After Hours Summary: Sec Yellen appears on CNBC to discuss inflation, the economy, and markets; CCJ -10.9% falls on deal to acquire Westinghouse; LOCO +14.1% pops on special dividendAfter Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: ETWO +2.8%
Companies trading higher in after hours in reaction to news: LOCO +14.1% (declares $1.50/sh special div; also authorizes new $20 mln share repurchase program), AMRN +5.8% (issues statement in response to Sarissa), UVE +4.9% (provides update on Hurricane Ian impact), GATO +3.9% (increases production guidance and lowers cost guidance for 2022), ANGI +3.4% (reports Sept performance metrics), AHT +1.8% (reports preliminary Q3 RevPAR of $127), ESTE +1% (purchases 3 mln shares from Warburg Pincus), CLOV +0.6% (receives new Star Ratings for its PPO and HMO Medicare Advantage plans), GE +0.5% (files Form 10 with SEC for planned spin-off of GE HealthCare), GM +0.4% (invests in Queensland Pacific Metals of Australia), IVZ +0.1% (reports September AUM), CTO +0.1% (files $500 mln mixed securities shelf offering), BLD +0.1% (names new COO), BEP +0.1% (CCJ and BEP form partnership to acquire Westinghouse Electric)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: None
Companies trading lower in after hours in reaction to news: CCJ -10.9% (CCJ and BEP form partnership to acquire Westinghouse Electric; also announces $650M bought deal offering; also provides Q3 operating update), RCUS -2.2% (files for 11,613,029 offering by selling shareholder), FANG -1.4% (to acquire all leasehold interest and related assets of FireBird Energy), APAM -0.9% (reports September AUM), BBAI -0.8% (CEO steps down; names former IBM exec as new CEO), DICE -0.5% (proposes $250 mln share offering), IAC -0.2% (reports Sept performance metrics), BEN -0.1% (reports September AUM)
Closing Stock Market SummaryToday's trade started on a downbeat note and ended on a downbeat note. There was some improvement in between, though, that ultimately got tempered as financial stability concerns came back to the forefront. Along the way, the S&P 500 set a new low for the year (3568.45). That low came shortly after the open, yet it stoked renewed buying interest that would carry the S&P 500 to 3,640.66 at its high for the day.
The opening selling interest stemmed from growth concerns and worries about financial stability. The latter resonated with the Bank of England (BoE) intervening again in the UK gilt market after a nasty selloff yesterday that completely undid the gains registered after the BoE announced its emergency gilt purchase operation on September 28. Today, the BoE said it is going to buy index-linked gilts from October 11 until October 14 to mitigate dysfunction in the market and prevent "fire-sale" dynamics.
Slowdown concerns came to light after the IMF cut its 2022 forecast to 2.7% from 2.9% and said the worst is yet to come. Also, reports indicated that China imposed new restrictions in some Chinese cities because of rising Covid cases.
Notwithstanding these issues, the major indices forged a rebound effort that saw broad based participation and most stocks recouping losses registered in the opening trade. That rebound effort, however, hit a wall in the afternoon.
The second leg lower today followed news of BoE Governor Andrew Bailey advising pension funds that they have three days left to rebalance, keeping in line with the BoE's prior indication that its emergency purchases of gilts would end October 14. The fact that the market would trade lower on this news implied that there was an expectation that the Bank of England would ultimately extend its timeline for purchasing gilts. Now, faced with the potential that this emergency support is going to be pulled soon, as indicated, market participants are fretting about the possibility of some type of market dislocation that could have reverberations elsewhere.
The Dow Jones Industrial Average (+0.1%) squeezed out a modest gain, outperforming from the start with the help of Amgen (AMGN 245.44, +13.29, +5.7%), which was upgraded by Morgan Stanley to Overweight from Equal-Weight. Small and mid cap stocks also outperformed as the Russell 2000 (+0.1%) and S&P Mid Cap 400 (+0.2%) logged modest gains.
For the S&P 500, only four of the 11 sectors closed in positive territory, led by real estate (+1.0%). Communication services (-1.6%) and information technology (-1.5%) sank to the bottom of the pack.
The 10-yr Treasury note yield rose six basis points to 3.94% (after hitting 4.00% overnight) and the 2-yr note yield was unchanged at 4.30%.
Energy complex futures settled the session in mixed fashion. WTI crude oil futures fell 1.9% to $89.18/bbl while natural gas futures rose 2.1% to $6.60/mmbtu.
Today's economic data was limited to the September NFIB Small Business Optimism Index, which rose to 92.1 from 91.8 in August.
Looking ahead to Wednesday, market participants will receive the weekly MBA Mortgage Application Index (prior -14.2%) at 7:00 a.m. ET. The September PPI ( consensus 0.2%; prior -0.1%) and Core PPI (consensus 0.3%; prior 0.4%) is out at 8:30 a.m. ET. The FOMC Minutes for the September meeting are out at 2:00 p.m. ET.
Dow Jones Industrial Average: -19.5% YTD
S&P Midcap 400: -20.3% YTD
S&P 500: -24.7% YTD
Russell 2000: -24.6% YTD
Nasdaq Composite: -33.4% YTD
The Bank of England’s Dilemma: Easing and Tightening at the Same Time
If and when something else goes badly wrong, central banks are likely to intervene. Can they do that while continuing to battle inflation?
The Bank of England is testing one of the most challenging problems facing central banks today: Can they ease and tighten at the same time?
On Tuesday the BOE had to intervene again in the country’s dysfunctional government bond markets, offering to buy up to £5 billion, equivalent to $5.5 billion, a day of inflation-linked bonds, just 24 hours after expanding its offer to buy conventional bonds. Inflation-linked prices rose a little in morning trading, but failed even to reverse Monday’s huge selloff.
The BOE insists its interventions are about financial stability, not monetary policy. But there is a fine line, and the instability is interfering with monetary policy. The turmoil in the bond market triggered by surprise tax cuts—since partially reversed—three weeks ago forced the BOE to delay a planned selloff of its vast holdings of government bonds that was designed to tighten monetary policy. On Tuesday, it delayed sales of corporate bonds that only began last month as another part of the monetary-policy plan.
Pressure is now growing for the BOE to extend its support of the bond markets beyond this week, when it says it will stop.
Where the Bank of England is leading, others may follow. Investors have begun to focus on the dangers of financial problems hitting elsewhere, encouraged by official warnings of the rising risks. Among other threats identified by the International Monetary Fund on Tuesday: high debt, overextended nonbank lenders, emerging-market banks, elevated house prices, weak sovereigns and hard-to-trade markets, made worse by rapidly-rising global interest rates and a strong dollar. On the plus side, the IMF says banks in developed countries are strong.
If and when something else goes badly wrong, central banks are likely to intervene. Can they do that while continuing to battle inflation?
The IMF says not only that they can, but that they must.
“To the extent possible, in a situation of financial crisis, financial instability, that should not change the commitment to lower inflation,” says Tobias Adrian, director of monetary and capital markets at the IMF. “Central banks have the ability to provide liquidity as a last resort and so in principle they can even purchase while they’re increasing interest rates.”
History isn’t supportive. In the past when financial crises hit, central banks ended their rate rises. It is such a regular pattern that the Federal Reserve policy is often described as “tightening until something breaks.”
Sometimes this is a serious problem for monetary policy, but often it isn’t, because financial crises typically weaken the economy and reduce inflation. One example: The turmoil in government bonds in the U.K. has already pushed up mortgage rates dramatically, which will leave homeowners with less to spend on other things, potentially helping to lower double-digit inflation.
Financial crises can conflict with monetary policy when inflation keeps rising anyway, but the central bank feels forced to stop tightening policy because the financial system is falling apart. In 1998, the implosion of hedge fund Long-Term Capital Management prompted the Fed to slash interest rates, which turned out to be unnecessary and helped inflate the dot-com bubble. In Britain, the 1973-1975 secondary banking crisis pushed the BOE to stay its hand on rates while rescuing the sector, even as inflation soared above 25% in 1975.
Many investors are skeptical that central banks can avoid falling into the same trap again. Yet, the BOE insists that its decisions about monetary policy are distinct from decisions to step in as market maker of last resort for government bonds. If that’s true, it might show up in even bigger interest-rate rises than previously planned to offset the easing effect of the financial stability interventions—traders are currently pricing a monster rate rise of above 1 percentage point at the next meeting, in early November.
I think the BOE will be reluctant to risk its tattered anti-inflation credentials at a time when international investors have been questioning the credibility of Britain’s institutions. Raising rates and buying bonds at the same time seems entirely plausible, if still weird.
Sometimes, though, it is the higher level of interest rates themselves that cause the problem.
In the U.K., it was the sudden jump in very long dated bond yields, not interest rates, that triggered margin calls at leveraged pension plans, threatening a self-fulfilling cycle of forced selling. But if higher overnight rates lead to higher long-bond yields, they risk restarting the cycle.
Luckily, higher short-term rates also raise the prospect of a weaker economy and lower inflation, which ought to push down long-dated yields. For this to happen, investors have to believe that the BOE can give priority to fighting inflation even after a recession hits, and they might doubt its ability to withstand political pressure.
The European Central Bank will face a similar issue if investors lose confidence in the new hard-right Italian government. The ECB has created a plan to allow it to buy Italian bonds, but if it keeps raising interest rates, Italy’s borrowing costs will keep going up, worsening the fundamental problem that worries investors. If a rescue is needed, the ECB might find it difficult to keep its foot on the monetary pedal.
Top Fed policy makers have been discussing the blowback to the U.S. of possible financial troubles elsewhere. But none have suggested they could act pre-emptively to head off a financial crisis created by tighter monetary policy. This is probably right, since they could never be sure serious problems were on the way, and failed to spot in advance major problems even in their core market of overnight dollar borrowing.
As the fastest rises in interest rates in a generation continue to batter global markets, investors face a triple uncertainty. Where will the next financial crisis appear? When it does, how long will it take for central banks to step in? And, the biggie, will the threat of financial meltdowns distract the Fed and other central banks from the inflation fight?
None have easy answers. But there’s a decent chance that other central banks will end up forced to follow the BOE and tighten policy even while offering bailouts elsewhere.
French Luxury Groups to Highlight Sector’s Resilience as Demand Holds up For Now
French luxury groups LVMH , Gucci-owner Kering and Hermes are expected to post double-digit third-quarter sales growth as demand for high-end fashion from tourists and shoppers revamping post-pandemic wardrobes remains strong.
The sector has sailed above stock market turbulence, lockdowns in China and soaring inflation in recent months, buoyed by its wealthy customer base even as retailers of cheaper clothing and accessories warn of weakening demand.
After cheering a solid quarter, investors will be looking for any signs that appetite for leading fashion labels could also ease from the post-lockdown frenzy that has seen business boom in recent months.
“Resilience will be tested starting in Q4 this year,” said Aurelie Husson-Dumoutier of HSBC.
Slowing economic growth and drops in consumer confidence and US credit card spending paint a “cautious” picture of the consumer in the run-up to the festive season, Thomas Chauvet of Citi warned.
Company strategies for increasing prices, which will likely have helped boost sales and are aimed at protecting margins, will also be scrutinised.
Luxury labels including the industry’s largest, LVMH’s Louis Vuitton, have historically raised prices at around 2.5 times the rate of inflation, according to UBS, which forecasts further price hikes in at least the mid-single digits next year, citing a global inflation forecast of around 4 percent.
Without citing a corresponding inflation figure, UBS estimates prices for the sector increased by 4.6 percent on average this year, through July.
Business in China is expected to have bounced back considerably from the second quarter as COVID lockdown disruption eased, but uncertainty remains.
“China is where companies see high volatility, which makes it difficult to extrapolate trends month-on-month,” noted Luca Solca of Bernstein.
UBS’ Zuzanna Pusz, who ranks among the top 8 analysts covering LVMH in terms of estimate accuracy according to Refinitiv data, forecasts the group will post organic sales growth for the quarter of 21 percent, with a boost from foreign exchange rates. A Visible Alpha consensus cited by the bank points to 13 percent organic sales growth.
Pusz expects 13 percent organic sales growth for Kering and 15 percent growth at constant rates from Hermes, over the period.
LVMH posts third-quarter revenue on Oct. 11, while Kering and Hermes announce results on Oct. 20.
European wind industry ‘struggling’ with rising costs
Manufacturers cut jobs as supply chain woes and higher prices for key materials bite
European wind turbine manufacturers are financially struggling and cutting jobs, putting them at risk of losing market share to Chinese competitors, despite the energy crisis, major industry players have warned.
Turbine makers General Electric Renewables and Siemens Gamesa both announced job cuts in recent weeks, and European manufacturers were “all financially struggling,” Jon Lezamiz Cortázar, global head of public affairs at Siemens, told the Financial Times.
“Everything is getting much more expensive in an already stretched wind industry supply chain,” he said. If the situation did not improve, “it may happen that the European Green Deal is installed with non-European technology”.
The Global Wind Energy Council said it was likely to downgrade its forecasts for the amount of new capacity added this year globally from around 101 gigawatts to 94-95 gigawatts. This amounts to almost no growth since last year, with 2021 being a peak year for offshore wind installation.
The challenging picture comes even as European leaders scramble to boost their supply of domestically produced renewable energy in the context of a global energy crisis fuelled by Russia’s invasion of Ukraine. The EU wants to increase its target for renewable energy from 32 per cent of total power production to 45 per cent by 2030.
“Companies are laying people off, at a time when the supply chain should be ramping up,” said Ben Backwell, chief executive of the Global Wind Energy Council.
Inflation and the rising cost of key materials, such as steel and copper, have pushed up the cost of making turbines. But long lead times and turbine prices that are locked in by customers years in advance have made it difficult for manufacturers to pass on higher costs. Many have now started raising prices and renegotiating contracts with customers.
The industry is also grappling with supply chain delays, already strained by the lockdowns during the pandemic and exacerbated since the war in Ukraine. That put companies at risk of having to pay so-called “liquidated damages” to customers, or compensation payments related to project delays, analysts said.
Vestas Wind global head of marketing and public affairs, Morten Dyrholm, said the current situation amounted to “a pretty critical period in time for the supply chain”.
Shares in Vestas, turbine maker Nordex and offshore wind farm developer Orsted have all been sliding since their peaks in early 2021.
Vestas missed analyst expectations for its second-quarter results, posting an underlying operating loss of €182mn, while Siemens reported its first quarterly loss in nearly 12 years.
Morningstar analyst Matthew Donen said western companies were at risk of losing out to Chinese competitors, many of which were more financially resilient and could build turbines for less.
“The threat of Chinese competition is increasing,” he said. “They can match now the western turbine manufacturers, which hadn’t been the case in the past.”
Backwell said Chinese manufacturers were “stepping in” in emerging markets, but could also move more into Europe. They had benefited from years of policy certainty at home, while western companies faced “stop-start” policymaking, and a large domestic steel industry, he said.
Western manufacturers said European policymakers must do more to protect the domestic wind industry by reforming the approval process to make it quicker to obtain permission for new projects.
“Supply chains would be in much better shape if there were enough projects to go round,” but they can take up to 10 years to be approved, said Dyrholm.
Wind auctions — during which governments assess offers for the generation of electricity and sign power purchasing agreements with bidders — should also take factors beyond price into account, such as whether turbine parts are recyclable, company executives said.
On Tuesday, executives from major renewables companies including SSE, Vestas and Siemens Gamesa wrote an open letter to G20 nations asking them to do more to accelerate the deployment of wind energy worldwide.
“At the current pace of growth, we are only on-track to reach less than two-thirds of the global wind capacity required by 2030 for a net zero and Paris-compliant pathway,” the executives warned.
Ramping up new wind power would require countries to raise their renewable energy targets, make the approval process easier and invest in expanding electricity grids, they said.