After Hours Summary: CXM +3% rises while PL -11% lags on earnings/guidanceAfter Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: CXM +2.6%
Companies trading higher in after hours in reaction to news: MOR +15.1% (entered into equity participation and license agreements for felzartamab and MOR210), ZEN +4.1% (entered into settlement talks with Jana Partners, according to WSJ), SMFR +2% (announced departure of CFO Isaac Ro), MRNA +1.5% (FDA advisory committee voted to recommend two-dose COVID-19 for children aged 6-17 years), VTNR +1.4% (disclosed resignation of COO)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: PL -10.5% (also announced expansion of strategic relationship with Bayer [BAYRY])
Companies trading lower in after hours in reaction to news: MEG -5% (disclosed recent ransomware attack), OLN -2.1% (provided operations update and announced temporary curtailment of production of certain products)
Apple scores deal for Major League Soccer streaming rights worth $2.5bn
Tech group teams up with North American football league amid race to secure sports content for digital platform
Apple and Major League Soccer have agreed to a broadcasting rights package worth $2.5bn over 10 years, according to people familiar with the matter, a big investment in live sports by the tech group that will put the North American football league’s matches on its streaming service.
Beginning next year, all live fixtures will air on a dedicated MLS streaming service available on the Apple TV app. The price of the subscription for consumers was not immediately available.
MLS commissioner Don Garber declined to comment on the dollar value of the agreement. He said it was structured as a “minimum guarantee” with Apple to form a streaming service, with the potential for additional revenue sharing and sale of some traditional television rights.
Moving the league’s live broadcasts to streaming will allow MLS to expand its appeal overseas as opposed to “being the North American version of the global game”, Garber said.
The deal between Apple and MLS is the second live sports rights deal for the tech group and its first comprehensive rights package with a league. Earlier this year, it struck an agreement with Major League Baseball to broadcast Friday night games, joining Silicon Valley peers like Amazon in taking on traditional broadcasters for the rights to live sports.
“Sports clearly represents the next battleground for ownership of the living room among the big tech companies”, said Paolo Pescatore, tech and media analyst for PP Foresight. “This is a statement of intent by Apple. While it’s late to the party, it must now be considered a serious player for sports rights in key markets for its products.”
Eddy Cue, Apple’s senior vice-president of services, said centralising all MLS matches on its platform would eliminate friction for fans who typically have to toggle between different networks or platforms to watch. Each of the big North American professional leagues, including MLS, split their broadcast rights among a variety of networks, a process that help owners extract the highest price but produces confusion for fans and occasionally results in viewing blackouts.
“No fragmentation, no frustration — just the flexibility to sign up for one convenient service that gives you everything MLS,” he said.
The Apple and MLS deal follows another blockbuster media rights package for the Indian Premier League, which this week parcelled out broadcast and streaming privileges to Disney and Viacom18, respectively, for nearly $6bn.
The IPL and MLS media deals amount to a mixed verdict for incumbent Disney, which holds streaming rights for both leagues under their current terms.
Figures released by ESPN in 2021 showed viewership for MLS matches on ABC and ESPN rose 39 per cent from 2019, its last pre-pandemic season, to an average of 384,000 viewers.
A person familiar with the matter described the negotiations for the next round of MLS rights as “a competitive process” but that ESPN, Disney’s sports platform, feels comfortable with its other football offerings, including Germany’s Bundesliga, Spain’s La Liga and England’s FA Cup.
A spokesman for ESPN said “we continue to have a great relationship with MLS and are proud of the role we’ve played in helping grow the league and the sport in the US”.
ECB has ‘no limits’ in defence of euro from debt turmoil, says executive
Schnabel stresses bank’s commitment to countering any ‘disorderly’ jump in borrowing costs
The European Central Bank has “no limits” in its commitment to defend the euro, board member Isabel Schnabel said on Tuesday, stressing its willingness to launch a new instrument to counter any “disorderly” jump in the borrowing costs of weaker eurozone economies.
The comments by Schnabel in a speech to students of the Panthéon-Sorbonne University in Paris were designed to reassure investors that the ECB is determined to prevent a recent sell-off in the bonds of certain countries from triggering another debt crisis in the region.
Borrowing costs for heavily indebted countries such as Italy and Spain have shot to eight-year highs since the ECB last week signalled an end to its ultra-loose monetary policy of the past decade by announcing plans to stop buying more bonds and to start raising interest rates.
A lack of detail from the ECB over when or how it would intervene to tackle fragmentation in financial markets has worried investors and led to a sell-off in bond markets that hit the debt of more vulnerable southern European countries harder than their northern neighbours.
“Our commitment is stronger than any specific instrument,” said Schnabel, the ECB executive who oversees market operations and is one of the most influential voices on its board. “Our commitment to the euro is our anti-fragmentation tool. This commitment has no limits. And our track record of stepping in when needed backs up this commitment.”
Schnabel indicated the ECB was getting closer to the point where it would intervene in bond markets, saying “some borrowers have seen significantly larger changes in financing conditions than others since the start of the year”.
“Such changes in financing conditions may constitute an impairment in the transmission of monetary policy that requires close monitoring,” she said.
However, she gave little new detail on what the ECB was considering in response. “We will react to new emergencies with existing and potentially new tools,” she said. “These tools might again look different, with different conditions, duration and safeguards to remain firmly within our mandate.”
Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, wrote on Twitter that Schnabel had sent a “strong signal” and he guessed “a new ECB backstop is coming”. But Oliver Rakau, an economist at Oxford Economics, wrote on Twitter that a lack of detail in Schnabel’s speech meant “markets won’t care much”.
Even without a new scheme, analysts estimate the ECB already has an additional €200bn to spend on the purchasing of stressed government debt from bringing forward some reinvestments of maturing sovereign assets by up to a year. Schnabel reiterated that such reinvestments “can be adjusted flexibly across time, asset classes and jurisdictions”.
The gap between Italian and German borrowing costs — the so-called spread — has widened to 2.4 percentage points, double last year’s level and up from around 2 percentage points before last week’s ECB meeting.
Further “fragmentation” in member states’ borrowing costs would mark a return to the days before the ECB began buying bonds in 2014 — a time when the threat of a debt crisis in weaker economies risked triggering a break-up of the currency area.
But most ECB governing council members think there is no point announcing a new instrument to tackle this risk until it materialises, because it could be blocked by the ECB’s own lawyers for not being “proportionate” or attract a challenge in Germany’s constitutional court.
“How we ultimately react to risks of fragmentation will firmly depend on the situation we are facing,” Schnabel said, adding: “This commitment can be put into practice within a very short period of time if we conclude that policy transmission is at risk.”
However, she said the chances of another debt crisis had been reduced by governments extending the maturity of their bonds to lock in low rates.
The public finances of weaker countries have also been boosted by €800bn of grants and cheap loans under the EU’s recovery plan, she said, adding that the ECB expects the impact of high inflation on nominal growth to keep reducing debt as a proportion of gross domestic product for all eurozone countries.
Closing Stock Market SummaryThe stock market tossed and turned today, but it was really the interest rate markets that called the shots -- and those markets were more foe than friend.
The 2-yr note yield settled the session up 16 basis points at 3.43% and the 10-yr note yield settled the session up 12 basis points at 3.48%. Meanwhile, the fed funds futures market upped its rate-hike game, pricing in the probability of more aggressive policy moves by the FOMC at upcoming meetings, including the June meeting which will culminate with the release of a new policy directive and updated economic and interest rate projections on Wednesday.
Briefly, the CME's Fed Watch Tool shows a 96.6% probability of a 75-basis point rate hike on Wednesday (up from 3.9% a week ago), a 95.8% probability of another 75-basis point rate hike in July (up from 0.4% a week ago), and a 97.0% probability of another 50-basis point rate hike in September.
If this course is followed by the FOMC, the target range for the fed funds rate will be 2.75-3.00% after the September meeting. A week ago, the fed funds futures market assigned only a 0.2% probability to the target range being that high after the September meeting.
Market participants looked at the rapid pace of change in Treasury yields and fed funds futures with some trepidation, worrying that the higher rates will lead to a marked slowdown in economic growth -- or possibly a recession -- that will lead to a marked downturn in earnings growth.
Consequently, rebound efforts today lacked conviction. The major indices all hit new 52-week lows at one point today. The S&P 500 for its part flirted with a break of the 3700 mark. It stopped short at 3705.68 where it found some buying interest that repaired a small part of today's damage.
Things would have been worse if not for the outperformance of the information technology sector (+0.6%), which is the market's most heavily-weighted sector. It was helped by some pleasing earnings results and guidance from Oracle (ORCL 70.78, +6.73, +10.5%) and relative strength in the semiconductor stocks. The Philadelphia Semiconductor Index gained 0.6%.
The only other sector that eked out a win was the energy sector (+0.1%), but that was a hollow victory considering it was up as much as 3.2% earlier in the day.
The energy sector pulled back intraday along with oil prices ($118.50, -2.43, -2.0%), which had edged above $123.00/bbl earlier in the session. Meanwhile, natural gas futures ($7.29/mmbtu, -1.32, -15.3%) were down big all day, getting squeezed by excess supply concerns following a report from Freeport LNG that a fire last week at a Texas facility interrupted the transfer of LNG from storage tanks to dock facilities. Freeport LNG does not expect the plant to return to full operations until late 2022.
Separately, the Dow Jones Transportation Average (+2.1%) had a standout day, not so much because of the drop in oil prices, but because of a standout performance by FedEx (FDX 229.95, +28.97, +14.4%), which rallied after announcing three, new independent directors and a 53% increase in its quarterly dividend to $1.15 per common share.
The main laggards of note today were the utilities (-2.6%), consumer staples (-1.3%), health care (-1.1%), real estate (-1.0%), and financial (-0.9%) sectors. These sectors sport some of the highest dividend yields, but with yields rising as sharply as they have in risk-free Treasuries, they presumably saw some defections from income-oriented investors.
The May PPI report was released before the open. It was not as bad as feared, but it still wasn't good with total PPI up 10.8% year-over-year and core PPI, which excludes food and energy, up 8.3%.
Reviewing today's economic data:
- The May NFIB Small Business Optimism Index checked in at 93.1 versus 93.2 in April.
- The PPI for final demand increased 0.8% month-over-month in May (consensus 0.8%) following a downwardly revised 0.2% increase (from 0.5%) in April. The index for final demand, less foods and energy, rose 0.5% ( consensus 0.6%) following a downwardly revised 0.2% increase (from 0.4%) in April. On a year-over-year basis, the PPI for final demand was up 10.8%, versus 10.9% in April, and the index for final demand, less foods and energy, was up 8.3%, versus 8.6% in April.
- The key takeaway from the report is the year-over-year moderation seen for both PPI for final demand and the index for final demand, less foods and energy. That is supportive of the peak inflation narrative, although the shadow of the disappointing May CPI report, and the bump seen in energy costs this month, should mitigate some of the enthusiasm for today's report.
Looking ahead, market participants will receive the weekly mortgage applications report (7:00 a.m. ET), the May Retail Sales Report (8:30 ET), May Import-Export Price Index (8:30 a.m. ET), June Empire State Manufacturing Survey (8:30 a.m. ET), April Business Inventories (10:00 a.m. ET), June NAHB Housing Market Index (10:00 a.m. ET), FOMC Rate Decision (2:00 p.m. ET), and April Net Long-Term TIC Flows (4:00 p.m. ET) on Wednesday. In addition, Fed Chair Powell will hold his press conference at 2:30 p.m. ET.
- Dow Jones Industrial Average: -16.5% YTD
- S&P 400: -19.6% YTD
- S&P 500: -21.6% YTD
- Russell 2000: -23.9% YTD
- Nasdaq Composite: -30.8% YTD
Bond Slide Deepens, With No End in Sight
10-year Treasury yield settles at highest level since 2011 amid uncertainty over how high the Fed will have to raise rates
The sharp investor retreat from government bonds in recent days reflects deepening gloom over the outlook for markets in the wake of Friday’s surprisingly hot inflation report.
Rocked by data showing a broadening increase in consumer prices, bonds slid sharply on Friday and then again Monday and Tuesday, pushing yields on U.S. Treasurys—which rise when prices fall—to their highest levels in more than a decade.
Heading into Friday, there was widespread hope on Wall Street that bond yields had finally reached the peak of this year’s climb, having done enough to tighten financial conditions that consumer demand and inflation could gradually return to more sustainable levels. Now, many say they have little idea how high the Federal Reserve will have to raise short-term interest rates to wrest control of prices, which are currently rising at a rate several times higher than the central bank’s 2% annual target.
“There is definitely an element of capitulation,” in the bond market’s move, said Thomas Simons, senior vice president and money-market economist in the Fixed Income Group at Jefferies LLC. “There is a general acknowledgment that Friday’s data was a profound message.”
Yields on Treasurys largely reflect investors’ expectations for short-term rates over the life of a bond, and they in turn set a floor on borrowing costs across the economy. On Tuesday, the yield on the benchmark 10-year U.S. Treasury note settled at 3.482%, its highest close since April 2011.
The yield has climbed 0.513 percentage point over the last five trading sessions, the largest gain over that span since Oct. 2008.
The two-year yield, more sensitive to the near-term outlook for monetary policy, settled at 3.435%, the highest since November 2017 and up from 2.815% Thursday.
Shorter-term yields in particular got a boost late Monday after The Wall Street Journal reported that the Fed could raise short-term rates by 0.75 percentage point at is policy meeting that ends Wednesday—an aggressive step it hasn’t taken since 1994 and an escalation from the half-a-percentage point increase it delivered at its May 3-4 meeting.
The potential shift in policy followed Friday’s consumer-price-index data, which could hardly have been more dispiriting, according to investors and analysts. Not only did headline inflation reach a four-decade high at a point when many investors had expected it to be coming down, but there were substantial price increases across the board, in everything from housing costs to children’s footwear.
Investors, therefore, couldn’t blame the report on any one category, as some had done the previous month when surging airline costs played a large role in driving up a closely watched measure of inflation that excludes volatile food and energy costs.
Delivering another blow to Treasurys, data released just an hour and a half after the CPI report showed consumers’ long-term inflation expectations rising to their highest level since 2008. That hurt the argument that anchored inflation expectations would help keep a lid on actual inflation.
“The reality is that we’re not seeing sufficient signs that things are slowing down,” said Daniela Mardarovici, co-head of multisector fixed income at Macquarie Asset Management, referring to the level of economic activity and inflation.
The result, she added, is that investors have had to increase their estimate for the so-called neutral level of interest rates that neither stimulates nor slows economic growth. That, in turn, has pushed up both short- and longer-term U.S. Treasury yields. The two-year yield briefly surpassed the 10-year yield in after-hours trading Monday, sending what is often considered to be a warning sign about the economic outlook.
Treasury yields play a critical role in both the economy and financial markets. Their rise this year has helped push the average 30-year fixed mortgage rate above 5% for the first time in more than a decade. They have also dragged down stock prices, increasing the opportunity cost in foregoing bonds for equities and delivering a particularly heavy blow to relatively unprofitable companies valued for their longer-term earnings potential.
Bonds themselves have suffered heavy losses this year as a result of price declines, with major bond indexes easily on pace for their worst year on record.
As of Monday, the Bloomberg U.S. Aggregate bond index—largely U.S. Treasurys, highly rated corporate bonds and mortgage-backed securities—had returned minus 12% this year. Its second-worst performance over the same period was minus 2.9% in 1984, in records going back to 1976.
Many investors and analysts still believe that the worst is likely over for bonds, pointing to slowing housing demand and plunging consumer confidence as signs that higher interest rates are already having their intended effect of cooling the economy.
Still, others warn that the poor performance of bonds could even create its own negative momentum.
“Perhaps the biggest risk for higher rates is that investors just decide to sell bonds,” said Donald Ellenberger, a senior fixed-income portfolio manager at Federated Hermes. “If investors decide that bonds aren’t doing a very good job hedging stocks and still aren’t paying much income, we could see rates spike higher because Wall Street dealers don’t have the balance-sheet capacity or desire to warehouse bonds nobody wants.”
US Economy Has "Decent Chance" Of Avoiding Recession But Things "Could Go Bad": Bernanke
Federal Reserve officials have a “decent chance” of avoiding a recession in the United States with a “soft landing,” former Federal Reserve Chair Ben Bernanke said on Sunday.
“The U.S. economy today is a mixed bag,” Bernanke said on CNN’s “Fareed Zakaria GPS” while noting inflation levels that have reached 40-year highs.“A recession is possible. Economists are very bad at predicting recessions, but I think the Fed has a decent chance, a reasonable chance of achieving what [Fed Chair] Jay Powell calls a ‘soft-ish landing;’ either no recession or a very mild recession to bring inflation down,” he added.
Bernanke pointed to a strong labor market in the United States, saying that “with some luck, and if the supply side improves, the Fed can get inflation down without imposing the kind of costs we saw in the early ’80s.”
The former Fed chair also noted that the central bank “knows it is responsible” for inflation and will take the lead in bringing it down, citing its political support from President Joe Biden and lawmakers in Congress.
Bernanke did, however, note that “some things could go wrong” and said he was counting on the supply chain crisis to improve, adding that there is already “some evidence” that it is.
“I’m hoping and guessing that oil and food prices will at least stabilize and preferably begin to moderate,” he said, while acknowledging that “things could go bad” if the above does not go to plan and inflation persists, leading Americans to start losing confidence in the central bank.“Then the Fed might have to crack down much harder,” Bernanke said.
Bernanke’s comments come as experts have sounded the alarm on a potential full-blown recession in the United States, despite the Biden administration insisting that inflation is a “top economic priority.”
U.S. annual inflation rate surged to 8.6 percent in May, prompting Biden to tell reporters at a White House press briefing on June 10 that his administration will “continue to do everything we can to lower prices for the American people” while calling on Congress to act fast in passing legislation to cut shipping costs and prices for families for things like energy bills and prescription drugs.
Morgan Stanley projects (pdf) a 27 percent chance of a recession in the next 12 months, up from 5 percent in March, while a recent Bloomberg monthly survey of economists found that the probability of a recession over the next 12 months is 30 percent, the highest since 2020.
In contrast, Goldman Sachs economists said earlier this month that improved inflation figures and adjustments to the jobs market have reduced the risk that the Federal Reserve will have to aggressively raise interest rates to the point that it could force the country into a downturn.
Crypto Legislation Could Undermine Market Regulations, Gensler Says
SEC Chairman says recent proposal could impact broader $100 trillion capital market
WASHINGTON—Securities and Exchange Commission Chairman Gary Gensler expressed concern Tuesday that efforts in Congress to write legislation for the cryptocurrency industry could compromise regulations that govern the broader capital markets.
Asked about a bill introduced last week by Sens. Cynthia Lummis (R., Wyo.) and Kirsten Gillibrand (D., N.Y.), Mr. Gensler initially demurred, saying he would prefer to discuss the proposed legislation with the senators. But he then suggested that legislative changes targeting cryptocurrencies could have implications for stock exchanges or mutual funds.
“We don’t want to undermine the protections we have in a $100 trillion capital market,” Mr. Gensler said at The Wall Street Journal’s CFO Network Summit. “Like behaviors should have like treatment.”
WASHINGTON—Securities and Exchange Commission Chairman Gary Gensler expressed concern Tuesday that efforts in Congress to write legislation for the cryptocurrency industry could compromise regulations that govern the broader capital markets.
Asked about a bill introduced last week by Sens. Cynthia Lummis (R., Wyo.) and Kirsten Gillibrand (D., N.Y.), Mr. Gensler initially demurred, saying he would prefer to discuss the proposed legislation with the senators. But he then suggested that legislative changes targeting cryptocurrencies could have implications for stock exchanges or mutual funds.
“We don’t want to undermine the protections we have in a $100 trillion capital market,” Mr. Gensler said at The Wall Street Journal’s CFO Network Summit. “Like behaviors should have like treatment.”
“We’re not looking to extend our jurisdiction,” Mr. Gensler said. “But these tokens are being offered to the public, and the public is hoping for a better future. That’s the characteristics of an investment contract,” a type of security.
Mr. Gensler’s remarks contrast with those of his counterpart at the SEC’s sister regulator, the Commodity Futures Trading Commission, which would gain significant authority under the Lummis-Gillibrand bill.
At an event last week, CFTC Chairman Rostin Behnam said the proposed legislation “does a very good job” of clarifying the distinction between securities and non-securities in the crypto market and in empowering the CFTC to police the latter category of assets.