Friday December 23 Daily Market Primer
US
stocks slipped
in lackluster trading ahead of the Christmas holiday. The market is on
track for a very good December if nothing goes wrong, with the Dow up over
4% for the month. Big retailers didn’t help yesterday,
with Bed Bath & Beyond down 9% on an earnings decline, Nordstrom down 6%,
and Gap down 5%. Treasury yields are creeping back up over the
last few days, and the 10 year is 2.54% this morning, and oil seems to like a
low 50s price, for now. Stocks fell in Asia and are up slightly in Europe,
as investors breathed a sigh of relief on big bank settlements with the US, and
S&P futures are pointing to a down Christmas Eve-Eve.
LAST
|
CHANGE
|
% CHANGE
|
|
19,918.88
|
-23.08
|
-0.12%
|
|
5,447.42
|
-24.01
|
-0.44%
|
|
2,260.96
|
-4.22
|
-0.19%
|
|
1,362.66
|
-12.53
|
-0.91%
|
|
2,533.29
|
-2.50
|
-0.10%
|
|
Stoxx
Europe 600
|
359.75
|
-0.07
|
-0.02%
|
Nikkei
225
|
19,427.67
|
-16.82
|
-0.09%
|
UK:
FTSE 100
|
7,068.17
|
4.49
|
0.06%
|
CBOE
Volatility
|
11.57
|
0.14
|
1.22%
|
Australia:
S&P/ASX 200
|
5,627.90
|
-16.00
|
-0.28%
|
3,110.15
|
-29.40
|
-0.94%
|
|
21,574.76
|
-61.44
|
-0.28%
|
|
Europe
Dow
|
1,554.00
|
-3.28
|
0.24%
|
India:
S&P BSE Sensex
|
26,040.70
|
61.10
|
-0.21%
|
France:
CAC 40
|
4,836.00
|
1.37
|
0.03%
|
Germany:
DAX
|
11,435.02
|
-21.08
|
-0.18%
|
Italy:
FTSE MIB
|
19,283.20
|
161.94
|
0.85%
|
Spain:
IBEX 35
|
9,351.60
|
18.00
|
0.19%
|
0.508
|
0/32
|
||
1.206
|
-0/32
|
||
2.03
|
1/32
|
||
2.537
|
4/32
|
||
3.108
|
12/32
|
||
-0.79
|
0/32
|
||
0.262
|
0/32
|
||
52.31
|
-0.64
|
-1.21%
|
|
54.41
|
-0.64
|
-1.16%
|
|
3.548
|
0.015
|
0.42%
|
|
389.41
|
-2.55
|
-0.65%
|
|
2256.5
|
-2.25
|
-0.10%
|
Everything
is relative, and it’s a relatively good legal outcome for Duetsche Bank,
which announced a settlement last night of $7.2 billion with US
authorities over mortgage backed trading during the financial crisis. This
amount is half of original the demand from the US of $14 billion.
Only $3 billion of the settlement is in cash and the rest is in the form of
customer relief, including loan modifications. Credit Suisse was
also part of the deal, settling for $5.3 billion. Barclays, which
you’ll remember bought the international business of Lehman Brothers after the
bankruptcy, did not join the settlement and will fight awhile longer.
Deutsche Bank has has already reserved for most of the
legal costs, and the stock rose 3.3% in Frankfurt. How does a $7 billion
settlement stack up with other financial institutions that got in trouble in
the credit crisis? In August of 2014, Bank of America reached the
largest mortgage related settlement with the Justice Department for a whopping
$16.6 billion.
UK
GDP was revised up to .6%. Mr. Trump has been Tweeting again, playing
defense contractors Lockheed Martin and Boeing against each other and
expressing the need to “greatly expand” the US nuclear arsenal. It
was good for uranium miners yesterday, but some policy analysts are
nervous.
Friday
Factoid: Purchasing Power Parity
With
the US dollar on a tear since the election, I thought it might be a good time
review the drivers of exchange rates. There are two main theories
at play, Purchasing Power Parity and Interest Rate Parity. In case you
don’t have your college economics books handy, we will start with this summary
of Purchasing Power Parity.
Time
to get those Eurotrips planned... The USD/EUR exchange rate touched its lowest
rate in twelve years this week, trading at $1.0388 this Tuesday. Investors are
anticipating the dollar continues to strengthen relative to the Euro helped by
divergent central bank monetary policies, hawkish comments from the Fed after
the .25bps rate hike last week, and increase demand for the dollar as we look
forward to repatriation of corporate cash and potential Trump “U.S. first”
trade policies.
YTD USD/EUR Price Movements
In addition, WSJ also
found that more money has left the Eurozone financial markets this year than
any time in the bloc’s history. Between Eurozone investors buying assets
outside of the Eurozone and foreign investors selling their Eurozone assets, a
total of €528.8 billion has left the Eurozone markets as of end of September
putting further downward pressure on the currency and appreciation in the USD.
This
recent change in exchange rates makes it a good time to brush up on the theory
of Purchasing Power Parity (PPP). PPP states that a good or service should be
the same price across borders because any arbitrage opportunity would be
exploited by consumers and/or speculators and drive prices back to an
equilibrium point. The Economist magazine puts out an annual piece to track PPP
known as the Big Mac Index where they track a price of a McDonald’s Big Mac
across the globe to see where it is over/undervalued relative to the price of a
Big Mac in the U.S. based on current exchange rates.
Here’s
the 2016 Economist Big Mac Index ranking countries from most overvalued to most
undervalued:
Applying this to the
current USD/EUR exchange rate, one could hypothetically purchase Big Macs in
the Eurozone at a lower price and sell them to consumers in the U.S. at a
higher rate, thus exploiting price inefficiencies and profiting. Eventually,
others would catch on to this trade and the increased demand for the lower
priced Euro Big Mac (Royale with cheese?) would drive the price up to a point
where it costs the same as a Big Mac in the U.S.
The
PPP does not hold up well in the short-term due to other factors affecting the
exchange rates, but over the long-term it does a better job of predicting
exchange rate movements.
So,
in theory, the depreciation of the Euro relative to the USD should ultimately
benefit the Eurozone as more foreign money flows in to purchase goods and
services due to the lower exchange rates. This in turn would strengthen the
Euro relative to the USD as purchasing power parity drives the exchange rates
back toward equilibrium.
We will cover Interest Rate Parity in a future factoid. The
Daily Market Primer will take next week off for the Christmas-New Years
break. Happy Holiday’s everybody, here’s the news:
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|
Deutsche Bank AG said in statement this morning that it has
reached a $7.2 billion settlement with U.S.
authorities following an investigation into its dealings in mortgage-backed
securities. The total is far below the $14 billion originally demanded by the
Justice Department but still is higher than many expected. Also this
morning Credit Suisse Group AG agreed to pay $5.28 billion to settle a similar
case. Shares in both banks rallied in European trading. The deals
settled a major point of uncertainty.
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|
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Barclays Plc, however, failed to come to an agreement with
U.S. authorities to end the probe into its part in the sale of
mortgage-backed securities, which were described as "craptacular"
by a consultant who reviewed the loans. The two sides will now face each
other in court. In Italy, meanwhile, the government will step in to rescue Banca Monte dei Paschi
di Siena SpA after the lender failed to raise the 5 billion euros ($5.2
billion) it needed from the market.
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|
|
Third quarter U.K. GDP growth was revised higher to 0.6 percent, with
consumption driving the expansion. In a separate report, the Office for
National Statistics said that the country's current-account deficit widened
as Britain posted its worst trade performance in three years. In the U.S.,
new home sales data and University of Michigan Consumer Sentiment are due to
be released at 10:00 a.m. ET.
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Overnight, the MSCI Asia Pacific Index dropped 0.2 percent in light trading. In
Europe, the Stoxx 600 Index was 0.1 percent higher at 4:57 a.m. ET as
banks propped up the market in a session with volumes about a third lower
than the 30-day average. S&P 500 futures were flat.
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|
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Italy
has reached a deal to save its banks. The Italian government
has agreed to a 20 billion-euro ($20.9 billion) fund to aid its struggling
banking system, Reuters reports. Monte Paschi, the world's oldest bank,
requested a bailout just moments after a deal was completed.
Bitcoin
is zooming higher. The cryptocurrency is up 5.1%, or $44, to $905.50, bringing
its year-t0-date gain to 117%. Bitcoin trades at its best level in three
years.
"Fallen
angel" debt had its best year since 2003. Bonds issued by companies
that were unexpectedly downgraded by credit rating agencies have generated a
37% total return in 2016, more than double the total return for the broader
high yield market, according to Goldman Sachs.
Putin
says the Russian economy is on the mend. Speaking at an annual
year-end news conference, Russian President Vladimir Putin said the economy
is slowly healing as the capital flight fades and wages pick up, Reuters,
reports.
The
US is suing Barclays over mortgage-backed securities. The Department of Justice
is suing the bank and two former executives, saying more than half of the $31
billion worth of packaged mortgage loans defaulted during the financial
crisis, a person familiar with the matter told Reuters.
Twitter
has had a rough week. The stock has tumbled 12% over the past week after a slew of
top executive departures.
Stock
markets around the world are lower. China's Shanghai
Composite (-0.9%) trailed in Asia and Spain's IBEX (-0.4%) lags in Europe.
The S&P 500 is set to open up 0.2% near 2,262.
US economic data flows. New home sales and
University of Michigan consumer confidence will be released at 10 a.m. ET and
the Baker Hughes rig count will cross the wires at 1 p.m. ET. The US 10-year
yield is down 1 basis point at 2.54%.
US
markets are closed on Monday. US stock markets are open a full day on
Friday, but the US Treasury market will see an early 2 p.m. ET close.
Shootout in Milan
The man suspected of carrying out the truck attack on a Christmas market in Berlin has been killed in a shootout in Milan, an Italian official said. Anis Amri was stopped by police during a routine check at about 3 a.m. and started shooting. The police returned fire, killing him. We report that the path the 24-year-old Tunisian took to Europe has laid bare multiple failings in the continent’s security apparatus, including poor cooperation between governments, porous borders and lack of biometric data to identify people who use false identities. The rise of Islamic State and Germany’s decision to throw open the door to refugees has left security services overwhelmed as they try to track threats among new arrivals. Overtaxed security agencies dropped 24-hour surveillance of Mr. Amri this year when they failed to find enough evidence to make him a high-priority target.
Billions More
The Obama administration scrambled to resolve its remaining crisis-era megabank mortgage cases, striking multibillion-dollar settlements with Deutsche Bank and Credit Suisse over toxic securities while separately filing a lawsuit against Barclays alleging more than $30 billion in fraud-tainted sales. U.S. authorities settled with Deutsche Bank for $7.2 billion Thursday. Early Friday, Credit Suisse said it had agreed to pay about $5.3 billion to close the matter. The dramatic back-to-back announcements show the urgency among senior Obama appointees in the Justice Department to resolve the outstanding probes of precrisis conduct at major banks before those officials leave office in mid-January amid uncertainty about whether Donald Trump’s administration will show any interest in pursuing the cases. Deutsche Bank and Credit Suisse shares rose 4% and 2%, respectively, on Friday morning. Shares in Barclays dropped less than 1% as investors digested the potential uncertainty of a protracted legal battle with the Justice Department.
The Price Is Right
President-elect Trump’s pick to run the Health and Human Services Department traded more than $300,000 in shares of health-related companies over the past four years while sponsoring and advocating legislation that potentially could affect those companies’ stocks. We report that Tom Price, a Georgia Republican, bought and sold stock in about 40 health-care, pharmaceutical and biomedical companies since 2012, including a dozen in the current congressional session. In the same two-year period, he has sponsored nine and co-sponsored 35 health-related bills in the House. His stock trades are likely to be a significant issue during his Senate confirmation hearings. Ethics lawyers in both parties have advised lawmakers against trading even if it is legal. Meanwhile, Mr. Trump on Thursday rounded out his senior White House team and said in a cryptic tweet that he supports an expansion of U.S. nuclear-weapon capabilities. |
Trump says nuclear
arsenal must be "greatly" expanded.
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EU's nightmare year ends
with Le Pen risk haunting investors.
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Bitcoin surges above $900.
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Jamie Dimon on Trump,
taxes, and a U.S. renaissance.
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The year in money.
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If you're so smart, why aren't you rich?
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Eleven ways to stop
winter weather delays from ruining your travels.
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Well! This year didn't quite turn out as people expected. A
year ago, all of the talk in markets had to do with the oil crash, high-yield
debt, and China. Today the risk landscape seems mostly dominated by politics.
That's always how it is. You never know in advance what the big stories
are going to be. So to say that the big events in 2017 will probably be
things that nobody sees coming doesn't even rise to the level of
pseudo-insightful. But one thing that makes this moment especially
interesting is the speed with which ideas and ideologies can travel from the
fringes to the mainstream. This week we got the news that UC-Irvine economist
Peter Navarro will be leading a new trade advisory council within The White House.
Navarro is a hardcore China trade hawk who, we can assume, would pursue a
trade strategy far outside the economic mainstream. In a statement announcing
Navarro's appointment, Trump said “I read one of Peter’s books on America’s
trade problems years ago and was impressed by the clarity of his arguments
and thoroughness of his research." It's not just Navarro's stock that's
on the rise. Whether it's a rethink of the U.S. relationship with Vladimir
Putin (to one more favorable), the Universal Basic Income, or getting rid of
physical cash... All kinds of concepts and ideologies that seemed to be
relegated to the fringe are now entering normal discourse. This is what made
2016 different: not the surprise political developments, but the intense
attacks on mainstream ideology. Expect that to continue next year.
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Source:
Bloomberg, BI, WSJ, CFAI Fin. Newsbrief
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