Tuesday October 25 Daily Market Primer

US stocks had another good day yesterday, as mergers created optimism in the market, earnings are reasonably strong, and tech stock continued to outperform, with the NASDAQ posting double the return of the S&P.  Treasury bond yields are moving up, with the US 10 year at 1.78% this morning.  The Chinese yuan has been depreciating, and it’s down 1.5% since the end of September, and at the lowest level since 2010, but global markets do not seem to be reacting. Overseas markets are mostly up, and the US S&P future is basically flat this morning.

	LAST	CHANGE	% CHANGE
DJIA	18,223.03	77.32	0.43%
Nasdaq	5,309.83	52.43	1.00%
S&P 500	2,151.33	10.17	0.47%
Russell 2000	1,226.45	8.35	0.69%
Global Dow	2,458.81	10.43	0.43%
Japan: Nikkei 225	17,365.25	130.83	0.76%
Stoxx Europe 600	344.60	0.34	0.10%
UK: FTSE 100	7,015.72	29.32	0.42%
CBOE Volatility	12.93	-0.41	-3.07%
Australia: S&P/ASX 200	5,442.80	34.30	0.63%
China: Shanghai Composite	3,083.88	42.71	1.40%
India: S&P BSE Sensex	28,091.42	-87.66	-0.31%
France: CAC 40	4,553.58	1.00	0.02%
Germany: DAX	10,791.12	29.95	0.28%
Italy: FTSE MIB	17,275.06	-30.71	-0.18%
Spain: IBEX 35	9,170.80	-45.40	-0.49%
Germany: DAX	10,791.12	29.95	0.28%
Italy: FTSE MIB	17,275.06	-30.71	-0.18%
Spain: IBEX 35	9,170.80	-45.40	-0.49%
U.S. 3 Month	0.345	1/32
U.S. 2 Year	0.856	-1/32
U.S. 5 Year	1.291	-2/32
U.S. 10 Year	1.781	-4/32
U.S. 30 Year	2.525	-4/32
Germany 2 Year	-0.65	-0/32
Germany 10 Year	0.034	-3/32
Crude Oil	50.6	0.08	0.16%
Brent Crude	51.41	-0.05	-0.10%
Natural Gas	3.472	0.007	0.20%
S&P GSCI	375.83	0.87	0.23%
E-mini S&P 500	2146.25	2	0.09%

T-Mobile was up 9.5% on and earnings and revenue beat, while much larger rival ATT is sank 1.7% on the Time Warner deal.  Apple reports today and you know what that means – nervous investors everywhere since as we have discussed before, Apple has a strong influence on the cap weighted indices because of its size.

The WSJ has another article on Active-Passive, this one focusing on how proxies are voted.   This has implications for ESG (aka Impact) investing, since passive investors are less likely to vote in an ESG aware manor (The Active Passive, below). 

Here’s the news:

Big day in tech

Apple Inc. is likely to report its first annual drop in revenue since 2001 when the company releases earnings after the bell this evening, according to analysts' estimates. Investors will be particularly focused on Apple's performance in China, where competition from local manufacturers has been increasing. Meanwhile, Twitter Inc.'s woes continue, with the company said to be planning to cut as much as 8 percent of its workforce, according to people familiar with the matter. An announcement on the cuts could come before Twitter releases earnings on Thursday. 

Yuan falls

The U.S. Federal Reserve is inclined to raise interest rates higher than would otherwise be the case if the next president pursues an expansionary fiscal policy. Speaking yesterday evening, Federal Reserve Bank of Chicago President Charles Evans said that the Fed should be more explicit about how policy makers would respond to new information on the economy. Market-implied odds of a rate increase by the central bank in 2016 were at 71 percent this morning.

Markets creep higher

Overnight, the MSCI Asia Pacific Index advanced 0.4 percent, while Japan's Topix index added 0.7 percent to climb to the highest level since May as the yen weakened against the U.S. dollar, boosting the outlook for exporter earnings. In Europe, the Stoxx 600 Index was 0.1 percent higher at 6:13 a.m. ET as a drop in bank shares was offset by a rise in miners. S&P 500 futures added 0.1 percent.

U.K. poll backs May

Britons are more concerned about controlling immigration than maintaining access to the European Union, according to a survey published this morning, suggesting support for Prime Minister Theresa May's position on Brexit. Meanwhile, Bank of England Governor Mark Carney is due to face questions in the House of Lords on the economic consequences of the Brexit vote, which will be watched closely by traders as to hints of future policy, as well as the governor's intentions for his own future.

Obamacare will get a lot more expensive in 2017. On Monday, the Obama administration warned that premiums for plans under the Affordable Care Act, also known as Obamacare, would soar by an average of 25% next year.

Twitter is planning a round of layoffs. The social-media company is planning to cut about 300 jobs, or about 8% of its staff, according to a Bloomberg report citing anonymous sources.

Apple Watch sales are in free fall. An estimate released by IDC shows Apple shipped just 1.1 million Apple Watches in the third quarter of 2016, down a whopping 71.6% form the 3.9 million watches that were delivered a year ago.

The world's oldest bank is cutting jobs and shares are crashing. The debt-ridden Banca Monte dei Paschi di Siena is down more than 13% in Rome after announcing it would slash 2,600 jobs, or about 10% of its labor force.

South Korea's economy was hurt by the fire-prone Galaxy Note 7. The South Korean economy grew by a seasonally adjusted 0.7% quarter-over-quarter in the third quarter. "When you take away the effects from Samsung and Hyundai, third-quarter growth was considerably better than expected," said Chung Kyu-il, a director at the Bank of Korea. The Korean won slipped 0.2% to 1133.35 per dollar.

Business conditions in Germany keep improving. Germany's Ifo Business Climate survey rose to 110.5 in October, making for the best print since April 2014. "The upturn in the German economy is gathering impetus," Professor Dr. Clemens Fuest, the president of the Ifo Institute, wrote in the report. The euro is weaker by 0.2% at 1.0879 against the dollar.

Greece got more bailout cash. The debt-plagued country has been granted another 2.8 billion disbursement by eurozone officials, raising the total amount of bailout cash awarded to 31.7 billion euros of the 86-billion-euro program that was implemented in July 2015, AFP reports.

Stock markets around the world are up. Overnight, Japan's Nikkei (+0.7%) hit a six-month high. In Europe, Spain's IBEX (+1.3%) leads the advance. S&P 500 futures point to a gain of about 0.2% at the open.

Tough Deal
That $85.4 billion AT&T deal to buy Time Warner sails toward two cresting waves of opposition: resurgent antitrust enforcement in Washington and politicians fired by a new bipartisan populist rage. It is too early to know how regulators will treat the AT&T-Time Warner deal. But after several quiet years, President Barack Obama’s antitrust team has switched into high gear in response to a recent spurt of deal-making. This trend is likely to continue in the next administration, as both presidential campaigns have signaled unease with the AT&T deal. Shares of both companies dropped Monday amid Wall Street skepticism. At WSJDLive, Netflix CEO Reed Hastings offered qualified support for the deal—as long as it doesn’t give an “unfair advantage” to Time Warner’s networks.

Discount Buyer
One of the nation’s biggest discount brokerages is buying a smaller rival as a decline in stock trading and a relentless price war in commissions push stock sellers to seek new ways to make money. The $4 billion acquisition of Scottrade by TD Ameritrade joins two of the biggest names in online brokerage, a business that boomed in the late 1990s as individuals flocked online to buy stocks on their own for a fraction of what traditional brokers had charged them. TD Ameritrade is buying privately held Scottrade for its larger brick-and-mortar brokerage and bank network. The combined company would have more than 10 million client accounts and nearly $1 trillion in assets. The acquisition makes sense as a bet on higher interest rates. But as a response to other forces buffeting the industry, it falls short.

The Active Passive
Index funds are increasingly the default investing option for individuals and big pension funds alike. As a result, the power brokers with leverage over America’s corporate boards are changing. Passive-fund managers used to be unequipped and unwilling to weigh in on most corporate events. With their new power, they are waking up to how much they can sway takeovers, the fates of chief executives and other crucial decisions. Index-fund executives have added employees to deal with shareholder votes but say they don’t use their new power like activist investors. The change is shifting the clout in boardrooms toward investors known for being deferential to management, a stance troubling to stock pickers who believe shareholders should assert themselves. Take a look at how WSJ readers responded to our survey about active versus passive investing.

GOP fears loss of majority in Congress

Polls indicate that public support for Republican presidential nominee Donald Trump is falling rapidly, prompting Republicans to seek ways to maintain control of Congress. Democratic nominee Hillary Clinton is ahead of Trump 50% to 38%, an ABC News poll shows. The New York Times (free-article access for SmartBrief readers)

Exchanges use AI to detect market manipulation

Nasdaq and London Stock Exchange Group plan to launch artificial intelligence by year-end to catch market manipulation and to improve surveillance. The software could simplify complex issues such as layering, in which orders are sent to exchanges, then quickly canceled to falsely move a stock price.

Reuters (25 Oct.) 

Bundesbank report links HFT with "flash crashes"

A Bundesbank report published Monday could support US and European regulators' efforts to further monitor high-frequency trading. "Taken together, the different behaviors of active and passive high-frequency trading firms indicate a heightened risk of periods of short-term excessive volatility, which could encourage market upheavals as far as flash events," according to the report.

The Wall Street Journal (tiered subscription model)

M&A involving RIA firms rises

Mergers and acquisitions among registered investment advisory companies reached 109 in the first nine months of this year, compared with 100 in the same period last year, according to DeVoe & Co. The third quarter saw 37 M&A transactions, up from 30 in Q3 of 2015.

InvestmentNews (24 Oct.) 

Earnings reporting is heavy. Caterpillar, Freeport McMoRan, General Motors, and Under Armour are among the names reporting ahead of the opening bell, while Apple and Chipotle Mexican Grill highlight the names releasing their quarterly reports after markets close.

US economic data flows. The FHFA Home Price Index will be released at 9 a.m. ET, and consumer confidence crosses the wires at 10 a.m. ET. The US 10-year yield is unchanged at 1.77%.

Green power installations have beaten fossil fuel for the first time.

Shares of the world's oldest bank go on wild ride following turnaround plan.

Trump's Facebook Live may herald a new media venture.

Silicon Valley decides it's just too hard to build a car.

Ratings inflation is back, subprime style.

Are banks being roiled by oil?

Fed’s Task Next Week: Signal December Rate Rise

The Real Problem of This Election: Lack of a Mandate for the Winners

Retailers Rushed to Hire for Holidays, a Sign of Tight Labor Market

Deal Making Has Biggest Week Since 1999

At the beginning of the year, it seemed likely that one of the big stories for global financial markets would be Chinese monetary conditions. Both the selloff of August 2015 and the one in January 2016 were accompanied by weakness in the yuan that caught people by surprise. The currency is back on the radar now, with USD/CNY at its highest level since Sept. 9, 2010. The broader story, however, is very different to previous bouts of yuan weakness. While the move may be leaking into the price of Bitcoin (which as Bloomberg's Justina Lee notes has hit a three-month high) it doesn't seem to be affecting that much else. Bloomberg's David Ingles notes that U.S. financial conditions haven't tightened at all with the latest yuan move. Perhaps the big difference between now and then was the orderliness of the move. Yuan three-month implied volatility is near its lowest level of the year, so even though there's been a significant move, it hasn't caught investors offguard. The attached chart shows how U.S. financial conditions have closely mirrored yuan volatility over the last two years, signaling that the absolute price level of the currency is not the most important thing to pay attention to.

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