Rates Rise and Equities Contemplate Correction

TradeTheNews.com Weekly Market Update: Rates Rise and Equities Contemplate Correction
Fri, 02 Feb 2018 16:09 PM EST

The long overdue healthy correction may have finally begun this week as equities pulled back as aggressively as we have seen in almost two years. Many pointed to the continuing rise in interest rates while others blamed the political rumblings out of Washington, month end portfolio rebalancing, and the liquidity offered by the heart of Q4 earnings season all as factors inducing a sell off. Even as the stock market selloff accelerated on Friday, volumes were not particularly robust given the deluge of high profile earnings reports, leading some commentators to speculate that the downdraft was largely a buyers strike from overbought conditions. Nevertheless, many stock indices traded off about 4% from recent highs and the VIX popped above 17, touching levels not seen in more than a year. For the week the S&P500 dropped 3.9%, the DJIA fell 4.1%, and the Nasdaq sank 3.5%.

The Greenback probed fresh 3-year lows despite various US inflation readings that ran significantly hotter than expected. Friday’s January payrolls report saw annual wage gains reach 2.9% for the first time in 8-years. Janet Yellen's final FOMC statement signaled a March rate hike is on track and markets appear willing to debate the merits for four total hikes in 2018. Treasury yields moved up globally, highlighted by the US 10-year breaking above 2.75% and the German Bund retaking 75 bps. The dollar was unable to gain any traction until Friday's carnage in equity and cryptocurrency markets. Many noted the 3-4 rate hike Fed trajectory is all but priced in and Tuesday's quarterly refunding announcement served as a reminder the US government is set to embark on bringing more supply to a market where the Fed is going to be taking a step back.

In corporate news this week, Apple missed iPhone sales expectations but the market was assuaged by strong ASPs, indicating iPhone X sales were solid. Amazon’s quarterly earnings blew away expectations, demonstrating again that the online retailer has the market power to ratchet up its margins at will. The healthcare sector was roiled again by another Amazon disruption story, this time when the retail giant announced it would team with Berkshire and JPMorgan on an employee healthcare initiative. Metlife got slammed after disclosing it discovered a material weakness in internal control over financial reporting. PayPal shares dipped after eBay announced that it would be replacing its primary payments processing partner, though eBay users will still be able to make transactions with PayPay’s digital wallet until 2023. Dr Pepper Snapple announced it would be acquired by Keurig Green Mountain for $103.75/share via a special cash dividend, though it will retain 13% of combined company.



SUNDAY JAN 28
(US) Trump team considers nationalizing 5G network in order to counter China – Axios
MONDAY JAN 29
ABLX.BE To be acquired by Sanofi for €45 in cash for EV €3.9B
DPS To be acquired by Keurig Green Mountain for $103.75/shr via a special cash dividend, and retain 13% of combined company
LMT Reports Q4 $4.30 v $4.06e, Rev $15.1B v $14.8Be
(US) Atlanta Fed forecasts initial Q1 GDP at 4.2%
(US) Trade Rep Lighthizer: Canada has made a massive attack on US trade laws
MET Reports prelim Q4 $0.61-0.66 v $1.10e; discovered material weakness in internal control over financial reporting; to see $135-165M FY17 net income impact; to increase reserves by $525-575M; to postpone earnings

TUESDAY JAN 30
SAP.DE Reports prelim Q4 Non-IFRS Net €2.14B v €1.83B y/y, non-IFRS Op profit €2.36B v €2.39Be, Rev €6.81B v €6.84Be
(FR) FRANCE Q4 ADVANCE GDP Q/Q 0.6% V 0.6%E; Y/Y: 2.4% V 2.3%E
(JP) BOJ have taken appropriate steps in spirit of global FX code - press
(ES) SPAIN Q4 PRELIMINARY GDP Q/Q: 0.7% V 0.7%E; Y/Y: 3.1% V 3.1%E
(EU) EURO ZONE Q4 ADVANCE GDP Q/Q: 0.6% V 0.6%E; Y/Y: 2.7% V 2.7%E (fastest annual pace since 2007)
(EU) EURO ZONE JAN BUSINESS CLIMATE INDICATOR: 1.54 V 1.68E; CONSUMER CONFIDENCE (FINAL): 1.3 V 1.3E
AMZN Amazon, Berkshire Hathaway and JPMorgan Chase & Co. to partner on U.S. employee healthcare
PCAR Reports Q4 $1.67 v $1.12e, Rev $5.12B v $4.84Be
(DE) GERMANY JAN PRELIMINARY CPI M/M: -0.7% V -0.6%E; Y/Y: 1.6% V 1.7%E
(US) JAN CONSUMER CONFIDENCE: 125.4 V 123.0E

WEDNESDAY JAN 31
SIE.DE Reports Q1 Net €2.21B v €1.90Be, industrial business profit €2.21B v €2.57B y/y, Rev €19.8B v €19.9Be
MT.NL Reports Q4 $1.02 v $0.80e, EBITDA $2.14B v $2.07Be, Rev $17.7B v $18.3Be
BA Reports Q4 $4.80* v $2.91e, Rev $25.4B v $24.8Be
SAN.ES Reports Q4 Net €1.54B v €1.46Be, Rev €12.06B v €12.3B q/q
(DE) GERMANY JAN NET UNEMPLOYMENT CHANGE: -25K V -17KE; UNEMPLOYMENT CLAIMS RATE: 5.4% (record low) V 5.4%E
(US) JAN ADP EMPLOYMENT CHANGE: +234K V +185KE
(US) JAN CHICAGO PURCHASING MANAGER: 65.7 V 64.0E
(US) Conference Board Jan Total online job ads 4.90M v 4.90M m/m v 4.89M y/y; New ads 2.15M v 2.01M m/m v 2.24M y/y
(US) Association of American Railroads weekly rail traffic report for week ending Jan 27th: 543.5K carloads and intermodal units, +4% y/y
MSFT Reports Q2 $0.96 v $0.86e, Rev $28.9B v $28.4Be
PYPL EBAY: Adyen to become primary payments processing partner, replacing PayPal as primary payments processor
X Reports Q4 $0.76 v $0.68e, Rev $3.13B v $3.07Be
992.HK Reports Q3 Net loss $288.8M* v profit $98Me; Rev $12.9B v $12.5Be
(HK) Macau Jan Gaming Rev MOP26.3B, +36.4% v 27%e (largest gain since 2014)

THURSDAY FEB 1
NOKIA.FI Reports Q4 adj EPS €0.13 v €0.11e,, adj Op €1.0B v €940M y/y, Rev €6.70B v €6.44Be
ROG.CH Reports FY17 (CHF) Core EPS 15.34 v 15.53e, Core operating profit 19.0B v 19.4Be, Rev 53.3B v 53.2Be
VOD.UK Reports Q3 Rev £11.8B v £12.2B y/y, Service Organic Rev +1.1% v +1.2%e
UNA.NL Reports FY17 Core EPS €2.24 v €2.21e; Op €8.86B v €7.80B y/y, Rev €53.7B (inc spreads) v €52.7B y/y
RDSA.NL Reports Q4 adj Net $4.3B v $4.12Be, basic CCS EPS $0.52 v $0.50e, Rev $85.4B v $64.8B y/y
(UK) JAN MANUFACTURING PMI: 55.3 V 56.5E (18th month of expansion but lowest since Jun)
BX Reports Q4 adj $0.71 v $0.70e, Rev $1.88B v $1.81Be; Raises Quarterly dividend 93.2% to $0.85 from $0.44 (indicated yield 9.3%)
(CZ) CZECH CENTRAL BANK (CNB) RAISES REPURCHASE RATE BY 25BPS TO 0.75%; AS EXPECTED
UPS Reports Q4 $1.67 v $1.65e, Rev $18.8B v $18.2Be
(US) Q4 PRELIMINARY NONFARM PRODUCTIVITY: -0.1% V 0.7%E; UNIT LABOR COSTS: 2.0% V 0.9%E
(CL) CHILE CENTRAL BANK (BCCH) LEAVES OVERNIGHT RATE TARGET UNCHANGED AT 2.50%; AS EXPECTED
AMZN Reports Q4 $3.75 v $1.85e, Rev $60.5B v $60.0Be
GOOGL Reports Q4 $9.70 adj** v $10.12e, Rev $25.8B (ex $6.45B TAC) v $25.7Be; authorizes $8.6B repurchase of Class C capital stock
(JP) BOJ AGAIN CONDUCTS A FIXED-RATE JGB PURCHASE OPERATION (4th time performed): Offers to buy unlimited amount of 10-year JGBs at 0.11%

FRIDAY FEB 2
DBK.DE Reports Q4 Net -*€2.18B v -€2.24Be, Pretax -€1.34B v -€2.42B y/y, Rev €5.71B v €5.90Be
AZN.UK Reports Q4 Core EPS $1.30 v $0.84e, Rev $5.78B v $5.49Be
(US) Fed announces plan for tougher big-bank stress tests in 2018, as speculated (update)
MRK Reports Q4 $0.98 v $0.94e, Rev $10.4B v $10.4Be; To invest $12B over 5-years in US capital projects
(US) JAN CHANGE IN NONFARM PAYROLLS: +200K V +180KE
(US) Pres Trump authorizes release of memo written by Rep Nunes amid FBI objections today - press
(CA) Canada Prime Min Trudeau: Canada is willing to walk away from NAFTA

Barrons weekend update

Barrons weekend update: positive cover story on GS; cautious feature on SNA 

Cover story: Three out of four of GS’s businesses are thriving, but trading—the most important part of which is fixed income, currency, and commodities—has suffered; The bank has kept much of its FICC team intact in the belief the down cycle will turn, and Goldman is more diversified than it was before the financial crisis, making today a good time to buy shares. 

Features: 1) After a year of disappointing IPOs from firms such as SNAP and APRN, there is growing optimism now that Dropbox and Spotify are preparing to go public, and some venture capitalists believe this will be the best year for offerings since 2014; 2) Cautious on SNA: Company’s in-house financing arm has boosted sales at a fast clip, despite a decrease in the number of U.S. auto mechanics, but investors are concerned about slowing organic growth in its main tools division; 3) The U.S. economic expansion may be getting a little long in the tooth, but capital spending has picked up and shows signs of staying strong this year, a situation in the works long before the GOP tax overhaul. 

Tech Trader: Conventional wisdom says the chip sector is a good place to pick a sure thing in tech, given its importance as the backbone of the industry; But for investors who want to look beyond it, three strong picks are auto-parts supplier APTV, semiconductor maker STM, and motor manufacturer Nidec. 

Trader: Consumers are pouring money into equities, a big change from when they withdrew $9B during the last six months of the year, a situation that isn’t worrisome—at least not yet; Cautious on VRTX: Investors may be disappointed when the company reports earnings Wednesday, but it is well prepared for the months ahead, says Guggenheim analyst Tony Butler; A move by arbitrageurs long on DVMT and short on the VMW shares it tracks to unwind trades on the mistaken belief the spread was too wide has created one of the better trading opportunities of the year.

 Interview: Marvin Schwartz, head of Neuberger Berman’s Straus Group, talks about tax reform, the outlook for oil, and the elevated levels of today’s market (picks: DVN, JPM, LNC, FDX). 

Small Caps: Small company investors may want to switch their focus from the Russell 2000 to the lesser-known S&P SmallCap 600, which has consistently performed better during the past two decades. 

Follow-Up: Cautious on FSLR: Solar power will continue to get cheaper and supplant fuel-generated electricity, but investors should monitor how Trump administration tariffs disrupt the market in the short term. 

Asian Trader: Vietnam was the best-performing market in Asia last year, with traditional manufacturing, consumer, and utility stocks driving the rally, and its market continues to look strong in 2018. 

Emerging Markets: Turkey’s economic stimulus helped pull it out of a recession, “but the binge is flashing signs of an incipient hangover,” with inflation near 12% and a current account deficit near 5.5% of GDP. 

Commodities: “The outlook for lithium continues to shine, even as lithium-related stocks started off the year on a sour note”; cobalt should also benefit from its use in lithium-ion batteries. 

Streetwise: “Blockchain has taken on the same magical quality as bitcoin, with companies using it as a buzzword they know will appeal to investors—a turbocharger to turn a boring business into a rocket ship.”

FX Faux Pas at Davos Doesn’t Deter Risk-on Behavior

TradeTheNews.com Weekly Market Update: FX Faux Pas at Davos Doesn’t Deter Risk-on Behavior
Fri, 26 Jan 2018 16:03 PM EST

US indices finished out the week on yet another positive note pressing new highs. Markets barely took note of Monday’s announcement that President Trump was going to move forward and slap tariffs on Chinese solar panels and South Korean washing machines. By Friday, Trump's official Davos remarks were reserved and generally well received. The first look at Q4 GDP missed expectations, but a closer look suggested surging domestic demand was offset by a wider trade deficit and an unexpectedly sharp slowdown in inventory investment. Corporate sentiment was buoyed by the sagging Greenback and earnings season. Q4 earnings announcements added to the momentum as a host of key managements significantly raised financial projections while offering forecasts that include increased capital spending. For the week the S&P500 rose 2.2%, the DJIA added 2.1%, and the Nasdaq gained 2.3%.

Heading into Thursday’s ECB meeting the dollar stayed under pressure helped by comments from the US Treasury Secretary. Mr. Mnuchin didn’t do Mario Draghi any favors when it was reported he noted a weaker dollar was good for US trade. Despite US officials walking back the Mnuchin comments, the Greenback remained confined near the lowest levels since late 2014. Rates moved up after the ECB met and Draghi indicated the council has become increasingly confident inflation will move back to target while not changing the language around Euro volatility despite the recent surge to 1.24. US Treasury yields followed European rates higher helping the 10-year close above 2.65% for the first time since 2014. WTI crude continued to bump up against 2.5 year highs as well, coinciding with another bump up in the US rig count.

Markets digested a slew of quarterly reports this week as earnings season got into full swing. Cruise stocks rallied on a Royal Caribbean earnings beat, boosted by higher on-board spending. Netflix crossed the $100B market cap level after reporting revenue above consensus and seeing a stronger than anticipated influx of net new customers. Intel shares ripped to an 18-year high after an earnings beat and a capex boost. Airline names descended after United announced plans to match low fares and expand capacity. Celgene confirmed it would acquire Juno for $9B at $87/share in order to become a preeminent cellular immunotherapy company. Wynn Resorts fell 10% Friday after the Wall Street Journal reported dozens of allegations of sexual misconduct over decades against its namesake CEO.


SUNDAY 1/21
(DE) Germany Social Democrats (SPD, center-left) votes to support the opening of formal coalition talks with Chancellor Merkel’s conservative bloc; ends four-months of political stalemate

MONDAY 1/22
UBSG.CH Reports Q4 (CHF) Net -2.22B* v -2.15Be, adj Op 1.22B v 1.00B y/y, Rev 7.12B v 7.12Be; Plans CHF2B buyback; Creates unified Global Wealth Management division
(US) Senate Democrats reportedly ready to make deal on govt funding in exchange for DACA vote promise - Talking Points Memo
NFLX Reports Q4 $0.41 v $0.41e, Rev $3.29B v $3.28Be
President Trump approves tariff recommendations on imported large residential washing machines and imported solarcells and modules - financial press
(JP) BANK OF JAPAN (BOJ) LEAVES INTEREST RATE ON EXCESS RESERVES (IOER) UNCHANGED AT -0.10%; AS EXPECTED

TUESDAY 1/23
CA.FR Confirms 2022 Ambition: invest €2.8B in digital by 2022, cut 2,400 jobs (20% of workforce)
066570.KR Reports FY17 (KRW) Net 1.87T v 126.3B y/y, Op 2.47T v 1.34T y/y, Rev 61.4T v 55.4T y/y
(DE) GERMANY JAN ZEW CURRENT SITUATION SURVEY: 95.2 *(record high) V 89.6E; EXPECTATIONS SURVEY: 20.4 V 17.7E
(US) JAN RICHMOND FED MANUFACTURING INDEX: 14 V 19E
CRM CEO: economic freight train remains on the track; CEOs are bullish - Davos comments
TXN Reports Q4 $1.09*(ex $0.75 tax expense) v $1.09e, Rev $3.75B v $3.73Be

WEDNESDAY 1/24
NOVN.CH Reports Q4 $1.21 v $1.16e, Rev $12.9B v $12.6Be
(FR) FRANCE JAN PRELIMINARY MANUFACTURING PMI: 58.1 V 58.6E (16th month of expansion)
(DE) GERMANY JAN PRELIMINARY MANUFACTURING PMI: 61.2 V 63.0E (37th month of expansion but moves off from record highs)
(EU) EURO ZONE JAN PRELIMINARY MANUFACTURING PMI: 59.6 V 60.3E (54th month of expansion but moves off from record high)
(UK) NOV AVERAGE WEEKLY EARNINGS 3M/Y: 2.5% V 2.5%E; WEEKLY EARNINGS (EX-BONUS) 3M/Y: 2.4% V 2.3%E
(UK) DEC JOBLESS CLAIMS CHANGE: +8.6K V +12.2K PRIOR; CLAIMANT COUNT RATE: 2.4% V 2.3% PRIOR
(UK) NOV ILO UNEMPLOYMENT RATE: 4.3% V 4.3%E
GE Reports Q4 adj $0.27 v $0.28e, Rev $31.4B v $32.7Be
CAT Reports Dec dealer statistics: Total Machines +34% y/y
(US) Association of American Railroads weekly rail traffic report for week ending Jan 20th: 508.2K carloads and intermodal units, -2.9% y/y
(BR) Third judge in case against former Brazil President Lula rejects defense's arguments against Judge Moro - press
F Reports Q4 $0.39 v $0.42e, Rev $41.3B v $37.2Be
000660.KR Reports Q4 (KRW) Net 3.22T v 3.4Te, Op 4.5T v 4.3Te; Rev 9.03T v 8.9Te
(KR) SOUTH KOREA Q4 PRELIMINARY GDP Q/Q: -0.2% V +0.1%E (first contraction since 2008); Y/Y: 3.0% V 3.4%E; 2017 GDP 3.1%

THURSDAY 1/25
(MY) MALAYSIA CENTRAL BANK (BNM) RAISES OVERNIGHT POLICY RATE BY 25BPS TO 3.25%; AS EXPECTED
(DE) GERMANY FEB GFK CONSUMER CONFIDENCE: 11.0 V 10.8E (highest reading since Oct 2001)
DGE.UK Reports H1 Adj Op £2.19B v £2.1Be, Net Rev £6.53B v £6.57Be
(NO) NORWAY CENTRAL BANK (NORGES) LEAVES DEPOSIT RATES UNCHANGED AT 0.50%; AS EXPECTED
(DE) GERMANY JAN IFO BUSINESS CLIMATE: 117.6 V 117.0E (matches record high); CURRENT ASSESSMENT: 127.7 V 125.3E
CSIQ Received going private proposal; appoints special committee (no decision has been made)
CAT Reports Q4 $2.16 v $1.77e, Rev $12.9B v $11.9Be
*(EU) ECB LEAVES MAIN 7-DAY REFINANCING RATE UNCHANGED AT 0.00%; AS EXPECTED
FCX Reports Q4 $0.51 v $0.49e, Rev $5.04B v $4.81Be
(EU) ECB’s Draghi: Reiterated that Interest rates to remain at present level well past end of QE; favorable financing conditions were still needed - prepared remarks
(EU) ECB’s Draghi: ECB does not favor any country in its QE program; stock (not flows) is the only relevant metric to assess QE - Q&A
(US) DEC NEW HOME SALES: 625K V 675KE
(US) Atlanta Fed maintains Q4 GDP estimate at 3.4%, unchanged from Jan 18th
(US) President Trump: Thinks there's a good chance we'll be able to renegotiate NAFTA but we'll see what happens - CNBC interview excerpts
TSLA Employees say to expect further Model 3 delays due to inexperienced quality control operators and time-consuming manual assembly of batteries - CNBC
INTC Reports Q4 $1.08 v $0.86e, Rev $17.1B v $16.3Be; Raises FY18 capex plan materially; raises quarterly dividend by 10% to $0.30 from $0.2725 (2.65% yield)
(US) President Trump reportedly to support path to citizenship for ~1.8M DACA recipients and Dreamers in return for $25B fund for border wall and end to chain migration and visa lottery system - NBC News
VMW Dell Technologies said to examine strategic alternatives, including IPO or deal with VMWare - CNBC

FRIDAY 1/26
(UK) Q4 ADVANCE GDP Q/Q: 0.5% V 0.4%E; Y/Y: 1.5% V 1.4%E (slowest annual pace since 2012)
(US) Q4 ADVANCE GDP ANNUALIZED Q/Q: 2.6% V 3.0%E; PERSONAL CONSUMPTION: 3.8% V 3.7%
(US) Q4 ADVANCE GDP PRICE INDEX: 2.4% V 2.3%E; CORE PCE Q/Q: 1.9% V 1.9%E
(US) DEC PRELIMINARY DURABLE GOODS ORDERS: 2.9% V 0.8%E; DURABLES EX TRANSPORTATION: 0.6% V 0.6%E
WYNN Dozens of people make sexual misconduct allegations against CEO Steve Wynn - press
BBD.CA ITC rejects Boeing's injury claims in Bombardier dispute by 4-0 vote; throws out US duties on CSeries jets - press

Barrons weekend summary

Barrons weekend summary 

Cover story: The second installment of Barron’s Roundtable offers picks from panelists Henry Ellenbogen of New Horizons Fund (EFX, MTN, BFAM, SERV, SHOP, GRUB); Mario Gabelli of Gamco Investors (MSG, Liberty Braves Group, MGM, Davide Campari-Milano, ZBH, CNHI, GCP, PCAR, TXT, ENR); Jeffrey Gundlach of DoubleLine Capital (XLE, NTG, BKLN, EWZ, DXJ); Abby Joseph Cohen of GS (OXY, Samsung Electronics, ABBV, China Railway Signal & Communication, MDLZ); William Priest of Epoch Investment Partners (SBUX, OLED, AMAT, MLM, MET); Scott Black of Delphi Management (LRCX, HCLP, GTN, ARCC, HOFT); and Meryl Witmer of Eagle Capital Partners (KMX, OEC, Dart Group, Howden Joinery Group). 

Features: 1) Small caps are in a bull market, but there are more risks than many investors realize: many companies are carrying large debt loads, and shares are expensive by historical standards; 2) At CES this year, tech companies heavily pitched their IoT strategies, but “beneath the veneer of convenience, there are considerable obstacles that could sidetrack or delay tech’s utopian vision”; 3) Keith Sanders, the director of operations at a Georgia book distributor, is the winner of the 2017 Barron’s forecasting challenge, topping more than 3,000 other entrants. 

Tech Trader: Technology has a harder time than other industries putting vast amounts of cash to work, and while the tax overhaul may lead to some investment in U.S. manufacturing, tech outfits will most likely boost dividends, buybacks, and M&A. 

Trader: The wider the gap grows between the 10-year Treasury yield and the S&P 500’s dividend yield, the more enticing bonds will become for yield-seeking investors; As companies bring money back home under the new tax law, some may try to boost growth through acquisitions; Betting on BA, which is trading at 42.8% above its 200-day moving average, may seem risky, but history shows the stock can remain extended for a long time when it’s in that region. 

Profile: Mark Baribeau, co-manager of the Prudential Jennison Global Opportunities fund, seeks to build a “unique collection of business models that have a lot of firepower” (top 10 holdings: Tencent Holdings, BABA, Kering, AMZN, MELI, FB, NFLX, UNH, MA, CHTR). 

Follow-Up: Positive on WMT: The retailer’s acquisition of Jet.com and the talent infusion it brought has put the company back on entrepreneurial footing, as with its move to shutter some Sam’s Club stores and turn others into fulfillment centers for its online business. 

European Trader: Cautious on H&M: Shares of the Swedish retailer are down since mid-December, and “there is a chance that the pessimists are right, and a big rally isn’t in the cards at this point.” 

Asian Trader: Positive on AIA Group: The largest pan-Asian life insurer remains one of the most attractive insurance stocks around, partly because it’s in the middle of the world’s fastest-growing life-insurance market. 

Emerging Markets: The time may have arrived for emerging markets sectors that have lagged—such as banks, utilities, and commodities producers—to gain ground, but betting on them isn’t straightforward. 

Commodities Corner: Gold prices could hit record highs this year, driven in part by declines in the U.S. dollar and Treasury bonds, excessive optimism in the stock market, and surging inflation. 

Streetwise: Columnist Vito Racanelli critiques Larry Fink of BLK’s call for companies to make a positive contribution to society, saying such an approach isn’t a sustainable way spark social change.

Specter of US government shutdown overshadows bull run

TradeTheNews.com Weekly Market Update: Specter of US government shutdown overshadows bull run
Fri, 19 Jan 2018 16:07 PM EST

US stocks extended their climb, powering through 26K on the Dow and 2,800 on the S&P for the very first time. Trading resumed following the MLK break with a key reversal in US equity indices which spawned some hope for the bears, but as has been seen so often markets sprang back to new all-time highs within 24 hours. Economic data faded into the background while corporate headlines came into focus. Earnings season picked up in intensity while preannouncements dotted the landscape. Though it is early in the year, it has become increasingly clear that analysts have more work to do to reconcile their estimates for corporation earnings impacted by the tax reform package passed late last year. For their part, firms continued to release details on how they intend to put the expected tax windfalls to work for both investors and employees. By Friday, even the real threat of a US government shutdown did little to dent the momentum. For the week the S&P500 gained 0.9%, while the DJIA and Nasdaq each added 1%.

The US dollar stayed under siege with a dysfunctional Washington DC doing no favors for the Greenback. Rates moved up led by the bellwether 10-year yield testing what many view as the key post-election high of 2.65%. Nevertheless the Euro made another run at 1.23 as some analysts tweaked their rate hike calendar forward ahead of next week’s ECB meeting. WTI crude prices continued to consolidate above $60/bbl. Both the IEA and OPEC hiked their forecasts for non-OPEC supply significantly, indicating that they expect rising oil prices to result in a surge of US production. Doctor copper fell to the 38% fiboncacci retracement level from the Dec break above $3.25.

In corporate news this week, earnings season kicked off as major financial companies began to report. Bank of America shares dropped after notching a revenue miss, while Goldman fell on disclosure of its first quarterly earnings loss since 2011. IBM reported some encouraging top-line numbers, but reduced margins and reported zero growth in its cognitive solutions sector. CSX reported a larger than anticipated revenue miss as service issues led to some lost business. Schlumberger traded lower on Friday despite beating Q4 forecasts and offering upbeat management commentary. GE shares saw its worst five-day decline in 9 years after the company announced $6.2B in charges and a rigorous review of strategic alternatives.

SUNDAY 1/14
(DE) Germany Social Democrats in Saxony-Anhalt state said to reject proposed German coalition with Merkel's party - German press

MONDAY 1/15
CLLN.UK To enter compulsory liquidation with immediate effect (in-line with recent speculation)
RIO.AU Reports Q4 Pilbara iron ore shipments 90.0Mt v 89.7Mte v 87.7Mt y/y; Pilbara iron ore production 87.9Mt, +3% y/y

TUESDAY 1/16
(US) US lawmakers are said to be advising US companies that ties to Huawei or China Mobile could hurt their ability to do business with the US government – financial press
GE Provides update on insurance review: Sees $6.2B charge in Q4; suspend dividend for foreseeable future
C Reports Q4 $1.20 (adj) v $1.19e, Rev $17.3B v $17.1Be
(US) JAN EMPIRE MANUFACTURING: 17.7 V 19.0E
CSX Reports Q4 $0.64 v $0.56e, Rev $2.86B v $2.88Be

WEDNESDAY 1/17
(US) President Trump could release infrastructure plan on Jan 30th - financial press
BAC Reports Q4 adj $0.47 v $0.44e, Adj Rev $21.4B* v $21.3Be
GS Reports Q4 adj $5.68* v $4.90e, Rev $7.83B v $7.63Be
*(US) DEC INDUSTRIAL PRODUCTION M/M: 0.9% V 0.5%E; CAPACITY UTILIZATION: 77.9% V 77.4%E
(CA) BANK OF CANADA (BOC) RAISES INTEREST RATE DECISION BY 25BPS TO 1.25%; AS EXPECTED
(US) Sen Maj Leader McConnell: not ready to move ahead yet on long-term spending bill; currently working on temporary solution to avoid govt shutdown
(US) Treasury Undersec. Mandelker: Virtual currencies are an evolving threat; examining 100 registered digital currency providers - Senate testimony
CA.FR Reports Q4 Rev €23.3B, +2.3% y/y
(US) Association of American Railroads weekly rail traffic report for week ending Jan 13th: 511.9K carloads and intermodal units, +0.5% y/y
AAPL Highlights Apple's contributions to US economy over next 5 years as a result of investments and US tax reform; sees $30B in capex and creation of 20K jobs in the US
(US) FEDERAL RESERVE BEIGE BOOK: TIGHT LABOR MARKETS ACROSS US AS WAGE GAINS REMAIN MODEST
(US) President Trump: Declines to confirm reports US is considering possible preemptive strike on North Korea - press interview
(UK) House of Commons approves the EU Withdrawal Bill in 3rd reading (as expected)
(US) NOV TOTAL NET TIC FLOWS: $33.8B V $152.9B PRIOR; NET LONG-TERM TIC FLOWS: $57.5B V $26.2B PRIOR
AA Reports Q4 $1.04 v $1.23e, Rev $3.17B v $3.29Be
*(KR) BANK OF KOREA (BOK) LEAVES 7-DAY REPO RATE UNCHANGED AT 1.50%; AS EXPECTED
(CN) CHINA NOV PROPERTY PRICES M/M: RISES IN 57 OUT OF 70 CITIES V 50 PRIOR; Y/Y RISES IN 61 OUT OF 70 CITIES V 59 PRIOR

THURSDAY 1/18
(CN) CHINA Q4 GDP Q/Q: 1.6% V 1.7%E; Y/Y: 6.8% V 6.7%E
(TR) TURKEY CENTRAL BANK (CBRT) LEAVES BENCHMARK REPURCHASE RATE UNCHANGED AT 8.00%; AS EXPECTED
(ZA) SOUTH AFRICA CENTRAL BANK (SARB) LEAVES INTEREST RATES UNCHANGED AT 6.75%; AS EXPECTED
(US) DEC HOUSING STARTS: 1.19M V 1.28ME; BUILDING PERMITS: 1.30M V 1.30ME
(US) PHILADELPHIA FED BUSINESS OUTLOOK: 22.2 V 25.0E
Early weakness in generic pharma names attributed to NY Times report that some hospitals plan to create a nonprofit generic drug company
BAS.DE Reports prelim FY17 Net €6.1B v €4.1B y/y, EBIT €8.3B v €7.9Be, +32% y/y, Rev €64.5B v €57.6B y/y
(BR) Brazil govt reportedly considering voting on pension reform bill after election - press
(US) Sen Maj Leader McConnell (R-KY) reportedly is planning for a govt shutdown - Politico
Tier 1 Firm does not believe reported hospital plan for generic nonprofit is a major threat to generic players
CP Reports Q4 C$3.22 v C$3.20e, Rev C$1.71B v C$1.69Be
IBM Reports Q4 $5.18 v $5.17e, Rev $22.5B v $22.0Be

FRIDAY 1/19
CPR.UK Trading Update: Total Group Sales -2.3% Cuts FY profit guidance to range of £2.0-6.0M
(UK) DEC RETAIL SALES (EX-AUTO/FUEL) M/M: -1.6% V -1.0%E (biggest decline since Jun 2016); Y/Y: 1.3% V 2.6%E
SLB Reports Q4 adj $0.48 v $0.44e, Rev $8.18B v $8.12Be; Oil market now in balance
SNP Reports FY17 oil production 238.5Mt, +1.26% y/y
(US) JAN PRELIMINARY UNIVERSITY OF MICHIGAN CONFIDENCE: 94.4 V 97.0E
(US) Weekly Baker Hughes US Rig Count: 936 v 939 w/w (-0.3%)

Barrons weekend summary

Barrons weekend summary: positive feature on Vivendi 

Cover story: In the first installment of the Barron’s 2018 Roundtable, the panelists said they “generally expect more of the same in the months ahead—more gains for equities, large-cap and small” as economic growth continues; The Republican tax overhaul will help the economy and profits, prompting fresh investment as well as buybacks and more dividend payments. 

Features: 1) Overview of Barron’s 2017 picks, which were up 8.1% from the date of publication to the end of the year, though they trailed their benchmarks; 2) Positive on Vivendi: As Spotify prepares to go public and streaming gains popularity, content providers such as Vivendi that receive royalties are on more solid footing than the streaming companies that pay them; 3) Driverless cars were a hot topic at CES, but while optimism about the market is growing among tech companies and consumers, numerous hurdles remain ( Positive on APTV, Lyft, BMW, GOOGL, TSLA, F, TM, GM, SNE, Kia, Nissan, Hyundai, Volkswagen); 4) MSFT co-founder Bill Gates says greater progress addressing developing world health problems could be made if pharma companies and startups were involved. 

Tech Trader: Positive on QCOM: Company’s announcement at CES about new business in the radio frequency sector signals it plans to go on the offense against AVGO to thwart its takeover attempt, and that its business isn’t just about collecting royalties on phones. 

Trader: Lori Calvasina of RBC Capital Markets and Julian Emanuel of BTIG expect the S&P 500 to hit 3000 by the end of the year; “The bond market’s brief selloff last week drew attention away from what might be the real issue: U.S. trade relations”; Positive on FB, AMZN, AAPL, NFLX, GOOGL: FAANG stocks seem more expensive than a year ago, and because they make up such a huge part of the S&P 500, any sustained weakness could be bad for the index and investors. 

European Trader: Positive on Next: British retailer, which has about 700 stories selling clothes, shoes, and home furnishings, offers a good retail play for investors, though it remains heavily dependent on the U.K. 

Asian Trader: Positive on Keyence: Japanese company, a key player in artificial intelligence and robotics, is among several cutting-edge tech-focused firms in Japan that are helping drive up the Nikkei 225. 

Emerging Markets: Trade wars pose a potential problem for emerging market investors this year, but for now there is no reason to abandon the sector. 

Commodities: Tightening global supplies and rising demand for crude oil helped prices start the year with a bang, and many analysts think they could rally to $80 a barrel. 

Streetwise: “Tech’s deflationary powers—the ability to disrupt industries, increase efficiency, and lower prices—are the same ones driving a growing rebellion against tech,” says columnist Alex Eule, who also wonders why Jana Partners is targeting AAPL instead of FB, TWTR, SNAP, or GOOGL, which make the products that keep children tied to their phones.

Markets and Firms Respond Favorably to US Tax Cuts and Hawkish ECB

TradeTheNews.com Weekly Market Update: Markets and Firms Respond Favorably to US Tax Cuts and Hawkish ECB
Fri, 12 Jan 2018 16:09 PM EST

The rally in stocks extended into yet another week with 2018 looking very much like most of 2017 thus far. The NASDAQ and banks led early on, before cyclical groups like retailers and small caps took the lead as the week wore on. WTI crude prices probed fresh 2.5 year highs into the mid-$60 range while Brent approached $70/bbl. The energy complex saw a breakout to the upside with stock prices significantly outperforming the gains in oil. Utilities, REITS and other bond proxies lagged that of the overall market as rising Treasury yields served as a headwind. For the week the DJIA gained 2%, the S&P500 added 1.6%, and the Nasdaq rose 1.8%.

Rates moved up globally helped by a hawkish take of the latest ECB minutes, continued robust economic data including rising CPI figures, and upbeat corporate sentiment predicated on the anticipated effects of fiscal stimulus. The US 2-year Treasury yield crossed above the 2% mark for the first time since 2008 while German rates rose to levels not seen in months. Dollar weakness extended into another week, in part on the belief robust overseas growth will result in more aggressive policy from those central banks in an attempt to play catch up with the US Fed. There were some gyrations in the Mexican peso and Canadian dollar on reports that the Trump Administration may be moving closer to giving formal notice on dissolving the NAFTA agreement. The Euro rallied to a 3-year high with dealers citing building technical momentum for the move above 1.21. Cable climbed to levels not seen since late 2016 in the days following the Brexit vote. The exuberance for cryptocurrencies hit an air pocket after reports circulated that China and South Korea were drawing up plans to shackle trade on exchanges there.

In corporate news, the week was dominated by reports of holiday sales figures from some key retailers and the start of the Q4 earnings season. Big box retailer Target announced holiday SSS rose 3.4%, leading it to raise Q4 earnings guidance. Nordstrom reported holiday sales up a more modest 1.2% and narrowed guidance, but there was also a report that the controlling family has resumed efforts to take the company private. JP Morgan kicked off the earnings season for banks with a strong beat on the top and bottom lines. CEO Jamie Dimon made positive comments about the credit environment and said that tax reform will be positive for the country. Walmart joined the growing number of Fortune 500 companies announcing one-time bonuses and a higher minimum wage for new employees in response to the US corporate tax cut.


SUNDAY 1/7
(CN) China Dec Foreign Reserves: $3.140T v $3.127Te (highest since Sept 2016, 11th consecutive gain, biggest gain since July)

MONDAY 1/8
066570.KR Reports prelim Q4 (KRW) Op profit 366.8B v 464Be; Rev 16.97T v 16.3Te
*(EU) EURO ZONE JAN SENTIX INVESTOR CONFIDENCE: 32.9 V 31.3E
*(EU) EURO ZONE DEC BUSINESS CLIMATE INDICATOR: 1.66 (record high) V 1.50E; CONSUMER CONFIDENCE (FINAL): 0.5 V 0.5E
GPRO Reportedly has hired advisers to consider sale – CNBC
(US) Special Counsel Mueller reportedly likely to interview Pres Trump as part of Russia investigation in next few weeks - Wash Post
*(US) NOV CONSUMER CREDIT: $28.0B V $18.0BE (largest gain in 16 years); Total consumer credit annual rate +8.8% (Fastest pace in over two years)

TUESDAY 1/9
TGT Reports Nov/Dec SSS +3.4%; Raises Q4 $1.30-1.40 v $1.22e, SSS ~+3.4% (prior $1.05-1.25, SSS 0-2%)
INTC Microsoft spokesperson: chip flaw patch may significantly slow some servers; greatest impact on corporate data services – press
JWN Reports Nov/Dec combined net sales +2.5% y/y, SSS +1.2% y/y
DPZ CEO Patrick Doyle plans to leave company in June; Richard Allison named CEO; Russell Weiner as COO; effective June 30th

WEDNESDAY 1/10
*(FR) FRANCE NOV INDUSTRIAL PRODUCTION M/M: -0.5% V -0.5%E; Y/Y: 2.5% V 2.6%E
*(UK) NOV INDUSTRIAL PRODUCTION M/M: 0.4% V 0.4%E; Y/Y: 2.5% V 1.8%E
(CN) China Officials: Said to view treasuries as less attractive; Recommends slowing or halting Treasury buying
*(US) DEC IMPORT PRICE INDEX M/M: 0.1% V 0.4%E; Y/Y: 3.0% V 3.1%E
NVDA Announces world’s first functionally safe AI self-driving platform
(US) Association of American Railroads weekly rail traffic report for week ending Jan 6th: 415.9K carloads and intermodal units, -4.6% y/y
(CA) Canada officials reportedly increasingly convinced Pres Trump will soon announce a withdrawal from NAFTA – press
*(CN) CHINA FX REGULATOR SAFE: REPORT THAT CHINA IS CONSIDERING REDUCING OR STOPPING PURCHASES OF US TREASURIES COULD BE BASED ON WRONG INFORMATION - financial press

THURSDAY 1/11
TSCO.UK Reports Q3 UK LFL (ex-fuel, ex VAT) 2.3% v 2.4%e; Christmas Trading period UK SSS ex fuel and ex vat +1.9%
DAL Reports Q4 $0.96 v $0.89e, Rev $10.2B v $10.2Be
WMT To raise U.S. wages, provide $1,000 bonus and expand hourly maternity and parental leave
*(US) DEC PPI FINAL DEMAND M/M: -0.1% V +0.2%E; Y/Y: 2.6% V 3.0%E
*(US) TREASURY'S $12B 30-YEAR BOND REOPENING DRAWS 2.867%; BID-TO-COVER RATIO: 2.74 V 2.53 PRIOR AND 2.33 AVG OVER THE LAST 8 SALES (highest BTC since Dec 2014)
AMD Spokesperson: chip vulnerabilities are applicable to AMD processors; two exploits uncovered apply to AMD chips – press
(US) US Commerce Sec Ross: Submitted results of probe into national security impact of steel imports to President Trump
*(CN) CHINA 2017 TRADE BALANCE (CNY): +2.87T V +3.35T Y/Y
*(CN) CHINA DEC TRADE BALANCE ($): 54.7B V 37.0BE (highest monthly surplus since Jan 2016*)
*(CN) CHINA DEC TRADE BALANCE (CNY) 362.0B V 235.2BE

FRIDAY 1/12
(DE) German coalition negotiations said to have achieved a breakthrough; still working on a final deal - financial press
JPM Reports Q4 adj $1.76 v $1.69e, Rev $25.5B v $25.0Be
*(US) DEC ADVANCE RETAIL SALES M/M: 0.4% V 0.5%E; RETAIL SALES EX AUTO M/M: 0.4% V 0.3%E
*(US) DEC CPI M/M: 0.1% V 0.1%E; CPI EX FOOD AND ENERGY M/M: 0.3% V 0.2%E; CPI NSA: 246.524 V 246.372E
JWN Reportedly family members will resume efforts to take company private later this year - CNBC

January-February 2018 Outlook: Winter Games

TradeTheNews.com TTN January-February 2018 Outlook: Winter Games
Thu, 11 Jan 2018 16:10 PM EST

The XXIII Winter Olympics start in early February, but instead of signifying a moment of global unity, these Games may present a reminder of international tensions. The Games are being held in PyeongChang, South Korea, just miles away from the world’s biggest pariah nation whose nuclear program is currently the most obvious threat to international security. Ahead of the Games, North Korea has reopened direct contact with the South, and tensions have eased somewhat. But the two Koreas have gone through cycles of detente before, only to see the North go back to its antagonistic ways.

Despite the geopolitical uncertainties, the global economic environment is on an uptrend. Equity markets have reached Olympic heights, with most equity indices posting double digit gains on the year. Treasury yields are rising, though there has been significant flattening in the yield curve, sparking some speculation about the timing of the next recession. The dollar index ended the year down about 9%, and 2018 may see more weakness in the greenback as markets speculate that other major central banks will start to tighten policy and play catch up with the Fed. Central bankers will be watching inflation which has shown some signs of life, led by WTI crude climbing above $60/barrel on better demand and surprisingly strong compliance with the OPEC production cutting deal.

As the Winter Games get underway, the gold medal scenario for markets would have the melt up continuing as businesses take advantage of the more favorable tax code to invest in capex and in workers, while a refocused Congress works on infrastructure stimulus and possibly a workable healthcare reform package. This gold(ilocks) scenario would also see inflation continue a slow rise toward target levels and gently rising rates at the Fed and other central banks over the next few years.

A less glorious outcome could see companies using tax relief to pad their dividend and share buyback programs with little new investment. Congress could get mired in partisan contests over entitlement reform and healthcare. President Trump’s trade rhetoric could turn decidedly protectionist, while the Russia probe could paralyze the White House agenda. Inflation might finally reassert its presence and spook the newly reconstituted Fed board into raising rates too fast. Or an exogenous event like a military confrontation in Korea could shake global markets.

Out Over Their Skis

The apex of political competition is in Washington D.C. where ‘Team GOP’ is riding high on the passage of its first major piece of legislation after suffering an embarrassing defeat on its healthcare initiative earlier in the year. Congressional Republicans avoided tripping over their skis this time and managed to rush tax reform through the gate before the end of the year. Unfortunately for them, the plan is unpopular with the public, which perceives it as a tax cut that largely benefits corporations and the wealthy. If this poor public perception persists, it could prove disastrous for the GOP in the 2018 election cycle, but they have 11 months to win over voters.

Public perceptions may turn in the New Year when middle income workers see less tax withholding in their paychecks. Many large US companies have also declared their intentions to spread the wealth provided by tax breaks. Several firms – most notably Walmart – have announced that they are raising the minimum wage for entry level workers and are handing out one-time cash bonuses to non-executive employees. The Republican tax cut has already given a boost to the stock market as well. All of this could turn the tax cut into a clear political victory for Republicans (at least in the short term, before the individual tax cuts start to erode over time).

Republicans will need to muster high scores from the judges’ table because they hope to tackle even more challenging issues in the New Year, eying bank deregulation, GSE reforms, and comprehensive changes in healthcare and entitlement programs. The hope is that reforms in these other major budgetary areas can help to close the fiscal gap that will be widened by the tax plan, to the tune of $1.5T over 10 years by most estimates.

The political realities will preclude Speaker Ryan’s Olympic-sized dreams of wholesale changes to entitlement programs and healthcare. Any revisions will require cooperation from the Senate, where the GOP majority has just narrowed to 51-49, and where the tax bill just barely passed after several Republican holdouts demanded significant changes. Some small efficiencies in entitlement programs may be gained if the GOP can reach out to the centrist wing of the Democratic party. A bipartisan plan for fixing some of the issues with the Affordable Care Act has been floating around Congress, but it remains to be seen if the leadership will support the idea, especially in the face of President Trump declaring that he has essentially killed Obamacare by ending the healthcare coverage mandate as part of the tax bill. An infrastructure spending plan, depending on how it is framed, is more likely to garner support from both parties and could lay a laurel wreath atop the increasingly athletic-looking economy.

Anticipation of the corporate tax cut and other possible reforms boosted stocks throughout 2017 and for the first time in history the stock market finished the year with positive performance every single month. In the days since the passage of the tax bill some large companies (such as AT&T and Comcast) have declared special bonuses for workers and some new spending plans, though it remains to be seen if these are just opportunistic public relations announcements or if more companies will actually use the tax break for increasing worker wages and capital spending as the Republican plan envisions. After getting some time to study the new tax structure, many more firms will be solidifying their spending plans and announcing guidance modifications in the next two months. Depending on the industry – and for multinationals how much US tax exposure they have – publically traded firms could paint a very rosy picture under the new tax scheme (after taking a hit from the one-time tax on stockpiled foreign profits).

While the Winter Games don’t seem to have much appeal to President Trump personally (golf is clearly his game), he has spent a lot of time at the podium congratulating Team GOP. Yet there are still many moguls ahead. Stock market volatility tends to pick up early in the New Year and that could be exacerbated by the changes in US tax code, as companies and analysts rejigger their forecasts for Q4 and 2018 results. Stocks were up for the first five trading days of the year, so the ‘January effect’ is in play, putting statistical chances of the S&P500 posting another positive year at 83%. Trump continues to pin his reputation on an advancing stock market, however, so when a correction does eventually arise it may be at least a temporary distraction for the Administration.

There are additional obstacles littered over the course of Washington politics that could create other major distractions. The US government faces another potential shutdown as the latest short term spending bill expires on January 19. The Administration wants a $100B increase in military spending while Democrats seek a similar increase in domestic spending. Reportedly negotiators were nearing a deal in late December, with DACA remaining the major sticking point. This could lead to an embarrassing government shutdown and derail hopes for other bipartisan efforts this year.

Though Russia has been banned from the Winter Games, it remains at the heart of special investigation that haunts the White House. Despite the administration's insistence that the probe will soon come to an end, there is no clarity about when it will wrap up. Indications are that Mueller's investigators are trying to leverage General Flynn and Paul Manafort into implicating officials who are still in the White House. To date, however, there is no concrete evidence that candidate Trump ordered collusion with Russia during the election, though his proxies including his namesake son had encounters with some unsavory Russian operatives in the run up to the vote last November. The latest reporting says that President Trump could agree to be interviewed by the Special Counsel before the end of January, but that Trump’s lawyers are pushing for a written questionnaire so that the President can avoid open-ended, face-to-face questioning.

Even if no more senior administration officials get caught up in the investigation, some White House advisors could make it their New Year’s resolution to retire from the administration. National Security Agency (NSA) Director Mike Rogers is already planning to step out of the arena this spring after four years at his post. Economic advisor Gary Cohn, who had a public falling out with the President over his statements about the Charlottesville incident, may take a victory lap on the passage of the tax cut and then return to private life. That would be a minor blow to Wall Street which sees Cohn as its champion in Washington, though other former financiers like Treasury Secretary Mnuchin will still be in positions of influence. Meanwhile, Secretary of State Rex Tillerson, who has been long rumored to be planning an exit amid policy conflicts with the President, is now reportedly planning to continue to serve at least through the end of 2018.

It’s All Downhill…or Cross Country

The Olympics aspire to create the highest level of competition on a fair playing field. Global trade representatives have similar aspirations, but sometimes domestic politics change the game. Sparked by the populist wave that reshaped the political landscape last year, some old trade alliances are being reshaped, for better or for worse, to meet populist demands. Cross-border trade is only one area that is impacted by this movement as populism is threatening to shake up the old order in Italy, and Catalonia takes another run at independence.

The White House expected a quick rewrite of the North American Free Trade Agreement, but Mexico and Canada pushed back against rushing a deal, and now negotiators are looking to work into March. In the meantime, Trump administration has taken a hard line, using trade reviews to slap duties on Canadian lumber and its aircraft maker Bombardier. By all accounts, the sticking points are the White House’s insistence on rules of origin and a sunset provision that would require the three countries to renegotiate their commitment to the trade deal every five years. The US wants rules of origin to require over 85% of content come from within North America (up from 62% now). Canada and Mexico argue that such a level of domestic content is not realistic in the global supply chain and that the sunset provision would hurt confidence and drive down long term investment.

At this point Canada and Mexico are not buying in on these concepts and the US does not appear to be flexible, so barring a breakthrough, the White House could announce plans to tear up NAFTA later in Q1. Six months after issuing a formal notice, the US could dissolve the trade agreement at any time. This could prove very disruptive for businesses that do significant cross border manufacturing – including the likes of Ford, GM, and GE – but presumably negotiators would start right in on bilateral trade talks. Canada and Mexico appear to be stalling, betting that the US Chamber of Commerce, farmers, and Congress will pressure the White House to retain the current NAFTA framework. The forces that support NAFTA may be bolstered by public falling out between President Trump and his former chief strategist Steven Bannon, who was seen as the biggest proponent of protectionism in the White House. Now that Bannon is on the outs, the trade rhetoric from the administration may soften. The sixth round of NAFTA talks will take place in Montreal during the last week of January.

Key trade talks are under way in Europe as well. The UK just barely managed to salvage a preliminary agreement with the EU to close out Phase I of the Brexit process, covering preliminary issues like citizen’s rights and the ‘divorce bill’ settlement. By all accounts, it will be even more difficult to get the puck across the goal line in Phase II, as talks will turn to a gloves-off trade negotiation between the bloc and its departing member.

Britain continues to talk tough, expressing certainty that a trade deal can be completed by March 2019 and threatening Europe with its mantra that “no deal is better than a bad deal.” Yet the Britons seem to want to have it both ways. Reports that the EU is making contingency plans for a ‘no deal’ Brexit scenario have upset the UK’s chief negotiator Davis, who declared that such plans are damaging to the process – even as London was said to be considering establishment of a cabinet post to manage a ‘no deal’ contingency.

A new wrinkle is further complicating the Brexit talks. Just as the EU does not compete as a bloc in the Olympics, it was revealed that they may not be acting in unison in the Brexit trade talks. In a recent press interview, French President Macron warned other EU leaders not to succumb to the "prisoner's dilemma" a paradox in game theory in which two parties act out of individual self-interest and both lose out in the process. Macron’s admonition implies a split in the EU’s united front as Phase II gets underway.

The pound sterling may experience bouts of weakness in 2018 Brexit if negotiators go crashing sideways into the boards like they did early in Phase I. Ultimately though, it is in the interest of both sides to strive for a harmonious solution rather than risk the inherent uncertainties of a ‘hard Brexit.’

Even as Brexit negotiators circle each other in the rink, Europe’s strain of populism can be heard heckling from the cheap seats. After the Catalan parliament voted to declare independence in late October, the body was thrown out by the government in Madrid. But separatists climbed out of the penalty box and regained control of the regional parliament (by a narrow margin) in December elections, threatening to reignite a political crisis in Spain. The two main separatist parties have agreed to reinstall Carles Pugidemont as the parliamentary president. This will be complicated by the fact that Pugidemont fled the country last month and is still wanted on charges of rebellion and sedition by Spanish authorities. The Catalan leader is sure to use his exile to his advantage, to raise sympathies over his ‘political persecution’ and to spotlight that some of his former colleagues are still in jail on political charges.

The political situation in Italy is not as charged, but even a symbolic victory for populists in one of Europe’s largest economies could deal a blow to the push for ‘more Europe.’ Italy’s President has just moved to dissolve parliament, setting up new elections on the 4th of March. After struggling to form a government after each of the last several elections, the mainstream parties are at risk of an embarrassing loss at the hands of the populist party this winter. The populist Five Star Movement (M5S) has been leading the polls, edging out the Democratic Party (PD) led by former PM Renzi, while Silvio Berlusconi’s Forza Italia is running a distant third. Even under the newly constituted election laws that should favor the mainstream parties with their stronger local party infrastructure, the M5S looks like it could skate to victory, giving its leader, 31-year old Luigi Di Maio, the first go at forming a new government (though, as it stands, none of the other major parties would be willing to enter a coalition with M5S). Formed as a protest against the political elite, the Five Star Movement has built its appeal on fighting cronyism and corruption, but like most populist movements on the continent, it also has euroskeptic and anti-immigrant strains. Di Maio has promised to seek concessions from the EU and, that failing, would then call for a referendum on Italy’s membership in the single currency. While the party has not threatened to pursue a full Italian-style exit from the EU, a victory by M5S could put further strains on a European Union already trying to stitch up the wounds from the Brexit.

Inflation on Ice

In most of the developed world, inflation has been frozen at sub-optimal levels for the last decade or longer. The era of extremely low interest rates instituted by the global central banks has helped foster the weak inflation environment, but now that inflation is starting to thaw, rates are beginning to rise as well.

People have grown accustomed to low inflation, but as economic growth revives, inflation could finally see a resurgence. CPI readings in the US and Europe have begun to track toward the desired target levels and central banks may soon face a question they have not had to address for the last decade: what to do if inflation overshoots on the upside. Most central bankers looking at this question will state that their target CPI level is symmetric and can tolerate some periods above the desired level. But this thinking seems to presuppose that inflation will continue to move at creeping pace, not accounting for a potential quick spurt higher should the economy finally begins to see wage inflation and basic materials and energy costs start to mount.

As the major central banks contemplate policy normalization over the next few years, policy adjustments will more closely resemble the pace of a curling match than a speed skating heat. Just recently, the Bank of Japan modestly trimmed its daily JGB purchases, while the Bank of England got its feet wet with an initial rate hike in November, and improved data in Europe has the ECB on track to wrap up its QE program as soon as September. The prospects of these other central banks playing ‘catch up’ with the Fed has been enough to keep the dollar index at bay, but for the time being the focus remains on the Fed, which has now raised rates five times and is prepared for at least three more hikes this year.

The Fed team will also have a new coach in February, as Jerome Powell takes over the Chairmanship from Janet Yellen. Powell is an experienced hand at the Fed, having served on the Board of Governors since 2012, so he has a track record and is a known quantity. But changes in the Fed leadership often result in some market jitters and it will require some time to build confidence in the new Chair. That also applies to the newest members of the Fed team being added by Trump, which have so far been mainstream candidates after some fears that the President might appoint radical or even anti-Fed governors. The veteran members will take on a slightly less dovish tilt as the annual rotation of voting members moved the two December dissenters (Evans and Kashkari) to the sidelines.

Fed officials have indicated that they are not observing any real asset bubbles but they remain vigilant. Some members have worried aloud that the low interest rate environment that has existed globally for such a long time could have destabilizing effects. The implication is that it might spark ‘reach for yield’ behavior among financial investors that could be especially risky at a time when monetary or fiscal policy can’t react if a new negative shock arises. The Fed is also keeping an eye on the yield curve, which flattened throughout 2017. By year end, the spread between 2-year and 10-year narrowed to below 0.50, the lowest since before the financial crisis, and a potential early warning sign of an impending recession.

Like the Olympic flame, the torch of inflation may flicker low but it never dies. Ironically that flame may be stoked back into a full blaze by burning oil. There is growing demand for raw materials of all types, illustrated by firming prices in commodity markets, but the long-awaited rebound in energy prices is central to the case for higher inflation. Above average global crude inventories have been worked off by the OPEC/non-OPEC production agreement and could come back into balance early in the second half of 2018. Compliance with the production accord has been running at over 100% and this surprising discipline has paid off in higher energy prices, driving WTI crude above $60/barrel. Improving growth readings in most of the developed economies should bolster demand for oil and further feed into inflation.

After a decade of very slow price and wage growth in developed economies, a sudden inflation rebound might catch investors off guard in 2018. Most economists don’t expect runaway inflation, but the US could see inflation rise past the Fed’s 2% target to 2.5% or higher. How the Fed and other central banks react to the data will be key. Though some above target inflation is generally acceptable, in the Powell Fed the hawks may have more sway. Faced with a fast moving inflation scenario, the new Fed might be tempted to push rates up faster, which could stunt the vigorous growth that the administration is gunning for.

The Olympic Seoul

The world’s eyes will be turned to South Korea this February as the Winter Games get underway. There were concerns that the North Korean dictator would find this international gathering as an irresistible opportunity to get the world’s attention through ominous threats. Instead, the event appears to have engendered some détente. The North has just reopened direct lines of communication with the South for the first time in two years, leading to an agreement for the North to send a delegation of dignitaries and athletes to the Games. Building on this hopeful development, the usually hawkish President Trump has toned down his rhetoric and agreed to postpone joint military exercises during the Olympics, apparently as a sign of good faith that some good may come from the reopened talks between the Koreas.

Unfortunately, a true breakthrough in relations between the two Koreas is about as likely as reconciliation between Nancy Kerrigan and Tonya Harding. The North has exhibited a certain predictable pattern in the past: A cautious rapprochement followed soon thereafter by demands for concessions, which inevitably leads to relations chilling again.

North Korea’s latest overture may also be an attempt to dissuade President Trump from trying to flex his military muscles. Trump has been posturing for a potential military conflict with North Korea, mocking Kim Jong Un as "little rocket man" and declaring that a military solution is "fully in place, locked and loaded." Recent reports stated that the Pentagon has drawn up plans for a “bloody nose strike” against some of Pyongyang’s WMD facilities. Such an attack would seek to be severe enough to show the regime that the US is serious and capable of destroying the weapons program. A targeted military strike would be a risky strategy, however, one that was looked at and rejected by the last few US administrations. First it might merely embolden the regime which can proclaim it has “withstood” a US attack. A show of American force also risks triggering a full scale conflict on the Korean Peninsula, one that most analysts predict would result in the decimation of Seoul before the North was defeated.

As North Korea’s only ally, China may ultimately determine how the standoff is resolved. For decades Beijing has helped to prop up Pyongyang both as a buffer state between it and the US-allied South Korea and to prevent a massive refugee crisis at its border. But it appears that Chinese thinking on North Korea has shifted. By all accounts Chinese President Xi is not fond of the regime in Pyongyang and he has signaled that he would not adhere to a 1961 mutual defense treaty if North Korea provokes a conflict (in fact, Pyongyang has already violated that pact by developing nuclear weapons).

Reports in the last month indicate that China has established a number of refugee camps on the Korean border, indicating that Beijing fears the worst. Some analysts are speculating that if a shooting war breaks out in the region, China may use its growing military not to support Pyongyang, but instead to seize control of the North. Such a bold maneuver would allow China to show off its military prowess and exert its political influence over the eventual Korean reconciliation process. It would also give notice to the world that China is prepared to take on superpower status, standing on that elite podium next to the US.

Blunting US influence in the region remains a chief goal for the Chinese government, especially in light of the more aggressive stance President Trump is taking on trade issues. As President Trump seeks to make good on campaign promises about “fair” trade, he could soon decide on broad trade sanctions against China. The Commerce Department has been assessing potential restrictions on aluminum and steel trade on national security grounds, and Trump could soon announce response measures based on those findings. The US is also looking at violations of intellectual property rights and unfair technology transfers as well as anti-dumping duties on solar panels.

Imposing tariffs on Chinese exports is likely to trigger retaliatory measures, potentially opening up a full scale trade war between the world’s two biggest economies. China has a number of options to push back against threats of blanket trade barriers, perhaps the most obvious being its US treasury holdings. A recent report said some Chinese officials were recommending “slowing or halting” Treasury purchases because the US bonds have become less attractive assets as they face a bear market. While it seems unlikely that China would stop buying USTs outright, this report appears designed to give the American government second thoughts about a direct confrontation on trade issues.

Aside from geopolitics China’s leaders continue to contend with many domestic concerns. One such issue is maintaining a hold on currency flows as the growing wealth class in China seeks new ways to circumvent state currency controls to slip money offshore. This pressure has quietly made China the center of the cryptocurrency craze that has hit the public consciousness in the last few months.

The strength of the cryptocurrencies has always been their decentralized control but that now may also become their Achilles heel. In an effort to clamp down on extra-governmental currency trading China has begun to impose restrictions on bitcoin mining. Authorities are looking at strategies to discourage mining including raising electricity prices and writing new tax and environmental regulations. There are also reports that South Korea is concerned about the unregulated nature of cryptocurrencies and seek cooperation with China and Japan to curb irrational speculation. These reports have blunted the advance of the major cryptocurrencies in early January and virtual coins could see more declines if other government authorities weigh in on potential regulation. Even as nations gather to celebrate international unity at the Games, this new borderless virtual currency is at risk of a collapse, perhaps serving as an early warning for excessive risk-on sentiment in other assets classes.

CALENDAR
JANUARY
1: New Year’s Day
2: UK Manufacturing PMI; US ISM Manufacturing PMI; China Caixin Services PMI
3: UK Construction PMI; FOMC minutes
4: UK Services PMI; US ISM Non-manufacturing PMI
5: US Payrolls & Unemployment; US Trade Balance; US Factory Orders

8:
9: China CPI & PPI
10: UK Manufacturing Production; US Import Prices
11: BOE Credit Conditions Survey; US PPI; China Trade Balance (tentative)
12: US CPI; US Retail Sales; Preliminary Univ of Mich Consumer Sentiment

15:
16: UK CPI & PPI
17: US Industrial Production
18: US Housing Starts & Building Permits; China Q4 GDP; China Industrial Production
19: UK Retail Sales; US short-term government spending bill expires

22: BOJ Policy Statement
23: Philadelphia Fed Manufacturing Index; World Economic Forum in Davos begins; 6th Round of NAFTA talks begin in Montreal
24: UK Claimant Count & Unemployment; US Existing Home Sales
25: US New Home Sales
26: US Advance Q4 GDP; US Durable Goods Orders
29: US Personal Income & Spending
30: US Consumer Confidence
31: Chicago PMI; FOMC Policy Statement; China Manufacturing & Non-manufacturing PMIs; Caixin Manufacturing PMI
FEBRUARY
1: UK Manufacturing PMI; US Nonfarm Productivity; US ISM Manufacturing PMI
2: UK Construction PMI; US Payrolls & Unemployment; US Factory Orders

4: China Caixin Services PMI; Superbowl LII
5: UK Services PMI; US ISM Non-manufacturing PMI; Powell becomes new Fed Chairman
6: US Trade Balance
7:
8: BOE Inflation Report; BOE Policy Statement; China Trade Balance (tentative)
9: UK Manufacturing Production; Preliminary Univ of Michigan Consumer Sentiment; WINTER OLYMPICS opening ceremonies


12: China CPI & PPI
13: UK CPI & PPI
14: US CPI; US Retail Sales
15: US PPI; US Industrial Production; China Lunar New Year begins
16: UK Retail Sales; US Housing Starts & Building Permits; US Import Prices

19:
20: UK Inflation Hearings; Philadelphia Fed Manufacturing Index
21: UK Claimant Count & Unemployment; US Existing Home Sales; FOMC Minutes
22: UK Q2 GDP (2nd estimate)
23:

26: US New Home Sales
27: US Durable Goods Orders; US Consumer Confidence
28: US Q2 Preliminary GDP (2nd estimate); Chicago PMI; China Manufacturing & Non-manufacturing PMIs; China Caixin Manufacturing PMI
MARCH
1: UK Manufacturing PMI; US Personal Income & Spending; US ISM Manufacturing PMI
2: UK Construction PMI
3:
4: Italy elections

Risk Appetite Refreshed in the New Year

TradeTheNews.com Weekly Market Update: Risk Appetite Refreshed in the New Year
Fri, 05 Jan 2018 16:05 PM EST

The New Year started with a bang as stocks climbed aggressively and NYSE floor traders donned their ‘Dow 25,000’ hats. President Trump was quick to note the DJIA milestone, providing some distraction from a bad week of PR for the administration after his casual mention of the nuclear option in a tweet aimed at North Korea, and the release of a tell-all book about the White House that painted the President in a bad light and appeared to drive a wedge between him and former chief strategist Steve Bannon.

A slightly subpar US December payrolls report did not deter the risk appetite in the markets, and European bourses largely outperformed on the back of more solid data including record low unemployment claims in Germany. The oil market remained bullish as the US Interior Department announced plans to open up more offshore areas to drilling. WTI crude rose to its highest level since June 2016, hitting the $62 handle, while natural gas prices paired last week’s gains as the end is in sight for the arctic freeze gripping half of the US. The bond yield curve continued to flatten, with the 2-10 year spread narrowing to under 50 basis points on Friday. That garnered a prediction from Janus’ Bill Gross that the bond market is headed for a mild bear market. The dollar index continued in last year’s trend, drifting another 0.2% lower. For the week, the S&P500 gained 2.6%, the DJIA added 2.3% and the Nasdaq rose 3.4%.

In corporate news this week, Macy’s and JC Penney reported improved sales y/y for the holiday season, and Costco also delivered strong results, handily topping Wall Street SSS estimates. Intel shares dropped after reports broke that its chips are susceptible to a hardware-based exploit and that the security patch could significantly impair performance. In M&A news, Dominion Energy agreed Tuesday to acquire Scana Corp in a deal valued at $14.6B, including debt. Brookfield Business Partners announced it would buy Toshiba’s bankrupt nuclear services company Westinghouse Electric for $4.6B, including assuming the Pittsburgh-based company’s underfunded pension plan. MoneyGram and Ant Financial had to terminate their amended merger agreement thanks to an inability to receive CFIUS approval.


MONDAY 1/1
(HK) Macau Dec Gaming Rev +14.6% v ~20%e (update)
(CN) CHINA DEC CAIXIN PMI MANUFACTURING: 51.5 V 50.7E (highest reading since Aug 2017)

TUESDAY 1/2
(UK) DEC PMI MANUFACTURING: 56.3 V 57.9E (17th month of expansion)

WEDNESDAY 1/3
(DE) GERMANY DEC UNEMPLOYMENT CHANGE: -29K V -13KE; UNEMPLOYMENT CLAIMS RATE: 5.5% V 5.5%E (record low)
SCG To be acquired by Dominion in all-stock deal valued at $7.9B
INTC Weakness attributed to The Register report: 'Kernel memory leaking' Intel processor design flaw forces Linux, Windows redesign
(US) Conference Board Dec Total online job ads 4.93M v 4.70M m/m v 4.92M y/y; New ads 2.06M v 1.82M m/m v 2.17M y/y

THURSDAY 1/4
(UK) DEC SERVICES PMI: 54.2 V 54.0E (17th month of expansion)
M Reports Nov and Dec SSS +1.0%; raises FY17 $3.59-3.69 v $3.39e (prior $3.37-3.62 prior), narrows Rev -3.9% to -3.6% y/y (prior -4.3% to -3.2%), narrows SSS -2.7% to -2.4% (-3% to -2% prior); taking actions on cost management
(US) DEC ADP EMPLOYMENT CHANGE: +250K V +190KE
(US) US govt reportedly plans healthcare law exemption for the self-employed and small businesses to allow purchase of plans that don't comply with all ACA requirements - press
6502.JP Brookfield Business Partners announces deal to acquire Westinghouse for $4.6B
(KR) President Trump and South Korean President Moon reportedly agree in phone call to delay joint military drills during Winter Olympics - Korean press
(KR) Follow Up: South Korea Unification Ministry: North Korea said it accepts offer for talks on Jan 9th; talks to include Winter Olympics and 'other issues of mutual interest'

FRIDAY 1/5
(FR) FRANCE DEC PRELIMINARY CPI M/M: 0.3% V 0.3%E; Y/Y: 1.2% V 1.2%E
(US) DEC AVERAGE HOURLY EARNINGS M/M: 0.3% V 0.3%E; Y/Y: 2.5% V 2.5%E; AVERAGE WEEKLY HOURS: 34.5 V 34.5E
(US) NOV TRADE BALANCE: -$50.5B V -$49.9BE
(US) DEC CHANGE IN NONFARM PAYROLLS: +148K V +190KE
(US) NOV FACTORY ORDERS: 1.3% V 1.1%E

Markets stay within striking distance of all-time highs as 2017 comes to a close

TradeTheNews.com Weekly Market Update: Markets stay within striking distance of all-time highs as 2017 comes to a close
Fri, 29 Dec 2017 16:19 PM EST

S&P futures for good measure once again inched out to an new intra-day high ahead of the final opening bell on the NYSE. The UK FTSE 100 finished the year at an all-time high, as well, before US indices drifted marginally lower, ending the week slightly in the red. In what has been a tough stretch for Dollar bulls, the Greenback is looking to finish out the year on another sour note. The Euro approached 1.20, which has led to the 9% decline for the Dollar Index in 2017, and gold hit a three-month high on the Dollar weakness. WTI crude ended above the $60 mark heading into 2018, and nat gas moved back towards $3. US Treasury prices traded flat to marginally higher, with buying in the belly and short end resulting in modest curve flattening. The benchmark 10-year yield looks poised to finish the year largely unchanged around 2.40%, with much of the curve holding at some of the flattest levels in a decade. For the week, the S&P fell 0.3%, the Dow lost 0.1%, and the Nasdaq dropped 0.8%.

During this holiday-shortened corporate news week, a plethora of companies disclosed how the tax bill would affect their Q4 outlook. Apple weighed on the NASDAQ early in the week after a report surfaced of potentially slow iPhone X demand. Potash and Agrium set the closing date for their merger of equals after receiving clearance from regulators. Adtran slashed its Q4 outlook, noting a slowdown in spending at a domestic Tier 1 customer. And President Trump on Friday suggested USPS should charge Amazon “much more” for delivery services.

Barrons weekend update

Barrons weekend update: positive cover on AAPL; positive feature on WDC, PCG 

Cover story: Positive on AAPL: With the tech giant poised to reach a $1T valuation, investors should re-evaluate the stock; The peak isn’t near, and the company “seems to be escaping its product supercycle peaks and troughs to post more-consistent year-to-year growth,” which could have a lasting effect on valuation. 

Feature: 1) A panel of independent financial advisors discuss how they’re preparing their clients for 2018 and looking for unloved investment opportunities in overlooked areas of the market; 2) “The new tax bill passed by Congress on Wednesday and signed into law on Friday is a major coup for U.S. corporations, but a mixed bag of give-and-take for individual taxpayers, with benefits sharply skewed to the wealthy”; 3) Positive on WDC: The company is doing much better than the stock price suggests; the shares are cheap and could have upside of as much as 50% in the coming year; 4) Positive on PCG: Company’s move to suspend its quarterly dividend and concerns about its liabilities related to wildfires in California have sent shares down, but the the drop could be a buying opportunity. 

Tech Trader: For investors looking to buy low in the tech sector, QRVO, FNSR, OLED, and CSCO are good candidates; New regulation in Washington and the European Union continues to pose a general risk for tech companies.

Trader: The Republican tax overhaul could create complications in the new year as analysts begin to tweak their numbers, even if much of what they know about the law is guesswork; Positive on UPS, FDX: “While the easy tax-reform money has been made, knock-on effects should help boost transportation fundamentals, while the technical setup is looking better than it has in a while”; There is a fundamental problem in trying to pick a bottom for bitcoin, but the greater concern may be what the recent selloff says about fledgling cryptocurrency exchanges. 

Profile: Raife Giovinazzo, manager of the Fuller & Thaler Behavioral 

Small-Cap Equity fund, buys companies with market values of less than $5B and pays close attention to how other investors react to insider buying and share buyback programs (top 10 holdings: LSTR, CENTA, UCTT, SBH, RUTH, NMIH, TREX, DSW, EXTR, PAHC). 

Follow-Up: There’s mounting evidence that the technology sector’s tax-free ride in Ireland is about to end, amid greater pressure from European regulators and changes to the U.S. tax code. 

European Trader: Cautious on Pirelli: Italian tire company, whose shares were relisted in October, faces a number of challenges, and trades at a premium to rivals Michelin and Continental. 

Asian Trader: Positive on Hyundai: “After a bad year in which its stock essentially flatlined, Hyundai might be the comeback kid of the auto world in 2018.” 

Emerging Markets: The election of Cyril Ramaphosa as president of South Africa has boosted EZA and the rand, but the new leader still faces major hurdles in turning around slow growth and high unemployment. 

Streetwise: MCK, whose shares were sold off over drug-price pressures, might have had a strong rebound were it not for the opioid crisis.