Thursday February 2 Daily Market Primer

• ·         Markets (barely) rebound
• ·         Central Banks hold the course
• ·         Cabinet confirmations pick up
• ·         DB disappoints
• ·         Year of the Handoff - 2017 NT Market Outlook summary

Stock markets rebounded as Apple may have single handedly boosted the cap weight indices into the green yesterday, since it rose 6.1%.   Still, it wasn’t much of a move with the Dow up .1% and the S&P almost flat.  The NASDAQ did a little better, up .5%.  The Fed met yesterday and not only maintained the status quo as expected, but did not signal anything about the timing of the next rate hike.  The Bank of England met today maintained monetary policy with a .5 – .75 target rate, and Governor Mark Carney gave an uneventful press conference.  Markets are mostly up overseas and US futures are….down.

	LAST	CHANGE	% CHANGE
DJIA	19,890.94	26.85	0.14%
Nasdaq	5,642.65	27.86	0.50%
S&P 500	2,279.55	0.68	0.03%
Russell 2000	1,361.23	-0.60	-0.04%
Global Dow	2,606.66	3.78	0.15%
Stoxx Europe 600	362.65	-0.55	-0.15%
Nikkei 225	18,914.58	-233.50	-1.22%
UK: FTSE 100	7,135.49	27.84	0.39%
CBOE Volatility	12.29	0.30	2.50%
Australia: S&P/ASX 200	5,645.40	-7.80	-0.14%
China: Shanghai Composite	3,159.17	Closed
Hong Kong: Hang Seng	23,184.52	-133.87	-0.57%
Europe Dow	1,613.00	9.64	0.30%
India: S&P BSE Sensex	28,226.61	84.97	0.60%
France: CAC 40	4,797.13	2.55	0.05%
Germany: DAX	11,640.33	-19.17	-0.16%
Italy: FTSE MIB	18,994.95	254.30	1.36%
Spain: IBEX 35	9,376.40	45.60	0.49%
U.S. 3 Month	0.51	-0/32
U.S. 2 Year	1.221	-0/32
U.S. 5 Year	1.918	2/32
U.S. 10 Year	2.466	2/32
U.S. 30 Year	3.075	0/32
Germany 2 Year	-0.731	1/32
Germany 10 Year	0.451	6/32
Crude Oil	54.17	0.29	0.54%
Brent Crude	57.24	0.44	0.77%
Natural Gas	3.13	-0.038	-1.20%
S&P GSCI	403.31	1.6	0.40%
E-mini S&P 500	2268.25	-6.25	-0.27%

President Trump is getting his cabinet in order, as both Treasury Secretary Steve Mnuchin and Secretary of State Rex Tillerson were confirmed by the Senate this week.  Dem’s boycotted the Mnuchin vote and the Republican’s pushed it through anyway.   Mr. Trump also warned Iran not to launch missiles, picked a fight with Australian PM Malcolm Turnbull, and may have threatened to send troops into Mexico, presumably to fight drug cartels.  Chinese bond defaults seem to be picking up, and the reason may surprise you.  I included a note from the Financial Times to bring you up to speed on the situation (Chinese Defaults: Failing Better, below).

Deutsche Bank, the standard bearer for European banking dysfunction, reported disappointing earnings, no wonder since they are paying them all in fines.  Five trillion AUM money management giant BlackRock expanded into alternative assets by buying infrastructure fund provider First Reserve funds, which manages $3.7 billion.    I’ll bet the margins are higher for infrastructure funds than for index ETFs.  The terms were not disclosed.  Meanwhile, former bond 800 pound guerrilla PIMCO is getting into multi-factor equity ETF’s (PIMCO readies, below).  What’s the world coming to?  And, stock picking is hard to do, as Chicago hedge fund king Citadel is shutting down one of their active management teams after just one year of poor performance (Citadel is shutting, below).

Here’s the news:

Super Thursday

At 7:00 a.m. ET the Bank of England will announce it latest monetary policy decision and also update its forecasts for the U.K. economy. While interest rates are expected to be kept unchanged, the announcement will be followed by a press conference which investors will be watching for any hints of a shift in policy from the central bank as it faces rising inflation and Brexit risks. The pound reached a seven-week high this morning ahead of the decision.

Trump diplomacy

President Donald Trump blasted a refugee deal with Australia on Twitter after Australian Prime Minister Malcolm Turnbull was forced to defend the relationship between the two countries. That followed a report by the Washington Post that said the U.S. leader had berated his Australian counterpart over the deal in a phone call. Elsewhere in phone calls, the Associated Press reports that Trump told Mexico's president that he was ready to sent U.S. troops to stop "bad hombres down there." Mexico denies that the remarks were threatening. The White House also stepped up criticism of Iran, saying it is putting the country "on notice" following a ballistic missile test.

Dollar falls

The dollar dropped to levels not seen since the days immediately after Trump's election victory, following yesterday's Federal Reserve meeting in which the bank signaled it is in no hurry to raise rates. Goldman Sachs Asset Management says investors should look through the currency's worst start to the year in more than a decade - as well as the noises around the current U.S. administration - to bet on a stronger greenback as a reflationary era takes hold.

Markets mixed

Overnight, the MSCI Asia Pacific Index gained 0.2 percent, while Japan's Topix index closed 1.1 percent lower as the yen strengthened and corporate results disappointed. In Europe, the Stoxx 600 Index was down 0.1 percent at 5:40 a.m. ET as worse than expected results from Deutsche Bank AG put pressure on financial stocks. S&P 500 futures pointed to a lower U.S. open.

Deutsche Bank earnings

Shares in Deutsche Bank AG dropped almost 7 percent after the company announced disappointing results this morning with trading revenue missing analyst expectations. Chief Executive Officer John Cryan said he expects the bank to return to profitability this year. The wider European banking sector has seen positive earnings revisions and is generating investor optimism after years of downgrades.  The Fed kept policy on hold. The US central bank held its benchmark interest rate between a range of 0.50% and 0.75% while noting that the labor market "remains solid" and inflation was "still below" its 2% target. The Bank of England is growing more concerned about inflation. The central bank held its key interest rate and asset-purchase program unchanged at 0.25% and 435 billion pounds, respectively, but some members raised concerns about accelerating inflation. The British pound is little changed at 1.2650 against the dollar. The UK took a step closer to Brexit. Parliament voted 498 to 114 to move along the European Union (Notification of Withdrawal) Bill, which if passed will give Prime Minister Theresa May the ability to trigger Article 50, the mechanism that would begin the UK's exit from the European Union. Anthony Scaramucci reportedly won't get a White House role. The New York Times reports Scaramucci was notified by Trump's chief of staff, Reince Priebus, and strategist Stephen Bannon that he wouldn't be getting the job as liaison to the business community. Scaramucci's hedge fund, SkyBridge Capital, is being sold to a division of HNA Group, a politically connected Chinese group. Facebook had a blockbuster quarter. The social-media giant earned $1.41 a share as revenue exploded by 51% versus a year ago to $8.81 billion. Both monthly active users and daily active users outpaced Wall Street estimates. Deutsche Bank had a rough 2016. The German investment bank lost 1.4 billion euros ($1.51 billion) in 2016 as it restructured and dealt with "negative news flow" surrounding the fine levied against it by the US Department of Justice. Citadel is shutting down one of its stock-picking units. Ken Griffin's hedge fund is shutting down its Ravelin Capital unit a little over a year after its launch because of underperformance, a person familiar with the matter told Business Insider. Stock markets around the world trade mixed. Japan's Nikkei (-1.2%) lagged in Asia, and Britain's FTSE (+0.4%) is out front in Europe. The S&P 500 is on track to open lower by 0.3% near 2,272. Earnings reporting is in high gear. CME, Ferrari, Philip Morris, and The New York Times are among the names reporting ahead of the opening bell, while Amazon, AthenaHealth, Chipotle Mexican Grill, GoPro, and Visa highlight the names releasing their quarterly results after markets close. US economic data is light. Initial jobless claims will be released at 8:30 a.m. ET. The US 10-year yield is down 1 basis point at 2.46%. The Nuclear Option President Trump, one day after introducing his nominee for the Supreme Court, urged Republicans in the Senate to make a major change to the chamber’s voting rules if Judge Neil Gorsuch can’t attract the necessary Democratic support to win confirmation. Mr. Trump’s suggestion that Senate Republicans “go nuclear,’’ as the last-resort option is known, came amid early signs that the two parties were headed for a showdown over the nomination. Democrats are under pressure from their liberal base to thwart the nomination and are bitter about the blockade last year by Senate Republicans of former President Barack Obama’s pick for the same court seat. Republicans are under equal pressure from their conservative base to push ahead. Visa Review The White House and lawmakers in Congress appear poised to take on another contentious slice of immigration policy: the visa programs favored by technology and other companies. A draft of an executive order under consideration directs the government to re-examine a range of visa programs to ensure they prioritize and protect “the jobs, wages and well-being of United States workers.” The draft doesn’t single out any industry, but many tech firms are clearly rattled by potential changes to the H-1B visa program for high-skilled employees. At the same time, several congressional Republicans are crafting, or have introduced, legislation aimed at overhauling visa programs and possibly decreasing the number of legal immigrants admitted into the country. It’s a striking shift for the party, which has typically focused on enforcement measures to combat illegal immigration. You’re on Notice The Trump administration has put Iran “on notice.” The White House sharply condemned a recent Iranian ballistic missile test launch and warned of consequences including the possibility of new U.S. sanctions, in a more confrontational approach to Tehran that lays the groundwork for a potential early clash between the two countries. Calling Iran a “destabilizing influence” in the Middle East, National Security Adviser Mike Flynn declared Wednesday: “As of today, we are officially putting Iran on notice.” The pronouncement marked a pivot away from the Obama administration’s policy of diplomatic engagement, which led to a 2015 multinational nuclear deal that has been denounced repeatedly by Mr. Trump and his aides. Iran has warned that new U.S. sanctions could constitute a violation of the nuclear deal, setting up a scenario in which the agreement could unravel. Meanwhile, Mr. Trump suggested he could back out of an agreement with Australia—one of the U.S.’s closest allies—to take 1,250 refugees, calling it a “dumb deal!” in a tweet, following a combative phone call with the country’s prime minister, Malcolm Turnbull. Chinese defaults: failing better (FT) A debt default is generally not cause for celebration. Not defaulting, by contrast, should be a good thing. But in China, a lack of defaults has said more about inadequate processes for dealing with failing companies than it does about their financial health — not to mention a lack of political will to allow companies to fail. That is slowly changing. Lately, defaults have been rising as the government tries to restructure ailing state-owned enterprises. Wind, a data service provider, notes a “flurry” of defaults in the past three months, bringing the accumulated total of sour loans to $8bn — three times higher than at the end of last year. SOEs, once considered immune, account for nearly half of that. As part of its push to open its markets to international capital, China is keen to stimulate overseas interest in its debt. Although the third-largest domestic bond market in the world, and growing rapidly, China’s fixed income market totalling nearly $10tn is still less than a third of the US market’s value. In an effort to grow, regulations regarding foreign investor access have been loosened. Last year the interbank bond market, which accounts for the majority of bond trading in China, was opened to qualified foreigners. Efforts to pique foreign appetite have so far been only partly successful. Overseas investor buying increased as the market rallied last year. Still, they hold just 2 per cent of the total. Disincentives abound. Credit risk and the absence of a transparent process to handle defaults is still a deterrent. Poor-quality issuer information and questionable local ratings (nearly all issuers are rated A plus or above, according to Wind) do not help. And a period of renminbi depreciation hardly makes RMB assets attractive. Fitch Rating notes that defaults have added to recent disruption in the asset class. Tightening liquidity and the expectation of rising US yields have led to a market sell-off; onshore corporate bond issuance fell one-third versus the previous year for the month of December as 82 deals were cancelled or delayed. In the long run, however, better allocated capital in China will bring clearer rewards. Mnuchin's Treasury appointment OK'd by Senate committee Mnuchin (Mark Wilson/Getty Images) Republican members of the Senate Finance Committee unanimously approved President Donald Trump's nomination of Steven Mnuchin to be Treasury secretary. The committee suspended its rule requiring a quorum on nomination votes after Democrats boycotted the vote.  Pensions & Investments (free access for SmartBrief readers) Tillerson becomes US secretary of state Tillerson (Michael Reynolds/Getty Images) Former ExxonMobil CEO Rex Tillerson has been sworn in as US secretary of state after the Senate confirmed his appointment in a 56-43 mostly party-line vote. Tillerson has expressed support for NATO, refusing to join President Donald Trump in questioning its value, and has declined to back Trump's suggestion that Japan and South Korea acquire nuclear weapons. Reuters (02 Feb.),  Report: Blockchain could stop trading fraud Blockchain technology could be leveraged to eradicate fraud on banks' trading platforms, reports FinTech Network in partnership with BNY Mellon and Rabobank. "The traceability and the permanent historic record that would exist on blockchain backing up every asset or item of value that was traded would provide assurance and authenticity all the way through the supply chain," the white paper says. The Trade (UK) (01 Feb.)  Factory output, hiring point to strengthening US economy Data from a variety of sources suggest that the US economy is broadly gaining strength. In January, factory activity surged to its highest level in two years, and private-sector employers hired 246,000 people, significantly more than December's 151,000. Reuters (01 Feb.)  PIMCO readies 3 multifactor-strategy ETFs PIMCO has filed with the Securities and Exchange Commission for three exchanged-traded funds tracking indexes designed and managed by Research Associates to implement multifactor investment strategies. The PIMCO RAFI Dynamic Multi-Factor Emerging Markets Equity ETF, the PIMCO RAFI Dynamic Multi-Factor International Equity ETF and the PIMCO RAFI Dynamic Multi-Factor US Equity ETF would trade on NYSE Arca.  ETF.com (01 Feb.)

The Uneasy Politician: Janet Yellen Is Struggling to Fend Off the Fed’s Many Critics

Senate Panel Advances Three Trump Nominees, but DeVos Hits Bump

NATO Shelves Plan to Meet With Ukraine Israel Begins Clearing Illegal West Bank Outpost Super Bowl Ads Walk Tightrope in Politically Charged Times U.S. Auto Sales Cooled in January Dollar Caught Between President Trump’s Tough Talk, Policy Plans New York Pension Scandal Prompts Firing of Second Employee Here's a glimpse of the global trade carnage from a U.S. border tax.

The U.S. may export more oil in 2017 than four OPEC nations produce.

A new front opens up against Merkel's re-election bid...

...As Europe's volatility curve gets kinky ahead of French vote.

Russia nears the end of recession.

Bank of America says European credit is 'mispricing' inflation.

Self-driving cars are getting good.

On Monday we were talking about the large gap that exists between the Trump administration's actions - which have so far mostly focused on border and trade issues - and the aspirations of investors, who seem most excited about potential tax reform and fiscal stimulus. Matt Levine wrote about the same thing, but much more eloquently and forcefully. But there's another gap worth keeping an eye on, and that's the growing divergence between U.S. soft economic data - such as consumer confidence surveys - and hard economic data that shows actual activity. While the survey data has absolutely exploded in recent months, the hard economic data remains rather ho-hum. The question, then, is whether the hard data will inevitably catch up with the survey data? Or to put it another way, will these renewed animal spirits translate into action? Bloomberg's Matt Boesler, who wrote about this gap, was on TV yesterday and explained that in the past when the survey data jumped higher like this it was usually coming out of a recession, not eight years into a recovery. Thus we're at a fairly unusual point in economic history, where we've had a late-cycle rise in confidence as a result of the election. We'll get one clue about the hard data tomorrow when January Non-Farm Payrolls are published. Economists are looking for 175,000 new jobs, the unemployment rate to stay at 4.7 percent and for average hourly earnings growth of 2.8 percent.

Source: Bloomberg, BI, WSJ, CFAI Fin. Newsbrief, Reuters, The Trade, ETF.com, FT