Dominoes on Edge
DOW + 35 = 19,251
SPX + 7 = 2212
NAS + 24 = 5333
RUT + 14 = 1352
10 Y + .01 = 2.40%
OIL – .95 = 51.88
GOLD – .80 = 1170.20
Another record high for the Dow industrial average. This is starting to be old hat. Also, a record high for the Russell 2000 – close but no cigar for the S&P. Still, it looks like the stock market, at least the US stock market loves the idea of Trumponomics, at least for now.
The rest of the financial world – not so much.
The bond market certainly has not been happy. Government bond prices have unraveled. The yield on the benchmark 10-year Treasury note for example, surged from 1.6% at the end of September to 2.40% today. And there is the inverse relationship to price and yield; as yield moves higher prices moves lower, or in this case prices have cratered.
So, is the stock market or the bond market smarter when it comes to predicting what’s next for broader financial markets and the economy? Will inflation sour the growth outlook, and which market will reflect that sooner? Perhaps the biggest threat to financial markets right now is a sense of complacency.
The U.S. trade deficit jumped almost 18% in October as imports rose to the highest level in 14 months. The nation’s trade gap climbed to a four-month high of $42.6 billion. October imports increased 1.3% to $229 billion, marking the highest level since August 2015. The U.S. imported more drugs, computer accessories, cell phones and other consumer goods.
Exports, meanwhile, slipped 1.8% to $186.4 billion in October. That’s the smallest amount in three months. The decline in exports was largely related to fewer shipments of farm products such as soybeans and corn as well as petroleum and other industrial supplies.
Bankers are running out of private sector solutions for Banca Monte dei Paschi and have told the Italian lender to prepare for a state bailout this weekend after Matteo Renzi suffered a referendum defeat. Renzi will remain in his job as Prime Minister for at least a week; snap elections have not yet been called.
While financial markets responded relatively calmly, sources told the Financial Times that the political upheaval made it “more difficult” to secure a €1-billion-euro investment from Qatar on which Monte de Paschi’s €5-billion-euro capital-raising plan hinges. Shares in the bank have lost more than 85% in value this year. Plans by leading Italian banks to raise billions of euros from investors to boost their financial strength have been damaged by the outcome of Sunday’s referendum, a leading ratings agency said on Tuesday as it downgraded its outlook for the sector.
Fitch – which said it had a negative outlook on the Italian banking industry for 2017 – said profitability in the sector was already frail before the referendum. So, why no bank run in Rome? Well, Eurozone rules come into effect: first the shareholders lose, then bondholders get bailed in and their bonds are exchanged for stock, and then depositors above the deposit insurance level of €100,000 are forcibly converted to equity. Only then can the government step in with bailouts.
No idea who would buy all the newly converted stock, and without buyers, you have a bank run of sorts. And if you have a bank run of sorts in Italy, the German banks (specifically Deutsche Bank) start looking very, very dangerous. So, the idea that Italian banks are having a hard time finding private recapitalization brings up visions of dominoes on edge.
Despite approving a set of “short-term” debt relief measures, talks between Eurozone ministers and the IMF broke down on Monday with little headway having been made in resolving splits over Greece’s €86-billion-euro bailout. And it looks like the International Monetary Fund has abandoned the bailout program, at least until the Eurozone gives Athens more debt relief or Greece legislates more spending cuts. The Greek government, facing a population worn down by years of austerity, has warned creditors not to push it too far.
Reaching a deal to cut production is one thing; getting an actual reduction in global output is another. Crude production from OPEC members is likely to have risen to a record 34.16 million barrels a day in November, with African members leading the gains.
Federal and Los Angeles officials said they had been alerted by authorities in another country to a “specific” threat against the city’s Red Line commuter rail system, prompting them to beef up security and alert the public. Los Angeles Police Chief Charlie Beck told a news conference, “This threat is imminent, … it is very specific, but the credibility still needs to be vetted.”
Amazon wants to automate grocery shopping. Amazon is testing a grocery store in downtown Seattle that lets customers walk in, grab food from the shelves and walk out again, without ever having to stand in a checkout line. Customers tap their cellphones on a turnstile as they walk into the store, which logs them into the store’s network and connects to their Amazon account through an app.
The service is called Amazon Go. It uses machine learning, sensors and artificial intelligence to track items customers pick up. These are then added to the virtual cart on their app. If they pick up an item they later decide they don’t want, putting it back on the shelf removes it from their cart. Amazon envisions opening more than 2,000 brick-and-mortar grocery stores under its name, depending on the success of the new test locations. Target and Walmart plan to expand a service that lets shoppers order online and pickup curbside to 1,000 stores by the end of next year.
The Supreme Court ruled that Samsung’s violation of Apple’s smartphone design patents may involve only a component, rather than the entire product – a decision that means Samsung might not have to pay penalties reaching into the hundreds of millions of dollars. The justices reasoned that the patent infringement could affect just a component of the phones, such as their appearance, rather than all their capabilities.
The legal battle between the two tech giants represented the first design patent case to reach the high court in more than a century. A jury in 2012 had ruled that because Samsung infringed on three of Apple’s iPhone design patents, it must fork over the entire profits from the phones in question. Now the case will return to the U.S. Court of Appeals for the Federal Circuit to determine what portion of its profits Samsung must pay – a process several justices predicted will be difficult.
In a separate case, the Supreme Court sought to crack down on insider trading, ruling unanimously that tips passed between relatives and friends are illegal even if the corporate insider receives no financial benefit.
The decision marked the first time the high court had clarified what constitutes insider trading in nearly two decades, and it upended a legal standard set by a New York-based federal appeals court in 2014 that had made prosecutions more difficult. The decision was written by Justice Samuel Alito, saying: “Giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds.”
Wall Street has been watching the case carefully for a sign of where the justices stand on the issue. The earlier case, which the high court refused to hear, made it almost impossible to obtain convictions unless prosecutors presented evidence showing the tipster received a direct benefit. The high court called that decision “inconsistent” with its precedents.
Requiring that insiders get rewarded didn’t sit well with most of the justices during oral argument in October. In some instances, Justice Stephen Breyer said, “to help a close family member is like helping yourself.” Federal prosecutors have used a 1983 rule, like the one agreed upon by the justices, to convict both corporate insiders and the people they tip off. Maintaining such a rule, Justice Elena Kagan said last month, was important to maintain “the integrity of the markets.”
A group effort? YouTube, Facebook, Twitter and Microsoft are stepping up efforts to remove extremist content from their websites by creating a common database that will be up and running in early 2017. The web giants will share “hashes” – unique digital fingerprints they automatically assign to videos or photos – of terrorist material to enable their peers to identify the same content on their platforms.
5G and its multi-gigabit cellular speeds probably won’t hit the market until 2020, but AT&T has started testing the technology inside of one of Intel’s offices in Austin, TX. The company is particularly interested in how the new network will stand up to streaming 4K video, but will also test a wide variety of uses, including VPN, VoIP, “unified communications applications” and good old internet access.