Financial Review


…Trump blows up Iran deal. Stocks stumble but close flat. Oil dips but holds $70. JOLTS – a job opening for everyone. Equifax gets worse.

Financial Review by Sinclair Noe for 05-08-2018

DOW + 2 = 24,360
SPX – 0.71 = 2671
NAS + 1 = 7266
RUT + 7 = 1586
10 Y + .02 = 2.97%
OIL – .69 = 70.04
GOLD + .60 = 1315.20


Trump announced the U.S. will pull out of the landmark nuclear accord with Iran, declaring he was making the world safer but dealing a blow to our allies. Trump said the 2015 agreement, which included Germany, France and Britain, was a “horrible one-sided deal that should never ever have been made.” He added that the United States “will be instituting the highest level of economic sanction.” The move is especially striking because even Trump administration officials have previously said Iran is complying with the accord. Trump had until May 12 to decide whether to waive sanctions as the deal requires if Iran is complying, and he made his announcement four days early.  There was an inevitability about Trump’s announcement, which had been expected in some form for months. Trump, as a presidential candidate, had pledged to rip up the agreement that he’d labeled the “worst deal in history.”


Trump’s decision means Iran’s government must now decide whether to follow the U.S. and withdraw or try to salvage what’s left of the deal. Iranian President Hassan Rouhani said he was sending his foreign minister to the countries remaining in the accord but warned there was only a short time to negotiate with them and his country could soon “start enriching uranium more than before.” French President Emmanuel Macron said his country, Britain and Germany all regretted Trump’s decision.


The administration said it will re-impose nuclear sanctions on Iran immediately but allow grace periods for businesses to wind down activity. The Treasury Department said there will be “certain 90-day and 180-day wind-down periods” but didn’t specify which sanctions would fall under which timelines. Treasury says at the end of those periods, the sanctions will be in “full effect.” It’s unlikely that countries like China and India, which rely heavily on Iranian crude exports, will alter their plans to keep buying Iranian oil. They and others can now point out that it is the U.S., not Iran, that has violated the deal. However, the sanctions could precipitate a major crisis with America’s European allies, as some of the sanctions could affect European companies that do business in Iran.


The whole point of the deal was a quid pro quo: Iran agreed to nuclear restrictions in exchange for the financial benefits of sanctions relief, which would amount to billions and billions of dollars. What Trump did today was reimpose a major portion of the pre-deal sanctions regime — something called “secondary sanctions” targeting Iran’s oil sector. Secondary sanctions don’t punish Iran directly, instead targeting international banks that do business with Iran’s oil sector. Hence why they’re “secondary”: Instead of hitting the primary target, Iran, they cut off access to US markets for third parties that want to work with Iran. In effect, it forces foreign countries into a choice between importing large amounts of Iranian oil or doing business with the United States. Since America is the world’s largest economy, it’s not exactly a hard choice — and thus would end up punishing close US allies that want to do business with Iran. Reimposing these sanctions puts the US in clear violation of its obligations under the deal, thus effectively withdrawing America as a participant — and significantly reducing Iran’s incentive to stay in. But the deal isn’t dead, at least not yet. If the rest of the countries don’t reimpose their own sanctions, Iran may very well end up still having more access to international markets than it had before the deal was inked. It could thus still decide to stay in the deal, rather than kicking out inspectors or restarting large-scale uranium enrichment, in order to avoid angering these other parties — all of which opposed Trump’s decision.


You might think that oil might spike on the news, but the spike happened yesterday, when oil topped $70 a barrel. Buy the rumor, sell the news – maybe. We have seen a recent rally in oil, and $70 marked resistance. Oil dropped today as Saudi Arabia said it would pick up any slack in OPEC production to compensate for any possible shortage of Iranian oil. But there might not be much slack. In a monthly report issued today, the Energy Information Administration raised its 2018 and 2019 forecasts on U.S. crude-oil production. Notably, the agency increased its 2019 domestic crude production forecast by 3.6% to 11.86 million barrels a day. The U.S. is not dependent on Iran unlike Europe, who will not back out because Iran buys a lot from Europe. We might still see a new deal to replace the old one, but that is down the road. In the longer term, we can expect sanctions to push prices higher.


Analysts at multiple banks have noted that a rise in oil and gas prices by $1 could wipe away any benefits bestowed by the tax cuts passed last year.  According to Deutsche Bank, a rise much smaller than that would wipe out the increased discretionary income generated by the tax cuts for the lower economic tiers. RBC issued a note with similar analysis, but put that dollar threshold into perspective, noting it was a “high hurdle” to clear, considering that gas prices would need to be $3.40 on average. According to GasBuddy, the national average is now $2.83 a gallon. Still, sustained prices at current levels would effectively remove a third of the tax cuts’ benefit of raising take-home pay, according to Morgan Stanley. As the bank’s analysts wrote, “Gasoline expenditures are highly inelastic — when prices rise, we must divert expenditures from elsewhere.”


The dollar continued to rally with the dollar index briefly topping 93. Fed Chair Jerome Powell delivered a speech today confirming the normalization of rates and arguing that the normalization of monetary policy in advanced economies should continue to prove manageable for emerging market economies. The remarks come as investors bet against emerging markets in response to the Fed policy of tightening. The dollar has soared against most developing-nation currencies in the past month.  Debt sales from countries such as Russia and Argentina have been canceled or postponed recently as potential buyers — becoming more selective and demanding as U.S. benchmark rates rise — balked at the prospect of faster inflation and widening budget deficits.  Policy makers have started to act, with Argentina’s central bank abruptly raising rates three times, to 40 percent, to stem a sell-off in the peso. Russia has put the brakes on further monetary easing. Turkey is seeking to bring down its current account deficit. Indonesia is burning reserves to prop up its currency. Investors are watching Treasury yields, which hit a four-year high of 3 percent last month.


JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said it’s possible U.S. growth and inflation prove fast enough to prompt the Fed to raise interest rates more than many anticipate, and it would be wise to prepare for benchmark yields to climb to 4 percent. A sustained move higher would pressure local currencies and lure away foreign investors. The International Monetary Fund warned last month that risks to global financial stability have increased over the past 6 months.


According to the latest data from the Job Openings and Labor Turnover Survey, there were 6.55 million job openings in March. In March, there were 6.59 million unemployed, meaning there are 1.01 unemployed workers for every job. The fact that job openings have climbed so steadily — at a time when jobs growth is slowing — suggests that companies are now having a hard time finding the right workers. The JOLTS report put the quits rate at the highest level since the recession. Workers are choosing to ditch their jobs presumedly because they are confident they will find a better job. A separate survey from the National Federation of Independent Business found that 88% of companies hiring or trying to hire reported few or no qualified applicants for the positions they were trying to fill. So, the follow-up question is – why aren’t wages going up? The quick answer is that wages are going up – just very slowly (2.6% annualized). The longer answer is that wages remain low because companies are loath to raise them; and workers haven’t forced the issue by quitting to find better pay. In this expansion, in the shadow of the financial crisis, workers are not feeling as free to leave jobs.


Speaking of job openings –  as of today, the 2018 midterm elections are officially underway with primary elections in Ohio, Indiana, West Virginia, and North Carolina.


After the closing bell, Disney reported earnings; the success of Marvel’s “Black Panther” helped drive 21 percent year-over-year revenue growth for its studio entertainment business. Earnings and revenue topped analysts’ estimates. Meanwhile, Reuters reports cable operator Comcast is asking investment banks to increase a bridge financing facility by as much as $60 billion so it can make an all-cash offer for the media assets that Twenty-First Century Fox has agreed to sell to Disney for $52 billion.


In a filing with the SEC, Equifax released long-awaited details about its massive data breach. The figures for the amount of compromised Social Security numbers was again revised upwards, now to 146.6 million. Last September, when the breach was announced, the figure was 143 million. In the filing, Equifax spelled out exactly how many people were impacted in a variety of different fields, painting a far more detailed picture of the data breach. According to the filing, almost everyone involved had their name, date of birth, and Social Security number compromised, though 1.1 million people didn’t get their number compromised. Ninety-nine million people had their address compromised, and 209,000 people had credit card numbers and expiration dates stolen as well, putting a new category of potential fraud damage in question. A few hundred thousand even had a picture of their face stolen. Bottom line, we’ve all been compromised.

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