Financial Review

Chips and Salsa

…Nasdaq hits a record high. ECB dovish with plans to end bond buying. Why it matters. Looming risk – trade wars. Retail sales jump. Kentucky sues Walgreens. NY sues Trump Foundation. DOJ IG blames Comey. AT&T-Time Warner cleared.

Financial Review by Sinclair Noe for 06-14-2018

DOW – 25 = 25,175
SPX + 6 = 2782
NAS + 65 = 7761
RUT + 8 = 1684
10 Y – .03 = 2.95
OIL + .38 = 67.02
GOLD + 3.10 = 1302.90

 

A subdued trading session led to mixed results with the Dow industrials lower but the broader market higher; good enough for the Nasdaq to set a record high close.

 

The European Central Bank did exactly what the markets expected – they left rates unchanged and announced a timetable for moving away from quantitative easing or ending its bond buying program by the end of the year. In a balanced announcement reflecting the uncertainties hanging over the economy, it signaled that any interest rate hike is still distant, maybe next year, maybe late next year. The cautious move to roll back stimulus contrasted with the Federal Reserve’s rate hike a day earlier, which signaled a break from policies used to battle the 2007-2009 financial crisis and a return to normalized central banking. While yesterday’s rate hike by the Fed was considered hawkish, today’s ECB announcement was much more dovish. The new rates guidance sent the euro down over one percent against the dollar.

 

The ECB action, or inaction, will also impact US markets. It can be argued that what the ECB has been doing — buying European government bonds and driving the euro lower with negative deposit rates — has forced capital out of that region and into US bonds. That move has acted as an extra dose of stimulus for the U.S. bond markets, which has driven investors to look for better-yielding investments in equities and corporate bonds. Therefore central banks taking away the punch bowl, particularly in Europe, is key for the future of all assets globally. Foreign buyers look for longer-term US Treasuries at the same time the Fed is raising the short-end – actions that result in a flattening of the yield curve.

 

The ECB will cut back its bond buys to 15 billion euros a month from October then finish the program at the end of the year. It also sees interest rates steady “at least through the summer of 2019” — a vague definition that gives policymakers a wide window and the flexibility to push back any move. ECB President Mario Draghi emphasized that uncertainty and risks were increasing, comments taken to indicate that risks were skewed towards a later hike, rather than an earlier move. So it’s bad for banks because deposit rates will continue to rise, but the rates they charge to loan money won’t. The rate-sensitive financial sector was the biggest percentage loser of the S&P 500, led by a 1.8 percent decline in JP Morgan Chase.  And if the yield curve should go from flat to inverted – well, that’s just bad for the overall economy.

 

A looming risk is the possibility of a trade war. European Union countries today unanimously backed a plan to impose import duties on $3.3 billion worth of U.S. products after Washington hit EU steel and aluminum with tariffs at the start of June.  The measures still need to be adopted by the European Commission, whose next scheduled meeting is June 20. They should be in place by late June or early July. The European Commission has proposed setting 25 percent duties on U.S. goods such as orange juice, bourbon, jeans, and motorcycles. The European Commission has also launched a legal challenge against the US tariffs at the World Trade Organization. Canada has announced it will impose retaliatory tariffs on $12.9 billion worth of U.S. exports from July 1. Mexico put tariffs on American products ranging from steel to pork and bourbon last week. Today, word that Mexico is considering tariffs on up to $4 billion of US corn and soybeans. Imposing such tariffs would be a last-ditch option hitting at U.S. corn farmers’ top export market, and such a move would hurt Mexico’s own industry. But it has already been increasing its imports of grains from suppliers like Brazil and Argentina that could enable it to lessen the impact. Mexico is holding off on imposing tariffs on corn for now, but they are preparing for the possibility that Trump might launch a national security investigation into tariffs on auto imports, which could hammer Mexico’s $67 billion auto industry.

 

Meanwhile, Trump and his circle of advisers are finalizing plans to impose tariffs on tens of billions of dollars of Chinese goods in the coming week, perhaps as early as Friday — a move that is likely to spark heavy retaliation from Beijing. Since Trump’s initial warnings of tariffs, China has done nothing to do address the president’s concerns about its trading practices. The administration in April initially planned tariffs on $50 billion in goods, but the total could change as the list is refined, with some products taken off and others added following a public comment period. The White House had set Friday as a deadline for a list of products that would be covered under a new tariff regime.

 

Taking a look at economic data: Retail sales jumped in May. Americans are spending more because of a strong economy. We’re not really buying much more but rising inflation means we have to pay more for gas and other staples. Retail sales nationwide jumped by 0.8% last month. Sales growth in April and March were also revised up sharply. Retail sales have risen a solid 5.9% over the past 12 months. Sales at gas-stations rose sharply in May, reflecting higher prices at the pump. Home centers also saw a big boost in sales, as is typically the case in the spring. Restaurants and clothing stores posted strong sales. Auto sales also rose 0.5%. Sales fell at stores that sell sporting goods, books, music and home furnishings.

 

The import price index in May rose by 0.6% for the second straight month, adding to mounting evidence of higher inflation. Rising gas prices in particular are helping to spur on inflation. Excluding fuel, prices of imported goods advanced a smaller 0.2%. The increase in import prices over the past 12 months rose to 4.3% from 3.6%. If fuel is omitted, the increase in import prices over the past year was a more modest 1.9%.

 

Kentucky’s attorney general has sued Walgreens Boots Alliance, accusing the company of playing a dual role in propagating an opioid epidemic in the state as both a pharmacy chain and wholesale drug distributor. The lawsuit by Kentucky Attorney General Andy Beshear was his sixth to date seeking to hold corporations like drug manufacturers and distributors responsible for their roles in the drug abuse crisis. The lawsuit claims Walgreens filled massive opioid orders in both unusually large sizes and great frequencies. In its role as a distributor that shipped drugs, the company failed to report suspicious orders to authorities. At the store level, Walgreens dispensed opioids at “such an alarming rate and volume that there could be no legitimate medical purpose associated to their use.”

 

The New York state attorney general sued Trump, three of his children and his foundation today, saying he illegally used the nonprofit as a personal “checkbook” for his own benefit, including his 2016 presidential campaign. The AG’s office said the 21-month investigation uncovered “extensive unlawful political coordination” by the foundation with Trump’s campaign, as well as “repeated and willful self-dealing” to benefit Trump’s personal, business and political interests.

 

The Justice Department’s inspector general has released a report of his findings in an internal investigation into the FBI’s handling of the Hillary Clinton email inquiry. The report faults James Comey, the FBI director at the time, for several decisions he made surrounding the 2016 presidential election. The department’s inspector general concluded that while Comey was “insubordinate,” his decisions were not biased. The report says Comey usurped the authority of the attorney general when he announced during a July 2016 press conference that the FBI would not be recommending charges against Clinton. Further, the report found that Comey often used a personal email account to conduct official FBI business.

 

A federal judge ruled on Tuesday that AT&T’s $85 billion bid for Time Warner was legal, imposing no conditions on the merger. The Justice Department has agreed to let AT&T complete its purchase of Time Warner, likely clearing the way for the deal to be completed as soon as tomorrow. The DOJ will not file for a stay pending appeal. And with that…, Comcast formalized a $65 billion all-cash bid for most of Fox. The offer is an attempt to thwart Disney, which reached a $52 billion deal in December for the same film and TV assets. The Comcast offer sets the stage for a high-stakes bidding war between two of the biggest players in media and telecom. A handful of companies could be in play as Big Media races to consolidate. Shares of Discovery (DISCA) have climbed 5% since a federal judge signed off on the AT&T-Time Warner deal on Tuesday. CBS (CBS) has climbed 5%. And the film studio Lionsgate Entertainment (LGFA) has jumped 3.5%.

 

Adobe stock fell as much as 5 percent after the company reported better-than-expected earnings for the second quarter. Revenue rose 24 percent year over year. And the company raised guidance for third quarter earnings and revenue.

 

A study conducted by LendEDU last year found that roughly 18 percent of Bitcoin investors used a credit card to fund the purchases. Of those, 22 percent couldn’t pay off their balance after buying the digital coin. And so, Wells Fargo is joining Citi, JP Morgan, and Bank of America by restricting credit card customers from buying Bitcoin with Wells Fargo credit cards, that they didn’t know they had and then defaulting.

 

 

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