Fed minutes mixed with a hint of dovishness. Trade deficit grows on stronger dollar. ISM service side up. UK RE funds halt redemptions. Keep calm and move to Berlin or Paris. Gold up. Medivation on the block. PBGC and Central States Pension going broke. Messi messed up but misses another penalty.
Financial Review by Sinclair Noe for 07-06-2016
DOW + 78 = 17,918
SPX + 11 = 2099
NAS + 36 = 4859
10 Y + .02 = 1.38%
OIL + 1.27 = 47.87
GOLD + 7.00 = 1364.20
Silver + .14 = 20.16
The Federal Reserve released the minutes of the June FOMC meeting. When the central bank met in mid-June, an abysmal May jobs report (just 38,000 new jobs in May) had just startled markets, and the upcoming British referendum on European Union membership loomed large – an event that certainly had the Fed worried. But beyond that, what was the Fed thinking? Were they confident of a recovery and chomping at the bit to hike rates, or were they more concerned that the economy was still too fragile for higher rates?
Turns out, the Fed was mixed. Some of the policymakers thought the weak jobs report was an aberration; others thought “the lower rate of payroll gains could instead be indicative of a broader slowdown in growth of economic activity.” Even though retail sales were strong in April and May, “a few participants expressed caution.” Some officials thought business investment could pick up, particularly given the “greater optimism” businesses had expressed, including in the Fed’s Beige Book. Yet “some participants mentioned that the sluggishness in business investment could portend a broader economic slowdown.” There were similar mixed interpretations on inflation. In the end, the doves prevailed. The decision to leave rates unchanged was unanimous. The June minutes contained no reference to the timing of any future rate rises. Dovish indeed.
Stronger demand for imports boosted the U.S. trade deficit by 10% in May, but the rebound in consumer spending suggests the economy regained momentum after a slow start to the year. The nation’s trade gap climbed $41.1 billion — a three-month high — from a revised $37.4 billion in April. Imports increased 1.6% in May to a seasonally adjusted $223.5 billion. Exports, meanwhile, slipped 0.2% to $182.4 billion. Exports have been weak because of a strong dollar that makes American products more expensive as well as slower growth around the world. The U.S. exported fewer autos, airplanes and computer accessories in May.
The Institute for Supply Management’s service sector index jumped to 56.5% in June, a much stronger reading than expected. The forward-looking new orders component jumped 5.7 points to 59.9%, and the production index rose to 59.5. Employment increased 3.0 points to 52.7%, signaling expansion. The ISM says the report shows a “strong rebound” in economic activity.
The pound sterling dropped to a fresh 31-year trough overnight, sliding as far as $1.2796 to record a more than 14% loss in value since last month’s referendum. The 10-year US Treasury note yield hit a new record low of 1.32% in overnight trade; not so much an indication of US strength but of global weakness. The Stoxx Europe 600 dropped 1.7%, with all but the defensive utilities sector losing ground. Among banks, Switzerland’s Credit Suisse Group and German lenders Deutsche Bank and Commerzbank posted their lowest share-price closes on record.
Henderson Global Investors, Columbia Threadneedle Investments and Canada Life suspended trading in at least $7.4 billion of property funds, taking the number of U.K. firms curbing redemption to six in the wake of Britain’s shock decision to leave the European Union. Investors pulled money from real estate funds in the lead up to the vote, depleting cash levels, as industry commentators warned that London office values could fall by as much as 20 percent within three years of the country leaving the EU. Standard Life Investments was the first money manager to halt withdrawals on Monday, followed by Aviva Investors and M&G Investments. These are open end funds. It is kind of like a run on a bank, but it is a mutual fund, and it is not as liquid as many investors had hoped.
Deutsche Boerse has signaled the company to be created from its planned merger with the London Stock Exchange may be headquartered outside of the U.K. following Britain’s EU vote. A referendum committee, involving representatives of both partners, will assess all regulatory and commercial goals aimed at getting the transaction approved.
Paris is sending letters to British executives. German politicians have paid for billboards in London to promote Berlin. Dublin is planning an advertising campaign, and Milan wants to be home to Europe’s bank regulator. Not 2 weeks after the Brexit vote and cities across the Eurozone are trying to steal away British jobs and lay claim as the new financial hub. In London’s financial district on Tuesday a truck was spotted carrying a billboard with the words “Dear start-ups, Keep calm and move to Berlin.” French and German politicians have sparred over whether Frankfurt or Paris should take over London’s euro-clearing business. And once again they miss the point; instead of trying to poach the UK’s financial interests, they should try to think about how they can build a union that is better than what they have and so good that people will want more of it.
Stock in struggling Italian bank Monte dei Paschi di Siena bounced back after the country´s financial market regulator temporarily banned short-selling in the bank´s shares. The intervention comes after shares in the troubled lender fell by nearly 20% in yesterday’s session.
Gold prices extended recent gains to strike a fresh two-year high and is now challenging $1400 per ounce. Silver prices topped $20 an ounce, a nearly two-year high, gaining over 10% just in the handful of trading days since the Brexit vote. Analysts at UBS say gold has now entered a “new phase” and is the go-to investment for the remainder of 2016. They raised their annual forecast to an average of $1,280 an ounce, up from $1,225 an ounce.
Copper inventories are piling up. Copper inventories at the London Metals Exchange-approved warehouses rose 10,525 tons. The jump in inventory made for the biggest copper stockpile in nearly a month.
US cancer drug company Medivation has agreed to open its books and provide confidential information to French pharmaceutical company Sanofi as part of exploring a sale that would be open to other bidders. Similar agreements have been signed with Pfizer and Celgene, which have also expressed interest in an acquisition. As part of negotiations, Sanofi agreed to drop efforts to have Medivation shareholders replace the board, after its $9.3 billion offer for the company was rejected in April.
Sanofi has also formed a partnership with the US Army to expand R&D of an experimental Zika vaccine that has shown promise in early laboratory studies and is among a few candidates expected to be tested on humans in the coming months. Researchers and companies are racing to get a vaccine to market as quickly as possible – though they caution it is likely to take three years or more before that happens.
Barcelona’s Argentine soccer star Lionel Messi was sentenced on Wednesday to 21 months in prison and fined $2.2 million after being found guilty of three counts of tax fraud, although it is unlikely he will serve time. Another penalty he will miss. Spanish law is such that any sentence under two years for a non-violent crime rarely requires a defendant without previous convictions to serve jail time. The court also found Messi’s father guilty, sentencing him to 21 months and fining him 1.5 million euros. Messi and his father were accused of defrauding the Spanish government of 4.2 million euros in taxes between 2007 and 2009. They allegedly evaded taxes on income from Messi’s image rights by using a web of shell companies, which were revealed in the Panama Papers expose this spring.
The Pension Benefit Guaranty Corporation (PBGC) is now saying the government is on track to run out of money to prop up the troubled Teamsters Central States Pension Fund in 2024, roughly the same time the fund itself is expected to go bankrupt. Without congressional action, the confluence of those two events could leave Central States pensioners collecting pennies on the dollars they invested in their retirements. Central States, the largest of the country’s troubled pension plans negotiated between single unions and multiple employers, has been operating at deficits of $2 billion a year recently. The PBGC, which guarantees a minimum benefit to pensioners, expects to spend the better part of $15 billion assisting Central States in the next decade. But the projected rate of assistance to Central States and other ailing pension plans will wipe out the government’s multi-employer assistance funds by 2024. Should Central States fail and the PBGC emergency fund run dry, all of Central States’ 407,000 participants could see their payments cut almost to nothing. The scramble to solve the problem has not been as urgent as the pressure to stop the cuts Central States proposed under the Multiemployer Pension Reform Act of 2014 (MPRA). That fight involved rallies by angry pensioners, some of whom faced benefit cuts of 40 to 70 percent. The Government Accountability Office said it would investigate investment decisions made by Wall Street firms hired by Central States Pension Fund trustees.