Thursday August 10 Daily Market Primer

•         Stocks sideways
•         Market handles geopolitical risk
•         Initial claims = 244K
•         Benign inflation
•      Snap, retailers report

The US stock market held up remarkably well in the face of threats to attack Gaum yesterday, with the S&P closing flat and the Dow down just 36 points.   Treasuries gained but also ended up not changing  much.   Global stock markets are uniformly down on Thursday, and S&P futures are down 9 points.

 Its Thursday, so that means Initial Unemployment Claims are out at 244K, +3K from the prior week, and just slightly higher than the expected 242K.  The US Producer Price Index (PPI) fell .1% in July, vs the consensus number of +.1%, another sign of benign inflation.  The annualized PPI came in at 1.9% vs the Reuters poll number of 2.2%.  SNAP, considered a bellwether for unicorn IPO’s this year, reports earnings today, as does Blue Apron, which also IPO’ed on June 28, and a batch of retailers, including Kohl’s, Macy’s, and Nordstrom’s.

I tried a new return table today, this one is lifted from Barron’s and I dropped a few items, let me know if you like it better.

Here’s the news:

Safety Dance

Tillerson said the U.S. is engaged in a very active diplomatic effort to halt Kim Jong Un’s pursuit of a nuclear weapon that could strike the U.S. mainland. He said North Korea should be looking for talks, adding too that “Americans should sleep well at night, have no concerns about this particular rhetoric of the last few days.”  President Donald Trump tweeted that  the U.S. atomic arsenal is more powerful than ever, while Defense Secretary Jim Mattis said in a statement that North Korea “should cease any consideration of actions that would lead to the end of its regime and the destruction of its people.”  Meanwhile, the two nations most at risk when it comes to the hermit kingdom largely brushed off Trump’s threat to unleash “fire and fury.”  An unidentified official at South Korea’s presidential office was cited as saying there’s no “imminent crisis,” and a senior Japanese official said there’s no mobilization for a military strike, with very few people in the government taking Trump’s comments seriously.

 

Time to Shine

The barbarous relic, gold, is glittering brightly during the geopolitical turmoil, jumping more than 1 percent Wednesday for its steepest gain since May. The Swiss franc was the currency of choice for safety seekers, with the yen only advancing moderately as investors decided Japan’s proximity to the potential action made it a dubious refuge. Emerging market stocks retreated along with risk proxies including the Aussie and the rand. Treasuries pared their gains and U.S. equities pulled back from steep declines following Tillerson’s soothing efforts, though it was hard to find anything but red on stock-market screens.

 

Deflated Policy Makers

A pair of Federal Reserve officials sounded a touch more fretful at the inability of strong labor markets to deliver price gains of the magnitude the central bank wants. St. Louis Fed President James Bullard warned that failure to get inflation to the central bank's 2 percent goal undermines the target’s credibility, echoing some colleagues. "The misses add up over time,’’ he said. Separately, Chicago Fed chief Charles Evans stated it would be reasonable to announce the start of balance-sheet reduction next month, but cautioned disappointing inflation data may delay rate hikes.

Two More Years

The Reserve Bank of New Zealand also sees no signs of strengthening price gains. It held its benchmark interest rate at a record low of 1.75 percent and said it expects to keep it there for two years amid weak inflation. The central bank’s surprisingly cautious tone in recent months has been justified by data since that showed consumer-price gains weaker than forecast and economic growth disappointing. RBNZ Governor Graeme Wheeler may also be reluctant to flag future rate increases because that could boost the New Zealand dollar and further damp inflation. Speaking of which, Thursday’s statement may not have been gloomy enough, as the kiwi climbed straight after, consolidating the gains of about 7 percent against the greenback since the RBNZ’s last set of forecasts on May 11.

 

Warning Shots

Two of the biggest money managers are telling investors it’s time to dial back on risk.  Pacific Investment Management Co. says U.S. stocks and high-yield debt should be pared in favor of lower-risk assets, such as Treasuries and mortgage-backed securities, according to an allocation report by the company, which oversees more than $1.5 trillion.  It deems that “asset prices generally are fully valued.’’ T. Rowe Price Group Inc. had a similar view, cutting the stock portion of its asset-allocation portfolios to the lowest level since 2000. The Baltimore-based money manager said it also reduced its holdings of high-yield and emerging market bonds.

Standing Firm
The Trump administration sought to keep pressure on North Korea to curb its nuclear ambitions, while also taking steps to leaven President Donald Trump’s tough talk from earlier this week. North Korea, in a second day of unusually direct threats aimed at the U.S., lashed out at Mr. Trump and warned its missiles could surround the U.S. territory of Guam in an “enveloping fire” in coming weeks. Mr. Trump touted the strength of the U.S.’s nuclear arsenal in a tweet but tempered his earlier rhetoric. He also took to Twitter to criticize Senate Majority Leader Mitch McConnell for failing to advance the health-care bill.

Imitation Game
Startups live by the rule that speed is paramount. Houseparty, creator of a hot video app, has an extra reason for urgency. Facebook is stalking the company, part of the social-media titan’s aggressive mimicking of smaller rivals. Facebook’s plan to launch an app similar to Houseparty’s highlights a Silicon Valley dilemma: While it’s as easy as ever to start a company, it is getting harder to grow large and fast enough to avoid being either acquired or squashed by one of the technology behemoths. Regulators, politicians and academics are taking note, increasingly questioning how industry majors use their considerable clout. While for app makers getting acquired can be “a very good win for the founders, that might be at the expense of a more competitive landscape,” says Scott Stern, management professor at Massachusetts Institute of Technology.

Growth Limit
U.S. worker productivity rose modestly in the second quarter but showed little sign of breaking out of the sluggish trend that has prevailed for more than a decade, holding back economic growth and living standards. Sluggish productivity gains can slow economic growth and prevent wages from rising much. Nonfarm business productivity, which measures workers’ output for each hour worked, rose at a 0.9% seasonally adjusted annual rate. When compared with a year ago, which is how economists often look at the longer-term trend, productivity was up 1.2% Some forecasters say they think continued modest gains will contribute to keeping overall U.S. economic growth from exceeding its recent pace of roughly 2% a year. Mr. Trump has said he wants to push annual growth above 3%. “If we can’t get productivity up, it’s just not going to happen,” said Columbia Business School dean Glenn Hubbard, who served as chairman of the Council of Economic Advisers under former President George W. Bush.

The UK and Scotland fail to reach an agreement on Brexit. Talks between UK and Scottish government officials were unable to produce an agreement on what powers should be handed over to Scotland after Britain leaves the European Union, the BBC reports.

Venezuela's inflation explodes. Venezuela's inflation rate climbed by 26% in July to 248.6%, Reuters says, citing data released by the opposition-led congress on Wednesday.

New Zealand's central bank holds. The Reserve Bank of New Zealand held its key interest rate at 1.75% and said policy would "remain accommodative for a considerable period."

Trump zeros in on his pick to head the FTC. Joseph Simons, a partner at the law firm Paul, Weiss, Rifkind, Wharton and Garrison LLP who served as a top official at the Federal Trade Commission under President George W. Bush, is said to be Trump's top choice to lead the FTC.

New York City landlords may start cutting back on freebies. "We're getting to the point where tenants are reluctant to sign with heavy concessions because if the concessions are removed, say a year from now on renewal, many will not be able to afford the rent," Jonathan Miller, the CEO of the real-estate appraiser Miller Samuel, told Business Insider.

Facebook is officially launching its attack on TV. The social network's Watch, a platform for original TV shows, will launch "soon," people familiar with the matter told Business Insider.

Stock markets around the world are lower. Hong Kong's Hang Seng (-1.13%) trailed in Asia, and Britain's FTSE (-1.08%) lags in Europe. The S&P 500 is set to open lower by 0.31% near 2,467.

Earnings reports keep coming. Blue Apron, Canada Goose, and Macy's report ahead of the opening bell, while Nordstrom, Nvidia, and Snap release their quarterly results after markets close.

US economic data is light. Initial claims and PPI will be released at 8:30 a.m. ET. The US 10-year yield is down 1 basis point at 2.24%.

Labor Dept. fiduciary rule could be postponed 18 months

The US Labor Department has notified the Office of Management and Budget that it is proposing to delay full applicability of the fiduciary rule to July 1, 2019, and to change three exemptions in the rule. Labor Secretary R. Alexander Acosta disclosed the action in a court document in connection with a lawsuit brought against the department by Thrivent Financial for Lutherans.   Reuters (09 Aug.),  The Wall Street Journal (tiered subscription model) (09 Aug.) 

SEC postpones action on takeover bid of Chicago exchange

Clayton (Chip Somodevilla/Getty Images)

The Securities and Exchange Commission has delayed until further notice action on its staff's recommendation to allow a group led by Chinese investors to buy the Chicago Stock Exchange. SEC Chairman Jay Clayton said the full commission will review the transaction, rather than allowing a staff report backing the deal to take effect. Bloomberg (09 Aug.),  Reuters (09 Aug.),  The Wall Street Journal (tiered subscription model) (09 Aug.) 

    

Supranational debt issuance increases

Syndicated debt issuance by supranational entities such as the European Investment Bank and the EU have more than doubled over the past 10 years, with further rises expected.  Financial Times (tiered subscription model) (09 Aug.) 

SIX Swiss Exchange, Nasdaq partner on blockchain project

SIX Swiss Exchange plans to tap Nasdaq and its distributed-ledger technology partner Chain to provide blockchain architecture for SIX's over-the-counter structured-product business. "Working together with Nasdaq reinforces our commitment towards being an exchange at the technology forefront," said SIX CEO Chris Landis.

Finance Magnates (09 Aug.) 

Traders brace for tapering in emerging markets

The iShares JPMorgan USD Emerging Markets Bond exchange-traded fund in July experienced its biggest flow reversal to date, as investors pulled about $680 million. Traders worry rising yields in developed markets might create chaos among emerging markets.

Bloomberg Professional Services (09 Aug.) 

Wanda Hotel shares spike on news of major acquisition

Shares of Wanda Hotel Development shot up more than 27% in Hong Kong trading after the company announced a major acquisition. The company said it will pay $1.05 billion for two businesses controlled by billionaire Wang Jianlin and his family.

South China Morning Post (Hong Kong) (10 Aug.),  Forbes (09 Aug.) 

China’s hedge fund industry greets global managers with promise, peril

Noble’s massive writedown is proving Iceberg right

CEO of Commonwealth Bank of Australia, the nation’s largest, gets grilled over money-laundering case

Trump’s nuclear firepower is the same as it was when he took over from Barack Obama

The FBI searched a home belonging to Trump’s former campaign chairman

Wall Street investment bankers can expect hefty bonus gains this year; traders may get little

Goldman Sachs Group Inc. says it’s getting harder for institutional investors to ignore cryptocurrencies

Sega is embracing rogue fan programmers with a retro Sonic the Hedgehog game sequel

FBI Raided Home of Paul Manafort in Russia Probe

Health ‘Navigators’ Brace for Decision on Their Funding

French Police Arrest Suspect in Hit-and-Run Attack on Soldiers

Mylan Defers Product Launches Amid Regulatory Uncertainty

Canadian Private-Equity Giant Catalyst Accused of Fraud by Whistleblowers

North Koreans are probably sifting through their diplomatic playbook trying to find ways to deal with U.S. President Donald Trump. I doubt they’ll find anything useful. Trump’s warning that Pyongyang could face “fire and fury like the world has never seen” is unprecedented. World leaders are becoming increasingly frustrated with the rogue regime. The UN Security Council just slapped North Korea with its most severe sanctions yet but analysts question their effectiveness.

To gauge the impact of the sanctions we first have to understand the North’s economy — and that's no simple task. An estimate from South Korea’s central bank says the North’s GDP grew 3.9 percent in 2016, the fastest pace since 1999. But given the lack of North Korean sources, the BOK used raw data compiled by organizations such as the country's intelligence agency, while unknown data was replaced with South Korean estimates. The widespread black market also adds to the challenge of assessing the North’s economy. A recent study by the Center for Strategic and International Studies says that most North Koreans earn about 75 percent of their income from the black market.

So the hope now is that Beijing, Pyongyang’s main ally, will play a bigger role. Chinese diplomats have expressed confidence the new sanctions would help. We’ve already heard from customs officials that China is buying less from North Korea. We’ll see if this trend accelerates in the coming months and if it’s fast enough to make a difference.

Source: Bloomberg, BI, WSJ, CFAI Fin. Newsbrief, SCMP, FT, Finance Magnates, Reuters, Barron’s