Is the Federal Reserve running out of time?

The Federal Reserve was steamrolled by a perfectly hedged move by the POTUS, who escalated the Chinese tariffs conflict, imposing a 10% tariff on 300 bln of Chinese goods. The POTUS and his team decided to further escalated trade wars, after a calculated move urging the FED to cut the IOER by 50 bps during the FOMC July meeting. Since then the market has rallied to long duration trades, which has led to more curve flattening and further inversion of the 3s10y TSY curve. At this point the 2y10y has still not inverted but has come under massive pressure following recent days. Even though long duration trades are not any novelty, due to the fact that financial institutions are chasing yields at every price possible, the sharp decrease in TSY is astonishing.

Generally a flattening of the curve does not mean a downfall for equities. Nonetheless such a flattening emphasizes the fear of escalating trade wars and a Federal Reserve which is not able to communicate its policy in an effective way. The risk of a market correction/downtrend have risen dramatically and market participants are slowly positioning towards a risk-off scenario, with gold slowly but surely crawling back to the levels of the GFC, trading at USD 1502 with no real profit-taking in sight. The aforementioned global tensions are reflected by equities, most notably the S&P 500, who saw a harsh and quick drawdown. The S&P ended up drawing down 205 points, losing 6.78% of its total market cap.

As of recent the distress is also felt in the interbank market with the 3M LOIS widening back to the yearly high, showing a worsening in credit. The move in credit is widely off-set by liquidity constraints, driving towards a wider the EURUSD XCCY basis. This comes as no surprise with the Treasuries decision of increasing the debt ceiling and the earlier than expected stop in balance sheet unwinding. At this moment the XCCY basis is at some sort of a sweet spot. On the one side Europe investors are looking for high yields in the U.S. zone and on the other side U.S. debt managers are looking at tendering low-yield debt. This can be observed by the growth in reverse Yankee funding.

The 5y5y forward rates on inflation levels have come down from the highs off 2.30 to well below the inflation target of 2% set forth by the Federal Reserve. This comes as an aftermath of the slowing in Economic data and the dovishness of most central banks.

The crucial factors which could impact equities are:

1. Forward Guidance of the Central Banks: As other central banks have proceeded to react to growing worries with respect to global trade tensions, like the RBNZ who cut its rate by 50 bps the FED has come under increasing pressure. Fed Fund Futures are pricing in a total of 100 bps cuts up to December 2020. This is not observable in TSY, where the 2Y Yield is trading at 1.5978. If the Fed is unable to put markets at ease ad keeps running behind the curve we could see a correction in equities. In essence, the September FOMC could be absolutely pivotal to resetting animal spirits. The Fed has plenty of excuses to do this, trade-escalations being the primary factor, particularly as Chair Powell has consistently noted that the biggest risks to the economy are those that are external. Nonetheless compared to the rest of the globe US yields are still very attractive compared to other jurisdiction, like the German 10Y Bund who is yielding at -0,587%.
2. Fading fiscal stimulus: With the fiscal easing under Trump, stocks saw an artificial rejuvenation. Since then fiscal stimulus has faded away and makes the comparison of companies earnings rather difficult. This phenomenon could be observed when fiscal easing began an economic surprise was very high, now with fading effects of fiscal stimulus the Citi Economic Surprise Index has been trending lower.
3. Further Escalation in Trade Wars: In the initial rounds of tariffs President Trump raised tariffs to 25% after having levied an initial 10%. This could well become a deja-vu in the newest round of discussions, between the US and CHINA.

As observed by Citi equity markets seem to be essentially trading like a two-factor model, with the input variables Trump Tweets and FED pricing:

1. The end of 2018 brought about more conciliatory tweets from Trump in November but crucially these were unable to prevent the equity market from correcting ~20% due to a hawkishly delivered Fed hike. An almost immediate dovish turn by Powell in conjunction with a friendly Trump tweet reversed the market sell-off at the turn of the year. At this stage, the money market curve hadn’t yet started to price cuts but did price out further hikes.
2. By the beginning of March stocks were up 18% from the December lows, but an abysmal non-farm payrolls number spooked the money markets into pricing an entire cut by the end of the month. Ironically, this is where the “bad-data = good-news” regime emerged. Data weakness gave lower projected discount rates which helped the equity market rally back to all-time highs in May, supercharged by pacifying Trump tweets.
3. The May escalation of trade wars started the vicious circle of the risk assets relying almost entirely on the premise of Fed cuts. The market recovered as ~70bps worth of Fed cuts were priced by June. Sentiment recovered following what looked like a temporary end to trade escalations in the G20.
4. As of now, the Fed has disappointed the market with a ‘hawkish cut’ whilst there looks to be no sight of trade détente in the short term given the move higher in USD/CNH and the subsequent branding of China as a currency manipulator by the US Administration.

Global Macro: Outlook 2019

Introduction

The FY 2018 has nearly come to an end and heavily hit the equity markets, as most indexes look like they will close below their opening at the beginning of the year. Three factors weighted heavily on the on 2018.

1. Transition from mid to late cycle, with central banks pulling back on years of loose monetary policy. Last time this year central bank purchases government bonds were running at a pace of $2 trillion per annum. Today the number is zero and by Q1-2019, central banks will be net sellers
2. Economies did not match expected growth. Beginning of this year expectations were high for synchronized growth. Nonetheless this year was coined by the divergence between the U.S. growth and the disappointing growth in pretty much the rest of the world.
3. Geopolitical conflicts took the main stage, most prolific the trade-wars and the formation of a populist movement in Italy.

Economic Outlook

It is written in the stars whether 2019 will be the transition year of central bank late cycle into economic recession or not. Taking a look at the deflated markets there might actually be some upside to equities in 2019. More generally, the mix of low returns and higher volatility should again be a central feature. Unlike 2018, there is a high possibility of that pockets of value in fixed income will develop, notably in front-end USD and EUR. Furthermore the strategic risk-reward is shifting away from outright selling of fixed income and into steepeners. For broader markets, the market consensus seems to be that the dollar trend will turn down, though it may not be evident early on in either the euro or the yen.

Before setting out some possible themes and trades for 2019, we will shortly revise the main macro assumptions that we will be operating under.

Growth: neutral but with a modest upside flavor. While it may not feel that way, global growth in 2018 was likely the strongest since 2014 (3.8%, up from 3.7% in 2017). The trouble is the better growth was highly skewed toward the US, and much of this year has been spent revising (mostly to the downside) forecasts in much of the rest of the world. Some of the markets consensuses, while mildly upbeat are:

• In the US, we think strong supply side positives from the combination of deregulation and the 2018 tax reform will help sustain the recovery for longer than many think, even if we see growth slowing from 2018 levels.
• China is as tricky and sensible as it gets. Nonetheless the belief is that policymakers are expected to avoid any slippage in growth and that they will be successful at it.
• In the Eurozone, fiscal policy support (after years of drag) will help offset some of the external drags. Expect growth to stabilize.
• In the UK, growth forecast have been increased to 1.9% (from 1.6%) on a benign Brexit outcome and fiscal policy boost

Inflation: contained, but with material upside risks. Despite the pick-up in wages seen in many developed economies, there is still little risk of pass-through to headline inflation. Oil will also be a net negative for headline inflation rates next year, although prices are expected to stabilize and rise very modestly in 2019.

Monetary policy: less negative, if not yet positive. Uncertainty around monetary policy is especially high heading into 2019, though on balance the headwinds should feel less fierce than in 2018. To be sure, US quantitative tightening will remain in full swing and the Fed is not expected to end its balance sheet reduction until 2020. This means central banks will be net sellers for fixed income for the first time in a year. Against this interest rate policies will be mildly dovish, on balance:

• The FOMC will only hike twice in 2019, hence signalling a pause in the 3-year tightening cycle.
• The ECB and BOJ will hold rates steady again.
• The Bank of England will raises rates once in 2019 and once in 2020
• The RBA and Riksbank join the policy normalizers; not the RBNZ

Geopolitics: a big swing factor? The geopolitical calendar in 2019 is a busy one and the risks around the key events are finely balanced. Importantly, markets have not been especially good at trading geopolitical risks in 2018 and it is hard to see why this would improve in 2019.

• • US/CHINA relation. These two countries have been at it for quite a while and there is no reason to believe that this Tango will end anytime soon.
  • Similarly no easy end to the current stalemate between the Italian Government and Brussels is to be expected. The May European Elections will be a key barometer of where integration is heading and there is no reason for optimism.
  • On BREXIT, the base case assumes a more market-friendly outcome in the next term. But uncertainty is high and longer-term risks are still significant.
  • Market Volatility

Looking back, the expected late cycle pick-up in volatility did arrive in 2018, though not always in the way envisioned. It came in a series of waves, rather than as a discrete event. Until very recently, the rise in macro implied volatility was still rather modest. And importantly, the increase in volatility was barely notable in interest rate markets. In the end, rising yields was a key driver for higher market volatility, although for the most part higher yields caused volatility shocks elsewhere, such as US equities (twice) and emerging markets.

Looking ahead, the case for a sustained period of higher volatility is still strong. Simply put, this is the time of the cycle when financial fragilities tend to be exposed. The figure below depicts a lagged measure of Fed accommodation against equity volatility (VIX). The two key takeaways are (1) Fed policy is getting closer to neutral and, given this, (2) implied volatility is likely to move higher than it is today. US equities in particular have been shielded from the macro headwinds thanks to the lingering effects of the 2017 US tax reform. But these factors will fade heading into 2019. Inevitably the mix of volatility in 2019 will be different than it was this year. This leads to the conclusion that rates volatility will play a bigger role next year as policy and economic uncertainty, inflation risks and supply begin to chip away at a prolonged period of compressed term premia and low inflation.

Steepening Curves in 2019

In the past few months the debate with regard to the relative risk rewards of USD 5s30s steepeners compared with outright selling of USD back-end rates has been intensive. The general view has been that both make sense, but as we head into 2019 the steepener trade looks the better risk-reward on the medium-run horizon. Looking ahead to 2019, with a mature, and potentially cresting, US economic expansion and the Fed reaching a potential inflection point as rates hit neutral, the year-ahead possibilities are perhaps more two-way than they have been since the immediate aftermath of the crisis. Does the expansion continue into overheat territory as the Fed stops at neutral and/or the Phillips’ curve finally starts to take hold? Do we experience a “Goldilocks” expansion period as supply-side productivity gains allow growth to continue absent inflation pressure? Or does an overly aggressive Fed, trade war, overseas risks, equity correction, or a combination of any of these or more send us into recession? In 2019 the market sentiment will swing frequently and at times wildly between all three scenarios depending on the economic and political developments. Nonetheless similarly to last year to last year there is a high conviction on the shape of the curve. This is why steepeners, more specifically 5s30s can be specifically profitable. The main arguments for this strategic approach are:

• Fed Priced In: Since the summer, the major push back to a steepening strategy view has been that the curve always flattens in a hiking cycle, and that the current hiking cycle will continue into 2019. While certainly true, the market is largely priced for this. OIS markets are currently priced for ~2.5 more hikes by year-end 2019 (including a likely hike at this month’s FOMC meeting), which would put the Fed funds rate at the low-end of what is considered to be the Fed’s “neutral” zone. On the curve, end of 2019 forwards are still priced for 2s10s at ~20bps and 5s30s at ~35bps. In addition, if one looks at the 2004-2006 hiking cycle, the curve flattening hit its trough in February 2006, about 4/5s of the way through the cycle with 4 months and 3 hikes left to go. From the start of the hiking cycle, to February 2006, 5s30s flattened by ~170bps. Over the last four months of the hiking cycle (which saw another 75bps of hikes) 5s30s actually steepened by a little over 20bps.

 

• Term Premium: The belief is that in 2019, we will see term premium injected back into the Treasury market. Since the 1970s, term premium has, in our view, been on a long-term downward trend due to increased central bank transparency and credibility, culminating in post-crisis forward guidance and a secular move lower in the uncertainty related to both monetary policy and economic data. However, as the chart below shows (plotted from 1990), within that long term decline, term premium bottoms into or near the first Fed rate cut of a cycle, with the notable exception being the Taper Tantrum. The belief is that we may be at or near that part of the rate cycle, even if we aren’t necessarily forecasting a turn towards recession in 2019. But with market participants increasingly split over the near- to medium-term direction of the economy and markets (overheating/Goldilocks/recession), investors will need to be compensated for rising two-way risk, pushing term premium higher. Additionally, as the Fed moves towards data dependence, and away from forward guidance, central bank transparency will decline and the range of potential Fed outcomes should widen. Term premium should rise on this basis alone.

• Volatility: While it is not clear which leads, term premium and implied volatility tend to move together. Conceptually, both implied volatility and term premium can be interpreted as investor compensation for uncertainty. To that end, increasing uncertainty, as discussed in the prior bullet, should lead to higher volatility, something we have already seen in FX and equity markets. In 2019, higher rate volatility as well, additionally supported by slower growth in the US and, in some cases, the slowing expansion of, or outright decline in, central bank balance sheets are to be expected.

 

• Supply: In the long end, markets should remain concerned about increasing Treasury supply, as the Treasury is expected to take a pause on increasing nominal auction sizes at some point in 2019. Nonetheless the market could interpret such a pause as a “pullback” in supply, and in turn bullish for rates. But Treasury’s monthly gross coupon issuance will still be significantly higher than it was at the beginning of 2018 – meaning that even if Treasury pauses or slows the increases in auction sizes for some time, the amount of outstanding Treasury debt will still be growing at a rapid pace. Importantly, these headwinds are apparent even though no major fiscal policy expansion is expected in 2019, given Congressional gridlock. The expectation is that the growth in outstanding Treasury debt weighs most heavily on the back-end. Thus far, from a par perspective, Treasury has increased front-end auction sizes the most. But when taking into account duration, and the maturity/rolldown profile of existing Treasury debt held by the public (ex-Fed), the back-end will be growing at a faster pace than other sectors. For example, by the end of 2020, the size of the 10- to 30-year sector that is held by the public is expected to grow by ~58% since the beginning of 2018.
• Demand: In addition, there are reasons to remain very concerned about foreign demand for the Treasury market, particularly in the context of rising supply. This concern is especially focused at the long end, where foreign investors are already infrequent buyers of 30yr Treasury bonds (since January 2016, foreign investors have bought an average of 9.5% of 30yr bonds at auction). But, with both prohibitive hedging costs and questions about the durability of the USD rally into 2019, foreign demand will be tepid across the curve going forward, at a time the supply outlook means the US needs additional buyers more than ever.

In sum, the front end of the US curve is already priced for additional Fed action from here on. Supply and demand dynamics, along with the possibility of term premium returning, point to a steepening bias in 2019. The expression of this could be a 5s30s curve, given the view that the long-end will be more impacted by supply and looks even less attractive to foreign buyers.

Italy and Europe

2019 is likely to be another year dominated by politics in Europe, and politics will be dominated by Italy, as every widening in BTPs, every interaction with the Commission, and every political event will be seen as a de-escalation, or a step toward the Italexit event horizon. Markets are already very pessimistic, nonetheless the direction of travel is toward greater pessimism and wider spreads – too much can go wrong between now and European elections, which will be seen largely as a trial run for Italian elections. Nonetheless concerns about a 2012-style contagion seem low.

With no surprise most market participants have been short BTPs. For those looking for proxies with better carry: short EUR FX (vs CHF or JPY), long EUR FX volatility, short Austria, long Schatz.

Euro Exit = (Crisis + Euroscepticism)

One thing is certain: a country leaving the euro will only do so in the midst of a crisis, supercharged by capital flight. But would the decision to leave be the cause of that crisis or the response to it? The concern is, of course, that the process is non-linear; that a country might be sucked increasingly quickly toward a point of no-return, as economic pain, Euroscepticism, and capital flight feed on each other. Italy is the only country in Europe where such a process looks like it could gather speed in the near future. It is not in crisis now, but shocks are unpredictable, it is already relatively Eurosceptic, and markets are on edge. Of course, if a level of crisis is a necessary condition to set such a circle in motion, a crisis in Italy could easily become a crisis in other countries too. We look at contagion risks below because Euro break up is not only a BTP theme. It has been the major theme of 2018, and looks likely to be the major theme for European markets again in 2019.

How much bad news is in the price?

An approach to this framework is to directly look at the probabilities of Italexit and possible losses given default. The table below shows that markets attribute Italexit a probability of 30-40% in the next ten years, depending on the LGD on the BTPs ( compared to an alternative of holding bunds).

A guide to anticipating an Italian crisis in 2019

But what about the tactics, if you’re interested in direction of travel? There are no great secrets here. Trying to think in a possible escalation sequence, some of the accelerators to have in mind include:

BTP idiosyncratic risks. BTPs do not just reflect expectations. They have real effects. Wider spreads feed into broad financial conditions, are constantly commented in the press, and tempt politicians to blame Eurocrats for weaponising the markets against them. BTP idiosyncratic risks are the most likely early crisis-accelerators, in particular:

• A failed BTP auction or a poor syndication could quickly turn uncertainty into something much more serious. The new government entered in late May, and has enjoyed lighter H2 supply so far. This is expected to step up in January.
• Ratings downgrades are likely in 2019. Fitch and S&P did not move this year, although S&P downgraded its outlook to negative in October. Italy is two notches above ‘junk’ with these two, while the buffer is just one notch with Moody’s. The next reviews may be around March. A downgrade to a middle rating below BBB-would risk unlocking substantial selling, especially of the ~€630bn of BTPs held abroad.

Debt sustainability concerns. There is no magic level where markets might start to worry about the long-term affordability of Italy’s debt. The chart above illustrate that debt sustainability is not at the core of any budding crisis at this point. Italy rolls about 15% of its debt every year, so the average cost of financing does not rise exceptionally quickly even if markets demand higher yields in a challenging year.

Government ‘reaction function’ to market/economic stress. Finance minister, Giovanni Tria, indicated that 400bp in 10y BTP/bund spreads might be a level where action would be taken to reduce pressure on financial conditions. Although that does not imply budget cuts, markets might expect something in that direction if that level were tested. Conversely, if nothing were done, confidence could leak away quickly. Mr Tria has also recently assured markets that there is a ‘safeguard cushion’ to guard against budget slippage if growth disappoints and that 2.4% is a ‘maximum ceiling’. The way this is spelled out in a final law could be important for restoring Mr Tria and Italy’s credibility with markets.

Global/European growth. External demand is important for Italy: export demand adds up to 26% of GDP. Slower growth increases the likelihood of budget slippage, confrontation with the Commission, and ultimately Italian sentiment toward Europe and the Establishment. The debt sustainability analyses that show debt/GDP continuing to fall in coming years rely on some economic growth.

European elections… Salvini’s League and the French Front National explicitly intend to sit together in the European Parliament, and others could switch from current formations to join them. It is unlikely that ‘Eurosceptics’ would be able to form the largest bloc. But they may be significant enough to present a serious challenge to the European order, making further progress on reforms to strengthen European contagion firewalls and financial stability almost unthinkable.

… and European elections as warm-up act to Italian elections. New elections are likely in Italy in 2019, especially if a right/centre-right coalition can sustain 45% or more in the polls. The European Parliament campaign will be a key test of how far the League and M5S will try to develop and exploit eurosceptic feeling, and their results will be a vital test of how successfully such strategies might be carried into national elections.

In/out referendum. The end game for Italexit would almost certainly involve a referendum, if a government does not wish to be accused of staging a coup. In Italy, a binding referendum on an international treaty is unconstitutional (article 75). A non-binding advisory referendum would be possible, however (the vote on EEC membership in 1989 is a precedent). Greece’s 2015 bailout referendum, which was eventually ignored, and the UK’s 2016 Brexit referendum, which was not, were both non-binding. A promise to present a referendum would dramatically raise risks in the short-term.

Italexit as campaign pledge? Could we jump straight to the end game like this? Unless elections were held in deep economic crisis, this is surely highly unlikely. Could it just be good tactics for a politician who has already concluded that leaving is in the national interest to try to accelerate the agenda by causing a crisis? This is far-fetched. A risky policy is more likely to cause trouble the more markets think you will be in a position to carry it out. But the more likely you are to win, the less you will want to cause trouble that may just complicate things for you. Although Mr Salvini enjoyed campaigning in a ‘Basta Euro’ t-shirt in 2017, that was before he became the leader of the centre-right and serious contender to be next prime minister.

What about crisis-brakes?

Investor risk appetite. As with any positive carry trade, BTPs are expected to tighten if the risks outlined simply fail to emerge. This would naturally put the crisis- Euroscepticism spiral into reverse.

TLTRO-iii. The ECB will probably have to offer long-term funding to guard against worsening in financial conditions in Italy, and to replace TLTRO-ii money before it slips below one year maturity. Markets expect an announcement in March or April and tender in June. This may encourage carry trading, at least short-term in short-dated paper. It is possible that the ECB will design incentives carefully to encourage banks to behave as it would like them to, which, if effective, may discourage sovereign carry trades.

Early elections. Early (H1) elections are unlikely, but could raise the possibility of a right/centre-right coalition to replace the populist coalition. This may be welcomed by markets because it would concentrate accountability and replace the M5S with partners perceived as more business-friendly and less eager to raise spending.

Contagion

Interlinkages: Opacity, Bubbles, Finance, trade, and the Eurosystem. It is worth recalling that contagion in the Subprime Crisis and the Sovereign Crisis alike was rife largely due strong but opaque financial-sector interlinkages. Asset price bubbles and private leverage were a key vulnerability, especially in Spain. Spanish households and firms have cut debt by over 60pp of GDP since 2010?

i) Finance. Even though the ECB has made an effort to buy back most of the Italian debt, markets will seek out direct financial interlinkages most quickly. Spain and France are the most exposed. Total portfolio and FDI exposures sum to around 8% of GDP in both cases. As a cross check, the BIS puts French banks’ consolidated exposures to Italy at €270bn (11% of GDP). But a large part of this will be due to local claims of separately capitalised and funded subsidiaries such as BNL and Cariparma. Consolidated claims of Spanish banks on Italy are 5% of GDP.

ii) Trade. Italy as a consumer market for a remaining EMU would clearly suffer in Italexit. Total exports to Italy from other EMU countries, of which only a proportion will represent final demand, are around €175bn (1.7% of GDP). The most exposed countries are The Netherlands (3.3%), followed by Germany and Spain (2%). A competitive devaluation in the case of Italexit would risk stealing market share from other EMU countries across industries, but might be fought against via trade policy.

iii) Eurosystem holdings. BTPs held by the ECB and Eurosystem are probably not big enough to be systemic. Europe’s ‘big’ exposure to Italy is the Target 2 balance (€489bn in September, see sidebar). We assume that in any break-up, the ECB would be able to monetize a loss in such a way that this would not become a systemic problem.

Firewalls: ECB OMT, PSPP, and the ESM

If Italy finds itself under pressure but does not want to leave the Euro, OMT and the ESM are almost certainly enough to cope. Italexit is a risk only if the strings attached are unconscionable. The key question, therefore, is whether firewalls are large enough to protect the rest of the currency area from Italexit contagion.

National budgets. The first line of defence would be the national budgets. The commission will surely allow significant forbearance in the surveillance process for such an event and cross-border exposures are not so large that it is clear the cost of an Italexit crisis would push debt/GDP to levels where markets would cease to finance. Portugal is a possible exception, but its direct exposure to Italy is relatively low.

ECB PSPP/OMT, and ESM. If this is too sanguine, in such a crisis, the ECB could use its deep pockets to support in several ways. Indirectly, re-starting quantitative easing would be very likely to be justified by the inevitable deterioration in economic conditions. In principle there is little doubt about the capacity of OMT to smooth through any Italexit turmoil together with the ESM, whose €400bn lending capacity is prima facie more than enough to guard against Italexit contagion, even allowing that this headline figure would be reduced due to questions over some of its major shareholders in a crisis. The fly in the ointment is both OMT and ESM support would require an ESM programme to be approved. Italy, with its 17.8% of ESM voting rights could veto any such programme and may find that it is in its strategic interest to threaten maximum disruption in any exit process.

Trading Italexit

Short BTPs. There is a near-term upside risk for BTPs because November has been a hard month, while in December PSPP flows are friendly and political risk may quiet down. But into next year the high probability of too many of the risks listed above materialising to be sanguine. In particular, we do not expect the budget to embed any formal brakes. Economic downturn makes budget slippage likely. A spiral of escalation between a hardline Commission and scapegoating by the government is foreseeable, which could heighten tensions into the European Parliament elections, where we expect populist-nationalists to perform well.

Trade recommendation: Short 10y BTPs vs 10y Germany at 287bp. Target 400bp. Stop at 265bp. Carry and roll down to be short is -20bp/month.

Top contagion trade? Short EUR FX, long EUR FX volatility, Short Austria, long Schatz. The multi-asset screener (published by Deutsche Bank) below highlights possible value in banks and periphery as lower-carry trades to proxy a short BTP view. Iberia and banks look like they might be susceptible to some catch-up with BTP spreads.

Where the cost of a short is the cost of carry, it is natural to consider this the ‘premium for an option on Italexit escalation’, and we can work out a ‘payout ratio’ for a terminal scenario to compare them. A number of flight-to-quality trades are likely to benefit from Italexit and offer positive carry or flat carry, however.

• Benchmark: short BTPs. 10y BTPs carry and roll around 15bp per quarter negative (to be short). With BTPs at 308bp this gives a scenario payout ratio of 11.5x.
• The best contagion trades are in currencies. In particular, short EUR against risk-off currencies such as CHF and JPY, although long USDEUR should also work and it is a trade you are paid to hold.

6. Brexit – Deal or no Deal?

For all that is known, the Brexit has been discussed from all angles possible. In their current form, the proposed Withdrawal Treaty (WT) and Future Framework (FF) political declaration suggest a ‘softer’ Brexit outcome relative to current market pricing. Any extended transition period (into 2022, say) – where the UK has left the EU but retains status quo access to the Single European Market (SEM) – would further reinforce this, even if the eventual long-run economic settlement is more accurately depicted as a ‘harder’ Brexit. Some of the favourite trades (with fat-tails payoff) are:

Trade 1: pay Nov2019 SONIA, more risk inclined investors may want to add paying Feb19 SONIA

November 2019 MPC-dated SONIA only discounts 21bp of rate hikes. It seems a very strong view that the MPC will hike if they have resolution of Brexit in a pro-risk manner, and whereas markets call has previously been May 2019 for the next hike, there is every prospect of February being the date. Given there is just 4bp discounted in February 2019, this is good risk/reward as a pay.

Paying November 2019 SONIA, discounting 21bp of hikes, seems an even safer way to play this, and will still profit from any February move (which surely will see a full extra hike discounted in 2019). A May hike will still see this make ~20bp profit.

Trade 2: 3s20s flatteners in Gilts

3-yr Gilts are the richest point on the curve, trading around the repo rate already (0.75%), which is itself set to rise on resolution amid markets revising up growth forecasts. In the absence of global recession this value is just not justified, and this as a stringent global growth bearish author. Moreover, 3-yr Gilts are not eligible for the 2019 buybacks that occur (the BoE will only buy Gilts > 3 years to maturity). The biggest redemption in the next three years occurs in March, and the BoE cash holding of £20.6bn will be immediately reinvested via QE of a likely £3bn/week (our trading desk estimate). This QE is very important to note in a world which is tightening liquidity conditions (eg the US balance sheet is shrinking), and a reason our shorts vs Europe are at the front end and not along the curve.

Meanwhile, 20y rolls better than 30y, and in buyback scenario analysis in past years has been shown to be a strong performer when buybacks are ongoing. Long 20y carries & rolls marginally better than 30y, so at the margin is a better long point, especially when we see global forces steepening up 10s30s curves in Europe, US and Japan – if possible we will avoid the 30y point. This costs 0.7bp/3m carry and roll to run.

Trade 3: pay 1y1y UK inflation at all-time highs. A 100bp home run trade

Trades like these they do not appear to often and those seeking them just pay away premia for events that do not transpire. The newest possible home run trade could be a 100bp mover. Pay 1y1y inflation in the UK at 3.74%. This looks strong risk/reward. It trades more or less at an all-time high and has recently spiked as markets have become wary of a ‘risk off’ Brexit. This is just WRONG. And shows that the memory of the market is too short. Inflation is peaking in the UK anyway, economist forecasts a peak in next two months of 3.4%yoy, before gently gliding down to 3.0% at the end of 2019. Moreover, no demons are predicted in the data, with another 3.0%yoy forecast for 2020. I submit that if we are at 3% on a gentle glide down all summer/autumn, which makes for falling inflation volatility, markets will not price 1y1y inflation much above 3%, and perhaps a bit lower. A target of 3% would mean 75bp value, and a move to 2.75% would unlock 100bp of value. It is rare to suggest that there is 100bp of value in anything (unless making a major call such as short credit as big macro theme). There is one major mistake the markets are making, namely that a harder Brexit is risk off and means weaker FX and higher CPI. It does not. Yes, import prices will rise as FX falls, but corporates will be the buffer to the consumer, because we will be in recession conditions. In 1992, the pound ended its ill-fated membership of the Exchange Rate Mechanism. The 16% fall in trade-weighted sterling led a consensus calling for inflation to take off. Markets called this 100% wrong, because the UK was coming out of recession and there was no ability to pass through the import price rises. UK RPI dropped from 4% in summer 1992 to 3.2% by end 1992 and troughed at 1.2% in mid 1993. Crushed. It is extremely unlikely to be any different now. A hard Brexit scenario and big fall in £ is surely associated with weaker growth – our call is recession on no deal/hard Brexit. As such, we have a glorious opportunity to fade everyone who has put 2 and 2 together and got 5, without looking at the underlying economy, and just looking at a normal import prices vs CPI chart, which in any NORMAL circumstances will be well correlated.

FX trades: Sterling – risk premium to be squeezed

The evolution of relative Brexit outcome probabilities in the latter part of November – a greater likelihood of a ‘softer’ Brexit outcome (a WT with an extended transition period or a ‘remain’ vote) vs a ‘harder’ Brexit outcome (No Deal or a revised, minimalist Eurosceptic WT) – suggest Sterling valuations should be higher.

Fundamentally, Sterling has been seen through the lens of the risk premium, which in turn is almost solely a function of uncertainty. With more uncertainty, the greater the risk premium and the weaker Sterling has become. For sure, uncertainty is extremely high. But, at some point, valuations will reflect a probabilistic model of outcomes. This is where the value lies in owning Sterling.

A greater likelihood of “remain” or a “soft-Brexit” outcome and a much reduced chance of “no deal” Brexit suggest Sterling valuations should be higher; potentially considerably higher. Reduced uncertainty can also see a greater focus on a much-improved twin deficit metrics and possible BoE rate hikes.

This leaves low delta GBP/USD calls in a favourable position. In spot we forecast for a change in Sterling sentiment as uncertainty declines, through short EUR/GBP and long GBP/CAD positions. The latter position chimes with our core North American theme of late cycle policy tightening and ebbing growth. EUR/GBP reflects our expectation that political risks will shift to the Euro area in ’19 and ECB policy normalisation is delayed.

Trade 4: Short EUR/GBP | Target 0.84, Stop 0.9150. Spot reference 0.8890

Trade 5: Long GBP/CAD | Target 1.8450, Stop 1.6350. Spot reference 1.6940

Trade 6: GBP/USD 6 Month 1.50 Digital Call = 4.0% (spot ref) 1.2828

The asymmetric (upside) risks to inflation

While the base case is no meaningful pick-up in inflation in 2019, risks are skewed to the upside when markets are not pricing much change. Late cycle pick up in wage growth and an easing in fiscal policy just as economies reach full employment. At the secular level, the combination of populism and trade protectionism is inflationary, all else equal. Possible volatility trades could be 5y5y USD BEIs, SPGBei23s and 10y10y USD volatility.

In most countries, inflation has consistently come in below forecasts from analysts and, more importantly, central banks – on balance. 2018 was no exception (see figure below). The bias on inflation has also made markets more inclined to be bullish bonds, with the US a key exception last year. Economists are again calling for a generally tame outcome for inflation in 2019. While US core inflation is expected to remain above the Fed’s forecast there is no case for any further acceleration. Cyclical and secular forces of disinflation are weakening

That said, we can’t help but think the risks around the inflation base case are significantly skewed to the upside. The reason is that many of the cyclical and secular forces of low inflation are under threat. Importantly, markets are not priced for much deviation from this low and stable inflation equilibrium. In the US for instance, both 10y term premia and interest rate volatility are at or very near record lows dating back to the 1960s. Inflation markets seem equally unfazed judging from most breakeven inflation curves.

So just what are these forces of disinflation that are beginning to turn? Let’s start with the cyclical drivers:

• The G10 unemployment rate is currently at its lowest level since 1974. It is hard to know what the right “full employment” level is and there are measures such as the employment-to-population ratio in the US which imply labour markets are less tight than they seem. Still, from its peak in 2010 of 8.1%), G10 unemployment has been falling by nearly 0.5% per year, the fastest, most persistent decline in unemployment since the 1960s.
• More compellingly, there are signs of stronger wage growth in many advanced economies. The BIS Global Wage Heat Map below shows the general trend in wages has been mostly up in 2018. Indeed, as we look back on this year, this broad-based improvement in wages is surely high on the list of potentially important and certainly surprising (to many) macro trends.

• Fiscal policy is turning more growth supportive – at a very late stage of the business cycle. Naturally, much of the focus of fiscal policy has been on the US. Indeed, today’s gap between the unemployment rate and the budget deficit has only been repeated once in post WWII history, in the late 1960s. Ironically, that was a similar period of inflation complacency. But the tilt toward easy fiscal policy (and away from easy monetary policy) is not just a US phenomenon. The swing from fiscal tightening to loosening in Italy will be more than 1% of GDP. In the UK the figure is close to 0.7%. Even Germany is expected to loosen fiscal policy in 2019.

A few trades that look interesting to take advantage of these asymmetric risks include:

1. Buy USD 10y10y volatility. Very attractive valuations, cheap carry and less supply of vega in 2019 make this trade good risk reward.
2. Buy US 5y5y inflation either via TIPS breakeven or inflation swaps: attractive entry levels, a stabilization in oil prices and increased supply in 2019 imply good risk-reward for positioning for upside inflation risks.
3. Buy SPGBei23s at 91bp on breakeven. Target 135bp. Six-month roll and carry is approximately +12bp at trend inflation of 1.2%.

Global EM: long deficit high yielders vs. short commodity low yielders

In 2019, trading global EM FX will be about the balance between the expected flow of global savings and the nature of synchronised global growth. Savings are expected to ‘Crowd In’ to high carry EM deficit countries once the market recognises that US growth is rewarding savings less for funding the US twin deficit. Synchronised global growth to continue to unwind, which would leave us bearish on lower carry EM countries which are exposed to manufacturing and commodities is expected. In CEEMEA long TRY/ZAR, in LatAm long BRL/CLP and in Asia long IDR/CNH.

The story of 2018 for EM was a liquidity shock driven by US fiscal issuance (Crowding Out) and the Fed’s Quantitative Tightening (The Portfolio Balance Channel). According to Jim McCormick current account, real policy rate and REER buffers mean that EM can now absorb those shocks better than in the past. EM now offers better protection and compensation for deteriorating global liquidity. Counterintuitively, ‘Crowding In’ implies global savings will favour EM deficit countries. EMs most dependent on capital imports will actually attract most capital because of valuations and growth potential vs. commodity EM. $463bn of net global savings will seek the best expected relative return. Peak US growth in combination with cheap EM assets means the US twin deficits will struggle for funding relative to the rest of the world. Synchronised global growth will likely continue to unwind in 2019, as global growth decelerates from 3.8% to 3.6%.

The key point to make there is that last year two thirds of the improvement in global growth came from the commodity producing economies across G10 and EM. The boom was highly commodity and manufacturing intensive, so the slowdown will likely see those economies suffer more on a relative basis. CNH shows high manufacturing (29%) and Global Value Chain (48%) exposure, while CLP and ZAR have high commodity exposure (68% and 44% respectively). So we go short those on RV.

At the same time as the housing, capex, manufacturing and auto data have softened in the US, aggregate EM fundamentals have fared relatively well, with EM return on equity and profit margins rising to 12.7% and 9.9% respectively (left chart below). This pushes the ‘Crowding In’ theme further, especially with EM equities looking relatively cheap having underperformed developed markets by 19% this year.

Taking a relative value EM approach is key as global risk assets are still vulnerable, including credit and equity. Risk assets contend with peak global earnings growth (now ~17% from ~21% February), scarce global QE flow excluding reinvestments and wage growth eating into the profit share. Therefore a suggestion would be to hedge long TRY, BRL and IDR exposure with short ZAR, CLP and CNH.

Cross Asset Valuation Snapshot

A year-ahead process is never complete without a lens on long-term value. Some key points:

1) Equities are not that rich when you look outside the US

The expensiveness of US equities has been a key discussion point for some time. This year did see some de-rating of the S&P, but it still looks rich. Other developed markets are also in the expensive zone, if not notably. Against this, many EM markets look cheap, especially compared with bubble-like levels in 2008. India is an exception.

2) European fixed income is expensive, EM is cheap, US is “fair”

European fixed income remains very rich on a real yield basis. US real yields are now firmly positive, which will be important as uncertainty builds. Many high-yield EM markets now offer decent value for fixed income investors. Turkey FI looks expensive, but only if current high inflation levels are sustained.

3) The CNY is still expensive while the US dollar is getting there

Despite the 6% drop in the CNY basket in 2018 the currency remains expensive from a longer-term perspective. The US dollar is also getting expensive, if not yet notably so. Against this, the Turkish lira is the cheapest currency, a significant turn compared to early 2018. The yen is also very cheap on a longer-term basis, although it may need some movement from the BOJ to change this.

4) Credit: expensive, but some value in EM

DM credit looks universally expensive, especially when compared to equity. EM credit looks better value, Mexico and Turkey especially.

5) Housing markets remain very expensive in small open economies

The balance between low inflation and high house prices remains an issue for many small open economies. Canada and Norway have started raising rates despite some housing stress. We’d expect Sweden to follow suit in December and Australia in 2019.

Alibaba has another blockbuster quarter

After a strong week, the DAX is slowing down today and losing some of its momentum, quoting a downward movement. The German Index started out strong but reverted back to the mean very quickly. 2 hours before close, the German DAX is down 0,20% from its previous close. A reason for this cool down in the German markets might be that German investors are on their tiptoe amid the AirBerlin and Lufthansa deal. Oil and Gold are down 0,39% and 0,22% respectively.

In the U.S. the bulls began trading yesterday with a new head of steam, as the leading averages all moved out to impressive early gains. On point, after we had passed the first half hour of market action, the Dow Jones Industrial Average had rung up a gain of some 70 points. Modest rallies also were under way on the S&P 500 and the NASDAQ. Also, yesterday, unlike Tuesday, the S&P Mid-Cap 400 and the small-cap Russell 2000 were comfortably in the black, as well. As to the Fed minutes, Wall Street was looking for clues about the Fed’s interest rate intentions. The report, meantime, suggested that there was now a split developing on the Fed regarding whether to tighten the monetary reins again this year, citing concerns about low inflation balanced out by improving GDP growth. Our sense continues to be that the Fed will raise rates just once more in 2017, and that such an adjustment might not come until late this year. Meantime, the market’s advance remained in place as the morning wound down, with the Dow’s advance holding in the 60-85 point range as noon arrived in New York. The NASDAQ, up haltingly early in the session, strengthened as the afternoon approached, with its advance surpassing 25 points. The stock market then stayed near the upper levels of its range for the next hour, or so, but ill winds politically, as other companies now have decided to abandon the President’s manufacturing council following last weekend’s violence in Charlottesville and the Administration’s changing response to it, fueled some selling as the 2:00 PM hour approached. In all, the Dow’s advance went from more than 85 points down to fewer than 30 points at one time. Still, the market had a generally strong tone to it, which suggested at the time that unless the minutes held some unwanted surprises, the day would end higher for stocks. The Fed minutes had little impact, with stocks initially rising then pulling back, with the Dow’s gain at one point nearly evaporating. Our thinking is that this Fed release will have little meaningful impact, with political headwinds probably more of an influence at this moment on market behavior. Traders, meantime, then backed off somewhat as we headed into the close, with the Dow ending the session ahead by a modest 26 points, while the NASDAQ, which waxed and waned late in the day, finally ending matters up by 12 points. Meantime, the Russell 2000, once ahead strongly, edged down a trifle at the conclusion of the day’s action.

Walmart has poured billions into its e-commerce and tech to integrate its digital business with its stores, and the strategy is paying off handsomely. The retailer said comparable sales at its 4,000 U.S. stores, a $300 billion a year business, rose 1.8% on the year in the three months to June, well above Wall Street expectations for 1.3% according to Consensus Metrix. That gave Walmart U.S. its 12th straight quarter of growth. More crucially for the world’s largest retailer, shopper visits also increased, rising 1.3% and showing that Walmart’s massive investments in features like grocery curbside pickup, in-store order retrieval, its own mobile payment app and the expansion of its online assortment are spurring shoppers to come into stores. In an effort to be able to compete with Amazon, Walmart made some big investments in its e-commerce division. But investments, along with more aggressive pricing generally, cost money. The company disappointed Wall Street with a profit forecast of 90 cents to 98 cents per share for the current quarter, compared with the 98 cents analysts expected. Wal-Mart Stores shares, which had been on a tear of late, slipped 1.5% in pre-market trading. “Sales growth is coming from across the business – including stores, e-commerce and a combination of both,” CEO Doug McMillon said in a statement. The chain also got a boost from its massive grocery business, which generates 56% of its revenue. Food saw its best quarter in five years, aided in large part by an overhaul of the fresh food business that aimed at better competing with the likes of Whole Foods Market, which is being acquired by Amazon. Other bright spots for the company included the performance of Sam’s Club, which chronically underperforms its rival Costco Wholesale. Comparable sales, a metric that strips out the impact of newly-opened or closed stores, rose 1.2%, but shopper traffic was up 2%. Further afield, nine of Wal-Mart Stores’ eleven markets saw comparable sales increases, including a first rise in sales in three years at its Asda unit in the U.K. Still, the investments took a toll: Walmart earned $1.08 per share, slightly above $1.07 expected by analysts and roughly on par with a year-ago levels. Total sales were $123.36 billion, a hair above the $123.15 billion markets were expecting. Short after opening Wal-Mart is down 2,20%

Ireland’s finance minister said the European Commission’s demand that Dublin collect up to €13bn in back taxes from Apple was unjustified, in an interview with Germany’s Frankfurter Allgemeine newspaper. The European Commission ordered Apple to repay taxes to Ireland after ruling last year that the US technology company paid so little tax on its Ireland-based operations that it amounted to state aid.

Cisco reported FY4Q17 earnings on 8/16, after the close. Revenue and EPS came in as expected. Looking at revenue by products, there are puts and takes but nothing major to note. Gross margin for the quarter came in at 63.7%, or 20 bps lower than expectation, while non-GAAP operating margins came in 40 bps ahead of expectations at 31.5%. However, guidance is a tad weak. FY1Q18 revenue and EPS are about in-line, but non-GAAP gross margin was guided to 63-64% vs. 64.1% consensus, and non-GAAP operating margin was guided to 29.5%-30.5% vs. 31.3% consensus. Overall, the quarter is uninspiring, which is reflected in the stock trading down 2.5% in the aftermarket on high volumes.

Alibaba had another blockbuster quarter of business as its profits almost doubled. The Chinese e-commerce giant reported net profit of 14 billion RMB ($2.1 billion) for its recent quarter that finished June 30 — that’s up 96 percent year-on-year. Total revenue grew 56 percent to reach 50.2 billion CNY ($7.4 billion), easily exceeding estimates, with the firm reporting 466 million active buyers over the previous 12-month period. Alibaba’s core commerce business brought in the majority of revenue — 43 billion ($6.4 billion) — but its 58 percent annual growth was topped by its smaller business units. That’s a sign of the future, according to CEO Daniel Zhang. “Alibaba had a strong start to fiscal 2018, reflecting the strength and diversity of our businesses and the value we bring to customers on our platforms. Our technology is driving significant growth across our business and strengthening our position beyond core commerce,” Zhang said. Of those units, its aggressive cloud computing business, which TechCrunch profiled earlier this year, was one of the more impressive. It grew 96 percent to reach 2.4 billion RMB ($359 million) in revenue while losses narrowed to 103 million RMB, or $15 million. The company noted that its cloud computing customer base passed one million for the first time. Alibaba’s digital media and entertainment business, which includes video service Youku Tudou, saw revenue jump 30 percent to four billion RMB ($602 million). The company has spent the past year expanding its business outside of China, which this quarter again shows accounts for the lion’s share of revenue, and the results are beginning to bear fruit. Alibaba said its international e-commerce services reached “meaningful scale” with 2.6 billion RMB ($389 million) in revenue. It credited Lazada, its business in Southeast Asia which it recently invested a further $1 billion in this year, and AliExpress for increasing revenue by 136 percent from last year.

 The Earnings Outlook for tomorrow are Deere with an Actual EPS of 1,95, Foot Locker with an EPS of 0,902.

Todays Economic Calendar:

I) Jobless Claims

II) Industrial Production

III) Leading Indicators

IV) Fed Balance

V) Money Supply

 

 

 

Ryanair files anti-trust complaint

1. DAX Review
2. U.S. Review
3. Ryanair files anti-trust compliant
4. Amazon 16 billion bond release
5. Gigaset Earnings
6. Economic Calendar

In case you missed out Elliott Wave Technical Analysis Report, make sure to catch up on it.

The DAX is recovering from its recent losses. 3 hours before close the German Index is up by 0,83% reaching the 12278 point mark. With this actual form it does seem that the DAX will be breaking its August high. There are no major international signals, as the Brent and Gold seem have to stabilized at 50 USD and 1270 USD respectively.

Following a strong equity market rally on Monday, as simmering tensions eased a little with North Korea, and fears of an imminent armed conflict with that nation lessened to a degree, Wall Street calmed down a bit yesterday morning, too. Indeed, after a small early extension to the rally in the first few minutes of yesterday’s session, stocks faltered somewhat within the first hour of trading, and an early 35-point gain in the Dow Jones Industrial Average quickly faded, with that blue-chip composite falling into the red during the second hour of trading. The other averages went into the red, as well. Meantime, a big individual story, one day after the shift away from North Korea, was at giant home improvement retailer The Home Depot, which issued quarterly results yesterday. And while the top and bottom-line results were better than expected, the gains, and the raised full-year forecast did not satisfy the Street, as that stock tumbled, losing nearly 4% of its value early on. The loss in HD turned the Dow negative, costing that index some 40 points. However, after that initial turn down by the Dow, that index returned to the black shortly thereafter. Also in the retail category weak earnings hurt Coach stock in early dealings. Still, the resilience of the bulls was evident yesterday, with that late-morning attempted comeback in the Dow. Meanwhile, in other market moving news, the Commerce Department reported that retail sales had posted an increase of 0.6% in July. That was above the 0.4% rise forecast. Also, June’s result was pared back from a rise of 0.4% to one of 0.3%. Excluding motor vehicle sales, core retail spending was ahead of 0.5%. Here, too, the gain was above consensus. Contributing to the pickup were sales of furniture and home furnishings, and building materials. Sales over the Internet soared, meantime, advancing by 1.3%. The market remained in somewhat of a mixed pattern as the noon hour arrived in New York, with the Dow near the breakeven line, and with the S&P 500 and the NASDAQ each off incrementally. The small-cap Russell 2000 and the S&P Mid-Cap 400 also were in the red, but in a more meaningful way. As has been the case recently, it was the retail group suffering once again, with steep losses in some high-profile names, such as Under Armour. Also, more stocks were lower than higher on the Big Board at that time, by a count of two-to-one while among the core groups, energy, basic materials, and consumer stocks were leading things lower. The weak tone persisted through the middle of the afternoon, and while the Dow held near the breakeven line, and the large-cap S&P 500 and the NASDAQ were just down incrementally, the smaller indexes and the advance-decline ratio were notably off. It was, to that point, a somewhat sobering day, even as the economy continued to show relative strength and the news out of North Korea was somewhat reassuring, for now. The equity market then would firm up slightly as the session wound down, but the overall weaker tone would persist into the close. When all the numbers were in, the Dow, with some last-minute selling, would end the session ahead by just five points; the S&P 500 would conclude matters just about where it began them; and the NASDAQ would end the day off seven points. Losing stocks easily led gains, though, and the small- and mid-cap categories showed noted weakness.

Germany on Wednesday rejected a claim by budget airline Ryanair of a conspiracy behind efforts to keep bankrupt rival Air Berlin afloat until a new owner is found. The Irish airline lodged a complaint with European Union competition authorities after Air Berlin filed for bankruptcy protection and then got a 150 million euro ($177 million) loan from the German government. Ryanair said late Tuesday there’s “an obvious conspiracy” between the German government, Lufthansa and Air Berlin. The loan will help Air Berlin to keep flights running for the next three months, while it is negotiating a possible deal with Lufthansa and another unnamed carrier, reported by German media to be easyJet. A spokeswoman for Germany’s Economy Ministry said it was “absurd” to claim that the rescue package had been staged. Beate Baron told reporters in Berlin that the government expects the loan to Germany’s second-largest airline to be repaid. Air Berlin filed for bankruptcy protection Tuesday after its main shareholder, Abu Dhabi-based Etihad, said it would make no more financing available following years of unsuccessful turnaround attempts. The airline, which carries some 80,000 people a day mostly on short-haul destinations, made a loss of about 782 million euros last year.

Amazon.com Inc. on Tuesday completed a $16 billion bond deal to fund its planned $13.7 billion acquisition of Whole Foods Market Inc. The issue came a day after ratings agency Moody’s Investors Service assigned the deal a Baa1 rating and revised Amazon’s credit outlook to positive from stable. S&P Global Ratings assigned the credit a higher rating of AA-minus last week. Amazon raised $16 billion in a seven-part offering that included a 40-year tranche, underwritten by Bank of America Merrill Lynch, Goldman Sachs and J.P. Morgan Chase. As expected, the bonds priced at the tight end of guidance, but the new concessions were still attractive, according to research firm CreditSights, which had upgraded its recommendation on Amazon’s bonds to outperform from underperform based on the initial price talk. Initial price talk on the 10-year tranche was 110 basis points above comparable Treasurys, which later tightened to Treasurys plus 90 basis points. CreditSights analysts led by Jordan Chalfin said at the price, the notes were still a bargain.

Gigaset reported a drop in first-half sales and EBITDA but reiterated its outlook for higher sales over the full year, thanks to growth in new market segments like smartphones. In the first half, smartphone revenues rose to EUR 3.7 million from EUR 1.1 million a year earlier, following the launch of two devices. Over the first six months of 2017, total revenues fell 3.6 percent to EUR 128.3 million due to a continued contraction in Gigaset’s main market, cordless home phones. Sales in the consumer segment fell to EUR 98.1 million from EUR 110.7 million a year ago, while the business market grew 25.7 percent to EUR 25.4 million, driven by strength in its home market Germany.  EBITDA fell to EUR 5.7 million from EUR 10.6 million in the first half of 2016, hurt by increased spending on marketing and R&D, including the ramp-up of mobile sales. Excluding the extra EUR 4.6 million in costs, EBITDA would have been largely stable for the full year, Gigaset said. Free cash flow was a negative EUR 24.1 million versus an outflow of EUR 13.1 million a year earlier.  Despite the lower H1 results, Gigaset maintained its outlook for higher revenues over the full year, with a low double-digit million euro increase thanks to the expanding smartphone business. Core EBITDA is expected to reach EUR 15-25 million over the year, while cash flow should be just a mid single-digit million euro outflow.

Today Economic Calendar:

1. MBA Mortgage Applications
2. Housing Starts
3. Atlanta FED Business Inflation Expectations
4. EIA Petroleum Status Report
5. FOMC Minutes

 

Technical Analysis: Elliott Waves

In todays Weekend Special Edition we will be discussing Elliott Waves. For some technical analytsts Elliott Waves are a vital tool. As any investor the Technical Investor will want to have a reliable forecasting method. The possibility of easy profits by forecasting the market has been the underlying force that motivates so many investors. Elliott’s market model relies heavily on looking at price charts. Practitioners study developing trends to distinguish the waves and waves structures that we will refer to later in this article. The application of the Wave Principle is a form of pattern recognition. To obtain a full understanding of the Wave Principle including the terms and patterns, I recommend Elliott Wave Principle by A.J. Frost and Robert Prechter.

The Elliott Wave Theory was introduced by Ralph Nelson Elliott during the 1930’s. Elliott a full-time accountant believed that stock trends follow a repeating pattern which can be forecasted both in the long and in the short term. The Elliott Wave Theory was published in his book “The Elliott Wave Principle” in 1938. Using data from stocks he concluded that what seems to be a chaotic movement, actually outlines a harmony found in nature. Elliott’s discovery was completely based on empirical data, but he tried to explain his findings using psychological reasons. The main principle of this theory was that a pattern consists of eight waves as can be seen in the Image below.

It is visible that Wave 1, Wave 3 and Wave 5 follow the cyclical trend while waves 2 and 4 correct the underlying trend waves A, B and C correct the overall trend , while Wave A and C follow the correction and Wave B resists. Elliot observed that each wave consists of smaller waves which follow the exact same pattern as is shown in the Image below, thereby forming a super-cycle. The numbers in the Image represent the number of waves when counted in a different scope. For example the whole diagram represents two big waves, the impulse and the correction. The impulse consists of 21 usb-waves which in turn consist of 89 smaller waves, while the Correction wave consists of 13 sub-waves, which in turn, consist of 55 even smaller waves. As can be observed all of the above numbers are part of the Fibonacci series. According to the Elliott wave theory, when Elliott first expressed his theory he was not aware of the Fibonacci series.

Elliot believed that there are nine cycles, of different durations, the bigger of which, is formed by the smaller ones. From the largest to the smallest cycles there are:

1. Grand supercycle: multi-century
2. Super-Cycle: multi-decade (40 to 70 years)
3. Cycle: one year to several years
4. Primary: a few months to a couple of years
5. Intermediate: weeks to months
6. Minor: weeks
7. Minute: days
8. Minuette: hours
9. Subminuette:minutes

The duration of these cycles varies from minutes to decades. Each pattern (cycle) is outlined by the following rules:

1. The Second Wave cannot be longer than the first wave and cannot return to a lower price than that set at the beginning of the first wave
2. The third wave is never the smallest wave compared to the first and the fifth.
3. The fourth wave does not return to a lower price than the price found at the end of the first wave. The same applies for wave a.
4. Usually the third wave shows a greater dynamic, except in some cases where the fifth wave is extended (the case when the fifth wave is made up of five smaller waves)
5. The fifth wave usually leads to a higher point than the third.

When it comes to the interpretation of the waves we will present a short overview of the general dynamic of the waves. The first wave is the “new beginning” of an impulse. Opening a position at this point will be the most profitable scenario. It is difficult to differentiate it from a correction of a previous downtrend, and therefore it is not a powerful wave. Most investors prefer to wait for better timing. The force behind the wave pattern is the number of investors that decide to enter and exit the market at a given time. After some initial winnings, investors decide to exit the market as the price becomes higher, and the stock becomes overpriced for these few investors. This behavior translates in the second wave. As the price begins falling, the stock becomes more attractive for a great number of investors that regretted not having entered the market during the first wave. As the price begins falling, the stock becomes more attractive for a greater number of of investors that regretted not having entered the market at a higher price. Those who entered in the beginning of the wave, are satisfied with their winnings, and have most likely exited the market. Investors realize that the price has reached a level making it difficult to attract any further investors. Demand begins falling, which leads to the fourth wave. Major investors are out of the market, waiting for the end of the fourth wave, to enter again and reap in the profits of the fifth wave. It is important to note that the fourth and the fifth wave are the easiest ones to follow, as they come after the third wave which is the easiest to spot, due to its length, power and speed. Major investors have bought stocks on lower prices, from investors that had bought them during the end of the third wave who feared the price might go lower. However as the major investors enter the market again, they create a small hype, the fifth wave, smaller than the third wave, which usually reaches the peak of the third wave and sometimes even higher. Investors who know the market, know that the market is extremely overrated and therefore have exited the market. Wave A is a corrective wave which is often mistaken for a second wave. This explains wave B. Smaller investors think that wave A corrected the price enough, so that it can lead to an upward trend. Unfortunately, this is the Wave where most smaller, and occasional investors lose huge amounts of money, as Wave C starts, pushing the price lower until the price gets underrated again, for a new pattern to start.

The above explanation is by no means a statistical explanation of the wave behavior, but explains the difference between major and occasional investors and their knowledge of the market. It is exact to know the exact wave patterns , otherwise it is very easy to misinterpret signs. It is important to note that the following explanation regards an overall impulse trend. The opposite would happen in case of an overall correction.

Atsalakis et al (2011) compared the Elliott Wave principle to a Buy and Hold Strategy with remarkable results. The Elliott Wave Principle was tested with the stock of the National Bank of Greece. A paper portfolio worth 10.000 Euros was simulated. Buy and sell decisions did not take into account the confidence index, as it is subjective, depending on the risk the investor is willing to take, even though a threshold of 52% is widely acceptable. Stocks were bought whenever the forecast was positive, and the position was closed when the forecast became negative. Transaction costs were not taken into consideration. The system was tested for period April 2007 to November 2008, for a total of 400 trading days.s. It is worthy to note that this period also includes the great recession of October 2008, were the system achieved interesting results. For the whole period of 400 trading days, the hit rate was 58.75%, mainly due to the crisis. By breaking this period in four sub-periods of 100 observations, the hit rates achieved are 58%, 64%, 60% and 53%, respectively. During this period of 400 trading days, the WASP system made 63 transactions. This gives a rough average of 1 transaction every 6 days.

Dow Jones opens with 100 point loss

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• DAX Review
• Wall Street Review
• Bechtle Earnings
• Macy’s Earnings
• Kohls Earnings

After record-breaking weeks, Equities have had a hard time in the European Markets. Some catalysts for the week development in the Eurozone were the strengthening EURUSD, fueling the European Markets and therefore increasing liquidity in U.S. Markets. German Earnings and the German auto- cartel have been weighting down investor-sentiment. The North-Korea conflict seems to be the most recent agitator for the sell-off on the German markets. For the current trading day the DAX has not been quoting any green digits with the Index going down since its opening without any resistance. 2 Hours before close the German DAX is down 0,91% from its previous close.

Following another record closing high by the Dow Jones Industrial Average to start the trading week on Monday and a late reversal on Tuesday amid growing tensions with North Korea, the stock market, on an extension of those heightened geopolitical concerns yesterday morning, started the middle session of the week, notably to the downside. Of course, the threats and counter threats involving North Korea was not the only influence on Wall Street, as a disappointing revenue release from entertainment mogul Walt Disney also rattled the street and helped to push the Dow down notably to start the day.  In all, the Dow fell back 80 points early, and the NASDAQ, under pressure from declines in several high-profile technology names, tumbled 60 points at the morning’s nadir. In fact, that composite remained the large-cap’s weak link throughout the morning. But it was mainly a story of growing geopolitical risk, as U.S.-North Korean relations continued to deteriorate. Leading the way lower was the consumer discretionary category, which takes in the aforementioned entertainment giant, which lost some 5% of its value in the morning. What did do well early yesterday were traditional safe havens, such as Treasuries and gold. Meanwhile, there was no bounce of note as the morning moved along, as all 10 of the principal equity groups were trading in the red as we approached the noon hour in New York, while losing stocks were sustaining a 2.3 to 1.0 ratio on the Big Board. Further underscoring the weak nature of the day’s action to that point, the CBOE Volatility Index (VIX), widely considered the fear gauge, was up some 7%, to near 12, a one-month high. Overall, we think the market’s response to the threats from North Korea seems rather muted, in part because the consensus seems to be that tensions will eventually subside. The market’s decline then moderated for a time as the afternoon got under way, with the Dow’s loss narrowing to about 40 points. However, that proved to be a brief respite, and stocks soon faltered again, but not dramatically so. In truth, the stock market is a bit frothy, with P/E’s up to around 20 for companies with earnings. That is high, albeit not dangerously so in this low inflationary environment. Still, if traders needed some excuse to sell, the news out of North Korea and the revenue miss at Disney were reason enough. So, stocks wilted, as the afternoon progressed, and as we moved inside two hours, the Dow was near the day’s low. This downturn would then persist up until the final half hour, or so, with few periods of sustained buying to interrupt the downtrend. However, as the session neared its close, some selective buying took hold, enabling the larger-cap composites to notably pare the day’s losses. However, the comeback did not fully encompass the smaller-cap indexes, where the Russell 2000 still ended matters off more than 13 points. As for the various equity sectors, there was only a breakeven performance by the health care group, while the other nine categories posted declines of generally half a percentage point, or less. In the Morning the Dow Jones is down 100 points shortly after open, dropping under the 22’000 point mark, with Goldman Sachs contributing the most losses. The S&P 500 declined 0.6 percent, with information technology and financials leading all sectors lower. The Nasdaq composite pulled back 0.75 percent, with Apple, Alphabet, Amazon and Netflix all trading lower. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, soared more than 24 percent to trade at 13.79.

Information technology company Bechtle AG said its second-quarter earnings after tax rose 11 percent to 25.39 million euros from 22.71 million euros last year. Earnings per share grew to 1.21 euro from 1.08 euro a year ago. Earnings before interest and taxes or EBIT in the second quarter reached 36.5 million euros, an increase of 13.2 percent from 32.3 million euros last year. Quarterly revenue increased 13.7 percent to 822.2 million euros from 723.4 million euros a year ago. Looking ahead, the company’s Executive Board continues to expect significant revenue and earnings growth for the year as a whole and confirms the forecast for 2017 published in March.

Macy’s is taking its victories where it can. On Thursday, the department store chain said comparable sales fell 2.8% in the second quarter, the 10th straight quarter of decline for the retailer. That said, the results were not as bad as investors had feared. Wall Street had predicted comparable sales would drop by 3.5%, according to Consensus Metrix. (Comparable sales exclude recently opened or closed stores.) And profit by one measure came in at 48 cents a share, better than the 45 cents analysts were projecting. Total net sales fell 5.4% to $5.55 billion, slightly above expectations. Despite the not-as-bad-as-expected results, Macy’s did not raise its full year forecast, which suggests the retailer views these improvements as fragile. Investors were sufficiently spooked: Macy’s shares were down 2% in premarket trading to $22.50, about half the level of their 52-week high.

Kohl, who has a recorded success of undermining Macys, has released its and they look crispy. Kohl’s reported a narrower, 0.4 decline in same-store sales, compared to a drop of 1.8 percent during the same quarter last year. Analysts were expecting comparable sales to fall 1.5 percent, according to FactSet. Shares of Kohl’s were recently down 9 percent on the news, after initially jumping 4 percent in premarket hours. “The traffic momentum that we saw in the combined March/April period accelerated in the second quarter,” CEO Kevin Mansell said in a statement. “Though transactions for the quarter were lower than last year, July transactions increased. … We are also excited by the sequential sales trend improvement in all our lines.” Trying to drive shoppers back to its stores, Kohl’s has been testing new initiatives, like entering a partnership with Under Armour to sell the sports retailers merchandise. Management said on Tuesday that it’s also beginning to see benefits from initiatives in place with the goals of better managing inventory and cutting costs. “Under Armour in particular continued a very strong performance and beat the sales plan across almost all categories,” Mansell said on Thursday’s earnings conference call. “We’ve gained significant share in active apparel and footwear in the first half of the year and expect that to continue in the back half based on assortment improvements and our momentum.” The company’s net income rose to $208 million, or $1.24 per share, in the second quarter, from $140 million, or 77 cents per share, a year earlier. Net sales fell 1 percent, to $4.14 billion, notably declining for the sixth straight quarter. Analysts on average were expecting Kohl’s to report an adjusted profit of $1.19 per share and revenue of $4.13 billion, according to a survey by Thomson Reuters.

 

European stocks fall amid North-Korea conflict

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The North-Korean conflict is staining the stock markets. European stocks fell sharply across the board today as investors around the world piled cash into safe-haven assets amid increasingly dangerous rhetoric between North Korea and the United States. President Trump presented a statement warning North Korea that any threats to the United States would be met with “fires and fury.” Gold and Silver are up 1,26% and 2,84%respectively.On the other hand all major European Stock Indices ,with a few exceptions such as the ATHEX, are quoting a negative net change. The DAX is no different and as such is down 1,17%, two hours before close. After a pretty slow week, the DAX opened by climbing a little and reaching the 12226 point mark 30 minutes after opening. After reaching the intraday high, the DAX went crashing and is now down 1,17%.

Following a mostly higher beginning to the trading week on Monday, Wall Street got off to a somewhat weaker start yesterday, with the Dow Jones Industrial Average, a 26-point winner on the first session of the week, moving down to a 40-point loss in early dealings. With the economic calendar light and no new political headlines of note until late in the day, the focus was again on earnings, which continue to pour in for the second quarter. To be sure, most of the nation’s larger companies have reported already. Now, we are starting to hear from some smaller names, as well as results from a few retailers, which often have July ending periods. As has been the case almost uniformly, however, the bulls didn’t stay down for long, and as we ended the first half hour of trading, the early setback was pared, although the indexes remained a bit under water. That would change in the next half hour, as the Dow would make it back into the black, with the bulls hoping for a 10th straight record close. Meantime, the big item of note on the earnings calendar was yesterday afternoon’s pending quarterly release from Dow stock Walt Disney, which is noted below. Some retailers also were on the docket, as noted above. Indeed, with respect to the latter item, the retail reports made surprisingly good reading, with better-than-expected results from both Ralph Lauren and Michael Kors Holdings helping to turn things around as the morning wound down. In fact, as we approached the noon hour in New York, all three large-cap indexes were securely in the green, with the Dow seemingly on course for a 10th straight record close, with a mid-session gain of some 50 points. All told, corporate earnings have been up some 10% for the second quarter, which is well ahead of the 6% increase that has been forecast. Little wonder stocks are strong. The good news would continue into the first part of the afternoon, affirming that when the focus is on earnings, rather than politics and even the economy, this overbought stock market has continued to do well. And yesterday, the gains extended to the S&P 400, the mid-cap benchmark and the small-cap-dominated Russell 2000. Meantime, the gains increased in the first part of the afternoon, with the Dow’s intraday uptick reaching 60 points. But that would prove to be the high water mark for stocks, and as the afternoon moved along, the sellers entered the fray. However, there was little intensity to that pullback. The mid-afternoon selloff, albeit modest, did continue into the close, with the energy and basic materials sectors leading the way lower, with an assist from health care. Few groups showed any noteworthy strength, although recently soaring Apple Inc. shares did press ahead to an all-time high of just over $161. Still, while the Dow and the S&P 500 Index both set intraday peaks, each fell back below the neutral line in the final hour of trading–especially during the closing half hour. Also, losing stocks held a plurality on winning issues on the Big Board and the NASDAQ. The late selloff, meanwhile, was driven largely, it would seem, by President Trumps statement.The weakness then accelerated somewhat into the close, with the Dow at one time dropping by some 60 points. So, when all the numbers were added up, the blue chip composite was off by 33 points; the S&P 500 Index was lower by six points; and the NASDAQ’s deficit was 13 points, as more stocks fell than gained on the session. Then, after the close, Disney chimed in with a profit beat, but a shortfall on the revenue side, causing that stock to falter in after hours trading.

Walt Disney will stop providing new movies to Netflix starting in 2019 and launch its own streaming service as the world’s biggest entertainment company tries to capture digital viewers who are dumping traditional television. Walt Disney will launch two Netflix-like streaming services, one for sports and another for films and television shows. As a reaction to these news Disney is up 0,19% and Netflix is down 2,61%, as these move could be a predecessor for further pullbacks.

Office Depot‘s profits fell on weaker sales in the second quarter, missing analysts’ estimates. Second-quarter sales declined 9 % to $2.4 billion YoY, the Boca Raton-based office supply retailer said Wednesday. Same-store sales — those open at least a year — fell 6%, Office Depot said. Retail sales were $1.1 billion for the quarter compared with $1.2 billion a year ago. Office Depot had lower traffic, transaction counts and average order value, according to its regulatory filing. It saw lower sales in most categories, including ink and toner, computer and technology products, offset in part by cleaning and break-room products. Office Depot had previously said 2017 sales would be lower due to store closures. The company said it closed 31 stores during the quarter, ending with a total of 1,408. For 2017, 75 stores are scheduled to close.

The airlines of the Lufthansa Group welcomed 13.1 million passengers on board in July 2017. This shows an increase of 16.9% YoY. The available seat kilometers were up 12.4% over the previous year, at the same time, sales increased by 12.8%. The seat load factor improved accordingly, rising 0.3 percentage points to 86.3%, compared to July 2016. In total the airlines of the Lufthansa Group carried more than 73 million passengers this year until July. The overall seat load factor reached a historical record with 80.2 percent.

Todays Economic Calendar:

1. MBA Mortgage Applications
2. Productivity and Costs
3. Wholesale Trade
4. EIA Petroleum Status Report

Michael Kors Income drops 15%, stock is up 14% pre-market.

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The summer season seems to be affecting the German DAX. After a strong start in the afternoon and a slide-off in the afternoon, the Index reverted back to its previous close being off by 0,03%. If there can be a mention of a clear winning stock, REWE the German retail group would be it, being up 1,43% from its previous close.

The same kind of holiday boredom seems to have hit the Wall Street. Following a rather eventful week on Wall Street, as one month ended and another one began, with a succession of all-time highs being set amid some mixed economic data being issued, the latest five-day span began with prices initially headed somewhat higher. On point, the old week featured confirming evidence that the economy was still pressing ahead, if irregularly. Specifically, the reports showed a solid level of manufacturing growth, a slowing rate of non-manufacturing improvement, and a surprisingly strong employment report. Given that still largely positive backdrop, it is not all that surprising that stocks have been on the ascent. After all, with solid, but not inflationary, economic growth, a cooperative and cautious Fed, and strong earnings, the market backdrop is positive enough to keep the bull alive. On the other hand, multiples are rather stretched, so the margin for error is quite small. Accordingly, although stocks continue to head higher, the gains are not easily secured. And that was the case again yesterday morning, as the initial gain was pared rather quickly. But as has been the case this year, no serious selling took place. Thus, stocks again headed higher as the morning wound down, and the afternoon began. By midday, it looked as though another record in the Dow Jones Industrial Average would be set. The major beneficiaries yesterday were the consumer staples stocks, which performed nicely on the Dow. Slightly weaker performers included the energy stocks, which eased as oil prices fell, and some basic materials names, including recently weak Mosaic. On the other hand, some tech names strengthened, as the NASDAQ, with a mid-afternoon gain of 30 points again led the way. One big tech name doing well yesterday was Apple, which pushed up close to another all-time high. Holding the 30-stock Dow down, with a sharp loss on the day was United Technologies. That issue fell on news that it might be going after a major merger partner in Rockwell Collins. Meanwhile, stocks stayed irregularly higher as the afternoon wound down, but stayed in a tight band throughout the afternoon. As the final bell sounded, the major averages were all in the black, with the Dow’s 26-point gain securing that composite’s ninth straight record close. A four-point advance by the S&P 500 Index and a 32-point surge by the NASDAQ rounded out the session. Going forward, we will get inflation data later in the week along with earnings reports from some of the nation’s retail chains.

Michael Kors said Tuesday that its net income attributable to the company dropped 15 percent to $125.5 million, or 80 cents per share, from $147.1 million, or 83 cents a share, a year ago. Last year’s figure included one-time costs related to the acquisition of a Greater China licensee. Excluding that charge, Kors had earned 90 cents a share. While its profits fell, Tuesday’s results outpaced both the company’s and analysts’ expectations. According to Thomson Reuters, analysts on average were predicting Kors would earn 62 cents per share. That was also the midpoint of the company’s own forecast range. Total revenue for the first quarter came in at $952.4 million, again topping analysts’ estimates for sales of $918.6 million, according to Thomson Reuters. But this was another drop — by 3.6 percent — from last year. The drop in revenue wasn’t a surprise, Saunders commented, but it’s more of a “necessary evil” as Kors gets out of retailers that no longer fit the brand’s fresh strategy. “Reducing ubiquity comes with a price attached.” Michael Kors’ same-store sales dropped 5.9 percent during the period, coming in better than expected. Analysts surveyed by FactSet had predicted a decline of 9 percent. Shares of Michael Kors climbed more than 14 percent higher on the news in premarket hours.

The VW brand said it would offer buyers trading in an old diesel a discount on cars meeting the latest Euro 6 emissions standard, ranging from €2,000 to 10,000€ on its compact cars. And the carmaker proposed an additional discount of between 1,000€ and 2,380€ for those buying more environmentally friendly hybrid, all-electric or natural-gas-powered vehicles. VW was “acknowledging its share of responsibility for climate- and health-friendly mobility on German streets,” it said in a statement.

Ralph Lauren Corp reported better-than-expected quarterly profit and sales as the luxury apparel maker kept a tight leash on discounting and inventory, sending its shares up 5 percent in premarket trading. Ralph Lauren, like other U.S. apparel chains, has been struggling with weak sales due to sluggish spending on clothing and accessories and fierce competition from Amazon.com and fast-fashion retailers.  In a bid to turn its business around, the company has been pulling back inventory from wholesale partners, reducing sales in the off-price channel, engaging in fewer promotional periods, shuttering stores and exiting underperforming brands.  Ralph Lauren’s adjusted gross margins rose 210 basis points to 63.2 percent in the first quarter ended July 1, helped by a double-digit decline in costs.  The company also lowered its inventory levels by 31 percent from a year earlier.  The company’s net income was $59.5 million, or 72 cents per share, in the first quarter ended July 1, compared with a loss of $22.3 million, or 27 cents per share, a year earlier. Excluding items, the company earned $1.11 per share, while sales fell 13.2 percent to $1.35 billion in the quarter. Analysts on average were expecting adjusted earnings of 94 cents per share and revenue of $1.34 billion, according to Thomson Reuters I/B/E/S.

Todays Economic Calendar:

1. NFIB Small Business Optimism Index
2. Redbook
3. Jolts

 

Dow breaks the 22’000 mark

The German DAX was able to profit from the great reports released by the Labor Department. The reports were a catalyst for a weaker EURUSD which fueled investments in the German Index. 2 hours before close the DAX is up 0,75% at the 12247 points mark. The German Index was able to make a 100 point jump thanks to the big jump in Daimler. Daimler was able to increase sales of cars by 12,1 in July.

As per recent sessions, the chief influences were second-quarter earnings. And as before, the profit tide was strong and supportive, although there were some outliers among the companies issuing their releases, including MetLife, Inc., the giant insurer. That stock fell back some 3% after posting results on Wednesday. Overall, though, the reporting season has been a good one, with some three-quarters of the companies in the S&P 500 exceeding their bottom-line consensus views. That is helping to counter the choppy economic news we have been seeing on occasion. On this count, the Institute for Supply Management reported that its non-manufacturing survey had slowed down in July, registering a well-below consensus expansion rate of 53.9. Expectations had been for a tally of 57.0. In June, this survey had come in at 57.4. Breaking this report down, we see that July’s results were headlined by slower rates of growth in new orders, employment, supplier deliveries, backlogs, and exports. One category, pricing, rose strongly in July, however, as it had in the companion manufacturing survey released on Tuesday. Still, this report, disappointing as it was, didn’t shake Wall Street, as the initial pause in the Dow’s rally was brief. So, as we moved into late morning, that composite strengthened a bit further, although the other indexes remained under water. As we moved into the first part of the afternoon, the market steadied, but the Dow again started to move in and out of the black. The other indexes retained their losses, as selective profit taking persisted. As before, most of the 10 leading equity sectors were lower, but just marginally so, while losing issues held a modest lead over gaining stocks on both the Big Board and the NASDAQ. Things changed little as we moved into and through the latter stages of the afternoon, as most investors’ eyes were focused on the just-released Labor Department report on non-farm payrolls and the unemployment rate (see below). That posting can be a game changer if there is a major departure from expectations. That said, the Dow did firm somewhat for a time, before weakening again into the close. So, when the final tallies were in, we saw that this index had set another record high, while rising a modest 10 points on the day. Losses were spread across the other large and small composites, however.

Royal Bank of Scotland swung to a profit in the second quarter as the taxpayer-owned lender reduced charges for past misdeeds. RBS, bailed out by the British government during the 2008 financial crisis, said Friday that net income totaled 680 million pounds ($894 million) after a loss of 1.08 billion pounds in the same period last year .Adjusted operating profit, which excludes litigation and restructuring costs, more than doubled to 1.69 billion pounds as RBS increased lending, cut spending and reduced the amount of money it set aside for bad loans. “We see the first six months of this year as proof of the investment case for this bank: our path to sustainable profitability is becoming clearer and closer and we have resolved some of the most significant issues this bank faced,” CEO Ross McEwan said in a statement. RBS also said its NatWest Markets unit has carried out contingency planning for Britain’s looming departure from the European Union by ensuring that the bank’s license ithe Netherlands is valid. Depending on the outcome of Britain’s negotiations with the EU, the bank may need a beachhead in Europe to continue operations on the continent.

As to the employment report, the Labor Department has reported that the nation had added 209,000 positions in July; expectations had been for a gain of 180,000. At the same time, the unemployment rate came in at 4.3%; the consensus had been for a 4.3% rate. In June, the jobless rate had been 4.4%. This ties the low rate since the recession in 2007-2009. Also, job gains for May were reduced from 152,000 to 145,000; for June, though, they were revised up from 222,000 to 231,000. Importantly, and the best feature of this report was the fact that average hourly wages rose by nine cents, or above expectations in July.

This report, while better than forecast, still wasn’t strong enough, with a labor-force participation rate of 62.9%, to push the Federal Reserve to be more aggressive in raising interest rates. At most, we see just one additional interest rate increase this year, with that uptick unlikely to come before December. As for the stock market reaction, the U.S. equity futures, up modestly before the report was released, strengthened a little further in the moments following the issuance. Treasuries, though, weakened, with yields rising somewhat on the better-than-expected data.

 

Tesla losses smaller than expected

After a big earnings-flood the German Index started by opening with a loss at 12140 points. The DAX documented a downwards movement and nearly fell under the 12100 points mark and was able to recover in the afternoon. 1 hour before close the Dax is trading at 12145 points cumulating a loss of 0,28%. The big winner of the day is Commerzbank which is up 2%.

Following another record-breaking performance on Tuesday, and an after-the-close earnings beat by Apple that day, it was widely expected that the equity market would start the middle session of this five-day span with formidable gains. And, indeed, that is just what transpired, as the Dow Jones Industrial Average broke through the psychologically important 22,000 barrier during the first minutes of trading yesterday morning. Not surprisingly, the early charge was led by a nine-point gain in the shares of Apple. But this is just one stock, and when that increase was not followed by a broader rally, the market wilted. In fact, as we passed the first hour of trading, the S&P 500, the NASDAQ, the S&P Mid-Cap 400, and the small-cap Russell 2000 all had moved into the red, with the Dow, the lone remaining winner. But even that upturn had eased notably from an early 70-point plus advance to one of fewer than 30 points. Profit taking was the main culprit, it would seem, as the economic and political tidings were rather sparse and not unwelcome. The stock market then stayed range bound for several hours during the middle of the day, with the Dow generally holding to about a 40-point advance, while the other indexes remained under water. The Dow, heavily influenced by Apple stock, which remained some 5% higher on the day, continued to hold above the 22,000 mark. Apple shares were heavily influenced both by the latest quarterly results and also the upcoming iPhone cycle 8, which is expected to begin this fall. Meanwhile, it took just 107 days for the Dow to go from 21,000 to 22,000. The biggest contributor to this additional surge has been Boeing, the aerospace and defense giant. In other news, private U.S. companies added 178,000 jobs last month, a tad below the consensus forecast of 185,000 jobs. Returning to the stock market, the Dow strayed modestly above 22,000 as the afternoon progressed. The recent batch of economic reports, albeit stronger, in the main, seem insufficiently formidable to encourage the Federal Reserve to more aggressively step on the monetary brakes. The pending jobs and non-manufacturing issuances would seem to fall into that category. Current thoughts on the Fed suggest that the bank will next raise interest rates in December, making it three such increases this year. We now would expect a similar level of tightening in 2018, assuming economic growth does not slacken. The Dow held its ground into the close, while the NASDAQ, once down more than 40 points, came all the way back, even going into the black briefly in the final hour. The S&P Mid-Cap and the smaller-cap Russell 2000, however, stayed well into minus territory, as sector rotation evolved notably. At the close, some late buying lifted the Dow comfortably above 22,000. In all, that index ended the day’s action at 22,016; while the S&P 500 and the NASDAQ were, respectively, just above and below the breakeven lines, and, as noted, the S&P Mid-Cap and Russell were off on the day, while losing issues were out ahead of gaining stocks on the NSYE.

On Wednesday Tesla reported a smaller quarterly loss than expected and said production of its Model 3 sedan remained on track to hit targets. The electric-car maker reported a loss of $1.33 per adjusted share on revenue of $2.79 billion. Analysts had forecast Tesla lost $1.88 per share and earned $2.51 billion in revenue, according to Bloomberg. In the earnings letter, Tesla said it averaged over 1,800 net Model 3 reservations daily and was confident it could produce just over 1,500 vehicles in the third quarter. Deliveries to non-Tesla employees would start in the fourth quarter, Tesla said. Tesla had said it planned to produce 500,000 vehicles annually by 2018 and would ramp up costs to meet that goal. The company burned through $1.16 billion in cash in the second quarter, up from $144 million a year before.

BMW, the German carmaker, posted stronger than expected profits after sales of its latest models in Europe and Asia helped offset a decline in the US. The Munich-based maker of luxury cars said operating margins at its automobiles unit rose to 9.7 per cent in the second quarter, from 9.5 per cent last year, near the upper end of its 8 to 10 per cent target. The figure compares with 9.2 per cent at Daimler’s Mercedes unit and 9.1 per cent at Audi, the luxury unit of Volkswagen. The improved margins helped BMW post a 9.2 per cent climb in profit before tax to €3.06bn in the quarter as revenues climbed 3.1 per cent to €25.8bn. After earnings report BMW is up 0,95%.

Continental’s second-quarter adjusted operating profit fell 10 percent as the auto parts maker raised spending on production and R&D capacities, but the company slightly lifted its sales outlook on growing demand for electric-car components. Adjusted earnings before interest and tax (EBIT) declined to 1.16 billion euros ($1.37 billion), near the low-end forecast of 1.15 billion in a Reuters poll of analysts. But the world’s second-largest automotive supplier raised its full-year sales guidance by 500 million euros to more than 44 billion euros and stood by its profit forecast which includes an adjusted EBIT margin target of 10.5 percent. Continental, which makes driver-assistance technology, fuel-injection systems and vehicle tires, said it expects about 450 million euros in raw material cost headwinds until the end of the year, 50 million euros less than previously forecast.