Financial Review

If Needs Be

…Stock rally stumbles. G7 could get testy. Remember tariffs on solar? ZTE deal. Facebook fumbles privacy, again. Buyback record. Household wealth record. Home prices and affordability.

Financial Review by Sinclair Noe for 06-07-2018

DOW + 95 = 25,241
SPX – 1 = 2770
NAS – 54 = 7635
RUT – 8 = 1667
10 Y – .04 = 2.93%
OIL + 1.20 = 65.93
GOLD +.90 = 1297.80

 

After a nice rally, the markets look a little vulnerable here. The Dow Industrial Average is up for 4 out of the past 5 sessions with a gain of more than 800 points over that time – still, you look at the Dow and see tremendous exposure to potential trade wars. The Nasdaq Composite and Russell 2000 are coming off of record high closes yesterday, but faltered today – and absent a breakout, you have to start looking for confirmation…, or levels of support. Perhaps the most concerning part of the market is the lack of concern with all the inconsistencies. The VIX, or volatility Index bounced a bit today, but it is coming off a more than four month low.

 

The S&P 500’s Energy index gained 1.6% and was the biggest gainer out of the 11 major sectors. Oil prices moved higher on concerns of a plunge in exports from Venezuela and worries OPEC may not raise production at its meeting this month. The S&P technology index fell 1.2 percent, led by Microsoft and Facebook, which both fell more than 1.6 percent. The losses followed a six-day rally that had pushed the index to record levels. McDonald’s was the biggest gainer among the Dow 30 stocks, after announcing it is slimming down its corporate structure and laying off workers in an effort to reduce expenses by $500 million by the end of 2019. McDonald’s share were up more than 4%.

 

Treasury yields fell, reversing the prior day’s move as safe-haven demand rose on worries about trade disputes between the United States and its major trade partners ahead of the Group of Seven (G7) summit. There’s caution associated with the G7 meeting which historically is neutral for the market, but this meeting could be the exception.

 

Look for Trump to confront other world leaders at the G7 summit in Quebec on Friday over what he believes is a global economic system tilted against the United States… escalating tensions with U.S. allies who have expressed outrage at his pivot toward protectionism… In a sign Trump is looking to stoke divisions, White House officials are discussing ways to impose additional economic penalties against Canada — the host nation for the summit — in retaliation for Ottawa’s threat to levy tariffs next month on roughly $13 billion in U.S.-made products. Among Canada’s targets: orange juice, soy sauce, sleeping bags and inflatable boats. But there are divergent views within the White House over how to treat Canada, with Treasury Secretary Steven Mnuchin urging both sides to de-escalate. German Chancellor Angela Merkel predicted difficult talks at the Group of Seven summit, warning that there is no sense in papering over divisions on issues such as trade. French President Emmanuel Macron said: “Maybe the American president doesn’t care about being isolated today, but we don’t mind being six, if needs be.” Finally, we might have an interesting G7 summit, but not in a good way.

 

And once we get past the G7 summit, there’s a European Central Bank meeting and a Federal Reserve meeting next week. Both are paramount for the market’s direction. The Fed is widely expected to announce an interest rate hike on Wednesday but investors are looking for clues on whether the U.S. central bank will raise rates a fourth time in 2018.

 

The European Union announced it will start imposing duties on a list of U.S. products in response to Trump’s decision to slap tariffs on steel and aluminum imports from Europe. The new duties start applying in July.  The EU says it will introduce ‘rebalancing’ tariffs on about $3.4 billion worth of U.S. steel, agricultural and other products, including bourbon, peanut butter, cranberries and orange juice.

 

You may remember that tariffs actually started back in January, with levies on solar panels and dishwashers. How’s that working out? The tariff on imported solar panels has led U.S. renewable energy companies to cancel or freeze investments of more than $2.5 billion in large installation projects, along with thousands of jobs. That’s more than double the about $1 billion in new spending plans announced by firms building or expanding U.S. solar panel factories to take advantage of the tax on imports. Solar developers completed utility-scale installations costing a total of $6.8 billion last year, according to the Solar Energy Industries Association. Those investments were driven by U.S. tax incentives and the falling costs of imported panels, mostly from China, which together made solar power competitive with natural gas and coal. The U.S. solar industry employs more than 250,000 people – about three times more than the coal industry – with about 40 percent of those people in installation and 20 percent in manufacturing. GTM Research, a clean energy research firm, recently lowered its 2019 and 2020 utility-scale solar installation forecasts in the United States by 20 percent and 17 percent, respectively, citing the tariffs.

 

The United States and China have reached a deal that allows the Chinese telecommunications giant ZTE  to stay in business in exchange for paying an additional $1 billion in fines and agreeing to let U.S. regulators monitor its operations. The fine announced Thursday comes on top of $892 million ZTE has already paid for breaking U.S. sanctions by selling equipment to North Korea and Iran. The Commerce Department said that ZTE must also put $400 million in escrow — a sum that it would forfeit if it violated Thursday’s agreement. In addition, a compliance team chosen by the United States will be embedded at ZTE and the Chinese company must change its board and executive team. Commerce Secretary Wilbur Ross says the ZTE ruling allowing the company to stay in business is not part of  wider U.S.-China trade talks.

 

Sometimes its difficult to tell if something is just a blip on the screen or the start of something much bigger. For Facebook, problems just keep growing. Facebook announced that millions of users had their privacy settings accidentally changed by a “software bug,” letting anyone on the internet read status updates and posts that were intended only for private audiences. The company says that the problem occurred between May 18 and May 27 but has since been fixed. Facebook told Recode that 14 million users may have been affected, and that whose posts were made public incorrectly will be notified. In the wake of the Cambridge Analytica scandal, Facebook CEO Mark Zuckerberg was questioned for two days on Capitol Hill about the importance of user security. He apologized for the handling of the issue and promised that the company will be more transparent and “do better” when it comes to protecting user data and security. OK. Now might be a good time.

 

Mick Mulvaney, acting director of the Consumer Financial Protection Bureau, fired the agency’s 25-member advisory board yesterday, days after some of its members criticized his leadership of the watchdog agency. The CFPB said it will revamp the Consumer Advisory Board, known as the CAB, in the fall with all new members. Between now and then, not much will get done, apparently. On Monday, 11 CAB members held a news conference and criticized Mulvaney for, among other things, canceling legally required meetings with the group. On Wednesday, group members were notified that they were being replaced — and that they could not reapply for spots on the new board.

 

American companies announced a record $201.3 billion in stock buybacks and cash takeovers in May. Apple made up nearly half that total, according to a report from investment research company TrimTabs. Last month, Apple pledged to purchase $100 billion worth of its own stock. It didn’t provide a time frame for when it would complete the purchases. Micron Technology ($10 billion) and Qualcomm ($8.8 billion) rounded out the top three. S&P Dow Jones Indices said that total buybacks and dividends for the past 12 months could top $1 trillion for the first time ever.

 

The Federal Reserve reports that household wealth topped $100 trillion for the first time in the first quarter. Thanks to rising house prices, the net worth of households and nonprofits rose to $100.77 trillion from $99.74 trillion, offsetting the impact of a decline in the stock market. Household debt rose at an annual rate of 3.3%, staying in the range it’s been for the last few years. The December quarter, when borrowing climbed by 4.6%, was propped up by the need to replace cars damaged by hurricanes. Federal government debt skyrocketed 15.3% after the debt-ceiling increase, while state and local government debt fell by 4.2%. Business debt grew by 4.4% for the second straight quarter. Corporate cash holdings rose to $2.66 trillion from $2.59 trillion. One way of measuring the stock market’s valuation, equities to corporate net worth, ticked down slightly to 111.76% from 112.68%.

 

Whenever we talk about home prices lately, there is a familiar theme – tight inventories and higher prices. An acute shortage of affordable homes in the United States will continue over the coming year, according to a majority of property market analysts polled by Reuters, driving prices up faster than inflation and wage growth. House prices have regained the losses from the meltdown but supply has not been able to keep up with rising demand, making homeownership less affordable. Annual average earnings growth has remained below 3 percent even as house price rises have averaged more than 5 percent over the last few years. A pricier market is likely to push many people to rent rather than buy. But even renting a home in major U.S. cities will become more expensive relative to average income.

 

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