Financial Review

Quitaly, Chinariff (and other words)

…Italy’s government dissolves. New elections in July. New tariffs on China. Stocks fall, Treasuries rally, bank stocks tumble. Puerto Rico’s humanitarian crisis. No coffee today.

Financial Review by Sinclair Noe for 05-29-2018

DOW – 391 = 24,361
SPX – 31 = 2689
NAS – 37 = 7396
RUT – 3 = 1623
10 Y -.16 = 2.77%
OIL – 1.07 = 66.81
GOLD + 1.20 = 1299.40

 

The good news is that it could have been worse. The Dow Industrials were down over 500 points at session lows. Today’s losses marked the third straight trading session of negative numbers for the Dow and S&P 500, both of which suffered their worst day on a percentage basis since April 24. Stocks extended their losses throughout the day as European exchanges closed and the euro fell further against the dollar. The VIX, or volatility index jumped by about 30%; complacency got a sharp awakening. The risk-off attitude fueled demand for safe-haven trades. Treasury bonds had a huge bounce, suddenly pushing yields down over 5%. It was the biggest one-day advance for Treasuries in about 2 years and it pushed yields to 7-week lows. The yield on the 2-year note also dropped 16 basis points to 2.34%, so the already flat yield curve did not flatten further. Treasuries were a safe haven play as investors abandoned Italian bonds, pushing yields up over 50 basis points. The euro fell below $1.16 — its lowest level this year against the greenback — as Italian debt rates continued to rise. The Dollar Index, which pits the greenback against a basket of currencies, was up 0.68 percent Tuesday at 94.83.

 

Italy is heading for new elections after populist politicians failed to form a government. Radical parties could gain even more ground, and there are concerns that the vote will turn into a de-facto referendum on the euro. Some market observers worry Italy may ultimately crash out of the European Union — a scenario they’ve dubbed “Italexit” or “Quitaly.” The turmoil over the failed Italian coalition, with the prospect of new elections, has revived memories of the crisis which engulfed the eurozone over Greece. Investors have taken fright that Italy might effectively vote to leave the euro, sending markets and bond prices tumbling. And on top of that, there is concern over Spain, where the government faces a no confidence vote on Friday.

 

Italy’s government debt is above €2 trillion euros ($2.3 trillion), equivalent to more than 130% of annual economic output. That’s the third highest level of indebtedness in the world after Japan and Greece. A majority of Italy’s government debt is owned by Italians, but the European Central Bank also owns a big chunk, along with banks and investors in France, Luxembourg, Germany and Spain.

 

Italian President Sergio Mattarella on Sunday blocked the formation of a government that would have been decidedly against the euro. The anti-establishment 5-Star Movement, Italy’s biggest party, and the far-right League party picked euro critic Paolo Savona as their economy minister. The two parties, both critical of Europe’s single currency, had won more than half the votes in March’s parliamentary elections. Mattarella vetoed the choice and instead asked Carlo Cottarelli, a former IMF official, to form a temporary government, but both parties object to him, and a new vote is now expected in late July.

 

There is little chance the euro zone’s third-largest economy will move to leave the single currency, creating a continent-wide crisis of confidence. But internal chaos and a new election could make for a rocky summer for markets and even put a dent in European economic growth. It might even influence the Federal Reserve policymakers, but for now, it looks like the Fed is sticking to its course which includes a rate hike next month. For some traders, the Italian political crisis is deja vu to the Greek debt crisis, which wound down three years ago after fanning fears that the whole financial and economic fabric of the euro zone could unravel. But it really is much ado about nothing – at least for the time being – there is no sovereign debt crisis in Italy.

 

As Wall Street stumble, bank stocks led the decline. Goldman Sachs, J.P. Morgan, Citigroup, Morgan Stanley and Bank of America all lost more than 3 percent. The Financial Select Sector SPDR (XLF) exchange-traded fund fell 3.3 percent, below its 200-day moving average. Exacerbating banking sector woes was J.P. Morgan Co-president Daniel Pinto, who revealed that trading revenue in the second quarter will probably be flat from a year ago. Morgan Stanley, meanwhile, clinched its worst day since June 2016, down 5.75 percent on concerns about  its wealth management division.

 

The White House has taken aggressive new steps in its effort to reduce a $337bn trade deficit with China, announcing that it will impose a 25% tariff on $50 billion of Chinese goods containing “industrially significant technology”. The White House said China had “pursued industrial policies and unfair trade practices including dumping, discriminatory non-tariff barriers, forced technology transfer, over capacity, and industrial subsidies that champion Chinese firms and make it impossible for many United States firms to compete on a level playing field”. The new tariffs will cover goods related to the “Made in China 2025” program the administration claims “harm companies in the United States and around the world”. The White House statement identified four aggressive technology policies pursued by China which it claimed put 44 million American jobs at risk. The White House said the policies included forced technology transfer; requiring licensing at less than economic value; state-directed acquisition of sensitive US technology for strategic purposes; and outright cybertheft. The full list of imports that will be subject to the 25% tariffs will be announced by June 15.

 

China expressed surprise, saying the US move was contrary to the consensus both sides reached recently.

 

When Hurricane Maria hit Puerto Rico last September it left a deadly trail of destruction. The official government death toll was 64 souls. Today, a new study published in the New England Journal of Medicine concludes that as many as 4,600 “excess deaths” occurred in the aftermath of the storm due to failures of medical and other critical infrastructure and described the official number as “a substantial underestimate”. Researchers said their fresh evaluation was probably an underestimate, too, owing to problems with communications that persist in the storm’s aftermath. In an enormous range of calculations, they said there is a 95% likelihood the death toll was somewhere between approximately 800 and 8,500 people.

 

In the days, weeks and months that followed the hurricane, roads and electrical lines were slow to be restored, grinding much of life to a near halt. There were also severe shortages of food and lack of access to potable water in many areas. The government figure of 64 fatalities accounts for those whose deaths were confirmed by the Institute of Forensic Sciences as directly disaster-related. The new study used baseline mortality figures to calculate “excess deaths”, or loss of life that otherwise would not have occurred if the island hadn’t been plunged into a prolonged humanitarian disaster.

 

 

Salesforce continued its upward climb in first-quarter earnings on Tuesday with a major beat across the board that sent its stock up in after-hours trading. Revenue was up 25%, beating expectations. Earnings beat expectations. Guidance was raised  for the second quarter and full year. Salesforce’s stock was up roughly 2.5% in after-hours trading.

 

HP shares rose nearly 2% in the extended session, then dropped nearly 3% after the company beat revenue expectations and met Wall Street earnings estimates.

 

The $66 billion merger of agribusiness giants Bayer and Monsanto won conditional U.S. antitrust approval today after the rival companies agreed to a record-setting sell-off of roughly $9 billion of assets to maintain market competition.  Germany-based Bayer will divest its seed and herbicide businesses to competing German chemical company BASF as part of the agreement. Bayer will also sell an array of intellectual property and research and development projects.

 

No coffee for you, at least for a while today, at certain Starbucks, but not all. Up to 180,000 employees at Starbucks stores and at its headquarters are receiving training from a “tool kit” that will “focus on understanding prejudice and the history of public accommodations in the United States.” Starbucks also said future training will address “all aspects of bias and experience.”

 

Roseanne didn’t get the memo. She did, however, tweet. And it was not nice. It resulted in ABC cancelling the recently rebooted sitcom.

 

Missouri Governor Eric Greitens said he would resign from office this week, avoiding a potential impeachment he faced after he became embroiled in separate sexual misconduct and political fundraising scandals.

 

The Conference Board’s consumer confidence index rose to 128 from a revised 125.6 in April. The present situation index, a measure of current conditions, climbed to a 17-year high. The future expectations index also edged higher. The high level of confidence reflects a sturdy economic expansion in the U.S. that’s about to turn nine years old with no end in sight. Job openings are at a record high and unemployment is at a 17-year low.

 

The S&P/Case-Shiller national index rose a seasonally adjusted 0.4% and was up 6.5% compared to a year ago in March. The 20-city index rose a seasonally adjusted 0.5% and was 6.8% higher than a year ago. Home-price growth showed no sign of slowing down. Demand is strong, supply is short and favorable economic conditions are making it possible for many people to bid prices up. In March, Seattle was still on top, charting its 27th-straight month of double-digit annual price increases. Las Vegas, which is benefitting from an influx of coastal refugees, was second. But prices in Vegas are still 25% lower than their 2006 peak. In Phoenix, home prices were up 0.9% from the prior month, and up 6.8% over the past 12 months.

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