Friday September 30 Daily Market Primer

Happy last day of Q3. Stocks sank again yesterday, affected by the negative Bloomberg story about Deutsche Bank trading partners withdrawing collateral and assets on deposit.   The Dow and S&P were down 1%.  The weakness is also dragging down European banks and the broader markets this morning.   Asian markets fell overnight reflecting the higher financial sector risk.  US equity futures are just barely positive this morning.   I’ve been saying that the Deutsche Bank situation in not a Lehman moment, and I'm sticking by that call.   While I proofread this US markets opened up .5%, shaking off Deutsche Bank woes at least for the moment.

	LAST	CHANGE	% CHG
DJIA	18143.45	-195.79	-1.07%
Nasdaq	5269.15	-49.39	-0.93%
S&P 500	2151.13	-20.24	-0.93%
Russell 2000	1237.75	-17.91	-1.43%
Global Dow	2438.18	-15.77	-0.64%
Japan: Nikkei 225	16449.84	-243.87	-1.46%
Stoxx Europe 600	341	-1.72	-0.50%
UK: FTSE 100	6880.79	-38.63	-0.56%
Asia Dow	2969.86	-40.4	-1.34%
DJ Asia-Pacific TSM	1474.85	-14.53	-0.98%
Australia: S&P/ASX 200	5435.9	-35.4	-0.65%
China: Shanghai Composite	3004.7	6.22	0.21%
Hong Kong: Hang Seng	23297.15	-442.32	-1.86%
India: S&P BSE Sensex	27865.96	38.43	0.14%
Singapore: Straits Times	2869.47	-16.24	-0.56%
France: CAC 40	4404.97	-38.87	-0.87%
Germany: DAX	10369.34	-36.2	-0.35%
Italy: FTSE MIB	16208.42	-130.36	-0.80%
Spain: IBEX 35	8697.1	-99.2	-1.13%
U.S. 3 Month	0.259	0/32
U.S. 2 Year	0.738	0/32
U.S. 5 Year	1.107	1/32
U.S. 10 Year	1.545	3/32
U.S. 30 Year	2.272	2/32
Germany 2 Year	-0.688	0/32
Germany 10 Year	-0.147	10/32
Crude Oil	47.83	0	0.00%
Brent Crude	48.99	-0.25	-0.51%
Natural Gas	2.939	-0.02	-0.68%
S&P GSCI	363.45	0.13	0.03%
E-mini S&P 500	2149.75	1.25	0.06%

Consumer spending fell .1% in August, while core inflation was up 1.7% YOY (year over year).  This is below the consensus forecast of +.1%.

Qualcomm may buy NXP Semiconductors in a $30 billion dollar deal.  If you are wondering “who is NXP and how can they be worth $30 billion if I’ve never heard of them?”, it might be because NXP is a Netherlands company, which makes a wide range of specialized chips for the automotive, networking, security, and RF (think TV controller) markets.  NXPs biggest claim to fame is as co-inventor (along with Sony) of NFC, or near field communications, which allows gadgets to talk to each other at close range.    This is the technology behind ubiquitous RFID tags, keyless entry systems on cars, and some mobile payment systems.  NXP bulked itself up in 2015 buy buying Austin based Freescale Semi, itself a chip giant behind such technologies as very small chips used in FitBits and wireless charging.

Friday Factoid:  Six Reasons to Love Hedge Funds

With equity markets high and a risk off market over the last few days, here are some reasons to talk to clients about NT Hedge Funds

1. Equity markets are high, volatility has been low, and some clients are worried
2. Equity is the biggest risk in most portfolios, hedge funds reduce equity risk
3. Our hedge funds are diversified sources of non correlated alpha and not subject to the concentration risk of the hedge funds making the headlines
4. Hedge funds provide similar diversification without an 8-10 year lockup of PE
5. Diversified, Alpha, and Equity Long-Short have 3 and 5 year returns in the 4-5% range and beat HFRI benchmarks.
6. Fees are decreasing.  A WSJ article published on Tuesday said average hedge fund fees are closer to 1.5% and 17.5% than 2 and 20.  We have recently negotiated fee discounts with seven of our own funds-of-funds managers

Here’s the news:

Deutsche Bank

Shares in German lender Deutsche Bank AG dipped below €10 and its riskiest bonds dropped as concerns about the lender's ability to withstand mounting legal costs lead to some hedge funds reducing their exposure to the bank. Chief Executive Officer John Cryan said the bank has never had as safe a balance sheet, adding that there is "no basis" for media speculation on clients leaving. In a possible sign of wider market tensions for European banks, dollar liquidity provided by the ECB jumped significantly this week. 

Risk off

The pressure on Deutsche Bank is pushing down equity markets across the globe. Overnight, the MSCI Asia Pacific Index dropped 1.1 percent while Japan's Topix Index fell 1.5 percent. In Europe, the Stoxx 600 Index was 0.9 percent lower at 5:56 a.m. ET as the fall in bank shares spoiled the end of the index's best quarter for lenders in 18 months. S&P 500 futures were little changed. In the bond market, yields on German sovereign debt dropped to the lowest level since July.

Several years of work by Chinese authorities will bear fruit tomorrow when the yuan joins the International Monetary Fund’s Special Drawing Rights basket of currencies — alongside the dollar, euro, yen and pound. Gaining recognition as a reserve currency does not guarantee wider adoption for transactions, as the Japanese yen shows, with that currency still accounting for just 4 percent of global reserves. Where the yen stalled, China hopes the yuan will flourish as it seeks to become an alternative to the dollar.

Yuan day

Several years of work by Chinese authorities will bear fruit tomorrow when the yuan joins the International Monetary Fund’s Special Drawing Rights basket of currencies — alongside the dollar, euro, yen and pound. Gaining recognition as a reserve currency does not guarantee wider adoption for transactions, as the Japanese yen shows, with that currency still accounting for just 4 percent of global reserves. Where the yen stalled, China hopes the yuan will flourish as it seeks to become an alternative to the dollar.

U.K. deficit widens

The U.K. current-account deficit widened to 28.7 billion pounds in the second quarter, the Office for National Statistics said this morning. Separately, the ONS also revised second-quarter economic growth higher, to 0.7 percent from 0.6 percent. The numbers come as, almost 100 days after the referendum on E.U. membership, firms remain in the dark as to what a Brexit will actually look like. The pound was trading broadly unchanged at $1.2974 at 6:30 a.m. ET.

Coming up...

The Fed's preferred inflation gauge, the core PCE deflator, is expected to have picked up to 0.9 percent when the number is published at 8:30 a.m. ET. Personal income and spending are due at the same time, with economists expecting both to have slowed in August. At 10.00 a.m. the latest University of Michigan consumer-sentiment report is due.

Deutsche Bank CEO John Cryan sent another memo to employees. The memo, which was aimed at reassuring employees, said, "Ongoing rumors are causing significant swings in our stock price." It continued: "Trust is the foundation of banking. Some forces in the markets are currently trying to damage this trust."
Contagion from Deutsche Bank spreads across Europe. Bank stocks across Europe are in the red amid fears of a collapse of Deutsche Bank. Commerzbank Bank, Germany's second-largest bank behind Deutsche Bank, is down by about 6%.
Hedge funds are bleeding assets. Reuters reports that the Billion Dollar Club report provided by Hedge Fund Intelligence showed that assets at the largest hedge funds fell by nearly 7%, or $132 billion, in July from a year ago.
There was another sign China's industrial sector is stabilizing. The Caixin-Markit manufacturing purchasing managers' index report for September showed a small uptick to 50.1 in September, making for the third straight month in which reading has held steady or improved. That hadn't happened since late 2014.
Europe is finally starting to see some inflation. Data from Eurostat showed that eurozone consumer prices climbed 0.4% year-over-year in September, which is double 0.2% increase from August. The biggest gains were seen in the services sector. The euro is weaker by 0.4% at 1.1177 versus the dollar.
Consumer prices in Japan fell for a sixth straight month. Core consumer prices were down 0.5% YoY in August, holding at their weakest level since March 2013. The Japanese yen is flat at 101.05 per dollar.
UK GDP topped estimates. The UK economy expanded at a 0.7% quarter-over-quarter clip in the second quarter thanks to strength in the production and service sectors, according to the final figures released by the Office for National Statistics. Economists had forecast that the economy would grow at a 0.6% pace. The British pound is little changed at 1.2973 against the dollar.
Sturm und Drang
Is this a Lehman moment? Some Deutsche Bank clients, among them several big and influential hedge funds, are losing faith in Germany’s largest bank. They have moved to pull billions of dollars from Deutsche amid concerns about its stability and their exposure, taking steps to withdraw securities or cash, dial back their trading activities or both. The amount of assets recently withdrawn is a tiny fraction of the bank’s more than $600 billion in customer deposits overall. Still, the retreat is a sign of nervousness about Deutsche Bank’s ability to weather its challenges, some of which are specific to the bank and others wrought by economic conditions plaguing European banks as a group. But an obvious parallel to the failure of Lehman Brothers is deeply misleading, writes our Streetwise columnist James Mackintosh, because Deutsche Bank has a far more diversified client base, a lot more liquidity and access to the ECB. The bank’s shares nose-dived today in Frankfurt to hit new multiyear lows. Its stock has fallen more than 50% this year.
TV Couple
The relationship between CBS chief Leslie Moonves and Shari Redstone—the flashy TV executive and the behind-the-scenes family brawler—holds the key to whether Ms. Redstone can pull off what would be a dramatic finale to a year of corporate drama—putting back together CBS and Viacom, the two companies her father split apart a decade ago. Ms. Redstone, who now essentially controls the $40 billion media empire, would like the companies to consider a merger, and Mr. Moonves’s support is crucial. He is widely regarded on Wall Street as having turned CBS from a TV laggard into a profitable engine. We take a close look at their relationship and report that Mr. Moonves, for his part, wants to get in sync with Ms. Redstone, but isn’t yet persuaded of the merits of a merger.
Reverse Coattails
If Donald Trump wins Ohio, it may be because of the groundwork laid by Rob Portman, the state’s Republican senator who avoided the stage, the presidential nominee and the spotlight during the Republican Party’s Cleveland convention in July. Mr. Trump’s campaign only recently started organizing voters in Ohio—months after Hillary Clinton—while Mr. Portman has for nearly two years been identifying and courting GOP voters in anticipation of a tough re-election race. Consequently, Ohio may be a rare case study in reverse political coattails, with big stakes for Mr. Trump. We also report that political TV advertising is forecast to fall this election season, due to Mr. Trump’s resistance to ads. On the campaign trail, he traveled to New Hampshire for the sixth time since mid-June yesterday, while Mrs. Clinton arrived in Iowa for the first day of early voting there. Meanwhile, astrologers are demanding to see Mrs. Clinton’s birth certificate to learn her exact time of birth.

Qualcomm reportedly discussing $30B deal to buy NXP

Qualcomm is in talks to acquire rival chipmaker NXP Semiconductors in a deal that could be valued at more than $30 billion, a person briefed on the matter said. NXP shares closed up 16.9% Thursday, while Qualcomm's stock was up 6.3%.  The New York Times (free-article access for SmartBrief readers) (29 Sep.),  Reuters (29 Sep.) 

Harvard endowment taps Columbia's Narvekar

Harvard University has hired Nirmal Narvekar, who successfully overhauled Columbia University's endowment, as CEO of its fund. Harvard's fund has been generating just 5.7% in annualized returns over the past decade, trailing behind Yale's 8.1% and Columbia's 10.1%.  Bloomberg (30 Sep.) 

Tech firms launch group to promote AI benefits

Some high-profile US tech companies, including Google and Microsoft, have formed a nonprofit to help stem concerns that artificial intelligence is bad for jobs and humanity.  Financial Times (tiered subscription model) (28 Sep.) 

Stock markets round the world are lower. Hong Kong's Hang Seng (-1.9%) led the losses in Asia, and Spain's IBEX (-1.7%) paces the decline in Europe. S&P 500 futures are down 3.75 points at 2,144.75.

US economic data flows. Personal income and spending will be released at 8:30 a.m. ET before Chicago PMI and University of Michigan consumer confidence cross the wires at 9:45 a.m. ET and 10 a.m. ET. The Baker Hughes rig count is due out at 1 p.m. ET. The US 10-year yield is lower by 2 basis points at 1.54%.

Wall Street says annual holiday stock rally isn't on the cards this year.

Secret Alpine gold vaults are the new Swiss bank accounts.

Into Africa: Cocaine, commodities and a blue-blooded trader.

China's new silk road hinges on a small Pakistan port.

Elizabeth Warren trains her sights on a new target.

Why unconventional monetary policy works in theory.

U.S. Second-Quarter GDP Revised Up to 1.4% Gain

Congress Looks to Narrow Bill Allowing Terror Victims to Sue Foreign Governments

U.S. Signed Secret Document to Lift U.N. Sanctions on Iranian Banks

Salesforce.com to Press Regulators to Block Microsoft-LinkedIn Deal

Promontory Financial Group Signs Up With IBM

“Our trading clients are amongst the world’s most sophisticated investors,” a spokesman for Deutsche Bank AG wrote yesterday, responding to a Bloomberg story that reveals some funds are cutting exposure to the afflicted lender. “We are confident that the vast majority of them have a full understanding of our stable financial position, the current macroeconomic environment, the litigation process in the U.S. and the progress we are making with our strategy.” It turns out flattery doesn't get you everywhere. Those compliments weren't enough to prevent Deutsche's share price from dropping below 10 euros at one point in early morning trading -- a new record low. Even though the Lehman Comparison starting to rear its head is exaggerated, for reasons that include (but aren't nearly limited to) the fact that Lehman Brothers Inc. wasn't a bank, had no access to deposit funding, and the German government says so, things aren't looking good for European banking this morning. Deutsche can console itself. It's not the only one in a tight position, for one thing, and it's hardly without options; hot on the heels of an adviser to President's Erdogan's tongue-in-cheek suggestion that Turkey should snap it up comes the almost more extraordinary revelation that companies do very well after the Turkish government takes them over, thank you. (Disclaimer: it doesn't always end nicely.) It's hard to remember that this has been the best quarter for global stocks this year, with the last days of September bringing such a torrent of bad news for banks. Maybe the rest of the year will bring better cheer. (Or maybe not.)

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