…Stocks rally on kind words from Xi. Mueller in the crosshairs. Wagging the dog in Syria. Facebook theater. And oil moves higher.
Financial Review by Sinclair Noe for 04-10-2018
DOW + 428 = 24,408
SPX + 43 = 2656
NAS + 143 = 7094
RUT + 28 = 1543
10 Y + .01 = 2.80%
OIL + 2.16 = 65.58
GOLD + 3.40 = 1340.10
Stocks moved higher with a nice rally to start the trading session, after Chinese President Xi Jinping promised to open the country’s economy further and lower import tariffs on products including cars, in a speech seen as an attempt to defuse an escalating trade dispute with the United States. Xi said that China will sharply widen market access for foreign investors.
Xi portrayed China as committed to opening its economy as he presented an alternative vision to Trump’s calls for tariffs and restricting trade, urging “dialogue rather than confrontation.” Speaking publicly for the first time since the beginning of an escalating trade dispute between his country and the United States, Xi said, “The Cold War mentality and zero-sum game are increasingly obsolete. Only by adhering to peaceful development and working together can we truly achieve win-win results.” Stocks spiked higher in afternoon trade following Trump praise of Xi’s “kind words on tariffs and automobile barriers.”
The idea of tariff’s on Chinese cars is a bit disingenuous because China doesn’t actually export many cars to the US, with the possible exception of their partnership with Volvo, which is not facing tariffs. And the US does not export many cars to China, even though US automakers – especially GM – do build cars in China. And Xi’s pledges to open China’s banking, auto and manufacturing sectors are not entirely new. Last November, China said it would ease and eventually remove limits on foreign ownership of banks and other financial firms, but financial firms have not received details about when and how that will happen.
Federal Reserve Bank of Dallas President Robert Kaplan said trade issues between the U.S. and China won’t get resolved soon and warned of potential damage if the dispute is prolonged. President Xi did not make specific concessions on trade, just some broad, soothing words. President Xi says nothing at all (so ‘Party on’ dudes). With the newly friendly tone, investors began weighing whether fears of an outright trade war had become overblown. That, in turn, reinvigorated faith in the synchronized global-growth story ahead of earnings season.
Stocks continued their advance despite additional revelations about Monday’s raid on the office of Trump’s personal lawyer, Michael Cohen, by the Federal Bureau of Investigation. White House Press Secretary Sarah Sanders said Trump believes he has the power to fire Special Counsel Robert Mueller — a step numerous lawmakers have warned him against taking. “He certainly believes he has the power to do so,” Sanders said. She added Trump believes the investigation should be ended. “The president has been clear that he thinks this has gone too far,” Sanders said. Sanders also said she couldn’t confirm whether Michael Cohen is still Trump’s personal lawyer. If only there was some distraction, something that would take attention off the FBI raids, the porn star, the fixer lawyer, the investigations. If only there was some way to wag that dog.
The United States and other Western powers are considering taking military action over a suspected poison gas attack by the Assad regime on Saturday in a small town near Damascus. Dozens of people died from the attack, including young children. Russia vetoed a U.N. resolution to create a new inquiry to ascertain blame for such attacks. The United States and other countries then blocked a rival Russian bid to set up a different probe that would require the Security Council to attribute responsibility. Trump cancelled his scheduled trip to South America for a summit in Peru. Press secretary Sanders said Trump will stay in the US in order to “oversee the American response to Syria and to monitor developments around the world.”
And then Mark Zuckerberg went to Washington and testified before the Senate Judiciary and Commerce committees. Zuckerberg even wore a suit and tie. He apparently said all the right things. Facebook share rose 7.11 to 165.04 – the best trading day in about 2 years. But this follows a very bad month for Facebook. Cambridge University researcher Aleksandr Kogan created a personality app in 2013 that was used by around 300,000 people, but was able to access information associated with millions of accounts. Facebook says that data was later used by another firm, Cambridge Analytica, against Facebook’s rules — an abuse that was revealed by reporters at The Guardian, The New York Times and Channel 4 last month. Cambridge Analytica was affiliated with Trump’s campaign.
Zuckerberg told a joint hearing of the Senate Judiciary and Commerce committees that Facebook was striving to correct issues with its platform, despite failing to notify the FTC about data issues. In a sharp line of questioning, Sen. Lindsey Graham asked Zuckerberg if Facebook has a monopoly on the kind of service it provides for its more than 2 billion users. “If I buy a Ford and it doesn’t work well and I don’t like it, I can buy a Chevy,” Graham said during Tuesday’s hearing. “If I’m upset with Facebook, what’s the equivalent product that I can go sign up for?”
Zuckerberg struggled to name a direct competitor but he said other tech companies overlap with what Facebook does. But he didn’t say there are other companies that make the same product, so to speak. It’s a worthwhile issue for Graham to bring up. Many tech companies including Facebook provide services no one else does, in part because they’re so big that they can buy the competition. A customer would be hard-pressed to find another website that provides the ability to connect with others like Facebook does. If you don’t agree, be sure to send me a message on MySpace.
That’s why the Graham-Zuckerberg exchange is so important. It gets to the heart of the power that companies like Facebook have — and whether Congress has a role in regulating the size and scope of these companies. What is going to happen to the internet and companies like Facebook? Will they be broken up because of their monopolistic size and power, or will they be regulated? In a full-page ad that ran in a number of national newspapers in the immediate wake of the Cambridge Analytica scandal’s initial revelation, Zuckerberg wrote that “we have a responsibility to protect your information. If we can’t, we don’t deserve it.”
There was plenty of interesting stuff. Zuckerberg said he could see AI taking a primary role in automatically detecting hate speech on Facebook in five to 10 years. He also confirmed Facebook is working with special counsel Robert Mueller. If you’re wondering what will become of all this testimony, the best guess is – not much. But it makes for great political theater. And today it made for a good bounce for Facebook shares. So, we have markets right now trading off of headlines, which can be unnerving. There will be a shift back to fundamentals as the week continues – maybe. Companies will soon begin reporting first-quarter results, starting with the big money-center banks later this week, and analysts expect earnings growth rates to be the highest since the second quarter of 2011. Energy, financials and materials should lead the bottom-up consensus forecast for 16.5 percent growth in earnings-per-share.
Also, tomorrow we get a look at inflation on the retail level. The government is forecast to say that core consumer prices, which exclude food and energy, surged 2.1 percent in March from a year earlier and up from a gain of 1.8 percent in February. That 0.3 percentage-point increase would be the biggest from the previous month since September 2004. Why such a big jump? An unusual plunge in costs for mobile-phone services in March 2017 that has weighed on the core consumer-price index is now set to fade. Markets are on watch for signs of price pressures that could trigger a faster pace of interest-rate increases.
Meanwhile, WTI crude shot past $65 a barrel, and Brent futures reached their highest level since December 2014. It was the biggest daily price jump for oil in 8 months. And to accent the move, it came on the back of a report that showed a surprise addition to surplus US supplies. The American Petroleum Institute said crude inventories increased by 1.76 million barrels last week. That topped estimates which called for a drop in supplies. The federal government is scheduled to release its tally on Wednesday.
Today’s higher prices are largely the result of concerns about the potential for a trade war between the U.S. and China, as well as sanctions against Russia. Plus, Saudi Arabia wants to push oil significantly higher, to $80 a barrel, to pay for the government’s crowded policy agenda and support the valuation of state energy giant Aramco before an initial public offering. But it’s not just oil prices. Aluminum rose to cap its biggest five-day gain since 2009. Cotton closed at its highest in almost a month. the market for raw materials is running on all cylinders. The downside to higher commodities prices is that they tend to boost inflation expectations, which tend to damp demand for bonds and raise borrowing costs; it also is a major concern for the Fed. At the U.S. Treasury’s auction of $30 billion in three-year notes today, the largest for that maturity since 2014, dealers were stuck with 40.9 percent of the bonds, the most since September. Indirect bidders, which include foreign investors, pensions and mutual funds, purchased 47.6 percent, the least since September. In other words – no demand, lots of supply.