…Stocks rebound from bad week. Tariffs as a political show. German and Italian elections. ISM stays strong. 3-month T-bills strong auction. Sorting out crypto plans. Qualcomm v. Broadcom.
Financial Review by Sinclair Noe for 03-05-2018
DOW + 336 = 24,874
SPX + 29 = 2720
NAS + 72 = 7330
RUT + 12 = 1546
10 Y + .02 = 2.88
OIL + 1.36 = 62.61
GOLD – 2.80 = 1320.80
Stocks started the session in negative territory. In the first few minutes of trade, the Dow was down about 130 points. Last week, stocks posted hefty losses, with the Dow dropping 3% and notching its fourth-straight-session loss on Friday. The S&P 500 shed 2% for the week and the Nasdaq declined 1.1%.
This morning, Trump signaled that his hastily announced tariffs on steel and aluminum may not be implemented, at least for Canada and Mexico, if a “fair” NAFTA agreement is negotiated. Trump tweeted: “Tariffs on steel and aluminum will only come off if new & fair NAFTA agreement is signed.” While Trump has regularly railed about China’s trade practices, the impact of the tariffs of 25 percent on imported steel and 10 percent on aluminum may be most felt by U.S. allies, the European Union, Canada and Mexico. House of Representatives Speaker Paul Ryan, whose state of Wisconsin would be hit by proposed European counter-tariffs on Harley Davidson motorcycles, urged the White House not to push ahead with tariffs. House Republicans tasked with tax and trade policy are drafting a letter addressed to Trump “expressing concerns about the prospect of broad, global tariffs on aluminum and steel imports.
Caterpillar was the biggest contributor of gains to the Dow, rising 3.2 percent. Harley-Davidson rose 2.4 percent. Seeing Caterpillar and Harley-Davidson trade higher is a clear indication that Wall Street does not believe tariffs will happen. Ray Dalio, who runs the world’s largest hedge fund at Bridgewater Associates, captured the sentiment when he wrote on his LinkedIn page, “I believe that what is happening now is more for political show than for real threatening.” Of course, cooler heads might not prevail, Canada and Mexico might reject the idea of re-working NAFTA, and then we could be looking at tariffs and the breakdown of NAFTA. According to a Washington, DC-based economic consulting group Trade Partnerships, “Steel and aluminum tariffs would reverberate throughout the US economy in ways that will, on balance, reduce US employment.” The study says tariffs would result in a net loss of 146,000 US jobs, even before the impact of any retaliatory tariffs from trading partners are figured in.
The threat of tariffs is hitting a raw nerve in the energy industry, which has been racing to lay enough pipelines to accommodate booming U.S oil production. U.S. shale oil output is set to surge over the next five years, stealing market share from OPEC producers and moving the United States, once the world’s top oil importer, closer to self-sufficiency. U.S. oil output hit a record late last year and is expected to rise by 2.7 million barrels per day to 12.1 million bpd by 2023, as growth from shale fields more than offsets declines in conventional supply. Natural gas liquids will add another 1 million bpd to U.S. supply to reach 4.7 million bpd by 2023. With total U.S. liquids production set to reach nearly 17 million bpd in 2023, up from 13.2 million in 2017, the International Energy Agency now forecasts the United States will be by far the world’s top oil liquids producer within 5 years.
The Institute for Supply Management’s survey of service-oriented companies fell slightly in February one month after hitting a nearly 13-year high. The ISM non-manufacturing index slipped to 59.5 from 59.9 in January. Numbers over 50% are viewed as positive for the economy, and anything over 55% is considered exceptional.
At the government’s auction of $51 billion in three-month bills today, investors submitted bids for 3.26 times the amount offered. That’s the highest so-called bid-to-cover ratio for that maturity since mid-August. Although on the surface a 1.66 percent rate doesn’t seem all that attractive, it’s downright juicy considering that is higher than the rates investors are accepting to lend for five years to the governments of Switzerland, the Netherlands, Germany, France, Sweden, Spain, Portugal, Italy, the U.K. and Japan. U.S. government debt auctions are becoming even more important than usual now that the government is forecast to at least double its debt sales this year to more than $1 trillion.
In Europe, the broadest measure of the region’s equities halted a four-day slide after a major breakthrough on the path to a German government. Italy’s stocks and bonds were the standout losers as anti-establishment political groups surged in Sunday’s election. The Italian election result and Germany’s move toward a coalition kick off a busy week for macro events. Both the Bank of Japan and European Central Bank will meet to decide on interest rate policy, while China hosts its National People’s Congress.
Sunday’s Italian election is expected to end in a hung parliament, as populist euroskeptic parties made a better showing than forecast. That is seen as signaling a protracted period of political uncertainty for the eurozone’s fourth-biggest economy.
In Germany, Social Democrats voted to support a grand coalition government. That means Chancellor Angela Merkel will serve a fourth term and the country is set to have a government after more than five months of uncertainty.
Shares of Square rallied on what appears to be old news making the rounds on the Internet and on trading floors. The stock’s surge may have been prompted by an article from a little-known news site based in Latvia that said Square is “possibly testing an integration with Bitcoin.” Square Chief Executive Officer Jack Dorsey said in a Jan. 31 tweet that the company is introducing Bitcoin trading for almost all users of its Cash App. Square shares up almost 9% today.
PayPal Holdings moved higher today after it was revealed that the company recently filed for a patent related to bitcoin. The company’s patent filing was for an “expedited virtual currency transaction system” and was flagged by Bitcoin.com. Such a system could potentially speed up bitcoin transactions and be anonymous. Shares of PayPal were originally down to start the day after the Wall Street Journal reported that Amazon.com was interested in creating its own product similar to a checking account. PayPal’s stock is up 84% over the past 12 months.
Washington has waded into Broadcom’s effort to buy rival chipmaker Qualcomm for $117 billion. America’s foreign-investment watchdog has told Qualcomm to delay by 30 days its annual shareholder meeting. The agenda includes director elections that could give board control to nominees of Singapore-based Broadcom. It’s a surprising twist in an already tangled situation. But it may remove a big unknown from the equation. Broadcom is blaming its target, saying Qualcomm sought a review by the Committee on Foreign Investment in the United States and didn’t tell its shareholders or its suitor. While the committee’s latest pre-emptive move is highly unusual, it’s not illogical. Having decamped to Singapore in search of lower taxes, Broadcom Chief Executive Hock Tan has promised to return his acquisitive $100 billion firm to the United States. That process could be completed in a few months, but for now Tan’s company is foreign, and it’s trying to make a big purchase in an important technology sector
France’s AXA is trying to buy Bermuda-based XL Group for $15.3 billion, a move that would create a world leader in property and casualty insurance. Europe’s second-biggest insurer offered $57.60 for each XL share, a 33 percent premium to Friday’s closing price. XL has already agreed to AXA’s offer.
Convicted fraudster Martin Shkreli will have to forfeit $7.36 million to the federal government as part of his upcoming criminal sentence. Shkreli is scheduled to be sentenced March 9 for lying to investors in his hedge funds about his track record and performance as well as a fraud that involved Retrophin Inc., a company he founded. Prosecutors argued last month that Shkreli cost his investors more than $20 million by inducing them to put millions of dollars into his two hedge funds, which operated essentially like Ponzi schemes. They said he spent investor funds on personal expenses “to maintain the image of a successful hedge fund manager.”
In an ongoing worker standoff that has captured national attention, unions representing West Virginia teachers say they will stay on strike after the Republican-led state Senate voted down a pay raise educators had negotiated with GOP Gov. Jim Justice. As the statewide strike carried through its eighth school day, the state’s teachers are protesting salary levels that are among the lowest in the nation, as well as rising health-care costs. They are holding out for a 5 percent raise after four years without any increase. West Virginia lags most of the nation when it comes to teacher pay. Despite average spending of more than $12,200 a year per pupil, just shy of the median level for all states, West Virginia public school teachers had a statewide median annual salary of about $45,700 for the 2016-17 school year, the fourth-lowest in the nation.