This Week In Markets: PPI

Friday, July 8, 2016

July 4-8: Post-Brexit Rush to Safe Assets Force Yields Down

DJIA 18067 // S&P 2120 // NASDAQ 4928 // 10-YR TRE 1.403% //

EURO 1.105 // OIL 45.57 // GOLD 1355 // BIT 653

The current election cycle has been marked by mass protests, rallies, and deepening party lines. Regardless of who Americans are voting for, seven in ten say they feel the country is on the wrong track, according to the WSJ. Promises of wholesale economic growth from previous decades have widened gaps between rich and poor and left structural employment problems, leaving many Americans feeling left behind.

1.36%

The US 10-year government bond's lowest yield ever, hit earlier this week. In a global context, this yield is actually quite robust: according to Citi, around one third ($7 trillion) of all developed country sovereign debt now has negative rates, effectively charging lenders for borrowed money and paying borrowers for taking on risk.

NOTE: If article is paywalled, use Google to search for title or try accessing via mobile

CREDIT:

10-year Treasury Yields Hit Record Low, USA Today

The yield on the benchmark US Treasury bond hit an all-time low this past Tuesday, as investors fled post-Brexit to the lowest risk assets they could find, pushing up Treasury prices. Bond yields fall as prices rise.

M&A:
Dare to Dream: The Bank Mergers That Could Help Fix the Industry, Bloomberg

Stagnant growth and lower valuations would push most other industries into an M&A glut, but regulatory concerns about too-big-to-fail banks are pushing financials to stay smaller. But some particularly hard-hit banks are better situated than others to gain from merger activity.

DEMOGRAPHICS:
Election 2016 is Propelled by American Economy's Failed Promises, WSJ (paywalled)
The Wall Street Journal begins a multipart series examining why promises made in 2000 about how technology, trade, and competent central banking could maintain an indefinite period of US economic growth are now seen as oversimplified and incorrect, leading to extreme reactions among voters.

CHINA:
Brexit is Helping China Push Down the Yuan, WSJ (paywalled)
As China shifts to slower growth associated with a cleaner, services-led economic model and domestic consumption, weakening the yuan as a strategic move to keep exports competitive. But a weaker currency also means capital flight--over $550 billion of outflows are anticipated this year.

Vocabulary:

Calendar, July 11-15:

Monday: Q2 Earnings Season begins, Labor Market Conditions index
Tuesday: Job Opening and Labor Turnover Survey (JOLTS)
Wednesday: Import/Export Prices, Beige Book, EIA Petroleum Status
Thursday: Jobless claims, PPI
Friday: CPI, Retail sales, Industrial production

Weekly Predictions:

CPI up as sustained oil prices ~$50 trickle down to consumers
Alcoa (AA) beats earnings for third straight quarter because of ongoing demand in US autos
One big M&A deal in financials is announced

Monday, March 9, 2015

Mar 2-6: Bulls and bonds

DJIA 17875 // S&P 2073 // NASDAQ 4412 // 10-YR TRE 2.20% //

EURO 1.086 // OIL 49.53 // GOLD 1173 // BIT 280

The Federal Reserve (whose headquarters, called the Eccles Building in Washington DC, is pictured here) just finished its annual stress tests designed to assess the strength of the US banking system. The Fed was founded in 1913 after the Panic of 1907 demonstrated a need for a government financial entity to preserve market liquidity. The Fed has 3 primary goals: maximize employment, stabilize prices, and and moderate long-term interest rates.

676

The value of the S&P 500 index exactly 6 years ago--the lowest level that it hit during the bear market associated with the financial crisis. The index has rebounded by several hundred percent since then, hitting record highs over the past several trading sessions.

The bull market is 6 years old, now what? CNN Money

After hitting a bottom of 676 exactly 6 years ago this Monday, the S&P has returned more than 200% amid the 4th-longest bull market in history. Two market analysts made names for themselves by "calling the bottom," citing that the market losses in 2009 exceeded even the market turmoil from the 1929 market crash. Soon afterwards, the central government and Federal Reserve took emphatic steps to reassure investors, triggering the beginning of the bull market.

Fed stress tests find banks adequately capitalized, WSJ

The Fed's annual stress test of financial health confirmed that all 31 banks tested had resources available to continue lending in the midst of economic shock. This is the first time all 31 banks passed, although it noted Goldman Sachs and Zions Bancorp had certain capital ratios that approached minimum required levels. Banks who pass the test are now permitted to return value to shareholders in the form of dividends and share buybacks.

Faith falters in S&P 500 as $17 billion outflow precedes selloff, Bloomberg
Despite hitting 50 record highs in the past year, investors in 2015 have pulled $17 billion from the S&P index and devoted that money to investments in fixed income and bonds. That change in investment represents the biggest quarterly divergence since 2000. The movement of funds is being attributed to talks that, following continued strong employment numbers, the Federal Reserve will begin raising rates later this summer.

European stimulus sparks bond blitz, WSJ
With rates in Europe being kept low and even negative as the economy continues to recover, some European firms are taking advantage by issuing bonds paying zero interest. The purchase of zero interest bonds indicates that investors believe capital gains--an appreciation in the price of the bond itself--will provide gains. American companies such as Berkshire Hathaway and Coca Cola have issued $26 billion of euro bonds so far this year.

Foreign takeovers see US losing tax revenue, WSJ
Recent government outrage pushed regulators to limit "tax inversions," when US companies purchased companies abroad in order to capture reduced tax in foreign countries. But the law doesn't regulate the opposite: foreign countries purchasing US companies. For example, instead of acting as a predator, Salix Pharmaceuticals has chosen to be the prey in a recent deal to be acquired by Valeant, a competing pharmaceutical firm.

Vocabulary:

Calendar Mar 9-13

Mn Mar 9: Labor market conditions; URBN
Tu Mar 10: NFIB small business index, JOLTS; BKS, HABT
We Mar 11: EIA petroleum status, Treasury budget; BOX, KKD, SHAK
Th Mar 12: Retail sales, Import prices, Inventories; DG, TKMR, MTN
Fr Mar 13: PPI, Consumer sentiment

Predictions from last week: 2/3 All-Time: 15/24

Costco beats estimates: CORRECT
Trade gap widens: WRONG
Caesars Entertainment misses: CORRECT

Weekly Predictions:

Stock market drops as Fed signals summertime rate hike
Apple shares spike on enthusiasm for Apple Watch
Dollar General (DG) beats earnings forecast