Tuesday January 17 Daily Market Primer

• ·         US stocks mixed on Friday, flat last week
• ·         PM May confirms hard Brexit
• ·         China dominates Davos

US stocks were mixed on Friday, as the Dow slipped 5 points, the S&P had a tiny gain, and the NASDAQ was up .5%.  The S&P fell .1% for the week.  While we tend to think of the strong stock market prior to the election and the post-election rally, really stocks have been moving mostly sideways for the past month.  As I mentioned Friday morning, banks had a good day on solid earnings reports and the S&P financial sector was up .5%.  This week, the market will be looking ahead to the inauguration on Friday, when the US government changes hands.   Overseas markets were mostly down ahead of Theresa May’s highly anticipated Brexit speech this morning (evening London time).  Excerpts were leaked to the to the press early, and in the speech PM May said she will call for a clean break with the EU single market, which is the definition of hard Brexit.   May said she would seek an “equal partnership” with the EU, and that both houses of parliament would vote on the final Brexit deal.   Pres-Elect Trump said on Sunday that that “Brexit is going to be a great thing” and that the US would negotiate a fast trade deal with the UK.  The pound is up 2% on the speech.  S&P futures are down 8 points (.3%).

	LAST	CHANGE	% CHANGE
DJIA	19,885.73	-5.27	-0.03%
Nasdaq	5,574.12	26.63	0.48%
S&P 500	2,274.64	4.20	0.18%
Russell 2000	1,372.05	10.98	0.81%
Global Dow	2,591.34	5.66	0.22%
Stoxx Europe 600	362.77	-0.20	-0.06%
Nikkei 225	18,813.53	-281.71	-1.48%
UK: FTSE 100	7,263.73	-63.40	-0.87%
CBOE Volatility	12.48	1.25	11.13%
Australia: S&P/ASX 200	5,699.40	-49.00	-0.85%
China: Shanghai Composite	3,108.77	5.35	0.17%
Hong Kong: Hang Seng	22,840.97	122.82	0.54%
Europe Dow	1,607.04	13.12	-0.19%
India: S&P BSE Sensex	27,235.66	-52.51	0.82%
France: CAC 40	4,869.15	-13.03	-0.27%
Germany: DAX	11,531.11	-23.60	-0.20%
Italy: FTSE MIB	19,307.91	60.66	0.32%
Spain: IBEX 35	9,398.70	-11.30	-0.12%
U.S. 3 Month	0.523	-0/32
U.S. 2 Year	1.152	3/32
U.S. 5 Year	1.841	9/32
U.S. 10 Year	2.341	15/32
U.S. 30 Year	2.935	1 3/32
Germany 2 Year	-0.741	-0/32
Germany 10 Year	0.303	7/32
Crude Oil	53.21	0.84	1.60%
Brent Crude	56.6	0.74	1.32%
Natural Gas	3.386	-0.01	-0.29%
S&P GSCI	401.27	4.64	1.17%
E-mini S&P 500	2264.25	-8.25	-0.36%

Morgan Stanley announced earnings this morning, and profit doubled in Q4 to $1.51 billion, fueled by strong trading. The bank also laid off about 20 senior Managing Directors last week and cut bonuses by 15%.  GM announced plans to invest an additional $1 billion in US factories in addition to $2.9 billion in investments announced last year.

Last week showed some evidence of Trump trades being reversed, as bond yields fell, the dollar weakened, and stocks moved sideways. OPEC says they can drop the recent production cuts by mid-year as the oil market rebalances.  The annual World Economic Forum in Davos kicks off today, and based on what I’ve read and heard on the radio, China seems to be a big theme.  Alibaba head Jack Ma and Dalian Wanda Group Chairman Wang Jianlin are there, and Chinese president Xi Jinping kicked off the event with a speech that spoke out against global trade restrictions.

Here’s the news:

Brexit details

U.K. Prime Minister Theresa May is due to give a speech at around 6:45 a.m. ET in which she will outline plans for Britain to pull out of the European Union. She will say that she has no interest in “anything that leaves us half-in, half-out,” according to extracts released by her office. The pound, which weakened following press reports about the speech over the weekend, was trading at $1.2174 by 5:00 a.m. ET, a level close to Friday's close. Inflation data released this morning showed consumer-price growth increased to 1.6 percent in December, the highest level in over two years, and ahead of economists' expectations for a 1.4 percent increase.

Weakening dollar

The dollar declined against all of its Group of 10 peers and dropped against the yen for the seventh day, with that currency trading as high as 113.01 to the greenback. The acceleration in selling came after a Wall Street Journal story cited President-elect Donald Trump as saying the dollar was already too strong. The move has also seen gold rise to $1214.39 an ounce by 5:13 a.m. ET, its highest level since Nov. 23.

Saudi's plan early exit

Saudi Arabia says the agreed OPEC cuts can end by mid-year, as the market rebalances. According to Bloomberg calculations, removing the production curbs when the current deal expires in June would not be enough to eliminate the entirety of the global stockpile-overhang. Saudi Arabia’s Energy Minister Khalid Al-Falih said that many countries are “going the extra mile” in making deeper production cuts. A barrel of West Texas Intermediate for February delivery was trading at $53.28 by 5:22 a.m. ET.

Markets slip

Overnight, the MSCI AC Asia Pacific Index fell 0.4 percent, while Japan's Topix index dropped 1.4 percent as the yen rallied against the dollar. In Europe, the Stoxx 600 Index was 0.5 percent lower by 5:21 a.m. ET as investors waited for May's Brexit speech. S&P 500 futures also slipped 0.5 percent.

Davos

The annual World Economic Forum meeting in Davos, Switzerland is underway this week, and among the early speakers is Chinese President Xi Jinping, his country's first head of state to address the meeting. In an interview with Bloomberg this morning, UBS Group AG Chairman Axel Weber said that the mood at the meeting was too gloomy, saying the possibility of worsening trade relations between China and the U.S. would be an opportunity for European countries. US markets are set to open lower. US markets are pointing lower as traders return to work following the holiday weekend. The Dow Jones Industrial Average is on track to open down 0.3% near 19,818. Treasurys are rallying. Aggressive buying has US Treasury yields down by as much as 8 basis points in the belly of the curve, with the 10-year falling to 2.32%, its lowest since the end of November. Xi Jinping speaks in Davos. Xi gave the opening plenary speech at the World Economic Forum in Davos, Switzerland, and said, "No one will emerge as a winner in a trade war." Saudi Arabia says the OPEC production cut might not extend past June. "We don't think it's necessary given the level of compliance," the country's energy minister, Khalid al-Falih, said Monday while speaking at an industry event in Abu Dhabi. "My expectations (are) ... that the rebalancing that started slowly in 2016 will have its full impact by the first half." Theresa May reveals her road map for a hard Brexit. UK Prime Minister Theresa May said while speaking at Lancaster House on Tuesday that "we do not seek to hold on to bits of membership as we leave" and that she was against any deal that left the UK "half-in, half-out" of the European Union. UK inflation surges. Data released by the Office for National Statistics on Tuesday showed that consumer prices in the UK rose by 1.6% in January, up from November's 1.2% print, as transport prices saw the biggest jump. The British pound is stronger by 1.1% at 1.2174 per dollar. BAT agrees to buy Reynolds. British American Tobacco upped its offer for its US rival Reynolds to $49.4 billion, Reuters reports. BAT will pay a 26% premium over Friday's closing price, $29.44 in cash plus 0.5260 BAT shares for each Reynolds share, for the remaining 58% stake of Reynolds that it doesn't already own. GM is investing $1 billion. The automaker says it will invest $1 billion in its factories and create or keep 1,000 jobs as part of its normal process of upgrading factories, the Associated Press reports, citing a person familiar with the matter. US economic data is light. Empire Manufacturing will cross the wires at 8:30 a.m. ET. Earnings reporting picks up a bit. UnitedHealth and Morgan Stanley report ahead of the opening bell, while CSX and United Continental release their quarterly results after markets close. On the Borderline President-elect Donald Trump has criticized a cornerstone of House Republicans’ corporate-tax plan, known as border adjustment. The measure would tax imports and exempt exports—a plan Mr. Trump called “too complicated.” The apparent divide between the president-elect and congressional allies underscores the challenge he will face advancing his agenda, and in particular his planned tax cuts. Overseas officials are wary of potential rifts as well. European leaders called for unity after recent comments by Mr. Trump that they feared could herald a break with decades of support from Washington for European integration and the trans-Atlantic alliance. Meanwhile, China has called for a study on the impact of a trade war, bracing for an incoming U.S. administration that appears determined to shake the foundations of U.S.-China relations. Scandal in South Korea Prosecutors’ decision to seek the arrest of Samsung Group heir Lee Jae-yong on suspicion of bribery and embezzlement threatens to knock one of the world’s biggest companies off course—just as its scion was trying to chart a new path for the conglomerate. The move strikes at the country’s corporate champion, a group that accounts for nearly one-third of South Korea’s stock-market value and is the nation’s biggest exporter. Mr. Lee’s likely arrest could deepen the scandal surrounding President Park Geun-hye, who was impeached last month over allegations that her confidante sought to shake down the country’s biggest conglomerates for donations in exchange for political favors. With Mr. Lee potentially in custody from Wednesday, Samsung faces the prospect of a leadership vacuum that that could also put on hold attempts to reorganize the business empire. Emptying the Nest Egg The largest generation in U.S. history has to start pulling out its retirement money this year, kicking off a mandatory movement of cash that could total hundreds of billions of dollars in the coming decades. U.S. law requires anyone 70½ years of age or older to make annual withdrawals from their tax-sheltered retirement accounts and pay taxes on those distributions. The oldest of the nation’s 75 million baby boomers are now crossing that threshold. And with boomers holding roughly $10 trillion in tax-deferred savings accounts, according to an estimate by Bank of New York Mellon’s Edward Shane, the obligatory outflows are expected to ripple through the U.S. economy, the stock market and the money-management industry. Davos agenda focuses on China, Brexit, Trump Xi (Pool/Getty Images) The World Economic Forum is poised to start Tuesday, with Xi Jinping becoming the first Chinese president to attend the meeting in Davos, Switzerland. China, Brexit and US President-elect Donald Trump are expected to dominate the agenda. BBC (16 Jan.),  The New York Times (free-article access for SmartBrief readers)/The Associated Press     Luxottica-Essilor merger to form eyewear giant Italy's Luxottica, whose brands include Ray-Ban, and France's Essilor, the world's top maker of ophthalmic lenses, will merge into a €46 billion eyewear giant. The merged company will have 140,000 workers in 150 nations and annual revenue of €15 billion. Deutsche Welle (Germany)/Deutsche Presse-Agentur/Reuters (16 Jan.)  HFT dominates bitcoin market High-frequency traders -- taking advantage of Chinese venues' free transactions, arbitrage opportunities across different exchanges, 24-hour trading and server co-location services -- now control 80% of bitcoin transactions. "It's the golden age to be in the bitcoin market, because it's imperfect," says Zhou Shuoji, 35, a trader in Beijing. Bloomberg (17 Jan.)  Chinese fund eyes Trump's infrastructure initiative Ding Xuedong, chairman of the China Investment Corp., said the sovereign wealth fund wants to be a major investor in US President-elect Donald Trump's massive infrastructure rebuilding plan. Ding said the cost to rebuild America's roads, bridges and other public facilities will be $8 trillion and the US will need help from foreign investors.  South China Morning Post (Hong Kong) (16 Jan.), Economists: Fed-Trump conflict to drive up dollar The clash between President-elect Donald Trump's drive to accelerate economic growth and the Federal Reserve's growing concern about inflation is likely to produce a significant increase in the value of the dollar, two economists say. Bloomberg (16 Jan.)

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Deutsche Bank may withhold 90 percent of bonuses, according to reports.

The ECB marks its 1,000th board meeting with Tutankhamun and rhymes.

The Davos disconnect. Fed Officials See Less Need for Tax and Spending to Boost Short-Term Growth Theresa May to Seek Clean Brexit From EU General Motors Plans at Least $1 Billion in Fresh U.S. Investment British American Tobacco Agrees to Pay $49 Billion to Take Full Control of Reynolds American Pound Drops to 31-Year Low Against Dollar Single Stock Sends China Shares Tumbling in Chain Reaction

Probably the biggest question facing investors this year is whether we're at the start of a bond bear market. We've seen rates rise and bonds sell off since the summer (a move that accelerated after the election), but it remains to be seen if this is the start of something big or just a short-term blip. Of course, another question is: If we do go into a bear market, how bad would it get? Well, here's a crazy fact. You know how when people talk about stock bull markets, they say things like: "We haven't seen a rally this long in over 10 years" or "valuations haven't been this stretched since the late 90s"? It turns out that when it comes to bonds, you have to go back over 500 years to see a bull market bigger than this one! That's according to Paul Schmelzing, who wrote a brilliant post for the BoE's Bank Underground blog about the nature of bond bear markets. Schmelzing breaks down modern bear markets into three categories: Inflation reversals (such as what we saw in the late 60s), sharp reversals (such as what we saw in 1994), and VaR shocks (such as what happened in 2003, when banks were forced to dump bonds to keep within risk limits). Not only should you read Schmelzing's post, but you should listen to the latest episode of the Odd Lots podcast which I co-host along with Tracy Alloway, as we had him on as a guest and talked about how bad a theoretical bear market could get, and which historical examples might help to understand what could happen.

Source: Bloomberg, BI, WSJ, CFAI Fin. Newsbrief, NYT, BBC Deutsche Welle, SCMP