Wednesday September 7 Daily Market Primer

US stocks had another good day yesterday, predictably led by energy shares, which were catching up with their global counterparts after the OPEC-Russia pledge to work together to prop up prices over the weekend.  Telecom stocks also had a good day,  up .9%, and they are up 17% for the year as investors seek reliable dividend payers in a low yield world.  The market seems to have formed a consensus that a September rate hike is a non-issue, now looking ahead to December as the earliest possibility.  Asian markets were mostly down, especially Japan, which was penalized by investors as the Yen jumped .5% against the dollar.  The US market just opened slightly….down.

	LAST	CHANGE	% CHG
DJIA	18538.12	46.16	0.25%
Nasdaq	5275.91	26.01	0.50%
S&P 500	2186.48	6.5	0.30%
Russell 2000	1253.37	1.54	0.12%
Global Dow	2490.45	4.49	0.18%
Japan: Nikkei 225	17012.44	-69.54	-0.41%
Stoxx Europe 600	350.12	0.66	0.19%
UK: FTSE 100	6841.89	15.84	0.23
CBOE Volatility	12.14	0.12	1.00%
China: Shanghai Composite	3091.93	1.22	0.04%
Hong Kong: Hang Seng	23741.81	-45.87	-0.19%
India: S&P BSE Sensex	28926.36	-51.66	-0.18%
Japan: Nikkei 225	17012.44	-69.54	-0.41%
Singapore: Straits Times	2893.65	-2.9	-0.10%
France: CAC 40	4545.88	15.92	0.35%
Germany: DAX	10738.48	51.34	0.48%
Italy: FTSE MIB	17254.18	201.61	1.18%
Spain: IBEX 35	8988.7	89.2	1.00%
U.S. 3 Month	0.343	0/32
U.S. 2 Year	0.718	1/32
U.S. 5 Year	1.102	2/32
U.S. 10 Year	1.522	4/32
U.S. 30 Year	2.207	1/32
Germany 2 Year	-0.666	0/32
Germany 10 Year	-0.119	3/32
Crude Oil	44.97	0.14	0.31%
Brent Crude	47.36	0.1	0.21%
Natural Gas	2.724	0.007	0.26%
S&P GSCI	349.87	1.68	0.46%
E-mini S&P 500	2183	-1.5	-0.07%

Hedge fund manager Bill Ackman decided to take a break from railing against Herbalife, and disclosed a 9.9% stake in Chipotle, where he is seeking discussions with management about working together to increase the stock price.  Maybe it’s already working, since Chipotle was up 6% in after hours trading.  Apple kicks off the iPhone 7 product cycle today, and will probably announce a few other products, but its getting harder for them to surprise the market since the Apple leaks industry has been getting bigger and better than ever.  Ireland has reiterated their promise to appeal the Apple tax decision with the EC.  HSBC may face criminal prosecution in the US over forex practices if it’s found to have violated the terms of its 2012 deferred prosecution agreement.  And according to ETF.com, Northern Trust may be getting into the actively managed fixed income ETF business (FlexShares readies, below).

  

Here’s the news:

Apple

It's a big day for Apple Inc., and not just because it's having a product event in San Francisco where it's expected to launch a new iPhone and a faster Apple Watch in an attempt to reignite interest in that product category. Meanwhile, the ongoing argument about the company's tax position moved to the Irish parliament this morning, which was recalled early to debate the issue. Irish premier Enda Kenny said the government there has "every expectation of success" in their appeal of the EU's €13 billion (plus interest) ruling against the company. Apple shares were higher at $108.20 in premarket trading.

Carney barney

Bank of England Governor Mark Carney is expected to face something of a no-slowdown showdown when he answers questions from British lawmakers today, some of whom have accused the central bank of acting too early when it cut rates in the aftermath of the result of the Brexit referendum. While there have been upside surprises in data in recent days which helped move the pound above $1.34 yesterday, this morning saw disappointing manufacturing output numbers and house prices drop for a second month, pushing the pound lower to $1.3367 by 6:13 a.m. ET.

HSBC charges weighed

Prosecutors in the U.S. are considering criminal charges against a unit of HSBC Holdings Plc which relate to conduct on its foreign-exchange desk. The prosecution, if it were to go ahead, could have wide ranging implications for the bank since it signed a 'deferred prosecution' deal with the Justice Department back in 2012, which basically left it on probation. If HSBC is found to have broken the terms of the deferred prosecution, then the bank could find itself pulled back into the money laundering and sanctions case that it thought it had put behind it four years ago.

Markets are quiet

Overnight, the MSCI Asia Pacific Index rose 0.3 percent while Japan's Topix index dropped 0.2 percent as the yen gained against the dollar. In Europe, the Stoxx 600 Index was 0.1 percent higher at 6:13 a.m. ET as calm reigns ahead of tomorrow's European Central Bank decision. S&P 500 futures were 0.1 percent lower.

Bank of Canada

Central bank month rolls into Canada today, where Governor Stephen Poloz is expected to maintain the bank's 0.5 percent benchmark lending rate at 10 a.m. in Ottawa. Canadian and U.S. bond yields have diverged by the most in almost half a year as investors bet that Poloz could be years away from following the expected Federal Reserve's rate-increase path. In fiscal matters, a Bloomberg poll has found that stimulus packages from Prime Minister Justin Trudeau's government have done little to boost consumer spending.

Australia has gone what seems like forever without a recession. The Australian economy grew 0.5% quarter-over-quarter in the April through June period. And while the reading was a bit below the 0.6% growth that was expected, it marked Australia's 25th consecutive year without a recession. The Australian dollar is down 0.1% at .7678 per dollar. 
British manufacturing fell sharply in the wake of Brexit. Data from the Office for National Statistics showed manufacturing production fell 0.9% in July, missing expectations of a 0.4% decline. While the reading was disappointing, it should be noted that production fell 0.2% in June and 0.6% in May. The British pound is weaker by 0.5% at 1.3370 versus the dollar.  
Turks don't want to join the EU. Turkish Foreign Minister Mevlut Cavusoglu says the government is under pressure to end negotiations to join the EU as Turks see a "double standard" being applied following the coup attempt earlier this year. 
Bill Ackman has taken a massive stake in Chipotle. Ackman's hedge fund, Pershing Square, disclosed a 9.9% stake in the fast casual burrito chain, saying in a 13D filing that the stock is "undervalued and is an attractive investment."  
Lego has a plan to revive US sales growth. The world's largest toy maker says it is building a new plant in China and increasing production elsewhere in an effort to add production capacity to meet growing demand in North America. 
Credit Suisse has a new head of global markets. Brian Chin has been named CEO of global markets and will join the executive board of the investment bank, Reuters reports.
Back to School
A federal crackdown on for-profit colleges is cutting off a lifeline to the once-high-flying industry as the second major school operator in recent years closed Tuesday, potentially leaving taxpayers on the hook for hundreds of millions of dollars in student loans. ITT Technical Institute, among the nation’s largest for-profit college chains by revenue, abruptly closed more than 130 campuses, forcing more than 40,000 students at campuses in 38 states to begin looking for another school after the government banned it from enrolling new students receiving federal aid. ITT got 80% of its cash revenue in 2015 from Title IV federal aid, including Pell Grants and student loans. Meanwhile, a lawsuit seeking class-action status was filed Tuesday on behalf of the 8,000 employees laid off by the closure of ITT’s campuses.
Iran’s ATM
The Obama administration followed up a planeload of $400 million in cash sent to Iran in January with two more such shipments in the next 19 days, totaling another $1.3 billion. The payments settled a decades-old dispute over a failed arms deal dating back to 1979. U.S. officials have acknowledged the payment of the first $400 million coincided with Iran’s release of American prisoners and was used as leverage to ensure they were flown out of Tehran on the morning of Jan. 17. We report that the Obama administration briefed lawmakers on Tuesday, telling them that two further portions of the $1.3 billion were transferred though Europe on Jan. 22 and Feb. 5. The revelations come as Congress returns from a summer recess with Republicans vowing to pursue charges that the White House paid ransom to Tehran, a charge President Barack Obama has repeatedly rejected.
Accentuate the Negative
Investors are now paying for the privilege of lending their money to companies, a fresh sign of how aggressive central-bank policy is upending conventional patterns in finance. German consumer-products company Henkel and French drugmaker Sanofi each sold no-interest bonds at a premium to their face value Tuesday,—in effect a negative interest rate—a rare feat for companies which ask investors to bear credit risk. Meanwhile, we report that Wall Street has re-engineered the most bread-and-butter of investments in a way that leaves many investors with lower returns, and facing losses if they have to cash out early. Returns on market-linked or structured CDs depend on the performance of a basket of stocks or other assets instead of a flat interest rate. We take a look at some disappointing returns data.

Merger to create $127B pipeline giant

Pipeline companies Enbridge and Spectra Energy have agreed to an all-stock merger to create the biggest energy-infrastructure company in North America, worth about $127 billion. Enbridge shareholders will get a 57% stake in the combined entity, while Spectra shareholders will receive the remaining 43%.  The New York Times (free-article access for SmartBrief readers)

UK's Hammond, bank execs discuss Brexit

Hammond (Carl Court/Getty Images)

UK Chancellor Philip Hammond is meeting Wednesday with London bank executives to explain the government's economic plan in light of Brexit uncertainty. Hammond says the government wants to "ensure the continued investment that creates jobs and supports wage growth throughout this period of uncertainty ahead of the UK formally leaving the EU."

Bloomberg (06 Sep.) 

Saudi Arabia aims to reduce budget deficit

Saudi Arabia is considering cutting $20 billion worth of projects and scaling back ministry budgets 25% as it struggles to bring down the biggest budget deficit among the world's 20 biggest economies, sources said. Last year's budget deficit shot up to 16% of GDP.  Bloomberg (07 Sep.) 

FlexShares readies actively managed bond ETF

Northern Trust's FlexShares has filed with the Securities and Exchange Commission for an actively managed exchange-traded fund buying investment-grade corporate debt denominated in US dollars. The FlexShares Core Select Bond Fund would primarily buy shares in other ETFs and registered investment companies.  ETF.com

Stock markets around the world are mixed. Japan's Nikkei (-0.4%) lagged in Asia and Spain's IBEX (+0.8%) leads the pack in Europe. S&P 500 futures are down 1.25 points at 2,183.25. 
Earnings reporting is light. Hewlett Packard Enterprise will report after markets close.  

US economic data is light. JOLTs Job Openings will be released at 10 a.m. ET and the Fed's Beige Book will cross the wires at 2 p.m. ET. The US 10-year yield is unchanged at 1.54%.  

How Glencore's roller-coaster ride tamed its swashbuckling CEO.

Four fresh worries about China's shadow bank system.

Duterte outbursts are taking toll as Philippine stock losses mount.

The G-20 gets it, but is unlikely to act.

The fading college dream is sapping the U.S. economy.

Merkel says more needs to be done in defense of refugee policy.

Robot Macroeconomics: What can theory and several centuries of economic history teach us?

Immigration Source Shifts to Asia From Mexico

Undecided GOP-Leaning Voters Provide an Opening for Donald Trump

Kabul Siege Ends After 10-Hour Gun Battle at Aid Group Compound

Pershing Square Reveals 9.9% Stake in Chipotle

Driver-Led Oil Rally in Peril as Stockpiles Grow

The only thing you need to know about this market right now is that shares of Amazon.com Inc. have been tracking the price of silver over the last 10 days. Okay, that may be a bit of an exaggeration, but not by much. Why is this relevant? Because the defining feature of this market is the high degree of cross-asset correlation, or everything moving together. You've probably seen charts showing the degree to which stock indexes like the S&P 500 are tracking government bonds. But the trend has moved beyond that to the point where a monkey throwing two darts at a newspaper (presuming the paper still had listings, and presuming the paper listed multiple asset classes) would probably hit two very different things that had very similar charts. It's for this reason that one major hedge fund has 50 percent of its money held in cash, because there's no such thing as diversification right now with everything trading in lockstep together. This is arguably what happens when all markets are focused on central banks, and everything seems to trade to varying inverse betas from cash. Now by comparing Amazon and silver, I may be putting my finger on the scale just a little. Both of these are arguably important macro assets. Amazon is a growth juggernaut in a period of low growth, and one that's provided outsized returns to any portfolio that's owned it. Silver is a precious metal and obviously a Fed-sensitive one, that has some 'growthy' aspects in that it tends to outperform gold during the good times. So it's not a total accident that the two have moved in tandem. Nonetheless, the similarities in the charts over the last couple of weeks reveal something important about this market.

Source: Bloomberg, BI, WSJ, CFAI Fin. Newsbrief, ETF.com