Financial Review

Stay Calm and Reboot

…Stocks rebound. Italy, meh. China prepares retaliation. EU gets no tariff breaks, retaliation expected. Beige Book shows moderate growth, not much inflation. Fed eases up on Volcker Rule. Tax cuts are not providing much boost. Stay calm and reboot. Side effects of Ambien.

Financial Review by Sinclair Noe for 05-29-2018

DOW + 306 = 24,667
SPX + 34 = 2724
NAS + 65 = 7462
RUT + 24 = 1647
10 Y + .07 = 2.84%
OIL + 1.40 = 68.21
GOLD + 2.50 = 1301.90


The Dow Jones industrial average rose more than 300 points, with Boeing and Home Depot leading the blue-chip stocks higher. Also, the energy stocks came roaring back with Exxon Mobil and Chevron up over 3%. A Reuters report indicated that output cuts implemented by members of the Organization of the Petroleum Exporting Countries and nonmembers led by Russia will remain in place, sending oil prices sharply higher. The Russell 2000 hit a new high. The euro recovers much of its previous losses with a 1.1 percent climb against the greenback to $1.166. An uptick in rates push the big banks upward, with Goldman Sachs, J.P. Morgan, Citigroup, Morgan Stanley, Bank of America and Wells Fargo all finishing up more than 1 percent.


The comeback in equities came as European markets stabilized. The Stoxx Europe 600 closed up 0.2 percent, while Italy’s FTSE MIB — which fell 2.5 percent on Tuesday — rallied 2 percent. Italian two-year bond yields fell to 1.72 percent from 2.1 percent, wiping out much of Tuesday’s climb.


Yesterday, the White House announced it would have a final list of $50 billion in Chinese imports that would be subject to 25 percent tariffs by June 15, and two weeks later would announce investment restrictions on Chinese acquisitions of U.S. technology. In response, China is reportedly looking to line up countries against the U.S., the Journal reported. The countries in question are mostly in Europe and Asia, where companies could benefit from China’s plans to give foreign companies more open access to its markets.


Yesterday, Italy and China had the markets freaking out; today, not so much. What changed? Not much.


Meanwhile, after the closing bell the Wall Street Journal reported that the White House is not planning on extending the European Union exemptions from steel and aluminum tariffs. An announcement might come tomorrow. Trump has been unable to win concessions from European Union counterparts ahead of a Friday deadline. The move, which has been threatened for months, is almost certain to draw a response from the EU, which has threatened to retaliate with its own tariffs on such American products as motorcycles, jeans and bourbon.


Trump announced in March global tariffs of 25% on imported steel, and 10% on aluminum, based on national security concerns. The White House delayed implementation for some countries, giving those trading partners a chance to offer concessions to avoid the tariffs.


Before the market opened we had a couple of disappointing economic reports.  Both ADP’s report on private payroll growth for May as well as the second estimate for first quarter GDP missed expectations.


In the first quarter, the U.S. economy is now estimated to have expanded at an annualized rate of 2.2%, down from the 2.3% rate of growth reported back in April and below expectations for this estimate to be the same as the first. The contribution from inventories was reduced from 0.4% points to 0.1% but final sales to domestic buyers, a better gauge than GDP of underlying strength, was revised up to 1.9%, from 1.6%. So, consumer spending was actually a little stronger than first reported. Second quarter growth is currently tracking to growth north of 3%.


ADP’s report showed that 178,000 jobs were created in the private sector in May, fewer than the 190,000 consensus estimate. Friday morning the Labor Department will report on non-farm payrolls, and estimates are running around 190,000. Job growth is strong, but slowing, as businesses are unable to fill a record number of open positions. And the big question is whether companies will start paying higher wages to recruit and retain workers.


Two weeks before a Federal Reserve FOMC policy meeting, the Fed publishes its Beige Book. The Fed said the U.S. grew “moderately” from late April to early May in its latest evaluation of the economy, indicating the central bank remains firmly on track to raise interest rates next month. Although companies have responded to chronic shortages of skilled workers by boosting pay and overall compensation, the Fed found that “wage increases remained modest” in most of the country. Prices for goods and services rose “moderately” in most regions. In every region of the country, Fed officials characterized the economy as performing well. Manufacturers raised production, banks reported stronger demand for loans and home builders were very busy, among other things. A talent shortage, however, is the biggest source of anxiety. Truck drivers, electricians, carpenters, painters and computer technicians were particularly hard to find. Yet despite these shortages as well as rising costs for some raw materials such as oil and steel, inflationary pressures still appear subdued. The Beige Book confirms what Wall Street already knows. A steadily growing economy, a shrinking pool of labor and a gradual rise in prices all point to the Fed raising its benchmark interest-rate in June.


Meanwhile, the Federal Reserve is proposing to ease a rule aimed at defusing the kind of risk-taking on Wall Street that helped trigger the 2008 financial meltdown. The Fed unveiled proposed changes to the Volcker Rule, which bars banks’ risky trading bets for their own profit with depositors’ money. The high-risk activity is known as proprietary trading. The proposed changes would match the strictest applications of the rule to banks that do the most trading — 18 banks with at least $10 billion in trading assets and liabilities. They account for 95 percent of all U.S. bank trading and include some foreign banks with U.S. operations. Less stringent requirements would apply to banks that do less trading. The idea is to make it easier for banks to comply with the Volcker Rule without sacrificing the banks’ safety and soundness. So, roll back the bank regulations because, what could go wrong?


Economists are watching closely for signs the tax cuts are boosting business spending, which would signal more hiring, rising pay and stronger economic growth. They’re still squinting. Business investment is on track to have a solid year, but there’s little evidence we are in a boom. The new tax legislation isn’t providing a significant boost to capital expenditures. Capital goods orders, excluding aircraft and defense. This includes business spending on machinery, equipment, computers, office furniture and most other things companies need to operate. Spending picked up in 2016 and accelerated in 2017. But the rate of growth has actually slipped since then. Small-business spending plans. This survey by the National Federation of Independent Business measures the percentage of business owners saying they plan to increase spending on equipment or facilities within the next three months. It has generally been drifting upward since the lows of 2009, but at 29%, is now three points lower than it was last August. ISM manufacturing new orders index. This is a survey of businesses conducted monthly by the Institute for Supply Management, which asks, among other things, about the level of new orders manufacturing firms are receiving from customers. The index has been climbing since 2015, but it’s lower now than it was at the end of 2017. Morgan Stanley capital-expenditure plans index. This index tracks data on manufacturing spending plans in several Federal Reserve business surveys, and often signals spending that takes place about three months in the future. This index hit a record high in March, but fell back in April and May.


Shares in rose 1.9% after the maker of software for customer relationship management posted quarterly results and an annual outlook that beat forecasts.


Michael Kors Holdings dropped 11% after the fashion house posted its results but investors are more concerned with weak sales growth going forward.


HP stock rallied 4% after the maker of computers and printers posted a revenue beat late Tuesday, but earnings just matched forecasts.


Dick’s Sporting Goods stock jumped 26% after the retailer reported first-quarter earnings and revenue that beat expectations and raised its guidance. Apparently, not selling assault rifles is working out.


DSW dropped 5%, pulling back from the previous session’s 2-year closing high, after the discount shoe and accessories retailer reported better-than-expected fiscal first-quarter earnings and revenue, while keeping its outlook unchanged.


Phoenix Mayor Greg Stanton officially announced his resignation. Stanton is making his bid to represent Arizona’s 9th Congressional District. Under state law, Stanton must give up the mayor’s post to run for the congressional seat. Vice Mayor Thelda Williams is serving as the interim mayor until one is permanently selected. A special election is scheduled for Nov. 6.


The FBI says anyone with a small office or home router should reboot it to stop the spread of malware. A potential attack had infected hundreds of thousands devices across 54 countries with software called VPNFilter, which was traced back to Ukraine where it was first found in 2016. The software had not had any negative effects yet, but would allow devices to be hacked for a number of nefarious purposes. Ukranian officials said in a statement they suspect Russia is behind the attack. To thwart it, the FBI has instructed Americans to do what many IT professionals ask you to do when you have a problem with your Wi-Fi: Turn off your router and then turn it back on again. Stay calm and reboot.


After Roseanne Barr’s racist comment caused the cancellation of her hit ABC show, Barr had an unusual defense, blaming the insomnia medication Ambien.  However, Ambien’s manufacturer, Sanofi quickly denied any role in the controversy – tweeting: “While all pharmaceutical treatments have side effects, racism is not a known side effect of any Sanofi medication.”

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