the Bernie Sanders campaign to lament on Twitter that it had to be this candidate who was finally calling for a higher deficit. Kelton has been advocating for more forceful use of fiscal policy for years. So far we haven't really seen any major spending boosts from the big economies, but you should keep watching this space to see what develops.

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